Web Hosts Make a Play for the Gaming Vertical

By Max Smetannikov

From Web Hosting Monthly, February 2004 edition

March 1, 2004 -- (WEB HOST INDUSTRY

REVIEW) -- While Web hosts still hope online gaming companies will grow

into a strong vertical market, accounting for dozens of racks and

thousands of megabytes, hosting providers have not yet found the

formula that will give them that important appeal to upcoming online

gaming developers.

Hosts' latest hope for a piece of the

gaming industry action comes from massive multiplayer online games

(MMOGs). The opportunity has been clear for months, if not years, as

hordes of hosts tried to sell servers to Sony in support of the very

first big MMOG success, Everquest, a game that now has an audience of

400,000 simultaneous players. That contract was eventually split by MCI

and AT&T, after which the opportunity seemed closed for small

hosts, muscled out by larger competitors. After Sony, the biggest games

in this arena have been launched by Microsoft and Electronic Arts.

This year, however, dozens of startups

have been funded and are in the pre-launch mode or early development

stages offering new MMOGs. Execs heading these gaming enterprises say

they are tapping into a form of entertainment as common to young males

aged 18 to 35 as cable TV is to their parents. MMOGs are even sold in a

manner similar to cable: once end users install the game, they are

expected to pay monthly subscription fee of about $15 in order to

receive updates and interact with other gamers. The second tier of

companies building online multi-player games, while startups in a

sense, are frequently backed by larger international corporations.

"Other MMOG vendors include Lucas Arts

(Star Wars Galaxies based on Sony's Everquest engine), Mythic

Entertainment (Dark Age of Camelot), NCSoft (Lineage, a huge Korean

MMOG), SquareEnix (Final Fantasy XI on Playstation and Playstation 2)

and Vivendi Universal Games (Blizzard's new World of Warcraft)," says

Billy Pidgeon, an analyst with Zelos Group.

The excitement surrounding this segment is finally generating business for hosts. Verio (verio.com) recently signed up the newest MMOG vendor Artifact Entertainment (artifact-entertainment.com) as a customer both in Europe and in North America, with a clear intent to turn the customer win into an area of focus.

"We do believe this is a strong vertical

segment for us," said Craig Schlagbaum, Verio vice president of

enterprise hosting and access channel sales. "There will be over 150

MMOGs that are going to be introduced over the next 18 months."

The online gaming business cycle appears

to mesh well with hosting offerings. As with cable channels, nobody

expects all of these games to survive. To prove their longevity, these

games have to launch, achieve a critical mass, and then hold gamers'

interest long enough to make the virtual worlds created within the

games feed on themselves.

Artifact's cycle with its MMOG Horizons:

Empire of Istaria illustrates why gaming vendors need hosts. The game

was launched December 5 in Europe and December 9 in the US, and already

has around 100,000 subscribers. To support the action, Artifact has

been leasing Verio servers, 212 at the time of the interview, enough to

support 150,000 players with over-subscription of five to one (one out

of five subscribers playing at any given moment).

It's easy to see now why Verio execs are

excited. If the game flops, Artifact, which raised $38 million from

venture capitalists primarily for MMOGs, will launch another game. If

Horizons takes off like Everquest did, this is a reliable, bandwidth

intensive business that Verio can count on and that can become very

big. Sony is rumored to host Everquest on close to 3,000 servers.

"We expect to add five to 10 of these

customers over the next 12 to 14 months," said Schlagbaum. "We are

excited and expect for MMOG vendors to be excited to host with us

because we cater to this space."

As exciting as the MMOG opportunity is,

hosts probably should be aware of another dynamic with the gamers,

feeding on the level of services they are buying from hosts.

Gone are the days when gaming vendors

like Artifact sought premium services like content distribution and

geographically distributed load balancing, requiring highly

sophisticated global IP networks and proactive, hands-on management on

behalf of hosts.

Games that require a lot of hosting

resources and premium services are still emerging as a class, with

broadband still spreading in countries with hardcore gaming populations

like the US and the quality of consumer broadband still unreliable.

Apart from "deluxe download" games like puzzles; games that are

downloaded to be played with AOL's AIM; and casual games involving

minimal online interaction, online games that involve hardcore hosting

are sold mainly by Sony, Microsoft and Yahoo.

"An emerging online game format that

requires more extensive hosting is online console gaming as provided on

Microsoft's Xbox Live service, which is on Microsoft's proprietary

network, and on Sony Computer Entertainment's PS2 online service, where

each game's hosting is provided by the publisher or a third party.

Another format that requires considerable hosting resources is

streaming computer games such as Yahoo Games on Demand, which delivers

games to broadband users' computers on a rental subscription basis,"

says Pidgeon.

So going after the part of the gaming

market that requires advanced hosting services could mean bagging

Microsoft or Yahoo as customers. For MMOGs that are breaking into this

online gaming world, what hosts like Verio can offer comes down to the

ultimate commodity - a server and a ping.

Verio's Schlagbaum confirmed that even

though the company is targeting gamers as a vertical it hasn't changed

its standard enterprise offering in order to attract them. That's no

wonder since execs like Artifact's co-president and creative director

David Bowman are not likely to pay for much more - and in fact may not

be willing to pay for Verio's services forever.

"Right now we are happy with Verio as

hosting with them makes a whole lot of headaches go away," said Bowman.

"But from the business point of view and if we were of a larger scale,

we could buy a building in Virginia or in Phoenix, Arizona where we are

based and host our content ourselves."

Considering that with 100,000 users

playing Horizons and paying $12.95 a month Artifact is clearing

$1,295,000, Bowman may be not too far off suggesting that Artifact may

ultimately find better economies of scale by hosting its own operations

and infrastructure.

Whether that day comes will depend on

Verio and the other hosts tapping MMOG vendors as customers. Hosts have

to come up with services that appeal to customers like Bowman while

they are growing so that the allure of hosting their own games a la

Microsoft won't make much business sense in the long run.

The unfortunate alternative is losing yet another vertical market to insourcing.

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