Free To Play

I don’t imagine we have too many artists reading f2p.biz, but if you are that guy or girl you might want to check out Jagex’s latest job posting. Seems they’re looking for a designer in Cambridge to do the following:

We are looking for a talented web designer to join and help create websites that will be viewed by millions of people each year.

With over 1.1 million paying subscribers to our online game, RuneScape and a further 6 million other active players visiting the website regularly, you will be responsible for designing the site they visit to play our ever-popular game.

Seems like a cool opportunity for a designer who wants to be on the cutting edge. If we had you at hello, go ahead and send your resume here. Tell them F2P sent you.

:: :: :: :: :: :: :: :: :: ::

Motley Fool has a good wrap up of Shanda’s just released Q2 numbers. I’ve included a couple quotes from the article below.

Further to my previous article on the potential acquisition costs of the Asian F2P leaders, Shanda seems already unaffordable for all but the most well-heeled Western suitors.

Revenue soared 39% to hit $74.1 million in the second quarter. Earnings, before a one-time gain related to the company’s sale of its stake in SINA (Nasdaq: SINA), soared 78% to $0.42 per American depositary share (ADS).

Wall Street was expecting the company to earn just $0.36 per ADS on $72.4 million in revenue. The pros have been perpetually humbled by Shanda. This is now the fifth consecutive quarter in which the company lapped the market’s profit targets by at least $0.06 per ADS.

And most interestingly:

Yes, China’s online gaming market is getting crowded, but just three players — NetEase (Nasdaq: NTES), The9 (Nasdaq: NCTY), and Shanda — account for roughly 60% of the market. [Ed: emphasis mine]

:: :: :: :: :: :: :: :: :: ::

Last month my family traveled to London, a city of less than 500,000 in Southwestern Ontario. While there, I watched my 7 and 13 year old cousins, Brad and Kyle, play games on their family computer.

Somewhat surprisingly, Brad and Kyle had just one retail PC game between them (Settlers). Instead, their favorite games were Puzzle Pirates, Habbo Hotel, and Runescape - all free to play, virtual item sales games (with the exception of Runescape, which uses tiered subs rather than virtual items for its revenue).

What does this say about where the North American PC market is headed?

Based on overwhelming anecdotal evidence, it’s clear to me that the younger set (under 20) is embracing free to play and virtual goods games because the budget and engagement model is tailored made for for them. And as the younger set is further weened on the same virtual goods business model that’s already dominating Asia, retail only pay-to-play PC games will be ignored en masse.

In some respects, North American companies have begun adjusting to the F2P/virtual goods wave. With gifting sites like Facebook and HotorNot.com, microtransaction services like Xbox Live and casual MMOGs like Puzzle Pirates, one might argue that we’re at least keeping up with the pack in this emerging space.

But what are traditional North American game publishers (EA, Activision, etc) doing to adjust to this new, non-retail, online-centric business model? Are they seeding their own internal virtual goods projects? Building virtual goods into their existing or upcoming products? Acquiring early movers in the space?

At least right now, the answer appears to be “none of the above”.

North American game companies are taking the same “partner and acquire” approach that they’ve used to achieve growth and purchase innovation for the last two decades. When done correctly, this approach pays off handsomely. Activision partnered with Infinity Ward to produce the first Call of Duty, then opted to purchase the developer for a meager $5M just before Call of Duty 1 shipped. Activision knew that when CoD became a big hit, Infinity Ward’s asking price would grow immensely due to their successful IP.

In another bit of foresight, Take Two bought Irrational in 2005 for just $8.2M. Last week, Irrational delivered Bioshock - the highest rated new IP in years. If Irrational were for sale today, their asking price would likely be 5-10x what they sold for.

But studios with already successful IP (or a track record that indicates their next game will be huge as well), command a larger acquisition premium than the aforementioned deals.

For example:

IP Acquisitions

• EA buys Maxis for SimCity for $125M
• Activision buys Red Octane for Guitar Hero for $99M

Track Record Acquisitions

• Microsoft buys Rare for $375M
• Elevation buys Pandemic/Bioware for $300M

But an even larger premium is paid for companies that couple good IP or a good track record with an online-only distribution model.

Online Acquisitions

• Disney buys Club Penguin for $700M
• EA buys JamDat for $680M

Why the higher acquisition premium? Because online-only companies such as Club Penguin, Shanda, Netease, etc routinely see annual profit margins of 50% or more.

Look no further than Club Penguin making $35M profit on $65M annual revenue.

By contrast, retail game sector margins have been in decline ever since the last big reduction in costs: the move from carts to CDs in the mid-90s. Development and distribution costs have risen so dramatically in the last two console generations that EA’s net income has declined 87% since 2004, Take Two has lost $90M total over the last six years (50M units of GTA sold and still a loss?), and Ubisoft and THQ are considered a profitability leaders at nearly 10% annually. *

So it’s no wonder that deals like Disney/Club Penguin and EA/JamDat have much higher valuations than their retail counterparts. They have a far better ROI.

But let’s get back to my point: the “partner & acquire” approach Western companies have traditionally used to internalize innovation will likely prove cost prohibitive as it’s being applied thus far in the virtual goods space.

Some of the recent virtual goods partnerships made by publishers include:

• Battlefield Online: EA, Neowiz
• FIFA Online: EA, Neowiz
• Counterstrike Online: Valve, Nexon
• Neopets Mall: MTV, Nexon
• Dead or Alive Online: Tecmo, Shanda
• Company of Heroes Online: THQ, Shanda

These are all great relationships, but they are bridging strategies primarily suitable for the short to medium term. The acquisition portion of these partnerships would be cost prohibitive. Which North American game publisher would be able to afford the acquisition cost of a Nexon or Shanda based on the latter companies’ very healthy margins and rapid revenue growth?

Let’s use Shanda and THQ’s most recent Q1 2007 results as an example.

THQ (Q1 2007)

• Gross Revenue: $139M (down 12% from previous year)
• Profit: -$10M (net loss)

Shanda (Q1 2007)

• Gross Revenue: $68.8M (up 61% from previous year)
• Profit: $58M

Western companies have huge revenues, but even huger development costs owing to their terrestrial products - resulting in little or no profits. Eastern companies have smaller (rapidly growing) revenues, huge profit margins from online only distribution and a big head start on virtual goods. This contrast holds more or less true for most of these Western/Eastern partnerships.

Shanda’s market cap today is $2B. It’s not far-fetched to assume their purchase price might be close to $3B. The only companies with that kind of cash on hand are EA and Microsoft.

While it could be a partial stock deal, why would Shanda would trade their high growth stock for low growth publisher stock? Any partial stock transaction would ultimately result in a higher overall purchase price.

Netease (NTES) has a market cap of $2.06B. The9’s (NCTY) market cap is $1.14B. Nexon is privately held, but with $235M in revenue two years ago, they won’t be cheap either. The point is, there aren’t many deals left among the virtual goods establishment.

The billion dollar question is: Where will these numbers be next year? Or in 2-3 years?

My gut says that in two years, North American companies will be “priced out” of acquiring a leadership position in the global virtual goods market.

To avoid this fate, big American publishers need internally developed/wholly owned virtual goods projects or partnerships with newer, smaller virtual goods companies whose acquisition costs are far below the big Asian players such as Shanda, Netease, Nexon, The9, NHN, etc.

So…

• When will we see early stage virtual goods startups acquired by game publishers in massively undervalued deals a la ATVI/Infinity Ward? Are the big publishers even capable of spotting these deals as well as venture capitalists? Companies like Conduit, Three Rings and Areae would be prime targets for early acquisition if VCs like Charles River and others weren’t already all over them. Venture capital’s eagerness to fund low risk/high margin virtual goods plays (and not high risk/low margin retail game companies) will drive innovation in the sector, ratcheting up acquisition costs for publishers are late to the party.

• When will we hear of internally developed virtual goods projects underway at major publishers? Perhaps EA and Ubisoft’s new casual games focus will bring about the next big Flash MMO or virtual world, but I can’t help but think most of their attention is still on on the try-before-you-buy $20 casual games, rather than F2P/virtual goods. Ironically, some of the biggest stateside-initiatives in free-to-play are coming from Asian companies like Sony Online (FreeRealms) and NCsoft (Dungeon Runners).

Until we see big American publishers announcing more than stop gap Asian partnerships, I’m concerned that the next generation of gamers - my cousins Brad and Kyle in London, Ontario - will be playing even fewer games from today’s North American publishing giants.

:: :: :: :: :: :: :: :: :: ::

Notes:

* For more of these numbers, check out the GAAP financials for big publishers using this link to EDGAR, then enter a stock ticker like ERTS to get to a 10-K form like this one for EA. Search for “statements” or “2004″ and keep going until you get a table with last five years or so, then check out the net income row.)

At last month’s Casual Games Conference in Seattle, I spent about 30 minutes chatting with Daniel James, CEO of Three Rings. Daniel told me an interesting story about how Puzzle Pirates, the hit Java MMO, has accelerated user base growth.

Puzzle Pirates utilizes few other distribution portals outside of www.puzzlepirates.com. But one site Daniel has had phenomenal success with has been Miniclip.com, the browser-based games portal.

In Daniel’s experience, a stunning 1 million out of Puzzle Pirates’ 3 million players have come via Miniclip alone.

Because Miniclip users are younger, they don’t monetize as well as other players. Daniel’s estimation was 1% monetization for Miniclip users vs 5% among the rest of the Puzzle Pirates user base. However, according to Daniel a secondary wave of word-of-mouthers join Puzzle Pirates shortly after each wave of new Miniclip users and the conversion rate among this secondary wave is much better.

I bring this up now because of this very recent Ypulse article, which contends that Miniclip has been the primary growth catalyst for games like Club Penguin and Runescape as well. A degree of influence not surprising given the “explosive growth” of the Miniclip.com site itself, as illustrated on this chart.

Here are some quotes from the Ypulse article:

Without Miniclip, it is likely that there is no Club Penguin phenomenon. The product launched in October 2005 and was able to eke out a base of about 25,000 users. A few months later, the game was posted on Miniclip and experienced explosive growth. By September, the product had over 2.6 million users. Runescape’s user base saw a similar, if slightly less dramatic, increase from a niche game to a multi-million user success.

With a core demographic of 10-24 year olds, Miniclip has built a portal with the power to instantly launch a youth brand. What network TV was for The Transformers, so Miniclip has been for Club Penguin. Great products can travel virally, but the task is a lot easier if the starting point is 30 million exposures.

:: :: :: :: :: :: :: :: :: ::

US-CA-Glendale-Executive Producer, Neopets

Here’s an opportunity that doesn’t come around every day. Neopets is looking for an EP.

The Neopets Executive Producer reports to a VP and interacts with the longest list of Director types I’ve ever seen included in a job description. I quote:

This position will interact closely with:

-Director, Technical Development

-Director, Multimedia Applications Development

-Director, Casual Game Development

-Director, Marketing and Operations

-Director, Promotions Marketing

-Director, Fraud Management

-Design Director, Neopets Creative Resources

-Director, Consumer Products

-Director, Research Analysis

But as we all know, the market for talent is tight. So I wasn’t surprised to see a relatively light set of prerequisites:

EDUCATION/EXPERIENCE:

-BA in a related field or equivalent experience. MA a plus.

-3+ years working as a Product Manager, Producer or Associate Producer on multi-player on-line games or similar position.

-2+ years experience with project budgetary processes.

And after listing off 23 bullet points under the KNOWLEDGE/SKILLS section, I always find it odd when companies throw in a line like this:

-Proficiency in the following software or systems:

-Microsoft Office, Visio, MS Project, Outlook

In any case, it’s late at night and I’m being overly critical. If you’re interested in this opportunity, email Mia Burgess (mia.burgess@mtvstaff.com) or go straight to the top by tracking down Kyra Reppen, SVP & GM of Neopets.

:: :: :: :: :: :: :: :: :: ::

From a Gamasutra interview with Nicholas Beliaeff, Sony Online San Diego studio head… here are a few quotes:

On reducing barriers to entry:

We’ve got a lot of streaming going on, and we’ve reduced the barrier to entry for players. There’s no big download, and no credit card required. We’re really excited about that.

On multi-platform development:

For us as a company moving forward, all of our MMOs in development have a console component.

On min specs:

Whenever you’re making a game and are proud of it, you want as many people as possible to play that game. In the PC world, the lower the machine spec you can get, the bigger potential audience you have, and the more chance you have for people to look at your work.

On Free to Play:

If you look at some of the free to play games like Club Penguin and RuneScape, it’s a huge market. If you look at the actual numbers of people playing RuneScape, there may actually be more people playing RuneScape than there are playing World of Warcraft.

Interestingly, Nicholas and I met in 2001 when I was pitching a product of mine to him and Trip Hawkins at 3DO.

:: :: :: :: :: :: :: :: :: ::

Virtual Goods Summit 2007 - Conference Videos

As has already been reported on several sites, the videos from June’s inaugural Virtual Goods Summit at Stanford are now online. Thanks to the organizers for making the videos freely available - I wish more conferences did this.

I took a heap of notes at the Summit, so why not share them now as well, both in “Top 10″ and raw format.

My Top 10 Notes from the Virtual Goods Summit:

1. James Hong of HotorNot.com
On HotorNot, users can purchase a $10 rose to send to other users. The rose dies 2 weeks later. HotorNot figured there were three value propositions inherent to a real life rose: the flower itself, the gesture of giving it, and the trophy effect of having received it. HotorNot figured that for virtual roses, 2 out of 3 of those values weren’t bad - and they were right. The $10 rose is HotorNot’s highest priced item, but it is still their best seller. James Hong said re: price elasticity, “It’s not impossible that if we raised the price of the rose, we’d sell even more.”

2. Paul Thind of Habbo Hotel
Habbo puts spending caps on every payment method to control economy & keep parents happy - so users can spend money only on 2-3 set days of the week.

3. Craig Sherman of Gaia Online
Gaia has three full time people on staff whose job it is to open envelopes filled with dollar bills and coins because people are desperate to get money into their accounts but can’t find a suitable payment method.

4. Min Kim of Nexon
Average user lifetime in a Nexon game is 2-4 years; Audition, Nexon’s newest game, is 50% female; Maple Story and Kart Rider are 20-30% female.

5. Tim Stevens of Doppelganger
The typical console game would not benefit from virtual item sales because of its lack of a continuing connection with its audience. I.e. the game launches, everyone buys and plays it, then most if not all of them leave very quickly for the next game. The community doesn’t grow and care about their presence in the game long-term.

6. Daniel James of Three Rings
The average Puzzle Pirates user spends 2.5 hours per day in the game. Some drop in and leave, but others spend up to 9 hours a day in-game.

7. Raph Koster of Areae
Regarding preventing and tracing fraud: “You need to serialize everything - so you can trace the path of a virtual coin right back through to its minting.”

8. Kyra Reppen of Neopets
Neopets builds their item packages and costs around a template metric of $10-15 per complete outfit.

9. Kevin Efrusy of Accel Partners - Facebook’s VC
The Facebook gifting service was just an experiment. A third party will use the newly-launched Facebook Application Platform to deliver a far more successful gifting solution. He said if he were an independent developer, he’d be working on that right now as he believes it is a huge opportunity.

10. Eric Bethke of GoPets
GoPets users are 80% female, one third of whom are in North America. Users are spread throughout the 20s, 30s, 40s, 50s age groups. Interestingly, GoPets highest ARPU is from the low 30s age group.

All of my raw, totally unedited notes from the Virtual Goods Summit, after the jump.

:: :: :: :: :: :: :: :: :: ::

(more…)

From this article: Gaia looking to sell?

It would certainly make sense given the post-penguin acquisition fever. Gaia Online is the very popular anime hangout for US teens. And they’re boasting some excellent numbers these days:

• World’s fastest growing hangout for teens.
• #2 forum with 1 billion posts, over 1M posts yesterday, 2M monthly unique visitors.
• Avg simultaneous users 64K. 3x growth since May 2006.
• Avg minutes per session: 48 - Beating MySpace, Facebook, Habbo, Runescape, Puzzle Pirates
• 85% US users, 55% female audience, 300k users log in daily.
• .5m uniques a month this time last year, now doing 2.5m uniques/month.

:: :: :: :: :: :: :: :: :: ::

The following 10 revenue models allow some or all of their associated game or virtual world to be played for free. The ordering is quite unscientific and I’m sure I’ve missed something obvious or messed up a detail. I leave it to the internet to correct me.

1. Virtual Item Sales
A well familiar revenue model first established in Korea and now the dominant model in Asia. Nexon - makers of KartRider, MapleStory, Audition and more - are widely seen as the leaders in this area, doing $230M of gross revenue in 2005 (the most recent year for which they’ve released figures), with 85% of that revenue coming from virtual item sales.

Virtual item sales is the practice of allowing users to purchase functional, decorative, or functional & decorative in-game items for use in and out of gameplay. A virtual item system usually uses two currencies - an attention currency (users earn virtual money via in-game activities) and a real money-based currency (users buy virtual money using real money). Typically, 5-15% of users opt for the latter currency and the influx of real world money is what provides the virtual item sales revenue stream.

What’s so compelling about virtual item sales is the unlimited ARPU (average revenue per user). According to Daniel James, CEO of Three Rings, some hardcore Puzzle Pirates users have poured more than $10,000 apiece into the game via virtual item purchases. To reach that contribution level via a World of Warcraft-style $15/month subscription would take a user 55 years.

While extremely shaky sources peg the overall size of the virtual item sales market at $1.5-2B this year, without an NPD-esque measurement organization there’s no way to verify that number.

2. Subscription Tiers
Runescape, the Java MMO from Jagex, is one of the leaders in the tiered subscription space. A tiered subscription model allows users to play the core game for free, but those that desire access to elite weapons or other game content, must pay a small ($5/month) subscription fee. Over 1 million of Runescape’s 6+ million users have opted into the tiered subscription program, grossing $60M annually for Jagex.

Dungeon Runners, an NCsoft free to play MMO, offers a similar $5/month subscription package that affords players access to the elite items, a bank and the ability to stack potions. It also gives subscribers server queue priority.

3. Advertising
Several different forms of game-related advertising revenue streams have popped up in recent years. Firms such as Massive, IGA and Double Fusion do big business in in-game advertising for clients such as EA, Activision, THQ and Microsoft. Game ad agencies typically serve up static ads (ads that ship with a product and never change) or dynamic (ads that are updated in real time via the net) within game products that are contextually appropriate for advertising (i.e. sports, racing, or contemporary shooters).

The size of this conventional in-game advertising market is currently pegged at $100-200M, according to well-placed industry sources. However, the number and quality of games with dynamic advertising enabled is escalating dramatically. So much so that Yankee Group predicts the in-game ad market will reach $732M by 2010.

But other, more emergent forms of in-game advertising have been at the forefront of enabling free to play. Examples include:

• Google Adsense PPC ads (see recent post on Maid Marian, grossing $800K/year from Google Ads alone)
• Sponsored item sales (Habbo Hotel)
• In-game video ads (Real Networks)

4. Real Estate or “Land Use Fees“
Second Life is the biggest legitimate player utilizing this revenue model whereby virtual land is sold leased to individuals. Monthly lease fees range from $5 to $195, depending on the size of land in question. Users may also purchase their own island for a one time fee of $1,675 in addition to a monthly fee of $295.

Approximately 70% of Second Life’s revenue comes from land sales and maintenance fees. Of course the virtual land ownership revenue model doesn’t come without headache, as the Bragg vs Linden suit has proven.

Entropia Universe uses land auctions as a revenue stream, but a recent headline-making $100,000 land sale has been called into question as the successful bidder is an employee of Entropia’s developer, MindArk.

5. Merchandise
In what’s become a phenomenon of Furby proportions, Webkinz plush toys and their associated Webkinz World have taken the pre-teen set by storm. Users purchase a $15 Webkinz plush toy at retail and enter a secret code to activate the associated virtual character in Webkinz World. Beyond the retail plush toy purchase, there are no additional fees for playing in Webkinz World.

Two million Webkinz toys have been sold since April 2005, with more than 1 million of those users registering their pet online. That’s more than US$20M in retail sales in just 24 months. Products such as Bratz/Be-Bratz are quickly jumping on this bandwagon.

Another successful merchandise-based revenue model is collectible card games, or CCGs. Neopets launched a CCG in 2003 and just this week MapleStory became the latest free to play game to go this route, announcing a partnership with Wizards of the Coast. Consumers purchase real-world MapleStory collectible cards that come with codes redeemable for exclusive in-game content in the MapleStory MMORPG.

6. Auctions & Player Trades
In June 2005, Sony set up Station Exchange on select Everquest II servers. Station Exchange facilitates player to player trade of in-game items - including the provision of an escrow service - in return for a 10% closing fee as well as listing fees ranging from $1 (items and coins) to $10 (characters).

While Station Exchange recorded only $274K in net revenue in its first year of limited release, it was enough for Sony Online President John Smedley to declare it the future of RMT. Read the SOE Station Exchange whitepaper for more.

Entropia Universe - a world in which virtual items actually decay with use and require real money to repair or replace - utilizes first party auctions as their primary revenue stream. This means that instead of merely facilitating player to player auctions and taking a cut (a la Station Exchange’s eBay model), Entropia auctions items directly to their players.

Entropia items sell for ludicrous sums, with rare weapons auctions closing at $26,000, land auctions for (allegedly) $100,000. The May 2007 auction of five in-game banking licenses brought in $404,000, total. Ironically, Entropia takes no fees for player-to-player auctions.

In the wake of this success, watch for third party virtual item auction houses such as Dan Kelly’s Sparter.com to offer developers and publishers a cut to ensure the (exclusive?) cooperation of their products.

7. Expansion Packs
The best known example of expansion packs as a primary revenue model is the Arenanet product, Guild Wars. Likened by Richard Garriott to a series of fantasy novels, Guild Wars relies not on monthly subscription fees for its revenue, but on the sale of successive expansion packs for $29.99.

The game’s creators argue that the thin-pipe origins of their technology allow their game to be run far more economically than competing titles, enabling this no-subscription free model.

Over 3 million people have purchased the previous three Guild Wars products (Guild Wars, Guild Wars: Factions and Guild Wars: Nightfall) with those numbers set to surge again with the release of Guild Wars: Eye of the North on August 31, 2007.

8. Event or Tournament Fees
Netamin’s free to play, ad-supported Ulimate Baseball Online uses event fees as an additional revenue stream. UBO’s Pay to Play tournaments cost $5 per player to enter and offer cash prizes up to $4,500.

Shot Online, a free to play/virtual item sales golf MMO, also charges users to enter tournaments.

Third parties such as Valve’s Tournament.com and Groove Game’s Skillground.com are getting into the pay to play tournament scene as well. These sites charge charging entry fees for game tournaments for games such as Half-Life 2 and Counter-Strike.

9. TrialPay
At the recent Virtual Goods Summit and again at the Seattle Casual Games Conference, I bumped into representatives from TrialPay. TrialPay is a third party facility that allows customers to pay for products (i.e. games) by trying or buying from advertisers.

What this means is that when you go to pay for a casual game or purchase virtual currency, you can instead select from a demographically targeted list of special offers. Trying or buying one of these offers - from merchants such as Avis, Geico, Vonage, etc - allows you to get your game purchase for free, as the offer merchant has paid the game provider for acquiring a new customer on their behalf.

TrialPay claims that this allows game developers to earn more per user, as some offers pay game developers upwards of $50 per user (as opposed to the $20 a casual game might normally charge).

Someone from TrialPay can jump in and give me a more relevant example of their system’s use in the game space, but all I could find was a casual games company called Dreamquest Games.

10. Donations
Clocking in at last on the list is of alternate revenue streams is player donations. Raph Koster recently blogged about meeting up with the Kingdom of Loathing guys at ComicCon in San Diego. Raph reported that while KoL’s revenue is “definitely indie,” their primary revenue stream of player donations is a sustainable one.

According to Wired, the donation revenue has allowed creator Zack Johnson to quit his day job and hire six employees to help improve and maintain the product.

That’s what Maid Marian founder Gene Endrody would call a “lifestyle business,” but I suspect most of us wouldn’t scoff at it or any of the above revenue models.

:: :: :: :: :: :: :: :: :: ::

Worlds In Motion - Nexon Teams With Wizards of the Coast to Release MapleStory Card Game

File this one under “Nexon Taking Over the World”. Great partnership and it sounds like MapleStory’s CCG>Online integration is well thought out. So everyone who buys a pack of cards gets a virtual item or experience of some sort.

:: :: :: :: :: :: :: :: :: ::