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.
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
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.