Gaming business models: Freemium beats advertising July 7, 2009Posted by jeremyliew in advertising, business models, flash, game design, games.
Dan Cook has a great post about business models for flash game developers over at Lost Garden. He says:
Ads are a really crappy revenue sourceFor a recent game my friend Andre released, 2 million unique users yields around $650 from MochiAds. This yields an Average Revenue Per User (ARPU) of only $0.000325 per user. Even when you back in the money that sponsors will pay, I still only get an ARPU of $0.0028 per user. In comparison, a MMO like Puzzle Pirates makes about $0.21 per user that reaches the landing page (and $4.20 per user that registers)What this tells me is that other business models involving selling games on the Internet are several orders of magnitude more effective at making money from an equivalent number of customers. When your means of making money is 1/100th as efficient as money making techniques used by other developers, maybe you’ve found one big reason why developers starve when they make Flash games.
Ask for the money
When game developers ask for money, they are usually pleasantly surprised. Their customers give them money; in some cases, substantial amounts. I witnessed this early in my career making shareware games at Epic in the 90s and I’m seeing the same basic principles are in play with high end Flash games. Fantastic Contraption, for example, pulled in low 6 figures after only a few months on the market. That’s about 100x better than a typical flash game and in-line with many shareware or downloadable titles.
I think his conclusion is right not just for Flash game developers, but for all sorts of game developers, including MMOGs, iPhone games etc. dan runs through some steps that game developers should take to maximize their chances of being able to make a living from designing games, specific ideas about what to charge for, and responses to common objections to getting users to pay. For new or aspiring game designers, it is worth reading the whole thing.
New Media companies should emphasize “media” over “new” June 29, 2009Posted by jeremyliew in advertising, business models, media, startup, startups.
AdAge has a good article today about how AOL has been attacking web publishing where it notes:
In the heady days of early 2000, the megamerger of AOL and Time Warner heralded the web-based future of publishing. It would create a digital platform for Time Inc., the biggest, most-prestigious magazine group in the world.
Needless to say, that didn’t pan out, and here’s where it gets ironic. Just as Time Warner is unwinding that mistake, AOL is figuring out the future of magazine publishing on the web. And it’s doing so without Time Warner’s content assets.
The model goes something like this: Find a vertical with an audience attractive to advertisers, brand it (Daily Finance, Asylum, Lemondrop, Politics Daily), hire five to seven people to run it and plug in AOL’s traffic fire hose. Repeat.
This reminded me a little bit of the continual tension in media companies caused by serving two constituents – readers and advertisers. AOL has clearly discovered one path to repeatable success, which is to start with the needs of advertisers. This is emphasizing the “media” part of new media.
The new media companies that are doing the best in this recession have taken a similar approach. Companies like CafeMom, Flixster (a Lightspeed portfolio company) and Glam have focused on creating highly valuable inventory for endemic advertisers, and on building excellence in sales execution.
In contrast, some other startups have focused on the “new” part of new media. They have often created incredible compelling experiences for users, and have generated impressive traffic. But their monetization ability has lagged; sometimes due to creating inventory that is hard to sell, sometimes because the startu’ps culture is not inimical to ad sales.
Here in Silicon Value there can be a tendency to overemphasize product and technology and underemphasize ad sales. Advertising revenue often scales with ad sales people. Yet I have seen some startups that have been disappointed with their revenue growth but have >10% of their employees focused on revenue.
Like AOL, new media companies should remember that they are also media companies, and organize themselves appropriately. This can include doing things like:
– Building traffic with a consideration for your ability to package and sell it to advertisers
– Placing significant company and senior management attention on revenue. This can mean up to 30-50% of employees working on revenue generating activities
– Adding advertising sales expertise and contacts to the management team
– Being flexible about tradeoffs between advertiser needs and user needs
Many new media companies based outside of Silicon Valley (especially those in New York) grasp this innately.
For more in this vein read two prior posts; on the preeminent importance for sales excellence in ad networks, and on the three ways to build an online media business to $50m in revenue.
The Consumer Confidence Index (CCI) measures how optimistic consumers are about the state of the economy. Specifically, it measures how consumers are feeling about:
1. Current business conditions.
2. Business conditions for the next six months.
3. Current employment conditions.
4. Employment conditions for the next six months.
5. Total family income for the next six months.
In the most simplistic terms, when [CCI] is trending up, consumers spend money, indicating a healthy economy. When confidence is trending down, consumers are saving more than they are spending, indicating the economy is in trouble. The idea is that the more confident people feel about the stability of their incomes, the more likely they are to make purchases.
The Conference Board, which measures the CCI, announced yesterday that:
The Conference Board Consumer Confidence Index™, which had improved moderately in September, fell to an all-time low in October. The Index now stands at 38.0 (1985=100), down from 61.4 in September…
Says Lynn Franco, Director of The Conference Board Consumer Research Center: “The impact of the financial crisis over the last several weeks has clearly taken a toll on consumers’ confidence. The decline in the Index (-23.4 points) is the third largest in the history of the series, and the lowest reading on record. In assessing current conditions, consumers rated the labor market and business conditions much less favorably, suggesting that the fourth quarter is off to a weaker start than the third quarter. Looking ahead, consumers are extremely pessimistic, and a significantly larger proportion than last month foresees business and labor market conditions worsening. Their earnings outlook, as well as inflation outlook, is also more pessimistic, and this news does not bode well for retailers who are already bracing for what is shaping up to be a very challenging holiday season.”
As a point of comparison, the CCIs most recent peak was at 112 in July 2007. It is down by two thirds since then. The last CCI trough was at 61 in March of 2003, down from a peak of 144 in May 2000. This time around consumer are far more concerned than they were in even the depths of the last economic slowdown. Historical CCI stats are available here.
All consumer facing companies, whether ad based or commerce based, should bear these numbers in mind when planning for Q4 2008 and for 2009.
MMOG nuggets from Austin GDC September 18, 2008Posted by jeremyliew in business models, freemium, games, games 2.0, gaming, mmorpg, virtual goods, virtual worlds.
Some interesting tidbits about both free to play and subscription MMOGs coming out of the talks at Austin GDC. Min Kim of Nexon says:
Not just a Korean thing:
“South Korea is still a big market for us,” Kim admits, “but the split is now 50/50 with overseas markets,” which includes the Asian and U.S. markets.
On growth in North America:
In 2005, Nexon America’s revenues were around $650,000. In 2006, when they added Paypal as a payment option, sales rose to $8.457 million, based on item sales. In 2007, once Nexon released its Nexon Cash cards to retail stores, revenue jumped to $29.334 million.
On localization of games:
While many of the free to play games currently come from Korea, Kim feels that the market will eventually be dominated by Western titles. “We’ve seen this happen in other places like China,” he posed. “The big games now are from Chinese developers. I think the same thing will happen in the West, with Western-developed titles.”
On how game design interacts with business model design:
Focus on fun, not just on what items you can sell. “Have an idea about what your business model is,” he advises, but don’t go overboard laying out your business plan completely from the beginning. “Don’t have all your items and categories pegged out. Make sure you have a fun game, first.” 9 times out of 10 the ideas you’ll have at the beginning will be wrong. The players will tell you what they want to buy.”
From a panel on evolving business models in MMOs, CCP’s (Eve Online) Petursson notes that subscription MMOs mostly reward time spent playing (which is consistent with the business model):
All subscription-based MMOs are merit economies – those with most time, win. But the only thing you can’t buy is social merit. To be a purely subscription-based game, you should aim for social merit as it’s the only merit economy defensible against outside influences.
On when Free to play works and when it does not (a function of demographics, geography/ cultural norms and genre):
* Robert: The demographics in LOTRO etc are a lot older: 20-35, male. F2P games tend to be younger, more females, casual, less hardcore. 30 year old males are not playing a lot of F2P and have no problem paying monthly subscription. Younger people and kids are playing lots of games and want F2P for that flexibility. However, F2P microtransaction games can pull in more ARPU than subscriptions.
* Helmar – In CHina, it is illegal to have an automatic debit for sub based game – user always has to choose. For game operator it’s important to realize that most biz models will be implemented by user… better to implement them yourself and tune appropriately.
* Min – also based on genre…not many ppl shell out $15/month to play FPS. There are some F2P FPSs now in Asia. Biz model based on genre as well.
Turbine’s Ferrari notes that F2P games need low barriers to play
What we’re seeing is a shift that a lot of the f2p games are so much lighter than traditional MMOs. Heavy MMOs are beautiful, but that puts a barrier to entry based on min spec – younger demographics don’t have these systems. Global expansion doesn’t support those specs either. Our games are above 5gb in size, whereas Maple Story is close to 1gb now.
Nexon’s Min Kim has a contrarian view:
In S Korea, people have no problem downloading big client products as the web is so fast. I often wonder if browser-based gaming is an interim step until web speeds creep up and people can return to client download.
And multiple comments on the importance of letting your customers pay you how they can and want to pay you (including prepaid cards at retail):
* Min: Offering payment methods relevant to your target demographic is important. Over 20 years old, credit cards are viable. In the teen demographic, prepaid cards are still the dominant form of payment. Maybe SMS payments will come, but it is all about accessibility and convenience. In demographics such as Club Penguin’s, credit cards are a big part of their payment methods as parents are paying.
* Nicolay: I think Habbo has 140 different payment methods. The ability to pay has to be the lowest barrier to entry, otherwise you aren’t getting any money.
* Robert: SMS charges surrender so much margin to carrier, but retail cards may be more expensive just to get into channel.
* Hilmar: It’s puzzling why carriers aren’t lowering their surcharges. People would switch to it immediately, resolving credit card issues.
* Min: There is no access for our consumers to use credit cards. In 2006, we did $8.5M in the US in virtual item sales – in 2007 we did $29.3M in virtual items. Virtually all of that growth came from enabling people to pay.
* Robert: Companies like Turbine are looking at the console to expand their playerbase. Potentially we can use an xbox payment system, so we don’t need to do it ourselves. It’s about expanding access for players.
Facebook selling digital gifts at a $35m run rate September 2, 2008Posted by jeremyliew in business models, digital goods, facebook, gifts, virtual goods.
In January of this year, we estimated that Facebook was selling digital gifts worth $15m per year. We based this estimate on an analysis of the number of each gift available each week over a 7 week period.
Facebook creates a certain fixed number of each type of gift. When the number remaining for any particular gift drops below 100,000, Facebook displays the number left. (The most common size runs are 100,000 and 1,000,000 but they range as high as 10,000,000 and as low as 15,000.). For those items where less than 100,000 remain, we can track how many gifts had been sold in the preceding week by subtracting the number remaining from the number remaining the previous week.
We updated the analysis this month and found that Facebook has dramatically increased its sales rate of digital gifts. As before, we tracked the number of digital gifts available of each type (where data was available). We ordered the items by bestselling (as defined by Facebook) and, because data is sparse, we divided the list into groups of 20, took the average of each group of 20 items and applied that sales rate to all items in each group.
Once we excluded the free gifts, the averages looked like this:
By multiplying each average by 20 and adding the totals we came up with virtual gift sales of between 390,000 and 600,000 per week, with an average of around 470,000 across the three weeks.
The vast majority of facebook gifts are bought from the first screen of gifts in the directory – almost 80% of the total sales come from the group of the first 20 gifts. This points to the self reinforcing nature of popularity (the crowdiness of crowds rather than the wisdom of crowds) when popularity data is made public.
We need to take into account seasonality. In most retail environments, something like 40% of sales occur in the last 8 weeks of the year. Judging from the high number of holiday themed gifts over the holiday period last year, the same seems to be true of Facebook:
Holiday themed gifts (e.g. Santa hat, eggnog, Happy New Year!) dominated the list of top selling paid gifts, averaging 4,755 sales per week.
If we apply this assumption to our weekly average sales numbers, we multiply by 73.3 (instead of 52) to get to an estimate of annual sales. Using this estimate we get a range of between 28,500,000 and 43,500,000 in annual Facebook gift sales, with an average around 34,500,000.
Unfortunately however, as only one item in the first 20 had “number left” data available each week (Bear Hug), this also makes our estimate prone to significant error. Bear Hug was consistently around 6 or 7 among the most popular gifts, behind most of the birthday gifts, so hopefully it approximates the average popularity of the top 20. Applying 25% uncertainty to the average of the top 20 bestselling gifts creates a similar range of between 28,000,000 and 42,000,000.
In both cases, these estimates are double the number that we estimated at the beginning of the year which was around 15,000,000 digital gifts. That estimate was based on data drawn during the holidays and may have been high on a run rate basis.
Given that Zuckerberg has estimated that Facebook will do between $300-$350 million in revenue this year, digital goods constitutes a meaningful secondary revenue stream for the company.
Yesterday’s WSJ noted that retailers and manufacturers were increasingly selling their branded virtual goods inside virtual worlds:
Retailer Kohl’s Corp. this month launched a new line of apparel, but the plaid skirts and printed T-shirts won’t be sold in its 957 stores. Instead, it’s selling them on Stardoll.com, a virtual community for teens and tweens where kids can fork over “Stardollars” — purchased online at a nominal sum — to buy apparel for their online characters…
This month, casual-wear maker K-Swiss Inc. and lingerie and swimwear designer Eberjey rolled out virtual clothes on There.com. And in late July, retail pioneer Sears Holdings Corp. opened its first online boutique featuring back-to-school apparel and dorm-room furniture on teen site Zwinky.com
Virtual Worlds News noted a few other brands also participating on There.com
… music merchandiser Bravado, and the Country Music Hall of Fame and Museum are now peddling their virtual wares in There.com. Each will establish specialty shops to sell branded goods for There.com avatars. There.com has sold virtual goods as part of brand campaigns before, most recently for NaCo, but has also popular for large, branded environments, such as those for Scion, Coke, and CosmoGIRL!.
So far the brands seem to be getting good results; according to Virtual Worlds News:
Yesterday’s Wall Street Journal article on apparel marketing in virtual worlds reports that the Zwinky boutiques “logged 750,000 visitors and sold 850,000 virtual items during their first 16 days through mid-August.” Meez CEO Sean Ryan followed up on his personal blog that 700,000 Sears items have been adopted so far by his users. There’s likely some overlap in users, but that’s over 1.5 million branded items distributed in just two of the properties. The campaign will run through the end of the month
However, these retailers and manufacturers are not selling virtual good for the revenue. Rather they are doing it for the promotion and advertising. Says the WSJ:
“It’s really a way to get shoppers to test-drive your product,” said Carlos Mejia, chief financial officer of Eberjey, a maker of lingerie, swimwear and sleepwear. The brand, which largely sells to women ages 20 to 45, hopes to attract teenagers with its virtual line.
Penney decided this year to put back-to-school outfits on Yahoo after learning that, during a seven-week experiment last summer, 1.5 million avatars wore its clothing on Yahoo and 5 million Penney outfits were tried on. “It casts a very modern, current light on the brand with teens,” says Mike Boylson, Penney’s chief marketing officer. Before Penney’s presence on Yahoo, “perhaps J.C. Penney wasn’t on their radar before,” he says.
Sears is marketing its virtual boutiques on billboards in the virtual world, and is hosting daily fashion shows on the site promoting its products through the end of August.
Adds Richard Gerstein, the Sears CMO:
Teens and tweens are making more and more of the purchase decisions, or at least influencing that decision. Mom already knows that Sears provides trusted value and quality, but we need to prove to the teens and tweens that we have the apparel and styles to help them “arrive” at school this year with confidence…. And as we continue to expand our outreach to the tween demographic it is increasingly important to expand our marketing strategy to include the mediums where tweens are spending most of their time.
The focus on marketing can create a tension within virtual worlds about how to price these virtual goods. On the one hand, to drive revenue and create value in the brand, you want to price these items at a premium. On the other hand, to get the broadest possible reach and trial, you want these items to be at the free tier. Online trial will hopefully lead to more real world sales. Anecdotally at least, it seems to be working:
The online pitches are striking a chord with Jen Rediger’s daughters, 13-year-old Tyler and 9-year-old Kenzie. In the first week that the Kohl’s store opened on Stardoll, they spent about 70 Star Dollars, or $7, on virtual skirts and shoes. Ms. Rediger, 32, an interior designer who lives in Hoschton, Ga., says she doesn’t mind her daughters being exposed to such marketing because “it’s not worse than what they see on television.”
Tyler has already asked her mom to take her to Kohl’s to buy the real versions. “They look really cool on my doll,” she says. “It’s my style so I think I’ll wear it a lot.”
Facebook has already taken this approach with its branded gifts. I suspect that we’ll see the model move more firmly in the direction of advertising, with most branded virtual goods being made available for free.
BestBuy launching prepaid cards for online games August 20, 2008Posted by jeremyliew in business models, games, games 2.0, gaming, mmorpg, virtual goods, virtual worlds.
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Although some still doubt that free to pay games have a viable business model, this month’s launch of game cards at Bestbuy may change some minds. Reports Virtual Worlds News
Stardoll, Meez, AdventureQuest, and Gala-Net have all partnered with GMG Entertainment to launch individually branded prepaid cards at Best Buy. The Meez card will come with an exclusive virtual good, and Stardoll, which has previously worked with GMG Entertainment, is expanding its prepaid offerings to include a $15 card that will unlock various virtual goods.
I’ve noted in the past that prepaid cards at retail are an excellent way to monetize MMOG players. Earlier this year, Raph posted on the game card endcap at Target who have pioneered this category.
Sean Ryan, MEEz’s CEO, notes:
So why should anyone care about old-line retail stores and physical goods when we’re all selling cutting edge virtual goods? Isn’t it all going to be virtual? The reason is that retail still matters a great deal, especially when addressing a somewhat unbanked audience like teenagers. We all know teens acquire an estimated $60B each year, whether it’s from allowances or part-time jobs – however, they don’t have an easy way to send it to their favorite virtual world or Massively Multiplayer Online (MMO) game company since they don’t have credit cards, are not happy borrowing them from parents, and aren’t as comfortable with PayPal, even though it can be linked to a checking account. Plus, teenagers still go shopping a lot, and that retail foot traffic is incredibly important since it provides another way to reach that audience when they’re not online. Finally, parents or friends are more comfortable giving gift cards these days so it’s easier for a teenager to ask grandpa for a $10 Meez card for graduation vs asking for cash – it’s a big Win/Win for the category.
Retailers are notoriously data driven when it comes to what they will give floorspace. Music is already getting cutting back according to Silicon Alley Insider:
… the three big retailers who comprise most of the industry’s sales — Best Buy (BBY), Wal-Mart (WMT) and Target (TGT) — will likely make significant cuts in the amount of floorspace they devote to CDs. We are hearing predictions of cuts that range from 20% to 40%, with Wal-Mart making the most aggressive pullbacks.
If retailers are giving shelf space to free to play games, that is a big vote of confidence in their future.