If you fondly recall playing the video game Pong as a teenager, not only are you old, but you’re also in a prime position to appreciate the sophistication of 21st century gaming culture.

Gone are the days of two players volleying a toxic waste-green, glowing dot between two stubby straight lines on a black background or pensively studying Pacman’s scissoring mouth. Contemporary massively multi-player online games (MMOGs) like Everquest® and the feverishly anticipated Champions of Norrath™ have lush, finely detailed, state-of-the-art graphics, complex fantasy storylines and allow thousands of participants to go online and move through a fantastical virtual world at the same time, communicating with other players, competing and assuming an assortment of exotic, whimsical identities.

Dr. Andrew Whinston

According to University of Texas at Austin business Professor Andrew Whinston, the seductive, addictive quality of the games gives us surprising clues as to where the future of consumer electronics lies.

Whinston, the Hugh Roy Cullen Centennial Chair in Business and director of the Center for Research in Electronic Commerce (CREC) at the McCombs School of Business, has studied the structure of online entertainment communities, looking for revenue-increasing strategies, and discovered that the irresistible draw of the games is something more primal than stunning content and visuals.

The driving force behind the $10.3 billion electronic gaming business seems to be players’ age-old human desire for status, for being highly ranked in online halls of fame, for example, or tournaments and “top 10 highest scorers” lists.

“In the world there’s an increasing emphasis on ranking,” says Whinston. “Universities are ranked, business schools are ranked, professional athletes are ranked and players of these electronic games are now ranked as well. Interactive games are constructed around the idea that people, in their fantasies, can play against others all over the world and see where on the knowledge spectrum they fall, winning prizes and recognition. Interactivity and these unbelievably popular online communities where individuals compete are what you’re going to see more and more businesses—not just online gaming—using to great advantage.”

According to Whinston, in 2002 sales for game-related equipment and services surpassed Hollywood record box-office sales, and top games such as Madden NFL 2004 brought in as much as $200 million.

Although game designers clearly have tapped into the power of competition and interactivity as moneymakers, little research has been done on what comprises the most effective game structure of these competitions and no one, until now, has offered theoretical guidelines.

Keeping in mind that the desire for status can motivate consumers to spend more time and money on a game, which in turn raises the provider’s revenues, Whinston and CREC doctoral students De Liu and Xianjun Geng trained a scientific eye on several key variables of contests, evaluating effort players are willing to expend, ability levels of players and ideal group size for online communities of competitors. Because online communities are very “elastic” and offer endless opportunities for manipulation of game details and features, their research findings are of tremendous benefit to game designers.

In games where prizes are awarded, high-skill players are maximally motivated by a small number of high-value prizes. Daniel Bellinger, a senior in Corporate Communication, demonstrates an action game on a GameCube.

Even more importantly, a study of players’ behavior in the gaming environment gives social scientists’ valuable insight into the human urge for status and what motivates individuals to expend effort in hopes of recognition. The ease with which data could be culled on participants’ behavior in online interactive entertainment communities made the gaming environment a perfect research laboratory.

Whinston and his research colleagues discovered that, in games where prizes are awarded to stimulate competition among players, different prize structures affected players of varying skill levels differently. Large prizes, but with few being awarded, appealed to the high-ability players, while a small-but-many prize structure was more desirable for the low-ability players. In very large, heterogeneous online communities, the winner-take-all prize structure was optimal. In the extremely popular Madden NFL 2004 game, for example, $50,000 is the grand prize for a national tournament winner.

In addition to prizes, entry fees and minimal performance requirements also were found to be techniques for shaping players’ status-seeking activities. In general, although charging an entry fee excluded contestants with lower skill levels and decreased the effort level of participating players as they faced less competition, the total revenue gain from participating players offset the loss and was recommended by Whinston.

Research also revealed that, when it comes to player group size and ability, competition increases along with group size, up to a certain point, and players in a homogeneous online community will expend more effort, thereby raising the provider’s profits.

“As more entertainment providers decide to create these online communities in order to make more money,” says Whinston, “the decision of a player to stay with one online community rather than moving to another will be influenced by the rules of status seeking. The design of these online worlds and architecture of the status seeking activities will determine who among the competing providers survives and thrives.”

And games are only the tip of the iceberg.

Whinston points out that the recent, really significant growth for companies such as Dell™, Microsoft and Sony has been in digital interactive home entertainment, with technology and business accounting for only around 5 percent growth compared to 40 percent in the home.

“Traditional, static, non-interactive, packaged forms of entertainment are steadily diminishing in revenue,” says Whinston. “People are now seeing that static entertainment can be copied and tampered with and that the business model—as we witnessed in the music industry with peer-to-peer file sharing and Napster—is undermined. As profits drive business, the world of entertainment will push more aggressively toward interactivity and try to understand how it can be used to make more money. The interactive part is the value.”

Whether the dilemma is a hacker breaking into Apple iTunes and sharing the break-in code on his Web site or the more sophisticated, Mafia-style tech criminals who can hijack a site like Yahoo and extort blackmail in order to leave it alone, interactivity seems to offer a solution. Ephemeral and ever-evolving, the interactivity is the element which cannot be copied and serves as the foundation of a new, more viable business model.

Looking beyond the boundaries of online games, one sees a perfect example of Whinston’s assertion in digital video recorder equipment such as TiVo®. With TiVo, television watchers are able to customize their viewing experience, frequently eliminating commercials and sabotaging the entire revenue-producing structure of television entertainment, which is based on advertising.

“What we’ll probably be seeing in the near future is interactive advertising,” says Whinston. “An ad comes on TV, and I have the opportunity to compete for prizes based on providing the correct answer to some trivia question about ad content. Perhaps a car’s being advertised—at the end of the ad, the advertiser can ask what color the beach towel on the hood of the car was, and I can interact and participate with millions of other contestants via wireless device, for example. So you have millions of people totally focused on the ad, maybe even more than on the actual TV show, because they have a chance to win a trip to Paris or a new truck.”

According to Whinston, in this new, interactive entertainment world, with relative positioning of people and prizes, a large part of the value of a business will lie in the value of the interactive community. Should one company decide to purchase another company, for example, the price will reflect the value of the community, and value will rise when the community of contestants is particularly active, devoted and will likely continue to compete.

Electronic entertainment monoliths like Microsoft already have begun to transform the digital home with Xbox, its games console. And Sony, Hewlett Packard and Dell are not far behind in the race to capture a chunk of the digital interactive home entertainment market.

Interactive games tap into players’ desire for status and mirror the dynamics of society at large.

“Microsoft and others believe products like Xbox will constitute the central computing environment of the home,” says Whinston. “It’s their dream. There will be Windows for the refrigerator, Windows for the oven, dishwasher, washing machine, etc. And this all will be controlled by an expansion of the Xbox. The TV will converge with the computer, entertainment will be delivered over the Internet with high-speed connections and you’ll be able to interact with friends and family all over the globe, competing for prizes and status. It’s a vision of the world that’s revolutionizing the tech industry.”

Cell phone companies in Europe already have begun to increase revenues by implementing wireless mobile gaming with popular games such as Mobile Millionaire. Based on the TV show “Who Wants to be a Millionaire,” Mobile Millionaire allows players to answer trivia questions provided by a game server. Participants retrieve and answer questions via their mobile phone through text-message or Wireless Application Protocol service, enjoying real-time interaction with other users and with service providers.

Players are charged for each message they send and receive, and, in countries such as Japan, they also are charged a monthly subscription fee. Users are ranked monthly, and halls of fame feature the best players of the month.

According to Whinston, by 2002 mobile gaming had become the top wireless data traffic in Europe, and experts estimate that the global mobile game industry may generate as much as $12.8 billion in revenue by 2008.

Peering into the future and scoping out what’s on the horizon is something that Dr. Whinston and the CREC do well, with the center’s research running the gamut from studies of network security to managing network resources using real-time markets. The center even has researched the financial impact of reselling, or “scalping,” fixed-date event tickets on eBay®.

“If, as a researcher, you just observe the world around you, you can see many, many things which arouse your curiosity and present questions,” says Whinston. “In the case of the online games study, we saw examples of ‘keeping up with the Joneses’ everywhere we looked and realized that evaluating data from electronic games would have larger applications, so we did that. We found that games model society. Unless you study things by looking at data, it’s just anyone’s guess what makes something successful.”

Kay Randall

Photos: Marsha Miller