This lecture looks at the use of innovative business models based around free services in the Games Industry. The material is drawn from Chris Anderson's book "Free" and a lecture given by Gabe Newell of Valve Corporation

1. (Stanford BUS-21)
Martin Westhead
Mastering Marketing
Free Business models in Games
How to make money
by giving things away

2. Overview
 Game Monetization
Examples
- Virtual Goods
- Subscriptions
- Advertising
- Virtual Real-Estate
- Pay-to-Win
 What Valve is doing
- User Generated Content
- Relinquishing Control
- Abundance thinking

3. GAME MONETIZATION MODELS

4. Virtual Goods

5. Virtual Gold

6. Subscriptions

7. Advertising

8. Virtual Real Estate

9. Merchandise

10. Pay-to-Win

11. Pay-to-Win

12. WHAT VALVE IS DOING

13. Gabe Newell
 Cofounder of Valve Corporation
https://www.youtube.com/watch?v=t8QEOBgLBQU

14. Valve
 Grow 50% per year for 18 years
 Higher profit per employee than Google,
Facebook, Amazon…
 4th largest bandwidth consumer
- bigger than most countries
 Corporate culture
- Insanely (suicidally?) flat corporate structure
- Laser focus on facilitating productivity

15. Games
 Innovative Games
- Half-life
- Team fortress

16. Platform for
- Digital distribution
- Digital rights management
- Multiplayer
- Communications
Steam

17. Steam machines
- Steam OS
- Console boxes
- Controllers
Consoles

18.  Free to play games
- Isn’t that a crazy idea?
- How do you make money?
 Goods that are created to satisfy
- personal expression
- Status
- Affinity
- Hierarchy
 Game experience is free but if you want to be
cool you’ll have to pay
Free to Play

19.  Incremental value of audience member is
greater than incremental cost of adding them
 Typically
- Audience size goes up by 10x
- Revenue goes up by 3x
 But profitability goes up by a lot more than 3x
Network effects

20.  Trade in in-game goods between customers
 Uptick in User Generated content (UGC)
 10x more content comes from users in TF2 (Jan
2013) than from Valve
User Generated Content
(UGC)

21. UGC store

22. UGC profits
 Interfaces for users to sell content
- Split proceeds
 First 2 weeks they did this we broke PayPal
 Top user seller makes over $500K per year
 Some games professionals employed in other
companies make more selling hats on TF2
than at their day job
- Succeeding in enabling their productivity

23. Monetary problems
 Inflation
 Deflation
 Users creating their own currencies
 Countries adding regulatory structures
- Korea there’s a W4 equivalent for players
 Liquidity problems
- mini-financial crises at certain times of day
 Worried about asset bubbles
 Probably should get an economist involved!

24. Economist on Staff
 Yanis Varoufakis
 2012
- Valve hires economist
 Fascinated by
economies with all
the data
http://www.develop-online.net/news/valve-hires-economist-yanis-varoufakis/0112279

25. Creating markets
 Maximize productivity… of users
- how do you think about what is the value
- UGC goods and services
 Markets determine marginal value of activities
 Creativity and the frameworks for that will
vary
 Probably going to exist a central economy
 Games specific instances hanging off that

26. Creating Value
 Many ways that people are adding value
- Arbitrage and trading opportunities
- designing,
- Trading
- Collecting
- Others create a whole game
- Models
- Artwork
- Story
 Plumb “ownership” and “authorship” though out the
system
 What about playing?
- Good players bring spectator value
- How to monetize?

27. Video game
parents

28. But…
 Being a really good player is valuable
 Dota 2 – Dendi
- When Navi is playing you can purchase
a banner
 % of the banner goes to the team
 More direct way to engage with the
audience than ads on YouTube
 Quickly making $100K per year on
banner sales
 Dendi made over $200K in 2012 in
prize money alone

29. Game value
 Things that you do have value
 Need to have persistence between games
- Preserve value as you move from one game to
another
 Need to be exchangeable and retain value

30. Steam
 Today Steam is a curated store
- Accept 3rd party games but
- becoming a bottleneck to content creators and
consumers
 Creates artificial scarcity
- Controlling the distribution model
- artificial shelf space
- but that's not what we are trying to do

31. Relinquishing control
for developers
 Steam should really be a publishing model
 Anyone should be able to publish anything
through steam
 Steam => network API
 Enable productivity of developers

32. Relinquishing control for
players
 TF2 anyone can make content
- People make a shanka (Russian hat) for characters
- No notion of privilege content
- should be open
 Anyone should be able to create a store
 Able to trade games
- people buy from my collection and I get a %
 Some will go to a lot of effort to create a store experience
 Rethinking two valuable assets:
- who should be on steam
- how store should look be created
 Rethink them both - let go of control
- enable productivity of users

33. Steam becomes…
 Generalized network service
 People will add value
 Audience will reward people for creating
entertaining stores (market mechanism)
 Steam becomes an agnostic platform

34. Productivity and Reward
 Working through the notions of authorship and ownership
 Texture -> Model ->Level -> Seller sells level to customer
- tracking the rev share
 Build frameworks to help people be productive and rewarded
 Even with primitive versions we are helping some people be
more productive than they are at their corporations
 Constantly thinking about the most useful fundamental ways
of enabling productivity

35. Summary
 Game Monetization
Examples
- Virtual Goods
- Subscriptions
- Advertising
- Virtual Real-Estate
- Pay-to-Win
 What Valve is doing
- User Generated Content
- Relinquishing Control
- Abundance thinking