[Editor's Note: Before embarking on his own startup, contributing writer Adam Martin was CTO at NCsoft Europe. Adam is a voracious gamer with a professional background split between programming and business. He blogs at T-Machine and can be reached at adam.m.s.martin at googlemail.com]
At FreeToPlay.biz, we’ve spent a lot of time examining how free-to-play (F2P) games work: their advantages, challenges, demographic appeal, etc. But we haven’t yet looked as closely at who makes these games what they are and who shapes the future of the F2P sector: the Publishers.
In the online games industry, there are three separate categories:
Who makes the games? (the “Developers”)
Who funds and markets the games? (the “Publishers”)
Who supplies the games to the users? (the “Operators”)
Historically, the core games industry (i.e. retail) has had just two categories: Developers and Publishers. With the advent of online games, a major offshoot of Publishers has appeared: Operators, who take none of the up-front risk of a traditional Publisher and focus instead on capitalizing on the game once it’s made (usually by taking it to territories and languages that the original publisher cannot reach).
This article looks at the Publishers: the businesses that take the bulk of the risk by financing the game. If a game is fully developed, and launched, but fails to earn out, the Developer makes no profit but no loss; the publisher, on the other hand, makes a net loss of whatever the development cost was, minus the game’s revenue.
Operators don’t usually enter the picture until the game has already gone to market in at least one territory, and set an expected level of popularity / revenue, so they have the lowest risk of all. Ultimately, the Publishers have the greatest control over what future games get developed.
For each Publisher, we start with their Name, Country, Incorporation year, and 2008 revenues (as estimated by the company in their latest financial report, or as estimated by me based on similar companies and markets).
Nexon is probably the most famous of the F2P publishers, thanks to two hugely successful games - MapleStory (2003) and KartRider (2004) - which have both attracted many tens of millions of players. Although MapleStory came first and has been the bigger global success with over 100 million players internationally, KartRider did much better in its home market of South Korea. Some reports allege KartRider has been played at one time or another by more than a third of the population of the country.
Maple Story (2003)
But it’s not just about sheer number of players. Nexon has also consistently made a huge amount of money out of their virtual item sales revenue model, with quoted revenues of $230m revenue for 2005, most of it coming from F2P offerings. Unfortunately, the Korean head office has been uncharacteristically quiet (for a Korean company) for the last few years, with the only good data coming from Nexon Publishing North America, a subsidiary with a games operations office in Los Angeles and an original game development studio in Vancouver, Canada.
Apart from pioneering the use of F2P, it’s worth noting that Nexon was also a pioneer of subscription-based online games. They developed one of the first ever MMOs in Asia - The Kingdom of the Winds (1996) (subs). One of the lead programmers, Jake Song, left to be part of a newly-founded company - NCsoft - and develop their first MMO, Lineage (1998). NCsoft is now one of Nexon’s major competitors. Lineage for many years held the world record for largest number of players for any MMO, and NCsoft is still an almost entirely subscription-based MMO publisher.
Giant Interactive is currently the top Chinese F2P publisher by revenue, although if NetEase’s rumoured conversion from subs to F2P for their main games goes ahead, Giant could slip down to a close second. Giant was founded by Shi Yuzhu, who made a fortune from selling diet-supplement pills… and then lost it all when the original Giant Group went bankrupt in 1997. He made a personal comeback with a new company based on similar pills, Nao Baijin (”Brain Platinum”) - and an exceptionally aggressive and intensive marketing campaign - then went on to found Giant Interactive in 2004.
ZT Online (2006)
Which all helps to explain Giant’s leading game, ZT Online (2006), which with around 10 million players and an ARPU of over $40 a month generates the bulk of their revenue. That ARPU figure stands out for being around 50% higher than most other operators.
Shi’s Nao Baijin pills were helped to huge sales through a massive nationwide marketing and sales team, and for Giant he went a similar route, using a thousands-strong sales team to personally visit the Internet Cafe’s around China and promote the game. This contrasts with the other online game publishers and operators, who - like their Western counterparts - generally do their marketing through much cheaper means, such as online advertising and industry events like conferences. According to the company’s website, they now have over 3,000 sales and marketing people. It seems fair to say that this is a marketing-lead business, and that we can expect to see Giant consistently getting every ounce of revenue out of its games over the coming years.
The creation of an alternative, Pay-to-Play (PTP) version of ZT may be an example of this. ZT Online PTP (2008) comes with a $2 / month flat subscription, or $0.01 an hour, and no item-purchasing allowed. Where operators and publishers go for parallel monetization, its nearly always the other way around: making available an F2P version of an existing subs game. Indeed, NetEase appears to be doing that right now with their major titles, in an attempt to shore-up the losses in players they’ve seen, with many of them allegedly moving to ZT.
Perfect World (which is the name of both the company and their first MMO) is a Chinese MMO company that has developed and launched seven games in four years. Like all the Chinese MMO publishers, they are young, and yet have seen huge revenues on the back of massive player numbers and rapid, consistent, growth.
Interestingly, their first MMO was a traditional RPG using the subscriptions model, but for the sequel, Perfect World II (2006), they decided to switch to an item-sales F2P model.
Although (like many of the Chinese publishers) largely unknown in the Western world, they established a USA subsidiary in April 2008, and so that may well change fairly rapidly.
For 2008 Q2, their ARPU for paying customers is a decent but not unusual $27 per month.
4. Disney, USA, 1994, $1000m (entire online division)
Club Penguin (2005)
Disney is the largest of the US companies making major use of F2P at the moment. Like Nexon, their earliest forays into online gaming were subscription based, with the likes of ToonTown Online (2003), which was also one of the first virtual worlds aimed at children, and peaked at over 1 million subscribers. They later acquired Club Penguin (2005), one of the biggest Western F2P games, acquiring approximately 10 million new users. Outside of children’s MMOs they’ve been less successful, and although they’ve used F2P in major MMO titles such as Pirates of the Caribbean Online (2007), it’s not been so well received, with numerous accusations that the F2P element was too heavily crippled.
TTO pioneered child-safe worlds, with features such as SpeedChat to protect children from other players, whose identity can never be confirmed. To those afraid that F2P worlds allow for “anyone” to play, without any way to identify them, it’s worth noting that the subs-only TTO had the same problem, and never completely avoided it. Interestingly, in 2007 Disney switched TTO to F2P.
CJ Internet has around 23 million people playing games at its NetMarble games portal. CJ Corporation (which acquired Plenus/NetMarble in 2004 and renamed it to CJ Internet), was originally a sugar-producing subsidiary of Samsung, and so the CJ stands for Cheil Jedang (lit “first sugar”). This may sound strange, but is a classic example of South Korean Chaebol (family-owned, government assisted, major corporations with ownership of businesses across a very wide spectrum of unassociated industries).
Sudden Attack (2005)
Their best-known game is probably Sudden Attack (2005), a clone of the hugely successful Counter-Strike (2000). Interestingly, CS’s owner, Valve Software, has commissioned Nexon to develop an “official” F2P version of CS for the Korean market, named Counter -Strike Online, due out in 2008.
Elsewhere, CJI appears to have taken a leaf out of EA Sports’ book by licensing the MLB (Major League Baseball) club names, logos, and famous players for use in their MaguMagu online Baseball game.
With 60 million users, Gameforge is one of the biggest Western F2P publishers. Although they have never released revenue figures, their quoted 11 million “active” players suggest an annual revenue figure somewhere in the region of $75m - $150m. Given that their games tend to be light browser-based games, I’m guessing they’re at the lower end of the spectrum.
OGame (2002)
They started off only running their in-house developed browser-based games, with the biggest (around 2.5 million players) being OGame (2002), but in the last few years they’ve branched out, and now operate several client-based games imported from Asia. One of those, Metin 2 (2007?), was originally launched as a subs game in Germany, and then switched to F2P for the localized versions launched throughout Europe. As a private company, figures are hard to get hold of, but they have quoted an ARPU of $26 for the 1.1 million M2 players in Europe (although its not completely clear if that includes the German subscribers).
Gameforge is particularly interesting because by focussing on rapid, high-quality localization of games to different languages (they claim to have localized into 25 distinct languages already) they’ve successfully moved from simple game developer to a major importer/operator of South Korean games. This is almost the opposite of Acclaim, but they’ve done it more slowly and until last year self-funded, so they appear to be taking the slower, harder, but more defensible and lucrative approach.
HanbitSoft came to fame in 1999 for being the South Korean distributor of Blizzard’s multiplayer (but non-MMO) StarCraft (1998), a best-selling game in USA/Europe, and one of the biggest-selling games ever in South Korea. SC was monetized as boxed retail sales only, with no ongoing revenue stream, and in South Korea became (and still is) a major competitive sport, with two TV channels running their own live SC leagues.
Granado Espada (2007)
However, right now HanbitSoft is probably best known outside Asia for being the main publisher of the failed Hellgate:London game from the now-defunct, ex-Blizzard-led, Flagship Studios. They’re one of the few companies in this list to have made a substantial net loss on funding games, and it’s interesting that this happened with a game that most closely bridged the game between “traditional mainstream Western action game” and “F2P MMO”. Hellgate had a troubled development and probably failed for many reasons, but one of the frequently cited complaints was that the monetization model was neither F2P nor subscription, but a mix of the two. This appears to have fared poorly.
In May 2008, T3 Entertainment, best known as the developers of Audition Online (published by Yedang Online), became the largest shareholder in Hanbitsoft. This may be T3’s first move into being a major publisher in their own right.
Bigpoint has been through two name-changes, starting out as “m.wire”, a self-publishing developer of browser-based sports games such as IceFighter (2003) and Soccer Manager (2004). In 2005 they underwent a change of name to better reflect this specialization, becoming “e-sport”, before switching the company name to match their gaming portal - bigpoint.com - in 2007. Their portfolio now is diversified away from sports games.
Bigpoint may appear at first glance to be nothing more than a smaller version of Gameforge (see above), with around one third of the annual revenues, and half the number of players, and a narrower portfolio (unlike GF, BP hasn’t started to operate any Asian games, nor branched out into client-based online games). That changed earlier this year when the 3 main VCs (all low-end investors) exited in a buyout split between the CEO, another VC fund, and … NBC Universal, selling 70% of the company for $110 million. The link with NBCU has already started to show, with their SCI FI channel website now carrying two item-based F2P games from Bigpoint (although not exclusively). This buyout made clear the company’s intentions: they swapped a group of small European funds for a 35% stake from a mainstream USA-based entertainment giant (more than $15b a year in revenue).
There are also signs that they may be one of the first wave of companies to get F2P games on PlayStation 3. To date, all games distributed via the PSN store have been allowed free demos but with extremely limited functionality. Now, along with demoing one of their games running on a PS3, Bigpoint’s CEO has stated that their games will be available on console “with free registration as usual, and ready to play right after download”.
That gives Bigpoint two major relatively untapped markets for their style of F2P, and with their powerful media partner, they may yet leapfrog Gameforge and secure a large chunk of one or both of those markets.
9. Frogster, Germany, 2005, ? (Frogster’s IR website is offline)
Spellborn (2008)
Over the past ten years there’s been a clear trend for the young, fast-grown, cash-rich South Korean online game companies to look for their next round of growth in the West, and so establish subsidiaries in Europe and the USA, starting with NCsoft’s acquisition of Destination Games in 2001. Frogster is one of the first companies to actively reverse that trend by taking wealth generated in Europe and the USA, and establishing a subsidiary in South Korea. This subsidiary is managed by a previous General Manager of Gravity, a Japanese online games publisher (non-F2P).
Originally formed as a management buyout of a standard middle-tier PC games publisher, Frogster has been focussing on repurposing as a pure MMO publisher / operator, and spun off it’s conventional PC games division in 2007. Like a couple of operators and publishers, they’ve been switching or parallelizing their subscription games over to F2P, e.g. in 2008 they added an F2P server to Bounty Bay Online (2006).
For the final entry, we’re going with something a bit different: not one company, but two, and not based on revenues, but on market and consumer base. And both companies are less than a year old. There’s a reason for this: unique in the F2P world, they’ve both risen to fame (and around 50 million users each) on the back of other people’s hosting platforms in the guise of Social Networking sites, especially Facebook. They’re included as a pair because, to be honest, there’s so little to distinguish between them.
WarBook (2008)
They represent a second wave of disruptive F2P businesses, thanks to that tie-in with the major Social Networks; without any partnership deal, in less than a year they’ve achieved user figures - as high as 18 million active - that are a notch faster again than the super-fast-growing Chinese F2P publishers. We’re seeing them uncharacteristically early - it took the games industry a good 5 years to even notice the existence of games like Runescape (now running at well over 1 million subscribers). So it’s no surprise that things like revenue levels are unquoted and relatively meaningless for these two - those will become established over the coming year or so. What we’re looking at here is very early businesses whose only direct, clear, measurable value (and indicator of probable lasting success) is the huge audience they command. These are almost typical web businesses, not games businesses, but the expectation among many is that with hindsight we’ll look back and say that they were the start of the new combined web + games industry, which is widely expected to eclipse traditional games.
Of course, they could easily sputter and fail (although it’s quite hard not to be profitable when you’ve got tens of millions of users), so they’re here at number 10.
Notes on inclusion
Direct revenue comparisons are difficult
Approximately 1/3 of publishers don’t publish their revenues, and another 1/3 don’t separate out their F2P revenues from their other revenue. The most accurate known figures are quoted for each company, sometimes these are F2P revenue, other times it’s an aggregate including non-F2P and even non-games revenue.
Many Operators think of themselves as Publishers
There are different definitions of “Publisher”, and the line between the two is often blurred. I’ve tried to include only companies who are are substantial publishers by the risk definition given above, but some publishers may have been accidentally categorized as operators. A followup article will look at the companies who are primarily Operators.
Companies have to be mostly F2P
Several major companies with large revenues have been excluded because the vast majority of their online-game revenue comes from subscriptions. Only companies that gain the bulk of their revenue from F2P, or have made major switches from subs to F2P, are included here.
A few hundred people watched my Red Bull-fueled version of this presentation on Monday, February 18th at GDC. The narration included in this slidecast was done this weekend and is not nearly as energetic.
In the interest of playing devil’s advocate, I thought I’d throw out 10 reasons why free to play might be slower to succeed in the Western world as it has been in Asia.
While I don’t necessarily believe all of these will inhibit F2P’s growth, one of the slides in my GDC presentation this year is to do with the challenges F2P faces - so this should help fulfill that requirement.
1. Virtual Property “Ownership”
The term ‘virtual’ may not have a strict legal interpretation, but if anything it means that the thing being described is NOT whatever comes after the word ‘virtual.
- Ginsu Yoong, Second Life’s legal counsel, Linden v Bragg
Despite virtual property’s ill-defined legal status, developers have had no qualms about starting byzantine in-game economies driven by the exchange of real money for virtual land, clothing, furniture and much more.
Some developers, like GoPets CEO Eric Bethke, have attempted to get out in front of the virtual property legal issue by defining their own “Avatar Bill of Rights.” But most of us have not been as proactive and instead seem content to leave it up to the courts to decide how to define and deal with our users’ virtual property.
As precedents regarding virtual ownership are set, the growth of some F2P products may be curtailed as the legal burden of dispensing virtual property increases.
2. Slow Broadband
On the issue of net speed, there remains a huge disparity between North America’s broadband ISPs and Korea’s military-grade internet provision.
The net effect is that free to play games like Maple Story can take 1-3 hours or more to download in North America, while Korea’s 45mbps network cuts the same download to a paltry 10 minutes or less.
It’s fair to say that we won’t soon be getting such high download speeds - but the North American market might have already found a way around the issue. With the launch of streaming game services like InstantAction and the proliferation of Flash as a full-blown development platform, downloading entire game clients become less and less the norm.
3. Poor Advertising Strategies
Some products in the F2P sector have come to rely heavily on advertiser support in order to keep their offerings free for the majority of players.
A recent OMMA article that claims advertisers are taking the wrong approach when handling virtual worlds. And as the populations of virtual worlds appear to be prematurely plateauing, advertisers may be starting to sweat.
But there is hope if advertisers change their strategies to suit the unique challenges virtual worlds present. As Worlds In Motion put it:
…themed events, branded avatar clothing, and representative personality appearances are finding success and opportunity in worlds like There, Habbo and vSide.
4. MMO Overload From Maple Story to Silkroad Online, there is no shortage of MMOs in the free to play space. In the same vein, there is an abundance of virtual worlds such as Second Life or Kaneva. It seems as though the vast majority of new free to play game since 2005 have been virtual worlds or MMOs.
Perhaps it’s the very reason that these games have proliferated in the free to play market; MMOs and virtual worlds are inherently more inclusive than an FPS. Still, it would be a shame to see the free to play space flounder due to constant reiteration of the same genres and themes, turning away players seeking a different experience.
Of course, games like Kwari are looking to change that, but it’s too early to tell just how well they will catch on.
5. Rising Development Costs With more prominent developers announcing plans to take advantage of the free to play model, the days of games fueled by ramen noodles and nights in the basement could, once again, be history. EA’s upcoming Battlefield Heroes is the latest big budget free to play game, signaling that the big publishers aren’t content to sit back and let Far East imports eat their lunch.
If the consumer makes the jump from 2D to more advanced 3D graphics, it could mean the end of the visually rudimentary worlds and Flash-based free to play games as market leaders, making way for the mainstream big budget games.
6. Second Life Slowdown Second Life is the Apple Newton of virtual worlds. It was here first, but isn’t the best representation of the potential of virtual worlds. However, it still occupies a place in investors’ minds - akin to a coal mine canary, warning of impending danger.
And while investors took note as Second Life soared to the top, they’re noticing its decline as well (active user hours were down 5% in November). There is concern among some that Second Life’s time might be up, and that’s not a good sign for potential investors in the free to play space.
7. Watered Down AdverWorlds With their lower barrier to entry and great potential to spin money, an slew of less innovative products are beginning to hit the market. Hardest to ignore are adverworlds like Build-A-Bear, Rush Zone, BeBratz, BarbieGirls and their ilk - marketing spend thinly disguised as entertainment.
The consumer’s willingness to pay money for virtual items in a world where their avatar is little more than a target for advertising will be tested by products like these.
8. Unsanctioned Secondary Markets Then there’s the issue of gold farming. With websites like IGE operating independently of game developers and establishing secondary markets for game currency and items, it’s not just traditional MMOs that are being subjected to this kind of treatment anymore.
What’s worse, while gold farming might fuddle with World of Warcraft’s player-driven economy, some developers believe a secondary market allows players to skip the middleman altogether - a potentially fatal issue for free to play games who survive on item-based revenue streams.
The recent launch of publisher-sanctioned Live Gamer is a step in the right direction for devs and pubs looking to reclaim lost revenue.
9. Limited Payment Methods
We have hanging on our wall a user who sent a $5 bill in a $15 fedEx package.
- Craig Sherman, Gaia Online
While other territories enjoy a plethora of tailored-to-the-consumer payment methods, North America has embraced relatively few.
SMS would surely be nearly as popular a payment method here as it is in Europe if our carrier surcharges weren’t in the range of 50% a transaction. Landlines - an expensive but very secure payment option in China - might also be popular with some services.
GoPets has 90 different payment systems worldwide, catering excellently to foreign payment preferences. Nonetheless, consumers still have trouble getting money into their favorite North American games.
10. Kids OnlyGames
The current offering of free to play games caters nearly exclusively to the under-25 set. An NPD study released last year showed that while 91% of online gaming among kids aged 2-17 is free to play, by the time those kids graduated high school, the boys had moved to sixty-dollar console games and the girls dropped out of gaming entirely.
In the core gaming arena, Nintendo has found a way to appeal to young and old alike. Free to play’s appeal among adults relies on the proliferation of products that do a Nintendo-quality job of bridging the age gap or target older demographics only.
Back in May, Chris Anderson, WIRED editor-in-chief and author of 2006’s much-buzzed-about “The Long Tail,” announced his next book. Due out in 2008, the book will be titled “FREE” with any one of the following subtitles:
1)FREE: The story of a radical price (zero)
2)FREE: How $0.00 changed the world
3)FREE: How companies get rich by charging nothing
4)FREE: The economics of abundance and the marketplace without money
5) FREE: The past and future of a radical price.
Having read Chris’s original Long Tail article in WIRED and being subjected to endless recitations from his book over the last year, I’ll wager a guess that “FREE” will be equally influential. Chris is writing “FREE” not only about games, but from a pan-industry perspective - which means by this time next year boardrooms the world over will be dreaming about how they might make more money by giving away their product free of charge.
Since October, Chris has started using a “free” tag in his blog posts, which gives us a glimpse into the type of content that might be included in the book. It’s worth checking out.
On a related note, I found an interesting post entitled “There’s No Money in The Long Tail of the Blogosphere” over on Read/Write Web today. It makes the excellent point that the long tail benefits the aggregators of long tail products much more than it does the makers of said products. Although the “products” discussed in the article are blogs and their associated authors, you can see the parallels for games.
I spent a couple hours today pretending I had infinite time and money to attend free to play-relevant conferences the world over. The result is this list of the top 10 conferences for those who want a crash course on F2P development and a slew of contacts in the sector.
Over the last year, there’s been a deluge of new virtual worlds conferences, but not all are created equal. So in addition to sorting on quality, I decided to sort for those that were at least partially geared toward English speakers.
Some of the following conferences occurred in the past, but have been included in the hopes that they become annual affairs.
The Virtual Goods Summit is a one day conference focused on the emerging market opportunity for virtual goods and economies. Once restricted to the world of online gaming, virtual goods and currencies are beginning to influence the development of social networks, community sites, and many other new and exciting markets.
The Virtual Goods Summit was a one day affair at the Annenberg Auditorium featuring a series of one hour panel discussions and presentations. Notable speakers included the CEO’s of Gaia Online, Three Rings, Kongregate, GoPets and K2 as well as the Director of Business Development at Nexon. The topics discussed included virtual goods as the next big business model, industry success stories and the forces driving user adoption.
Our pan-European virtual worlds confex connected brands, major corporations, digital and virtual worlds agencies, media and entertainment players and games companies, technology suppliers, analysts and commentators, lawyers, regulators and venture capitalists and all those harnessing the power of virtual worlds to engage with clients, suppliers or customers.
The Virtual Worlds Forum lasted two days and was by no means focused just on games. The keynotes and panel discussions we’re about many things including brand recognition, corporate opportunity and revenue possibilities. Panelists included Paul Hemp- Senior Editor, Harvard Business Review; Ginsu Yoon- SVP International, Linden Lab and Thomas Bidaux- Director of Product Development, NCSoft Europe.
Virtual Worlds Conference and Expo helps businesses harness the power of virtual worlds to engage with their customers, partners and employees. The event follows our sold out Virtual Worlds Spring New York conference.
Speakers from this year’s conference included Paul Yanover, VP and Managing Director at Disney and Anthony Zuicker- creator of CSI. The event featured hundreds of speakers overall and some major corporate support. This year six streams will be available with an emphasis on the financial and operational aspects of virtual worlds. Where as some of the conferences on this list are art or design orientated the Virtual World Conference seems to be strait business.
If you are going to attend one industry event in 2008, this is the one. The core objective of this year’s conference is to promote Learning, Networking, and Inspiration. The GDC team has been working hard to create the most exciting and compelling conference yet. Most notably, we have adjusted the timing for the call for papers forward to ensure that we’re presenting you with the most up-to-date topics facing game developers today. You won’t be disappointed.
The GDC isn’t exclusively interesting to free to play followers but in the wake of E3’s fall from grace this is the game industry’s flagship event.
Also at GDC is the Worlds in Motion Summit debuting this year, an event focused on virtual worlds. FreeToPlay.biz was asked to speak at the Worlds in Motion Summit and as a result, Adrian Crook will be presenting a primer on the F2P revenue model at the event. Also giving talks are Raph Koster, Nabeel Hyatt, Eric Bethke, Min Kim, Chris Romero and others - making this a great conference for the F2P sector.
IMGDC is a venue for Independent designers and developers to come together to share ideas and learn in all areas related to MMOGs. IMGDC 2.0 has positioned itself to be an even larger venue with three fantastic tracks covering design, development and business aspects of Indie MMOGs. The present is a time of MMOG giants, but the future lies in the hands of the passionate Indie developers. Do you have the passion?
2008 will be the second year for the IMGDC featuring presentations from Richard Bartle author of Designing Virtual Worlds, Raph Koster and Gordon Walton who was previously VP/Exec Producer at Sony Online Entertainment, Maxis, Origin Systems and Kesmai Corporation.
The SXSW Interactive Festival features five days of exciting panel content and amazing parties. Attracting digital creatives as well as visionary technology entrepreneurs, the event celebrates the best minds and the brightest personalities of emerging technology. Whether you are a hard-core geek, a dedicated content creator, a new media entrepreneur, or just someone who likes being around an extremely creative community, SXSW Interactive is for you!
Though SXSW doesn’t provide a ton of events catering specifically to the free to play crowd, it is a phenomenal collection of creative people working in emergent digital entertainment fields. Couple this with the fact that the event is part of North America’s largest music festival and party and attendance seems like more than a good idea.
The Austin Game Developers Conference attracts over 1,100 attendees and provides educational, networking, and business opportunities for game development professionals driving the $11 billion videogame industry. It is the a global forum where programmers, artists, producers, game designers, audio professionals and others involved in the development of interactive games gather to exchange ideas, network, and shape the future of the industry.
Austin GDC has become synonymous with MMO design due primarily to the city’s deep MMO development scene. The conference features talks and panels focused on free to play, “Web 2.o,” MMO development and micro-transactional revenue models.
Building on the great success of the 2007 conference, OGDC 2008 will expand the plenary sessions from two to three days, and feature a wide range of keynotes, sessions, and panels, giving attendees new views of the online game universe—everything from an overview of the latest business, product, and legal developments to in-depth looks at scalability, player psychology, and in-game economic systems.
This event features Erik Bethke, founder and CEO of GoPets; Alan Crosby director of global community relations at Sony Online and Steve Goldstein of Flagships Studios. 2007’s OGDC was a good start - hopefully 2008 is a big step forward.
9) Gartner Symposium ITxpo 2008 April 6-10 2008 - Las Vegas
Each year, Symposium/ITxpo: Emerging Trends is founded on a framework of six megatrends that Gartner sees as critical to how business and technology will evolve in the near and long term.
A mere sampling of the trends and technologies we’ll focus on includes:
User Generated Content
Social Networking
Community Source
The Metaverse
Relationship Assets
Hyperconnected Enterprise
Collective Intelligence
Gartner attracts a different crowd from the game-centric conferences listed here. Typically, Gartner attendees come from the IT or VC worlds. The value of Gartner attendance lies not in the curriculum, but in your fellow attendees.
The 6th Video Game seminar as part of IDATE’s DigiWorld Summit 2007, is organised with financial support from the City of Montpellier. A host of opportunities have opened up over the past two years: the development of serious games, Massively Multiplayer Games and persistent universes, online capabilities incorporated as standard features in home consoles, the emergence and growth of mobile gaming, the development of online poker that’s been as swift as it has been surprising… All constituting innovative technologies and ways to play which, in this era of growing convergence, involve or induce an overhaul of business models.
I’m sure I missed some relevant conferences, so if you can think of any leave a comment for our other readers.
Game developers the world over continue to explore the free to play model, whether it’s a large-scale MMO or an ad-supported casual game. But one of the more interesting free to play experiments of late comes from Facebook application developer David Gentzel, a 24 year old originally from Roanoke, VA. Mr. Gentzel now calls San Francisco home where he is a developer at SocialMedia, marketing guru Seth Goldstein’s rapidly growing “Social Advertising Network.”
David’s free to play experiment is the incredibly popular Food Fight application.
When the game first launched on Facebook, Food Fight players could sign up to receive a daily allowance of virtual cash that could be spent at the Food Fight cafeteria to purchase one of dozens of available food items. Players would then virtually “throw” said item at one of their Facebook friends. If the recipient had the food fight application, a small image of the item would appear on their page.
But recently, Food Fight’s the resourcing model changed, which is when it became interesting from the perspective of free to play revenue models.
As of mid-September of this year, a player’s lunch money account isn’t cleared at the end of every day - it’s persistent - like a real bank account. Additionally, the daily stipend given to each player was removed, replaced by a model where players earn virtual cash by answering short marketing surveys about a wide range of products. Each multiple choice question takes just a couple seconds to fill out with a reward of one dollar of lunch money per question answered. Interestingly, players earn a higher payout when they answer the same question the same way down the road, an attempt to value accurate answers more highly than one-offs.
Marketers pay for player responses to their surveys, creating a nifty free to play revenue stream and making Food Fight the definitive social networking application for SocialMedia. Seth Goldstein is understandably thrilled about the “craplet” (his words), saying in a recent Business 2.0 article:
People really like to throw piles of poop… So you price the poop high and people have to answer a bunch of questions to pay for it. That’s the future of Internet advertising: throwing shit at people. Literally.
That is it. No scoring, no winners, and no end. Nonetheless, a very successful idea.
How successful?
It takes a bit of conjecture to figure out, but here’s our back-of-the-napkin revenue estimate:
There are 36,257 active daily Food Fight users (among 2M registered FF players)
Assuming each daily user answered just two surveys (reality is likely higher, as the lowest priced item is $2 - requiring two surveys to be completed)
Assuming each survey response cost a marketer 25 cents (reality is likely lower, but Facebook polls already charge clients 25 cents/response)
This would result in $18,128 of revenue per day
Or ~$6.6M of annual revenue for SocialMedia, from one app
That is no small potatoes for an application that likely cost less than $100k to develop.
Since Food Fight introduced surveys, food prices have increased significantly as the game gets balanced. Prices for food items range from $2 to $11 virtual lunch money dollars. For instance, at $10 lobster is significantly more expensive than most items with only Bubble Tea having a higher price tag.
Consider the following price comparison from June 25th of this year till October 26th, a four month time period.
Haggis = $1.75 / $3.40 (194% increase)
Orange = $.50 / $2.30 (460%)
Banana = $.50 /$3.25 (650%)
Sucker = $.25 / $2.30 (920%)
Shrimp cocktail = $1.75 / $3.40 (194%)
So according to these numbers Food Fight items have increased in value by an average of 484%. However, in less than a minute a player can answer enough survey questions to buy even the most expensive item - keeping the game easy and fast to play, while deriving more and more potential revenue from the same virtual items.
Going Forward
Given the fad-ish, viral-flocking nature of social networking apps, it will be interesting to see if Food Fight can maintain and grow their numbers long enough to start capitalizing on this potential revenue stream. In the meantime, SocialMedia is using Food Fight as a beta test for their social advertising network as a whole (and a host of similar apps) - electing not to charge for most, if not all, of the marketing surveys they host. (F2P.biz’s request to SocialMedia for clarification on the “revenue stream, on or off?” point was not answered before this article was published).
Regardless of when SocialMedia turns on the money tap, it’s clear they’re onto a high-ROI free to play revenue model that traditional game developers could do well to emulate.
Tech Digest has a writeup from a panel discussion at Virtual Worlds Forum Europe. In it, Jessica Mulligan, Executive Director of Player Relations at Cyber Sports, provides several interesting-but-unattributed stats and a couple quotes that support what F2P.biz is about.
Stats
Just 10% crossover between online games and social spaces (e.g. World of Warcraft vs Second Life)
60 million active players of virtual world games (people who are paying money on a monthly basis).
Virtual worlds generated $4.5 billion in revenues last year. WoW, Westward Journey and Runescape are in this group.
Social spaces (Habbo, Webkinz, Club Penguin, etc) generated $400M last year.
Asia accounts for 50% of all virtual world revenues.
Quotes
We’re going to see more games under that business model [f2p, vis] than under the premium model.
In social spaces, web-based worlds are growing, while those that rely on you downloading a client are “stagnating”.
Interesting stuff, but without any sources to back up the stats or quotes, it’s tough to view this as anything more than cheerleading for the sector. For instance, I believe browser-based is a smarter choice than downloadable client, but I’ve heard little evidence to support Jessica’s notion that downloadable client games are stagnating.
Virtual Worlds Forum Europe is on now in London, England until tomorrow.
Editors Note: Since this article was posted, Jessica has been kind enough to reply (in the comments of this post) with the source for her stats and observations. Thanks, Jessica!
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.
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.
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.
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:
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.
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.)
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.
Bigpoint may appear at first glance to be nothing more than a smaller version of Gameforge (see above), with around one third of the annual revenues, and half the number of players, and a narrower portfolio (unlike GF, BP hasn’t started to operate any Asian games, nor branched out into client-based online games). That changed earlier this year when the 3 main VCs (all low-end investors) exited in a buyout split between the CEO, another VC fund, and … NBC Universal, selling 70% of the company for $110 million. The link with NBCU has already started to show, with their SCI FI channel website now carrying two item-based F2P games from Bigpoint (although not exclusively). This buyout made clear the company’s intentions: they swapped a group of small European funds for a 35% stake from a mainstream USA-based entertainment giant (more than $15b a year in revenue).
