games monetisation, Publishing, video games

Console microtransactions  

August 2011

 

One of the most lucrative ways that developers could make money in future – microtransactions on console – represents a truly vast commercial opportunity and one that is well suited to the UK games development industry with its long and strong console games development history. However it is an opportunity that is largely untapped and faces some significant hurdles before it can fulfil its enormous potential. This month I want to explore why it is so promising and what is inhibiting it.

 

Consoles, using a number of metrics, house the most concentrated and valuable collection of gamers in the industry. Every platform (Wii included) contains a sizeable nucleus of hard-core, typically male, players who spend many hundreds per annum on their hobby. An almost identical demographic is playing MMOGs and other online games. While, globally, they don’t spend as much online as console gamers, they are playing in greater numbers with growth being fuelled by microtransaction games not just in Asia but also in North America, and in particular, Europe. As a result, microtransactions have become the standard for almost all new western MMOGs.

 

But microtransactions do not need an MMOG to be effective. They often work best within freemium and multiplayer games services but neither are necessary. In the very few instances where they have been employed on console, they have been hugely successful. EA’s FIFA Ultimate Team football trading card/management hybrid has been included with the last three FIFA releases (on XBLA and PSN) and allows in-game currency to be topped up with real money purchases. The game was charged for separately but became free with FIFA 11 and generated revenues of $15m (FIFA09) and $30m (FIFA10) while FIFA11’s free version has dramatically accelerated revenues to $1m – $2.5m/week, during its first 5 months. Given the simplicity and low cost of the game, this strong performance produces remarkable profits for EA.

 

Another fascinating example of the potential of console microtransactions is Sony’s Home service. Home has become a genuinely lively hub for microtransaction gaming, supporting 100+ developers creating virtual items, spaces and games. Not only are the leading games generating 7 figure gross revenues from microtransactions, but they are doing so from what appears to be a noticeably more diverse audience than is found at retail for PS3. The top 10 best-selling virtual items on Home in the USA in the last six months have included an array of casual games related and female fashion items, although you’d be surprised at how common it is for some core male gamers to enjoy putting on virtual frocks.

 

So, why are there so few examples of console microtransaction games? The single biggest block is that two of the console manufacturers have been wary of microtransactions and freemium. Both Nintendo and Microsoft outright reject the idea of freemium. One console manufacturer’s most senior execs told us at E3 that their “publisher partners are simply not interested in providing a game for free”. There also remains the view that microtransactions are “interesting but not suitable for our audience”. However these offhand dismissals hide some more profound questions. Console manufacturers clearly fear the destruction of a consumer value proposition rigidly based on prices guided by the console manufacturers and set by the publishers/retailers. This would be replaced by a value proposition based on consumers setting their own discretionary spending limits. In addition, microtransaction games are typically updated frequently, which console manufacturers may struggle to QA in time. Some of the other features of microtransaction games, like analytics, rich customer usage data, viral recruitment and so on, are so far lacking. Let’s not understate this, widely supporting microtransactions would necessitate a fundamental change to the way console manufacturers run their businesses.

 

But they could also transform their businesses at a time of decline in the retail channel. Sony is comfortably the most progressive, being open to microtransactions, MMOGs and freemium in one corner of its service. Yet it has attracted only limited developer interest. Some developers want to large install bases across multiple platforms but we have seen dozens of microtransaction games on other platforms thrive with relatively tiny user bases.

 

Nintendo will probably remain a dead-end for microtransactions for the foreseeable future, but Sony is looking more promising. Foremost of these new microtransaction console games is CCP’s Dust 514, which could kick-start more microtransaction PS3 game releases, and open Microsoft’s eyes to their commercial potential, perhaps even changing their mind. In the meantime, EA has demonstrated that microtransaction games do not need MMOG-level investment or design complexity, can be launched on PS3 at least and can attract hard-core and high-paying audiences.

 

Games as services, games monetisation, Mobile games, Publishing

Chinese hordes – China buys into Western games companies

August 2010

This year China is likely to become the 3rd largest games producer in the world. A burst of acquisitions of US games companies by Chinese games companies earlier this year signifies the growing confidence and financial strength of the Chinese games industry and may herald a new phase in the globalisation of the industry. This month I’ll analyse what China’s meteoric rise into the top tier of global games territories means for the Western market.

First, Shanda Games spent $80m acquiring Mochi Media in January 2010, then came The9’s $20m acquisition of a majority position in Red 5 Studios in March and most recently Perfect World took a majority stake in Runic Games in May for $8.4m. They represent the first three transactions in the Western games market by a sector that barely existed five years ago. Mimicking recent global economic trends, Chinese gaming and Chinese games companies have prospered in the last few years whilst North America and Europe have suffered declining retail sales and their largest indigenous publishers have struggled to avoid falling revenues and losses. China’s success has been achieved without material sales outside of Asia. This minimal global influence is clearly not going to last and these recent US transactions highlight one potential route into the Western market.

The Chinese online games market is expected to grow around 30% this year to reach $4.6bn and whilst the rate of growth may slow down, it still has considerable room for long-term expansion. China already houses the largest internet user base in the world (c. 400m) but this still represents less than a third of the population (vs. c. 75-85% for most Western countries). It has an increasingly tech literate, wealthy and middle class populace benefiting from a buoyant economy and rampant entrepreneurialism. Both the number but also the monthly and lifetime value of Chinese gamers is far from peaking.

From this fertile primordial games market have arisen hundreds of indigenous games ventures, around a dozen of which will generate over $100m in sales this year. The largest – online and mobile giant Tencent’s games business – recorded $300m in sales during its most recent quarter (overtaking THQ, Take 2 and Ubisoft). The next two, Netease and Shanda Games, are expected to reach $800m and $700m turnovers respectively in 2010. More impressive is the fact that almost all of these companies are not only profitable but massively so. 50%+ net profit margins are not unheard of. In addition to throwing off sizeable amounts of cash, many of these businesses have sought to bolster their balance sheets with IPOs and additional fund raising. Giant Interactive, a mid-tier publisher with just $200m in expected sales in 2010 currently has some $700m in liquid assets (more than the combined cash reserves of THQ, Take 2 and Ubisoft) whilst the top 7 have some $5.2bn to spend in aggregate. The $108.4m spent so far would appear therefore a drop in the ocean. There is clearly the capability but is there the appetite to make more purchases in the west?

The answer, for me, is a conditional yes. The West represents a huge, mature market whose player base is considerably more valuable than those found in China. However, unless there is a radical change in direction, Chinese companies are only going to be interested in network games businesses in the West; buying a traditional games developer or publisher would result in unwelcome earnings dilution, lumber them with business practices, technologies and infrastructure that are both alien and largely irrelevant to them. All three acquisitions this year were of network games ventures that complement the Chinese companies’ businesses. The Chinese companies will primarily seek to apply their capital and business know-how to Western-developed network games although we also expect more Chinese publishers to follow Korean publishers’ leads and establish North American and European operations to exploit their existing Chinese-developed IP.

I don’t believe Western expansion will be an investment priority for several years given the rate at which the Chinese and pan-Asian markets are growing. The Chinese hordes are amassing but there will be no invasion just yet. However, I expect to see sporadic additional acquisitions being made in the West as the Chinese flex their financial muscles, and use opportunistic acquisitions and investments to “learn” the Western market and build a foundation for future operations. In the longer term, the question of whether China will become significant to investors in the Western games market is, in my mind, more a case of when rather than if.

Development, Games as services, Publishing, video games

Do we still need publishers in an online world?

April 2010

Scratch the surface of almost every independent developer (and many an ex-publisher turned indie) and you’ll find the old vein of discontent about publishers. Rather than repeat a familiar stream of invective about publishers’ shortcomings, perhaps we should ask whether, in a market where network games revenues will soon outweigh retail, you actually need a publisher any more? To answer this, let’s look at the roles publishers perform today and ask whether they are relevant in network gaming.

Offline, most games would not get developed without publishers who are the primary and, often, the only source of finance for traditional games platforms. In contrast, network games developers are more independent in their financing. They either grow organically by self-funding development to reach launch, or win private finance. This week, these businesses are winning funding by shining up their business plans, adding the word Facebook (or, less frequently, iPhone) and mapping out business models with nice predictable, sustainable revenue flow from a portfolio of games and services. A few MMOG developer/publishers license or build and then operate games based on 3rd party licenses and some newer online publishers fund a little 3rd party development but most online studios self-finance development. There is work for hire on XBLA, PSN and Wiiware, and DLC on AAA titles are still publisher-financed but the smaller platforms’ lower development budgets allow more studios to self-fund and get to market through Microsoft, Sony and Nintendo. In total, most online games companies are sidestepping publishers to boot-strap or find new finance sources and launch online product.

You might think publishers’ role managing distribution is redundant online, because it’s all ‘direct to consumer’. Dead wrong. This is one of the great canards of ‘going direct’ – no-one actually does. Even network retail platforms like iPhone or XBLA, which allow studios to keeping betting on individual hits, have intermediaries taking their cut. Yes, the console manufacturers, Apple, Steam, Direct2Drive etc take smaller shares than publishers, distributors and retail on traditional platforms, but there’s nothing truly ‘direct’ about casual console or iPhone games. The most ‘direct’ routes of all are via games companies’ own sites and on social networks such as Facebook, which, miraculously, demands no mandatory revenue share – yet. Many MMOGs rely heavily on big traffic sites with which they share revenue to reach critical mass. Perhaps the most complex value chain is that for downloadable casual PC games where distributors and aggregators are used by developers and publishers alike. These new distribution partners are essential for getting many online games to market.

Some offline publishers’ marketing skills have little relevance in the online world but on platforms such as iPhone and casual console where the retail experience is simply duplicated online, some of these skills are still useful. Wherever you find games charts, PR is still useful to generate press interest and consumer awareness. Online advertising campaigns are standard operating procedure for many online games, particularly on social networks. However, most online marketing techniques for customer acquisition (affiliate deals, viral customer acquisition, live betas to name a few) will be alien to traditional sales and marketing teams. And the many sophisticated upselling techniques are a completely new discipline in its own right, one vital to success and profitability. Indeed, virality, data-mining and, perhaps most importantly, self-perpetuating games community building are marketing disciplines almost unique to network gaming. These roles are nurtured in-house by online games companies, partly because they are so intrinsically tied into design.

The business of setting pricing and retrieving revenue is firmly in the hands of online companies, mostly because of its complexity. Many games have hundreds of price points to set, as well as discounting, promotions and tricky decisions about what is free and premium. Subsequently, revenue retrieval is a highly specialised area because taking payment for most online products beyond iPhone and casual console titles requires multiple transaction partners per territory. More new skills for online developers to learn.

Publishers’ responsibility for first line support on traditional platforms transfers almost completely to the online studio. Most technical support is handled in-house by online games companies, but some outsource support to specialists in non-core languages and territories. These components can grow to substantial scale and being responsive to customers takes on a more critical role for online companies than their offline peers.

Traditional publishers will remain relevant through financial and brand power, and because they are transitioning both organically (by getting offline products online and elongating development and marketing cycles) and inorganically (by acquiring online businesses). The last decade’s decline in overall market share for most traditional publishers will continue as online competitors grow new markets. These online competitors, no longer easily defined as independents or publishers, are evolving some of the responsibilities of traditional publishers, but more importantly they have to learn a new range of commercial and service-driven disciplines to grow, and will need almost as many partners as the offline world. So, do you need publishers in an online world? Yes, but many independents will become publishers themselves.

Games as services, games monetisation, Publishing

Taking a Gamble?

December 2009

2009 has been a remarkably quiet year for games company mergers and acquisitions; the volume of transactions so far in 2009 is half that during the same period in 2008. Despite this reduced M&A newsflow, I am willing to bet that you missed a transaction (albeit modestly sized) that took place in September, the sale of a majority shareholding in Dutch online games publisher United Games. What makes this particular transaction unusual is the identity of the acquirer, Austrian company Bwin, one of the giants of the online gambling world. This was followed in October by a $5.5m investment led by Bwin’s UK-based rival Betfair in Watercooler Inc, a fantasy sports and social network games company. Online gambling companies have rarely invested in, let alone made, acquisitions outside of the gambling universe so what is going on? Given the sizeable cash reserves on many of the top gambling companies’ balance sheets, is the games industry about to be flooded by gambling dollars?

The games and gambling industries have co-existed alongside each other for decades now with almost no interaction, nor, it would appear, much desire to interact, with each other. Both industries use the term “online gaming” to refer to two completely different phenomena without confusing many people, such is the infrequency with which the two industries overlap and share media or research coverage. These two interactive entertainment industries have grown to vast sizes in similar time frames but are utterly different. Regulation is the most important differentiator and is the reason why no major games companies operate in the gambling business but that does not explain why online gambling firms have not diversified into games until now.

To understand why, we need to look at some recent gambling market trends. The early and mid part of this decade saw the online gambling industry explode, fuelled by the rapid popularisation of multiplayer poker in particular. Lofty IPO valuations and vast fund-raisings accompanied this internet gambling frenzy and in many senses helped accelerate it. However, this began to be tempered around the middle of the 2000s by increasing restrictions on online gambling in Europe but in particular the USA where the legality of online gambling had hitherto been a grey area, exploited by companies located offshore. By 2007, online gambling had effectively become illegal in America as had any commercial dealings by non gambling companies with offshore online gambling companies. This forced the big European online gambling companies to abandon all operations in the USA. Americans, however continued to gamble online, finding ways round these restrictions but making themselves the target of government crackdowns. 27,000 poker players were subject to funds seizures in raids in mid 2009. The evaporation of the American market combined with the arrival of the recession has resulted in many of the surviving online gambling companies posting earnings declines and even losses in the last few years.

Whilst all this has gone on, the games industry, and online gaming in particular, has boomed not just grabbing an increasing proportion of global consumer entertainment spend but experiencing a radical demographic expansion that has given parts of the industry a mass market demographic profile. This has resulted in an increasing cross-over between typical online gamers and online gamblers. Whilst online poker players tend to be male and between 25 and 40, other forms of gambling such as online Bingo can attract a predominately female and older gambler. In addition skill-based variants of gambling and casino games have long proven popular on casual games services such as Pogo whilst Zynga Poker is one of the most successful social network games with some 19m active players per month. Games represent not only a rapid growth alternative revenue stream but also a player base which increasingly matches its own customer base.

Bwin attributed the rationale for acquiring United Games to its belief that there will be a strong convergence between MMOGs and online gambling. Betfair’s investment in Watercooler on the other hand was made to give it an interest in a legal online games operation in the USA (there is now a widespread anticipation within the gambling industry that the Obama administration will eventually reverse the existing online gambling prohibitions). Betfair’s move has therefore given it access to a sizeable gamer database to which it believes its gambling products will appeal.

So is this a brief foray or the opening sortie of gambling companies moving heavily into games? Many gambling companies are currently focused on re-establishing strong profit margins and so are less likely in the short term to make potentially expensive and speculative investments in a wholly different industry. But there is a huge amount of cash swilling around the online gambling business and I would wager that with increasing demographic overlap with and high margin opportunities presented by games, we will see a few more of these smaller market entries over the next few years and quite possibly even a large-scale acquisition especially if the US market does open up again.

Games as services, games monetisation, Publishing

Extraordinary Games Business 2: Giant

August 2009

For this month’s column I want to continue our look at some of the most interesting, innovative and successful companies operating at the fringes of the games industry by turning our attention to Giant Interactive Group.

Giant is a NASDAQ-listed but Shanghai-based MMO developer and operator focused almost exclusively on its indigenous Chinese market. Despite being less than five years old and having only released its first game in ‘06, Giant has grown rapidly, with sales of $233m in 2008. What distinguishes it from others in the Chinese market and, indeed, from pretty much every other games company on the planet, is its profit margins.

Net profits in 2008 were $163m, an astounding 70 per cent net income margin. This was not even an exceptional year for Giant. 2007 net profits were $156m, a 75 per cent margin. Most traditional games publishers would be delighted with a 15 per cent net income margin, but not even EA or the WoW-propelled Activision Blizzard ever achieve this. Yes, those with some financial understanding might argue that net income is not the best tool for comparing profitability, but with every profit measure Giant’s results are remarkable.

The secret to Giant’s success has been its ability to generate Western market Average Revenue Per Paying User (ARPPU) levels from a Chinese player base. So whilst most Chinese operators tend to generate ARPPU of $5 to $7.50 per month, Giant makes $14.60 ARPPU per month from its paying user base of over 1.2m. Again, to add some Western perspective, Blizzard generates around $8 per month from its WoW players (excluding retail sales) although this obscures differences between Asian licensing and directly monetised Western subscriptions.

Digging deeper into Giant’s performance uncovers an array of novel game design elements and commercial strategies. It also reveals no small amount of controversy, largely centred on the aggressive commercialisation built into its small portfolio of microtransaction-based games and, in particular, the randomised loot purchases in its key title ZT Online. Players pay around $0.15 for a key to open a treasure chest that yields random virtual items. Upon opening, the chest reveals a slot-machine-like display that spins through rare items before usually settling on a more common item. In addition to the low chance of gaining rare and valuable items, there is a significant gameplay prize for the player that opens the most chests on any given day. Because other player tallies are kept secret, players can purchase thousands of keys and still not come out top.

The result has been vituperative accusations of gambling and exploitation, and there is no doubt that these commercial practices are at the heart of Giant’s unprecedented financial performance. However, the mechanism appears little different to collectible card games such as Magic Online and even EA’s recent BattleForge, which are similarly based around randomised card pack purchases and the injection of artificial scarcity.

Giant did not invent the concept of gameplay-enhancing virtual item sales, but it both popularised it and took it to a new level in China. Progress in ZT Online is inextricably linked to how much players pay. Players can play for free but will constantly face glass ceilings. As we have pointed out in previous columns, this is fast becoming the standard for new MMOs in the West, although perhaps not to the extremes utilised by Giant. One of these extremes is the sale of ‘insurance’ to ZT Online players: players can insure (i.e. wager) against their progress in the game, receiving pay-outs potentially greater than their initial investment as they reach various in-game levelling milestones. As players must invariably pay to progress, Giant always wins.

In many ways, ZT Online was uniquely designed for a middle class audience of time-poor but wealthy players that are able and willing to spend money to avoid the time-consuming grind necessary to make early progress in most other MMOs. To reinforce this approach, Giant did something very novel: it established over 500 local sales offices and hired over 3,000 ‘liaison officers’ (i.e. sales staff) tasking them with travelling the country to promote Giant’s games and recruit new players. These staff would visit internet cafes and talk players into trying Giant’s games over other operators’ titles.

However, Giant’s rampant commercialisation eventually ruffled enough players’ feathers and resulted in extensive in-game protests. As a result, the company recently adopted a pacifying measure of launching several variants of ZT Online with differing levels of commercialisation. Interestingly, the most aggressively commercial version remains extremely popular and continues to grow. The financial result, however, has been a fall in net profit, although its Q1 2009 margin was still over 62 per cent. Not that the company is worrying too much: it raised $886m when it floated in 2007, it still has $763m sitting on its balance sheet and its current market capitalisation is $1.84bn. It is also one of the only listed games companies financially confident enough to pay a dividend.

The moral of this story is therefore that, whilst there is a limit to how much commercialisation you can get away with, it is almost certainly higher than you might expect.

Development, Games as services, Publishing, video games

Network gaming hits the mainstream: When network gaming will overtake retail

March 2009

‘Digital’ distribution paints an enticing picture for games studios. The promise of sidelining all those middlemen – retailers, manufacturers, distributors and even publishers – is a powerful lure for games companies swimming against strong financial currents. No warehousing, no market development funds, no point of sale marketing, customers who are always online, the long tail… the lure has glistened attractively for years. Industry commentators, often with patent vested interests, have for years proclaimed that retail’s time has come, that so-called ‘digital’ distribution (as if retailers purvey games made of glue and string) will triumph imminently. For just as many years that claim has been pure hyperbole, but 2008 has proved to be a watershed year for mainstream games content being distributed over the network to console and PC. Western publishers have begun to wake up to the potential – EA expects to generate over $500m from this category in its 2010 Financial Year. Far from being dead on its feet, retail still has a long life span, but last year network gaming suddenly came of age.

The 2008 global network games market was valued at $13bn, growing faster than retail – that’s saying something given that retail games boomed pretty much everywhere outside of Japan. Many types of games are in this basket: MMOGs and virtual worlds, mobile games, casual online games, downloadable console content, and full download PC games. 2008 was a predictably good year for most in the better known categories of network gaming. You’ll be sick of hearing about casual online games providers riding an upward trend, with growth healthy at 25% year on year. No surprise that MMOGs and virtual worlds grew strongly at over 30%, although smaller companies innovating at the edges, not the market’s resident behemoth, WoW, really drove the market’s expansion. Even the red-headed step-child of the games family, mobile gaming, broke out of its doldrums, with iPhone / smartphone gaming probably counterbalancing the contraction in regular mobile gaming to result in net growth.

The real success story wasn’t at the periphery of the industry, but at its heart, driven by the core gamer. The fastest growing area of network gaming was downloadable core content on console and PC. Surviving largely on hot air before 2005, it experienced a sudden growth spurt, reaching $800m in 2008. What caused this sudden adolescent exuberance? The availability of quality download services on console and PC was the trigger, resulting in core gamers buying and accessing games content solely online in rapidly increasing numbers. On PC, Steam is the leading platform, and PC gamers used Steam and others to download increasingly up-to-date full-scale games from EA, Take Two, Activision Blizzard, Sega, Sony and other leading publishers at or very near retail release. This has resulted in healthy growth – and margins – for publishers who are no longer wary of online distribution.

But the real powerhouse of growth has been downloadable games content on consoles, which grossed around $500m in 2008. Since late 2006, a wave of smaller games, expansion packs to major releases and other premium downloadable content (“PDLC”) has demonstrated that publishers came alive to the opportunities of selling content direct via console. That charge has clearly been lead by Microsoft, whose platform is easily the most mature both in terms of technology but also in terms of users, who are increasingly comfortable with buying all kinds of content via their 360s. Its importance to Microsoft is underscored by exclusive PDLC distribution deals for GTA IV (for which Microsoft paid a $50m advance) and Fallout 3 which will undoubtedly fuel a further growth spurt in 2009. Most publishers are following early movers Activision and Bethesda into PDLC with significant releases. Sony has been no slouch with PlayStation Store, Home, and the first full-scale online-only console release, Tekken 6. Even Nintendo’s lack of a hard drive hasn’t stopped its customers from purchasing games on the network. Now, as some PC games (such as EA’s Battlefield 1943) will bypass retail entirely, publishers are becoming increasingly emboldened to push the boundaries further.

EA’s term ‘direct to consumer’ category is another misnomer, because it suggests that there are no middlemen in the networked world. The networked world can have a cost equation for distribution, digital rights management, marketing and billing not dissimilar to that on the high street. Most of EA’s ‘direct to consumer’ products actually utilise a range of intermediaries, like mobile operators, online distribution partners such as Steam, online marketing partners like Yahoo and AOL, billing partners like Paypal, or its (troubled) DRM partners. However, mobile aside, most network distribution can be considerably more efficient and cheaper for publishers than retail as well as bringing advantages like usage and buyer tracking, or even, for publishers opening their own online store fronts, direct ownership of the customer. Marketing is of course still a key variable but it is far more accountable online.

So when will network gaming overtake retail? The way is littered with red faces and broken crystal balls, and the impact of the coming industry down-cycle merging with a global recession and rampant globalisation of the industry will have highly unpredictable effects on the market. What is sure is that retail costs for publishers are rising, recession is driving down the RRPs of boxed product, and some retailers are even beginning to question the logic of dedicating shelf space to gaming. In contrast, network gaming is growing fast on PC and console in the west, and on PC in Asia (outside of Japan) and particularly in China, with its negligible retail market and multi-billion dollar online market growing at relatively high double figures per annum. These factors will accelerate the global market’s shift towards network distribution, thus eating into retail’s market share. Today, networked games represent 30% of the global games software market, and we believe that, based on current trends, retail will take a minority share of the global market by 2013, although it will take several more years for the west to catch up.

Games as services, Publishing, video games

New business models: subscription

October 2008

Last month we looked at the potential of advertising as a core or ancillary revenue stream for games companies. This month I want to turn our attention to the venerable subscription, a business model that GIC estimates will generate over $2bn in the west this year.

Subscriptions have been established as a pillar of the hard-core online games market for well over a decade although its substantial commercial potential was only really established with the 1997 release of Ultima Online. With run rate revenues of some $2.5m / month at its peak, EA’s seminal online role-playing game established a commercial precedent that almost the entire Western MMOG market was the follow. Subscriptions ultimately allow companies to more closely match their revenues with their ongoing costs and offer an upside potential far beyond any fire-and-forget boxed product sale. However, in so doing subscriptions also force companies to adopt a service provider approach for which the regular flow of new content, improvements and features as well as the provision of an accessible and efficient customer service resource are of paramount importance.

The subscription business model is highly momentum based. Many of a typical hard-core MMOG’s largest ongoing costs (such as bandwidth, hosting, marketing and customer support /community management) are theoretically variable but in practice cannot easily be switched on and off and certainly not without significant ramifications for the MMOG’s revenues. Measuring and predicting this cost momentum, combining it with the more “fixed” billing, development and admin costs, and ensuring it all comes to below the forecast revenue level takes considerable skill and practice. It is a precarious balancing act which many MMOG companies have often got wrong. For some (most notably serial MMOG cancellers EA and Microsoft) the prospect of building and maintaining this cost momentum has resulted in MMOG projects being abandoned well into their development cycle and even after they have been launched.

With a typical hard-core MMOG customer lifetime value of some $105-$145 over a 8-10 month subscription duration, the opportunity cost of losing a subscriber early can be huge. It is ironic therefore that the greatest level of churn for a typical MMOG is within the first few months of a new player’s subscription. In contrast, many MMOG companies report that after this 8-10 months period the rate of churn plummets. Others believe that this loyalty could be exploited to a far greater degree than the current $10-$15/month with special premium-priced subscriptions offering exclusive, high perceived value (but low comparative cost) content and services. Getting users over the difficult first few months is therefore a huge challenge. The use of long-term subscription discounts, free periods of play and lower subscription rates can all help but ultimately it comes down to the quality of the game, and in particular the community and service that surrounds it.

Subscriptions also represent one of the fastest growing segments of the casual online games business too. And once again it has taken EA to establish the commercial precedent from which the rest of the market is drawing inspiration. The growth of EA’s Club Pogo subscriber numbers may have slowed significantly in the last 18 months (still an impressive 1.65m at present) but the service remains the clear market leader in the casual online space generating the most revenue and providing the most sophisticated service. In fact Club Pogo has begun to display some of the traits of its MMOG cousins, with communications at the heart of the service, 90% of its subscribers having created and modified Club Pogo Minis (avatars) and 20% having even paid additional sums to further embellish their profiles. Surprisingly, perhaps, this has been achieved with a subscriber base that is around 70% female and with 40% over the age of 50.

Most of the larger casual online games publishers and portals now also offer a subscription alternative to buying titles on an individual basis, a proposition that has proven extremely popular. This usually gives players either unlimited access to a selection of premium casual download games for the duration of the subscription or gives them 50%+ discounts on individual game purchases in return for a minimum number of purchases by the player. Others have built successful subscription services around individual casual online games that have elements of player and gameplay persistence built into them such as iWin’s Family Feud Online Party.

Conspicuous for their absence at this party are the consoles (Xbox Live Gold membership excepted). With a vast ready-made audience of gamers and established billing systems, it is almost shocking that there has not been more use of subscriptions on consoles to date. The subscription model has been proven to work with even casual online games, so the argument that subscription-based console games are too high risk does not fly. Given the manifold commercial benefits of the model, we believe that it only a matter of time before the consoles start to catch up with the PC subscription market.