Spot On: The (new) dawn of digital distribution

In the early '80s, a company called Control Video Corporation (CVC) developed a peripheral for the Atari 2600 called the Gameline. The device hooked up to a phone line and let users download games to their systems so they could play them without needing to leave the comfort of their own living rooms.

The Gameline failed for a number of reasons (not the least of it being the collapse of the entire gaming industry), but it didn't help that the service was undeniably ahead of its time, an analog precursor to the current trend of digital distribution in games.

Now the trail blazed by CVC is being picked up by a host of companies both large and small, among them the latest iteration of CVC itself. After the demise of Gameline, CVC changed it's name to Quantum Computer Services, which begat America Online, which looks to be one of the big digital distribution players thanks to efforts like AOL Games, Club Pogo, and fellow Time Warner subsidiary Turner Broadcasting's GameTap service, which is set to launch in fewer than two weeks. But is digital distribution still an idea that's ahead of its time?

At the moment, everyone has a stake in seeing digital distribution succeed or fail. It could give developers a way to circumvent the traditional retail model and get games straight to consumers. Publishers could use it as a way of juicing more money out of their back catalog of games, while retailers might go digital to expand their businesses beyond just the latest and greatest games that fit on their shelves. Console makers could put out systems that rely exclusively on digital distribution, eliminating the boxed product all together and giving the manufacturers complete control over their own market. On the consumer level, digital distribution could change not only how gamers get their games, but also who they get them from, how much they pay for them, and even the demographics of who gamers are. But even though analysts and insiders alike have been trumpeting digital distribution as the next big thing in games for quite some time, there still exists the possibility that the market remains unripe.

Electronics Boutique divisional vice president of business development Nathan Solomon was convinced that digital distribution was the next big thing back in 2001 when he spearheaded the company's creation of EB1, a digital distribution rental service. EB1 died in about a year Solomon said, in part because the technology wasn't quite there yet to make the service work as desired.

"Users would download [a game]--a limited number did it, [as] it took a long time to download it--and they said, 'That's really neat that you can just download a recent release game and just play it,'" Solomon said, "but people don't like to spend money for 'really neat.' They like to spend money for something that they can't get someplace else better."

The technology has caught up to the times, and now such streaming rental and download services are more common. But Solomon thinks there are still a number of questions surrounding digital distribution that need to be answered before it can break out and become the next big thing in games.

"I don't think that in terms of being in any way competitive that we're really there yet," Solomon said, adding "For [digital distribution] to be the next big thing there has to be something great about it on its own. As I was starting on it, it seemed to be self-evident, like, isn't it just better to click a button and have your game there? But in ways, it's really not an improvement. I think that [one of] the impediments is that enough people have to be able to access content fast enough, and then we can look at real business models."

With broadband adoption rates constantly rising and fiber-optic technology on the horizon, it seems the technology will take care of itself. Finding the right business model for digital distribution, however, will not. Even now the term "digital distribution" seems to be a woefully inadequate umbrella to cover a plethora of different business models.

There's the games-on-demand services, in which customers typically pay a monthly fee for access to a service provider's library of games, which will be streamed to the end user's PC during play but never completely downloaded. This is proving a popular option for many large companies in addition to Turner Broadcasting, as Comcast, Yahoo, Atari, Shockwave, and Verizon have all jumped on board with the model.

Then there's the try-before-you-buy model, which lets users purchase and download an entire game to their hard drives, typically with the option of trying out a portion of the game before committing to a final purchase. CNET's Download.com and IGN's Direct2Drive are a couple of sites that use this approach.

Beyond those simple categories, there are a few unique offerings in the field that don't fit snugly under labels. First and foremost among these has to be Valve's Steam service, which the company uses to digitally distribute Half-Life 2, and other new releases, to gamers. It's not the same thing as a full download-driven service, because Steam games can require players to be connected to Valve's servers to play the games. Game xStream holds another subniche of the digital distribution market in that it's a service used by publishers, like 3D Realms, to distribute full downloads of their games online. But it also lets them be streamed by eager players unwilling to wait for a download. And then there are sites like Codemasters' new Funsta.com, which combines the streaming games-on-demand services with full download options and free-to-play Web games.

On the console front, Microsoft offers digital downloads of simple games through Xbox Live Arcade, as well as premium content upgrades for some games, where users might pay a couple of bucks to get a few new levels. The latter setup is referred to as a micropayment, and much like digital distribution, it's a term that gamers can expect to see raised time and again in the coming years. Microsoft has said it will emphasize micropayments for premium content on Xbox 360, while Nintendo has said owners of the Revolution will be able to purchase vintage NES and SNES games to play on its new console, for a fee.

Sony's approach to digital distribution isn't as clear, but the company almost certainly has something up its sleeve. SCE president Ken Kutaragi has said before the PlayStation 3 won't ship with a hard drive because "no matter how much [capacity] we put in it, it won't be enough." And then there's Infinium Labs' ever-forthcoming Phantom, the first fully digital distribution console, which looks to set up as a games-on-demand service for the living room.

Clearly there are a number of different parties taking a number of different approaches to digital distribution, but they all have one thing in common: "Digital distribution makes all relationships more complicated," Solomon said.

There's a delicate web of relationships at work in the industry's current distribution model. Developers create a game for a platform, which will be sold to customers through retailers who bought it from a publisher. Money changes hands at every step of the way, with another half-step thrown in to cover licensing fees paid to the hardware makers if it's a console game. Every link in the chain has its own reasons for going digital and its own pressures that work to keep it in the existing model.

When Three Rings started work on the massively multiplayer puzzle game Puzzle Pirates, digital distribution was decided upon as the way to go early on. "It's the one way as an independent developer that you can get to market," said Three Rings CEO Daniel James. "You don't have to ask anyone's permission. You don't have to do a bunch of deals. You don't have to beg favors or hope that Wal-Mart takes your box or whatever else. You put up a Web site, and if it's any good, people tell their friends, and so on."

As beneficial as the technology can be for upstart developers, James says established devs can reap that much more from the direct approach.

"If, like Valve, you've got this AAA title, and you know a s******* of people want to play it. Why on earth would you go through a publisher and retailer and have them take all this money from you," James asks. "Why wouldn't you have a direct relationship with your audience, take their money directly, etc.? You'd be crazy not to."

Whether the developer's small or large, if it's selling directly to consumers it needs to find new ways to do the traditional job of a publisher in funding, marketing, and distributing the game. James said his company was fortunate enough to have the funding to start with, and lucky breaks like an early referral from Penny Arcade helped draw the initial batch of customers in. But distribution is something the company is still working on. James wants Puzzle Pirates available to the millions and millions of eyes that visit the digital distribution services like Yahoo Games and AOL Games every day.

"The tricky thing is that all of those guys are hard to talk to," James said. "They have barriers to entry because they have too many people submitting them games already. ... There's definitely an ecology where there are middlemen emerging in the online games distribution space."

In many cases, James says, online gaming services won't take submissions of games unless they come through those middlemen--companies like PopCap and GameHouse that partly fill the role of a traditional publisher. It's an ecology James says is analogous to the current distribution model of shrink-wrapped product in many ways, but he doesn't see an exact correlation. Retailers are one link in the chain that James expects to lose out big time in the coming years, in part because new models will simply make them expendable.

"I don't think anyone, even at EA, is particularly in love with Wal-Mart," James said. "I don't think they feel that Wal-Mart is someone they would really love to continue to do business with; it's just someone they have to continue to do business with, and it may be preferable to the Wild West unknown of online games where they might be unseated from their market dominance."

James has some reason for his forecast of retailer irrelevance. After meeting with sustained success online, Three Rings signed a deal with Ubisoft to publish copies of Puzzle Pirates through traditional retail channels. Puzzle Pirates boxes hit shelves in early May, and James says he hasn't noticed any significant change in the company's coffers as a result.

One thing that has impacted Three Rings' bottom line is the introduction of micropayments into Puzzle Pirates. The practice of charging users small sums here and there for in-game items and features has taken off in Asia, but James said he was apprehensive about how it would be received by his domestic audience. The answer was "better than expected," as Three Rings' monthly revenue has tripled since micropayments were introduced into the game. Now, the company is designing its next game, the Western-themed Bang Howdy, so it can be fueled primarily by micropayments.

Contrary to what you might expect, independent developers aren't entirely dreading the rise of publishers, like PopCap and GameHouse, into the digital distribution model. Telltale Games is actually banking on it. The company's focus these days is on releasing episodic adventure games based on independent comic licenses, like Bone and Sam and Max, but CEO Dan Connors says that's just a foot in the door for the company's long-term plans.

"Digital distribution does give us a chance in this window of time to get established and become a publisher," Connors said. "That's definitely the plan, but we could never become a publisher in the retail space because we'd be going up against EA and THQ and Activision, and there's just no way."

The episodic approach and modest technical requirements of its games play directly into that goal.

"We're building the product in a low-bandwidth, high-quality way so that it can be available across all platforms," Connors explains. "The fact that we make it low bandwidth makes it friendly whether it's a console, a handheld, a Blackberry... It's a long-term vision that sees digital distribution really coming into almost a broadcast model."

That vision is shared by no shortage of parties, but it seems each one has its own way of accomplishing the move to a model of game distribution more akin to the movie or television industry.

One of the biggest advocates of such a model is Exent Technologies, the company behind the infrastructure of numerous games-on-demand services, including those offered by Comcast, Yahoo, Atari, and Verizon.

As representatives of any of these companies are quick to point out (and are maybe sick of pointing out), they don't like being lumped in with those trying to get around existing links in the current chain, like Valve, Three Rings, or Telltale Games.

"They're not about extending their title's shelf life," said Exent VP of product markets and strategy Yoav Tzruya. "They're not about making their user's life easier. They're about replacing one distribution channel with another. From a business perspective, from what their goals are, they couldn't come from a more different place than where we are."

That's where the movie and TV model comes in.

"We take a title and repurpose a title or repackage it to be able to sell it online in a very similar way to how the movie industry has adopted the DVD rental and broadcast TV and cable TV models to generate money out of older content," Tzruya explained. "You're probably familiar with the Turner Classic Movies channel. They took old content that nobody wanted to pay for--nobody wanted to go to the cinema to pay $10 for such a movie--relicensed it, and all of a sudden people are paying them quite a bit of money for it."

It's the same approach being espoused by Infinium Labs for the Phantom. Essentially a games-on-demand service made for TVs instead of PCs, the Phantom is looking to complement the existing retail gaming industry, not undermine it.

"I kind of look at what we're doing as being like cable TV next to the DVD player that represents the console world," said Infinium CEO Kevin Bachus. "It's not like if you have cable TV, you don't buy DVDs anymore. They're different. I believe very strongly that we'll continue going into retail to buy physical discs for PCs and consoles for some period of time, certainly for the balance of this new generation, and I believe we will probably for the generation after that. But this is something that can sit alongside of that and potentially appeal to a different kind of customer."

Considering the amount of ridicule the Phantom has received among core gaming crowds since its original announcement, it's no surprise that Bachus would want to look to outside the existing gamer community for customers. But one of the reasons that Infinium Labs and huge corporations like Comcast, Turner Broadcasting, Yahoo, and Verizon are interested in appealing outside the core gaming crowd is because that's where the money is.

"The reason why I'm doing this is that I think one of the things holding back the industry is that by and large it's become a hobbyist market," Bachus said. "That's not necessarily a bad thing; it's just a statement of fact. But if the only people who watch movies are people who subscribe to Premier Magazine or read Entertainment Weekly, it would be a very small fraction of the total available market. And I think that the same thing is happening in the games world right now."

As for the console makers that typically attract that core market, Bachus doesn't see them fully embracing digital distribution anytime soon. While Microsoft or Sony might have the resources to create a digital distribution console like the Phantom, and while the idea of controlling their markets and having more-direct interaction with consumers is desirable, Bachus said existing relationships with (and dependence on) publishers and retailers restricts the big boys from rocking the boat.

"If you look at the relationship that the game publishers have with the console manufacturers, it's fairly contentious at this point, given the fact that there's a licensee/licensor relationship that exists with the publisher's largest single competitors," Bachus said, pointing out that Microsoft's sales of Halo 2 ran rings around the top efforts of its publishing partners. "If you think it doesn't give pause to these publishers that they have to go and reveal their road map a year and a half or two years out to their biggest single competitor, of course it does. The challenge is that then you multiply that a thousandfold by saying now Microsoft is responsible for deciding which games are going to get prominent focus, how they're going to be priced, how they're going to be presented to the consumers."

Regardless of whose business model will succeed here, it's clear that the industry is changing, with analysts generally agreeing that the digital distribution world is only growing bigger. The debate lies in how fast that growth is going to be.

While Steam has been one of the biggest success stories for digital distribution, Valve's Doug Lombardi doesn't think the technology will be taking over in the near future, either. "Retail is still a huge part of our business," Lombardi said, adding, "Time will help it evolve. Will it ever be 100 percent of the full products? Maybe, but it's not likely to happen soon. Does it open an alternative channel for distribution today? Yes. Does it open the door for different types of products today [episodic, more creative, riskier]? Yes."

Michael Cai, a senior analyst with the industry research firm Parks Associates, similarly believes the era of digital distribution isn't quite nigh, at least not for core gamers.

"The conflict between the publisher, the developer, and the retail channel is going to be a major inhibitor for releasing new games through digital distribution going forward in the near-term," Cai said. "I think [digital distribution of games] is going to be here to stay, but how long it takes to replace the traditional retail channel is going to be a long time."