Free-to-Play, Social, And Mobile Games

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Trends in Digital Gaming:Free-to-Play, Social, and Mobile GamesPietro Macchiarella, Research Analyst, Parks Associates

The Number of Gamers is IncreasingParks Associates’ study Online Gaming and Digital Distribution found thatan astounding number of people in the U.S. play some kind of videogameon a regular basis.135 million people play at least one hour of games per month (compared to 56 million in 2008).Gamersvey of U.S. gamers that quantifies their gamingindividuals in a broadband household whoplay at least one hour per monthare definedOnline Gaming and Digital Distribution is a surand spending habits and determines their gaming preferences and future intentions.The Number of U.S.Gamers increased 241%from 2008 to 2011on any platform.Most of these new gamers are casual gamers and have been attractedto the gaming world by social or free-to-play games through new,160convenient platforms such as smartphones and tablets. Online, andfocused essentially on packaged goods sold at retail to one that providesservices to consumers.Instead of ending support of customers after they buy individual gametitles, game companies now focus on building gamer communities anddeveloping ongoing relationships with their customers. The positive effect(Millions of Gamers)especially mobile, gaming is transforming the industry, changing it from oneof this approach is that game monetization can be extended beyond thepoint of sale. Unlike traditional offline games, the online world allows the in-80020082011Source: Online Gaming and Digital Distribution Parks Associatesdustry to earn revenue even when people play the same game repeatedly.About 80% of U.S. gamers play either free-to-play onlineAverage Monthly Spendinggames or Facebook games.for Social/Facebook &Free-to-Play GamesIn general, Facebook games, also referred to as social games, can be free-to-play and(U.S. Broadband Households)vice versa, but in the Online Gaming and Digital Distribution survey, Parks Associates askederage Monthly Spendingrespondents to distinguish between their Facebook games 30and the free-to-play games theyplay outside the social network (e.g., on a PC). Therefore, the two categories of free-to-play games andFacebook games as referenced in this whitepaper are exclusive.2

Trends in Digital Gaming: Free-to-Play, Social, and Mobile GamesFree-to-play GamesThe NumberU.S.The premise of free-to-playgames is ofin thename—playerscan play for freeand open increasedtheir wallets only241%when they needGamersvirtual items or upgrades to enhance their gaming experience,from 2008 to 2011an approach broadly referred to as the microtransactions model.160The mechanics of gameplay vary—they can be synchronous orasynchronous—and examples of free-to-play games include(Millions of Gamers)MapleStory and Lord of the Rings Online.80 of this business model is to remove theThe main advantagebarriers of retail cost and subscription fees, which tend to beformidable disincentives to play games, especially for casualgamers. Those segments who do not consider themselves0“gamers” are much more likelysubstantial amount2008 to spend a2011of money on free-to-play games than they are to purchaseSource: Online Gaming and Digital Distributiongames at retail outlets.For example, in the game Lord of theParks AssociatesRings Online, players have the option to buy extra quests,cosmetic gear, rare mounts, experience boosts, and more toenhance game play.Players often cite the microtransactions model as a way toreduce their gaming expenditures because it allows them tospend according to their budget and play patterns. However,Parks Associates research reveals that people who spend moneyon these games tend to spend amounts that are comparableto the cost of traditional games.In particular, gamers who spend money on Facebook gamesaverage about 29 USD per month in spending while thosewho pay for virtual goods and upgrades in free-to-play gamesspend about 21 USD per month on average. These amountsare not too far from the 24- 27 per month spent by incidentaland occasional gamers on new console games.Average Monthly Spendingfor Social/Facebook &Free-to-Play Games(U.S. Broadband Households)gam e r s 30Average Monthly SpendingIncidentaltend to playa lot of hours(but do not know why)whileoccasionalgam e r s 0sp e n d t h eleast timeamong all lay“Spenders”Source: Online Gaming and Digital Distribution Parks Associateswww.parksassociates.com All rights reserved.3

The most important benefit of monetization models basedon virtual items is that there is no maximum amount thatplayers can spend on each game.In the traditional retail model, the maximum amount earned per gamer by a publisher is mostly limited to the purchase price.In free-to-play games, the game experience can be monetized virtually forever, as long as the game engages its user base.Obviously, the biggest challenge for this type of game is convincing enough people to become paying customers. Currently, thelarge majority of gamers do not pay any money to play Facebook or free-to-play games.Most titles monetize only 5-10% of their active player base.Social/Facebook GamesFacebook games (also referred to as social games) have some unique characteristics that set it apart from other online games. Social games are layered on top of social networks. Theyutilize the underlying social network platform and need toconform to its guidelines, which usually include privacy,spamming, and monetization constraints. Social games are asynchronous multiplayer games. Gameplay is designed as asynchronous (instead of synchronous, asin traditional videogames). This setup eliminates the requirement for players to be online at the same time as their opponents and allows social games to be played without hugecommitments of time. Social games are extremely viral and can scale up theiruser base in a short period of time. Zynga’s FarmVille gained10 million daily active users in its first six weeks in the market;CityVille reached 20 million users in 11 days1, making it thefastest-growing game in history.14 Social games are mostly casual in nature and require littleup-front development costs. However, since social gamesare ongoing services, expertise in providing Internet servicesand customer care is essential to a company’s success. It isnot uncommon for operational and service costs to accountfor 70-80% of a game’s total cost. Finding cost-effective infrastructures to accommodate huge customer bases of millionsof players is critical. Social games provide impressive amounts of user data.Game developers are able to fine-tune their games afterlaunch, based on users’ behavior. They can detect lapsesin user interest and take measures to revive interest in thegame (such as launching new virtual items, special offers,etc.). These steps are nearly impossible (or prohibitively expensive) to do with traditional boxed -20-million-users-in-11-days-2010-12

HouseholdsSource: Online Gaming and Digital %Distributionwho play games on specific device at least monthly Parks AssociatesSource: Mobile Cloud Media and Access Platforms Parks AssociatesTrends in Digital Gaming: Free-to-Play, Social, and Mobile GamesAverage Monthly SpendingMonetizing Games onforMobileDevices &Social/FacebookFree-to-Play Games(U.S. Broadband Households)The popularity of online games and digital distributionof games has increased along with the number 30 of devicesAverage Monthly Spendingpeople can use to access and play videogames. The mostU.S. Gamers who download MobileGames or Gaming Apps20%is a computer or laptop, followed by the “traditional” gameconsoles (Xbox 360, PS3, the Wii). Not surprisingly, the useof game consoles and mobile gaming devices drasticallydecreases as the age of the gamer increases. Additionally,young consumers (18-34) are more likely than general 0broadband households to use their mobile phones toAmongaccess and play games.Facebook“Spenders”The number of mobile phone gamers has exploded in% Downloading MobileGames or Gaming Appspopular gaming device among U.S. broadband 82011Online Gaming and Digital Distribution Parks Associatesparallel with the increasing success of smartphones.Source: Online Gaming and Digital Source:Distribution Parks AssociatesToday, about 18% of all gamers download games on their phones,compared to 7% in 2008.Gaming on TabletsPreferred Gaming Device, by (U.S.AgeTablet Owners)Computer/Laptop100%Game ConsolePortable Game PlayerMobile PhoneTV Set-top Box80%50%40%0%0%U.S. 55 % Playing at Least One Hour Per Month on Tablets% who play games on specific device at least monthlySource: Online Gaming and Digital Distribution Parks AssociatesSource: Mobile Cloud Media and Access Platforms Parks Associateswww.parksassociates.com All rights reserved.Average MonthlySpending for Social/5

Revenue Models—Mobile GamingRevenue models for mobile gaming vary considerably as each developer/publisher chooses the best combination of monetization options for its games.Carrier26Strategic EffortsOutright purchaseThis model, similar to the traditional retail business model, capitalizes on volume by charging apurchase price. It is the easiest model to support because it does not require constant updates tothe gameplay but potentially leaves money on the table by not up-selling to current customers.Free game upgradable topaid versionThe challenge is to offer a compelling gaming experience at the initial level while holding backsome features that will convince customers to upgrade to a paid version.Free game with in-apppurchases(microtransactions model)If in-app purchases are properly implemented in the gameplay, they can generate more revenuesthan outright purchases. This approach has quickly become the most successful monetizationmodel.Free/Advertising-basedWhile advertising can generate significant revenue for the top-selling games (e.g., Rovio’s AngryBirds is estimated to generate 1 million per month through advertising2), it is not significantenough to sustain most titles.Subscription-basedPublishers charge users a monthly subscription to play a specific game (i.e., Order & Chaos Online)or a collection of games (i.e., Exent’s GameTanium service).Hybrid modelNone of the models above is mutually exclusive. The best model is a hybrid model that combinesmultiple revenue streams from a variety of models.According to Peter Vesterbacka, Rovio Mobile’s Chief Marketing Officer, quoted by TechCrunch, December 2010, d-1-million-advertising

S. BroadbandHouseholds18-2425-3435-4445-5455 % who play games on specific device at least monthly Trends in Digital Gaming: Free-to-Play, Social, and Mobile GamesSource: Mobile Cloud Media and Access Platforms Parks AssociatesImpact of Tablets and their Monetization PotentialTablets will have an enormous impact on the size of theIn other words, microtransactions based on impulsemobile gaming market and its monetization potential. As ofpurchases are greatly facilitated on mobile devices andQ3U.S.2011, Gamers71% of adult whoand 79%of teen tablet ownersplaydownloadMobiletherefore generate significant incremental revenues. Forgames on their tablets at least one hour per month.Games or Gaming AppsNearly allof the top 25 paid iOS and Android games are20%example, in Poker by Zynga players can buy chip stacks usingtheir iTunes or Android accounts.As a result, mobile games can yield high amountsaccessible (and tempting) to larger audiences. However,of spending per user. In particular, most of the top 25the real monetization innovation in mobile gaming is thegrossing games on both iPhone and Android devices can beintroduction of in-app purchases.downloaded for free.In-app purchases are equivalent to microtransactions onIn this way, mobile gaming is poised to expand U.S. gamingPC-based free-to-play games, but mobile gaming takes therevenues over the next several years by processing hundredsmicrotransactionsmodel to the next level by integrating the0%2006 Games2008running on2011game with user accounts.smartphonesof thousands of gameplay-related microtransactions for a% Downloading MobileGames or Gaming Appspriced at 0.99. This low price point has made gamesbroadening population of gamers.Digital Distribution ParksAssociatesandSource:tabletsOnlinehave Gamingindeedanda significantadvantage,comparedtotheir counterparts on PCs: they can rely on payment systems(via app stores or carriers) for which players do not have tosign up separately.Gaming on Tablets(U.S. Tablet Owners)100%50%0%AdultsTeens% Playing at Least One Hour Per Month on TabletsSource: Online Gaming and Digital Distribution Parks Associateswww.parksassociates.com All rights reserved.7

About the AuthorPietro MacchiarellaPietro Macchiarella joined Parks Associates following an international career in the wireless industry.He has worked in management-level positions throughout Europe and the U.S.In his role as a research analyst, Pietro covers home entertainment media with specific focus onvideo gaming, digital music, 3DTV, and connected CE devices. Pietro’s research interests also includeglobal residential energy management, with a particular focus on international deployments.He earned his degree in business administration from Università Commerciale Luigi Bocconi inMilan, Italy. He also has an MBA from Iona College in New Rochelle, NY.INDUSTRY EXPERTISE: Video Gaming, Digital Music, Connected CE devices, Mobile Services, 3DTV,Residential Energy ManagementABOUT Parks AssociatesParks Associates is an internationally recognized market research and consulting companyspecializing in emerging consumer technology products and services. Founded in 1986, ParksAssociates creates research capital for companies ranging from Fortune 500 to small start-upsthrough market reports, primary studies, consumer research, custom research, workshops, executive conferences, and annualservice subscriptions.The company’s expertise includes new media, digital entertainment and gaming, home networks, Internet and televisionservices, digital health, mobile applications and services, consumer electronics, energy management, and home control systemsand security.www.parksassociates.com 972.490.1113 [email protected]:Authored by Pietro MacchiarellaPublished by Parks Associates Parks AssociatesDallas, TexasAll rights reserved. No part of this book may be reproduced, in any form or by any means, without permission inwriting from the publisher. Printed in the United States of America.Disclaimer:Parks Associates has made every reasonable effort to ensure that all information in this report is correct.We assume no responsibility for any inadvertent errors.WP12-012312-18

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games or Facebook games. In general, Facebook games, also referred to as social games, can be free-to-play and vice versa, but in the Online Gaming and Digital Distribution survey, Parks Associates asked respondents to distinguish between their Facebook games and the free-to-play ga