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Analyzing console online revenues

June 28th, 2007 (Visited 3893 times) Tags:

Adrian Crook has an interesting article titled “The Economics of a Free-To-Play Console Game,” which attempts to break down the revenues that you could expect to see from having an online game on XBLA that was free-to-play and then monetized via upsells or item sales. In other words, monetized via what is widely considered the “rising wave” business model.

His conclusion?

Consoles are always going to be a subset of the addressable market of PCs and for now should be considered a secondary or tertiary platform for all but the cheapest-to-produce or most daring F2P endeavors.

He reaches this conclusion via simple math:

Take the 360 install base
Remove all the folks who don’t have Live
Remove all the folks who have Live but don’t ever play Live Arcade
Figure half of them never even download your free game
Figure you monetize only 1/10th of them — no wait! Some of them won’t stick. You can’t figure monetization off of your total downloads.
So figure you actually monetize of your monthly uniques, and manage 15% of them.
Multiply by your lifetime ARPU of $100

So, the weird thing there is of course that monetization step. It’s actually a complex calculation, because figuring just money off of your uniques each month isn’t right either. You can’t really multiply lifetime ARPU times on month’s typical uniques.

What you usually do is break it down further:

Figure half of them never download your free game (btw, this seems like a really high number — I wonder what the attach rate is on a typical XBLA game demo? David Edery, are you reading?)
Of those left, a percentage will bounce off and the remainder will stick for some appreciable amount of time. Usually, we use a month for this figure, and we call it “conversion” in the subscription world. (Because they convert to paying subscribers).
Regardless, now the clock starts ticking against an average user lifetime. No two users will be the same here, of course, but you can take an average for the purposes of ths calculation. An MMO that is really sticky will see a year and a half; an MMO in trouble will see three months or less, with all sorts of numbers in between.
Daniel James mentioned at the Virtual Goods Summit that in fact you can expect comparable average revenue from a subscriber customer versus a microtransaction customer — either way, there’s basically a threshold there, and you still usually get the same amount of money out of a given player.
So, one back of the envelope calculation would be to take the lifetime ARPU of a user, divide it by the average lifetime of a user, and figure the ARPU per month.
Then you take the area under the curve of the classic user usage pattern that I mentioned, and multiply it by this figure. And this will give you a better estimate of lifetime revenues.
Except then you have to chop off all your ongoing costs. I don’t know what the profit margins are in the F2P world. In the subscriber world, it could be anywhere from 60% down to 10% depending on the overhead you incur. You can run really lean and mean (and likely give really bad CS), you can have all kinds of cool infrastructure support and ongoing investment in the platform (launchers, shared tech, etc etc), you could be developing a new game on the back of the first one… lots of ways to go there.

Bottom line, I think Adrian is a bit pessimistic here — he ends up by citing these figures:

35K paying users

$100 ARPU per paying user, lifetime

$3.5M

Ugh. That’s $3.5M in revenue on a product that, if you’re not a small, furry animal like Three Rings, might cost you low 7 figures to develop. That level of profit is respectable from a contribution margin perspective (i.e. aiming for a 30% return), but not exactly a game changer on the scale of Kart Rider or Maple Story.

No, it’s not a game-changer, but for a small company, it’s a perfectly viable business, and likely sustainable over the long haul. (And it’s probably underestimated — it’s missing that full time dimension). Lastly, really, you should be a small furry animal if you are playing in this sort of territory.

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raphkoster_rss: Analyzing console online revenues wrote on June 28th, 2007 at 2:05 pm:

[...] http://feeds.feedburner.com/~r/RaphsWebsite/~3/128741240/http://www.raphkoster.com/2007/06/28/analyzing-console-online-revenues/Adrian Crook has an interesting article titled “The Economics of a Free-To-Play Console Game”, which attempts to break down the revenues that you could expect to see from having an online game on XBLA that was free-to-play and then monetized via upsells or item sales. In other words, monetized via what is widely considered the “rising wave” business model. [...]

External News wrote on June 29th, 2007 at 5:15 am:

[...] Analyzing console online revenues [...]

The Economics of a Free-To-Play Console Game « Free To Play wrote on June 29th, 2007 at 8:06 am:

[...] Raph’s Website » Analyzing console online revenues Says: June 28th, 2007 at 11:54 am [...]

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Adrian Crook said on June 28th, 2007 at 12:38 pm:

Wow, you’re quick Raph! I wrote that at 2am last night. I hadn’t even sent the article to anyone yet. I appreciate your feedback on my rough metrics – I’ll work that into future calcs and do my best to become more of a small furry animal than a dinosaur.

Patrick said on June 28th, 2007 at 1:25 pm:

Relative furriness aside, I think this is a really viable business approach, just not for a few years, and not on the 360 or PS3. A Wii Channel serving as a portal to a free virtual world, preferably one that can be monetized by item sales AND ad-integration (in a more robust sense that we’re used to seeing), with some kind of cross-demographic appeal so apartments and houses full of people can yield a few subscribers by association of exposure, combined with a great interface and a fairly deep dynamic, and you have something that could gross tens of millions on an installed base of 30 million units, which I suspect the Wii will surpass by 2010.

That was one whopper of a run-on.

Patrick said on June 28th, 2007 at 1:26 pm:

By “subscribers” I meant, “active players”, sorry.

Adrian Crook said on June 28th, 2007 at 3:35 pm:

Just added an update to my original article. I had forgotten to deduct the 30% cut Msft takes of DLC. So that revenue estimate went from $3.5M to $2.5M.

curious said on June 29th, 2007 at 3:10 am:

I am curious, but what does it mean to be a small furry animal?

Patrick said on June 29th, 2007 at 9:10 am:

It can mean a lot of things, but usally it means smaller team and/or burn-rate, looser corporate structure (i.e. work is modulated by remote contracting, development partnerships, outsourcing, ect. not nessecarily a more lax corporate tempo), smaller budgets, more reliance on procedural content, target platform usually is either a low bar console (like the DS or the PSP, or one of the console’s online markets) or is the internet, which can include downloadable games, web-based games monetizing on a variety of business models, or some kind of middleware/service provider. In other words, an entity operating with wider constraints than the big AAA console studios.

Kim Pallister said on June 29th, 2007 at 9:53 am:

I find the ’small furry animal’ nomenclature funny, as it looks like Raph’s dinosaur/mammal metaphor is getting firmly entrenched!

I can’t comment on things like attach rates, trial rates, etc. I will say that like any portal (msn games, for example), or for that matter, any retailer, than marketing and promotion can sway the number a fair amount.

Interesting analysis anyway!

David Edery said on June 29th, 2007 at 4:46 pm:

Likewise, I can’t really get into the numbers, but I think there’s opportunity in this space for concepts of reasonable scope. And if those concepts are ultimately developed by SFA (Hah! First to use the acronym!) that’s fine by me — XBLA is geared to support indies.

Azaroth said on June 29th, 2007 at 9:50 pm:

I always knew I was cute.

Andrew Crystall said on June 30th, 2007 at 9:05 am:

The problem with XBLA is getting on there in the first place. Microsoft have definite ideas what they want, and only release so many games per – basically, you have to allow them to exercise creative and scheduling control.

Which is why WiiWare is interesting. Because Nintendo won’t be exercising creative control (aside from the “no AO games” policy). I still think the controller is good only for a subset of game types, but if you’re working with that sort of game – it’s got to be interesting. How much they control scheduling, well, we’ll see.