19 Dec 2018 The New Age Gaming Business Model
If you’re familiar with any of the giant triple-A game studios of the world, you might have heard this phrase being tossed around: “Games as a Service”. Why are games now being viewed as a service? What happened to the good old-fashioned style of walking into a store, liking the cover art or the excerpt on the back of the CD ROM cover and buying the game with complete knowledge of what you’re paying for? For developers and marketers alike, what you’re about to read is certainly going to intrigue you!
Games as a Service
Gone is the brick-and-mortar video game selling business model; companies have learnt that a recurring revenue stream is far more scintillating than a one-time payment for a physical commodity. Thus, comes the new age business model, Games as a Service (GaaS). This means that customers get your product (for an upfront price or for free), and instead of working on the next title, you continue to develop the current product, adding items to the general experience of the game as well as the in-game market to increase customers’ in-game transaction activity. Instead of being a developer-centric product, games have become player-centric; here’s a list of changes to the business model:
To quote some of the big players:
Square Enix mentioned in their financial presentation: “Titles that have become global hits recently have tended to be offered via the “Games as a Service” model, and we believe this is going to be the mainstream model for gaming in the future. In developing future titles, we will approach game design with a mind to generate recurring revenue streams”.
Ubisoft CEO Yves Guillemot, in a financial call, explicitly mentioned: “We are transforming our games from standalone offline products into service-based platforms where we can continually interact with and entertain our players”.
We might deduce that ‘games as a service’ is a direct consequence of man’s reliance on the internet. If someone owns a $299 console or a $1000 PC or a $500 smartphone, he’s sure to be able to afford a $15/month internet subscription service. It’s no secret that multi-player functionality increases a game’s longevity exponentially; also, ad revenue is the genesis of ‘Games as a Service’. There is a symbiotic relationship between ad monetization as well as in-app purchases and free-to-play games as a service, and this is where the $60b mobile game industry comes into play.Ad Monetization
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Ad-monetization requires developers to constantly update their game with new levels, unlockables, flash sale events amongst many other possibilities for experience expansion, all so that players always come back to the game and thus are exposed to ads each time they turn the game on, therein lies the gold mine in an otherwise free-to-play game.
App Monetization has seen 3 shifts historically and they are as follows:
– 2007 – 2012: Paid apps (face value price)
– 2013 – 2016: Free apps with a high amount of in-app purchases, a small amount of ads
– 2017 – present: Free apps with a small amount of in-app purchases, high amount of ads
This explains how, for the past 5 years, free apps have dominated the app stores charts; the top grossing apps were the apps that monetized heavily through in-app purchases and the top downloaded apps were those that used ad-monetization.
Thus, in the gaming apps market ecosystem, there are users at the forefront who would pay top grossing apps for in-app purchases, in the middle lie the top grossing apps that use the revenue from their enticing virtual goods/services to increase their user base through monetization, and finally in the background, are the top downloaded apps that makes use of its huge (organic) player count to advertise other apps to them and earn their bread and butter from there.
Other than ad-monetization, in-game transactions are the bread and butter of games that act as services; depending on the developer’s business models for the games, they may be free with many in-game experiences locked behind a price wall such as in-game money, levels, characters and/or inventory (eg. Clash of Clans), or they may have a face-value price tag with just cosmetic items (that are purely aesthetic and do not impact the game experience) up for sale (eg. Minecraft).
The latter type of business model is often considered a risky one. It is very important to make the user feel that if he has already paid for the game upfront, that he should not need to invest further as he will feel entitled to all the game has to offer in terms of service; this brings us to the curious case of Electronic Arts.
Gaming studio giants Electronic Arts released their second instalment in the Star Wars Battlefront franchise in 2017; ‘Star Wars Battlefront 2’ (SWBF 2) was set up to be a huge improvement after the first game disappointed fans by hiding the main bulk of the game’s content behind a hugely expensive season pass. SWBF 2 was set to ditch the season pass model and adopt the ’game-as-a-service’ model, adding content to the game by-monthly and getting its financing from in-game transactions. Unfortunately, EA decided to tie the multi-player progression behind a loot-box system; not only did players that shelled out 60$ for a game have to pay more for in-game items but they would have no control over what they bought.
A loot box system is defined by an in-game item that can be bought using real money that gives you a randomized item based on a set algorithm. It can be compared to a slot machine, you may either strike gold and get what you wanted to level up or luck out and get an item completely unrelated to your progression), and this landed EA in hot water with governments as well.
Needless to say, EA learnt their lesson the hard way and had to re-strategize their approach with SWBF 2 and eventually pulled loot boxes from the game but it did little to dampen the negative press the game got. It is very important for developers to keep customers in the forefront of their operations since at the end of the day, they hold the key to the revenue studios need.
In the gaming apps market ecosystem, we’re told that it is impossible for all the apps to survive on ad monetization alone, there needs to be a driving force of revenue into this ecosystem other than the apps themselves. This, as you now know, comes from the in-app purchases; Forbes predicts that Fortnite will make $500bn on Android alone, and Fortnite earns its revenue from in-app purchases only!
However, a study by Soomla shows that with the recent introduction of paid discovery in the app stores, Google’s new algorithm that put indie developers at risk as well as Facebook’s focus on user experience and growth in Instagram ads have collectively made it easier and cheaper for top downloaded apps to also start acquiring users from paid channels.
”In essence, this means that through this disruption in the ecosystem, a top downloaded app could start promoting itself amongst another top downloaded app and the latter would need to ensure that the user it acquired for X cents should be exposed to enough ads to generate Y cents where Y is greater than X.” (This information was retrieved from a blog post by Soomla)
All of a sudden it’s become possible for an app to start profiting from promoting itself; there is a certain type of game app that specializes in this business model, known as a hyper-casual game; through investing in advertising themselves and then advertising to their newly acquired users, they are essentially making a risk-less investment. This has led to the industry calling these apps Arbitrage Games; examples of hyper-casual games include: Solitaire, Jigsaw, Sudoku, Mahjong to name a few.
Points to Take Away
We can confirm that we won’t be coming across complete games off-the-shelf anymore, it is simply more profitable to market and operate games as services instead of one-off products.
As we have learnt, there are two ways for a developer to monetize his or her app; he or she can charge users with in-app purchases, or through ad monetization depending on the kind of apps in question.
If the idea of the game is simple yet engaging enough, the app could become a hyper-casual game; this would mean that it could finance itself through ad monetization only and would have no need for in-app purchases, terming it as an arbitrage game.
As a fact hardware precedes software, and big mobile companies like Samsung, Apple, Xiaomi, Razer (to name a few) are doubling down on gaming specifications within their devices to ensure that their smartphones can manage to run the most demanding mobile games with gleaming results, essentially giving handheld consoles a run for their money. Such a precedent holds exciting mysteries for the future, can more prestigious games like PUBG, Fortnite come to mobile? What new aspects can be brought to these games that could be monetized? An evolution in the making or a revolution taking place? All that’s left is for Bob Dylan to sing a song about it!