Casual Biz Models No. 5 – Cash prize tournaments & skill-based gaming

In a nutshell
Gamers pay an entry fee to challenge each other online, typically either head-to-head or for position in a tournament. The winner gets a cash prize, made up of all the entrance fees less a percentage taken by the website hosting the game.

Pioneers
After eight years of failure and consolidation, a dozen or so companies now dominate skill-based casual games provision, with the top three taking 76 per cent of the revenues according to research firm Screen Digest. These three are the UK-based King.com, Liberty Media Corporation’s WorldWinner subsidiary in the US, and Germany-based GameDuell. WorldWinner in particular is the product of consolidations and failed endeavours that stretch back to the turn of the century, a time when even Disney was investing in the sector.

All the major casual gaming portals that offer skill-based games today do so in partnership with one of the leading skill-based specialists.

In detail
As the multibillion-dollar revenues generated by online poker have demonstrated, the combination of competition and cash can be a lucrative one for companies able to unite the two urges with an audience. People prefer to beat people, even in the virtual world, where an opponent might be nothing more substantial than a name, some ranking details, and an avatar pulled from a manga comic. HAL, the on-board computer in Stanley Kubrick’s 2001, wouldn’t vanquish its crewmates at chess – he likely wouldn’t get a game.

What’s true of poker has proven true in casual gaming, although it took trial-and-error to find out what works. Today players can challenge each other in games as diverse as casual arcade classics such as Diner Dash and Chuzzle, puzzle and word games like Scrabble, chess and mini-golf as well as traditional card games modified to reward player skill. The entry fees and prizes are usually modest, and the average player is a female housewife.

While the mechanics of skill-based game tournaments – as opposed to the games themselves – are essentially the same as in online gambling, the legal distinctions are critical. To qualify as a skill-based game, the element of luck must be minimised, so that the winner of a tournament primarily emerges due to her skill. This is a crucial distinction, since certain jurisdictions, including several US States, have banned online gambling, with devastating results for online gambling companies who found senior executives being detained at airports and who were forced to pull out of the US to the sound of their share price crashing through the floor. Skill-based gaming companies are understandably minded to avoid that fate.

Similarly important is matching players of similar abilities to ensure a fair game. It’s a complex task, made trickier still by the need for constant vigilance against cheating and any unfair ‘gaming’ of the system.

The biggest challenge for would-be skill game providers however is the need for a sufficiently large pool of players to provide adequate games and prizes. Even big portals like Pogo.com, AOL Games, Yahoo and MSN Games act as affiliates for one of the skill-gaming leaders, rather than running their own operations. The skill gaming companies write their games in-house, too, for reasons of security, which limits the opportunity for third-party developers to make such games.

Advantages

• Cash business, with players committing funds up-front.

• No distractions to the core game experience, unlike with advertising.

• Can attract consumers who like competition but who would be disdainful of ‘merely’ playing games.

• Players provide the main incentives, in terms of competition and the cash for prizes.

• Can tap into territories where anti-gambling legislation has left a gap in the online entertainment market.

• Success breeds ongoing success, as a larger membership base means players are more likely to find appropriately-matched opponents to play against.

• Simple games seem to work best, which caps development costs –attempts to create online skill-based tournaments with more hardcore games have so far failed.

• Skill-based games can have a long shelf-life.

• Flexible promotion and marketing opportunities: it’s easy to introduce special prizes or extra big money tournaments.

• The market has been consolidating for years.

• A large audience is required to provide well-matched games, which is very difficult for new entrants to acquire.

• Ensuring games minimise luck and are based on skill is an extra complication for game designers.

• Security issues are critical: most casual games sites only need to be extra vigilant at the time of purchase, but for skill game providers who have a great deal of money in aggregate flowing through their systems, detecting and deterring cheating is required throughout hosting and gameplay.

• Skill-based game sites generally develop their games in-house to ensure their integrity, which results in a truncated value chain compared to other casual game business models.

• The viability of online skill-based gaming is more likely to be affected by legalisation than other methods of monetization.

Future developments
The handful of leading skill-based game portals have now reached a scale where they are pushing into each other’s primary territories. Smaller companies would seem best off looking for niche markets or under-exploited local audiences, although the latter may be a short-term opportunity, given the growing reach of the existing giants who already provide multilingual gaming. The search for a more hardcore skill-based gaming success will likely continue, if only because new entrants to the sector will need a point of differentiation.

Legislation will continue to be a threat. Last year WorldWinner’s parent company and King.com united to create a skill-based gaming trade organisation, the IGSA), to lobby and help shape the future of the industry in accordance with US Law.

Bottom line
The design and creation on skill-based games for cash prize tournaments is burdened by legal and security considerations, and hosting them further complicated by the need for a large pool of active gamers and the difficulties of matching them. Not a business model to look to lightly.