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When can paying people become counterproductive? August 11, 2008

Posted by jeremyliew in business models, game design, game mechanics, games, mmorpg, social media, user generated content.
5 comments

I’ve posted in the past about how points can be used to drive user behavior.
Last week the Washington Post explored when play becomes work, and talked about some of the downsides of using rewards systems:

More than three decades ago, Edward Deci, a social and personality psychologist at the University of Rochester, found the first experimental evidence of a phenomenon with wide relevance to the way most Americans conduct their personal, professional and social lives.

Deci tracked a bunch of college students who were solving puzzles for fun. He divided them into two groups. One group was allowed to keep solving puzzles as before. People in the other were offered a small financial reward for each puzzle they solved.

The psychologist later evaluated the volunteers: He found that people given a financial incentive were now less interested in solving puzzles on their own time. Although these people had earlier been just as eager as those in the other group, offering an external incentive seemed to kill their internal drive.

The implication for social media and user generated content businesses is that creators create for love, not money, and that paying them with money may in fact be counterproductive. Instead, creators want adulation.

One interesting counterpoint might be the gold farmers inside World of Warcraft. When people play MMOGs for money, do they still play for fun? Anecdotally, it appears that they do. So when do rewards work and when are they counter productive?

But rewards and punishments are not always counterproductive, Benabou said. He drew a distinction between mundane tasks and those that carry meaning for people. In the first case, Benabou argued, rewards and punishments work exactly the way economists predict: They get people to do things.

External rewards and punishments are counterproductive when it comes to activities that are meaningful — tasks that telegraph something about a person’s intellectual abilities, generosity, courage or values. People will voluntarily perform intellectually arduous work, for example, because it gives them pleasure to solve a puzzle or win a game of wits.

“If I pay my kids to do their homework, I am saying, ‘You will get this if you do your homework,’ but I am also saying, ‘Homework is not likely to have intrinsic rewards,’ ” Benabou said. To the extent that a child is doing homework because he or she enjoys the challenge, or wants to demonstrate intelligence and diligence, the homework has meaning beyond the task itself, and Benabou predicts that offering a reward will backfire.

In most cases when it comes to user generated content, the creators do consider their work to be meaningful. So pay attention to how you pay them attention.

Is Social Media a business? July 29, 2008

Posted by jeremyliew in advertising, business models, social media, social networks.
10 comments

I am a fan and subscriber to the paper version of Technology Review, but was disappointed in their cover story in the current edition, where Bryant Urstadt looks at the current state of the social network sector and concludes that social networking is not a business (free registration required). The article essentially looks at CPMs in the current business (which are low), concludes that revenues are low relative to traffic, and it might all just be a fad.

I have to admit to being biased about social media, but I think that the author’s lack of knowledge in this area (he typically writes for Rolling Stone and Harper’s) really shows. As examples of how poorly social networking sites are doing he proffers four pieces of evidence:

1. MySpace will fall $100m short of its revenue predictions this year. This means that it will only do $650m in revenue and only grow revenue by 100% according to Goldman Sachs.

2. Facebook will only do $50m in EBITDA this year.

3. Ning won’t tell him their revenue

4. CPMs for social media sites are lower than that of Technology Review

Maybe I’m a glass half full kind of guy, but I’d call the first two pieces of evidence pretty promising! The third is hardly surprising as very few private companies want their revenues to be publicly disclosed. And the fourth is a completely specious argument; I’m sure that the Technology Review’s website’s traffic is tiny and that its ads are bundled with that of the print publication, so any sort of comparison is meaningless.

That being said, MySpace and Facebook are far and away the two most successful social media sites at monetizing so far. It is fair to say that click through rates and CPMs are low relative to other forms of online media. The author thinks that targeting is the answer to raise CPMs. I think that is part of the answer, but I don’t think it is the whole answer. It is certainly the answer for social media apps like Flixster (a Lightspeed portfolio company) and Dogster, both of which offer a very targeted audience to endemic advertisers. In these cases, CPMs are not in the sub $1 range, but are comparable to other internet media sites with similarly targeted traffic, often in the single digit or low double digit range.

For 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 social games are a subset of that trend.

For the vast majority of broad reach social media sites though, I think that the answer lies in a new ad standard for social media. The thing that differentiates social media sites from other forms of online media is not just user generated content, it is also that users are willing to affiliate themselves with brands. This takes many forms, from friending Scion on Myspace to putting a Natasha Bedingfield style on your Rockyou photo slideshow, to buying one of your Top Friends a Vitamin Water. These willing user affiliations/endorsements of brands are clearly valuable to marketers of those brands. Right now though, these deals are being negotiated on a one off basis; they look more like business development deals than selling ads off of a rate card. It will take a while for the social media industry to establish standards for selling this incredibly valuable inventory to brands, but I suspect that this will happen over the next 12-36 months.

There is an interesting parallel to search advertising here. In 2000, search inventory was monetized like every other form of online inventory, through banner ads. It wasn’t until Overture, and later Google, adopted the text ad-CPC standard that the distinctive thing about search inventory, user intent, was appropriately monetized. This created a new category of advertising that is now larger than banner advertising. Although some might disagree, I believe that a similar opportunity will eventually be unlocked by social media once the right ad unit standards emerge

In the interim though, targeting and scale go a long way. As Myspace has shown, $650m here, $650m there, and pretty soon, you’re talking about real money!

29 business models for games July 2, 2008

Posted by jeremyliew in business models, games, games 2.0, gaming.
34 comments

At the Social Gaming Summit recently, on the panel about Monetization and Business Models, David Perry mentioned that there were 29 business models for games that he was familiar with. I asked him to do a guest post listing them all and he agreed.

David Perry is a 27 year industry veteran whose games have sold over a billion dollars at retail. He’s the Chief Creative Officer of Acclaim Games, Inc. and prior to that was the founder of Shiny Entertainment, Inc. which was purchased by Atari. For more information, please visit: http://www.dperry.com

_______________________________________________________________________________
Potential Video Game Monetization Methods.

These models come from 25 years of watching people experiment with game monetization.

Note: The good news is there’s lots of choices and many of the models can be combined.

List © 2008 David Perry. www.dperry.com

1. Retail (bricks & mortar), selling boxed product at places like EBGames, Gamestop or Virgin Megastore. This also includes mom & pop stores, hardcore specialist gamer shops, and online retailers like Amazon.com that ship the product to your door. The gap in this market is “same day” physical delivery of games too big to download or 1st party titles (basically combining online & bricks and mortar in one solution.) The future of this space is pre-paid cards as the consoles will (in the future) go online only, distributing everything directly to the consumer, so retail (to make it worth selling the hardware) will need a cut of the software sales. Hence prepaid cards. The Gamestop tactic of re-selling USED games (to avoid paying for new product) will finally be over. To drive users to retail, the making of special “enhanced” versions just for their retail chain is a common practice.

2. Digital Distribution (direct download, direct to consumer), like the Steam service from Valve Software, the PlayStation Store or Xbox Live Arcade from Microsoft. This also technically includes “unlocking” access to a game already on a service, like the faux install process on Facebook (however the player would have to pay to do this unlock.)

3. In-Game Advertising (either obvious billboards or branded items in the game world, or subtle product placement (certain clothing, sunglasses or vehicles like Gaia Online), or built into story elements (like the hero’s girlfriend works for a Neutrogena). Companies like IGA, Massive, Game Jacket, Mochi Media, Google, VideoEgg etc.

4. Around-Game Advertising (basically making money from banner & skyscraper adverts that circle the gameplay window), this is common on flash game aggregator sites, they use services like Google, Commission Junction, personal affiliate deals etc. The revenue comes from CPM (cost per thousand views), CPC (cost per click), CPA (cost per acquisition of a player), CPP (cost for a “real” player who really plays for a certain time, or to a certain level.)

5. Pay Finder’s Fee from First Dollar. This allows you to pay much higher finders fees with no risk. Like offering (as the finder’s fee), the first $25 that comes in from any player they find. You balance the fee to a sensible percentage of the average income you get from players. We [Acclaim] get around $70 per paying player, so this seems reasonable.

6. Advertgames (the whole experience is an advert), common on movie websites, can also be big like America’s Army or the Burger King games on Xbox 360. I did one of the first of these called “Cool Spot” for 7-UP. The advertiser helps fund the game and depending on the deal, that determines who earns cash out of the revenue. Your reputation will impact this equation.

7. “Try Before you Buy” / Trialware / Shareware / Demoware / Timedware (this is letting you play crippled, shortened, or restricted time versions of a game for free, while trying to up-sell the full version.) This is a real balancing act as too much in the demo can kill any hope of future sales. Xbox Live has been experimenting with this concept, they seem to have hit the sweet spot by giving one playable level and then giving a big reveal (like there’s a giant boss monster around the corner) then they say “Buy the full version to continue!”. That’s basically the ‘cliff-hanger’ trick, and just like TV it works.

8. Episodic Entertainment (borrowing from the TV model), you either buy the episodes in a serial fashion as they become available, you can pay for all episodes unlocked for a period of time, or they are sold as expansion packs.

9. Skill-Based Progressive Jackpots (where players buy a ticket to enter into a tournament) this generates a progressive jackpot and winner who reaches a certain (winner) status wins the jackpot. You keep a percentage of the jackpots. The game must be skill based.

10. Velvet Rope or Member’s Club (where the user pays for VIP access), they get special privileges and access to special areas on your site or in your game. They sometimes get special access to new product before anyone else etc. (Basically the more interesting perks you give, the more likely people will want it.)

11. Subscription Model (like World of Warcraft or Conan) paid monthly, usually by credit card or automatic debit payment. It’s sometimes coupled with a retail purchase to get the install files / manual. Commonly players set up the credit card payments and don’t stop them, as they want to keep the game ‘available’ or keep their characters alive that they’ve worked so hard to create. (It’s pretty great to get a subscription from people that don’t even play, so expect more people to design games were they will clearly KILL your characters if you stop paying. Not good for players, but it’s on the list as it’s a monetization method.)

12. Micro-Transactions (small, impulse driven up selling), for vanity, saving time, better communications, leveling up faster etc. These are generally paid for using virtual points (earned in the game) or the points being bought by the player for real money. A new trend is using Friends to buy these items, where the item just costs you inviting a friend to the game, or an amazing item costs you inviting ALL your friends to the game. Another trend is to sell consumable items like actually selling the bullets you fire, or buying gas for the car you race, however this really grays the “free to play” line.

13. Sponsored Games / Donationware (serious games, games for good, charity games), these are the games that are somehow helping society, so could be paid for by a philanthropist, or by a charity or non-profit, or by player donations. www.Onebiggame.org is an example.

14. Pay per play / Pay as you go / Pay for Time (like the old arcade machine or pinball system), you only pay for what you need, for a pre-set number of lives, or as long as you can last. Also used in Internet Cafes and game parlors. This model could be used for game time online as well.

15. Player to Player trading of Virtual Items (letting them trade land, property, characters, items, also by auctions). You keep a cut of all the money exchanged. You also keep the transactions safe for the player (they don’t have to go to the gold farmers or risk the black market for characters.) Some games let the players cash this money out of the game, so it can become a full time job, but is also a major fraud generator (they use fake credit cards, buy things, trade things, sell for cash, cash out).

16. Foreign distribution deals (like the movie industry), where you need funding, so you pre-sell your foreign distribution rights in advance, then use that money to fund the project in the countries you care about the most. www.gameinvestors.com will be helping people do this.

17. Sell Access to your Players (like lead generation, special offers etc.), this is where you monetize your user database by inserting special offers, or personal profile questions into the registration loop. Like when you register, you’re asked if you would fill out a profile in return for virtual points. This is then paid for by an external agency who collects the data live. (Value is equal to how exclusive the data is, how detailed (revealing), and how fresh.) The agency would generally give you the questions and the capture code.

18. Freeware (get lots of users), it’s not a plan to make money, but then again, if you make something that’s very compelling you can expect offers to acquire your software, company or technology.

19. Loss Leader (focus on your real goal), meaning you sell the game far too cheap. There’s clearly TOO much value for money, (like the PS3 Hardware strategy). You use the passionate following to your free game to help sell something else, like a Toy, TV or movie deal, and that’s where the real money is that you were focused on.

20. Peripheral Enticement (the game cannot function without a piece of equipment), so it’s really a way to make you money on the hardware. (Gym equipment is a good example, like the virtual bike or rowing games, you tease them with the software into a very expensive purchase.)

21. Player to Player Wagering (they place wagers before they go head to head), the winner keeps the pot and you keep a percentage of every pot. The games they play MUST be skill based games. Gambling virtual items is another technique, where they buy/earn/trade virtual items, then bet them on maybe a 1-on-1 basketball game, the winner keeps the items. (You made your money selling the items to them in the first place.)

22. User Generated Content (letting users make endless new content), they can sell it to each other, or sell access to it, or get people to pay for time spent playing it, for points they can turn into cash (like IMVU), and you keep a cut of all sales.

23. Pay for Storage Space (on a server) to save progress, stats, game data etc. As an example, this can be used for Karaoke games where you pay to store your library of songs. (Or at least you think you do, even though you are technically just making virtual storage space for your songs.)

24. Pay for Private Game Server (where your friends come to play), like renting multi-player servers, or giving your friends a maximum quality experience. This is more for the hardcore First Person Shooter multi-player crowd.

25. Rental (stores like Blockbuster, or online like Gamefly), the old rental paradigm meant trying to design the game so it couldn’t be played through within one rental period. These days with the Netflix / Gamefly Model, it doesn’t matter anymore.

26. Licensing Access (like signing a deal with a chain of cyber cafes to unlock your game for their users.) Or using your game as a part of a TV show. Or letting a corporation use your brand in their advertising such as McDonald’s Line Rider commercial

27. Selling Branded Items from your site (using a service like Cafepress) – You need to work hard on your identity to make this interesting for people to wear. For example, Gamer Vixens http://www.cafepress.com/gamervixens/

28. Pre-Sell the Game to the Players. This model lets your fans actually fund the development of the title. For example, they pre-pay $5 in advance for a $50 game. (They also get to see it get developed and get to provide feedback.) When the game is launched, they get it for free (as they already paid the $5 advance.) Clearly you have to either have a reputation or a very hot idea to generate enough interest in advance, but once you get on a roll, this can work.

29. Buy Something, get the game for Free – This is the Trialpay model, where the player buys something they want (like a subscription to Gamefly), then Gamefly gives Trialpay a nice fat fee. From that fee, you get paid, and Trialpay gets paid. So by signing up to Gamefly, they get their service and they also get your game (technically) for free.

I’m sure there are plenty more models you’ve seen over the years, if you think of some I’ve missed, please email me at: dp@dperry.com

IMVU selling over $1m/mth in virtual goods June 25, 2008

Posted by jeremyliew in business models, games, games 2.0, gaming, mmorpg, virtual goods, virtual worlds.
10 comments

GigaOm says that IMVU is generating over $1m/mth in revenue:

Flying under the proverbial radar for the last four years, the web-based virtual world chatroom IMVU has released new jaw-breaking data: Since April 2004, it has amassed 20 million registered accounts, with 600,000 of those active monthly users. By comparison, Second Life took five years to acquire about 550,000 active users.

The company, well known to web surfers because of its ubiquitous ads, is now earning $1 million a month in revenue, 90 percent of that from the sale of virtual currency and 10 percent from banner ads embedded in its interface, CEO Cary Rosenzweig said. That works out to about $1.66 a month per active user.

This is within the range of monthlyly ARPU for MMOGs. The article notes that Peak Concureent Uers (PCU) is around 70k, so ARPU based on PCU is >$14/mth.

IMVU sells credits to its users who use these credits to buy items from their catalog to personalize their avatars. The vast majority of the items in the catalog are user generated. Of the 20m registered users, 100k are registered to make items in the catalog, but only a fraction of these are active. Still, they have created 1.7m items, so are averaging 20+ items created per active “item maker”.

Interesting stats.

Acclaim to make $30m in revenue from free to play games this year June 24, 2008

Posted by jeremyliew in business models, freemium, games, games 2.0, gaming, virtual goods.
4 comments

Howard Marks spoke at Paris GDC today, and Worlds in Motion has a writeup, including quotes from Marks about key stats for Acclaim’s free to play games:

For example, profitability is often measured through average revenue per user (ARPU). “Most of the time ARPU is $30-$40 a month,” said Marks. “A month! Not just one time.”

“The next thing is percentage of uniques,” he continued, defining “uniques” as players who spend money on a given game. “We’ve found in Asia, in Korea, we’ve found that 10% of people will spend money! I think it’s great! In the United States it’s less, more like 5-10%. But we’re getting there.”

The average lifetime for a player in the free-to-play space is 3-4 months per game, less than what is generally expected for a more traditional subscription MMO.

That statistic leads to churn rate, which describes player loss per month. “It turns out you lose a lot,” admitted Marks. “You should be prepared to say, ‘I only brought in 100,000 players this month, but only 10,000 stayed.’ That’s okay! That’s okay. Some of them will come back, and you can always get more.”

He also says (according to Worlds In Motion) that Acclaim will make $30m in revenues this year and break even on their core games business, but is investing heavily in R&D. Those are great numbers, and certainly place Acclaim to the front of the pack for free to play publishers in the West.

Notes, video and commentary on the Social Gaming Summit June 16, 2008

Posted by jeremyliew in asynchronous gaming, business models, casual games, game design, game mechanics, games, games 2.0, gaming, mmorpg, social games, social gaming, user generated content, virtual goods, virtual worlds.
8 comments

The Social Gaming Summit was quite a success on Friday. Over 400 attendees seemed to enjoy the sessions based on the high proportion of people in sessions (vs in the lobby) and the fact that even the last session, that ended at 6pm on Friday evening, was very well attended.

The attendee list was a good mix of game developers and publishers, with people coming from both the gaming side and the social media side. Most of the attendees with gaming backgrounds came from casual gaming, web based gaming or MMOG backgrounds. With the notable exception of EA, there were few representatives from the giants of the console space.

Although each of the topics covered different topics, it was clear that monetization was top-of-mind for all panelists as the discussion on most panels eventually turned to this issue.

I (Jeremy Liew) moderated the first session, on What Makes Games Fun, featuring game design thought leaders Amy Jo Kim, Nicole Lazarro and Ian Bogost, plus John Welch of Playfirst, the company behind one of the most popular casual game ever, Diner Dash.

The discussion was wide ranging and covered Nicole’s framework for generating emotion in games and the four types of fun and Amy Jo Kim’s five game mechanics.

There was excellent discussion about how fun, addictiveness and business models can either collide or work together, with in depth discussion of two games in particular, Pack Rat and Parking Wars.

Pack Rat was lauded as an example of a game that did a masterful job of creating addictiveness through game mechanics, and a game that had a natural digital goods/service business model baked into it. But some panelists questioned whether the “grind” without real “payoffs” at different levels could burn players out. In contrast, Diner Dash had real changes in game dynamic and strategy as players level up (e.g. when Flo gets the coffee maker at level 4, it changes the winning strategy) that made leveling up more meangingful and rewarding.

Parking Wars was pointed to as a highly social game with a genre matching to the mass market that let players “play slight variations of themselves” where they could explore slightly nefarious behavior in a safe environment. But “winning” in Parking Wars forced activity to the edges of the social network, instead of to the core, so the “points” game mechanic ended up working against the “fun”.

UPDATE: Virtual worlds has an excellent writeup of the What Makes Games Fun panel.

The second session was focused on Casual MMOs and Immersive Worlds, with Joey Seiler from Virtual World News moderating representatives NeoPets, Nexon, K2 Networks and Gaia.

One of the key questions was how to get free to play users to open their wallet. Gamasutra covered this panel in detail and noted:

Added Kim (Nexon): “A lot of people think they can make money off of casual games where people play a couple of hours a week. I don’t believe that. When people get engaged with the social experience then they’ll buy items. You need to understand the psychology.”

Reppen (Neopets) continued: “For us, it’s all about a sense of ownership that our audience has. There’s a real sense that it’s their game… The identity component to virtual worlds is so important, but there’s so many other things going on in the meta games around earning points, acquiring wealth, shopping and customizing and creating your own experiences… It’s part of a mix.”

In other words, even for casual MMOGs, you monetize the hardcore players who tie their identity into the game. Erik Bethke (GoPetsLive) said the same thing at this years GDC previously in explaining why he applies game dynamics to make virtual worlds more addictive.

UPDATE: Massively writes up the panel in Q&A style.

After lunch Andrew Chung from Lightspeed moderated a panel on Asynchronous Games on Social Networks with the CEOs of the companies behind many of the top games on Facebook, including Friends for Sale, Zombies, Vampires, Warbook, JetMan and (fluff)Friends.

Inside Social games
took live notes from the panel. One interesting counterpoint in response to the question, “How do you move people down the spectrum to make them more engaged and hard core?”:

Blake (Zombies, Vampires etc)- There is always going to be some subset of your userbase that’s never going to play more than their 30 minute lunch break, because that’s all the time they have. Don’t inundate users with too much experience at the beginning, gamers hate to read, I’ve never read a game manual in my life.

Siqi (Friends For Sale)- I think there’s a lot to learn from traditional MMO design, things like levels. If you get to the next level, you get this new shiny thing. It makes the game more complicated, but it works. Our hardest core users use more synchronous features.

Shervin (Warbook, Jetman, etc) – The first generation of social games were incredibly simplistic, and the platform was so viral, that it was a lot easier for apps to grow. But it behooves all of us to invest in content. I’m staying up late at night building social games 2.0, games with richer content, deeper stories, much better user experiences. It’s going to become harder for independent developers. I can’t talk about the games we’re working on, but you can look at Playfish. Their engagement levels are high and they’re growing faster than those that have come before.

In other words, games need to be easy to learn, but hard to master.

Next up was Dean Takahashi of VentureBeat moderating a panel on User Generated Games in Social Networks and Virtual Worlds. The speakers were from IMVU, Dogster, Three Rings (Puzzle Pirates, Whirled and Bang Howdy) and Habbo.

Virtual Worlds News has coverage of the panel and noted that:

In IMVU, said Rosenzweig, creators “do what they do because it’s cool, but they like making credits” by selling the items in world. That can then be cashed out through IMVU, which leads to 90% of its revenue, taking a cut while transfering IMVU credits to real world dollars. That user attitude is true of Dogster and Catster as well–users don’t get a cut of the money generated by creating games around their items and boosting activity. They just enjoy creating and sharing.

In other words, social game players generate content for love, not for money. But if there is money there to be had, they don’t mind taking some of that too! Last month Chris Alden noted the same experience in the blog economy.

UPDATE: Worlds in Motion also has a writeup of this panel

After a short break for cookies, the attendees reconvened to hear Brandon Sheffield of Gamasutra moderate a panel about Building Communities and Social Interaction In and Around Games, featuring the leaders of Kongregate, Zynga and Addicting Games, along with noted social architect and game designer Amy Jo Kim.

The discussion centered on the desire that many users had to communicate with each other, and how games often served as an easy way to break the ice and provide topics that made it easy to start a conversation. I haven’t found any coverage of this panel online unfortunately.

The final session of the day was focused on Monetization and Business Models for Social Games. My partner Ravi Mhatre moderated the panelists, including the leaders of Mochi Media, Sparkplay Media, Stardoll and Acclaim. This was a fantastic panel. Virtual Worlds News has great coverage.

Although most of the discussion was focused on the four models of advertising, subscription, digital goods and retail, David Perry noted that there are by his count 29 business models for games.

On the mix between advertising and virtual goods, the panel mostly agreed that virtual goods was the primary revenue stream but that advertising was an important secondary stream:

“Microtransactions and advertising go perfectly togetehr,” said Miksche. “Microtransactions drive our business, but we will never have 100% of our users wanting to pay for that. Advertising is a good way to monetize that remaining X percent.”

There was some good discussion about the tension between game balance and letting players buy powerful items in the games. Several panelists noted that self expression was a key driver of virtual goods sales:

As for who’s paying, Perry (Acclaim) expected most microtransactions to come from hardcore MMORPG playerskitting out the avatars with fancy armor and such. Instead, it comes from Dance. The game is a simple dancing activity, but because users spend so much time looking at their avatars, the appearance and identity becomes even more important.

That works well for Stardoll, a fashion-themed site, especially with trends that match the real world…

“We’re One-Click Dressing,” said Miksche (Stardolls). “You come to the site and instantly start dressing. For our users, young girls, that’s very important–instant gratification.”

For those who couldn’t attend, UStream.tv hosts video from the social gaming summit.

Andrew Chen’s blog also has his takeaways from the social gaming summit.

I’ve pulled together all the coverage I could find, but if there were additional posts, please let me know in comments.

How many of your MMOG’s monthly users can you get to pay? June 11, 2008

Posted by jeremyliew in business models, games, games 2.0, gaming, mmorpg, subscription, virtual goods, virtual worlds.
3 comments

I recently concluded that good MMOGs can expect $1-2 per user per month from a free to play model, with Second Life as an outlier at almost $10 per user per month.

This relatively tight band of monetization masks some fairly high variability in the ratio of paying users across games and virtual worlds. From the highest to lowest, here is some data available on the web:

Second Life reports 860k residents logged in over the last 30 days, and 383k customers spending money in world in May. As you can only spend Linden dollars if you have Linden dollars, and you can only get Linden dollars by buying them or becoming a premium members, this suggests a 45% paying ratio. (Likely the ratio is lower than this as some Second Life residents may buy dollars one month but spend it over several months)

Club Penguin at acquisition reported 700k paying users and had 2.6m UU in that month according to Compete, or a 27% paying ratio.

NCSoft’s Dungeon Runners self reports a ratio of 3:1 free to paying users, or 25% paying ratio.

Jagex’s Runescape claimed 1m players paying $5/mth in May 2007 and 6m players per month in October 2007, for a 17% paying ratio.

3Rings’ Puzzle Pirates has been reported to have 30k paying users out of its 200k unique monthly users, for a 15% paying ratio.

Frankly, all of these public numbers are on the high side of the industry. An NPD survey found that:

… 91 percent of online gaming among kids ages 2 to 17 is free; of the 9 percent that pay to play, these kids are more likely to hail from higher income households. In addition, the likelihood of a child to pay for games increases along with the child’s age and time spent on gaming.

Monetizing kids is more difficult than monetizing adults since kids have more limited access to payment mechanisms (e.g. credit cards), so the overall industry ratio of paying gamers is likely higher than 9%.

Most MMOG publishers do not publish their monetization statistics, but private conversations with many publishers suggest that getting to a 10-12% monetization ratio of active users is a stretch but achievable target.

Do readers have other data that they can share?

Second Life monetizing at 5x higher than other casual MMOGs June 10, 2008

Posted by jeremyliew in business models, games, games 2.0, gaming.
14 comments

Yesterday I pulled together some analysis of monetization rates for casual MMOGs. In my analysis I estimated that Second Life was making around $1.4m/month in revenue from premium memberships and selling Linden Dollars. A number of people noted in comments that the majority of Second Life’s revenue came from land maintenance fees that I had left out of my analysis, and that Second Life’s revenue was actually far higher.

In fact last month James Au estimated that Second Life’s total revenue is around $8m/month:

There’s currently 14,597 islands, and they make an average of $1200 for the sale of each; they charge $295 per island per month for land use fees. (I say average, as island pricing has fluctuated recently.) So about $17,500,000 for the island sales, but that’s a one-time fee.

Recurring income is around $4 million/month in island land use fees. The Lindens also charge land fees on the cheaper, Linden-controlled mainland continents, and that’s maybe 30-40% of the total land mass, so say $2 million/month more. Add the island sales and commission revenue from L$/US$ transactions, plus the 92,000 Premium account holders paying $10 per month for another $2 million total a month. All that tabulated, $8 million a month gross seems like a safe (if very sloppy) guess.

I’m not a Second Lifer, and James was a long time embedded reporter in Second Life, so I’m inclined to take his estimate over mine. Another estimate from secondlifepros.com comes in to roughly the same place.

Based on this higher revenue number and the 860k residents logged in over the last 30 days, Second Life is monetizing at around $9.30 per user per month, much higher than the other casual worlds I talked about yesterday, but in band for some of the more “hardcore” free to play MMOGs that companies such as Acclaim, Aeria, OutSpark, K2 Networks and IGG are importing.

Monetizing MMOG players without creditcards through retail May 21, 2008

Posted by jeremyliew in business models, digital goods, games, games 2.0, gaming, mmorpg, virtual goods.
3 comments

Raph’s latest post says that there is a market glut of MMOGs, but most of them will survive. In passing, he shows a picture that is worth a thousand words:

MMOG cards at Target

… here is the rack of game cards available at Target — snapped this weekend, and strongly reminiscent, finally, of similar shots I have taken in Korea, Japan, and China. For years, there was no such rack in the US. Then it was just a couple of cards, and only at some checkouts. Now it gets a rack right between the TV box sets and the top pop albums (you can see REM’s latest CD there, abandoned on the top shelf).

Besides the cards you maybe expect to see, like Club Penguin, WoW, and Zwinky, there’s also a large stack of ‘em for gPotato games (Flyff, Shot Online, etc) And Acclaim, which make their living by bringing over games from Korea. There’s WildTangent cards, and the Gaia cards are almost sold out. The diversity is interesting, as is the lack of cards for most of the core gamer MMORPGs. The strong presence of the often-marginalized Korean games is telling.

One of the challenges in monetizing MMOGs through virtual goods in the US has always been finding a way to sell them to young players who don’t have credit cards. Gaia even employs 3 people whose sole job it is to open snail mail envelopes full of cash that people send in for virtual goods.

Pre paid cards at retail are an excellent way to monetize this audience. I have heard from a number of MMOG companies that they have seen a substantial increase in both ARPU and velocity of spending since releasing these cards. Watch this space.

Dealing with in-game inflation May 7, 2008

Posted by jeremyliew in business models, economics, game design, game mechanics, games, games 2.0, gaming, mmorpg, virtual goods.
5 comments

Siqi Chen, CEO of Serious Business (publisher of the Friends for Sale game), pointed me to an excellent white paper on the money supply impacts on an online economy recently.

It notes that in most games, players control the rate at which new cash is introduced into the economy. To avoid hyper-inflation, it recommends four steps:

Consumables are important in creating new Cash – If large amounts of new cash can be created without consumables, then there is no economic brake on cash creation.

Players set the prices of Consumable – This is the other side of the coin, since only player set prices can legitimately respond to changes in the money supply. Attempting to do this programmatically in such a diverse economy as a typical MMO is to invite failure. National governments have not been able to do this.

Fixed drains need to be in place – This provides a mechanism to remove a Crafter who is economically irrational from the business game, as well as to provide equilibrium in prices and money supply. Thus a regular fixed cash fee for doing business is required, and set by the game.

Variable Drains via percentage commission of the sale need to be in place – This provides a damper that mitigates wild swings in the money supply. Fictionally Sales commissions provide this damper. The percentage is set by the game, on Facility Type basis.

People building social games should read the whole thing.