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Good for the Goose, Good for the Gander?

Posted by Segun777 Thursday October 18 2012 at 4:27AM
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Author’s Note: This is Part 1 of a 3 part series in a look at the rise of F2P in the West. I will take a indepth look at the path to a F2P MMO market and what it means for gamers and developers alike.

 

Part I: Business

 

There is a fundamental dichotomy in the way developers and gamers view F2P. From a business standpoint the only real reason for a developer to take a game F2P is to make more money than they are currently making. Certainly offering choice is a nice aside, but the point of the switch from subscription to F2P in whatever form, is to make more money than they are currently making. Gamers on the other hand view the F2P switch as a way to play a game without spending money, or more accurately they wish to control the way and the when of the money being spent. Here in then lies the Dichotomy, while gamers might have a thought in the back of their minds about the idea of business driving decision-making for developers, they aren’t inherently moved by the argument. So too developers might also acknowledge that gamers want everything for free, while putting that aside to make money. The games that make the best compromise between those two schools of thought are the ones that are likely to be the most successful.

This dichotomy leaves game writers with a conundrum. They are the bridge between the gamer and the developer, and while they have opinions on matters, it is necessary that they be impartial. An article from The Economist wondered “Given the huge cost of developing the most advanced video games, however, the new model seems unlikely to push aside the traditional model of selling games on disc (or as paid downloads) any time soon. But as gaming reaches out to new audiences, there may be more scope for new business models based on advertising and micropayments.” The biggest problem when talking about F2P from a business standpoint is that so little data exists from gaming in the West. In truth all things being equal, only the markets in Asia have any real data to correlate an opinion from. Because of the relative newness of the model in the West there is little hard data to try and postulate the outcome for companies and gamers alike in the F2P switch.

In 2010, Niko Partners, a Leader in Asian Video Game Market Intelligence said “The 2010 online games market revenue for the six Southeast Asian emerging markets [Indonesia, Malaysia, the Philippines, Thailand, Singapore, and Vietnam] countries plus the region of Taiwan, is estimated to reach $917 million by the end of 2010, growing to $1.7 billion by 2014. This represents a 14% compound annual growth rate (CAGR) over the four-year period.” While Asian statistics can be used to try to get a rough estimate of where the profits are likely to go in the West, an important consideration is the likely proliferation of video games from the East. Many markets such as China are fairly stagnant for any foreign made game, but that is not so for other markets. In addition with a rising middle class and population explosions in some Asian countries on the horizon, long term planning dictates getting into the market now. It is possible even, probable that with the explosion of the market in Southeast Asia, one could see a bid to try to gain ground in the Western markets. Video game companies that are already old hats at the F2P business in South East Asia could foreseeably push more established Western gaming companies aside; for example NCSoft and Nexon. While large companies like Blizzard have had success in the Mecca of online gaming South Korea with games like Diablo 3 (Blizzard’s Diablo 3 sold somewhere in the vicinity of 10% of its 10 million boxes sold worldwide, in South Korea), the fact of the matter is that there is untapped market potential for quality titles coming from the West. 

In the beginning of 2011, PricewaterhouseCoopers predicted: ‘As mentioned, the North American breakdown from 2009 brought in an estimated $15.1 billion but will expand to an estimated $20.7 billion by 2014, mainly due to the mainstream home consoles … However the largest gaming market in the world right now is the Asia Pacific region which garnered a very impressive figure of $19.4 billion in 2009 and is expected to be the fastest growing region within the next five years and estimated to grow at a 16.3 percent compound annual rate to $41.3 billion in 2014. This is mostly in due part to the free-to-play MMO market that made a heck of a lot of South Korean publishers billions of dollars very quickly over the past couple of years… The second largest gaming market in the world, the EMEA, also known to most gamers as the PAL territories, is estimated to expand from $16.8 billion in 2009 with an annual growth rate of 6.4 percent, to $23 billion in 2014.’ Furthermore they went on to say: ‘Online games [in Asia] will become the largest category in 2010, reaching $22.6 billion by 2014, a 27.3 percent compound annual increase from $6.8 billion in 2009.’ There is growth to be had in the North America markets, but is the worldwide market’s that see the biggest potential for growth.

Another important section to F2P is going to be security in both financial real world and virtual world matters. As games become more tied to real world currency there is more and more real life money to be won and lost. Consider that a simple gaming decision in 2008 for Second Life cost its users $750,000 US Dollars according to the Wall Street Journal. Robert Bloomfield, a professor at Cornell University's Johnson School of Management said “There is not a whole lot that is fake about this”. Behnam Dayanim, a lawyer who specializes in Internet law at Paul, Hastings, Janofsky & Walker LLP in Washington said “When virtual environments first started, they were viewed as libertarian dreams with no interference… As companies that sponsor these environments become more accountable to investors or regulators, they are starting to encounter real-world limitations.” It might have been fine for Blizzard to say that it owns its properties and money was not to be made outside of itself, but those days are long gone. Companies are not simply charging a monthly fee, a time honored tradition. New rules and regulations are going to be necessary to prevent fraud, theft, and ruinous spending habits. Gaming companies should look to the gambling industry as a preventative  against public outcry and a map for regulation. While news of hacking is not likely to go away for years to come, it would behoove game companies to get better security now rather than when it inevitably bites them in the backside. Sony’s PSN fiasco of 2011 is estimated to have cost them one Billion dollars in lost revenue, proof is in the pudding.

For F2P to be a sound business decision there needs to be a fundamental shift in the way western video game companies do business. A large part of succeeding in the F2P market is being adaptable to the changing atmosphere in the gaming market. Akin to the quickly rising and falling fortunes of companies in the mobile and casual markets, video game companies have to be faster on their feet. Gone are the one or two year waits between expansions, now there are the monthly updates to keep up with the veracious appetites and expectations of gamers who will move on to the next big thing as quickly as a child changes their mind. According to a recent Forbes article Lisa Cosmas Hanson, managing partner of Niko Partners is quoted as saying: “We see a risk in monetization because so many companies are putting out really great browser-based and mobile games, that the gamers can switch between one fun game and another three options easily, before getting to the point in the game where paying for it would make it even more fun for them.. So game companies need to be sure the monetizing starts early on in the game, or risk the loss of the gamer based on the easy switch to one of so many more options in this highly competitive field.” The move to F2P can be a dangerous one for video game companies in the West. F2P works in Asia by having a large number of players, consider League of Legends. Riot Games LOL had ‘over 15 million registered players, with 3.6 million monthly active users and over 1.4 million playing daily. The company also revealed its peak concurrency (number of those LoLing at the same time) as over half a million players’ according to an article from Joystiq in the middle of 2011. By the end of 2011 according to LoL’s own website the game had 32.5 million players signed, with 11.5 million gamers playing monthly, 4.2 million gamers playing daily, and 1.3 million gamers playing concurrently worldwide. Yet in May of 2012 Tencent Holdings Ltd. (700), China’s biggest Internet company and parent company of Riot Games, posted a record quarterly profit of 2.95 billion yuan or right about 467 Million US Dollars according to Bloomberg after having made 4.5 Billion in revenue and 1.6 Billion in net revenue for 2011 up 45%. Contrast that with Blizzard making Activision net revenues at $1.08 billion for the second quarter of 2012, even before its latest expansion Mists of Pandaria dropped. Even allowing for sales from games other than World of Warcraft, like Call of Duty and Diablo III, the number of gamers needed to make a comparable profit to a subscription game in markedly higher.

There is money to be made using F2P in the MMO market, but it is not a magic wand. Not only does it mean higher populations, it means bigger and better server tech and that is not cheap. While there are indeed benefits from the F2P model there are many pitfalls as well. Unless companies are ready to hit the ground running they’re likely to be swallowed up. Times are changing and the slow, powerful behemoths are a thing of the past. Without the agility to move with the flowing trends, F2P will just be an early trip to the grave.

 

Segun Adewumi

Blog: http://gamesforusbyus.blogspot.com/

MMORPG.com writes:
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