The Business and Design of Free-To-Play Games


VGSummit 2010: Where the Virtual Goods Market is Headed

Virtual Goods Summit 2010, Moscone West - San Francisco. Day 2 of 2, October 13, 2010.

I missed day 1 of this conference due to client meetings, but I'm fortunate enough to catch day 2 thanks to Charles Hudson. The last time I was at a VGSummit was the inaugural one in 2007, when it was held in an auditorium at Stanford.

Track the conference on Twitter using hashtag #VGSummit.


  • Alan Chen, CEO, Perfect World Entertainment
  • Jan Wergin, CTO, Bigpoint GmbH
  • Daniel Kim, CEO, Nexon America
  • Atul Bagga (Moderator), Senior Equity Research Analyst- Gaming, ThinkEquity



  • Companies in the West have not done a good job monetizing user, vs the East.
  • China's per capita spend on games is 50% higher than US.
  • US is all pay-to-play, China mostly free-to-play, Korea somewhere in between.
  • Lord of Rings saw 50% growth after they changed the model to a hybrid model.


  • Over 150 million registered users in the Bigpoint system.
  • Expanded into casual genre with Flash-based farm and zoo games recently.
  • Launching browser-based 3D games this year, such as Battlestar Galactica Online. Ruined Online and Mummy Online also coming.


  • Maplestory, 95 Million users worldwide, 60 different countries. Dungeon and Fighter online largest game in world right now - 2M PCU in China, 3.5M PCU worldwide.
  • US operations services 5 games. About to go open beta for Vindictus, 3D action MMO using Source engine.


  • Since PWI launched in 2008, they've launched 4 games. Coming up is a Western-style MMO.

ATUL - Where do you see the US market going? Still seems early days?


  • Huge space for us to grow into. In Asia we've established leadership. But here in US, the online gaming and free-to-play is still in its infancy. We've been very profitable with good revenue in the 5 years we've been in the US, but it's barely 10% of our global revenues. We expect it to be somewhere around 25-30% in the next couple years. We're seeing double digit growth year over year in this market and see it continuing.


  • We opened offices here because we see huge potential in this market. In the core game market it takes $40M to develop a game, but we can spend $100-200K to see if the game is going to be a hit. We can monitor risk better. Classical subscription based model means you only get a small amount of the value of the game - that's the value of virtual goods and the free-to-play model comes in. Of course you see this in the social networks, where ppl who were never gamers are looking into this now. You can do two things in the US: you can build console games or games for the browser that are action based. Europeans are more strategic.


  • US market is dominated by console games. I just came back from Europe... where the PC market is over 70% of the overall market size. There is a merging of terminals - consoles, PCs, etc are all bleeding into each other (paraphrasing heavily here). I think this is a service vs product approach. When we sell a product we invite the market to come get our latest product. But with service we ask our customers what they want. So the design angle is very different. Customers have individual choices in a free-to-play game... they can spend their time and money in more ways.

ATUL - How big is the US in your revenue stream.


  • In Europe we expect to grow our revenue up to $20M across 4 new games next year. In 2009 we did about $20M revenue in the US, a year after launching in the US. In 2010 we will double that. Next year we aim to double that again. We are still in budgetary stage though - not final numbers.

ATUL - Are you targeting games to people who have consoles? Your games seem like they are more for those gamers.


  • We know that most console gamers have PCs and play games there too as well. Just not a lot of high quality games online for people to play. We are successful because we provide that quality experience online. You can pay $60 for the next big console title or play Vindictus (opening today) for a lot less. We're trying to elevate quality of experience and service to this new audience that isn't used to playing games as a F2P service. Value proposition is clear: they have a low barrier to entry and they can choose to spend money later. We have seen great pickup due to this lack of a barrier to entry from a money standpoint. Most of the US is focused on console games and they are sold like packaged goods, where we see our job as service provider. A lot of these packaged goods games are summer blockbusters - they make all their money in the first week then it drops off over the next month. Most of our games are like the Simpsons - which has been running for 15 years. One of our Korean MMOs has been running for 15 years. Our retention is measured in years, not days or months. Facebook and social games have taken off here in the US and we see that as a huge boon to us - we've been teaching people about F2P and microtrans and over the last year that's become the norm thanks to Facebook. All these people are now used to purchasing virtual goods online and playing F2P games.

ATUL - What are the lessons learned when importing a franchise from another country?


  • Two fundamental challenges. In Europe there are so many local languages. In the US we can focus on one language and make it highly polished. In Europe we have double everything - double product management team, double localisation team, etc. If you want 5-10 languages, you'll need 10 teams. The other challenge is payment. Publishing a game in China for instance is tough - China won't even allow a joint venture.
  • Back to console game - most of our gamers are also console gamers. Remember a survey - "Why do you choose online games?" - and the #1 response was "because I want to make friends". In console games, graphics are the #1 concern, not making friends.


  • In Europe, it's really important to be local. Many countries were Google is not the #1 search engine. Payment providers... Bigpoint offers over 200 payment providers. Without them, you can't monetize those users in each local market. No matter how difficult it is, you need to do it.
  • People expect browser based games to look as good as console games. Good news is that we can do that now. Unity looks really impressive. No client download, in a browser.

ATUL - Any differences between countries in terms of ARPU, conversion rates, retention, etc?


  • Our business in China has a huge user base, but low ARPU but they make up for it with the huge number of players. Our China revenue is close to our Japan revenue but the number of users are hugely different. Japanese ARPU is typically the highest. Japan conversion rate is somewhere around 10%. Both paying rate (conversion) and ARPU are in the double digit range. Business model here will eventually change from packaged goods to F2P - we've seen it happen elsewhere.
  • Localisation is not just language translation. We have a staff of 160 people - none of which are developers. They simply plan localized content for different regions. I.e. Maple Story's wedding system was very Korean originally. The team converted this to a Vegas-style wedding with Elvis as reverend. We do a lot of changes and additions to make them relevant to the local market, not just in terms of language.

ATUL - Any differences in how users in different regions buy? How long will a user stay in your game?


  • We don't see a lot of differences between buying patterns between countries. What makes a difference though is how the game is designed. A typical retention rate for us is much higher than what you'd see in a social game. We have players that have been in our games for over 10 years.


  • What's important are price points. We've played around a lot with that. We see that different cultures have different price points for virtual goods. Dark Orbit US customers tend to buy more defensive stuff for their ships first, then offensive second. In Europe it is the other way around.
  • One of the reasons Europe is so interesting for US customers is that a lot of people don't have the money to buy high end PCs or consoles. But they still want to play games, so they will go to internet cafes to do so. Hence the need for browser based games. Germany and France are strong countries for browser-based games, but Turkey is also big (due to internet cafes).


  • Percentage of paying users in the US is about the same as it is in China, but the ARPU is much different. If your concurrent users in China are less than 200K, the game is considered a failure. So China's market is much larger. So there's a lot of potential if you can grow your ARPU.


  • We have the 10% rule: 10% of your user base will account for 80% of your revenues.


  • But there is huge value in the remaining 90% of the users as they provide as much content as we provide. The other players are also content for people to interact with. We look at how much influence players have - guild leader, influencer, etc - versus just looking at whether they pay or not. That's one of the reasons we're switching from to starting early spring 2011 because we are trying to provide more ways for users to connect outside of our game clients.

ATUL - Do core gamers want to know each other's names? See anonymity issues.


  • We've done a lot of research. Facebook is for real life friends, but I don't necessarily want my real life friends to know my gaming identity. Blockparty is trying to provide a forum for our users to continue their in-game identities in the way they want. Blockparty will be able to broadcast your gaming achievements to other social networks, but that is opt-in. The default is to preserve your gaming identity, apart from your real life identity.

ATUL - Accessibility barriers are lower in browser-based than console games. Do you see more browser-based games vs download games?


  • PC cafes provide amazing marketing and a great social hub. We don't have them here in the US. Here, most people play by themselves in homes or offices. Harder to get the same virality. The closest thing we have in the US is Facebook as a platform for gaming. For us, we've tried to stay focused on download games that are high quality experiences. We are planning to expand our portfolio to more browser-based games. Currently, all our games are coming from Korea and are proven worldwide hits, but in order to be successful in US we have to make games here. We are looking for co-production (i.e. we fund). Last spring we had 126 entries for our call for developers. We will shortly announce a couple of the winners from that and have already started working on a couple of them.


  • Something we've seen on TV we'll happen in gaming. Channel hopping is becoming game hopping. When you just have to punch in a URL, it makes it very easy to switch between games. This speaks to the rise of pure browser-based gaming in the US.


  • We found there is no universal formula. Some prefer download games for their quality, others prefer browser based. In US, ppl can download their client in 30-120 minutes. In China, the average download takes 10 hours. But people don't have complaints. They turn it on before they go to bed and can enjoy it in the morning. It really depends on who your user is.


How early in production cycle do you recommend doing discovery in China if you're working on a Western IP? When should I start my market research?


  • You need to do it as soon as you can. We find a huge difference between US and China. US gamers like to enjoy the process of gameplay. In China, most of the players are interested in how to level up quickly and be powerful. That's why they spend a lot of money to buy functional items. In order to be globally successful, my recommendation is to build two versions of the game.

How do you acquire massive user numbers on social networks? Do you plan to spend a lot of marketing dollars?


  • If you want to be successful on Facebook, you need to spend at least $1M on marketing to get into top 5-7 games. Otherwise you won't be successful. We try to get on other networks - Scy-Fy, MSN, etc.


  • Trick for us has been word of mouth. 70% of our users come from recommendation from other players. We've used Facebook as a way to continue our relationship with our userbase. We've already reached 500K fans on Facebook over the last 6 months since we've started Fan pages on FB. Been interesting, but the majority of our user acquisition has come from users. We spend money strategically where we can track our ROI all the way through to acquisition of paying/influential users. We value our users as a social node, not just a paying user. We've experienced with broad marketing (i.e. TV) but they are harder to justify - while it increases brand awareness, it doesn't translate to targeted users.

What are your plans with HTML5?


  • will be standard compliant with current standards and upcoming stuff like HTML5. There are features going into HTML5 that will enable a lot of interesting gaming elements. But we have no specific products around HTML5.

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Speaking and Working at Casual Connect

A bit late on this update, but if anyone would like to "connect" at Casual Connect 2010, I will be in Seattle all week.

Here is what I'm up to:

* Speaking at a roundtable on third party development issues at the Gamesauce event on Monday

* Organizing a partnering event for a provincial interactive agency later in the week (pairing up developers in the social/casual/iPhone sectors with leaders in those sectors)

* Doing business development work for one of my clients (a large consumer electronics company) - scouting out talented games content partners

* Producing a post-show report for a multinational, multiplatform games client

* Taking any meetings that come my way!

Please drop me a line using the contact form on my consulting site if you'd like to get together during Casual Connect!

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Speaking on MVP at INplay 2010, Toronto

I'll be giving a presentation on Minimum Viable Product (MVP) in Toronto, Ontario for INplay 2010, May 18-19, a conference focused on kids creative industries with "insights and opportunities in the interactive space."

Minimum Viable Product is a product development and release methodology pioneered by Eric Ries. Its main tenet is the development and early release of only the core of your product, allowing the marketplace to vet and feedback on its pros and cons. While the developer still has a roadmap of their own, risk is mitigated and the product offering more tightly focused when the core is released early and iterated upon often, in response to real customer feedback.

In my presentation, I'll go into why MVP has (or should) become your standard operating procedure for launching new products, especially in the online space. Hope to see you there!

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