Casual Biz Models No. 8 – Microtransactions

In a nutshell
A game is distributed for free, or a reduced price. Players are charged for optional add-on content, such as new levels, weapons, or tweaks to their avatar.

Pioneers
Microtransactions predominate in South Korea, where broadband penetration is very high and piracy rampant, and where gamers grew up buying game time in PC cafes rather than playing at home. Piracy is combated by microtransactions since they require gamers to connect to an account, and purchasing show-off upgrades suits South Korea’s sociable games culture. It’s all seen huge amounts of money generated by micropayment-funded games companies like Nexon Corporation, which turned over more than $100million in 2007 on the back of $1 to $2 upgrades for its casual multiplayer games like MapleStory and Kart Rider.

Western audiences are less keen. Xbox owners have a very vocal tolerate/hate relationship with Xbox Live’s Marketplace of downloadable content, for instance, while Pogo.com’s microtransaction experiments have mainly targeted social networking – funding is principally via subscriptions.

One true Western pioneer is PlayFirst – the Homeland Hero edition of its popular Diner Dash was launched last year based around microtransactions. Waitress accessories and diner decor items start at $0.79, with restaurant expansion costing around $5. PlayFirst claims great success, and has since launched PlayGold, a bespoke microtransaction currency for games sold off its website.    

In detail
Microtransactions make the capitalist world go-around – think razor blades, super-sized fries, and video rental. But it needed the Internet to bring the model to games, by enabling companies to bill customers and easily deliver the digital goods.
    
The principle is simple – distribute a great game for free, build an audience, and sell add-ons. Possibilities for the latter run from content that would previously have been bundled with a full-price game, such as levels or gameplay features, to in-game consumables like extra weapons or currency, and more cosmetic tweaks such as fancy clothes or paint jobs for cars that work particularly well in social settings.

With Western markets more focussed on advertising and Try Before You Buy models, it’s easy for commentators here to underestimate the revenues microtransactions are already generating. A study by Pearl Research found that $1.5 billion was made through games microtransactions in South Korea in 2007 – bigger than the total Western market for casual games. (Of course, it’s possible they would be even more lucrative markets if piracy hadn’t made the selling of full-priced products unfeasible.)

A more practical question is what to charge Western consumers used to paying up-front, or nothing at all. One infamous attempt to sell horse armour to Xbox Oblivion owners incited a backlash that echoed around the Web, and console gamers still regularly complain that they’re being asked to pay twice, since console games are rarely initially given away free. Also, some companies do not charge for extra content, which makes paying to download from those that do less palatable.

Advantages

• No upfront charge can hugely increase the initial uptake of a game, particularly by new casual gamers.

• Gamers may perceive extras for sale as a benefit, rather than cost.

• Sometimes the same chargeable content can be consumed multiple times by the same gamer (for instance, extra ammunition packs) leading to recurring fees.

• Some gamers who baulk at the $20 sticker price may spend more than that without realising it via microtransactions.

• It beats piracy (provided the microtransactions are secure), since copying the game only grows the potential market for in-game consumables.

• The earning potential of a game can be indefinitely extended as long as it retains an audience, by providing new micro-products for purchase.

• Parents can load a child’s account with a credit card, with the child then spending his or her points as desired.

• Offers the potential to establish deeper and more profitable relationship with consumers thanks to ongoing interactions.

• Can capture money being generated by the game elsewhere, such as the selling of special MMOG items and gold on real-world auction sites, for the IP owners of the game.

• No money upfront.

• The cost structure is hard to judge, as there’s no consensus in the West; gamers can easily feel ripped off if an upgrade is too pricey.

• Alternative business models in the West mean gamers can feel that microtransactions mean they’re paying for something that used to be ‘free’.

• Can require more sophisticated backend systems to manage player accounts, compared to other models.

• An unsuccessful game may earn even less than with other models, since all the microtransaction opportunities come after the gamer has tested the presumably unsatisfactory game experience.

Future developments
Electronic Arts’ cartoon-styled Battlefield Heroes – which will be exploited via microtransactions – is deliberately targeting more casual gamers than previous versions of its blue chip Battlefield franchise. The game is free: Consumers can pay to upgrade their appearance or buy new weapons. Battlefield Heroes is the first game to come out under a new EA label, ‘Free to Play’, and rival publishers will watch closely.

Elsewhere, a start-up called TwoFish has released a plug-and-play micropayments system called ‘Economic Engine’ to make it easier for casual games publishers to incorporate micropayments.

The bottom line
Micropayments are the business model everybody loves in principle, but few in the West have done much with in practice. The best approach for now may be to incorporate upgrades into a free, ad-funded game, so as to not be wholly reliant on microtransactions. Attempting the same with a paid-for download risks annoying customers who may feel they’ve being charged twice.