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The invisible hand of economics will make free to play the dominant gaming business model February 12, 2008

Posted by jeremyliew in business models, economics, games, games 2.0, gaming, mmorpg, subscription, virtual goods.
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The latest charts of MMOG market share by business model show the free-to-play (F2P in green) model to be roughly neck and neck with the subscription (P2P in yellow) model, with buy to play (B2P in blue) making up just a small fraction of the total:

MMOGs by business model

However, I think that we’ll see the free-to-play model (monetizing through virtual goods and advertising) increasingly take share over the next few years and eventually become dominant.

In the last 18 months we’ve seen many more free-to-play MMOGs being launched in the West, joining pioneers like Runescape. K2 Network, IGG, Acclaim, Aeria and others have all come to market with westernized versions of asian MMOGs, and all are employing a free to play model. Other companies like Sparkplay and Conduit Labs are building their own free to play MMOGs for the western market. But this flood of MMOGs is not the cause of the increasing dominance of the free to play model, but rather the symptom of the underlying economics of the business.

Marginal cost pricing is the principle that the market will, over time, cause goods to be sold at their marginal cost of production. MMOGs, like all other software businesses, have effectively a zero marginal cost of production. This is particularly true when distribution is also online. As a result, you would expect that over time, prices will tend towards zero, i.e. a free to play model.

MMOGs are not special in this respect. We have seen a number of categories of consumer online/software products start out being able to charge a subscription, but eventually move to a free model. In online personals for example, the big story of the last few years has been the inexorable rise of plentyoffish.com, a free online personals site that is now one of the top online dating sites (with no marketing):

online dating sites

Anti spyware software used to be a premium service, and now it too is mostly free. Anti-virus software is the same story. And parental controls software. Now all are available for free.

In each case, it took a few years for the move from premium service to free, but in each case the marginal cost pricing principle eventually took hold. It is hard to hold the line against the invisible hand of the market.

MMOG publishers and developers should be factoring in a free to play environment into their business models.

Comments»

1. Freemium service models - paying for convenience in games « Lightspeed Venture Partners Blog - February 20, 2008

[…] digital goods, freemium, mobile, subscription, virtual goods. trackback Last week I noted that free-to-play games will become increasingly dominant. I’ve also noted in the past several use cases for the digital goods business models that […]

2. Free to play arguments « Lightspeed Venture Partners Blog - February 27, 2008

[…] I’ve opined in the past, the economic principle of marginal cost pricing suggests that free to play models will become dominant. At a round table on digital goods business models at GDC, one of the EA folks working on […]

3. Is Social Media a business? « Lightspeed Venture Partners Blog - July 29, 2008

[…] the social games category of apps, likely the answer is free to play games with virtual goods models. This is the direction that the rest of the gaming industry appears to be moving towards, and […]

4. Softolio » Is Social Media a business? - August 7, 2008

[…] the social games category of apps, likely the answer is free to play games with virtual goods models. This is the direction that the rest of the gaming industry appears to be moving towards, and […]


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