Market Watch

VSGoD Sector Update

November 23, 2010

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The nascent video-streamed games-on-demand ("VSGoD") sector has seen a number of important developments in the past month. Screen Digest recently initiated coverage of the sector and these developments have impacted on our initial forecasts.

  • OnLive confirms end of service subscription fee, Microconsole launch and introduction of flat-fee access to games bundles
  • Gaikai enters open beta
  • SFR colloborates with G-Cluster to bring VSGoD to IPTV service Neufbox
  • IACs InstantAction closes

Onlive broadens device compatibility to connected TVs
OnLive will launch the OnLive Microconsole on December 2 in the US. The Microconsole plugs into TVs and domestic broadband connections via Ethernet and enables usage of the Onlive service on TVs, without requiring a PC. OnLive has priced a package containing the Microconsole, a wireless gamepad (similar in configuration to Xbox 360 and PS3 gamepads) and a free game at USD 99. OnLive CEO and founder Steve Perlman also mentioned that he expects the Microconsole to be fully integrated with TVs in 2011 however he did not specify a manufacturer.

The Microconsole is important to the continuing growth of OnLive: previously users required a PC to access the service which restricted OnLive to a crowded and highly competitive platform which was usually situated in the study or bedroom as opposed to a household's primary AV setup. Growth arising from rollout of the Microconsole in the US is already in our forecasts however we are encouraged that OnLive kept its promise to launch the peripheral by year-end 2010. OnLive has confirmed that it intends partner with TV and STB manufacturers to ensure the Microconsole is integrated into these devices as soon as commercial agreements can be struck. Ensuring OnLive is available from as broad an array of CE devices as possible is critical to OnLive's growth, as detailed in the Screen Digest Insight Report "Challenges ahead for video-streamed games-on-demand", published in October, 2010.

Onlive drops monthly service subscription charge
OnLive has confirmed that its service will no longer require a monthly subscription for service access: the charge was initially sponsored by AT&T in the US meaning that consumers have never actually had to pay it. In addition OnLive will shortly add monthly subscription based "all you can eat" access to bundles of back catalogue games.

Screen Digest felt that the eventual introduction of the fee to consumers was a significant customer acquisition inhibitor and have removed the growth constraint on our modelling of OnLive. The move to add subscription-based access to bundles of games to the rental and EST options available since launch is likely to be in response to evolving customer behaviour patterns and publisher desire for flexibility in charging and business models. Older titles face significant competition on price from PC download providers (eg, Steam, Direct2Drive) and second hand retail games sales. Offering subscription-based access offers OnLive an additional method to monetise catalogue titles while some consumers may find the value proposition compelling.

Gaikai enters open beta
VSGoD operator Gaikai's games streaming service entered open beta midway through November 2010. 10,000 users who had signed up were invited to try the service and further waves of 10,000 users will be invited as long as there are no operational issues (at the time of writing there were no operational issues delaying Gaikai's service ramp). Gaikai was offering Electronic Arts' high profile PC and console RPG, Mass Effect 2, which was released in the first calendar quarter of 2010.

Gaikai will shortly join Onlive with a live, consumer-facing VSGoD service however the operators' retain distinct philosophies to the technology underpinning their businesses. While Onlive is targeting the consumer, Gaikai's customers are games publishers. Gaikai uses games streaming to market and sell video games and only offers titles which publishers are looking to promote and sell. Gaikai's growth depends on its ability to win mandates from games publishers to promote their games by offering streaming gameplay from strategically selected online properties. Gaikai is already working with Electronic Arts (EA's Mass Effect 2 was the game chosen for the open beta) and the company is in discussions with a further 60 content and website owners.

SFR launches VSGoD on Neufbox with G-Cluster
French IPTV operator SFR has launched a VSGoD service to Neufbox subscribers in cooperation with Japanese VSGoD operator G-Cluster. Neufbox subscribers will be able to purchase access to a basket of games for €4.99, the entire catalogue for €9.99 or individual games for between €2 and €3 on an ?a la carte' basis. G-Cluster has content agreements with Capcom and Popcap. Screen Digest expects Neufbox to finish 2010 with around 2.5m subscribers, making it one of the world's largest IPTV networks.

SFR is first to offer a VSGoD in the French IPTV market and for the time being it is a differentiating factor for the Neufbox service. However Neufbox's priority is to drive TV and broadband subscription net additions and in this context VSGoD is a value-added service. Given the historical low spending patterns of the Neufbox subscriber base, we do not expect the service to generate significant revenues.

IAC's InstantAction closes before launch
IAC's VSGoD subsidiary InstantAction closed on November 12. The firm was still in a pre-launch phase and was hoping to convince third parties to use it's games streaming technology. InstantAction had also published an online F2P music game called InstantJam which has also been closed. No reason was offered by IAC or InstantAction however it is likely that IAC felt that InstantAction's games streaming business was a risky investment proposition given the competition, amount of funding and time required to achieve profitability.

While the VSGoD sector is still very young a number of characteristics are becoming apparent: it is a capital intensive business and, given growth for the sector is unlikely to kick in until the console transition period from late 2012 to 2014, participants must have sufficient funding to expand and compete for at least two or three years (in a wider business environment where capital is becoming relatively scarce and expensive). The two leading operators, Gaikai and Onlive, share a range of deep pocketed investors having already raised significant amounts of capital and insist that no further capital raising exercises will be necessary in order to achieve profitability.

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