While at the GameOn Finance event in Toronto, I found myself in an interesting conversation about ways to maximize the revenue generated by MMOGs. I found it difficult to fully express my thinking on the matter at the time, so during my flight home I wrote this post. Consider it a sneak previous into my upcoming IGDA Leadership Forum lecture on MBA Lessons applied to the game industry. :-)

One of the concepts I learned in business school was the “two-part tariff,” which is best explained through a simple example that we’re all familiar with: a nightclub. Most nightclubs generate the majority of their revenue from the sale of liquor. Why then do some of them also choose to charge a cover fee? Doesn’t that turn away potential customers? Well, part of the reason is simply to “keep out the riffraff,” but bouncers at the door can (and generally do) already reject anyone who looks like they won’t be a valued customer. Part of the reason is to project an aura of quality and/or exclusivity, but again, a velvet rope and an obstinate bouncer can already accomplish that as well.

Two kinds of customers

The third major reason for a cover charge at a nightclub is revenue maximization, pure and simple. Here’s the underlying rationale: nightclubs basically have two kinds of customers. One kind buys a lot of drinks (the especially valued customer buy a lot of the most expensive drinks.) The other kind buys one drink and nurses it all night, or even — heaven forbid — just a glass of water. Both kinds of customers are attracted to the nightclub because it offers music, attractive people to dance with, etc. Both kinds of customers clearly value the experience. But only one kind of customer will be profitable for the nightclub. Sound familiar?

So the nightclub does a very simple calculation. It asks, “what is the experience of being here worth to most people — or more accurately, just enough people that I can easily fill the place each night.” That estimate of worth becomes the cover charge. It extracts at least some revenue from the people who want to enjoy the nightclub but have no intention of paying if they don’t have to. The other customers — the ones who are likely to buy a ton of drinks — are not dissuaded by the cover charge because they already know going in that this is going to be an expensive experience for them. What’s five or ten more bucks at the gate?

Entry/Subscription fees and microtransactions are not mutually exclusive

It seems unfortunate to me that despite the existence of this very classic pricing example, many game developers seem to think that microtransactions and entry/subscription fees are mutually exclusive. But I’d argue that our industry’s equivalent of the “popular nightclub” — aka an MMOG with high production values and either A) strong IP and/or B) tremendous buzz — can take advantage of both. The thought process is the same for nightclubs and MMOGs: “how many people do I need to attract to make this an exciting environment for everyone to be in, and how much can I get away with charging as entry/subscription fee while still reaching that number?” Of course, that doesn’t mean you need to charge right from the get-go; there’s always the possibility of a free month’s trial (or something like that) to help build critical mass.

Maybe the subscription fee is $9.99 a month. Maybe it’s just $1.99 a month. The amount depends on the MMOG. And for many MMOGs, it’s clear that the amount is “zero.” There’s simply too much competition for customers in this space, and the competition is only going to get hotter over time. But for those MMOGs that can potentially justify a non-zero tariff, the truly important thing to remember is this: you can always drop price. Raising it is MUCH harder. If your experiment with a two-part tariff fails, eliminate the tariff. You might have lost a little momentum building towards critical mass, but odds are the delay won’t prove to be a critical error as long as the tariff itself wasn’t insultingly high to begin with.

Will it offend players? Not if handled correctly

The major objection to my argument seems to be that “people who pay a subscription fee will be offended if some players can pay to get an advantage.” It’s not clear to me that this is true, but let’s take for granted that it is. There is still a whole host of things you can sell that do not convey any sort of strategic benefit in game. Call them “status items” and “gifts.” A really cool-looking outfit, or virtual flowers. Or perhaps even an in-world home.

Now, it may be that an existing MMOG (like World of Warcraft) may not be able to institute microtransactions after the fact, because it has been around long enough that players have developed an expectation for “how the world works.” But a new MMOG faces no such preconceived notions. And if said “new MMOG” happens to be, as I mentioned, a likely equivalent of the “popular new nightclub in town,” the developers of that MMOG absolutely should consider a two-part tarriff revenue model.

Thanks to everyone who happened to attend my GDC lecture. I’m really very flattered that we had standing room only, despite something like 25 other sessions taking place at the same time (several of which I would personally have liked to attend!)

For those who asked, please feel free to download my slides here.

Next-Gen did a brief writeup of the session, which is nice. They focused on the “in-game-ads” portion of the talk. One point that didn’t make it into the Next-Gen writeup, which I’d like to clarify, is that while highly-integrated ads are indeed very effective (when done right), non-integral ads (like virtual billboards) can also be effective when done right — just in a different way. The influence of non-integral ads is more subconscious, and is limited to “low information” messages (like logos and images.) Anyway, it’s all there in the slides. :-)

I’ve found plenty of non-game-specific ad research. And there are several studies (sponsored by major publishers and/or in-game ad networks) that seek to prove advertisements in games are effective, without exploring what can make them more effective.

So I thought I’d ask you all: if you’re aware of any studies on the subject of game advertising effectiveness, especially studies that weren’t sponsored by organizations with a perceived bias, I’d greatly appreciate hearing about them.

Over the past few years, the concept of “involvement” has become an increasingly hot topic amongst media executives and marketers. MIT C3′s own Stacy Wood, an Associate Professor of Marketing at the University of South Carolina, has been studying involvement (among other things), and she recently wrote an excellent article on the subject. The article isn’t publicly available, but I’d like to share parts of it with you — it is relevant to game companies as advertisers, and as developers of an advertising medium.

“Involvement”, as a marketing term, refers to the level to which consumers are motivated to process product-related information. One might easily (and many marketing practitioners do) assume that you always want consumers to be highly involved when they process your product’s ad or information. After all, high involvement is the basis for effective learning — better attention, better rehearsal, better recall. Thus, many practitioner guides show how to get consumers involved in the marketing message.

This approach is not wrong, but it is a specific strategy that only works in specific situations. It seems counterintuitive, but there are many occasions when too much consumer involvement makes the marketing less persuasive rather than more. Often consumers are most influenced by ads in which they are least involved. This general phenomenon is reflected in a number of marketing and psychological theories. The most well-known is Petty & Cacioppo’s Elaboration Likelihood Model (ELM). The ELM describes what is persuasive to people who are highly involved (e.g., statistics, facts, logic, strong arguments, words, expert endorsers) and to those who have low involvement (e.g., slogans, humor, catchy arguments, pictures, affect, likeable endorsers).

Consumers who are involved are able to process meaty logical evidence and they see through the slogans. Consumers who have low involvement only take the time to process info that is quick and easy (pictures, affect, etc.) and ignore other “data”.

…Remember that new restaurant as absolutely fabulous? Who were your dinner companions? Oh, it was an effervescent group of your best friends? Are you still so confident that the restaurant itself was so good?

Now imagine you went to that restaurant alone, with the sole purpose of reviewing the food quality. Not hard to imagine how your evaluation might change, is it?

A worthwhile clarification: people sometimes confuse “involvement” with “intellectual processing” or “emotional processing”, but it is neither of these things (and relates to both!) When people are highly motivated to process information (i.e. “more involved”) they perceive emotional input but often discount it as irrelevant, because logic and fact have more impact on them. When people are less motivated to process information (i.e. “less involved”) feelings and arousal have more impact on them.

By the way, this is all very relevant to problems I’ve been thinking about for a while now (see my old article on enhancing the effectiveness of in-game advertising.)

Why does this matter for new, and increasingly interactive, media? The point is that low involvement “learning” is associational and can be discounted when individuals are paying close attention to their motivations. Many ads embedded in media like video games, movies, and television programming are “exposure ads” (shots of logos or products in use) that are and should remain in the shadows of low involvement.

And here, I think, is the key for game developers. Game players are often (but not always) more “involved” than someone consuming a TV show or movie. Involvement is especially high at certain moments; i.e. when trying to solve a puzzle in an adventure game, or as part of an ARG. Given that, developers should be cautious when embedding product placements or dynamic advertisements into their games, especially at thought-provoking moments. I’d step especially lightly with ARGs.

Here’s a concrete example. Imagine the typical racing game. It features some “low involvement” advertising opportunities, such as moments when you zoom past a billboard on the side of the road. Those billboards can, in general, display slogans, logos, etc, without issue. However, this becomes progressively less true as developers try to force notice of the billboard; say, by making players stare at it for a few seconds at some crucial moment in the game. And what about the moment when a player gets to choose which car s/he will race in? That’s probably a “high involvement” moment — not a good time to sell Tide Detergent, promote a four-cylinder car, or suggest that Exxon fuel will increase your top speed by 25%.

I show my classes billboards for Budweiser and point out the (extremely) easily processed pictorial cues of beauty and arousal. In the ads, two women always surround one man. Couples lean into one another at exaggerated angles, mouths are open in very wide grins, and eyes sparkle as if they are wet. Is this what the typical bar looks like, I ask? Is this the product you would expect these people to be consuming? When they stop to think about it (and only then), they ridicule the ad as a fantastical myth that offers no “good” reason to drink Budweiser and is somehow offensive in its assumption that sex sells. The initial boost to Budweiser’s evaluation due to arousal’s warm positive affect is discounted in the cold light of logic.

But the Budweiser ad flies precisely because the average TV watcher will not think carefully about it. Since video games are different (more or less so depending on the game and the moment), I’d recommend that developers play this kind of mind-experiment with advertisements they wish to integrate into their games. If an ad seems silly upon reflection, don’t integrate it.

At the end of the day, if companies find that they have succeeded in garnering the attention of a lot of highly involved consumers, they better give those consumers something worth thinking about.

Enough said, no?

The public release of Paul Hemp’s article on Avatar-Based Marketing has inspired me to write about something that we’ve been discussing at MIT for the past couple years. That is, reverse-placement: the idea that fictional brands can be created in games, then introduced to the physical world as real products. Also, the idea that market research can be conducted within games.

Consumer product companies spend tens of millions of dollars (if not more) attempting to establish a new brand, especially in competitive retail markets. Fighting mature competitors for mindshare and shelf-space is difficult at best. Many video games, on the other hand, offer vast acres of uncluttered virtual real estate via which to introduce a new brand.

Why not introduce a cola, not initially via commercials, but via a really popular game like Grand Theft Auto? Then, after it’s been virtually consumed by millions of people over the course of tens (or hundreds) of hours of gameplay, introduce it (for real) in a few select markets, and gauge the reaction. Of course, GTA has already performed step 1; it features a cola called “Sprunk” which is well-recognized by players of the game.

And why limit marketing in games to brand messaging? Virtual environments can be used to inexpensively conduct market research, too. For example, imagine if Ford were to make functional models of several prototype cars available to users of Second Life (or any massively multiplayer video game with a real-world theme.) The model that becomes most popular with players of the game might very well succeed in the real world. It isn’t a 100% guarantee, but it’s another useful data point.

And why stop there? What if Ford were to enable and encourage players to freely modify its cars? Given the right conditions, a user-modified car might become incredibly popular within the game community. That’s effectively free R&D. Why try to guess what consumers want, when you can let them show you?

And to keep things realistic (and therefore more commercially useful), Ford simply needs to distribute design tools that account for real-world manufacturing considerations, such as cost, structural limitations, etc. I think these “limitations” would make experimenting with the design tool more interesting for players, not less… so it shouldn’t prove a problem.

PS. If you’re really interested in this topic, one of our recent graduates, Ilya, writes about and researches placements, reverse placements, and game-based R&D.

Now that we know Massive could be valued at up to $400M, I think it’s high time I launch my own startup to take advantage of the in-game advertising market. I’ll be calling it either “Gigantic” or “Enormous”, or maybe “Ginormous”. And I won’t actually have proprietary technology or an ad-sales team. I’m just going to think of neat ideas for in-game ads, then sell those ideas to the highest bidder. Given the current market conditions, “Edery Ginormous, Inc.” should be worth at least a mil, wouldn’t you say?  :)

And, lest I be accused of empty posturing (or wasting your time, though it’s probably too late to avoid that), here are some of my ideas for in-game ads. The key to these ideas is: A) they all “fit naturally” within the game’s environment, B) they reinforce the advertiser’s brand message in some way, C) they do not distract the player from the fun; rather, they are part of the fun.

• When a SimCity town hits population 5,000 (or whatever), a Starbucks or McDonald’s should appear in the center of town. This fits the very common American perception that a town becomes a “real” town when it gets its first fast food restaurant. Even better: have a second Starbucks open across the street from the first one when the town hits 15,000.  ;)  I proposed this idea in an article I wrote a few months ago; it remains one of my favorites. It works even better if lots of brands are built into SimCity; after all, real cities are overflowing chain stores; featuring just McDonald’s or Starbucks would feel strange.
• In any FPS featuring giant insects (or insect-like aliens), one weapon could be a can of Raid, the spray of which is ignited by the player with a cigarette lighter or something. Not only would it be fun / amusing for the player to flamethrow bugs, but it reinforces Raid’s brand message perfectly. The Raid marketing team simply needs to resist the urge to demand ham-handed visuals; the mere presence of the can (and a clear label on it) would suffice.
• In Stubbs the Zombie, the main character could heal himself (i.e. close wounds or reattach limbs) with Scotch Tape. This only works because Stubbs is an intentionally humorous game, of course. The brand reinforcement: “gets you out of jam”, “reliably sticky”, etc.
• An FPS mod (as opposed to stand-alone game, or placement in-game) featuring armed Ford vehicles – Mustangs would move the fastest, F-150 pickup trucks could carry the greatest amount (and variety) of ordnance, etc. Bonus to Ford if it develops this by publicly releasing the necessary art assets and staging a competition; winner gets a free Mustang (and perhaps an entry-level design job working for the company that develops the FPS?)
• How about reverse-placement: World of Warcraft figurines in McDonald’s Happy Meals? Perhaps the winner(s) of a really important global WoW event could be rewarded by having their avatar(s) immortalized this way? I should admit that i don’t actually know how many children play WoW; this idea might need to wait for a future MMORPG that is incredibly popular with children age 10 and below.

Ever since it was announced that Microsoft may acquire Massive, speculation has run rampant as to what MS is up to. Mmmmm…. speculation. I want in.

Massive has the following: relationships with most major developers and publishers, a solid ad-sales group, and (presumably good) ad-serving technology. Massive’s expertise and insight has some value as well, though it’s difficult to quantify how much.

But wait: Microsoft already has relationships with most major developers and publishers — more, in fact. And Microsoft already has a (bigger, more experienced) ad-sales group; who do you think is populating the pages of MSN? And that leaves technology. How long do you think it would take Microsoft to duplicate Massive’s technology, if it really wanted to? A year? This isn’t rocket science.

So what is Microsoft thinking? I can hazard a few guesses:

1. They’ve bought into predictions that in-game advertising will grow explosively in the very near future; so explosively, in fact, that it’s worth ~$300M just to participate more fully right now. Certainly a possibility, but I have reservations. Most major advertisers are still in “test the water” mode. It’ll be another two or three years before the in-game ad market really heats up. (And I’d guess that Massive had less than $10M in revenues last year.) And I’m not sure that first mover advantage matters so much… not when Microsoft already has a direct line to advertisers and publishers, and controls the PC and Xbox platforms. Still, perhaps this really is just a straight-forward, “by the numbers” transaction…
2. They want to do everything possible to support Xbox Live’s growth, and in-game advertising is an important part of that objective. Remember, Microsoft has never really had more than two major arguments for why it will beat Sony this round: 1) “We were first!” 2) “Xbox Live rocks!” Unfortunately, thanks to a shortage of interesting games (and console units), first mover hasn’t helped Xbox tremendously (so far). That leaves Live. In the near term, Microsoft can (theoretically) use Massive to make life easier for developers and advertisers, be it via better integration and/or subsidized services.

To be honest, I’m really struggling to come up with great explanations. What am I missing here?

PS. A friend of mine has suggested another rationale: Microsoft is struggling to meet internal headcount demands, and would rather acquire a strong team than try to build one in the current environment. Rumors, rumors…

Michael McHale, Senior Producer at Konami, kindly answered some of my questions about his experience working with in-game advertisements.

Please describe how you made use of in-game advertising in Karaoke Revolution Party.

KRP for the Xbox includes technology from Massive, Inc. If the player is logged into Xbox Live, new ad-containing textures will stream into the game.

We made sure that the advertising spots appear in logical places in the game environment. We were very careful, so the ads are not constantly “in your face” and they integrate nicely with the background environment. We believe that it adds to the gameplay experience when the environment changes dynamically.

Did you reach out to advertisers who you thought would “fit” the game’s theme, or did you work with advertisers who reached out to you, or both? How did that affect the design and development process?

Massive’s sales team sold the ads. We retain approval over all ads before they appear in the game. The content must be appropriate for the audience (the game is rated E10+), and we expect the ad art assets to be high quality, and to fit the general art style of the game.

Did you experience any conflicts with your advertisers? How did you negotiate the process of integrating their ads into the game in a highly visible but tasteful way?

We created a guide that shows where the ads would be placed, with screenshots of the game environment. This hopefully helped the ad agencies. There was a set of ads that we felt did not meet our quality standards and did not fit the art style of the game, so we rejected them.

What surprised you most about the process of embedding advertisements into the game? Would you do anything differently?

There are currently two different types of advertisements you can run, and they each have limitations. Static ads are placed on the game disc and are visible whether you are online or offline. The issue with static ads is that you can’t track how many times they are viewed, and you can’t refresh the content, so the user sees the same ads for the life of the product. The ads have to be placed in the game months ahead of time before the game is released, so agencies can’t run ad campaigns that hit at a specific time, such as an ad for a movie release. The PlayStation 2 does not have a hard drive to store data, so static ads are your only option there.

Dynamic ads can be tracked and scheduled, but the player must be online while playing the game in order to see the ads. This works well for online multiplayer games, but not as well for single player games. I expect this issue to be worked out in the future, when dynamic ads will be stored and visible even when you are offline.

From the development side, the process of planning where the ads will go and integrating the ad-serving technology into the game takes time. Although the impact to our development schedule was minimal, we were still taking time that could have been spent elsewhere.

Looking back at the project, I don’t think we would have done anything differently, but it would have been nice to store the streaming ads locally on the Xbox. We hope we did a good job of integrating the ad content without being too intrusive. Advertisers and their agencies understand all too well that the end user can have a negative reaction to ads if they are not integrated into any form of media in the right way.

I just sat in on the “Continued Growth of Gaming” panel at the MBA Media and Entertainment Conference in New York. Moderator: Cyrus Beagley (Engagement Manager, McKinsey Entertainment Practice). Speakers on the panel: Greg Costikyan (Founder, Manifesto Games), Chris Di Cesare (Director of Marketing, Xbox), Nique Fajors (VP of Brand Management, Atari), Frederic Markus (President, eRelevant Games), Joseph Varet (Sr. Director of Biz Dev & Strategy, MTV Networks). I managed to catch most of what was said, except in the case of Greg Costikyan, who speaks two to three times faster than most normal human beings.

Topics discussed: What makes a franchise successful, MTV’s role in the video game industry, innovation, the attractiveness of various game markets, and some questions for Microsoft about portables and shortages.

Read the full transcript here.

Some marketing professionals would argue that there’s nothing wrong with this campaign. They might say that conscious rejection of the ads will be outweighed by subconscious assimilation of the brand. They might even dismiss conscious rejection entirely. There is some research that supports these assertions, though I don’t know of any study focused on an equally blunt campaign in a AAA game.

Regardless, now check out this image of Disney World that I have heavily photoshopped: v Can you imagine how people would feel if, after paying $50 per person, they walked into Disney World (expecting an escape, magic, etc), and they saw this? What if the rides themselves were filled with poorly-placed ads? Can you imagine Subway blanketing the Haunted Mansion in the same way it blanketed Counter-Strike? They’d never do it (and Disney would never permit it).

If you were a visitor to this theoretical Disney World, do you think your conscious frustration with Subway (and Disney) would fade quickly? Speaking only for myself: I’d be irate, and I wouldn’t forget it soon.

There’s an extra level of thoughtfulness that must be employed when advertising in any medium that people particularly care about — and games (like Disney World) are at the top of the heap.

Update (1/24): according to Jennie at Joystiq, the CS screenshot she posted was actually modified. Jennie added that the actual in-game Subway campaign was slightly less “absurd”, but still “badly done for the CS setting”.