Companies are likely to embrace virtual worlds for such applications first, the authors argue, because they offer a cost-effective, productivity-boosting (not to mention “green”) alternative to air travel. After reaching a critical mass in the next 12-24 months and doubling year over year, the industry will soon be earning billions of dollars in annual revenue. (Anticipating skeptics, the authors note that the existing market for online enterprise training and collaboration already earns that much just in direct costs alone.)

As for the major players in this burgeoning space? Tuttle and Waite name IBM and Cisco, two companies that have been developing virtual world/online collaboration solutions for years, with Adobe, Citrix, Oracle, and Dassault Systems as other contenders to watch closely. They also note that the market’s growth will provoke fierce competition among the many enterprise virtual world solutions already out there — OLIVE, Second Life, OpenSimulator, Project Wonderland, to name just a few — leading to a shakeout in the industry. After this tumult, a few dominant behemoths and successful niche players will emerge, though it’s still unclear if the winners are already on the market, or still in development.

In any case, the report recommends that companies large and small should immediately start pilot programs based around virtual worlds. “Because the technology is delivering cost savings and improved operations,” they argue, “the time to begin is now.”

Tuttle and Waite’s full report, “Virtual Worlds for the Enterprise Market,” is now available on GigaOM Pro (subscription required).

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The goal, Riot Games CEO Brandon Beck told me, is to provide a rich gaming experience that’s competitive with major publisher franchises like Call of Duty and World of Warcraft — but unlike those retail-distributed, high-cost titles, offer it online for free. As Beck explained, “The video game industry is undergoing a dramatic transition from a packaged goods offering to a service industry.” His company is backed by experienced investors with a pretty good track record in gaming: BenchMark also put early money behind Habbo, Gaia Online and Second Life, while China’s Tencent is the big gorilla of virtual goods, earning $1 billion in revenue last year.

Image credit: www.leagueoflegends.com

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You first need to install the PlayOn program on a computer running on the the same network your Wii uses for Internet connectivity. (Instructions here; follow those closely before even turning on your Wii or downloading the client, or you may end up with hours of aggravation and confusion, like me.) Once PlayOn’s launched on your PC, just point your Wii’s web browser to “playon.tv,” and you’re in.

PlayOn’s Wii starting screen presents you with the available channels to choose from, including Netflix and Amazon, though you need to register your account info in the PC client, to access those services. Video quality is not bad, at least on my console — slightly better than the average YouTube video, but a notch or two below Hulu. PlayOn for Wii seems to stream long format videos well; I was able to watch an extended 60 Minutes segment without any sputtering. Overall, however, it is still very beta. For instance, many of Hulu’s listings don’t even have show/subject titles. (I only found Daily Show episodes after much digging, and got a 404 error for my pains.) YouTube videos don’t seem to come with a rewind or replay button. At the moment, channel navigation and content search is so kludgey and time-consuming, it’s not a very good solution for random viewing.

Final summary for Wii owners? Instead of using the 14-day free trial offer now, I’d wait a month or two (or three) in hopes the folks at Media Mall Technologies can work out the worst kinks, and only then give it a whirl before deciding if you want to plunk $39.99 down for a full license.

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Nanovor, the company’s first game, is at heart a collectible creature-vs.-creature battle game similar to Pokémon or Yu-Gi-Oh!. It also hits a number of sweet spots I highlighted in my recent GigaOM Pro analysis of successful virtual worlds (subscription required). Like the extremely popular Webkinz, kids can access online content by purchasing toys at retail, and similar to Maple Story, RuneScape, and most other huge MMOs, kids can buy virtual currency via debit cards sold at retail. Nanovor also integrates elements that have worked with older gamers, including alternate reality game aspects, and a virtual economy. (Kids can buy and sell their creatures online, with the company taking a cut of each transaction.)

Lawandus expects Nanovor to be cash-positive within the next 18 months. And if my nephew starts regaling me about Electropods and other odd Nanovor beasties this holiday season, I’ll believe that forecast.

Nanovor image courtesy Smith & Tinker.

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That’s just the start, because you can then upload your animations from the DSi to Flipnote’s web site, where they’re viewable by others on a system which filters user contributions by popularity, views, ratings, and response comments. In other words, it’s pretty much a YouTube for flip book animations. (The videos are even embeddable on other sites.)

Only a day after the U.S. launch, there’s already a number of genuinely engaging, impressive animations (amid the usual thicket of dross.) Unsurprisingly, there are even more epic animations from Flipnote users based in Japan, where it’s been available since last December.

According to the developer, Hatena, Japanese users submitted 1 million uploads in the first six months. If the DSi continues its record sales pace here, where 1.7 million units have already been sold, we’ll likely see similar levels of user-generated enthusiasm from the U.S. market.

In any case, it’s a welcome addition to Nintendo’s Internet connectivity and social-networking features, which have been painfully sparse up to now. That’s even been disappointingly true of the DSi, especially when compared with the iPhone/iPod Touch, which as a platform for games, is steadily eating into the handheld market. With Flipnote Studio and DSi’s recently launched Facebook photo integration, it looks like we’re finally seeing Nintendo struggle to connect with the Web 2.0 crowd. (Better late than never.)

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While there are countless casual games overlaid with movie themes already on the market, I’m particularly impressed by the sleekly produced quality of this site’s offerings, which take full advantage of broadband connectivity and Flash-powered graphics. For example, the jigsaw puzzle game doesn’t just challenge you to reassemble pieces of a static movie still, but animated fragments of an entire scene. My favorite, Well Connected, plays like a mad cross between Guitar Hero and Six Degrees of Kevin Bacon in that you have to connect movie stars by their films as their headshots fly toward you. Seasoned casual gamers will likely enjoy these titles, but so will fumble-fingered game noobs who also happen to be film buffs. You can compete with other users in leaderboards and use the site’s Facebook connectivity to bring your friends into the fun. (Multiplayer games and other social aspects are coming soon, Long and Kuper told me in a call yesterday.)

As a business, Hollywood Player has a lot of revenue streams. In this beta phase, there’s Amazon affiliate links to buy the movies featured in the games. Premium content and sponsorship deals will be announced soon, Long and Kuper tell me, including partnerships with several Hollywood studios. As with so many social games nowadays, digital goods will also be a future revenue source. Right now, you can use the Hollywood Credits earned from gaming to buy movie-related sweepstakes tickets. Or if you prefer, you’ll also be able to donate those credits for in-kind cash donations to a designated charity — a brilliant way to leverage gamer activity for a higher purpose. Because at least that way, you won’t feel like you’ve totally wasted your time just idly clicking on Angelina Jolie’s head.

Image courtesy Hollywood Player.

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Segmenting that 12 percent according to consumers’ Internet activity and device ownership, social network gamers and iPhone owners are strongly represented (27 and 28 percent, respectively); PC and handheld console gamers were almost as likely to buy virtual items (between 19 and 22 percent.) However, active console gamers lag just a bit behind those segments.

Unsurprisingly, the most significant variable in purchase rate is virtual world usage: Nearly half of the respondents who report being active MMO participants are also virtual item consumers. (The key challenge for virtual world developers is figuring out how to monetize the other half, something I cover in my recent GigaOM Pro report, subscription required.)

Meanwhile, Eric Hartness, chief marketing officer at PlaySpan, told me he expects that by this time next year, that 12 percent figure will rise to 15-18 percent.

All charts and data courtesy Frank N. Magid Associates and PlaySpan.

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The recession is an obvious culprit, pushing consumers with lighter wallets away from store shelves in search of free gaming on the web. While retail games had previously been considered recession-proof, the quality and variety of free online games has been steadily improving. But this is part of a larger trend, one that’s already impacted recorded music, movies/TV, and print publications: When costly physical media comes into direct competition with free digital delivery on the Net, the latter eventually wins out.

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The latest addition to the incredibly profitable music video game franchise from MTV/Viacom game studio Harmonix, the Rock Band Network will initially be available for the Microsoft Xbox 360 retail channel, and later for Sony PlayStation 3 and Nintendo Wii. With more than 50 million purchases and counting, downloadable Rock Band songs are already an important revenue and promotion platform for the music industry. So what will happen when the Rock Band Network greatly expands the download catalog? Two leading figures working at the intersection of music and games are expressing enthusiasm for the Network, but are also sounding some cautionary notes on song deployment.

“Opening Rock Band to uploading by musicians is a key point in making the rise of music games be of benefit to all musicians,” said Nabeel Hyatt, CEO of Conduit Labs (developer of social music game Loud Croud.) Indie star Jonathan Coulton, who has two tracks in Rock Band’s current download library, including his much-loved themed to the cult video game hit Portal, says he plans to expand his offerings on the Network as soon as he can. “[M]y fans are always asking when there will be more,” Coulton told me. “This means I can put as many up there as I want.”

However, that also raises one of the Network’s biggest challenges: As more and more music is uploaded, Rock Band owners may find themselves overwhelmed by choices. “They are going to run into the same discoverability problems that we see in the iPhone App Store and saw in Tower Records,” Hyatt predicted. Coulton concurred. “Hopefully Harmonix will take a cue from all the other successful music discovery platforms and leverage the community itself, ratchet up the social networking aspect of it,” he said.

The challenge for musicians, meanwhile, will be finding indie game developers who can convert their tracks into engaging Rock Band experiences. “I don’t think it will be terribly time-consuming to get something playable,” said Coulton, “but translating good music into good gaming is a new skill, really, one that the Harmonix team has already mastered and the rest of us have never tried.”

Notwithstanding those concerns, “I do think it has the potential to be pretty transformative,” Coulton said. “Anytime you put independent musicians on the same playing field as old school superstars, interesting things start to happen.”

Photo: Coulton performing Rock Band version of Coulton’s “Still Alive” courtesy of Crashworks via Flickr.

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Mochi joins an increasingly crowded and competitive market for virtual currency solutions to monetize online games, with Facebook’s own system soon to come. (And in all likelihood, a standards war among competing virtual currencies soon to follow.) With 100 million monthly unique users across its network, however, Mochi immediately becomes one of its lead players. I’m watching this space closely, because as I noted in my GigaOM Pro analysis of virtual worlds (subscription required), monetization of virtual currency is one of the market’s biggest opportunities. Unsurprisingly, while Mochi currently has no virtual worlds in its network, in a phone call earlier today, Mochi’s Jameson Hsu told me to expect MMO partnership announcements soon.

Image credit: Mochi/Ninjakiwi.</em

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