Is Free-to-Play Bad?February 01, 2014
When Apple introduced the AppStore, applications had two basic choices, free or pay. The sweet spot was $.99. In essences “applications” or “apps” became the equivalent of a “ringtone” in the old world. Before the app store was created, users would go to Verizon, Vodafone, T-Mobile (or whatever carrier) and purchase ring tones and other customizations for their feature phones. The brilliance of the free and $.99 application was the users started to constantly check the AppStore every day for cheap deals to install on their phones. The psychology behind this worked extremely well - especially when you consider that users were accustomed to paying $19.99 - $29.99 for a Nintendo DS title and $49.99 to $69.99 for a full console title.
What wasn’t fully anticipated by the developer was that free applications would soon take over paid applications. Of course, Steve knew this would be the case and cause a lock-in to his AppStore. Yes, a developer could create their application for multiple platforms, but the mentality of the user was changing to constantly check iTunes for the latest free and $.99 applications and for .99 cent songs.
As developers realized this, they created a new model. First, they would offer a free application that was limited. Then, they would add a second application to the AppStore that was $.99 - $4.99. The free application would prompt and push the user to the paid application. At first, the conversion rates were not bad. But, as developers wanted placement to get into the AppStore, they started offering simply free applications. Companies like AdMob came along and allowed developer to add advertising within the games. This way, a developer could still monetize their users through ad clicks. However, this wasn’t very fruitful and developers did not make much money. For developers, this was still OK because the majority of the applications were by independent developers or applications that were supported by a greater web site that made them money. However, the large publishers like Activision, EA, Ubisoft and Disney couldn’t really play in the free space because the economics simply would not work.
Then, along came some rule changes in the AppStore that allowed in-app purchases and Zynga and Playdom’s success on Facebook by offering free games with a different type of purchase model.
In the game business, it takes a little while for game developers to fully understand a platform. For example, it was almost two years after the XBOX 360 was released where developers finally understood the XBOX Live platform and the graphic capabilities of the console to add to their games. The same thing happened with the iPhone and more importantly, how to “game” the player and the AppStore to maximize revenue without charging for a game.
In essence, the industry changed from the old “console” model where you would buy a box for $59.99 to a model where the game is now free and the idea to recuperate costs is based on charging a smaller number of people money for items that can be purchased inside of the game.
At Playdom, I coined the idea that Social Games are simply about three things:
- Voyeurism - players wanted to see what their friends were doing
- Bragging - I want to be better than my friends
- Cheating - I will pay to blow past my friends so I can brag
- Sticker Book Theory
Hmm, Sticker Book Theory. What is that? Well many kids will remember going to a supermarket with their parents and they were given a free book. Then, as your parents spent more money in the supermarket, you were given stickers. Of course, this turns into an instant collectible. I would have three stickers on Page 1 and it needs 5 stickers and so forth throughout the book. Well, the more and more the parents went to the store, the more I would get. And, since it was the local supermarket, the other kids in school would have the sticker books and trading would occur. The maker of the books were smart, certain stickers were “rare” and hard to come by. Therefore, the kids will bother the parents more and more and then they would make deals in school to get the stickers they needed. What happened was that an economy was created. The kids did not know they were participating in one, all they knew is that they wanted to fill their sticker books. First, they wanted to brag to their brothers and sisters on how they have this sticker or that sticker. And, they get to get a sense of pride when they would show the book to their parents. You would receive praise on how well you did. What is interesting is that the parents never realized that they probably spent more money in the supermarket than they normally would. They would subconsciously go back to the store more often and collect sticker packets for their kids.
Sticker Book Theory is the essence of all social games. This is all it was (and is). In fact, all in-app purchases today follow this basic theory. Even what people want to call DLC (downloadable content) is a derivative of sticker book theory and social dynamics. You download a new level, you brag to your friends and the convince their parents for the money to also download the level. And, if the game is network connected, now the two kids in different houses can play the same level. Then, they can go to school the next day and brag.
It is a virtuous circle. If you get it right, it is amazing amount of riches to be had. If you get it wrong, you alienate customers very quickly.
In this new generation of gaming, we have six core types of monetization models:
Free - a free game is simply that. Some one developed that game and they it away for free. Some of these games are just marketing others, like Facebook link to a greater service.
Free with Ads - this is a game that uses an Apple iAd or a Google mobile ad to monetize the application by getting users to click on banners.
Freemium - a free game that uses in-app purchases to entice the user to spend money. Some in-app purchases are DLC to unlock more levels while some are to buy coins or some other currency to buy items within the game and some want your to buy energy so you can continue the game without taking a break.
Paymium - a new type of game has arisen which you pay a small fee to download the game - such as $.99 - $1.99. But, the game also has in-app purchases and uses the same techniques as a freemium game.
Pay - this model simply wants you to pay a price for the game and you get he complete game. There is nothing else to buy.
Subscription - the game is free, but is very limited. To unlock the premium content, a player must buy a subscription to the service. Typically a subscription is 3, 6 or 12 months with each one getting cheaper the longer you commit.
Is Freemium Bad?
There are all types of games. It is imperative that game publishers understand this and understand the genre and market for their game before deciding a monetization model. But, this has to be done during the game design time. If you don’t build monetization into the core game loop for Freemium and Paymium, you will never get it right.
Games such as Casino Games, Bingo Games, “farming mechanic” games lend themselves well to the in-app purchase model. Other games the put social gates and hearts (lives) also lend themselves well to pay to keep playing. However, if you take a game like Boulder’s Gate or Final Fantasy and try to reimagine the game as an in-app purchase game, it will most likely fail as these games have built-in markets from the 1990s that don’t want to pay for in-app purchases in titles that they know and love.
You don’t even need to go that far back in time. Disney release Where’s My Water as a $.99 game with no in-app purchases. Following the footsteps of Rovio’s Angry Birds and Zepto Labs Cut The Rope, the game was a smashing success with millions upon millions of downloads. Then, when Disney created the sequel with Where’s My Water 2, they removed the $.99 and moved to an in-app purchase model where you needed to spend money for “energy” to keep playing the game. This alienated an existing user basis that just a few years prior paid $.99 for the game. The users simply thought Disney was greed and players did not come to the game.
Thomas Baekdal wrote an interesting article titled How In-app Purchases Has Destroyed The Industry. Thomas has some interesting and useful insights. But, has it destroyed the industry? Actually, I don’t think so. While I am not a fan of in-app purchases and I would rather pay one fee for a game, the reality is that there all types of business models that work for your game. You simply need to get it right.
For example, Club Penguin uses a subscription model. Subscriptions have been in the game business a long time and they are a variant of the modern day Freemium model. Instead of having a user pay for ever little thing, you simply pay a monthly fee. World of Warcraft was brilliant at getting people to pay the monthly service fee to be connected to play the game.
If I had to call out any business model, I would say the Paymium model is the most evil of all the models. A user pays good money for a game that they believe they can play for a long time without being prompted for in-app purchases to proceed through the game. For example, EA’s Need For Speed Most Wanted charges you $6.99 for the game. But, to get the most out of it, you need to buy a Rookie Pack ($2.99), Gearhead Pack ($4.99), Street Racer Pack ($8.99), Speed Demon Pack ($14.99), or Most Wanted Pack ($24.99). Basically what EA is telling you is that this game really costs $31.98. That is $10 more than a typical Nintendo DS title or $10 cheaper than a console title. On mobile, that is expensive.
With every bad example, there are examples where it works. Grand Theft Auto V did a brilliant job with this model. You pay your $59.99 for the game. But, in the game you can buy a condo for $1.2m or a private jet or advanced cars. However, whatever you buy doesn’t influence your level or game play. It is just the above social theory of bragging and Sticker Books at play. This gives the user a choice. You don’t need to pay at all to move forward. Your initial expenditure was it. But, if you love to brag and be cool, pay 4000 Microsoft points to get money to buy whatever you want.
In the mobile games business, you understand very quickly if you will have a hit or not. In about 30 days you will know if your game has caught on and will be successful or if it will fail and be relegated to being a tail game that will never pay for the cost of development and marketing. There are exceptions to the rule, but, you can pretty much follow this pattern for any game you put on the AppStore.
The Mobile Business and Economics
Apple’s AppStore boasts 1 million applications with $10 billion in payments. On the surface that sounds phenomenal. But simple math tells you that the average application will only make $10,000 per year. That is an awful business. In fact, if you aren’t a top 25 application, the odds of you being able to pay the bills for a classic game studio is very low.
If your game is in the 150 - 200 Top Grossing range, you application is pulling in about 90,000 per month. Again, that sounds amazing. But once you take Apple’s 30% from that, you are now down to $63,000 a month. This means that you only are making $756,000 per year on your game. If you then add the fact that you are probably spending about $10,000 per month on Facebook and Google ads, your monthly take home is now $53,000 which you need to pay $18,550 in U.S. taxes. Now, you monthly income is $34,450 or $413,400 per year. If you have a game that is connected and using Amazon’s Web Services, you are probably paying a bill of about $5000 per month, that gives you a new grand total of $353,400 a year. If you take in a typical mobile developers salary of $100,000 plus health benefits, you can only have 3 employees per game per year and that will get you to break even.
In the beginning of the AppStore where it was independents, this was OK because it was 1 or 2 people building a game. What made iOS and Android great, was that independents can once again create games. You no longer had to get on the Sony, Microsoft and Nintendo special list to build and publish games and pay way too much money for developer kits. But, the world has changed. Games are bigger and better. Teams are larger. The stakes are now larger. As you can see, a game team can only have 3 people. But, a typical mobile game has ballooned to 20 people per team. This simply can’t sustain the majority of sales on the AppStore. Yes, I modeled where your game is in the 150 - 200 top grossing range, but, 75 - 150 economics is marginally better. It is not exponential as you move up the top grossing charts. You really need to get into the top 25 if you want to be making millions a month on your game. In fact, if you want millions, you will be a top 10 game.
What has happened is that the publisher and large company has become important again. It is much easier for Disney, EA, Activision, Ubisoft, Microsoft to be a “featured” title on the AppStore. If you are featured, your ability to be top grossing is almost guaranteed. If you aren’t then the publisher needs to be pumping $50,000 - $100,000 per month into advertising channels to get your title in the top ten downloads that will then potentially turn it into a top grossing title.
Getting Back to What we were Talking About
So, is freemium bad? No. It is simply one business model that a company can use in a business that is more cutthroat than the movie business and has smaller margins than a retail store. It is the economics of the game business and how fast your grow your teams that is bad for business.
So is freemium bad? Yes. If you don’t know what type of game you have and what the market is for your game, if you make the mistake and go to freemium, you will alienate your customers immediately and it doesn’t matter how much money you spend on advertising and marketing, the players won’t come and play.
Remember, there are all types of players out there. Some that love to pay only when they need to pay to make progress and others that want to pay once and play forever and everyone in between.