Game Monetization Report for 2012

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1 Game Monetization Report for 2012 With executive insights from: Paul Thelen, CEO BIG FISH David Reid, CMO CCP GAMES Carig Relyea, SVP Global Marketing WALT DISNEY INTERACTIVE MEDIA GROUP Michael Pachter, MD Equity Research WEDBUSH By John Gaudiosi FC Business Intelligence 2011

Game Monetization Report for 2012 Over the past few years the game industry has seen unprecedented growth, in large part due to expanding business models that have opened up new opportunities in

2 Game Monetization Report for 2012 Over the past few years the game industry has seen unprecedented growth, in large part due to expanding business models that have opened up new opportunities in social, mobile and subscription-based gaming. Whether buying a traditional game disc or exploring a free-to-play game world, the industry has shifted more to digital business. As the way in which games are delivered and consumed is revolutionized, the shift in the way games are monetized has shaken the industry to its core. While traditional premium game experiences aren t going away, today s game publishers, large and small, need to explore multiple distribution avenues to connect with the expanding, and more mainstream, audience that is spending more time, and money, playing games. With millions of new players to be monetized, creating a solid strategy that engages and converts the smaller payers, while still hooking in the whales, is essential. Four industry experts from leading firms Disney Interactive Media Group, CCP Games, Big Fish Games and Wedbush Securities offer their insights into the present and future of the evolving games industry in this report. All four of these industry executives will be speaking at Game Monetization USA, which takes place December 5-6 at Hotel Kabuki in San Francisco.

3 Paul Thelen, CEO, Big Fish Paul Thelen is the CEO of Big Fish Games, one of the world s largest portals for downloadable games, distributing 1.5 million games per day. One of the key challenges in online gaming is player acquisition. In recent years, as traditional players have concentrated on the core market, we have seen many new players rise. What lessons have been learnt that will allow traditional players and new entrants to get noticed in the online space? If we go back a ways, retail console gaming used to be for everyone. Young men were the most active buyers and then retail fell victim to limited shelf space. Females and older players were alienated and even the games coming out on the Internet addressing those demographics were hard to discover. As a result, a whole generation past and games failed to gain traction. But the viral nature of social games has changed that. Social games have re-introduced females and over-30 gamers to gaming again. For the first time in a generation, those demographics thought of digital devices as their gaming platform. The challenge now is how do you approach this audience of 200 million new gamers. You need to put products in front of them with ease of entry and understanding, but offer them more than the grind of social games. They need something different that will allow them to explore new types of content. We re doing that with Big Fish Unlimited, which eliminates the friction of downloading and installing large games. In a few seconds, you can jump into the game just like the point-and-click experience many gamers are used to online. Even on the consoles today, the days of the 60-page user manuals are over. You need to create games that explain themselves. Free-to-play, subscription and premium are just three of the business models being used in the online space today. Why is there so much hype around free-to-play at the moment, and does this mean subscription and premium will simply die out? A games business model needs to match the game mechanic and the game needs to be designed for that business model. Free-to-play is new to us, but it s been dominant in China and Korea for a long time. That s because premium games and rampant piracy don t work over there, so free-to-play was developed to get around that. Free-to-play is the fastest growing segment in gaming today, but it s not growing at the expense of subscription or premium models. Our subscriptions grow year over year. World of Warcraft still succeeds as a subscription business. Free-to-play is a new type of game business model that attracts intrinsically motivated players with status building. It s a largely incremental base of gamers that are coming off social games and now playing single-player free-to-play experiences.

4 With such low price points and such high levels of competition, it can be tough to keep players engaged and playing your digital titles. How important is the use of analytics in keeping players engaged and spending money? Analytics and successful games have been tied at the hip for some time. There can only be so many non-replayable genres like physics-based arcade games. You can only have so many Angry Birds. When everyone is competing based on price alone that becomes a tough market. You can overcome that in free-to-play by eliminating the apples to apples comparison because there s no way to compare the cost of additional dragon food to the value of extra guns in a game world. We re doing this at Big Fish with games as a service. We offer over 100 games for a single fixed price per month, which is hard to compare to with $0.99 per game. The key is to be the best in your niche. Rovio can price its product high with Angry Birds because it owns that category. We have a strong position in light adventure and hidden object games and we ve been able to maintain our price integrity within those genres genre. The three keys to success are free-to-play, games as a service and having unique titles. Cross-platform has been a buzz word for a while now, how important is it to provide a good cross-platform experience for your players, and what challenges are thrown up in the process? If you re thriving or surviving on a few branded hit IPs, it make sense to port those to multiple platforms. As a publisher you have to focus on high velocity platforms first, and then get a hit and bring it over to other platforms. We have 1,000 titles heading to Big Fish Unlimited from our catalog of 2,500 games. That s a big commitment with a 60-plus person team that oversee the complicated process of bringing our games to other platforms. We re using the PC version of Big Fish Unlimited and porting the thin client to 10 platforms including connected PCs and consoles. Native apps make sense for PC/Mac and ios and we do on average three new titles a week. This spring we started doing Android because the penetration has hit a critical mass where it makes sense. What are the key platforms developers and publishers should be creating for? The biggest platform in the world today is still the PC with over 2 billion active users. Mobile is more than 50 percent of browsing traffic now. Smartphones are a must have with Android and ios, while ipad is a dominant player for the larger screen today with emerging Android tablets like the Amazon Kindle Fire, Nexus 7 and new Samsung Galaxy tablets. Windows 8, depending on how easy it is to go from PC to platform, could be interesting, as well.

5 Craig Relya, SVP Global Marketing, Disney Interactive Media Group Relyea is currently Senior Vice President, Global Marketing, for the Disney Interactive Media Group, the interactive arm of The Walt Disney Company charged with producing compelling experiences on mobile, social, online and console platforms. What lessons have been learnt that will allow traditional players and new entrants to get noticed in the online space? It s more challenging now if you re a new entrant than just a few years ago. Back then it was dominated by a handful of core targeted MMOs. Fueled by the rise of social media and the portability of mobile web access, as well as the true mass market nature of gaming now, it s a more competitive marketplace. Discoverability is a huge issue for anyone coming into the space at this time. Customer acquisition is the challenge after that. And for this space, the first customers are the hardest to acquire and, arguably, they re the most important customers. They re going to help you initially with feedback with iteration on the game s features and satisfying the gamers wants for the product. In addition, their role with virality is critical to getting the word out about the product. Why is there so much hype around free-to-play at the moment, and does this mean subscription and premium will simply die out? Free-to-play has a lot of attention, but I don t think other models will die out. If you take a few steps back and look at entertainment, movies, TV, and games, one of the key lessons learned is that as a content provider, you can t grip onto any one business model for too long because it s going to change. There are going to be multiple bus models and the pendulum is going to swing pretty wildly over which model seems to be the most prevalent at any given time. It s important to be guided by the type of content and not to the business model that s popular at any given time. The advantage of free-to-play now is that it gets you the most reach, and if you have an outstanding product getting the most reach is attractive. And then you can monetize against that, but higher quality products should win out. It s also attractive because so many people lay games in the mass market now and if you re structured correctly, it s a great proposition. How important is the use of analytics in keeping players engaged and spending money? Analytics and metrics are extremely important. It s getting a lot of attention now but it s always been important. In the realm of games as a service it s crucial. But even in past with games that were more singular experiences, that whole process of satisfying the consumer and listening to what they want has always been debated in games and entertainment overall. Games as a service need to have the numbers around consumers preferences, as you re serving up content the same as Amazon, Ebay or any live service game.

6 How important is it to provide a good cross-platform experience for your players, and what challenges are thrown up in the process? We release products on multiple platforms where it makes sense and we will capitalize on it. Cross-platform is not a necessity in its own right. It depends on the type of product. We look at this from a consumer guest point-of-view. Our guests are interacting on multiple platforms, sometimes in the same space at the same time. Whether or not it needs to be cross-platform is an individual platform decision. I d put that need underneath fun, solid core game mechanics, great IP, great story telling, and interesting characters. Having a great product is first and foremost and then cross-platform comes after. What are the key platforms developers and publishers should be creating for? I wouldn t look at this from the lens of the devices themselves, but consumer preferences. Consumers interact with multiple devices for different reasons, and sometimes for the same reasons but for different needs like work, school, vacation, and travel. It s about extending these experiences we have onto the right platforms from a consumer perspective. It s more about how can we satisfy their needs on various platforms within their lifestyle. We have a particular focus these days on mobile because there are a billion smartphones out there and a whole lot of our guests using those devices. We re looking at the experience first and then putting them on the right platform.

7 David Reid, CMO, CCP Games David Reid was appointed CMO of CCP in January 2012, bringing more than a decade of video game marketing experience to the team. He joined CCP from Trion Worlds, where as SVP of Publishing, he led the best-selling fantasy MMO RIFT to one million paid activations faster than any Western MMO in history. What lessons have been learnt that will allow traditional players and new entrants to get noticed in the online space? We re part of the big shift happening in the market now, all of us in the games industry. The core way in which games have been predominantly sold the past few years is completely different than the traditional games business that existed through the end of the PS2 cycle. The days of having one big business model with retailers in which there was a window before the price was reduced and fell into bargain bins are over. Things have changed drastically with free-to-play, micro transactions, and subscriptions, which are still new in the grand scheme of things. Things we once thought of as laws aren t the only way to do business today. Subscriptions aren t dead, but they re no longer mandatory to grow an MMO or live gaming service. The premiere of big games at retail isn t the only way to get a big AAA game out today. It s important to learn where the consumer is and how they re involved with the game and brand over time. It s also important to remember what s worked over the years. Some of the bigger publishers in the industry are feeling the pain of how hard it is to change to these new models like smaller companies have successfully done. Why is there so much hype around free-to-play at the moment, and does this mean subscription and premium will simply die out? Part of the excitement around free-to-play today is because it s new. The premium model, where a game shows up at retail for $60 and has big box office premiere weekend like Hollywood, is still healthy, but it doesn t work for every game. There s no good reason to move away from that when you can make hundreds of millions of dollars in an opening weekend. Free-to-play is getting new gamers into the business and with the right games it makes sense. CCP s EVE Online is a subscription game that has flourished even as the MMO business has been under pressure because gamers devour content faster than developers can create it. That s because of the game s strong PVP (player versus player) vibe continues to flourish under subscriptions. With DUST 514 we re building a free-to-play game that allows new players to tiptoe into this crazy MMO universe. All of these models work because we, as gamers, buy products with all three models. It s important to think from a high-level perspective what s right for the game and service you re offering. When EA saw that subscriptions weren t working for The Old Republic, they added free-to-play later. I believe it s better to start developing the game with the right business model from day one, rather than trying to force a game into a business model later.

8 How important is the use of analytics in keeping players engaged and spending money? It s super important, but it s not the solver glue to fixing everything. Analytics will tell you what people are doing in your game today and what they might do if you turn the dial. But games are a creative industry and an executive producer still needs to have the ability to add a creative incite that numbers might not predict. When you look at some of the mechanics with Zynga s business over the past year, the feeling was that the company ruled by metrics instead of design. Metrics can t build you a good game. Games are both an art and a science. While metrics will show you how things are going and research can help you avoid making mistakes, they re not going to give you a Minecraft or EVE. How important is it to provide a good cross-platform experience for your players, and what challenges are thrown up in the process? Cross-platform is an interesting concept, but it s not a requirement. It can be a terrific amplifier if done correctly through a transmedia way of doing different things together in the same universe. Square Enix allows people to play Final Fantasy on PS3, PC and Xbox 360 together in one shared experience, while meeting consumers on the platforms they chose. EVE and DUST take place on a persistent, shared universe, where all the history of EVE has always happened. EVE is an MMO RPG on the PC that has flourished as a single shard universe with a robust economy and thousands of people joining corporations and going to war with each other. DUST introduces a new kind of player into this universe without having to go to a PC game with 10 years of history. Cross-platform can work for a unique experience, especially with new cloud technologies that have opened up new opportunities, and it can be a big eye-opener with the right games like EVE and DUST. What are the key platforms developers and publishers should be creating for? The advent of casual, mobile and social are not going to replace the deep end of gaming for real gamers who look at games as an important part of their life. It s like the sport of golf. Some people play golf for fun, others spend thousands of dollars on the best equipment. But they re still playing golf together on the same course. The games industry still needs to have high-end console systems and PCs with immersive, breakthrough experiences. And there will continue to be a need for new portable platforms and more shallow gaming experiences. I see things evolving moving forward. There are a lot of things that happen in an MMO auctions, grinding, equipping that don t have to happen on a high-end PC. They can go in a cross-platform device or in browsers. You ll see those types of elements taking a bigger part of the gaming experience, augmenting experiences on other devices. With DUST 514 we have a NeoCom App on Vita similar to what the Fable guys were doing with the Fable Pub game on Xbox Live. These things are becoming an important part of cross-platform. The console business isn t dying, but the ecosystem of devices is going to be a bigger part of a fully integrated AAA gaming experience.

9 Michael Pachter, MD, Wedbush Securities Mr. Pachter is an analyst at Wedbush Securities providing coverage of the Entertainment Software, Entertainment Retail and Movies and Entertainment sectors. What lessons have been learnt that will allow traditional players and new entrants to get noticed in the online space? It depends on the company. Activision will say you partner with Tencent with Call of Duty. For EA it s brands. They get noticed because of Tiger Woods or FIFA online, or they take Star Wars and make it free-to-play. The lesson learned is you need to market your game. The barriers to entry are low, but it still takes spending to get to market. The new learning for the traditional guy is to put the games where the gamer is. He s not at retail. He s online. He s on mobile. He s on consoles. Then once you find them, you have to make it easy to engage. Why is there so much hype around free-to-play at the moment, and does this mean subscription and premium will simply die out? Free-to-play is a model that was born out of necessity in China because of piracy. And unintentionally, the guys who tried it found it was overwhelming successful. They realized they couldn t get subscriptions in China, but they could sell virtual items and the few devoted gamers could support the many. It proved out that non-traditional gamers embraced this model. Free-to-play is popular because it reaches the broadest audience, it s approachable and easy, and there s no barrier to entry. But subscription and premium will never go away because they allow a greater amount to be spent on game development. If you can t get 800,000 or more subscriptions, subscription doesn t work. You can make $100 million off a game that s free-to-play like Riot Games League of Legends. Free-to-play takes away some of the risk. But no one is going to spend as much money, because people don t expect it to be as rich as a subscription game. Players have lower expectations for free-to-play. If you have a success with this business model, you can expand that s what Angry Birds did. There will always be a place for subscription and premium models, but subscription will be very limited. Star Wars proved that out. How important is the use of analytics in keeping players engaged and spending money? Analytics allow you to maximize revenue. You can deliver the game and hope that the 2% spend a lot of money. You can tailor what you re offering to get the monetization up to 3%. The reason Zynga monetizes better than other game publishers is because of they invested a ton of money and resources in analytics. King.com is doing it well. Wargaming.net is doing it well. The Playdom guys are doing better. EA bought Playfish because they were good at analytics. The top companies are all succeeding because of analytics.

10 How important is it to provide a good cross-platform experience for your players, and what challenges are thrown up in the process? Different platforms have different power and different user bases. A cell phone user doesn t expect the same experience as a console or PC user. Social games don t have to be as rich on different platforms. Gamers know a Dead Space smartphone game won t be the same as an Xbox 360 experience. The challenge is giving the user a familiar experience, but dealing with the constraints of the platform you re on. The difficulty is not to diminish the brand or experience. As an example, Tiger Woods on a smartphone may be better served focusing on putting, rather than hitting the ball 280 yards. Recognizing the limitations of platforms is a real challenge. What are the key platforms developers and publishers should be creating for? It will differ for different companies. You need to know which audience has the greatest potential and that should be your primary SKU. If console is your primary SKU, then focus there. You can allow Sims Social or The Ville players to earn cash towards what they need to buy in the game by doing repetitive tasks on a smartphone like grocery shopping. I used to play Dragon Age Social and you could heal your dragon in the social game and it benefited in the console game. You want to keep the audience engaged. Let guys play target practice on a smartphone for Call of Duty to level up for the console game. The challenge is to help people earn credit toward their goal and understand the value proposition of what they re doing. All the cloud gaming pioneers who have contributed to this report will be speaking at the upcoming Conference & Expo,. This is the only event looking exclussively at digital acquisition, retention and RPU and has some of the biggest names int eh industry participating, Including: Tencent, Ubisoft, Google, Big Fish, Gameloft, Namco Bandai and many, many more. Head to for more information or contact the organiser, Alex Manessi, direct at alex@vgintel.com

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