Russ Pearlman's Blog

I’ve recently been working with a client who is a major textbook publisher for schools in the K-12 domain. A number of the major publishers provide technology (for free!) that schools can use to augment their textbooks. These online tools can be used by both teachers and students. In today’s world, much of this content is simply an electronic conversion of the text books. But, the ultimate goal is to provide materials that are much richer and experience and leverage multiple ways to teach our children concepts.

As part of the work that I’m doing, we are looking to build out the next generation of these tools, and, as a parent myself, I’m excited by the possibilities. In education, there is something known as exception based teaching which is the idea that teachers focus on the exceptions – students that are demonstrating capabilities well beyond average and students who require some remediation to be able to catch up. In a typical classroom with about 20 students to each teacher, it’s hard enough to be able to understand how each student is doing – so there is an obvious opportunity for software to help. So, encouring students to do some work on the computer along with on-line assessments can really improve opportunities for a teacher in the traditional classroom.

In a Father’s Day article for Parade magazine, Barak Obama said that: “We need to replace that video game with a book and make sure that homework gets done.” For such a young President, I think he misses t

he point – “games”, “books”, “computers”, “Internet”, etc. are all blurring. While his broader point that ‘entertainment’ should not be the substitute for ‘learning’, I agree – but we need to erase the basic premise that ink on paper is somehow “better” than electronic learning; we need to replace the idea that “fun” and “education” are mutually exclusive;

we need to find innovative ways to educate our society that often finds itself lagging behind much of the developed world.

Unfortunately, the attitude espoused by Barak Obama’s article – though subtle – mirrors those at the head of many educational publishers, schools and organizations. While they continue to hold onto the tra

ditional ideas of how education should occur, they really hold back the coming revolution of e-learning, interactive learning, computer based assessments, etc. I’m pleased that at least one major book publisher is trying to make head-way into this universe of possibilities, and for the sake of my children, I hope they don’t delay.

In a recent article from Reuters, Digital downloads spell end for videogame stores?,  John Gaudiosi writes about the push towards digital download for video games. There are some interesting statistics that I’d like to summarize:

• 17% of PC video games were downloaded during 2008
• An estimated 2% of overall sales (about $400 million) this year were digital
• NPD estimates 18% of XBox 360 Gold members regularly download from XBox Live Arcade
• NPD also estimates that 10% of PS3 users regularly buy from Sony’s PlayStation Network
• Valve’s Steam service has 21 million users and 700 games

So, for 2008, at least, digital downloads are still pretty small. But the quote from the article that really got me was from Wedbush Morgan Securities analyst Michael Pachter:

“Downloads will become 20 percent of the market within five years, and probably peak at around 50 percent of the overall market in 10 years,” said Pachter. This assumes an overall market growth of 5 to 10 percent annually, he added.

So, that all got me thinking… how well does the current situation parallel to digital music? After all, from a maturity perspective, music is first, followed by video, followed by gaming, followed by book publishing.

According to another Reuter’s article, a report by the trade group IFPI indicated that digital sales of music represented about $3.7 billion in value – about 20% of total music sales. I was actually surprised to find that so low – I had expected music sales to be majority downloaded. But, I think you could also account for that by the fact that music piracy doesn’t count among the 20% since it represents ‘downloads’ but it doesn’t represent revenue.

Back to the video gaming market, does that mean that 50% of sales is a good prediction, too high or too low? Today, there are a few reasons why physical sales are valuable: 1) a physical copy of a game (or movie or album) is its own backup, 2) there is no download time needed for a purchase, 3) you can browse through a variety of titles and even discuss games with other people and sales reps, 4) you can get printed materials that come with the game and 5) you can buy / sell used games easily. But, in 10 years time, #2 and #3 will have completely melted away. #4 is already on the cusp of extinction – there just aren’t that many printed manuals anymore. #1 can be solved with some work-arounds, but eventually the platform vendors will help solve this issue. But, #5 isn’t so easy to deal with – eventually, retailers will have to help with the value proposition for downloaded titles. And, I expect that to be the potential biggest obstacle to overcome.

Since I have 10 years to make my own prediction, I’m going to go ahead and do it. By the end of the year 2019, 80% of all video games will be digitally downloaded.

The last day of E3 is here. By now, anyone who is really interested in all the gory details will have tracked down a number of sources to get the dirt. So, let me focus on 2 areas that probably haven’t received too much attention: devices and game monetization.

Devices

As for devices, yes, there is a lot of hoopla over Natal – Microsoft’s planned 3D controller that doesn’t require you to have anything in your hands. Sony countered with their own motion controller announcement. But, I’d like to focus on what’s there now as opposed to what might be in the future.

Platforms: the PS3, XBox 360 and Wii are still the top platforms. There is little to no change (outside of pricing) to these consoles this year. That’s a good thing since games are still behind the full capabilities of these platforms in terms of graphics, physics and AI.

Hand-helds: the king of hand-helds is still the Nintendo DS. This last year, they introduced the Nintendo DSi and replaced the DS original with the DS Lite. So, what’s the difference?

• The DSi has a larger screens than the DS Lite
• The DSi has better aesthetics: slimmer and wider, discreet matte finish, better grips and click-able buttons
• The DSi has a camera and can play MP3′s
• The DSi only supports DS games – unlike the DS Lite, it can’t support Game Boy Advance titles
• The DSi can utilize the DSi Shop which provides online access to games

In my mind, only the last point makes any difference – and if Nintendo was really pushing this – it’s a huge difference. Imagine no longer having to buy or rent games. You could just download them like books on the Amazon Kindle. But, alas, Nintendo has only provided 256 MB of internal memory, and major retail titles aren’t available for download.

While at E3, I did get the chance to see a DS competitor called M2. It’s a more robust entertainment device that has a camera, video capabilities, music playback, etc. But, without the availability of titles, I don’t expect much from it.

Sports controllers: probably this biggest innovation over the last year was the introduction of sports controllers that have led to the huge success of Wii Fit. This year, there were a bunch of additional controllers from imitation Wii platforms, to skateboards, etc. I even saw a really interesting wheel that you can put an iPhone in the middle of to play racing games on the iPhone. Overall, I think this is an area where the industry will continue to push – after all, how can mom’s object to kids getting exercise while playing video games?

Monetization

The elephant in the room at E3 is certainly money. After all, this is a business conference. But, little has been said in the way of monetization strategies outside of selling physical products in the retail channel. A few interesting tid-bits during the conference:

• Super Rewards (srpoints.com) provides virtual currency for the gaming and social networking space. Major publishers and platforms have used similar strategies for individual titles, but Super Rewards provides an external capability that can be leveraged. I think this is extremely interesting for not only social networking sites and games but also for any other site where you want to charge a small premium for additional content (can anyone say newspapers?)
• InComm Gaming provides prepaid currency cards that are available at retailers such as Best Buy. They enable branding of cards specifically for games. The best part of this option is that it allows users without a credit-card (i.e., players under 16) to have access to premium content.

Overall, there wasn’t a lot of innovation being discussed at E3 around monetization. Microsoft’s plans around movies and games-on-demand was very short on detail around this, and I saw very little in the way of micro-transaction (outside of Forza Motor Sport 3 which will have a number of add-ons available). As I posted yesterday, I’m skeptical about Microsoft’s plans until we see pricing.

Day 2 at E3 was a bit calmer for me. I had already had a chance to look quickly through everything yesterday, so today I had the chance to slow down and take a closer look at a few things.

Let’s start of by focusing in on Microsoft. I was able to get a bit more specifics on their public XBox Live offerings. This includes:

• Zune Video Store. Movies will be sent to your XBox 360 over the Internet in full 1080p. There are a few caveats that you need to be aware of. First, the movies don’t buffer – which is good – but that means that they expect you to have about an 8 Mbps connection to the Internet. If you don’t reach that threshold, the movie’s audio will be reduced from 5.1 to stereo. Second, you don’t need to have anything beyond an XBox Live Gold subscription. However, they were unable to describe pricing for movies at this time – obviously there is an additional cost, but it isn’t clear yet what that is. On a related point, third, movies are on a ‘rental’ model. At the show, the representative was unable to clarify how it would work – do you get access to the movie for 24 hours?, can you pause it and watch the rest later?, etc. Finally, Microsoft did not specify what movies would be available at launch. So, it is unclear if we are talking blockbusters or deeper into the catalog. This functionality is being promised for the Fall, but it is clear that they are unable to publically confirm a lot of details that will decide how attractive this capability is really going to be.
  

  XBox Live

• Games on demand. Surprisingly, this wasn’t particularly highlighted during the Microsoft press briefing on Monday. But, Microsoft confirmed that over 30 titles will be released for full digital download this summer. Since purchase of these titles is a full-blow game, there are some details you should be aware of. First, it will take approximately 2-3 hours to download the games. This isn’t surprising, but it does present a barrier to some impulse buyers. Second, they were unable to confirm pricing, but after repeated attempts to get an answer, the representative told me: “You should expect [pricing] to be in-line with full-retail prices.” At launch, there will be a number of Microsoft Game Studio titles available along with titles from other publishers – again, Microsoft did not supply a complete list of titles at this time.
• Social movie watching. If you have friends who also happen to have XBox Live Gold Subscriptions, are Netflix members and are willing to watch a movie with you at the same time – you are a candidate for this form of interactive movie watching. For those of you familiar with BD Live – the BluRay offering available on some compatible movies – you are looking at something similar, though the Microsoft platform provides the experience instead of the BD Live service on a title by title basis. I’m not sure exactly how popular this sort of thing is, but clearly Microsoft is exploring areas where the XBox can be used for more social interactions. This extends into their support for Facebook and Twitter on the console as well. In looking at the demos, this felt more like ‘dazzle-ware’ than a compelling offering. But, then again, E3 is about dazzle…

For my next blog entry, I’m going to focus on devices. And, I’m going to wrap up with a dicussion on monitization.

E3 is a lot like walking into a casino – there are lots of lights, lots of sounds, lots of flash and lots of under-dressed girls vying for your attention.  If E3 took the conservative road over the last few years, it is certainly back this year.

As an E3 neophyte, I was a bit surprised about the focus of the show – purely about games that will be coming out over the next year or two. For the most part, these games are pretty ho-hum in terms of innovation – I don’t know how many para-military first person shooters I saw. They all have their quirks, and they are all enjoyable on some level, but they certainly don’t get the blood pumping like the days when it was all so new. (Not until I got a chance to play so many did I realize what a terrible FPS player I am on the console. Fortunately, the XBox 360 seems more forgiving than the PS3 for me, but ouch – did I get pwned.)

There were a few surprising games to me, though. My favorite was Eidos’ Mini Ninjas. Yes, this is the company that created such hits Blood Omen and Hitman, but in Mini Ninja’s, quoting the Eidos rep at the show: “There is no death.” You just hit enemies with your sweet ninja moves and they disappear in a cloud of smoke; poof – they are gone. What was really enjoyable, however, was the simplicity of the game play, the way in which it didn’t take itself too seriously and the numerous things you could do (from creeping along in the grass to conjuring the spirits of animals around you).

Tomorrow, I’ll plan on taking a closer look at some of the non-game announcements and demonstrations. I’ll also take a special look at some of the companies offering various monetization approaches.

I went as an invited guest to the Microsoft E3 press briefing this morning. Here are some of the highlights of the briefing:

• New games: there are bunch of great looking games that I’m sure I’ll get a chance to see more detail on during E3. These included four non-exclusive titles (Beatles Rockband, Tony Hawk Ride, Modern Warfare 2 and Final Fantasy XIII) and eight exclusive XBox 360 titles (Shadow Complex, Joy Ride, Crackdown 2, Left 4 Dead 2, Splinter Cell Conviction, Forza Motorsport 3 and Alan Wake).
• XBox Live innovations including access to lastfm.com (providing free music to all XBox Live Gold members), SkyTV (for those in the UK) and social networking tools (including Facebook and Twitter).
• Finally, they officially announced Natal dubbed as “A new way to play; no controller required”. I’d like to spend the remainder of my blog discussing it.

I have a Master’s degree in Artificial Intelligence, and I’ve always been fascinated by human and computer intelligence – both in how they work mechanically, how they can be used to solve problems and how they are different from each other. I’ve had the chance to apply this to a number of problems over my career, but I haven’t done anything fundamentally new. That’s why I’m excited when Microsoft spoke about what Natal can provide.

First, let me describe what it is – though I’m sure I won’t be able to provide a complete picture for you. Natal is essentially a device that sits on top of your TV (or under it) just like the Wii sensor pad. It is able to detect 3D movement in front of it, detect faces and hear sounds in the room. It does not require that you have a controller or anything in your hand. It provides input to the XBox 360 that can be used to navigate through menus using hand gestures (as was demonstrated during the briefing) or interact for games (like was demonstrated with a few games called Paint Party and Ricochet). While this project is still in its infancy, clearly there is some real meat to the promises that this could be available in the next year or two on a generally available basis. (It was announced that ‘select’ members of the E3 attendees would have a chance to see and use the prototypes.)

But, the last demonstration was the best – and it is what really got me excited. Peter Molyneux, President of Lionhead Game Studios and creator of some of the best gaming AI around, showed a video of a virtual boy named Milo that ‘lived’ within the XBox 360. Using the Natal controller, he had a person interact with the boy including dialog, facial expressions and exchanging ‘virtual’ materials (for example, Milo was able to take a piece of paper that was held out in front of the Natal. Physically, the paper remained in the room, but Milo took a copy of the paper into his virtual room). Milo was also able demonstrate a level of interactivity that I’ve never seen in anything before.

Now, I know that a lot of this is smoke & mirrors and a scripted demonstration. I’m sure that Milo couldn’t come close to passing a Touring Test - the Holy Grail of interactive AI – but this level of interactivity does impress. And, I think this really shows only the foundation of what you can do with AI mixed with interactivity like that provided by Natal.

I’ll have lots more to come in the next few days at E3. What a fun way to start.