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Rivals Square Off in $15 Billion Online Gaming Market

Every month, a group of people whose number exceeds the population of Greece pays $13-$15 each to enter the mythical world of "Azeroth." The diverse group of players, whose ranks range from William Shatner to Robin Williams and beyond, are playing "World of Warcraft," the video game industry's leading multiplayer game. But Activision , which makes the game, is about to face a big, new slate of rivals in the estimated $15 billion online gaming market.

World of Warcraft
Courtesy of Activision-Blizzard
World of Warcraft

For years, "World of Warcraft” — or “WoW,” as it’s more commonly known — has been the envy of game publishers and a seemingly unbeatable leader in online gaming.

Other publishers, such as Electronic Arts and 38 Studios (owned by former Major League Baseball pitcher Curt Schilling), are lining up their own "massively multiplayer games" (MMOs). And the threat from social gaming and other online portals continues to grow.

MMOs are virtual persistent worlds where thousands of people play games simultaneously — called "persistent" because someone, somewhere is always playing them. For the most part, big online games don’t dramatically move the earnings needle for game publishers. They’re expensive to make, cost money to maintain and have a high casualty rate. But when they’re a hit, the rewards can be substantial.

How substantial? Colin Sebastian, an analyst with Lazard Capital Markets, expects the online game market worldwide to surpass $15 billion in 2010.

EA’s betting big on the category, with “Star Wars: The Old Republic,” an upcoming persistent online world set in the “Star Wars” mythology. Analyst Michael Pachter of Wedbush Securities estimates the company is spending $60 million to $80 million to create the game.

Historically, persistent worlds have been the domain of the PC. Gaming consoles, despite their active customer base, have — with a few exceptions — been left out of the massive multiplayer world, despite lots of tire kicking by developers.

The reasons are varied. Some game makers say the timing is never quite right. Launching simultaneously with a console means there’s a very small customer base, so it’s difficult, if not impossible, to recoup investment dollars. Alternatively, if they wait until the machines have a large customer base, it’s typically halfway through the system’s life cycle, which limits the lifespan — and earning potential — of the game.

All that comes before the console makers demand their share.

“What’s the model going to look like?” asks Eric Handler, managing director of media, entertainment and video games for MKM Partners. “Typically, you buy a packaged good and the subscription model runs through Xbox Live and Sony PlayStation Home. How much are they going to want to take as a percentage of what you charge [customers monthly]? You have to look at the economics behind that.”

Of course, persistent worlds and massive online games aren’t limited to traditional game companies. Zynga has found a formula that works exceptionally well for Facebook games. And Disney ignores older players in the space, opting instead to focus on big online games that are fun and safe for children.

The money on those sorts of games isn’t as substantial as a subscription model, but it’s easier to attract a large number of players. And many of those can be enticed to spend a dollar here and a dollar there in a series of microtransactions such as character upgrades, which add up quickly with a large player base.

Korean company NCSoft, in particular, has learned the value of the microtransaction model. Twelve years ago, the company launched the online role-playing game “Lineage.” Today, the game is still a notable money earner. Unfortunately, not many other titles released that long ago can say the same.