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Free to play arguments February 27, 2008

Posted by jeremyliew in advertising, business models, casual games, digital goods, freemium, games, gaming, virtual goods.
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At GDC the argument continues over whether free to play and microtransactions are the future of games, or whether single sale and subscription models will continue to hold sway.

As 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 Battlefield Heroes noted that their surveys found that hardcore gamers and older gamers objected the most to digital goods, but that casual and younger players accepted it without comment. If the future of gaming is about breaking beyond the hardcore to the mass market, those defending the old models may be missing the larger opportunity.

Russell Carroll has an interesting post at GameSetWatch that sheds some further light on this issue. It is ostensibly about piracy in the casual game business and opens with the stat:

“It looks like around 92% of the people playing the full version of [the game] Ricochet Infinity pirated it.”

Carroll asks, if piracy can be stopped, can sales be increased by 12x? (i.e. would all the pirate players buy). After looking at all the methods by which the company could reduce piracy, and the impact of these methods on both downloads and conversion rates, he concludes:

As we believe that we are decreasing the number of pirates downloading the game with our DRM fixes, combining the increased sales number together with the decreased downloads, we find 1 additional sale for every 1,000 less pirated downloads. Put another way, for every 1,000 pirated copies we eliminated, we created 1 additional sale.

Though many of the pirates may be simply shifting to another source of games for their illegal activities, the number is nonetheless striking and poignant. The sales to download ratio found on Reflexive implies that a pirated copy is more similar to the loss of a download (a poorly converting one!) than the loss of a sale.

Think about this from the other direction. Currently, for every 1000 players, 80 bought the game and 920 are playing a free, pirated version. So the company makes around 80 x $20 = $1,600. If they were to eliminate piracy, they would sell one additional game, so their revenue would be $1,620.

At a recent panel on casual games, Alex St John said that he was able to sell advertising to support casual games monetizing at 15c/gameplay and that he was sold out of inventory.

To make $1,620 on advertising at 15c/gamplay, the 1000 players would on average need to play the game about 11 times each, which doesn’t seem unreasonable. (This assumes that the source of advertising dollars will be scalable.)

If you add to this a digital goods opportunity, the alternative becomes more interesting. Daniel James (CEO of Three Rings) has said in the past that the ARPU from digital goods is about the same as that from subscription, but with a distribution curve that looks more like a power curve – some heavy spenders and a long tail. An industry rule of thumb for digital goods monetization is around 5-10% of players will pay. Applying the same metrics to this game suggest a digital goods revenue stream in the $1,000-$2,000 range, incremental to the advertising revenue.

And finally, this doesn’t even begin to address the question on how many more players will play the game if the free period is not limited to 60 minutes. These incremental players all become candidates for monetization by both advertising and digital goods. Crossing the Penny Gap can dramatically cut the universe of users, as Josh Kopelman has noted before.

I would advise game designers to consider baking digital goods and advertising opportunities into the core mechanics of their new games so that they have the flexibility to explore both these business models as well as the proven subscription model.

UPDATE: Carroll has more data on his casual game pirating experience here.

Comments»

1. Tomorrow’s Toy Soldiers: Virtual Goods Lessons from Tabletop Games « Virtual Goods Insider - March 1, 2008

[…] is currently a raging debate about whether the MMO industry will move to a free-to-play model with virtual goods driving revenue […]

2. The One and Only - January 11, 2010

When will the industry take into consideration HUMAN NATURE? The fact behind all this research which is being completely ignored is freemiums draw in every type of player. This may sound like a great concept on the surface; however, looking at long-term playablity of any game, the inclusion of certain types of gamers is in no way a positive resultant. There are many players who will NEVER buy-in, opt-in or otherwise spend a penny on a “free” game. Among these players are a significant number of players who simply have no life to speak of and who seek god-like status in any game they play. These kinds of players will, over time, destroy the playability of any and all free games.

The only protection which exists from bottom-feeding, nihilists is the subscription. A player who pays upfront can claim some measure of “ownership” over their gaming experience. Where it was a matter of holding a CD in your hand and thereby possessing that paid for software (all rights reserved of course), it’s now a matter of downloading significant amounts of data and installing updates. With perceived ownership there comes a latent desire to protect what it “yours.” You will never have this kind of appreciation in a free gaming environment.

Freemium will always be cheesy, cheap and, ultimately, burden by zealotous inbreeds who crave nothing more than creating misery for others. Subscriptions, in part, give gamers multiple avenues of recourse in situations where their gaming experience is being destroyed by another player. In the freemium universe, you are virutally on your own.

I am more than willing to pay for a game upfront if it means I don’t have to deal with the worst of the trolls who exist only through the anonymity of the interwebz.

Freemuim is a joke. OMFG! Runescape made $1m USD????!?!?!?!?!111?!?!elevnty!!!??!?! World of Warcraft is making $2 BILLION annually. Shut up about “free.”

3. Revenue data and other metrics of virtual asset sales market | VERN - September 29, 2011

[…] Free to play arguments @ Lightspeed Venture Partners […]


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