Friday, June 13, 2008

Future of online gaming firms may be in prepaid cards

By Christopher Calnan

Online game developers are taking their battles offline.

Game companies are finding that prepaid cards, sold through retail stores, are becoming more popular as a way for  players — particularly teenagers — to pay for enhanced game experiences.

The irony of Internet-based game companies relying on shelf space allocated by mainstream retailers is not lost on local game software executives, some of whom fear that large game publishers with established relationships with brick-and-mortar retailers will supplant the Internet-based channels that have allowed even the smallest startup game developers to compete.

The shift in how online game companies earn new revenue could put pressure on young game companies ill-equipped to fight for shelf space in a cutthroat retail industry.

In the United States, consumers are projected to spend $50 million to $100 million on online games this year using the prepaid cards — up from $25 million last year, said Robert Goldberg, CEO of GMG Entertainment, a California-based company that produces prepaid cards for game publishers.

Putting the distribution of such a large market into the hands of retailers — compared with the “level playing field” of the Internet — concerns Nabeel Hyatt, CEO of Cambridge-based Conduit Labs Inc., which has been developing a social game website since last year.

“I mostly worry about the rest of the startup ecosystem that’s controlled by a retail channel,” Hyatt said. “Large companies can control the path to consumers.”

Prepaid cards, also called stored-value or gift cards, have grown in general popularity with retailers such as coffee shops. But for online gaming, which relies on web-based payment systems for users to purchase online game-play minutes or virtual goods used in game play, the cards are less about customer loyalty or convenience — they’re a critical link to the industry’s core customers, who are often too young to own a credit card.

During 2007, online games in North America generated revenue of $1.6 billion. The figure is projected to surge to $3.8 billion by 2012, according to the Yankee Group, a Boston-based research firm.

Such growth ensures that the prepaid-card business is here to stay, said Jim Crowley, CEO of Westwood-based Turbine Inc., a developer of massively multiplayer online role-playing games such as Asheron’s Call and Dungeons and Dragons Online. “There’s a lot of legs to that model,” he said. “That will become a standard part of the landscape.”

Turbine already bundles prepaid cards in game boxes. But later this year, it plans to expand to selling cards in store displays, Crowley said.

Hyatt’s Conduit Labs is basing its business model on that of Korea-based Nexon Corp.’s Kart Rider, which generates $250 million in annual sales by selling virtual goods, according to published reports.

“It’s really just a new business model,” said Jonathan Radoff, CEO of GamerDNA Inc., Cambridge-based company that operates an online community for gamers. “I think it expands the market.”

But retail exposure will be limited for smaller developers because retailers place prepaid card displays at end-cap locations, Yankee Group analyst Mike Goodman said. “The bigger the name, the more likely you are to gain shelf space,” he said.