While we spend most of our time talking about nitty gritty details in the casual games space, it is often good to take a step back and review the industry from a high level. Occasionally it’s good to organize what you know in a way that provides a more cohesive and complete picture than you might get from day to day. This high-level analysis of the casual games space was performed by Microsoft Casual Games for this issue of Casual Connect. Please note that this analysis reflects the Microsoft perspective and may differ slightly from information presented directly from the Casual Games Association.—ed.
Overview
This article provides an overview and introduction to casual games business models with an emphasis on developer and publisher opportunities. Though these more traditional software development and publishing opportunities generate the bulk of industry revenues and profits, they’re not necessarily the most profitable lines of business. The attached industry map provides brief insight into the context for the core models and outlying opportunities within casual games.
Game business models can be thought of as a pyramid: at the base of the pyramid are the mass of customers who play games but haven’t yet pulled out their wallets. These consumers nonetheless enjoy playing games and can be passively monetized through advertisements. Some subset of this group will be willing to “register” (in order, for instance, to save high scores or engage in community features) enabling more highly targeted advertisements. A smaller percentage of consumers (“transactors”) will proceed to actively purchase games or virtual game objects, while even fewer will enter into recurring billing relationships (subscriptions). Frequently business models will overlap: For instance, the virtual objects that a player chooses to purchase for a given game may also include product placements.
Advertising-Supported Games
Developers and publishers create games that command the attention of consumers worldwide. Advertising agencies and their clients need a bit of that attention and are willing to pay for it. Games, in particular, deliver an engaged, active audience.
In brief, there are four ways to monetize games through advertising.
1. In-game advertising appears in the middle of the game experience. Firms including Double Fusion and Massive work with developers and publishers to insert dynamic advertising “containers” into games. These containers can then be filled and refreshed as ad sales teams sell these virtual spaces.
2. Around-game advertising doesn’t appear inside an experience but instead appears around, on top of, before, or after the game experience. Games might be framed with standard-sized advertising banners and towers. Short, pre-roll advertisements front a game experience (with video or static images) while post-roll (bumper) advertisements end it, like a caboose. Advertisers are also fond of interstitials (mid-experience commercial breaks).
3. Product placement is more subtle than either of the first two options. Instead of a standard ad format, products themselves (such as a can of Pepsi or a t-shirt featuring a corporate logo) might be placed into games as items a character uses. Additionally, gamers might be given the option of purchasing Nikes or Pirellis for their avatars or cars instead of generic shoes and tires.
4. Advergames are games that serve as advertisements. Burger King, Toyota, and the U.S. Army are just a few of the entities that have commissioned games to drive brand awareness, brand engagement, and consumer preference.
Strengths
• They’re Dynamic: Print advertisements don’t change. In-game or around-game can be changed on the fly, enabling better targeting and fresher campaigns.
• They’re Interactive: Game advertising firms cite research that consumer memory is aided by interacting with an advertisement, a benefit that can be expected to translate into higher sales.
• They Overcome the Payment Barrier: Rather than require gamers to plunk quarters into a slot or enter credit card information into a form, advertising gives game developers and publishers the opportunity to monetize game attention passively. With conversion rates of traditional casual games hovering at between one and two percent, advertising offers an opportunity to monetize the other 99% of consumers who aren’t willing to pay directly for the pleasure of gaming.
According to research from eMarketer, in-game advertising is projected to grow at 23% per year to nearly $2 billion by 2011. Like other forms of media content, games also stand to grab a share of the $600 billion worldwide advertising market as advertisers chase audiences that are increasingly tuning in to newer forms of media.
Weaknesses
• Gamer Backlash: Push-back from players is a very real worry. Many gamers feel that ad supported products should be cheaper (or even free). Clumsy advertising placements can also disrupt the game experience (by being too invasive or by jarring gamers out of immersive fantasy).
• Furthermore, some games will never be well-suited to advertising. Immersive, fantasy-realm role-playing games will likely never be appropriate for anachronistic advertising of modern products.
Long-term Viability
The advertising business rises and falls with the macroeconomic cycle, and therefore it is somewhat risky. However, the flow of advertising revenues online has increased the viability and strength of this means of monetizing all applications (not just interactive entertainment).
Model Variations
Beyond the models described above, those who’d like to monetize their game products through advertising should also consider whether they’re seeking high- or low-CPM (cost per 1,000 impressions) advertising. Some forms of targeted, online video advertising may near $100 CPM, but chasing high-CPM advertising often requires investment in a dedicated ad sales force, advertising-targeting and -serving technology, and other investments that may not make sense on a smaller scale.
CPMs tend to vary positively with reach (the larger the group of consumers reached, the more an advertiser is willing to pay), with targeting (marketers will pay more to reach specific demographics or psychographics), and with richness (in general, the more graphically and aurally rich an advertisement, the more advertisers are willing to pay to expose consumers to it).
Retail Games
Retail involves the sale of games, one by one, to consumers. As opposed to wholesale operations (the bulk sale of games at a discounted price to an intermediary), retail consumers generally purchase a game for their own use or (more rarely) for giving to a friend or relative.
Retail further breaks down into physical brick-and-mortar retail locations and digital portal and website retailers. Physical retail tends to be rare in the casual games industry, but that may be changing. Emboldened, perhaps, by the success and growth of the casual games industry—including the surprise success of the Nintendo Wii and the runaway success of the Nintendo DS— the majority of the large publishers are increasingly venturing into retail channels previously dominated by hardcore fare. GameStop tends to dominate game retail, but other retailers including Amazon.com, Wal-Mart, and Target have capitalized on the broadening interest in games by expanding shelf space dedicated to all-ages content.
Because casual games tend to consist of smaller digital signatures than their multi-gigabyte hardcore cousins, they’re easier to distribute digitally. The realm of digital retail is diverse and full of experimental models, but the bulk of transactions occur at major casual portals such as Yahoo! Games, RealArcade, and MSN Games.
Inevitable audience fragmentation, however, has resulted in the emergence of specialty online stores. Some of them are dedicated to the products of a single developer or its affiliates (PopCap.com, for example), while others are dedicated to specific genres of games (Steam, for instance, specializes in core PC games, while GameTap’s immense catalog is relatively strong in retro fare).
As the online games business matures, the trend of audience fragmentation can be expected to continue as it has in other media: from one town paper to a global panoply of news sources; from three network television channels to thousands of satellite-delivered channels; from a few dominant portals to an embarrassment of niches.
This fragmentation presents a distribution challenge to developers and publishers who want to expose their games to the universe of potential buyers. They therefore seek to place their games with a wide variety of online partners. This change in the retail game means that developers and publishers need to pay increasing attention to the distribution and merchandising of their products on the crowded virtual shelves of games e-tailers. Aggregators such as Boonty, Oberon and Macrovision/Trymedia have emerged to help simplify the e-tail distribution challenge.
Strengths
Broad Audience: According to the Casual Games Association, over 200 million people enjoy playing casual games and will spend over $2.5 billion on them in 2008. This mass of consumers represents a tremendous opportunity for developers who can create interactive entertainment that has mass or niche appeal. Retail represents a channel for getting games in front of people who are willing to pay for them.
Weaknesses
The Challenges of Retail: Physical retail can be logistically complex and brutally competitive. Even once a firm’s games have completed the journey from duplication facility to distribution facility to retail shelves, there’s no guarantee that customers will see them. Premium shelf space at eye level and near the point of sale is at a premium; products that don’t sell are quickly bumped for products that will sell. Retailers need to stock fast-selling inventory and are often unwilling to take a gamble on lesser-known brands or unknown (but innovative) genres, preferring instead the sure bet that will keep money flowing in and the lights on.
Online retail is no less competitive. Industry-average conversion of trial users to customers hovers at around 1%: On average, only one out of 100 potential customers who download a casual game will actually pay for a full version of the game. Furthermore, the sheer variety and volume of distribution channels available requires that management rank and prioritize distribution efforts systematically so that the right games are placed in front of customers with the highest propensity to pay for them.
Long-term Viability
Pundits have long-predicted the death of physical retail, but GameStop’s recent entrance into the S&P 500 proves that retail is a growth market that will be vibrant for the immediate and foreseeable future. Savvy developers and publishers are running towards rather than away from physical retail.
Model Variations
Online retail has come to mean more than just making sure a game is listed on the top five casual games portals. Games are now distributed to iPods and iPhones via iTunes, to brand new PCs prior to sale, to affiliate distribution programs, to digital distribution platforms such as GameTap and Steam, and to alternative platforms such as Yahoo! Messenger and Windows Live Messenger. Developers and publishers who have invested in building a brand name and a destination website are also able to keep more of the revenue from a sale by cutting partners out of the developer-customer chain and going direct to consumer.
Subscription Services
Subscription services are modeled after similar services in other entertainment sectors. For a regular fee (usually monthly, quarterly, or annual), the subscriber is allowed unlimited access to premium content, usually in the form of deluxe downloadable games.
Revenue sharing with developers and publishers whose titles are offered within subscriptions vary between vendors, subscription type, and platform. The most common means of assessing revenue are based on relative time usage (how much time a player spends playing each game in the service) or the number of game starts for each particular game.
Strengths
Only a small portion of the people who play games online purchase more than one game via the dominant trial-to-purchase model. Subscription services can remove create additional, ongoing revenue streams in addition to the single purchase framework.
Weaknesses
Subscription services require maintenance as players need new games added on a regular basis to keep them engaged. Furthermore, customers willing to pay for subscription products may be the same customers who like to play the latest releases, making pricing of the service a challenge.
Additionally, some players subscribe only to find out over time that they aren’t spending enough time playing subscription games to justify the monthly expense. Account cancellations and churn can be high if the service lacks compelling, ongoing value.
Long-term Viability
Good. However, the ongoing challenge of any subscription service lies in maintaining its perceived value to its subscriber base.
Model Variations
• All You Can Eat: As used by the MSN Games and GameHouse service, GameSpring, subscribers pay a fixed amount per month, quarter, or year in return for unlimited play of all the deluxe games in the service. In order to keep playing games, the customer must keep the subscription current. New games are added regularly.
• Game of the Month: Similar to the Book or CD of the Month Clubs, subscriber pays a fixed amount each month in return for getting one (or more) games. Often, additional games can be purchased at a discount.
• Premium Membership: Many online services provide premium subscription memberships through which (for an additional fee) subscribers receive special privileges, such as extra storage space for virtual objects, advance access to new games, specialized game-play, and limited-time content.
Virtual Object Purchases
Gamers purchase one-off items to enhance the game experience. Examples include avatar clothing and accessories, car decals, themes, and new maps.
Strengths
• High Margin Model for Developers: The most expensive part of game development is the initial product launch. Downloadable content treats the existing game’s customers as an “install base” and treats the game as a platform. Adding additional content to a pre-existing engine leverages the investment in the game and further monetizes customers who have already made significant investment in the core game. In short, add-on content should be cheaper and more profitable than building a whole new game.
• Reinvigorates an Old Title: New content can bring people back to a title that had been finished. It can also bring in new consumers.
• Price Discrimination: Digital objects give gamers the ability to control their purchasing experience by presenting options for content they may or may not want. Gamers with higher willingness to pay will be able to spend more. Previously, these consumers would simply buy a different game.
• Team Morale: Valve’s management has stated that downloadable content can be a welcome break and boost to team morale after the time intensive development processes associated with core titles. With shorter, more manageable lifecycles, downloadable content doesn’t wear on development teams in the same way. It’s also an opportunity for teams to reinsert features that were cut to make a ship date.
• Customized for Customers: Feedback helps developers deliver a more compelling experience by giving gamers what they ask for post-release.
Weaknesses
• Payment Methods: Margins are eroded by credit card transaction fees. Some platforms minimize such costs by requiring the purchase of larger blocks of points.
• Consumer Confusion: A large catalog of digital goods can create a paradox of choice in which consumer anxiety over making the “optimum” purchase undermines the joy of gaming.
• Payment Preference: Gamers may be sensitive to being “nickel and dimed” for content that they feel should have been included in the core game. Some consumers simply prefer to pay a fixed price for the whole game.
• Complexity: When the number of digital SKUs multiplies, so do customer service issues. Digital objects require new policies. How should trading or selling of items between players be handled? If grey markets emerge, how should they be handled?
Long-term Viability
In an ideal world, this model removes all deadweight loss from the economic transactions of a game. Every player pays exactly what he or she is willing to for the experience.
Model Variations
KartRider is strictly based on digital object sales. The game is free, but players purchase add-ons such as weapons and decals to enhance the core experience.
WebKinz offers a neat twist by allowing a real world purchase (of a physical toy) to enable a digital world purchase.
Skill Gaming
The outcome of games of skill (as opposed to games of chance or gambling) is determined by a player’s skill rather than by pure chance. This distinction (and the implementation of it) is critical, as the legality of skill-based gaming depends on it. Even so, legal issues differ greatly by region.
The key difference between a game of Poker that one might play on a non-skill gaming destination such as Xbox Live Arcade and on a skill gaming destination such as King.com, WorldWinner, or GameDuell is the opportunity to compete for real cash. Players pay actual money (stakes range from pennies to thousands of dollars) to join a “tournament” comprised of other players who have also paid to join the tournament, and all of the players compete for the collected stakes. The tournament organizers keep a portion of the entry fees to cover their administrative costs plus some margin.
Strengths
• Standardized IP: Though almost any game title can be converted for use as a skill game, the most popular skill games tend to have well-known play mechanisms. For example, the most popular variant of poker (Texas Hold ‘em) is a well known, well defined variant of poker that has reached a level of standardization and ubiquity. As a result, development of such games can be greatly simplified (no extensive play-testing of the rules of play is necessary). Furthermore, such games tend to be readily available for license or purchase.
• Existing Market: A significant population of avid gamers show demonstrable willingness to engage and compete in skill-based gaming.
Weaknesses
• Regulatory Threats: Because of its proximity to gambling and because of the moral and political debate surrounding such activities, regulations that govern skill-based gaming are complex and vary widely by country and region within countries. These regulations are prone to change at any moment, sometimes with dire consequences for companies (and employees) involved in providing skill games.
• Fraud: Real money increases the attractiveness of skill games for hackers and cheats. Creating a safe, fair gaming service requires significant investment into technology, fraud prevention, and customer service.
Long-term Viability
Playing for money may be one of the world’s oldest industries. Internet technology makes it easier for players to match up with and play against others who also enjoy this centuries-old past-time. Where there’s consumer desire to play, there should be opportunities to profitably serve that desire.
Pay-per-play
Pay-per-play maps a game session to a cost. In classic arcade games, a quarter purchased one game session. This model can also be extended to a more direct pay-per-unit-of-time model in which a payment (from pennies to dollars) purchases a portion of play time (from seconds to hours or days)—much like a video rental.
Though players who anticipate playing a game regularly will almost always ante up for the full purchase price, players who are unsure of whether they’d like to play a game for hours on end tend to shy away from a $20 purchase. Pay-per-play solves this dilemma by offering a low-risk trial. Game providers win because they’re able to make money from players who would have normally just walked away from a $20 purchase.
WildTangent (through their WildCoins system of micro-payments) is one leader within the realm of pay-per-play, taking the arcade model to the internet by selling packs of virtual coins.
Strengths
• Flexible Pricing: Players pay only for what they use. As customer willingness to pay is more closely matched to products, more exchanges of goods for dollars are enabled. This should increase net revenue, though cannibalization (described below) is a concern.
• Accessibility: With proper micro-payment infrastructure and distribution in place, pay-per-play makes games more accessible. If anyone, including younger children, were able to take $10 to a convenience store and purchase a stored-value card for 1000 points, games would become accessible to a segment of the population that is unwilling or unable to use credit cards.
• Try Before You Buy: This model can also be used to supplement or replace the common hour-long trial that typically accompanies digitally-distributed casual games. For example, rather than force a hard cutoff after one hour of play, price-sensitive consumers could be given an opportunity to purchase additional playtime in smaller increments.
Weaknesses
• Cannibalization: Some portion of players who had been paying full retail for games might forego paying $20 for a full game and might instead defect to the pay-per-play model, cannibalizing sales of the more lucrative $20 offer. More careful analysis of the full impact of cannibalization effects is warranted prior to fully embracing pay-per-play.
• Consumer Comfort: Some players just don’t like having to pay for every minute they game. Constant reminders that minutes are ticking away can be distressing. Companies should study the way in which cellular providers provide “buckets” of minutes (and offer provisions for “overtime”) to maximize both consumer comfort and firm profit.
• More Complicated Purchasing: Many pay-per-play models have a retail component to purchase the currency of the game. This adds another step to the value chain, and creates further possibilities for confusion and increased customer support. Furthermore, the logistics of supporting physical distribution of point-cards to a variety of retail partners can be complex.
Long-term Viability
Pay-per-play represents the opposite of an all-you-can eat subscription service and may be the best opportunity for monetizing consumers who can’t be monetized through traditional models.
