Mobile Content & Advertising Perspective

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1 Mobile Content & Advertising Perspective V O L. 1 I S S U E 8 S E P T E M B E R 2008 Not So Virtual: Enhancing Telcos Role in the MMORPG Value Chain Analyst: Guillaume TOUCHARD gtouchard@pyr.com Tel: At year-end 2007, we estimated the cumulative number of MMORPG subscriptions at around 117m worldwide. We expect this figure to more than double by year-end Over the next five years, we expect revenue from MMORPGs to grow significantly. Two different MMORPG revenue-generating models have emerged and proven successful: pay-to-play and free-to-play. Operators are introducing MMORPGs to increase control over the value chain. Until now, they did not have any revenue control over these services, which use their networks Pyramid Research While every effort has been taken to verify the accuracy of this information, Pyramid Research cannot accept any responsibility or liability for reliance by any person on this information. ID# 351 Pyramid Research Locations Worldwide World Headquarters 58 Charles Street Cambridge, MA USA Tel: Fax: Latin America Waterford Business Park 5201 Blue Lagoon Drive Suite 971 Miami, FL USA Tel: Fax: Asia-Pacific Suites 2701/2801, Floor 11 AXA Centre 151 Gloucester Road Wanchai, Hong Kong SAR Tel: Fax: Europe Bloomsbury House, Suites 17/18 London, WC1A 2RP United Kingdom Tel: Fax:

2 EVENT SPOTLIGHT 2 Operators interest in massive multiplayer online role-playing games (MMORPGs), such as Second Life or World of Warcraft, has been growing in mature broadband markets over the past year. In South Korea where MMORPG has become a national sport SKT and KTF have introduced their own proprietary games allowing multiplayer gaming across platforms. SKT launched a portal named GXG where Internet fixed and mobile users can download and play MMORPGs online. Its competitor KTF also launched a convergent MMORPG, Imo: The World of Magic. In France in March, Neuf, a leading ISP, launched Exalight, its proprietary MMORPG aimed at broadband subscribers and nonsubscribers. The emergence of Internet service providers in the content area is not new. Over the past year, leading ISPs across many regions have signed agreements to launch their proprietary music, video and TV offers. The entrance of ISPs in the MMORPG value chain is surprising because the market globally appears to be such a niche. But is it? Pyramid Research believes that in mature broadband markets, all the conditions exist for ISPs to start offering MMORPG services. BEHIND THE HEADLINE Major MMORPGs reported more than 10m subscriptions each at yearend At year-end 2007, we estimated the cumulative number of MMORPG subscriptions at around 117m worldwide. We expect this figure to more than double by year-end MMPORGs have become widely available in mature broadband markets with some of them, such as World of Warcraft (Blizzard-Vivendi Games), Dark Age of Camelot (EA) or Ragnarok (Gravity Interactive), reporting more than 10m subscriptions each. The success of MMORPGs across broadband markets varies significantly from one country to the next. South Korea is at the forefront of adoption. Online role-playing games are highly popular among teenagers and young adults. At year-end 2007, 65% of Internet users in South Korea had at least one running subscription. The proportions are less significant in other countries. Taiwan and China are second and third in terms of MMORPGs popularity. As of year-end 2007, 28% and 26% of Internet users had registered with an MMORPG platform. This figure is lower in the US, the EU 15 1 and Japan, where we estimate service penetration of Internet users base at 14%, 11% and 15%, respectively, at year-end Globally, we expect the MMORPG industry to add an extra 147m subscriptions over the next five years. The main additions will be witnessed in China, the EU 15 and the US. In the EU 15 and the US, net additions over the next five years will stand, respectively, at 25.7m and 25.4m registered users. This growth is expected to be driven essentially by the increased availability of mobile broadband solutions and free-to-play MMORPGs. China will be a main driver for the MMORPG industry over the next five years. China will feature the highest CAGR in terms of broadband and MMORPG adoption, the fastest among the markets analyzed. The growth in MMORPG users will be triggered by increasing Internet and broadband adoption. At year-end 2012, we expect broadband penetration to reach 24% from only 14% at year-end The Internet users base will grow from 11% to 24% representing at year-end m people. We expect MMORPG subscriptions to reach 120m in China at year-end Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Sweden, UK

3 Millions 3 Exhibit 1: MMORPG subscriptions in selected markets, Source: Pyramid Research, Q US EU 15 Taiwan China Korea Japan Revenue from MMORPGs are expected to grow significantly China will be a main driver for revenue growth in the MMORPG industry. Over the next five years, we expect revenue from MMORPGs to grow significantly. Two different MMORPG revenue-generating models have emerged and proven successful: pay-to-play and free-to-play. Monetization of pay-to-play MMORPGs takes place at two stages in the relationship. First, the gamer needs to purchase the platform software and then pay a monthly fee to keep his character alive in the virtual world. Free-to-play games have developed an economic model based on add-ons. The gamer will have free access to all the basic functionalities of the game but will need to purchase credit in order to customize his character and develop his own environment. Global revenue from MMORPGs will double from an estimated US$15.3bn at year-end 2007 to $30.3bn at year-end 2012 (see Exhibit 2). At year-end 2007, we estimated that 54% of global revenue was generated in the EU 15 and the US. This proportion is expected to decrease over the next five years to 37% of total revenue. China had an estimated 38.9m MMORPG subscriptions at year-end 2007 with a market worth RMB11.5 billion ($1.6bn). China s revenue share of the global MMORPG market is estimated to grow from 10% at year-end 2007 to 16% at year-end We also expect revenue shares from markets such as Japan, Korea and Taiwan to decrease over the next five years. Their combined revenue share is expected to decrease from 36% at year-end 2007 to 27% at year-end 2012.

4 US$ billions 4 Exhibit 2: MMORPG global revenue, Global revenue Source: Pyramid Research, Q Operators are introducing MMORPGs to keep control over the value chain Each MMORPG gamer exchanges on average 12MB of data per hour. Operators are introducing MMORPGs to increase control over the value chain. Until now, they did not have any revenue control over these services, which use their networks. Massive multiplayers online role-playing games are heavy bandwidth consumers. According to a recent study by Cisco, each MMORPG gamer exchanges on average 12MB of data per hour in both downlink and uplink, bringing it up to more than 1GB per month per player. Although this is less than video (2.8GB per month per user), MMORPG represented at year-end % of the global Internet traffic. As can be seen in Exhibit 3, the improved video quality of games and strong adoption will significantly impact the use of bandwidth over the next five years. As operators are rolling out new next generation networks to increase bandwidth, the pressure for the generation of revenue from content transiting through their networks is becoming paramount.

5 Terabytes 5 Exhibit 3: Online gaming IP traffic, , , , , , ,000 80,000 60,000 40,000 20, North Americ Western Europe Asia Pacific Japan Latin America Central Eastern Europe Middle East and Africa Source: Cisco, Q Within the past couple of years, Internet service providers and mobile operators have made significant efforts to move from a pipe-only model to an all-integrated communication media and technology model where they increasingly provide prorprietary and aggregated content. Operators expect content to pay for investment in faster and more efficient networks. Leading operators such as Vodafone, France Telecom and NTT have signed partnership agreements with producers of premium content including the leading record labels and movie producers. The improved involvement of operators such as Neuf, SKT and KTF in the MMORPG value chain reflects this rationale. We expect operators in mature broadband markets to develop partnerships with game developers. At a later stage, this could result in the acquisition of game developers. For example, in South Korea, SKT agreed in March 2008 to invest $15m into Magic Grid, an MMORPG developer. CLIENT RECOMMENDATIONS Operators Partner, develop or acquire an MMORPG in markets where broadband adoption is significant, such as North America, the EU 15 and developed Asia. This recommendation also applies to fast-growing broadband markets, such as China. MMPORG developers Partner with operators to leverage new growth opportunities. We believe that the partnership model will enable developers to access new MMORPGready audiences.

6 6 Recent reports and other products from Pyramid Research Handsets Get a Latin Beat: Mobile Users in Latin America Turn to Music, Cameras and 3G Research Report published June 2008 Latin America s mobile handset market has grown remarkably in recent years, and device sales will increase further through This Report examines that transformation and what it means to vendors and operators, providing extensive forecasts. It looks at underlying trends in the mobile market, including technology developments, mobile services demand, the competitive landscape, ARPS, the battle between the two main regional mobile operators, handset revenues, unit sales, ASP trends, marketing campaigns, demographic factors and market shares. The focus is on the seven largest markets in Latin America: Brazil, Mexico, Venezuela, Argentina, Colombia, Peru and Chile. Orange Vs. Goliath: Taking On the UK s Big Pay-TV Players Regional Perspective published May 2008 In the UK s highly penetrated broadband market, competition is heating up, and pay-tv will be an important differentiator. The recently announced launch of Orange TV s long awaited IPTV service in 2008 will prove to be a useful tool for the ISP to retain subscribers. In this Perspective, Pyramid Research examines the IPTV opportunities in the UK and determines whether or not the new Orange TV service will help acquire new customers on top of retaining current ones. Social Networking Goes Mobile Research Report published February 2008 Social networking services like MySpace and Facebook have emerged as some of the hottest Internet names, with daily news of partnerships, advertising initiatives and acquisitions. This report looks at the SNS business model and analyzes its future, forecasting the number of social networking members globally by It also assesses the future of mobile social networking and the rationale for SNSs and mobile operators to collaborate, including the revenue mobile operators stand to gain. Finally, the report profiles some of the top players in the mobile social networking world. Handsets and Web 2.0 applications to continue to drive 3G adoption Regional Perspective published September G is at an important point in its development. Despite continued growth of 2G subscriptions driven by emerging markets, the rate of growth of 3G subscriptions is even higher, and so 3G penetration is increasing globally. This Perspective forecasts the continued growth of 3G and looks at the regions that will see the highest penetration rates. It also looks at the key drivers of 3G growth, including advances in handsets and Web 2.0 applications. Additional products Forecasts Updated on a quarterly basis, our Forecast products provide a complete picture of demand trends affecting each geographical market covered. The Excel output includes five years of historical data and five years of market projections, providing complete macroeconomic and market-sizing information. Available for: Mobile Communications, Fixed Communications, Mobile Data, Mobile Enterprise, Mobile Handsets, Mobile CAPEX, Internet and Media, Network OPEX. Country Intelligence Reports Country Intelligence Reports offer insightful analysis of a country's communications, media, and technology industries, including regulatory pressures and overall competitive landscapes. These data-intensive reports are published annually for 64 countries worldwide, and illustrate key trends within given markets, making them an excellent complement to our Forecast products. For more information or to purchase, contact Pyramid Research at: or sales@pyr.com or