FreeToPlay.biz The Business and Design of Free-To-Play Games

28Jun/074

The Economics of a Free-To-Play Console Game

Check this out: Online gaming to beat $13 billion by 2012 > www.mcvuk.com

What's interesting about this is not the total, it's that a mere $1B of that $13B is expected to come from virtual item sales on consoles. This is not surprising, given the relatively low install base of download-capable consoles, compared to the complete ubiquity of similarly equipped PCs. Consoles are always going to be a subset of the addressable market of PCs and for now should be considered a secondary or tertiary platform for all but the cheapest-to-produce or most daring F2P endeavors.

Why? Do the math using a fictional Xbox 360 Live Arcade Free-To-Play game:

  • ~12M WW Xbox 360 install base
  • 60% of users online via Xbox Live
  • 65% of Xbox Live users ever use Xbox Live Arcade

That leaves about 4.68M users as the addressable market for our fictional F2P product. Now let's assume a very high tie ratio, just to be optimistic, as we are giving away this product for free after all:

  • 4.68M users
  • 2:1 tie ratio
  • 2.34M users download our F2P XBL game

Great stuff! Now let's see how this group monetizes using some numbers from the wild. 5-10% of users ever pay for your product. Sometimes it can go as high as 15% or as low as 0% (of course), but we'll be optimistic and assume 10% for this calculation.

  • 2.34M users
  • 10% ever pay
  • 234,000 paying users!

Hold up though. We need to measure the active player base, not the amount of people who ever downloaded the product. This is hard to do, since your monthly uniques might be high at first, but decay over time as voyeurs lose interest. But let's assume your uniques/month stabilizes at around 10% of your registered user base (aka the 2.34M users who initially downloaded the product).

Conversion rates are more accurately based off your uniques/month than they are your total user base. Puzzle Pirates has about 30,000 active paying users on 200K uniques/month (and a total "registered user" base of nearly 3M). So Puzzle Pirates is monetizing 15% of its monthly uniques. So our monetization might look like this:

  • 2.34M users
  • 234K uniques/month (10% of users who downloaded the game)
  • 35K paying users

That doesn't sound bad though, does it? Now let's look at the lifetime ARPU from each of these players. We'll continue to use the casual MMO Puzzle Pirates for a data point here, with their $100 lifetime ARPU per paying user.

  • 35K paying users
  • $100 ARPU per paying user, lifetime
  • Average user lifetime in Puzzle Pirates, 2-4 years
  • $3.5M in revenue over 2-4 years

Ugh. That's 2-4 years to hit $3.5M in revenue on a product that, if you're not a small, furry animal like Three Rings, might cost you low 7 figures to develop. That level of profit might be a respectable contribution margin on a typical packaged product, but not exactly a game changer on the scale of F2P games like Kart Rider or Maple Story.

Also keep in mind that my tie ratio (2:1) and monetization rate (10%) are definitely on the optimistic side, so the real gross revenue figure is likely lower than $3.5M. However, I don't account for inevitable growth in the 360's install base, which will of course nudge these numbers upward.

In any case, this is why the really big opportunities in F2P and VIS (Virtual Item Sales) still exist exclusively on PC. With hundreds of millions of net connected PCs, the addressable market far outstrips that of the consoles.

UPDATE: I'm going to blame this omission on how late it was when I wrote this post. I totally forgot to factor in Microsoft's 30% cut of downloadable content sales (which we'll assume would still apply to virtual item sales on their console). So not only are your content creation costs higher for a F2P XBLA game (dev kits alone are costly), but your margins on virtual item sales are worse.

So after removing Microsoft's 30% cut, our fictional product's 2-4 year revenue forecast drops from $3.5M to $2.5M.

Sources:

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Comments (4) Trackbacks (2)
  1. Thanks for this analysis!

    It appears from http://www.zenofdesign.com/?p=838 that Puzzle Pirates’s ARPU is ~$100/year, not $100/lifetime. Am I missing something?

  2. I might be missing something. I’m pretty sure Daniel said $100 ARPU lifetime for the average paying user at the Virtual Goods Summit a couple weeks back.

  3. “..5-10% of users ever pay for your product. Sometimes it can go as high as 15% or as low as 0% (of course)..”

    How do you know 5-10% is the norm? Where can I find out more about that?

  4. Hi Chloe,

    The 5-10% number is pretty standard. Daniel James (Three Rings) writes openly about their microtrans conv rates and this is what he frequently cites (and has told me in person). But this Nov 2008 blog post from The Long Tail sums it up pretty well: http://www.longtail.com/the_long_tail/2008/11/freemium-math-w.html

    Some excerpts:

    “In online free-to-play games, companies aim to structure their costs so they can break even if as little as 5-10% of the users pay.”

    “Estimates for the number of free Flickr users that convert to paid Flickr Pro range from 5-10%.”

    “For the typical Web 2.0 company planning to use Freemium as its revenue model, my advice would be to set 5% as break-even, but balance the mix of free vs. paid features with the hopes of actually converting 10%.”


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