Free Games and Naievete
Chris Anderson, in his generally interesting Long Tail blog, made an intriguing - if slightly uninformed - post today that I thought worth responding to.
Now, Chris is a smart guy, and he’s done lots of important things for the tech industry as a whole. This includes coining important phrases like Long Tail, and editing magazines like Wired. But when it comes to game distribution issues, he just doesn’t understand.
I helped found a company called Trymedia Systems, the first successful company in the digital game distribution space. At one time, Trymedia powered almost the entire universe of downloadable game options, and, working with our partners (Yahoo, AOL, BigFish, etc) helped provide the infrastructure that’s enabled downloadable games to flourish. We started at the height of the boom (1999) and sold in 2005 to Macrovision, enduring a lot of pushback (”Gamers want to feel the physical CD in their hands”), pain (a big chunk of time unpaid during the downturn) and progress (More people play games on the web than any other channel).
But Anderson really misses the point about digital distribution. The marginal cost of a disc-based game is already very small - <$2/box for most, on an MSRP of $50. That doesn’t equate to a ton of costs that can be repatriated to the consumer. And, let’s be clear about something very important: games that are free-to-play/item based make significantly *more* money than most of their disc-based counterparts - when you look at an overall ARPU basis. And while most MMOGs (including Funware apps like rmbr) have a baseline free version, our business is absolutely predicated on the idea that people will pay for various items, powerups and features that are locked without a monetary contribution. This is nothing like the business model employed by most Web startups, because we really don’t give the game away for free, even though it *looks* like we’re doing that to the uneducated observer. We finely tune our online MMO products to wring the maximum revenue from each user - and that’s something the games industry is positively expert at doing.
Take a look at this ARPU chart. This is average revenue per user for a string of MMOGs. Does any regular “free” website get this kind of revenue? Does any non-porn web property even come close? Remember, these are averages, and the normal distribution is that most people don’t pay. 
The reality of downloadable games is that you’re lucky if 1% of the people who download your demo convert into paying users, and the distribution in MMOs - while better - still doesn’t suggest that 70% of lookers turn into buyers. So, we make due in all corners of the online business by getting some ad revenue where we can, selling subscriptions to those that will buy, and selling our product (be it virtual real estate or a CDRom) to those that are really passionate about what we make.
But let’s be honest. There are no free rides in games - and no partners/investors willing to pay $15Bn for a games company that doesn’t make money. So, until then, I guess we’ll just have to make do with our focus on revenue and engaging users.
October 25th, 2007 at 4:30 pm
Excellent points and I agree on almost all counts. I think you were slightly misunderstanding my point, however. I’m not saying that people won’t pay for games or that games should all be free, only that digital distribiution means more and more games can have free *versions* that maximize their reach. Of course the hope is that some people will convert to pay, whether it be in items, susbcriptions, or full versions, and clearly the market for pure ad-supported games is limited. But I do think that the shift to online distribution and play (both on PCs and consolues) is going to change the economics of the business, and I was hoping you’d get more into that.
One last point: I don’t understand how you can say that the marginal costs of a disk-based box is $2. Are you including manufacturing, wholesale distribution, wharehouse overhead, retail overhead and returns? For a box retailing at $40, I would expect all the marginal costs throughout the supply chain to be at least $20 and usually more, when you include both the wholesale and retail economics. After all, that’s what ultimately determines the price to the consumer, and that’s what gates demand.
Best,
Chris
October 26th, 2007 at 5:54 pm
Great points! I am very into the idea of digital distribution changing the paradigm…I did basically give up most of my twenties to the cause.
Sorry for misunderstanding your points.
As for the marginal cost issue - you’re right - the distribution margin is between 30 and 50%. Once you account for everything, on average, a title at retail is 50% publisher, 50% retailer. But therein lies the issue: it’s very hard to distribute games directly from creator to consumer, except in extremely rare cases. DD mostly helps developers (by making publishing less relevant), and the the boom in game-related VC interest also helps (alternate sources of completion financing) them. But none of these trends are positive for the publisher. Retail channels online insist on similar margins (they can be as high as 70% when it’s just a dev-retailer model), basically ending up with devs clearing a bit more money (10-15% of gross), but not substantially more. So DD, so far, has actually fattened the “retail margin”. Imagine that!
As you can probably tell, I’ve given a couple of “online games value chain” talks at GDC/CGA.
Happy to dive into this further with you anytime.
Gabe
April 15th, 2008 at 12:41 am
You are saying that developers cover cost in one or another aspect even if they provide games free of cost. Then my question to you is why every game is not distributed as a free and why users get demo games often and not the full free version games.
April 21st, 2008 at 6:54 pm
Nikhil (Free Games):
I think every game should have a free version. There is no reason to design *anything* today without a “free to play” angle (even if it’s just a demo or entry level version), but we should remember very clearly that people need to get paid for their work. And ultimately, there are a number of conditions under which truly free just doesn’t work. At some point, someone has to pay for the developers effort, and there’s no way around that.
Gabe
May 6th, 2008 at 3:32 pm
In the Czech Republic where I live, sales of MMOG have been rising for more than two years in a row. The reason is that people rather want to play co-operative online games and fight “human” enemies than playing against a computer.
November 20th, 2008 at 9:00 am
Great work chris. I really like your point of view. Every game should have a free demo in order to give the full description of that particular game. Thanks for sharing such a nice information with us.
May 19th, 2009 at 10:35 am
Have a Great Time Playing