Games as services, video games

Child’s Play: the new online market for children’s games

June 2008

In 2005 the BBC conducted a large scale, nationwide survey to learn more about British media consumption habits and attitudes. Unlike many similar research efforts, the survey encompassed children of 6 and upwards and included games amongst the media investigated. The results were fascinating and were probably a wake-up call for the Beeb. The survey found that 98% of children aged 6-15 play games at least once a month, the vast majority at least once a week. More surprisingly, games were rated as the single most important medium for 6-15 year olds, ahead of TV, music, cinema, reading, DVDs, the internet and mobile phones.

The children of today represent an entire generation for whom interactive entertainment is an integral and critical part of growing up. They are also a generation that are comfortable and highly adept online. Combine these two together and you have a new games frontier of truly colossal potential but one in which most ‘traditional’ games companies appear largely disinterested. As a result, this new market for children’s MMOGs and virtual worlds is witnessing a stampede of companies from outside of the games industry, especially from the toy and TV industries.

Start-ups also feature prominently in the gold rush, backed by venture capital investors eager to see Club Penguin-scale returns on their investment. Some $30m has been raised during the first 4 months of 2008 specifically for new children’s MMOGs and virtual worlds, compared to around $50m during the whole of 2007 (mostly for US companies).

Activity in this space has, as a result, become frenetic. Where three years ago there were less than a dozen child-focused virtual worlds, there are now 50. We are also tracking an additional 45 that are currently in development and do not believe that this rate of growth will slow any time soon. Around a quarter of the virtual worlds that have launched are based on existing kids’ properties such as Beanie Babies and Build-a-Bear.

The most popular or these virtual worlds attract millions of monthly users who devote huge amounts of time to socialising and playing in them. Mattel’s Barbie Girls virtual world generated over 11m registered users in its first 12 months alone. The seminal Neopets virtual world has 12m monthly users, Habbo Hotel 8.5m per month and so on. The market has begun to demonstrate clear demographic segmentation with, for example, separate virtual worlds primarily targeting girls under 8 (Pixie Hollow), girls under 13 (Barbie Girls) and girls over 13 (Zwinktopia).

These sites feature a broad array of business models and although a few are simply intended as loss-leading promotional tools to reinforce an existing brand, most are operated as profit centres. A number are extremely profitable. Initial and ongoing development costs are a fraction of typical MMOGs. Most feature simplistic gameplay, are browser-based, developed in Flash and opt for low-res cartoon graphics over the verisimilitude sought by hard-core developers. Almost all of the worlds are offered for free but feature advertising and/or optional payment models such as subscriptions or retail purchases (e.g. toys or cards) which unlock exclusive parts of the world. Around 40% feature micropayments, mostly geared around avatar and virtual world customisation. We estimate that subscriptions and micropayments in children’s MMOGs and virtual worlds alone generated over $300m in 2007 and will grow over 30% this year. Add in advertising and retail sales and it becomes easy to see why there is so much interest in this market.

Although these virtual worlds may seem rudimentary from a technology point of view compared to traditional video games development, there are crucial differences. Most important is that the developer must transition from being a product creator to a service provider as ongoing maintenance and development coupled with direct, continuous customer interaction are necessities. This alone puts such development beyond the comfort zone of most games developers (and more towards that of web designers who make up a significant proportion of the current market despite most having little or no games development experience). Add to this the myriad challenges of dealing with children (content, security, legality etc) and the proposition is not as straightforward as may initially seem.

However, these are surmountable hurdles and we believe that there is a great opportunity here for independent games developers with their established multi-disciplinary development processes and superior understanding of gameplay and player engagement.

The majority of the worlds have been or are being created by third party developers. We expect demand for third party development services to grow as more TV, toy and merchandising companies with children’s IP look to extend and differentiate their brands online. Those that have already entered the market show no signs of reducing their investment and some appear intent on making virtual worlds necessary online entertainment extensions for all of their major properties. Europe trails the USA (which represents the vast majority of the market to date) by quite a margin but we believe that it will invariably seek to follow the USA’s lead with European studios likely to be the principal beneficiaries.

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