Another liveblog…apologies for typos.
Monetizing Online Games
Lisa Rutherford of TwoFish
Karl Mehta, PlaySpan and PayByCash
Andrew Schneider, LiveGamer
Min Kim, Nexon
Moderated by Eric Goldberg
Eric: A realization at the conference that free to play is the future, these are the guys who can tell you about the future. LiveGamer recently acquired TwoFish. Can you each talk about your top three lines of business?
Andy: started in 2007b on P2P secondary market,and now we have a totalcommerce solution with nCash in Korea and TwoFish, helping partners get more revenue with microtransactions.
Karl:we monetize over 1000 games, microtransaction stack, prepaid card
Lisa: TwoFish focuses on post-purchase data, a data economy platform, what users do
Min: The most significant area I worked on, came out to US in 2005,started office in 2006, launched the payment card method here in the US, consumers had not been proven out yet. We looked at the iTunes card and said, we should do that. It started with the Nexon card. Distributed in 7/11, CVS,RiteAid, will be walgreens soon, 30k retailers in NA.
Eric: Nexon serves a very large audience of underage players,so Nexon led monetizing users without credit… let’s focus on North America. For those unaware, Asian market for virtual goods is estimated at $2b,first company in the world that has done $1b in revenue was Tencent, in CHina. Andy, your estimate?
Andy: what’s included in market size? Items sold by publishers,primarily, doesn’t necessarily include black market, which could well exceed the estimate of $200m here. Studies typically do not include eBay or other secondary markets, where we focused when we started.That market alone has been estimated at $2b worldwide on top of the other $2bn.
Karl: our study show the US market at around $700-800m, by including social games sales, entirely monetized by F2P. Take Flash games, casual games, MMOs, and social games, the primary market is 700-800m, growing at doble digits. Secondary market could be the same or double the size of that.
Andy: important to check what’s included.When I look at virtual goods at $200m, that is publishers selling goods, focuses on casuak and hardcore MMOs, not including social.
Eric: and Nexon, what is your sense?
Min:I estimated the f2p at around $300m on Andy’s definition, but I am curious if these gentlemen are including offers and cash-in as well?
(nods from table)
Eric: can you explain offers please?
Min:offers isif you play say maple Story and you don’twant to spend cash you can do an offe rlike fill out a Blockbuster subscription, and Blockbuster pays the ten dolalrs for you rpoints. Many companies on social games are doing offers now.
Karl: I include offers in there,andsocialgames are heavily monetized by offers. for context,Playspan alone is at $200m gross transaction volume, we think we’re biggest
Eric: let’s not make claims,no fights!
Min: all our games areIP blocked, there are international players which also muddy the numbers.
Eric: for the purposes of this argument,since the US needs money, if it comes form international players,we won’task unless it’s a drug deal.Real one, not virtualin Mafia Wars. Let’s start witht he core $200m, let’s talk about the most crucial second order factorsin building a virtualeconomy.Lisa, you wrote a great VentureBeat piece… what do people not in the field needto know?
Lisa: For game developers?
Eric:you have a system in place, what do you needto do to promote revenues?
Lisa:stop, take a step back, and figure out your goal.Get everyone to spend $50? Have them buy subs? You have to decide how much money att he end of the funnel.Then figure out how quickly they need to earn, and briudge that gap. What they can do by earning in gameplay,and then how much they will need to buy. If you just throw things out there to sell you are not going to optimize the gameplay OR the revenues.
Eric: you mean you have to build a P&L?
Lisa: yes, you need models, complex ones, typicalplayer behaviors in a month, much more of a retail company exercise than what a game company does.
Karl:the way you drive revenues is asking why do users buy?Lots of studies. Three things: performance, vanity, social and peer pressures. if you optimize on those three vectors and tune your game around those three things, you will find users move from spending $5 to $50. We work with partners to optimize those vectors.The great thing about F2P is that it is very scientific. You can model it and take your numbers from$5 to $50 ARPU.
Eric: so every game, all three vectors?
Karl:it does change genre to genre and audience to audience. Kids games, fantasy game, different from FPS for core gamers.
Eric: Min,you had to get money from people who didn’t wantto pay, kids. Can you talk about how to get money from kis, we’reall desperate over here.
Min:in the States most of our players are teens. Our median age is 17-19. Very big question,hard to answer, no cookie-cutter answer. you have to look at the type of game.You can’t just take one thing from one game and applythem to all. All items are “functional” so you ask whatfunction is it serving? Filling a need. The need in games is fun. Make it fun, then think about monetizing,it is about heuristics, not rules.We started out trying to make a subscription service for a quiz game, and we did a lot of trial and error and found we had to move to F2P.
Eric: I won’t ask you to cover your talk tomorrow, but can you give us the trailer?
Min: that kinda WAS the trailer! I kind of look at the current state of the market as ground floor,but you have to look at the kids using Club Penguin now, they will open different opportunities, in 2015 when they are 14-16 and have independent purchasing power,they will be buying new things:experinces in community and social experiences.
Eric: given that two of the speakers have pointed to a later question, let’s talk about demographics… people who grew up withthe Internet and those who did not. Gen X and baby boomers who have credit cards but didn’t grow up with it, and kids tained not to pay for music, movies,and now games.Andy, segmentation?
Andy:demography plays a key role, played key role in Asia, similar role here. A definitionof Gen X,pplwho grew up on consoles.Gen Y grew up on connected lifestyle and PCs, where digital persona is as important as your physical one, the way you present yourself in IM or 3d is important, how to customize myself. Those things become important in a social context and drive commerce.
Eric: concrete examples, how do I take a demographic group and do a distinct virtualgoods strategy for them?
Andy:my son is on Club Penguin, he cares about wearing what hi peer group does. It can go across demosdepending on the game.For some it is about achievement, highest mount or sword or armor.Or it couldbe customization of a shirt.
Lisa: We have two cusotmers at TwoFish, one game has littlepets you take care of, but in Star Fever Agency you make starlets famous by buyingthem breast implants and lattes. For the first group, credit card friendlyso grandparents andparents can buy for the kids, and buy toys to get virtualgoods.But with Star Fever it’swomen, timemanagement game, fashion and excitement,but` we add things likescarcity, vintage clothing, time limited items, provenance of an item affecting the starlet’sfame because she wore a great dress to the Oscars.So simple for the kids, and intricate social graph for the adults.
Eric:for kids, you work against a finite budget?
Lisa, yes, in termsof balancing you want to reverse price based on the money kids can put in. The other way, sky is the limit, peoplemight put more and more in if they are engaged.I buy lots of shoes bc it makes me feel good, and the same can happen in the game.
Karl: a contrary view to that, while important to segment the dmeo, also important to design to broad audience, if you go too nichey, your failing rate is high. Game designers, attract as broadan audience as possible.
Eric:Incidence of failure is higher in niches?
Karl: because competition is higher, we we have seen more failures.
Lisa:I don’t think this is becaus eof small demographic as much as rushed product. Look at late night TV, some folk watch a small segment of TV…entertainment has become more niche across all demographics.I think we see the same in games.Also important for democratizing the industry,small developers have limited resources and can satisfy a niche and grow it over time.So I agree there are more ways to reach more people and monetize,but the reality is that a lot of folks in this audience want a quick hold int he market.
Eric: Nexon plays on a big scale and on specific audiences…
Min:we usually try to go mass, Maple Story, Kart Rider, ovcer 25-30% of the korean population,but I have seen opportunities in both.Deopends on the type of game– low concurrency and fanatical fans who spend a lot can be aviable business.
Eric:can you give specific examplesthat worked?
Min: Atlantica is doing very well,from nDoors, has a rabid fan base and making very good money.
Eric is it an outlier? Only one of 100,000 that succeed?
Min:games that fail in a niche fail because they are bad, not because they are in a niche.Plenty of broad games fail too.
Karl: the higher probability of failure is from many factors. Theother thing about demo is that all the categorization is blurring, everyone is a gamer. Google is a game too. If you reallypackage and appealto a wide audience, you can reach out to a larger customer base,and then segment your virtual goods to core or enthusiast, gender, age… at a high level, address a wide demo,and at a goods levelgo to very narrow segmentation. A paradox.
Eric:can you argue a case for going small?
Andy:it perfectly reasonable to create niche contentwith digitaldistribution.
Eric: can you define a worthwhile nichesize?
Andy: It could be ten players.All depends on type of game,cost involved,and distribution.With digitaldistro and viral, you can get distrbution.
Eric: you can get the 11th?Can you really give me a game with 10 players that is profitable?
Andy:let’s invent one right now!
Lisa:a demographic of younger femaleslooking fo wealthy older males. A big desire for the wealthy males to signal wealth to the young women, they will pay a lot to signal something in that environment.
Eric: Karl & Lisa are onto something here… everything on the net is a game: online dating… more lessons to be learned from there that applyto virtual goods than from almost any other categor, and there are 10-12 years of history online (and a rumor of longer history offline)… To circle back, is anyone willing to describe…you describe a model.Is there a baseline larger than ten that is the smallest audience you should shoot for.Of the customers you have operated,what is the smallest profitabl eone,in audience size?
Karl:ifthe company is run by 2 people, the founder and his dog.
Lisa:exactly, unfair question, mr moderator! You can create something supercheap,you have to ask what type of game you want to have.
Eric:there are a lot of developers at this conference who work solo or two in a garage, I want to make sure to address thosefolks.
Lisa: and yes, you and your dog on a couch can make money.You do not have to be beholden to a large company, you can make money,just be clever,and you will have freedom you didn’t have.
Min:in termsof number of users, go to your Excel and figure out how much it costs to run.These games are a service, a core experience, server costs, staff, fresh content. Userswill bleed out if you fireand forget.You have to calculate on ongoing costs and does the business plan make sense.
Eric ok, you have 20k people, have reviewed the spreadsheet with your dog, now you operate it.How do you increase the revenue stream? I want to discuss merchandising.
Lisa: I think as a broader trend, microtransactions across the internet we have seen an evolution to etailing from retailing.We are moving towards detailing — smaller amounts, new payment methods, and a lot of the great services that are now available allow you to sell for smaller price points to mass audience. Third world and first world will be blurred, the idea of what you can resach will be completely different. Different price points to different people, different price points for territoties.
Eric:you have a stable of companies Karl.Can you give highlights for merchandising, increasing payment velocity?
Karl: rule #1 is you will have 50% outside the US,we see that consistently.You cannot assume they have credit card or paypal, assume global payment services, very important to drive volume. #2, a large portion will be minors, under 18, and you need a retail presence… target, walmart, 7/11.Prepaid card is 50% of the transaction volume. You can rent a retail presence, our card is at 45k in NA and 40k more worldwide. These two things see immediate revenue lift. #3 is, we have customers with ingame storefronts, hire peoplefrom retail stores to look at analytics as a retail store,and they change thignson a daily basis, experts with 15-20 yrs in store-running and pricing and promotions.Static storefront, it’s not going to happen.You have to be sophisticated and gotta have experts in pricing and promotions and managing it actively.We have seen incremental revenue lifts of 30-50%.
Eric: that may be a bit ambitious for the company with a guy and his dog. The point though is that you are in the direct marketing business… Andy can you elaborate?
Andy:We have 20k users with 1 dev,the assumption is it is fun, and great social display and community for reaosn to buy, and you can buy things. Before you get that person to pay, they needto be an atcive user, not passive registered. Then convert them to paying. Optimizing the feedback loop, make sure they go through thi whole funnel, and that is one of the big marketing challenges that many folks in this space are focused on.
Eric:Min,best practices at Nexon? Tho you are at the opposite scale from the guy and his dog?
Min:I do think it is a bit unfair to ask all these folks,they provide payment and billing, not games.At the core of it, you as developers are the ones who generate sales.Don’task Andy or Karl,they can help you, but they are not the ones that come up with what items sell well. It starts at the core of the product.
Eric;so who can help them, other than you, and you’re busy?
Min:it really is at the core of the product, what is the value from playing? Every game is very different.
Eric: can you provide 3rd party references? Not everyone here may have their inner marketer…
Min:in Maple Story we have hair styles, which support establishing identity. We will sell them in different formats, we sell them as VIP, take a coupon and pick form 10 different hairstyles.Most people can shape their characters,but for very special folks,they can choose “random”which gives access to stuff you cannot get any other way. For reallyspecial people, get hair that is not offered, they will spend more money to have it be random.
Lisa; using shorttemr offersto convert to paying.We have seen this in a few sports games…someone spendingearned points, and have not been buying things…give them something they want that expires.A simpleretail trick when you try to hit end of month numbers.We have seen online games do that effectively,and once they pay,they convert…
Eric: Don Choi pointed out that managing scarcity is one of the best ways to increase revenues.The other is seasonality, items tied to seasons, back to school, Christmas.
Karl: when someone buys an item, the news feed goes out on Facebook. A gun and ammo on Warrock, the friends get to know I bght this, and then some of my friends will buy it too,and those who don’t play it will ping me and ask what the game is.
Eric: is f2p is truly the future,what is blocking it in the US?
Andy: Broadband distribution is a prereq for high quality online,for 3d immersive MMOs, to compete with a shiny plastic disk.
Eric:Korea is so far ahead of us on infrastructure, they downgrade for here and don’t realize how bad ours is…
Min: The physical broadband barrier,yes. They click on an ad, they sign up, they decide to download, the gam eis a gig.In korea, that takes 1/2 a second,literally, and here it takes a long while.Users do not say “a gig of value!” it is abou perceived value of that time, and that is one of the ibg barriers.
Eric: OK, that elaboratesAndy’spoint. Would you say liquidity in the US is sufficient?
Min: I think that will naturally as populartion comes in, I am not worried about payments anymore.As demos age up, what will they do? Thatis when our company have giant success.
Eric: so mobile phones as credit cards in Asia, not a barrier here?
Min:it will come here too.I have seen our pay rate numbers here versus there… paying rates here are not that idfferent here.
Karl:online gaming is already the fastest segment of gaming, anf f2p is fastest subsegment, it will take the large publishers to adopt this.It took 5 years for adoptf2p, D&DO last WEEK. More will drive the growth.
Eric;so mug the big box pubs to get them to cooperate.
Lisa: I htink it is gameplay innovation.We have just started to scratch the surface with game and virtual economies, not just as a way to monetize but also user interaction, who they buy from,how they buy,what will happen next timeI level up, what I ewearand what i do.The success of offers retarded our growth because it was too easy, we didn’t meet the higher barrier that is the new challenge.Findthe new things that peoplewill pay for. We are going to see games with new dynamics we have never seen,and that will be what gets us excited.
Eric: to buttress the point, offer money has been easier and faster nut in almost every advertisiing segment where that happens, margins get hit, and then you get consumer resistance.And you are arguing that is distracting us from the hard work of making virtual goods work.
Lisa: we have amazing capabilities that have not been exercised yet. Think about your daily interactions with real people, we can do all of those. I am really excited from what i see from young developers and studios.