David Cole Presentation

Eating An Elephant One Bite at a Time: March 2010 DFC Intelligence (858) 834-4340 www.dfcint.com David Cole dcole@dfcint.com DFC INTELLIGENCE P R O P R I E T A R Y

DFC Intelligence Overview  Founded in 1994 to focus on games and digital entertainment content  From 1994-1997 a major focus was digital distribution and online games  DFC was a little too early to the online party  From 1998 to 2001, DFC’s primary focus was on U.S. retail  Starting in 2001, DFC once again started to focus heavily on the online game market looking at casual games, MMOGs and being one of the first research companies to start looking at the Korean game market  DFC Intelligence offers:  Off-the-shelf reports with market forecasts, company profiles  Detailed surveying of consumers on a global basis  Custom consulting -2- DFC INTELLIGENCE P R O P R I E T A R Y

DFC’s Theory  The game model where all products are released at a price of about $50 (less for portable) is whacked and not sustainable  We have had that theory since 1994  Sony brought prices down towards $40 with the first PlayStations  With the Xbox 360 and PS3 they brought prices back up to $60!  The fact that prices remained so high for so long is a testament to how popular games are in modern society  However, technology has caught up and allows for new pricing models  We have reached the point where there will be massive variation in game prices based mainly around usage  Research shows consumers are rapidly adapting to this change -3- DFC INTELLIGENCE P R O P R I E T A R Y

How did the Game Industry Get Its Start?  In the arcades where consumers spent 25 cents at a time  It became a multi- billion industry by the early 1980s -4- DFC INTELLIGENCE P R O P R I E T A R Y

Entering the Home  Home cartridge systems had a high cost of goods  High cost of goods = The start of $30+ games  People like being able to play at home -5- DFC INTELLIGENCE P R O P R I E T A R Y

It Took About 15 Years for Home Game Revenue to Reach Arcade Revenue 25 $30 cents -6- DFC INTELLIGENCE P R O P R I E T A R Y

Lessons Learned  People love games and are willing to pay for them  People like playing games at home on a regular basis  Technology has limited home delivery options and forced artificially high prices  Technology improves and allows for more flexible product delivery to the home  Economics 101: Offer people more efficient options and they will take them -7- DFC INTELLIGENCE P R O P R I E T A R Y

Economics 101: Game A and Game B  The past 20 years  Game A  Fun for 2 hours  Total Cost: $50  Cost Per Hour: $25  Game B  Fun for 100 hours  Total Cost: $50  Cost Per Hour: $0.50  This is not sustainable for Game A  With Game B, the market is undervaluing the product -8- DFC INTELLIGENCE P R O P R I E T A R Y

Compare with Other Entertainment  Going to a Movie: $10 for 2 hours or $5/hour  Assume a game is valued at only $1/hour  Game A should cost $2  Game B should cost $100  Assume a game is valued at $2/hour  Game A should cost $4  Game B should cost $200  We are still unclear how consumers will value games  Because new methods of charging based on usage are just being introduced consumers are still setting a valuation  However, we know consumers increasingly have more choices and are starting to make more efficient decisions -9- DFC INTELLIGENCE P R O P R I E T A R Y

Xbox Live Users Flocked to Call of Duty: Modern Warfare 2 - 10 - DFC INTELLIGENCE P R O P R I E T A R Y

World of Warcraft: People Try it and Continue to Play Game Lapsed Subscribers Game Never Used World of Warcraft 58% World of Warcraft 42% EVE Online 60% EVE Online 72% Everquest II 74% Lord of the Rings Online 80% Lord of the Rings Online 75% Warhammer Online 80% City of Heroes/City of Villains 84% City of Heroes/City of Villains 84% Warhammer Online 84% Everquest II 89% DFC survey of PC gamers in North America and DFC survey of PC gamers in North America and Europe conducted Jan-Feb 2010. Based on Europe conducted Jan-Feb 2010. Based on percentage of total subscribers that identified percentage of respondents that identified themselves as former subscribers not current themselves as never having played the game. subscribers. Respondents per game 2,512-2,526 Respondents per game 2,512-2,526 - 11 - DFC INTELLIGENCE P R O P R I E T A R Y

The MMOG Model  $15 a month = $180 a year for all subscribers  User A plays 30 hours/yr = $6/hour  User B plays 500 hours/yr = $0.36/hour  User C plays 1,000 hours/yr = $0.18/hour  Can you get Users B and C to pay more by getting them to pay for in-game enhancements?  The answer increasingly seems to be yes.  Economics 101 says Users B and C are getting high entertainment value for their $  Nov 2009: Blizzard adds pets available in WoW for $10 - 12 - DFC INTELLIGENCE P R O P R I E T A R Y

Gamers are Getting Comfortable Buying In-Game Goods Region No Yes Europe 49.33% 50.67% North America 37.30% 62.70% UK 36.42% 63.58% Grand Total 40.05% 59.95% DFC survey of PC gamers in North America and Europe conducted Jan-Feb 2010. Based on percentage saying Yes to question “Have you ever purchased an in-game good that is not a full game, but consists of a game component such as virtual currency, avatars/characters, items/weapons/vehicles, extra levels, etc?” Respondents 2,674 - 13 - DFC INTELLIGENCE P R O P R I E T A R Y

Gamers are making recent purchases: 80% of in- game good buyers have purchased in past 3 months Amount Spent Europe North America UK Grand Total None 24.3% 19.7% 19.2% 20.5% Less than $5 24.3% 17.8% 22.8% 20.9% $5-10 14.4% 17.2% 12.3% 14.9% $11-20 14.1% 18.5% 19.7% 18.0% $21-50 13.8% 15.6% 18.0% 16.1% $51-100 4.5% 5.1% 3.5% 4.4% More than $100 4.5% 6.1% 4.4% 5.2% DFC survey of PC gamers in North America and Europe conducted Jan-Feb 2010. Questions asked only to respondents that have said they have purchased in game goods. “In the past three months how much have you spent buying in-game goods?” Respondents 1,580 - 14 - DFC INTELLIGENCE P R O P R I E T A R Y

Free-to-play games are popular: 53% are current users I used to play F2Ps but no longer play Region Every day Several times a week Once a week or less them I never play F2Ps Europe 20.76% 19.81% 13.95% 33.28% 12.20% North America 21.26% 18.06% 18.52% 30.71% 11.46% UK 15.40% 15.65% 13.57% 37.16% 18.22% Grand Total 19.25% 17.72% 15.79% 33.43% 13.82% DFC survey of PC gamers in North America and Europe conducted Jan-Feb 2010. Based on answer to question “How often do you play F2P games” Respondents 2,540 - 15 - DFC INTELLIGENCE P R O P R I E T A R Y

Converting Users from Free to Paying Can Vary Significantly by Product and Business Model Percent Paying of Percent Paying of Game Total Users Game Total Users Runescape 39.5% Free Realms 19.0% Club Pogo 37.8% Knight Online 16.7% Real Arcade 36.4% Cabal Online 16.6% Texas Hold-Em 29.1% Flyff (Fly for Fun) 15.2% Maplestory 26.8% 2Moons 11.6% Club Penguin 26.4% Farmville 9.5% Silkroad Online 22.9% Neopets 9.1% Combat Arms 19.6% Mafia Wars 8.9% RF Online 19.3% DFC survey of PC gamers in North America and Europe conducted Jan-Feb 2010. Percent of respondents in North America that identified themselves as former or current users that had PAID. Respondents 1,069-1,085 per game - 16 - DFC INTELLIGENCE P R O P R I E T A R Y

iPhone and iPod Touch owners are purchasing games for the system: 60% of owners bought a game in the past 3 months More than none but less More than Region None than $5 $5 to $9 $10 to $19 $20 to $29 $30 to $39 $40 to $50 $50 Europe 49.14% 13.79% 4.31% 11.21% 4.31% 5.17% 1.72% 10.34% North America 40.37% 12.96% 13.33% 14.44% 5.56% 5.19% 1.85% 6.30% UK 34.25% 14.17% 13.39% 13.39% 9.84% 5.91% 2.76% 6.30% Grand Total 39.53% 13.59% 11.72% 13.44% 7.03% 5.47% 2.19% 7.03% DFC survey of PC gamers in North America and Europe conducted Jan-Feb 2010. Based on answer to question “Over the past 3 months, please estimate the total amount you have spent on iPhone / iPod Touch games purchases.” Question asked only to owners of iPhone or iPod Touch.” Respondents 640 - 17 - DFC INTELLIGENCE P R O P R I E T A R Y

Xbox 360 Owners Are Comfortable Buying Digital Content: 66% have bought a digital game or game component Xbox 360 – I have Xbox 360 - I have purchased Xbox 360 - I have purchased downloadable games Xbox 360 – I have Xbox 360 - I own this purchased a full downloadable games or games purchased non-game system but have downloadable game or game components components at any content such as never purchased Region for more than $10 priced at under $10 price music or a movie digital content for it Europe 36% 23% 52% 7% 45% North America 47% 38% 69% 16% 27% UK 42% 39% 69% 13% 28% Grand Total 43% 36% 66% 13% 30% DFC survey of PC gamers in North America and Europe conducted Jan-Feb 2010. Based on answer to question from only those that indicated they owned an Xbox 360. Respondents 1,248 Xbox 360 owners - 18 - DFC INTELLIGENCE P R O P R I E T A R Y

What Does it Mean?  Consumers are increasingly spending money based on product usage  Multiple types of usage based models are going to become increasingly popular  Usage based models can take all forms  Charging a set price for unlimited usage is a usage based model  For certain products a $50+ retail price and/or $15+ monthly subscription is a bargain because it allows for unlimited usage  For these products there is a growing ability to upsell digital content to heavy users  Most products will not have the luxury of getting consumers to make a major commitment up front and will need to rely on getting consumer payments in smaller increments  For all products quality of the user experience becomes more important  A high profile license can bring consumers in, but it can’t get them to stay around - 19 - DFC INTELLIGENCE P R O P R I E T A R Y

Online Usage Models are Already Major DFC Forecasted Online Usage Revenue Revenue Generators, $9.0 Especially in Asia $8.0 $7.0 Online Usage Revenue includes subscriptions and virtual item $6.0 models where the product is consumed and/or no longer in billions $5.0 usable once the consumer stops paying. $4.0 $3.0 $2.0 $1.0 $0.0 2009 2010 2011 2012 2013 2014 North America and Europe Online Usage Revenue Asia Online Usage Revenue - 20 - DFC INTELLIGENCE P R O P R I E T A R Y

Contacting DFC  The Data in This Presentation is From Our Latest Report: Downloadable Content: The Future of the Game Industry  Survey of nearly 5,000 gamers in North America and Europe  Partnership with Live Gamer to analyze seven years of actual micro- transaction data from games in Korea, U.S., Japan, Germany, Philippines and Vietnam  Strategic Market Reports, Forecasts and Analysis of Established and Emerging Investment and Partnership Opportunities  Emerging Markets Research: http://www.dfc-niko.com/  Monthly DFC Dossier report available for download.  Profiles emerging markets, products and companies  Sign-up to receive the report https://www.dfcint.com/DFCDossier/signup.php  If you know of a company or product that should be profiled contact George Chronis gchronis@dfcint.com  If you would like access to past reports or more info give your business card to David Cole or contact Ozzie Monge at omonge@dfcint.com - 21 - DFC INTELLIGENCE P R O P R I E T A R Y

David Cole Presentation

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