Alex St. John is president and CTO of social entertainment service Hi5. He was previously CEO and co-founder of WildTangent Inc., the world’s largest online game network with over 35 million monthly unique visitors.
“Commercide” to snatch defeat from the jaws of victory in online gaming by deciding to impose a restrictive commerce platform on your content producers.
“Advercide” to kill an otherwise successful online commerce business by trying to mix it with advertising incorrectly.
I’ve written on several occasions about the many fascinating parallels between the explosion in downloadable casual gaming in the early 2000s and the explosion in social gaming today. The content, distribution channels and business models all evolved very rapidly over a relatively short period of time. The companies that made the leaps in these areas lived to dominate the market (WildTangent, RealNetworks, Big Fish Games) while early market leaders often imploded (Yahoo, Shockwave). History is repeating itself in social gaming, especially in the endless struggle to find the right business model for online games.
In the early days of casual games, game developers created a stand-alone downloadable single player game and monetized through a basic business model – give the user an hour of free play then cut them off and demand $20. If they didn’t pay $20, refuse to entertain them any further and hope that the next player coughs up. Of course, as the market matured and got more competitive, there was enormous pressure to find more effective ways to monetize players. Between 2003 and 2007, there were a series of major leaps in monetization ideas that resulted in significant advances in downloadable game monetization. In rough chronological order, here are the ideas that worked, those that didn’t, and why:
1. Episodic Games = FAIL
Why: People consumed content faster than it could be produced, updating game apps didn’t exist, and there were rapidly diminishing returns for subsequent episodes because gamers lost interest quickly.
2. Advergames = FAIL
Why: Although custom-produced games for advertisers was and still is a great work-for-hire business, it was impossible to scale. Additionally, advertisers generally compromise game quality to over-promote brands, which results in poorly executed games.
3. Trial-to-Own = SUCCESS
Why: Giving players a free sample of a downloadable game and then upselling to ownership worked. In 2003, the average free game trial resulted in a $20 purchase from 1% of the players, and a hit game saw 3% conversion-to-purchase.
4. Free-to-Play = SUCCESS
Why: Hosting free Flash games on a site drove lots of traffic and low value ad impressions. Both Miniclip and Shockwave.com were early beneficiaries of this revelation, but Shockwave ultimately committed “Commercide.”
5. Subscription = FAIL
Why: Casual game impulse purchasers were offered an all-you-could eat subscription, and it resulted in cannibalization of other business models. Shockwave tried this model and ultimately killed its previously successful downloadable games business with it.
6. Rent-to-Own = FAIL
Why: Game developers didn’t want to jeopardize their boxed game channels with cannibalization from online distribution, so they demanded that online versions of their products have the same pricing model as their boxed products in retail stores like Wal-Mart. This demand was, of course, contrary to what online game buyers wanted, and as a result, rent-to-own was attempted unsuccessfully by some online portals, most notably Yahoo.
7. Upsell Bundles = SUCCESS
Why: Post-commerce transaction offers worked. The barrier to selling additional value to a user was much lower AFTER getting the user’s credit card. Typically, for every $1 in value the user was willing to pay BEFORE completing a credit card transaction, there was another $.40 in additional value that they would be willing to spend AFTER the transaction. Upselling users to bundles of games and CDs worked very well and brought the average transaction size for casual games up from $20 to around $27.50.
8. In-Game Advertising = MAJOR FAIL
Why: Around 2006, the idea of in-game advertising in purchased games began to gain momentum. For many months, the market was adamant that injecting live advertising into purchased games would lead to dramatic increases in game monetization. In the end, it really pissed off consumers and burned game developers who believed the hype and tried it.
9. Offers = SUCCESS
Why: Just like the offers provided on Facebook by TrialPay, offers were first tried in the casual games market. No offer could match the value of a $20 game purchase, so casual game publishers treated offers as a “diving catch” solution for consumers who initiated a commerce purchase, but ultimately dropped out of completing the transaction. Although offers provided an additional source of revenue, casual game publishers eventually learned that the success of offers on their site was a measure of how poor their own commerce solutions were at monetizing audience. When game publishers learned to monetize their audiences efficiently, offers disappeared because the most valuable “offer” on their site became ads for their own games.
10: Book-of-the-Month-Club = HUGE SUCCESS
Why: Pioneered by RealNetworks, the book-of-the-month-club model could be considered one of the earliest progenitors to the introduction of microcurrency pricing for online games in the US. Book-of-the-month-club pricing made RealNetworks the largest online game publisher in the world in a very short period of time. From the outside, Real’s pricing model looked a lot like a subscription, but it had some distinct advantages; critical among them was conveying a clear sense of value and ownership to the consumer over the typical buffet-style subscription model.
11: Commitment Plans = HUGE SUCCESS
Why: Pioneered by Big Fish Games founder Paul Thelen, who had previously designed Real’s winning model, commitment plans dramatically outperformed the book-of-the-month-club model. Commitment plans increased the average probability of converting a trial gamer to a buyer from 1% to 3%. They also increased average revenue per payer from $27.50 to around $80. Altogether, commitment plans produced a 900% increase in monetization yield over the early trial-to-own model.
12: Microcurrency = SUCCESS
Why: My own company, WildTangent, introduced micocurrency pricing for casual games in early 2007. We learned to chop monolithic single player games into smaller and smaller units of value. Instead of selling whole downloadable games, WildTangent began selling single “sessions” of downloadable games for WildCoins. Alone, WildCoins performed marginally better than commitment plans, and the technology we invented to chop single player games into sessions led to the next major leap.
13: Ad/Commerce Hybridization = HUGE SUCCESS
Why: Where others failed to blend ads into purchased games, WildTangent found a solution that elegantly blended advertising and commerce without cannibalizing commerce revenues. The solution required enormous analytics control to correctly predict a user’s behavior and serve each user the right mixture of commerce and advertising to maximize revenue without losing commerce sales. We achieved another 200% monetization yield with ad/commerce hybridization over commitment plan pricing and grew to become the #1 online gaming site in the US, according to comScore.
Today’s social game market feels a lot like the casual game market did around 2006 when hype about in-game advertising and aggressive testing of new commerce models for games was at its peak. Unlike that period, when many of the highly dominant market leaders took a wrong turn and committed advercide or commercide, it was possible for game developers to publish their games across many competing channels and avoid becoming casualties of those mistakes.
Today we have a single giant point of failure in the market, Facebook, which has publicly announced its intent to commit commercide on July 1st and take a fledgling industry with it by requiring all games to switch to Facebook Credits and taking 30 percent of every Credits transaction. The only major players they cared about have been strong-armed into adopting an obviously flawed commerce solution in order to preserve their “shelf space” so that now it doesn’t matter if hundreds of small and apparently irrelevant developers who have bet their livelihoods on Facebook get a rude awakening and have no way to escape. Although it may be too late for many, I believe that it would behoove most Facebook developers to declare July 1st Facebook Independence Day and aggressively seek alternative distribution channels before the Kool-Aid gets served.