Picture this: a CEO is sitting in a board meeting when an assistant runs into the room with a fax marked "confidential." Moments later the CEO's cell phone rings. It's them sending a warning. Casually, the CEO wraps up the meeting and sprints off to download the next level of Majestic, a new episodic game from Electronic Arts (Nasdaq: ERTS).

Online episodic games are an accelerating trend in digital entertainment. Built on the same principle as episodic TV shows like Survivor, each level of an episodic game concludes with a cliffhanger to keep players tuning in for the next installment. Companies let players download the first episode for free, and downloads of subsequent episodes cost around $5 or $10. If players so desire, game companies will even alert them to the arrival of a new episode by phone, fax, or email.

WHO WANTS TO PLAY? Obviously, the more popular the game, the more episodes a company can sell. "The ultimate goal of an episodic game is to have a life of numerous years," says Jim Perkins, founder, president, and CEO of Arush Entertainment. On the other hand, if a game doesn't work, it's simple to kill it off and move on. Whereas each version of a boxed game like Tomb Raider or Quake typically takes two to three years and costs $2 million to $5 million to develop, most online episodic games are built in a few months at an average cost of $250,000.

Because of the large front-end investment, only very successful boxed games return a significant profit. If a game fails, the publisher suffers and the developer never sees a penny in royalties. And even if a boxed game is a hit, developers often must wait years to see a percentage of the profits. For that reason, developers also like the shotgun approach of episodic games: they can be produced quickly, cheaply, and often involve less risk and a better chance of winning over the fickle gaming audience.

The low cost of online episodic games gives publishers leeway to invest in several developers. Arush Entertainment, a Scottsdale, Arizona, startup, has signed deals with Sunstorm Interactive and Yobro Productions. In March, Arush released six games through the Gigex syndicated network, which places games on Yahoo (Nasdaq: YHOO), Excite, IGN.com, and DemoPlanet. The games, like Monkey Brains, RC DareDevil, Feedn' Chloe, and Primal Prey, vary from G-rated, classic arcade-style games to blood-spattered shoot-'em-ups. All the games' first episodes offer three levels of difficulty and take approximately two weeks to play. If a player gets hooked, additional episodes cost $5 each.

WildTangent, a Redmond, Washington, startup that makes software tools to create 3D computer animation, is also exploring the subscription-game model. Unlike Arush, WildTangent develops its games in-house. A common criticism of online games is that they don't match the high quality of CD-ROM games, which have the space to store full-motion video and other impressive effects. WildTangent says its online episodic games are of the same quality as boxed games.

WildTangent has also struck deals to create games for large entertainment companies, which have identified the cross-marketing potential of episodic games. WildTangent cofounder, president, and CEO Alex St. John says his company has contracts to create an X-Files episodic game for News Corporation's (Nasdaq: NWS) Fox unit and a War Games series for AOL Time Warner (NYSE: AOL) to coincide with an upcoming TBS Superstation show of the same name. WildTangent plans to launch its own episodic games in summer 2001 for a monthly fee of $10. Electronic Arts, like the smaller games companies, plans to offer the pilot episode of its new game, Majestic, for free; subsequent episodes will cost $10 a month. EA Sports also has a $5-a-month subscription to a package of four games, including NASCAR Web Racing, Knockout Kings Web Boxing, and Tiger Woods PGA Tour 2001. A sports package can only last a few months, though. If done right, Majestic could continue for years.

The real question about episodic games has yet to be answered: will consumers pay for online games when there are so many free games on the Internet? Stay tuned.

Write to jennifer.lewis@redherring.com.

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