How Video Games Can Sweep in the Cash
David Perry
There are lots of ways to make money from the gaming industry. David Perry, co-founder and chief creative officer of Acclaim Games should know: In his 27-year (and counting) career, he has sold over a billion dollars worth of games at retail, the result of his work on titles such as Earthworm Jim, Disney's Aladdin, and The Matrix. In this exclusive BusinessWeek.com slide show, Perry outlines just a few of the promising business models that can be adopted by would-be gaming entrepreneurs.
MICROSOFT (XBOX)
Selling the Game
Selling physical, boxed product via bricks and mortar stores such as Gamestop (GME) andVirgin Megastore has been the historical backbone of the games industry. Online retail (Amazon [AMZN], EBGames.com, etc.) is a fast-growing area as well. But the long-term future of the games industry is all about digital distribution, as shown by Microsoft (MSFT), Nintendo (NTDOY), and Sony (SNE), all in on the action with their online game stores. This model includes PC direct-to-consumer services such as SteamPowered.com from Valve Software and Direct2Drive from IGN. Digital distribution also means "unlocking" access to a game already on a service. The new App Store from Apple (AAPL) is a good example of how to do this and make money (BusinessWeek.com, 8/11/08).
In-Game Advertising
A game world can include paid-for billboards or clearly branded items or subtle product placement (clothing, sunglasses, or vehicles, as in Gaia Online. Paid advertising can also be built into a game as a story element—think of the scientist friend who just happened to work forNeutrogena, featured in the infamous Lonelygirl15 series shown on YouTube. In-game advertising specialists such as Double Fusion, IGA Worldwide, and Massive are leading this field as they can supply the advertising inventory images needed to be streamed into the game world.
Around-Game Advertising
Around-Game Advertising
Essentially, this means making money from the banner and skyscraper ads around the gameplay window. This is already common on Flash game aggregator sites such asKongregate.com, and many use services such as Google (GOOG) or Commission Junction. The revenue comes from CPM (cost per thousand views), CPC (cost per click), CPA (cost per acquisition of a player—who plays the game), or CPP (cost per "paying" player—who buys something). Clicks are generally only worth a few cents, but paying players can earn a company many dollars.
Finder's Fee from First DollarYou need people to come and play your game, but if you can't afford CPM (cost per thousand views) advertising, which is essentially a bet on the effectiveness of someone else's Web site, don't despair! Even with no money to pay up-front, you can offer video-game Web sites either a percentage of net revenue or a "Finder's Fee from First Dollar." As money comes in from a player who has been directed to you from another site, that finder takes all the money until you hit the agreed fee (say $1.50 per player). In reality, they take all the risk and will be more aggressive in advertising your property than any campaign you could have paid for at CPM rates. If you balance the numbers, you can get a lot of Web sites working for you and sending you traffic this way. To make money from this, send your players to noncompetitive games in a similar kind of arrangement.
Advert-Games/"Advergaming"/Re-Dress
Already common on movie Web sites, games in which the whole experience is an advertisement can also be big. Think America's Army, made to find recruits for the U.S. Army, or the Burger King games on Xbox 360. Cool Spot back in the early 1990s was an early example made for 7UP. Players accepted that this game was a giant ad for 7UP—the main character was the big red dot from its logo! The advertiser helps fund the game while your reputation as a developer, publisher, or designer determines how much cash you can ask for. Another common way to make extra money from a game is to re-dress it for an advertiser and build a custom version. That's why you see so many clones of popular games like Bejeweled. (For an example, seeBewitched, made for Sony Pictures by Blitz Agency.)
Try Before You Buy
Trialware/Shareware/Demoware/Timedware lets you play crippled, shortened, or restricted-time versions of a game for free, while trying to up-sell the full version. This is a real balancing act as too much in the demo can kill any hope of future sales. Xbox Live has been experimenting with this concept and seems to have hit the sweet spot by giving one playable level and then closing with a big reveal (for instance: "There's a giant boss monster around the corner!"). Then they add: "Buy the full version to continue!" It's basically the old cliffhanger trick, and just as with TV drama, it works.
Episodic Entertainment/Expansion Packs
Episodic Entertainment/Expansion Packs
Again borrowing from TV, this model means that players buy a game's episodes as they become available, or pay to unlock everything current and new for a period of time, or pay for certain parts of the game. Sometimes the delays between episodes are quite major, in which case additions are often called "expansion packs." These introduce more content, characters, or places and are a great way to make money without having to remake the entire game itself.
Skill-Based Progressive Jackpots
Skill-Based Progressive Jackpots
This is where players buy a ticket to enter a virtual tournament. This generates a virtual jackpot, and the player who reaches a certain status wins. As the developer, you keep a percentage of the jackpot. The game must be skill-based to protect you from the current international gambling laws. King.com and Prizee.com are good examples of skill-based prize sites.
Velvet Rope or Members Club
Velvet Rope or Members Club
Users pay for VIP access and get special privileges and access to special areas on your site or in your games. They sometimes get access to new products before anyone else. (The more interesting perks you give, the more likely people are to want to buy in.) Sometimes, when buried in the gameplay, a game character can charge a player a fee, like paying the ferry man to take you to a very special island. (The player pays the ferry man real money to gain access to this "exclusive" area.)
Subscription
Demonstrated successfully by the likes of World of Warcraft or Age of Conan, these games are paid for monthly, usually by credit card or automatic debit payment. Sometimes they're coupled with a retail purchase to get access to the install files and user manual, maps, etc. Commonly, players set up the credit-card payments and don't stop them, as they want to keep the game "available" in case they come back and play more someday. (It's pretty great to get a subscription from people who don't even play.)
Micro-Transactions
These are small, impulse-driven purchases bought for reasons of vanity, saving time, better communications, or even moving up a level more quickly. (Levels are a player's ranking within a virtual society.) They're generally paid for using virtual points, either earned in the game (by playing), or bought for real money (which is a massive time-saver). A new trend is offering virtual items in exchange for access to a player's real-world friends. So for example: "You can have this magic sword, if you invite a friend to play." Getting that balance right can mean stunning revenue growth, which makes it even more important for you come up with offers the gamers really want. This technique works well on social networks like Facebook as friends are just a click away. If you can get more than a 1 to 1 ratio, the game goes viral, which results in exponential growth. That's the goal here.
Sponsored Games/Donationware
Also known as "Serious Games" (usually games played to learn things, or improve the world), these are the games that in some way help society. They could be paid for by a philanthropist, state or government grants, a charity, or by a nonprofit. Onebiggame is an example. To be clear, there's no money to be made from the game itself as it's commonly given away. So if you do make a sponsored game, be sure to include your profit in the development or distribution bid.
Pay Per Play/Pay As You Go/Pay for Time
Just as in the old arcade machine or pinball days, players pay for a go. They only pay for what they need, for a pre-set number of lives, or as long as they can last. Also used in Internet cafes and game parlors where they sell computer time, this model can be used for game time online as well.
Player-to-Player Trading/Auctions
This allows players to trade land, property, characters, and items—directly and also through auctions. You keep a cut of all the money exchanged. You also keep the transactions safe for the player (they don't have to risk the black market for characters). Some games let players cash earned money out of the game, and managing the transactions can become a full-time job. But it's also a major fraud generator (players use fake credit cards, buy things, trade things, sell for cash, cash out), so you have been warned. Companies such as Live Gamer are trying to make this safer for players.
Foreign Distribution Deals
When you need funding, pre-sell your foreign distribution rights. Then use that money to fund the project in the countries you care about the most. So imagine taking advances from Russia, Asia and Europe to fund a title you plan to release in the U.S. (where you own the rights). This can save a lot of money and leaves you owning the IP rights to whatever you build, which is incredibly valuable if the game is a hit.
Sell Player Access/Co-Registration Offers
This is where you monetize your users by inserting special offers or personal profile questions into the registration loop. So when a player registers, he or she is asked to fill out a profile in return for virtual points. PrimeQ.com is an example of an agency doing this, where you get paid for each form you can get filled out for them. They then sell this live data to external marketing companies looking for hot leads. (The value of a lead is equal to how exclusive, revealing, and fresh the data are.) The agency generally provides the questions and the Web site capture forms.
Freeware
This actually isn't a model to make money per se, but if you create something that's very compelling and it gets a lot of users, you can expect offers to acquire your software, company, or technology. So make it for free, get noticed, get bought or hired, and in a very roundabout way, you've monetized freeware.
Loss Leader
This means you sell a game far too cheaply in order to focus on your real goal and the real money. You use the passionate following to your free game to help sell something else, like a toy, TV, or movie deal, and that's where you rake in the cash. For example, you make a good game and sell it at what seems like an amazing deal for the player. What you are really doing is building awareness for a brand or for characters, for which you have other financial goals.KiddieCastle.com is doing something like this to get parents and kids to notice its vending machines at airports and theme parks.
Peripheral Enticement
The Nintendo Wii Fit game with the Wii Balance Board or gym equipment (such as virtual bikes or rowing machines) provide good examples of this model, which essentially means that a game cannot function without a piece of equipment. It's really a way to tease players with software they want to experience and get them to spend money on an expensive piece of hardware. Rock Band from Electronic Arts (ERTS) is another good example of this model in action.
Player-to-Player Wagering
Players place wagers before going head to head. The winner keeps the pot and the developer keeps a percentage of every pot. As with the jackpot business model discussed earlier, these games must be skill-based. Gambling virtual items is another model whereby players buy, earn, or trade virtual items, then bet them with the winner keeping all. (You made your money selling the items in the first place.)
User-Generated Content
This is where your users make endless new content (like virtual buildings, clothing, music, etc.), and then they sell or exchange it with each other. The design of your game needs to include user stores, and you take a commission.
Pay for Storage Space
Offer space on a server for players to save progress, stats, game data, etc. This can be used for karaoke games, for example, where players pay to store an instant library of their favorite songs with their customized reverb/volume/lyrics settings. Or say you adopted the user-generated content model of the previous slide. You might then also sell extra storage space for players to store all the virtual items they keep winning and buying.
Host Private Game Server
This is more for the hard-core players of games such as Counterstrike who need really fast network-response times to make a game fun. You rent dedicated servers with the gameplay server software pre-installed, meaning players have access to a "ready to go" dedicated server. They share this access with their group of close friends (who commonly help cover the bill), and they can all avoid the dreaded lag issue, when the Internet slows down gameplay. These players pay to be assured a high-quality Internet network experience when playing their favorite game.
Rental
The old rental paradigm meant trying to design a game so it couldn't be played through within one rental period. These days, services such as GameFly mean that doesn't matter so much anymore. But rental stores can drive a lot of early sales of boxed products since they stock new titles when they're first launched. Making a "Special Edition" for a specific retail partner gives that outlet a compelling reason to get behind your game. All you have to do is find a way to add some very compelling content that will make gamers make the effort to play the "rental" version of the game.
Licensing
This includes ideas such as signing a deal with a chain of cyber cafés to unlock your game for their users. Or using your game as a part of a TV show. Or letting a corporation use your "hip" or "cult" game brand in their advertising. A good example is the McDonalds/Line Rider advert.
Sell Branded Physical Items
Use a service like Cafepress to sell T-shirts and branded objects to people who love your game. Alternatively, set up a deal with a company such as Figure Prints, which lets players create and buy mini sculptures of their avatars.
Pre-Sell a Game to Its Players
This model lets fans fund the development of a title. For example, they pay $10 in advance for a $50 game. They get to see the game developed, and they provide feedback before it launches. When the game is launched, they get it for free—they don't have to pay the remaining $40 for the game. Clearly you have to have a great reputation or a very hot idea to generate enough interest to pull this off, but it can work. Essentially, you found a way to get fans to fund your next game.
Before-Game Advertising
This means players watch an ad before being allowed to play a game for free. It does require them to be patient, but it also works as they are a captive audience. You can get plenty of advertising inventory from companies including Game Jacket, Mochi Media, VideoEgg, and Ultramercial, and it's a very easy way to make revenues with your game. Be aware, however, that developers now get a pretty small amount of revenues from advertising this way (unless they have major traffic). But developers can also use these adverts to drive micro-transaction sales, selling a special 30-day item that turns off the advertising. That item can make you a lot more money per player than the advertising would have. You can also offer "optional" advertising, rewarding players that turn on the adverts with virtual coins or experience boosts. A new trick is to offer "invisible" wrappers, so if a game is played on your Web site, there's no advertising, but if someone grabs the game and puts it on their site (30,000 sites do this), then advertising before the game turns on automatically. So they got your game, but you get their advertising.
Virtual Item Sponsorship
Advertisers pay reduced fees to buy large quantities of virtual items that they then offer for free to gamers. So you make your money from the advertisers, and the gamers are happy to receive an item from a sponsor. You sell Coca-Cola (KO) 500,000 magic potions that boost a character's energy at a low cost, and you make the same item very expensive for the gamer to buy. Then the game shows a pop-up where Coca-Cola offers them the item for free. That's the most positive exchange with an advertiser ever, as Coca-Cola is giving players something they want and know is valuable. So everyone is happy.
Add Download Insurance
That's the $3.95 a gamer sees on an invoice with a little note that says: "To keep your download available online, just in case you need it." The publisher is basically saying: "Buy and download this game now. Pay an extra fee, and if your hard drive dies, you can always come back and download the game again." So in a funky way, it's like selling insurance.
Pay Players to Meet a Challenge
I first saw this in a Mafia-style game where players were paid $1,000 in real money from the publisher if they could "Whack a Don" in the game. That basically turned the player into a virtual hit man. As the game designer or developer, you obviously make the task really difficult and blend it with other revenue methods to fund any $1,000 payments you might have to make. So in reality the method here is to seem to be paying the user to play, but the game is making enough money to cover those payments. The bigger the game gets, the bigger the reward gets. So balanced just right, this could be very successful as a monetization method.
Sell Something Consumable
Another trend in free-to-play games is to sell consumable items such as virtual bullets to fire guns, virtual birthday cards for other players, or even the virtual gas you need to drive a car. However, this model really grays the "free-to-play" line and should be a last resort for generating revenue.
Feed Me or I Die!
Players spend a lot of time making characters they care dearly about. (You will never understand this unless you've invested endless hours in something that can be erased in seconds.) So there are two techniques to keep virtual characters "alive": pay to feed them (by buying virtual food) or, less creatively, pay to get access to them. Designers are now adding more and more things a player needs to do to keep a character alive. For instance, keep them healthy through visits to the virtual doctor. In fact, designers can give your "pet" or "character" any disease they like, and you have to deal with it. Not kind, but its another monetization model.
