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The Next Billion Dollar Videogame Opportunity

Is digital distribution the wave of the future? Will the always-on, immediate access, networked model replace retail? Investor Stewart Alsop (right), of Alsop Louie Partners, believes it will and that this presents a real opportunity for the next billion dollar company to emerge. We speak with Alsop who will be keynoting SRI's 2nd Annual Video Game Investor Conference.

While the majority of video game purchases are made at retail, digital distribution is quickly emerging as a significant force in the industry. Whether it's full fledged PC games, casual titles, or downloadable content and Arcade titles through Xbox Live, more and more gamers are making use of digital distribution.

In fact, while digital distribution is generally considered a nice complement to the retail model today, it could one day potentially replace retail as the main way people purchase their games. Bill Gates has said multiple times that all the hype concerning the format war between HD-DVD and Blu-ray won't matter in the long run because all content will be online. And more recently, SCE president Ken Kutaragi expressed a similar sentiment, noting that Apple has been successful with its e-distribution and that it's time for Sony to make a move as well.

So is this really the next billon dollar opportunity in the gaming industry? Stewart Alsop and Gilman Louie (who founded Spectrum Holobyte), of the investment firm Alsop Louie Partners, believe it is. The duo will be presenting a keynote on the subject at Strategic Research Institute's 2nd Annual Video Game Investor Conference, which takes place June 22-23 at Hotel Nikko in San Francisco , CA .

GameDaily BIZ recently caught up with Alsop to get a preview of the keynote and to find out what all the hubbub is about.

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"I think it's going to be a real massive crisis for the traditional video game companies," Stewart Alsop

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"We believe the change to digital presents the next billion dollar opportunity. Ironically, even though video games are inherently digital... the video game industry is stuck in what I call analog distribution. You have to encode it on a CD/DVD, put it in a jewel case and ship it physically to the store distribution system," Alsop began. "So we believe that once the video game business writes their games and delivers them to people through the Internet and through digital distribution systems, that the character of the business will be dramatically different, and that's what presents the opportunity to build a new billion dollar company."

"Whether it happens next year or ten years from now, that's the process we're involved in right now," he added.

And new is a keyword for Alsop, as his firm specializes in funding start-ups, unlike other firms like Elevation Partners, which have invested heavily in existing companies, such as Pandemic and BioWare.

Conceivably, the next round of video game consoles (or perhaps the round after that) may not even be disc media based at all. Maybe a "console" will become the equivalent of a cable or set-top box. Sony's Kutaragi believes the change will happen very quickly, and that within a couple years optical drives could become obsolete. He told Japanese site PC Impress Watch, "I expect even the hard disk to disappear eventually. If you have all the data on servers, you probably no longer need disk drives... but to do this, the server is crucial. It's a difficult problem."

 

"What we believe is that there's going to be a transformation in the business where the act of playing video games, which mostly means people playing video games on consoles, is transformed into a different business based on the existence of the Internet," said Alsop.

And if all the data is on servers as Kutaragi predicts, then the act of downloading may not be needed in the end. "Even the word 'download,' it's a little like using the word LP to refer to a CD... Download would become a term that is no longer used because things are just present and available," remarked Alsop.

"It's not a matter of there's a video game console, and there's a PC, and there's a mobile phone, and there's the web... As the network starts to bind all these devices together, the whole network becomes the platform."

If the video game industry is indeed headed in this direction, it could have huge implications for the current leaders in the space and people who diligently create today's games. Alsop explained, "The skills and qualities required to build a video game for the future, for this ubiquitous networked future, this always-on, HD kind of future, is going to be a different set of skills than those required to build video games distributed on DVDs or CDs and sold in retail stores... It doesn't look any different from the user point of view but internally the game would be architected differently. Video game designers will learn a different way of thinking about designing these games."

The transition from a retail disc-based model to digital distribution and a network-based platform could be difficult for traditional video game companies. Just as the music industry has had to deal with MP3s and iTunes practically replacing CDs, so too will the video game industry have to adapt.

"I think it's going to be a real massive crisis for the traditional video game companies," warned Alsop. "And it'll be totally ironic that the video game companies will be in the same place as the music companies and movie companies are now. They're having a hard time figuring out how to transition from the old to the new."

You can read more about Stewart Alsop and Alsop Louie Partners here.

Disclosure: GameDaily is a media partner for SRI's 2nd Annual Video Game Investor Conference

Here is more information on what to expect at the conference:

2nd Annual Video Game Investor Conference: Opportunities in Casual and Next Generation Games

June 21-23, 2006

San Francisco

To register call 800 599 4950 / 212 967 0095

Visit: www.srinstitute.com/cx599

Conference Highlights / Sessions:

· Keynote addresses from Trip Hawkins, Founder & CEO, Digital Chocolate. "Casual Mobile Games: The New Approach of "Social Games"

· Keynote Address from Chris Early, Studio Manager, Microsoft. "Casual Games: Casually Cashing In"

· Hear from Jon Goldman from Foundation9 on how he successfully raised 150M

· Top-tier VC's candid discussion on who's funding what and why

· Also addressed will be In-Game Advertising, How to Successfully Monetize in the Casual Video Game World, and live pitch presentations.

 
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Online Ad Exchanges Sprout Up
› › ›   ClickZ News

Finding the most value for available ad inventory has always been a problem for publishers, and advertisers are of course interested in getting the best deal when they make a buy. Several companies, including Right Media and AdECN, have begun to address this problem by creating auction-style exchanges to facilitate transactions between advertisers and media buyers.

"We're seeing lots of new inventory being created, and a lot more money flowing in once the pockets of inefficiency are removed," Right Media CEO Michael Walrath told ClickZ.

The Right Media Exchange (RMX) auctions every ad in real-time to the highest bidder. Online ad networks participate in the exchange by putting their publishers' remnant inventory up for sale, and by buying relevant inventory on behalf of their advertisers. Publishers and advertisers don't participate directly in RMX, but are instead represented by ad networks.

Without an ad exchange, unsold inventory today is sometimes passed through multiple ad networks to find avails, with each network along the path taking a cut. RMX is designed to keep that from happening by identifying the inventory that offers the most efficient path, providing the highest ROI, and otherwise delivering the most value to the advertiser and publisher, Walrath said.

Right Media's Yield Manager product is the interface for ad networks to buy and sell inventory on the exchange. The company also offers tools for publishers to create a private exchange and link it to RMX, or to sell their ad inventory on RMX as well as manage inventory sold elsewhere. It also has a similar tool for buyers to manage all of their campaigns, both on and off the exchange, in one place.

More than 50 ad networks representing 2,900 advertisers and 7,900 publishers are using the exchange already; numbers that have been growing steadily for the past 15 months, according to Walrath.

Online advertising exchange AdECN is not quite as far along. It's currently running with only one ad network, Experclick, in which it holds a controlling interest. It was necessary to create Experclick as a proof of concept for AdECN, according to CEO Bill Urschel, but the company is examining ownership options for Experclick once AdECN invites other networks to the exchange next month.

"It's important that we keep the two separate in order to avoid any conflicts and remain neutral," he said. "I expect we'll spin it off soon."

Another key to maintaining neutrality is its pricing model, Urschel said. AdECN charges participants a flat fee per transaction, so it remains a disinterested party in the deal, and has no incentive to favor one ad network over another.

Like Right Media, AdECN does not do business directly with advertisers or publishers; it works instead with ad networks, ad brokers, and a few ad agencies that maintain relationships with buyers and sellers, acting as a network themselves. Urschel likens it to a stock exchange, where buyers and sellers work through a broker.

AdECN, through Experclick's network, currently supports five IAB-standard in-page units and a pop-under format. It does not allow ads with adult content, and publishers working with a participating network are able to exclude ads by category.

The AdECN model lets advertisers decide up-front how much they're willing to pay and only delivers ads when those requirements are met. AdECN also monitors individual placements on publisher sites, and will adjust an advertiser's bid downward if it determines that a given position is worth less than others, such as being at the bottom of a page or surrounded by other ads.

"It's one thing to create a liquid market, but it still needs to be a fair market," Urschel said. "The spot where the ad appears needs to be up to par, so we keep a history of every spot and compare it with its peers before allowing the ad to go through."

Publishers benefit because they are assured of getting the highest price an advertiser is willing to pay at the time for their inventory, and can even end up selling more inventory in smaller chunks than they would ordinarily, Urschel said. Publishers also have a safety net, in that they can choose a back-up provider of ads if their requirements are not met at a given time by an AdECN-brokered ad.

The exchange model will not cut out ad networks, as long as they are providing value, both Walrath and Urschel insist.

"It holds networks accountable to a value standard. If they're taking more margin than they're providing in value, they'll get disintermediated," Walrath said. "If the ad network is creating value, they'll get more business from the exchange."

"We're not going to change the way good ad networks do business," Urschel said. "Extraneous middlemen will suffer. If there's no value-add, and they're just brokering a deal, that's not bringing anything to the table."

Ad networks can provide value and benefit by participating in RMX in many ways, Walrath said, including offering advanced targeting, reporting and optimization; or packaging inventory creatively to improve revenue optimization for publishers.

Support for creating these kinds of exchanges for ads has been growing. Walmart, HP, Microsoft and several others are reportedly exploring an online marketplace for TV ads through eBay.

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