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

2Aug/079

Top 10 Revenue Models for Free To Play Games

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:

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.

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Comments (9) Trackbacks (17)
  1. If this were a top 11 list, I would add Collectible Virtual items.

    The new Stargate CCG came out day and date with both paper and electronic versions (SOE) of the game.

    Magic The Gathering Online has been running strong for a while.

    They use a combination of required virtual goods (the cards) and tournaments (um… the tournaments).

    On Magic Online, an interesting business model has turned up – Player owned seller bots in the Marketplace (aka: Card trading rooms.) The people with the best bots make a decent living off of the Magic Online Marketplace

  2. A relatively new model, but i believe to be very promising was introduced earlier this year by “doubleTrump” with the launch of their site http://www.playonarcade.com

    This model allows you to “pay as you play to own”, meaning – you pay 1 cent per minute of play, and you play as much as you want per game. If eventually you played to own the game (full or promotional price) it is yours. In this model for example: with $10 you play 10 hours on various games and the “My Account” built-in to the site shows you how much you purchased so far per game. Clear benefits:
    1) It overcomes the psychological barrier of purchasing a game that you may not play anymore past the first few hours.
    2) Variety of games in reasonable price

    The founders of this approach claims that developers and distributors can earn 5 to 10 times more per game!!! sounds very good and make sense.

  3. I approved the comment above, even though it is almost certainly spam from playonarcade.com. I deleted a second comment from another person who was also flatly promoting playonarcade.

    Seems this post has already attracted the casual game marketers.

  4. Adrian -

    A quick correction, Tournament.com is not owned by Valve, but by a UK based company. They have an exclusive license from Valve for skill-based Counterstrike…

    Tournament fees probably should be separated from skill-based gaming, or the precedence should be reversed (with Skill-based gaming) being the main model and tournament fees being a special case.

    Second Life’s other business model is Currency Exchange. Virtual currencies and currency exchanges are a huge, open opportunity. I haven’t seen good data on WildTangent’s coins to know for sure.

    And then there’s gambling as a business model :) . I think there is a horse racing / breeding game in South Africa that uses this model.

    I think I would describe Project Entropia’s model differently. They have certain very rare assets (the space station, bank licenses, etc.) that they auction to the public… as opposed to their other model – the sale of consumable / decaying items.

    The Station Exchange is probably the main example of a game company profiting from player-to-player transactions. As I noted when the report was announced, the bigger benefit was the reduction in customer support calls rather than the transaction fees (as I recall, the customer support calls were cut in half).

    Finally, there is metered play – which is still used for a lot of games in China, in particular, and used to be big in the US in the days when Internet access was metered.

  5. Adrian -

    A quick correction, Tournament.com is not owned by Valve, but by a UK based company. They have an exclusive license from Valve for skill-based Counterstrike…

    Tournament fees probably should be separated from skill-based gaming, or the precedence should be reversed (with Skill-based gaming) being the main model and tournament fees being a special case.

    Second Life’s other business model is Currency Exchange. Virtual currencies and currency exchanges are a huge, open opportunity. I haven’t seen good data on WildTangent’s coins to know for sure.

    And then there’s gambling as a business model :) . I think there is a horse racing / breeding game in South Africa that uses this model.

    I think I would describe Project Entropia’s model differently. They have certain very rare assets (the space station, bank licenses, etc.) that they auction to the public… as opposed to their other model – the sale of consumable / decaying items.

    The Station Exchange is probably the main example of a game company profiting from player-to-player transactions. As I noted when the report was announced, the bigger benefit was the reduction in customer support calls rather than the transaction fees (as I recall, the customer support calls were cut in half).

    Finally, there is metered play – which is still used for a lot of games in China, in particular, and used to be big in the US in the days when Internet access was metered.

  6. Hi Adrian, I am really interested in starting a MMO site which should be surefire, based on the game analysts report. Anyone willing to assist or collaborate please contact me at subh10@gmail.com

  7. Interesting to note here, but Tournament.com just went out of business two days ago. They cite high infrastructure costs as their biggest problem. I am guessing their security requirements necessitated using a server per match, which is pretty hard to scale in a cost-effective manner.

    I could be wrong though – I’d welcome the guesses of others on what led to the premature demise of Tournament.com.

  8. Hello everyone,

    I am excited to be part of this forum.

    I am currently working on a thesis entitled “key success factors” for a virtual world.

    Frankly, I don’t know where to start and where to look. So that’s why I am asking you guys. Do you have any ideas that are coming to your mind spontaneously?

    I have already figured some of them out, like: Intuitive game play, Community Management, Costs of usage, User generated content, Link with real world.

    However, I am wondering if it is possible to establish such key success factors that are valid for any MMOG?

    I am waiting for your encourageing answers!

    Thanks a lot in advance.

    Kindest,
    Lisa

  9. I feel that #3 is without a doubt the least used method of monetization. As an MMORPG gamer myself, I really wouldn’t mind seeing ads while I game, so long as I knew that money was being spent on improving the game I’m p
    laying.


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