M a R K E T O V E R V Ie W

March 23, 2007 The Real Business Of Virtual Worlds by Paul Jackson MARKET OVERVIEW

Making Leaders Successful Every Day MARKET OVERVIEW

March 23, 2007 The Real Business Of Virtual Worlds Firms Creating New Virtual Worlds Must Balance Real Revenues With High Risks by Paul Jackson with Michelle de Lussanet and Lizet Menke

EXECUTIVE SUMMARY Second Life has brought discussions about virtual worlds out of the geeks’ basement and into the harsh light of business life. Revenues from successful virtual world services can be substantial, but success can be fleeting and significant risks are involved. Strategy professionals should investigate virtual worlds as a new channel for reaching the most influential segments of consumer markets. Make sure you’re “learning by doing” and are prepared to handle the emergence of business-critical, high-revenue virtual worlds.

TABLE OF CONTENTS NOTES & RESOURCES 2 Virtual Worlds: A Primer We found the following documents helpful in 4 The Business Of Virtual Worlds our research. Inﬂuential Consumers And New Opportunities Related Research Documents Drive Business Interest In Virtual Worlds “North American Video Gaming: Surviving Virtual Worlds Promise A Direct Revenue A Midlife Slowdown” Business Opportunity . . . February 21, 2006, Trends . . . But The Costs And Risks Associated With “Social Computing” Virtual Worlds Are Substantial February 13, 2006, Forrester Big Idea RECOMMENDATIONS 9 Engage, Experiment, And Explore . . . But Don’t Get Carried Away Just Yet

WHAT IT MEANS 10 The More Inclusive Future Of Virtual Worlds

© 2007, Forrester Research, Inc. All rights reserved. Forrester, Forrester Wave, RoleView, Technographics, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. Forrester clients may make one attributed copy or slide of each ﬁgure contained herein. Additional reproduction is strictly prohibited. For additional reproduction rights and usage information, go to www.forrester.com. Information is based on best available resources. Opinions reﬂect judgment at the time and are subject to change. To purchase reprints of this document, please email [email protected]. 2 Market Overview | The Real Business Of Virtual Worlds

TARGET AUDIENCE Strategy professional

VIRTUAL WORLDS: A PRIMER In recent months, virtual worlds in general and Second Life and World of Warcraft in particular have featured heavily in the mainstream media.1 But although they’ve only been in the news for the past ﬁve to six months, the concepts behind and early iterations of virtual worlds have been around for more than a decade (see Figure 1). Here is a whistle-stop tour of virtual worlds to date for strategy professionals in ﬁrms that are investigating advertising or establishing an experimental presence in such worlds or even creating their own. Aside from the technical platforms, virtual worlds are:

· Computer-generated worlds where people participate using avatars. In these worlds, people interact with virtual objects (e.g., transportation devices, games, information sources) as well as other avatars (see Figure 2).2 The ﬁrst practical consumer online virtual world was AlphaWorld, build on the Active Worlds platform; it debuted in 1995. A related discipline is virtual reality, the creation of a virtual environment into which an individual can “step” via technology like 3D goggles, tactile feedback gloves, and motion-tracking suits.

Figure 1 A Timeline Of Virtual World Development

Proto-virtual worlds arrive: • WorldsAway (1995) Up for launch in 2007: • thePalace.com (1996) • Spore Final Fantasy XI • Home (Playstation 3) • MUDs (1978- ) Ultima Online launch launch (1997) • Lord of the Rings (Playstation 2 & PC) Online The Matrix (2002) in cinemas World of Warcraft (1999) AlphaWorld launch (2004) launch (1995) <1995 1995 1998 2001 2004 2007

Virtual world concepts explored • Phantasy Star • Lineage User base: in science ﬁction: Online launch peaks at • World of Warcraft 8.5 • Tron (1982) (Sega Dreamcast) 3.2 million million • Neal Stephenson’s Snow (2000) users (2003) • Second Life 4.8 Crash (1992) • Habbo Hotel • Second Life million* • William Gibson’s Neuromancer (1984) launch launch • Philip K Dick’s The Three Stigmata of (2000) (2003) Palmer Eldritch (1965) *Registered to use service 40701 Source: Forrester Research, Inc.

Figure 2 What Makes A Virtual World

Virtual world characteristics 3-D “world” Realistic or recognizable representation of objects, perspective, etc. Consumer-driven avatar Viewpoint typically third person (i.e., outside body)

Many synchronous users

Persistent world

May simulate real-world phenomena: • Gravity • Day/night cycles • Travel distances Copyright 2007, Linden Research, Inc. All Rights Reserved. • Picking up objects, wearing clothes, etc. Communication mechanisms: • Voice • Text assembly via menus • Free-text entry

40701 Source: Forrester Research, Inc.

· An outgrowth of online gaming. The second age of virtual worlds arrived with massively multiplayer online role playing games (MMORPGs) — these emerged as a popular platform in 1998 with Ultima Online from Origin Systems, but really gained in popularity with the release of Lineage by NCsoft. Lineage became popular in South Korea in 1999 and had a peak subscriber base of 3.2 million consumers in 2003/2004. MMORPGs typically have fantasy “sword and sorcery” or science-ﬁction settings with speciﬁc “quests” for participants. These games were the forerunners of today’s popular games like EverQuest (Sony), World of Warcraft (Blizzard Entertainment), and City of Heroes/Villains (NCsoft).

· Evolving into rich ecosystems of online communities. The increase in PC power and the growth of broadband connectivity — around 41% of households in North America and 33% of consumers in Western Europe now have broadband — has driven the number of consumers taking part in MMORPGs and other virtual worlds up to around 19 million consumers globally.3 Key games include: EverQuest 1 and 2, Lineage 2, Star Wars Galaxies (LucasArts), Final Fantasy XI (SQUARE ENIX), and World of Warcraft. In addition to these games, other virtual worlds that emphasize chat, creativity, and community have begun to emerge, like Second Life, Toontown, Habbo Hotel, and There.com

The two key diﬀerentiators between current virtual world oﬀerings are how much time and dedication they require from the consumer and whether they are recognizably a “game” in the traditional sense — i.e., with goals, endpoints, and a “winner” (see Figure 3).

Figure 3 Mapping The Landscape Of Virtual Worlds

Traditional MMORPG worlds Free-form virtual worlds High time spend/ Second constant visits to EVE Online virtual worlds Lineage Life World of Final Fantasy There.com Warcraft Spore* EverQuest The Sims Playstation Home*

Star Wars Galaxies City of Guild Wars Heroes Toontown Habbo Hotel

Cyworld Low time spend/ occasional visits to virtual worlds Online game worlds Social network worlds Online game Virtual world

*Not released yet 40701 Source: Forrester Research, Inc.

THE BUSINESS OF VIRTUAL WORLDS In recent months, Forrester has received dozens of queries from clients on the topic of virtual worlds. Strategy professionals are keen to understand why mainstream consumer-facing companies from all areas of business — IBM, Toyota, Nokia, and Reuters — are so keen to get involved in this space. Why are high-proﬁle artists like Duran Duran and U2 and organizations with political agendas like Davos or Jean-Marie Le Pen’s far-right Front National party taking their messages into Second Life? Additionally, why are more development and media companies trying to bring their own virtual worlds to market? How do they make money and what costs are involved?

Inﬂuential Consumers And New Opportunities Drive Business Interest In Virtual Worlds While virtual worlds still only attract a niche group of consumers today, strategy professionals at media, ﬁnancial services, IT infrastructure, and consumer packaged goods (CPG) companies should take them seriously. Why? Virtual worlds are:

· A niche consumer activity — but what a niche! Forrester has been exploring the potential for companies to tap into the vein of user-generated content for some time and has developed a categorization of the pecking order of those consumers pushing the boundaries of Social Computing. At the very top of the pile is a small group of “creators” who generate much of the valuable content, have undue inﬂuence in peer groups, and experiment with new bleeding-edge technologies. Guess what? Virtual worlds today are almost totally populated by creators: Getting access to them — even if there are only tens of thousands of them globally — is probably worth the investment.4

· Still a wide-open market waiting for a winner to emerge. Unlike other emerging Social Computing technologies where clear global brands have already emerged — YouTube for user-generated content (UGC) video, MySpace and LinkedIn for social networking — no clear winner has yet emerged in virtual worlds. Sure, Blizzard has cornered the MMORPG market for now and Linden Lab has a headstart with PR-friendly Second Life, but the growth from today’s 19 million to ~90 million consumers could just as easily come from your company’s investments in virtual worlds.

· Getting easier and cheaper by the day to be involved in. If you wanted to build a virtual world 10 years ago, you had to start from scratch. The available tools were relatively basic even two years ago. Now, however, a number of companies will sell (or even give you) an oﬀ-the-shelf toolkit to build your own virtual world. Companies like BigWorld Technology, WorldForge (an open source oﬀering), Elysium Source, MyDreamRPG, Multiverse, and even Linden Lab are keen to talk to you.

Virtual Worlds Promise A Direct Revenue Business Opportunity . . . The various forms of business model that dominate virtual worlds betray the heritage of this technology: Alongside new, emerging models are combinations of free betas, video gaming models, and online service models (see Figure 4). The companies that run virtual worlds make money in a number of ways, including:

· Retail sales of a “boxed” product. This is the best-understood but least popular business model: selling a box with a CD or DVD in it via a high-street store or online retailer. This is the most conventional means of gaining access to a virtual word, and it suffers from the same downsides as the traditional offline video game business — infrequent large purchases and little ongoing revenue. NCsoft’s Guild Wars has been the most successful example of this type of business model recently, having sold 3 million copies of the game in the 18 months up until December 2006.5 And Blizzard sold 2.4 million retail units of The Burning Crusade expansion pack (priced at $39.99) during its first day on sale in North America and Europe.6

Figure 4 Tracking Virtual World Business Models

Business model Participants Sizing current revenues Retail sale Retail, virtual world Large: up to $1 billion software providers NPD pegs US sales of PC game software at $970 million; global market likely to be around $2 billion. Virtual worlds could account for 15% to 25% of this. Subscription Virtual world software Moderate: hundreds of millions of dollars providers, media partners While World of Warcraft may generate more than $90 million per month in subscriptions, most worlds have fewer than 100,000 users. Microtransactions Virtual world software Large: up to $1 billion providers, retailers, Korean Cyworld users spend $300,000 per day, media advertisers, while Second Life transactions amount to more consumers than $1.5 million in any 24-hour period. Advertising and Virtual world software Small: tens of millions of dollars marketing providers, advertisers, Speciﬁc budgets are near-impossible to come by, professional gaming clans but advertisers are only spending tactical amounts in virtual worlds and then mainly just in Second Life. Media franchise Virtual world software N/A: not a revenue stream yet providers, media owners Not currently seen as a revenue source, more as an enhancement to sell music, movies, and game systems. Could turn to large-volume microtransactions in the future.

40701 Source: Forrester Research, Inc.

· Subscription fees. After a consumer has gotten hold of the software via a free or paid-for download or retail purchase, he or she will pay a monthly subscription fee; average monthly fees are around $15. EverQuest, Star Wars Galaxies, and The Sims were early examples of subscription-fee success, while World of Warcraft is the most popular current example of this type of virtual world — it had 8.5 million active subscribers as of March 2007, each paying up to $15 per month after an initial free trial period.7

· Many, one-oﬀ small transactions. This is a relatively new business model for virtual worlds and is favored by several of the more social, nongaming virtual worlds. It is based more on the principles of conversational content than traditional game software.8 Typically, entering the virtual world is free, but a participant has to pay to customize his or her character (e.g., clothing, attributes) or environment via a microtransaction — usually in the virtual world’s own currency. This gets past consumers’ initial reluctance to commit to a subscription and, if successful, can lead to a large number of accounts being created very quickly — although in many cases, the majority of these are never used after the initial registration. Huge communities like Habbo Hotel (which has 70 million registered accounts) and Cyworld (with 18 million registered accounts just in Korea) not only challenge MySpace.com as social networking destinations, but generate signiﬁcant revenues from item transactions — up to $300,000 per day in Cyworld’s case.

· Accepting advertising and marketing money. Second Life is at the forefront of another revenue model: advertising and marketing. So far, companies including American Apparel, Nokia, Toyota, and Wells Fargo have paid to create a store or product in Second Life. As with other aspects of online services like online gaming or social networks, marketers are also likely to provide income for virtual world owners via sponsorship, in-world ads, and by maintaining an in-world presence. Early-adopting companies are spending up to $200,000 on their fully functioning virtual world presence.9

· Supporting media franchise development and enhanced user interfaces. Virtual worlds can be used to promote other (more easily monetized) products in a media franchise like TV shows, games, and music or to act as a visually pleasing front-end for other services. The application owner can create a virtuous circle whereby the world promotes the products and vice versa; microtransactions can generate additional in-world revenues. Sony’s newly announced Home application for the PlayStation 3 shows where this trend is heading.10 Announced at the Game Developers Conference in San Francisco and scheduled for release in fall 2007, this free downloadable virtual world for PlayStation 3 allows space creation, avatars, and communication. More importantly, the virtual world will serve as a launch pad for multiplayer games, casual game downloads, and music and video downloads on the device.

Increasingly, hybrid business models that combine retail sales, subscription fees, transactions, and advertising are beginning to spring up. Again, Second Life is the best-known example of a hybrid model to date: While consumers can play for free in a “basic” mode, they must upgrade to a premium subscription account before they can own “land.” Second Life’s developer Linden Lab then “taxes” consumers on the value of their land.

. . . But The Costs And Risks Associated With Virtual Worlds Are Substantial Blizzard could be banking up to $96 million per month from World of Warcraft subscriptions, so it is unsurprising that many companies are now investing in virtual worlds in one way or another.11 However, as Warner Bros., Sony, and game publisher Electronic Arts (EA) have found, it isn’t easy to consistently create a blockbuster virtual world and — the hardest part — keep it going. Companies considering investing in virtual worlds must consider:

· High costs. While there are significant benefits to operating an online, always-connected software model — such as reduced piracy levels and cheap or free distribution — these benefits are often offset by very high setup/development costs and disproportionately high maintenance costs. While it is difficult to get accurate figures for the development of virtual worlds, Interplay’s recent filing with the United States Securities and Exchange Commission (SEC) projects the cost of launching a MMORPG set in its popular Fallout brand franchise at $75 million — with a 3.5-year development cycle prior to launch.12 Add in the ongoing cost of servers, maintenance, and adding new content or events to keep users engaged, and the costs of owning a virtual world soon mushroom out of control.

· High risks. For every World of Warcraft, there are many Matrix Onlines or The Sims Online — seemingly sure-ﬁre concepts, based on recognized franchises, that failed to gain (or retain) critical mass. Although the audience for virtual worlds has exploded during the past year — with up to 19 million consumers participating globally — participation in virtual worlds is still a niche activity, and one that requires a lot of time. Because of this, few consumers will use more than one virtual world. Additionally, hacking risks are high: When consumers can actually make money in worlds like Second Life, the incentives for breaking in are increased. There have even been cases of in-game scams and item theft in virtual worlds like EVE Online.13

· Potentially high churn rates. Qualitative evidence from virtual world providers suggests that consumers ﬁnd these applications very “sticky” — they will often retain their subscription for one, two, or even three years to maintain their character, the experience, and the social connections they have gained. But like any other (primarily) free-to-use or subscription-based model, churn is the enemy — with consumers ﬂipping to other newer, cheaper, or more compelling virtual worlds before the developer has managed to recoup its costs.

RECOMMENDATIONS

ENGAGE, EXPERIMENT, AND EXPLORE . . . BUT DON’T GET CARRIED AWAY JUST YET Should strategy professionals get caught up in the hype of virtual worlds (as many of their marketing and PR colleagues have)? Probably not, unless they are in a company that’s in a position to generate direct revenues from its own virtual world. But that doesn’t mean that you should simply dismiss these applications out of hand. A measured approach to exploring virtual worlds can yield both valuable insight into the consumers using these platforms and a better appreciation of what is currently available and what is just around the corner. · Explore several of the free/low-cost virtual worlds . . . All you need to explore Second Life is a few hours and a relatively decent broadband-connected PC. Similarly, exploring Habbo Hotel or World of Warcraft requires no or very little financial commitment. Simply walking around these environments will yield a much better impression of what is going on than any amount of analyst commentary. Don’t get hooked though — World of Warcraft is already at the center of several addiction studies. · . . . but be realistic about the short-term benefits of time spent “in the Matrix.” While great fun, virtual worlds are often little more than elite social clubs — populated by gamers or über-geeks. As such, they can’t even be used for representative consumer research; any likely sample will be so biased as to be off of the scale of normal consumer behavior. Building stores or holding press conferences in Second Life may be great for PR — if you are the first apparel manufacturer or computer hardware company to do it — but shouldn’t be viewed as a mass communication mechanism. · Start building a framework for assessing business value. Strategy professionals should view virtual worlds as one of the applications that will fit into a future business toolkit for communications (both internal and external), media ecosystem support, and (perhaps) direct revenue generation. Knowing when the tipping point between novelty and viable platform occurs will be key. Start assessing what virtual worlds could do for your business and create a framework to help evaluate emerging opportunities in this space.

WHAT IT MEANS

THE MORE INCLUSIVE FUTURE OF VIRTUAL WORLDS Strategy professionals should be aware that in the next few years, virtual worlds will: · Include social networking technologies. The stickiness of Social Computing technologies like social networking, blogs, wikis, syndication, tagging, and shared bookmarks has fueled a new wave of technology investment spending. Virtual worlds like Second Life, Cyworld, and Habbo Hotel already incorporate many Social Computing features in their fabric, such as personalized spaces, chat, and virtual shopping. Other virtual worlds are likely to extend and expand upon these types of services during the next few years. Ultimately, this could pose a threat to incumbents like MySpace, Facebook, and Bebo — virtual worlds offer slicker, more immersive experiences, which are attractive to the Millennials.14 · Support multidevice participation. Game developers are already looking at allowing players to cross device boundaries. Microsoft’s “Live” efforts in gaming aim to create compelling worlds no matter how you access them, and companies like Froghop are exploring how multiple views of a virtual world could work through a range of different devices. Sony’s multiplatform gaming and communications ambitions will also drive PlayStation Home in this direction. These efforts aim to take the idea of the persistent world beyond the home PC and onto devices that consumers carry all the time, such as mobile phones and PDAs. This will also spur device manufacturers to design more sophisticated user interfaces than those available on today’s models. · Support multiworld avatars. The flip side of being able to access a virtual world from many devices is being able to access multiple virtual worlds using the same (or similar) avatar. While most active users today only use one virtual world, many users may want or need to swap between worlds for varying tasks as the 3-D virtual user interface becomes more widely adopted. Think of this as a much more sophisticated version of Microsoft’s Xbox gamer tag service. Although very difficult to do — and potentially stripping an element of control from individual worlds — this will allow a consumer or business entity to create one virtual representation of themselves for gaming, communication, and commerce. · Incorporate business communication, training, and productivity tools. Perhaps the most interesting prospect for virtual worlds is how businesses will use them. The past year has seen a renewed interest in videoconferencing, especially new high-definition videoconferencing — partially due to concern around the cost and environmental impact of travel, but also because the network bandwidth available now allows this at a fraction of the previous price. Virtual worlds — particularly those with realistic, highly articulated avatars — offer an inexpensive and potentially useful and immersive way of holding meetings, collaborating, and sharing information — creating the 21st century version of team workspaces and e-meetings. Companies like IBM are already exploring this, having created a dedicated business unit to explore and exploit virtual world technology.15

ENDNOTES 1 Articles about Second Life have appeared on the Web sites of Business Week, Time Magazine, and CNN. Reuters has a reporter, “Adam Reuters,” stationed in Second Life. Sources: “My Virtual Life,” Business Week, May 1, 2006; “My So-Called Second Life,” Time Magazine, December 16, 2006; “Educators Explore ‘Second Life’ Online” CNN, November 14, 2006; and the Reuters Web page http://secondlife.reuters.com/.

2 Arguably, the concept of virtual computer worlds has been mainstream since Disney’s movie Tron, which was released in 1982. At around the same time, “cyberpunk” author William Gibson was exploring the concept of virtual reality in his short stories and, most notably, his 1984 novel Neuromancer. An avatar is a representation of an individual’s presence in a virtual world — it was ﬁrst used in adventure games in the 1980s and popularized by author Neal Stephenson in his 1992 novel Snow Crash. The name is taken from a Sanskrit term used in Hindi texts to describe an earthly incarnation of a higher being.

3 The updated numbers are based on June 2006 ﬁgures from Woodcock, Bruce Sterling. “An Analysis of MMOG Subscription Growth” MMOGCHART.COM 12.0 at http://www.mmogchart.com. This analysis gives 12.5 million subscriptions; we added in retail sales of major franchises such as Guild Wars (3 million retail copies), the growth in the subscriber base for World of Warcraft (8.5 million now, rather than 6.6 million), and the increase in the number users of Second Life (4.8 million “residents” — assuming a generous 30% of these users have a subscription). We excluded “free to play” communities like Cyworld or Habbo Hotel. This also assumes that a consumer only has one concurrent subscription to a virtual world.

4 For more information, see Forrester’s teleconference on “Tapping The Power Of Consumer-Generated Media,” December 13, 2006.

5 “December 13, 2006 (Bellevue, WA) — Fuelled by sales of the hit game Guild Wars Nightfall, the latest release in the award-winning Guild Wars franchise, sales for one of the world’s leading subscription-free online role-playing games have surpassed three million units worldwide in a little more than a year and a half. This milestone event was announced today by ArenaNet, developer of Guild Wars, Guild Wars Factions, and Guild Wars Nightfall, and NCsoft Corporation, the world’s leading developer and publisher of online computer games.” Source: “Guild Wars Exceeds Three Million Sold,” NCsoft press release, December 14, 2006, http://www.ncsoft.com/eng/NCPress/list.asp.

6 “Irvine, Calif. — January 11, 2007 — Blizzard Entertainment, Inc. announced that World of Warcraft, its subscription-based massively multiplayer online role-playing game, was now played by more than 8 million gamers around the world. World of Warcraft had also achieved new regional subscriber milestones, with more than 2 million players in North America, more than 1.5 million players in Europe, and more than 3.5 million players in China.” Source: “World of Warcraft Surpasses 8 Million Subscribers Worldwide,” Blizzard Entertainment press release, January 11, 2007. Visit http://www.blizzard.com/press/070111.shtml for more information.

“Irvine, Calif. — January 23, 2007 — Blizzard Entertainment today announced that World of Warcraft: The Burning Crusade has broken the day-one sales record to become the fastest-selling PC game ever in North America and Europe, with a worldwide total of nearly 2.4 million copies sold in the ﬁrst 24 hours of availability. The Burning Crusade, the ﬁrst expansion set for World of Warcraft, was simultaneously released

in North America, Europe, Singapore, Thailand, and Malaysia on January 16 and on January 17 in Australia and New Zealand.” Source: “World of Warcraft: The Burning Crusade Shatters Day-1 Sales Record,” Blizzard Entertainment press release, January 23, 2007. Visit http://www.blizzard.com/press/070123.shtml for more information.

7 “Irvine, Calif. — March 7, 2007 — Blizzard Entertainment, Inc. today announced that World of Warcraft: The Burning Crusade sold through approximately 3.5 million copies within one month following its mid- January launch in North America, Europe, Australia, New Zealand, Singapore, Thailand, and Malaysia. This includes more than 1.9 million sold in regions that play on North American realms, including more than 100,000 copies in Australasia, and nearly 1.6 million in Europe. World of Warcraft’s worldwide subscriber base now numbers more than 8.5 million and is continuing to grow as new and returning players join existing players in the game.” Source: “World Of Warcraft: The Burning Crusade Continues Record- Breaking Sales Pace,” Blizzard Entertainment press release, March 7, 2007. Visit http://www.blizzard.com/ press/070307.shtml for more information.

8 New content services won’t rescue the telecom industry. Only services that unite content with communication — what Forrester calls conversational content — can tap €104 billion in potential new revenue through 2007. See the July 16, 2002, Report “Conversational Content Unlocks Revenue.”

9 Companies typically spend around $200,000 to set up a proper virtual storefront, which includes having it designed, buying or leasing the “land” and staﬃng it (hiring avatars to work in it), according to several game developers. Source: “How youth marketers are trying to understand and eﬀectively use virtual social worlds,” Youth Markets Alert, November 1, 2006.

10 “Tokyo and San Francisco, Calif., March 7, 2007 — Sony Computer Entertainment Inc. (SCEI) today announced the unveiling of a ﬁrst-of-its-kind 3D online user community service for the PlayStation 3 (PS3) computer entertainment system. The service, known as ‘Home,’ will enable users to create their own avatar and explore a real-time virtual community, as if they are playing a detailed 3D game for PS3. The service will become available globally beginning in fall 2007. Home is a real-time online 3D, networked community available on the PlayStation Network. It allows PS3 users to interact, communicate, join online games, shop, share private content and even build and show oﬀ their own personal spaces to others in real time. Home will be available as a free download from the PlayStation Store and will launch directly from XMB (XrossMediaBar) on PS3.” Source: “Sony Computer Entertainment Inc. announces ground-breaking, next- generation 3D online-user community for PlayStation 3 — ‘Home’,” Sony Computer Entertainment press release, March 7, 2007. Visit http://www.scei.co.jp/index_e.html for more information.

11 The World of Warcraft number is based on a simple assumption: 8.5 million subscribers each pay $15 per month to play, totaling $127.5 million. In reality, different tariff models in different markets — for instance, pay-per-play models in China — along with the number of consumers in their “free” trial month make judging income significantly more difficult; discounting by 25% to allow for payment variations and trials gives $96 million.

12 In a Form 8-K submission to the SEC on November 30, 2006, Interplay detailed the expected funds required to develop and launch a Fallout MMORPG. In summary, it predicted that the development budget

would involve: $5 million for preproduction; $40 million for production, and $30 million in launch costs. The document also detailed that if work on the project began in January 2007, the launch date should be July 2010.

13 In early 2007, a virtual bank CEO in the science-ﬁction role playing game EVE Online made oﬀ with billions in cyber-currency that fellow gamers had entrusted to him with the hope of earning some interest. Source: “Cons in the Virtual Gaming world,” CNet article, August 31, 2006. Visit http://news.com.com/2100- 1043_3-6111089.html for more information.

14 The professional workforce is dramatically changing as a new generation of younger, college-educated workers launches their careers. The “Millennials” — those born between 1980 and 2000 — have an innate ability to use technology, are comfortable multitasking while using a diverse range of digital media, and literally demand interactivity as they construct knowledge. See the September 30, 2005, Trends “Get Ready: The Millenials Are Coming!”

15 “IBM will launch an official group in January to deal with Second Life and other virtual realms from which the company hopes to profit. Virtual reality and other visual interface work is the next project on IBM’s plate, Irving Wladawsky-Berger said in an interview at CNET’s Second Life offices. Wladawsky-Berger, vice president of technical strategy and innovation at IBM, led the company’s response to earlier technologies that rewrote the rules of the computing industry, such as e-commerce and Linux. ‘I have been playing a strong role in helping us start our 3D Internet and virtual-world efforts. We are launching a new EBO in this area in January — that is, an emerging business opportunity — much like we did with Linux and the grid,’ Wladawsky-Berger said Tuesday. IBM believes the virtual realm has potential for training, conferences and commerce, he said.” Source: “IBM to give birth to ‘Second Life’ business group,” CNET article, December 12, 2006. Visit http://news.com.com/IBM+to+give+birth+to+Second+Life+business+group/210 0-1014_3-6143175.html for more information.

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