The Rise of Free-to-Play    Core Gaming          Mitch Lasky       Benchmark Capital
bizpunk.blogspot.comtwitter: @mitchlasky
Free-to-play is the mostimportant disruption in the core video game business
Distribution innovation in video games has historically created       the greatest wealth
What is free-to-play?•   Free-to-play is not a genre ...•   Free-to-play is not a business model ...•   Free-to-play is a ...
Part of Trend to Un-bundle Media   Bundle          Disruptor            Result   Album         Napster/iTunes        Song/...
F2P & The Activity Chain                                  Market                                           Distribute    D...
F2P and RevenueCumulative Recognized Revenue                                                   Re-orders                  ...
F2P and RevenueCumulative Recognized Revenue                                                      free-to-play        t   ...
F2P is eCommerce
F2P is eCommerce Interest/Intent      Clicks     Installs   Activations  Repeat Visits    PaymentsRepeat Payments
Many business models are  compatible with F2P
F2P Business Models     “Freemium”
F2P Business Models   Advertising-Based
F2P Business ModelsMicro-Transactions (Virtual Goods)
F2P Business Models“Crippleware” is not F2P
Why does the free-to-play +virtual goods model work?
Player’s Willingness to Spend                                Demand Power Curve                                       # of...
Player’s Willingness to Spend                                    Packaged Goods                                     Single...
Free-to-Play                                “whales”Player’s Willingness to Spend                                         ...
Strategic Rationale for Free• Rather than pay millions for conventional  marketing, use power of free to create reach,  bu...
Rise of F2P Core Gaming
Why Core?
From 2005 to 2009, core F2P was primarily an Asian phenomenon
Plenty of evidence from social gaming and mobile gaming that casual consumer inWest would embrace F2P / Virtual Goods
For core gaming, high production costs, uncertain  monetization, and “innovators dilemma” led  traditional publishers to f...
Investment Thesis (c. 2007)• Free-to-play removed issues of brand and  entry barrier for new core publisher• Core gamers w...
Risks• Core gamers might perceive F2P as code  for crappy Facebook games• Higher production costs required higher  convers...
... it worked.32.5 million installs11.5 million MAU4.2 million DAU1.3 million PCU              Source: Riot Games public r...
The Ten Success Attributes    for F2P Publishing
The Ten Success Attributes#10 Scalable, virtualized hybrid cloud infrastructure.                                 Public Cl...
The Ten Success Attributes   #9 World-class e-commerce system.
The Ten Success Attributes                                #8 Publishing platform allowing 3rd party integration.Publishing...
The Ten Success Attributes#7 Aggressive focus on reducing distribution friction. Interest/Intent     Clicks   Downloads   ...
The Ten Success Attributes    #6 Social marketing competence.
The Ten Success Attributes #5 Data-driven analytics and smart analysts.
The Ten Success Attributes #4 Virtual goods merchandising competence.
The Ten Success Attributes   #3 Customer acquisition leverage.
The Ten Success Attributes#2 Profound commitment to customer service.
The Ten Success Attributes    #1 Great games designed for F2P.
What’s Next?
The internet has leveled the publishing playing field and  de-centered incumbents
The Value of Scale• Amortize e-commerce platform and cloud  infrastructure across multiple titles• Customer acquisition ma...
The Value of Scale   Reach matters!
Who are the contenders?    Company                        +                              −                           Huge ...
Opportunity exists to create a    new, multi-billion dollarpublishing business as packaged  goods and console erode
www.playhawken.com
GDC 2012: The Rise of Free-to-Play Core Gaming
GDC 2012: The Rise of Free-to-Play Core Gaming
GDC 2012: The Rise of Free-to-Play Core Gaming
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GDC 2012: The Rise of Free-to-Play Core Gaming

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GDC 2012: The Rise of Free-to-Play Core Gaming

  1. 1. The Rise of Free-to-Play Core Gaming Mitch Lasky Benchmark Capital
  2. 2. bizpunk.blogspot.comtwitter: @mitchlasky
  3. 3. Free-to-play is the mostimportant disruption in the core video game business
  4. 4. Distribution innovation in video games has historically created the greatest wealth
  5. 5. What is free-to-play?• Free-to-play is not a genre ...• Free-to-play is not a business model ...• Free-to-play is a MARKETING STRATEGY• Free-to-play is also a value creation strategy
  6. 6. Part of Trend to Un-bundle Media Bundle Disruptor Result Album Napster/iTunes Song/MP3TV Prime Time DVR/Netflix/Hulu Show/Episode Newspaper Internet/Twitter Story/Link 40 hour/$50 F2P/virtual goods Game as Service Video Game
  7. 7. F2P & The Activity Chain Market Distribute Developt Develop Beta Distribute Analyze & Market
  8. 8. F2P and RevenueCumulative Recognized Revenue Re-orders Returns Initial Order t Launch
  9. 9. F2P and RevenueCumulative Recognized Revenue free-to-play t Launch
  10. 10. F2P is eCommerce
  11. 11. F2P is eCommerce Interest/Intent Clicks Installs Activations Repeat Visits PaymentsRepeat Payments
  12. 12. Many business models are compatible with F2P
  13. 13. F2P Business Models “Freemium”
  14. 14. F2P Business Models Advertising-Based
  15. 15. F2P Business ModelsMicro-Transactions (Virtual Goods)
  16. 16. F2P Business Models“Crippleware” is not F2P
  17. 17. Why does the free-to-play +virtual goods model work?
  18. 18. Player’s Willingness to Spend Demand Power Curve # of Players
  19. 19. Player’s Willingness to Spend Packaged Goods Single point of demand/ pricing optimization $50 $ # of Players
  20. 20. Free-to-Play “whales”Player’s Willingness to Spend Elastic pricing scales with demand $ non-payers # of Players
  21. 21. Strategic Rationale for Free• Rather than pay millions for conventional marketing, use power of free to create reach, build brand, and generate virality and community• Transform AAA games into services that can command a share of customers day with engagement that transcends social game churn• Generate revenue and earnings by capturing elastic demand and pricing with virtual goods• Allow valuable, long-lived franchise properties, which have always been the drivers of publisher economics, to arise organically through continuous development rather than sequels
  22. 22. Rise of F2P Core Gaming
  23. 23. Why Core?
  24. 24. From 2005 to 2009, core F2P was primarily an Asian phenomenon
  25. 25. Plenty of evidence from social gaming and mobile gaming that casual consumer inWest would embrace F2P / Virtual Goods
  26. 26. For core gaming, high production costs, uncertain monetization, and “innovators dilemma” led traditional publishers to favor hybrid models
  27. 27. Investment Thesis (c. 2007)• Free-to-play removed issues of brand and entry barrier for new core publisher• Core gamers would be willing to pay for virtual goods in context of a free title with high production values and great game play• DotA audience was large, passionate, under- served, and accessible online• Had to go “all in” with pure free-to-play model; not hedge like traditional publishers
  28. 28. Risks• Core gamers might perceive F2P as code for crappy Facebook games• Higher production costs required higher conversion & monetization to break even• Had to build next gen e-commerce business on top of great game• To attract desired audience, had to be authentic and legitimate heir to DotA; not opportunist but “for players, by players”
  29. 29. ... it worked.32.5 million installs11.5 million MAU4.2 million DAU1.3 million PCU Source: Riot Games public release; November 2011
  30. 30. The Ten Success Attributes for F2P Publishing
  31. 31. The Ten Success Attributes#10 Scalable, virtualized hybrid cloud infrastructure. Public Cloud Data Center “GaaS”
  32. 32. The Ten Success Attributes #9 World-class e-commerce system.
  33. 33. The Ten Success Attributes #8 Publishing platform allowing 3rd party integration.Publishing Abstraction Layer Publishing APIs Identity & Matching & Item Store & Analytics & Customer Authentication Messaging Billing Telemetry Support
  34. 34. The Ten Success Attributes#7 Aggressive focus on reducing distribution friction. Interest/Intent Clicks Downloads Activations Repeat Visits PaymentsRepeat Payments
  35. 35. The Ten Success Attributes #6 Social marketing competence.
  36. 36. The Ten Success Attributes #5 Data-driven analytics and smart analysts.
  37. 37. The Ten Success Attributes #4 Virtual goods merchandising competence.
  38. 38. The Ten Success Attributes #3 Customer acquisition leverage.
  39. 39. The Ten Success Attributes#2 Profound commitment to customer service.
  40. 40. The Ten Success Attributes #1 Great games designed for F2P.
  41. 41. What’s Next?
  42. 42. The internet has leveled the publishing playing field and de-centered incumbents
  43. 43. The Value of Scale• Amortize e-commerce platform and cloud infrastructure across multiple titles• Customer acquisition made more efficient and less costly by audience aggregation• Decreased risk and dependence on single hit title / title longevity• Potential access to public markets for capital, currency
  44. 44. The Value of Scale Reach matters!
  45. 45. Who are the contenders? Company + − Huge hit with LoL Single title Riot/Tencent Great, focused team No platform approach Resources of Tencent Steam user base Packaged-goods mentality Valve/Steam Online scale & experience Distribution-focused Great brands for F2P Experience in Asia, BF3 Legacy business EA/Origin Nucleus user base Execution risk Financial resources Huge Asian base Limited success outside Asia Nexon Experts in F2P Lack of relevant content Financial resources Great brands for F2P Packaged-goods mentalityActivision/Blizzard Financial resources “Have cake and eat it too” MMO experience Huge reach Rep with core gamers Zynga Great analytics Core development assets Managers with core experience
  46. 46. Opportunity exists to create a new, multi-billion dollarpublishing business as packaged goods and console erode
  47. 47. www.playhawken.com

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