Game in progress new business models for the videogame industry


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The online gaming industry is redefining business models for the entire videogame industry.

  • This is by far the most comprehensive analysis of the current state of the industry that i have found on the internet. I cannot imagine how long it would have taken me to gather and process so much information. I am currently researching different business models for my master's degree in video game production and business. It has been an arduous process navigating through so much information to gain a concrete understanding backed by evidence, rather than gut feeling. Thank you so much for taking the time to put this together. I will certainly be using this as a guide to my own research.
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  • Thank you Nick. Coming from you, I do appreciate !
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  • From one analyst to another - good work Luc and I now follow
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  • Thank you for your interest and comments.
    You're right in that this presentation was put together to summarize how videogames monetize for a general audience.
    However, one of my point is that one should consider there is only one industry and not digital on one side and retail box on the other which is what many people in this industry actually have in mind. This is a strategic error.
    About data, there's obviously plenty of them available that I used but when I looked for a simple one that was the share digital represented over the whole videogame industry revenues, I could not find it. Therefore, I made my own computations and assumptions to come up with a credible %.
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  • Hello, I looked through the slides and besides compiling data and stats, you are just reiterating what many of us in the gaming industry already know. However it is nicely written. Thanks.
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Game in progress new business models for the videogame industry

  1. 1. Game In Progress New Business Models for the Videogame Industry by Luc Bourcier
  2. 2.  The traditional videogame industry has failed to conceive the master model that would comprise all videogames business models. These are actually the online innovative scenarios that are re-defining the business models of the videogame industry, The game market is at the beginning of an evolutionary path, moving away from packaged games played on consoles to browser-based free-to-play and hybrid hosted scenarios, Does this mean that all videogames should look like casual social free-to-play games? No. Does this mean that online game developers have been right with whatever they have been doing? No. Does this mean that the conception of business models for all videogames should take into account what has happened online in the last five years? Yes.
  3. 3. Business model:«The essence of a business model is that it defines the manner bywhich the business enterprise delivers value to customers, enticescustomers to pay for value, and converts those payments to profit:it thus reflects management’s hypothesis about what customerswant, how they want it, and how an enterprise can organize to bestmeet those needs, get paid for doing so, and make a profit».(Wikipedia)
  4. 4. Video Game WW Revenues in M$600005000040000300002000010000 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 in M$
  5. 5. Video Game WW Revenues in M$600005000040000300002000010000 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Retail Digital
  6. 6. Since online has emerged, two distinct videogameindustries coexist. Should not they be the two facets ofa unique and more global industry?
  7. 7. hardcore casual
  8. 8. 1 B+ Internet400 M+ Smartphones 300 M+ Social Networks 200 M+ Console & PC
  9. 9. Average nb of Devices per Gamer 2,72,12009 2011
  10. 10. Boxed Digital ($18b) ($25b) Static Handheld Casual & MMOs Mobile Downloads Social CloudConsole Console PC ($1,9b) Browser ($4,6b) ($3,3b) ($2,9b) ($1,5b) ($0,05b)($17,5b) ($5b) ($5,5b)
  11. 11.  In the console eco-system, hardware vendors bring: • A closed, stable and secure platform, • A market under control, • An audience. Installed base is the n°1 KPI, Attach rate = average number of games per owner, Global market size= attach rate*installed base, Penetration rate for a specific game = number of units sold/installed base, Units sold for a specific game = • Penetration rate*installed base, • Market share*Installed base*Attach rate.
  12. 12.  Unit sales of a console game are impacted by:  Release date:  stage in console life cycle ,  competitive activity at release time.  Numerical distribution,  Awareness and preference determined by:  reviews (Metacritic),  marketing (usually TVRs from TV campaigns). Retail+TV: audience acquisition is based on FMCG marketing practices, As for FMCG goods , the Pareto law applies : 50% of sales are made by 4% of all games available (and 13% of annual new releases), As for FMCG goods, bigger brands dominate. The only way for publishers to generate profit is to develop and nurture strong recurrent IPs (mega-franchises), In the US: out of the 20 best-selling games, in 2010, 3 were new IPs. In 2011, there was none.
  13. 13.  Technological progress entails develoment costs rise. With stable installed bases and an unchanged number of new releases, the breakeven point is higher and ROI is more and more at risk. Successes become less frequent and are bigger. Failures become more frequent and cost more, Video game hardware economics are based on scarcity whereas video games are now available on a growing number of devices, The high retail price (40 hours of gaming for $60) makes any purchase a risky bet for most consumers. Hence : • Piracy, • Pre-owned. It leads to an elitist approach to game design. Gamers want value for their money - hardcore gamers dictate: • Realism, depth, immersion, • Long game sessions, long learning curves, long loading times.
  14. 14. Digital Video Game Market Segments (in % $billion) Cloud Gaming 0% Social 8% mobile 19% Downloads 16% MMOs 26% Casual/F2P 31%
  15. 15.  One PC game out of three is downloaded. And it is growing, New releases available the same day as boxed products, Average prices not much lower than in retail (-7%), An improved experience for both consumers and publishers.
  16. 16.  A more recent phenomenon: • Console connectivity, • Harware memory size, • Risk of upsetting retail partners. A strong share (at least 50%) of XboxLive and PlayStation Network revenues are coming from subscription fees to the service, A varied content: • Films, TV and music, • Demos, • Indy games, • DLC, • Very few full games. Almost no new releases.
  17. 17.  PC: emergence of new platforms: • Steam: 40 million accounts. 1800 games. Revenues: $1b. Market share: 70%, • EA’s 9,3 million accounts. Revenues $100m (Feb’12), • Should publishers set up their own, platform? Consoles: strength of DLC «a logical extension of the identical business model » (Strauss Zelnick) • Expand life cycle beyond retail, • Multiply points of contact between brand and gamers, • Grow revenues and makes big IPs even bigger. When will console games be launched simultaneously at retail and online? How will retail stay in the loop for digital revenues?
  18. 18.  Streaming of games through the web and IPTV: an emerging technology. Some major benefits: • multi-platform and multi-location gaming, • games become free from dedicated hardware. Some technical issues: • bandwidth and latency issues for HD games (technology will improve), • porting and reconfiguration costs. More a subscription model ? Revenue share similar to mobile (55/45) due to multiplicity of partners: carrier, platform, publisher .
  19. 19.  66% of internet users play casual games (200 million worldwide). Typically: the 43 years old woman, Different motivations: « make a pause, kill time, relieves from stress »… Casual games main features: • accessibility (Flash), • short repetitive sessions, • single player games, • rewarding games (addictive and encouraging), • free access.
  20. 20.  3 models for free-to-play (F2P): • Try-and-buy: limited access (time, levels…) • Advertising:  display ads on hosting sites (Yahoo!Games),  pre-roll in game ads (Spilgames). • Virtual goods. Advertising: was stronger during heydays of generalist portals (2005-2008), Try-and-buy: games must be really addictive - low conversion rate (1% to 5%), Affiliation commission (Europe) up to 20% of a new user lifetime revenues and/or $1 for each new paying user, Emergence of game portals aggregating large number of games to keep more loyal customers: Big Fish - 200 million accounts - revenues: $120 m. BigPoint 250 millions accounts - revenues: $200 m, Leading publisher: EA’s PopCap - revenues: $105 m. Affiliation commission: 18%, Metric: MUV – Millions Unique Visitors.
  21. 21. Portals Million Monthly % 0-17 % Female Avg Time on Unique Visitors years Site (mn)Bigpoint 21 20% 78% 18 10% 57% 09:40Club Penguin 14 50% 70% 11:40Pogo 12 15% 76% 14:30Addictinggames 12 41% 64% 14:30Zylom 9,1 49% 81% 08:50Big Fish 8,1 20% 78% 07:10PopCap 6,7 16% 81% 06:00WildTangent 6,1 26% 74% 04:50Kongregate 5,1 48% 48% 14:00Gamehouse 5,1 28% 79% 5 20% 24% . 33:20Gameslist 1,1 69% 70% 07:10Spilgames 0,83 61% 87% 04:50Gamezebo 0,56 16% 76% 05:50
  22. 22.  Huge number of low priced games makes discovery difficult, Limited marketing tools for developers (rely on portals and aggregators) • generic genre (mah-jong, mini-golf etc …), • word of mouth, • leaderboards, • demo. The game is the demo.
  23. 23.  MMO: a large number of players who may engage simultaneously in a persistent world, 42% of 16-25 men play MMOs, In France : 8,5 million player 13+: • 0,9 million play pay (client) games • 7,1 million play free (browser) games • 0,5 million play both. F2P casual browser MMOs have changed the World of Warcraft (WoW) paradigm. Habbo Hotel and Kart Rider manage more accounts than WoW, Less immersive MMOs are based on casual and mid-core themes.
  24. 24.  The value of the game is the community, Community measured by: number of recurrent players (engagement) + life time (retention), Customer average lifetime: hardcore 18 months & casual 4/8 months.
  25. 25.  Metrics: ARPU, retention and churn rates, Classic P2P hardcore model: • client -box and/or download- ($50), • subscription fees ($15/month), • virtual goods.• The example of WoW (launched in 2004): 10 million subs –revenues: $1,6 b (2010) - monthly ARPU from $9,30 (‘08), $8,70 (‘09) to $9,90 (’10). SWOTR (launched in 2011): 1,3 million subs (3 million forecast by end of ‘12),• Casual MMO model: • free trial or free game, • subscription compulsory or optional ($8/month), • virtual goods (average conversion rate: 10%) for personalization or action items of a unit value of $1 to $10 (or even $1000), • items payable through micro-transactions, • low ARPPU: from €0,84 to €1,62 - average: $1/month (vs $9/month hardcore)
  26. 26.  Very few MMOs have been able to replicate the WoW model, Few MMOs have been able to gather sustainable communities exceeding 1 million, Size of community so strategic than hardcore P2P games switch to F2P to lower entry barrier (Lotro, Warhammer, Everquest, Free Realms…), Towards an hybrid model? Free access with optional subscription and virtual goods. Runescape: 10 million accounts - 1 million subscribers - revenues: $62 m.
  27. 27.  MMOs reach their breakeven point when community has reached critical mass, months after launch. Long time engagement is critical, Lifetime Customer Value (LCV)= ARPPU*Life Time, The economics of F2P can’t lead to ROIs, development costs, game designs similar to P2P: • P2P MMOs: with LCV = $200 ($50 for client+10 months at $15). 500.000 players generate revenues of $100 million. • F2P MMOs: with LCV = $6. (ARPPU of $10 with conversion rate of 10% and 6 months lifetime). 500.000 players generate $3 million, Can F2P MMOs increase LCV?
  28. 28.  The average full cost to complete a MMO for a gamer may actually reach high values: WoW: $300, Rift: $230, Some players don’t even spend 20% of this while others spend much more, A limited number of users are ready to spend a lot of money to win. How much each user is ready to pay? « $1000 is a cheap price to be king » (Trip Hawkins)
  29. 29.  From pre-installed to streaming. From cell phone to Smartphone, From native source coded games paid by SMS via carriers to AppStore, Mobile gaming revenues down (-35%) while Smartphone gaming revenues up (+60%), Smartphone installed base: 400 million (incl.60 million tablets), People actually enjoy playing on their Smartphones: • 44% of mobiles are Smartphones in the US, • Smartphone owners buy twice as many games as those with cell phones, • 64% of Smartphone users have downloaded one game in past month, • 52% of tablet owners play games, • 38% of tablet gamers play 5 hours per week. Mobile gaming: « the new battlefield for the gaming industry » (Masamitsu Ohki)
  30. 30.  21% of mobile gamers play 1 hour/day. 24% of console gamers play 1 hour/day,, 44% of out of home gamers prefer Smartphone, Where is the handlheld console market going?
  31. 31.  Apple App Store launched in June ’08. Makes 65% of mobile games revenues in the US. • 26,000 games available, • average price of a game: $3,62, • average user downloads 2,5 games/month (88% free) which makes a total of 600.000 games a day. Android MarketPlace (Google Play) has 4,000 game apps at an average price of $3,27. Android carrier stores share the same OS but do not form a consolidated market place. This generates additional port costs for developers, More platforms to offer mobile games: Amazon, Facebook Mobile, PlayStation Suite etc, Revenue share bypassing carriers: 30/70 vs 45/55 in cell phone game business.
  32. 32.  Publishers started selling premium games at premium price ($9.99), Prices dropped with mobile native games selling many units (Cut the Rope: 5 million downloads at $0.99), F2P now dominates: • in game spending micro-transactions = 65% of the revenues for top 100 best-selling games, • ads: 12% of revenues. Subscriptions made possible on mobile platforms?
  33. 33. 51% of virtual good revenues come from items >$20(average item value: $14)
  34. 34.  The overflow issue. The number of games available on iOS = 3 times the number of console games released since 1986. Games in Top 25 sell 5 times more than following 25. Angry Birds: an exception. 60% of mobile game developers don’t reach their revenue targets, The discovery issue. 40% of adults learn about new games within AppStore and 50% through friends. Pay per Install and chart boosters not welcome on iOS, The retention issue. 26% of apps are used only once. Average lifetime of a game: less than 60 days, The virality issue. Mobile social networks may bring the missing link: Apple Game Center, Open Feint, Ngmoco, Tapjoy & others.
  35. 35.  Cross-channel gaming will grow in spite of differences in terms of usage (average gaming session times) and of features, Cross-platform gameplay • Unity: mobile <-->PC • Windows7 <--> XboxLive • Html5: mobile <--> web, Trade off between direct relation to users (and billing) and massive adoption (and ads).
  36. 36. 293 million social gamers in the world
  37. 37.  Social Games: • Casual games in a closed social network (existing communities), • Asynchronous gameplay, • Gamers play under their real names, • Metric: Daily Active Users. Social gamers: • Average gamer: the 43 years old woman but many variances among games, • 28% of internet users play social games, • 50% of Facebook time dedicated to gaming, • 46% to 55% of console videogamers also play social games, • Zynga makes 12% of Facebook global revenues.
  38. 38.  Virality: the key to success. • 40% to 97% of users join through virality, • Notifications, invitations, sharing, gifting etc, • On average: 1 feed leads to 3 clicks. Virality measured by K factor = infection rate * conversion rate (0,7 to 1), Engagement = DAUs/MAUs (should not be <0.2), Motivation to play = friends. Lack of intentionality. Contrary of search. • Games must be frictionless, free and adapted to all audiences, • Virality works better with very large audiences.
  39. 39. • social games must be able to work with low retention rates,• first day retention: 30% = a huge success,• acquisition : a constant pursuit.
  40. 40.  Freemium model: an immense majority of users play for free. A game is monetized with a small minority (conversion rate: 1%) and even more so with a micro-segment of heavy users (« whales ») who may spend up to $5000 annually (1% of paying users) – 2%of users generate 40% of revenues, The theory of engagement: the longer a user plays the more chances there are he buys virtual items, Virtual goods: • value of expression (personalization) or competition (action), • paid in soft currency (internal money) or hard currency (cash/credits). Micro-transactions (85% of the revenues for an average game): • inside the game (57%), • on an external web site (38%), • on an e-commerce site (Playspan) (16%), • from another user (8%). Ads (CPA/CPL) (15% of the revenues of an average game): • offer walls, • Sponsoring. Average monetization: $30 for 1000 DAUs (excl.Zynga)
  41. 41.  Acquisition through: • Virality, • Internal cross-promotion, • External cross-promotion (promo bars), • iAds (once game is a proven success), • Incentivization through offer walls (but engagement and monetization only 10% to 25% of a standard user). Recruitment costs rising: from $0,30 to $3, Zynga spend $120 for each new paying user.
  42. 42.  The gamer is an active part of the marketing strategy: • his own community: more users  more virals, • his time: engagement  monetization. •A logic of massive audiences. No room for niche games even though dev costs are low: • Dev cost: $100.000 to $300.000 + maintenance: $25.000 monthly. • Assuming a marketing budget of $100.000, 160.000 DAUs are required to reach breakeven point (1440 Facebook games at this level).
  43. 43. Social game publishers by estimated daily revenues
  44. 44.  Game design driven by: • Lack of intentionality (variety of tasks rather than a single mission, instant rewards, simple mechanisms, no defeat or victory). The game fulfill players’s envies rather than what the IP dictates, • Engagement through:  initial design of the game,  new contents delivered through time,  engagement funnel well managed (analytics), • Monetization  Management of frustration,  Offers must appear in growing order of value. « Zynga spend more money on analytics than a lot of companies spend on their game development” (Jeff Tseng) . Datamining is key. However do all developpers track users? Do they use behavorial marketing? Constant optimization. The game continues to improve after launch. It is an endless work in progress.
  45. 45.  The business is shifting to Videogame as a Service (VaaS), The gamer/user at the center of the strategy for: • Market segmentation (based on individual gaming time/money investments), • Gameplay, • Discovery and Marketing, • Monetization. Introducing metagaming to manage engagement, The crux of the change is in how games are monetized when there is not one direct fixed revenue but a combination of many, leaving all options opened for the user.
  46. 46.  More Roads to Market (delivery of an IP via a platform and via device(s)through a time flow) for publishers, Gaming sessions time: a variable for segmentation, Fixed price is a legacy of the past: variability of revenues, Instant engagement: a priority. Limit frictions to the max, Virality: at the heart of marketing, Data: a key to manage a game through time, “Free is the new price. Instead of pre-selling, we build emotionally committed users before we ask some of them to buy from us” (Bing Gordon)
  47. 47. before: after: MarketingDevelopment Marketing Game Development Game
  48. 48. The full 210 pp report is available upon request. Follow updates on: Twitter : lucbourcier Contact me: sources, references and details in the full report)