One of the things holding back the evolution of F2P gaming in the West is the understandable discomfort that many Western designers feel about the “aggressive” monetization strategies employed by Asian game developers. For the purposes of this post, I’m defining “aggressive” as the sale of items that impact gameplay and/or speed up a player’s progress, in addition to other, less controversial premium features like aesthetic items and account personalization.

To many developers, the idea of designing a game to be anything other than “fun” is heretical (they may also fear the possibility of offending sensitive players.) Consequently, they either ignore the F2P business model or attempt to create games with relatively tame revenue-generating systems; for example, focusing on the sale of items with aesthetic benefit only, or roping off a portion of the game and hoping enough players voluntarily pay for access.

The irony of these fears should not be lost on anyone who was designing games thirty years ago. Classic arcade titles were explicitly designed to eat quarters over brief, regular intervals, and people of all ages still put up with it. By comparison, modern F2P games are positively generous to players!

All this is why, up until the social game explosion, we heard of so few financially-successful F2P games in the West. The social gaming companies get a lot of credit for leveraging Facebook and for rediscovering the market potential of asynchronous gameplay, but they deserve equally as much credit for realizing that people in the West are not culturally predisposed to hating any game with an aggressive monetization model. As with everything in life, context matters.

Understanding the impact of conversion rates and ARPPU

Why is it worthwhile to at least consider the merits of designing a game with a more aggressive monetization model? It all comes down to conversion rates. The average Western F2P game is lucky to convert 5% of active users to paying users. At the low end, you get 1% conversion rates, which is where games like Farmville and Mafia Wars tend to sit. Some very rare games reach 20% or better, but to hit that level you generally need a fair bit of luck, an incredibly powerful brand and/or an intensely loyal niche audience. Bottom line: if you’re only going to convert 5% of your active users to paying users, you want to give those people every opportunity to pay you! Many of them will be delighted to do so if you handle the situation appropriately.

I’ve asked many F2P game developers to share their monthly ARPPU ( “average revenue per paying user”) statistics. Several have obliged in confidence, so I can’t share specific data points, but I can share averages. From my limited research, it seems that a game with a more aggressive monetization model and a loyal, niche userbase can hope to generate $50 per paying user per month, on average. (The term “average” is somewhat misleading — most users might pay $5 a month, while a small percentage of wealthier players might pay hundreds.) Obviously, these dollar figures will vary from game to game, depending on design, but they’re a useful generalization for the purposes of this post.

On the other hand, a F2P game that limits itself to flat subscription revenue and/or non-functional items is generally more likely to fall somewhere between $5 and $10 per paying user per month. You can expect the F2P equivalent of WoW (whatever that is) to do better than this, and you might expect a game that is largely focused on aesthetics to do better as well, but again, this is a useful generalization for most F2P games.

Different customers have different needs

Why is there such a big discrepancy between these types of F2P games? Basically: different customers have different needs. A game with a more diverse array of offerings is going to satisfy more people and earn more cash in the process, especially if it doesn’t arbitrarily cap the amount a loyal customer can pay. Some customers don’t have much spare time and are willing to pay for things that accelerate their progress. Some customers are mainly interested in making themselves or their surroundings more attractive. Some customers want anything that improves their social status. Etc. Customer XYZ might be willing to spend only $1 on aesthetic items, but $100 per month on functional items. Customer ABC may be the opposite. Every person is different.

There are other nuances to this issue. For example, the monetization strategies that convince a newly-active user to become a paying user may differ from the strategies that convince an old paying user to become an active payer once again. For example, imagine a game in which upgrading your avatar is an important (but costly) means of distinguishing yourself from newbs. A player might be willing to pay for the privilege of updating her avatar and distinguishing herself from newbs, but she only needs to do that once. How do you convince her to resume paying you? The answer, as before, comes down to having a diverse array of offerings that appeal to different kinds of players.

HappyFunTime: a fictional case study

To help put this in context, I’ve invented a fictional F2P game called “HappyFunTime”. You can play HappyFunTime forever without paying a dime (in other words, this is not one of those games that restricts most of its content to paying users.) HappyFunTime’s servers accommodate 2,500 active users per month. Each server costs $80 per month and eats approximately $120 in bandwidth per month. These fees consume a fixed percentage of HappyFunTime’s profit for every 2,500 active users, unlike payment processing fees (i.e. Facebook’s 30% rev share on credits) which are only incurred with paying users. There are other costs that scale with active users (for example, community moderation) but those costs don’t scale linearly, so I’m ignoring them for now.

If HappyFunTime combines subscriptions, aesthetic items, functional items, progress accelerators, etc, it can hope to generate $6,250 in revenue per server per month. That’s 125 paying users (5% of 2,500) paying $50 per month on average. Subtract 35% for all costs other than servers/bandwidth, and subtract $200 for server/bandwidth, and you get $3,863 in profit per server per month.

• This is a niche game, so we’ll assume just 50k active users. That nets us a total monthly profit of $77,260. Not bad for a niche game that converts only 5% of its players to paying customers!
• Server/bandwidth costs are eating just 3.2% of revenue in this scenario.

Now, for argument’s sake, let’s say that if HappyFunTime incorporates a flat subscription and non-functional items alone, it converts *twice* as many users to paying users. (In reality, I believe it would convert fewer players because it addresses fewer needs, but let’s run with this scenario.) HappyFunTime can now hope to generate $1,875 in revenue per server per month. That’s 250 paying users, paying $7.50 per month on average. Subtract 35% for all costs other than servers/bandwidth, and subtract $200 for server/bandwidth, and you get $1,019 in profit per server per month.

• 50k active users nets us a total monthly profit of $20,380; approximately 1/4th of the profit in the previous scenario (or just 1/8th the profit with an equivalent conversion rate of 5%.)
• Server/bandwidth costs are eating 10.7% of revenue in this scenario (or a whopping 21.4% with an equivalent conversion rate of 5%.)

In summary: because so few players actually pay anything for F2P games, the less aggressively you offer opportunities for paying users to support you, the less likely you are to be successful. And while it is possible to imagine a game that accomplishes this without selling functional items, progress accelerators, etc, that’s a hard feat to pull off.

Enough about money, what about ethics?

Some of you may still be thinking, “this still doesn’t seem ethical.” I can only respond to this by sharing how I feel. In my opinion, if the average person can enjoy playing a game for free, forever, without paying a dime, not only is the game’s design “ethical”, it’s practically charitable compared to the arcade games of the past. Or, for that matter, compared to $60 console games (given that I only have a few hours to play any given game, I frequently resent paying $60 for a bunch of content I neither need nor want.)

For that matter, I consider even the more aggressive monetization schemes in F2P games to be *far* preferable to the old TV model. Forcing me to watch 10 minutes of advertising for every 20 minutes of content feels abusive (if not akin to brainwashing.) I much prefer the opt-in monetization systems of F2P games.

Ultimately, ethical questions like this are highly subjective, and I neither expect nor wish to convince anyone of my opinion. This is how I feel about the work that I’m personally doing. Your mileage may vary.

For such a juicy situation, the online debate about Infinity Ward has been pretty dull. A summary, for those who haven’t been following along: 99.99% of people believe that Activision committed a grievous error and is clueless about the value of talent — the other 0.01% of people work for Activision. Either the wisdom of the crowds has revealed itself, or anyone who sympathizes with Activision has been unwilling to speak up for fear of being mocked.

It won’t surprise regular readers of this blog that I’m on the “pro talent” side of the debate. Making great games on a strict schedule is exceedingly hard, and anyone who can reliably manage a team to that end is probably worth their weight in gold. That said, there’s an interesting question to be asked here: if we take for granted that Jason & Vince were worth their weight in gold, is it possible that they were simply demanding “too much” compensation in their ongoing negotiations with Activision (i.e. all the gold, and more on top — leaving too little for Activision’s shareholders?) Or was Activision simply greedy and unappreciative?

I doubt that we’ll ever know the definitive answer to that question; the relevant facts seem unlikely to become public knowledge. And since Activision has bungled the removal of Jason and Vince so badly that most of Infinity Ward’s senior leadership has already decided to jump ship, this situation will almost certainly end poorly for the company. Activision’s shareholders can’t possibly be well-served by the crippling of the company’s marquee studio. But hypothetically speaking, if Activision had managed to retain most of IW’s lieutenants and other employees, would it still have been a terrible mistake to drive away Jason and Vince?

I’m inclined to believe that, yes, it was a terrible mistake. That said, research on this topic is all over the map. On one hand, there’s plenty of data to support the value of star performers like Jason and Vince. Some very famous companies, like Pixar, have very publicly attributed their great performance to the leadership of one or two key stars at the helm of each production. And Pixar has obviously served its shareholders very well.

On the other hand, multiple academic studies have indicated that in Hollywood, top-tier stars tend to consume all of the value they generate (in economic lingo, “stars capture their economic rent.”) A recent study by Anita Elberse of Harvard Business School went further, claiming that when film studios employ top-tier stars, their financial valuation does not significantly increase (financial valuation being the only metric that shareholders ultimately care about.)

Film production and game development are obviously very different beasts, so it’s unclear to what extent the experiences of Pixar or other film studios are relevant to the game industry. It’s also unclear that we can compare “stars” like Jason and Vince to “stars” like Tom Hanks, as they play very different roles (if you’ll pardon the pun.) Nevertheless, it’s unquestionably true that game development, like film production, is a complex team effort – Tom Hanks couldn’t make Castaway by himself or with a weak supporting team.

So, to rephrase my earlier question: as more individual game developers become celebrities (which seems to be the direction in which our industry is slowly tracking), will video game publishers begin to look like Hollywood studios and find themselves at the financial mercy of their stars? Or will video game publishers find a way to become like Pixar and thrive hand-in-hand with their star creative talent?

Time will tell. But I’ll say this: I’m glad that I don’t work for the average game publisher. ;-)

For those who attended my lecture at GDC and would like to see the slides (which I have annotated for your convenience), please find them here.

If you missed the lecture but are a regular reader of this blog, fear not. Much of the content was based on articles that I have posted on this blog over the past year. The new content pertained primarily to iPad vs. Kindle and some neat new research/data on the Long Tail. Fun stuff!

My favorite conference of the year, GDC San Francisco, is almost upon us! The date, time and subject of my lecture is noted below. If you’ll be attending and would like to meet up, drop me a note. :-)

Digital Distribution: How to Deal with the Parts that Suck and Capitalize on Everything Else
Date/Time: Thursday (March 11, 2010) 10:30am — 11:30am
Location (room): Room 303, South Hall
Format: 60-minute Lecture

Summary: This session will briefly summarize the current state of digital distribution across major marketplaces (console, Facebook, mobile, etc), examine the major challenges associated with digital distribution, and provide concrete strategies for success in these marketplaces. It should be of interest to both developers and publishers large and small, as it will address strategic errors commonly made by multi-billion dollar publishers and tiny startups alike. If you’re struggling to pick an ecosystem to focus on, or if you’ve picked an ecosystem but aren’t sure how to maximize your chances of success within it, this lecture is for you.

Observation #3: A polished game stands out from the crowd.

Some of the games that I played could really have used a few additional rounds of playtesting and design iteration before they were submitted to the IGF. The developers of those games would probably have been better off holding back their games until next year’s competition.

I know this can be tough to swallow. Perhaps you’ve worked long and hard on your game, and you really want some recognition for your effort. You might be counting on that recognition to help boost your marketing or business development efforts. I can imagine many an indie developer thinking, “My game isn’t perfect, but it shows a hint of something great, so I’m going for it!” And to be clear, that’s a fine attitude — if you wait until your game is “perfect,” you’ll probably never finish it! But unfortunately, some developers jump the gun and submit their games before they are truly fun, much less “perfect.”

If you’re creating a new gameplay mechanic (or an interesting twist on an old mechanic), make sure that you have implemented at least one very polished, very entertaining instance of that mechanic. A single, excellent level is better than five mediocre levels, in my opinion. Per observation #2, other developers are making me trudge through hours of tedious gameplay, so I’m going to be especially appreciative of a developer who wows me with ten short minutes of brilliance.

Of course, “very polished” doesn’t necessarily mean “short and sweet.” But many independent developers don’t have the time or resources to produce several hours of very polished gameplay, so all I’m saying is that if you can’t, you might as well err on the side of short and sweet. I’m fairly certain that you’ll be better off!

PS. Don’t forget to frequently playtest your game on other people. It doesn’t take long to lose your sense of perspective when immersed in a project; a pair of fresh eyes will significantly increase your odds of ultimately developing a polished gameplay experience. Also, for an example of a relatively simple indie game that is extremely polished, check out geoDefense (or its sequel, geoDefense Swarm) on the iPhone.

Observation #2: if at all possible, it’s best to entertain a judge from the very first minute — just like a potential customer.

Several of the games I evaluated simply weren’t very fun to start with. Some even came with explicit caveats which I will collectively paraphrase as follows: Dear judge, you must play this game for several hours before you understand why it is special.

Who wants to slog through an endless tutorial that isn’t inherently fun before actually getting to enjoy themselves? Who wants to trudge through hours of uninspired gameplay before the “magic” of the game’s design reveals itself? As a judge, I’m willing to do it because I feel obligated, but which game do you think I’ll probably give the higher score: the game that entertained me for three consecutive hours, or the game that entertained me for only the final hour out of three hours, total? With rare exception, it will be the former. And you can bet that most consumers will vote the same way with their wallets. In summary:

• Long-winded, boring tutorials are bad (seems like this should be self-evident, right?)
• Conversely, dumping people into a game without any explanation of how to play is also bad, unless the initial gameplay experience is very intuitive. For an example of a game that does a good job of introducing the player to the core mechanics of the game, see Braid.
• Games that don’t become very interesting (or don’t reveal their “special sauce”) until the player has invested lots of time into them are not inherently “bad”, but unfortunately such games are often doomed to smaller audiences. Most people simply aren’t willing to give a game the benefit of the doubt if it doesn’t entertain them relatively immediately. Long story short, developers should think carefully about finding ways to expose their game’s “special sauce” right away.

PS. On a tangent, my old post on crafting a good game demo might be interesting to some of you.

I volunteered to be one of the many judges for the IGF this year. Here are some of the random observations that I jotted down while working my way through the batch of games I was assigned to evaluate. Hopefully these observations will be useful to people entering the competition next year.

Observation #1: you can’t win a competition if the judges can’t play your game.

Out of all the games I was asked to judge, approximately half did not run on either of the two different Windows PCs in my home. One is my laptop, which is much more powerful than a netbook but isn’t one of those “desktop replacement” models with a $400 video card. The other is my brand new gaming desktop, a machine probably more powerful than 99% of computers in US homes today. I could also have tried the games on my wife’s laptop, but if by some chance a game somehow corrupted her PC she would have killed me, so I opted not to risk that. ;-)

I’m not surprised half the games wouldn’t run; the compatibility-related frustrations of PC gaming were precisely why, after many years of shunning consoles, I eventually threw up my hands and made the Xbox 360 my personal gaming platform of choice. And this isn’t a knock against the organizers of the IGF; they screen every game to make sure it runs before they submit it to judges for evaluation. The IGF can’t be expected to try every submission on fifteen different PC configurations… that’s the individual game developer’s job. But this isn’t even a knock against developers, because I appreciate how challenging traditional PC game development can be.

And that’s really the point of all this (I know, it took me long enough to get there.) If you’re an independent game developer working on a downloadable PC game, you really need to ask yourself if the benefits you get from your engine actually outweigh the portability benefits of Flash, and to a lesser extent, solutions like Unity. I doubt that consumers are, in general, much more forgiving than IGF judges. Requiring a download probably drives away half your potential customers right off the bat — the actual percentage varies depending on the game and the audience, of course. You’d better be certain that the game concept and technology you’ve settled on is so compelling that it justifies not only losing customers to a download, but also losing another large percentage to compatibility problems!

On a final note, this seems like a good time to once again reference Danc’s flash love letter: a worthwhile read for all PC game developers.

Update: After much additional effort, I was eventually able to play 70% of the games in my batch. I had to give up on the other 30%.

I wrote the following brief, high-level news analysis for a multi-industry expert network that I joined earlier this year; figured some of you might like to read it.

EA has just acquired social-network games maker Playfish for $275 million, plus an additional $25 million in equity retention arrangements and up to $100 million in additional cash contingent upon future performance. Playfish is one of the top three game developers in this space, the others being Zynga and Playdom (both privately held.) Zynga is widely rumored to be targeting an IPO within a year, leaving only Playdom as a wild card.

Why would EA pay such a large sum for a company that was only founded in 2007? In fact, one could argue that Playfish doesn’t even possess particularly distinctive IP and that its games are easily cloned (as Zynga demonstrated when it created “Cafe World” — a close copy of Playfish’s hit game “Restaurant City.” Cafe World now has 28 million monthly active users on Facebook, as compared to 18 million for Restaurant City.)

The answer is complicated. On one hand, big video game publishers have a history of overpaying for top development studios. But on the other hand, while social-network games may seem like simple things, they are in fact dramatically different from the video games that publishers like EA have built their businesses around. EA is, in part, acquiring expertise.

The traditional big video game publishers rose to prominence in part because they were capable of funding the development of robust, complex, multi-million dollar video games and in part because of their retail marketing and distribution prowess. In short: they are very good at getting people below the age of 35 to pay $30 to $60 for a boxed game that can be enjoyed alone on the couch or at the desk or with friends online. But social-networking games, by contrast, require a completely different product development and product marketing skill set. These games are free to play and generate revenue via optional microtransactions — they must be designed explicitly for the purpose of driving such transactions, as opposed to traditional games which can simply “be fun to play.” Furthermore, the core gameplay mechanic of any good social-network game must encourage players to invite their friends into the game — again, it cannot simply be “fun.” And of course, there’s no retail shelf to position a social-network game on; instead, developers must rely on non-traditional advertising, on the viral mechanics of their games, and on cross-promotion between online games to drive traffic.

This latter point is critical. The top social-network game developers have become very effective at driving players from their existing games to their new games. This means that they are essentially capable of helping any new title reach a critical mass of players almost immediately, and for “free.” From that point forward, if the game is designed well enough (i.e. if it is highly viral and good at engaging and retaining players), it will succeed.

So why did EA purchase Playfish? Because EA’s game designers are not accustomed to building games that focus mainly on viral design or on monetization via microtransactions. Because EA’s marketing people are not intimately familiar with the techniques necessary to market these non-traditional games to these non-traditional audiences. And because Playfish offers an established network of players that future games can be cross-promoted to. Of course, it certainly doesn’t hurt that Playfish is rumored to already be generating $50 million a year in revenue. Lastly, Playfish was likely the “cheapest” of the three established game developers in this space.

One could certainly argue that it would have been cheaper for EA to spin up one, two, or even three independent studios and charter them with experimenting in the social-network game space (especially if they’d had the foresight to do so two years ago.) Eventually, one studio would have hit on a successful formula, just as Playfish did. And perhaps other major publishers, such as Activision, should be considering such a strategy. But EA’s acquisition of Playfish certainly makes sense… it simply remains to be seen whether they overpaid or not.

It’s been a while since any given news story caused five different people to spontaneously email me. The latest story to do so is the Techcrunch exposé of scam artists who are working through the popular lead generation services (such as Offerpal) that are used by most major social gaming companies.

The story has already inspired quite a few responses, such as these thoughtful articles by Andrew Chen and Justin Smith, and this entirely predictable response by Mark Pincus, the CEO of Zynga.

My quick two cents: have the lead generation services (and therefore the social gaming companies, and therefore Facebook itself) benefited from the behavior of scam artists? Yes, absolutely. Should the lead generation services immediately do something to address the problem (and if not them, then the social gaming companies or Facebook itself?) Yes, absolutely. Does Facebook “deserve to be sued”, as one of my good friends suggested to me? No, it does not. Does this whole thing prove that social games are a house of cards? I highly doubt it.

Facebook is a popular open ecosystem, and like any other popular open ecosystem, it will be exploited from time to time by unethical people. There is always the argument that Facebook “could be doing more” to police the ecosystem (and in fact, it had already announced a plan to do precisely that as part of larger changes to the platform) but at the end of the day you simply cannot compare Facebook to the Playstation, to Wal-mart, or to any other closed ecosystem. Facebook has an essentially unlimited number of “content partners,” and while it should keep a close eye on the biggest of those partners, it is inevitable that some shadiness will eventually slip past the Facebook Police.

Sony and Wal-mart, on the other hand, have the advantage (and the great burden!) of controlling everything that enters their virtual and/or physical shelves… and they have much smaller shelves. So while I hope that Facebook will indeed do a better job of catching scams in the future, I don’t blame it, and in fact I hope it chooses to emphasize crowdsourcing techniques (i.e. better enabling users to flag and stifle abusive 3rd parties) as much as expanded police squads.

The social gaming companies turned a blind eye to their part in this problem, and now they are catching flack as they deserve. But this will blow over, and lead generation will likely continue to represent a significant percentage of their ongoing revenue. Why? Because at the end of the day, there are legitimate advertisers, content providers, and 3rd party networks with a vested interest in the success of this model. These aren’t all late-night, 1-800-type con-men; these are advertisers like Netflix, FTD, and GAP and product/service providers like Apple, The Wall Street Journal, and The New York Times. The only “house of cards” here is the house that Tattoo Media built.