The “whales” of the social-gaming world are a mystery to most of us. As the biggest spenders, they make up a tiny group (think about 2 percent of audiences) that drives most of the revenue for publishers of these games. But the word “whale” isn’t a flattering term, and neither are the numbers associated with it. These are people, not just customers.

It’s easy to think of whales anonymously because we’re not quite sure who they are or how they think — they’re often elusive due to the stigma that surrounds them. We know they play social games, but are they social? Are their habits casual or obsessive? What kind of people are they?

‘Whale’ has many meanings

Whales existed in online and mobile video games long before they started appearing in the West. Longtime game analyst Michael Pachter told GamesBeat that Asia has used free-to-play with microtransactions for 15 years, but it still feels like a relatively new phenomenon here as we wonder whether the business model holds a place in our future.

Today, the idea of a “whale” carries a different weight for each company. 5th Planet Games, a developer of social games for both casual and hardcore audiences, starts classifying its players as whales when they spend $100 or more a month. That’s a big jump from whales on Facebook, for instance, where social gamers could drop $25 per month to meet the same qualification.

5th Planet chief executive Robert Winkler revealed at the Game Developers Conference Online in 2012 that with its game Clash of the Dragons, 40 percent of revenue came from 2 percent of players who spent $1,000 or more. Ninety percent came from those who spent $100 or more, and the top whale had spent $6,700.

Other companies, like social casino developer Blitzoo, defines various categories of whales based on a combination of factors: total money spent, playtime, experience points earned in-game, and so on. Play sessions tend to be three or four times longer than what an average player’s would be.

But these are all still numbers, not faces or personalities. Winkler told us that a strong sense of community is important for encouraging whales to not only engage but also monetize, and that’s a clue to who they are as people.

“We’ve found that most players are more willing to spend money to help out their fellow gamers than to try to defeat them,” he said. “As an example, players who take part in our ‘guilds,’ or groups of players who come together to accomplish communal missions, are 8.5 times more likely to monetize than players who do not belong to a guild, and the ARPU [average revenue per user] of players in our guilds is 53 times higher than other players.”

For that reason, building community is a huge priority for 5th Planet. It’s a way to attract more whales and monetize more successfully.

“This could be by participating in your forums, by running contests and giveaways, by forming special guilds or councils, or simply by talking directly with your players and showing that you’re listening,” said Winkler. “When players feel like they’re part of community, they become more invested in the outcome of game. And when they’re more emotionally invested in the game, they’ll invest with their wallets as well.”

5th Planet declined to inform us whether their whales receive any special benefits, and as for whether these players subsidize the game for others, it only said, “As with any free-to-play game, there are a group of paying players, including whales, whose in-game [spending] allows game houses to bring new, fresh, and updated content to all players.” We were unable to acquire responses from the other companies we spoke with for this article.

Are whales different from ‘normal’ gamers?

Talking to whales isn’t easy; their habits and relationships with social-game publishers are touchy subjects. But as I found with one player, Greg Genega — who allowed us to identify him by name and also goes by the handle “Bludex” — all you have to do is disarm their defenses a little. Aside from the amount he spends every month ($100 on average and sometimes as much as $400), he shares many of the same interests and concerns of regular gamers.

Like many whales, Genega prefers to stick with one or two games — in his case, 5th Planet’s Clash of the Dragons (a free social massively multiplayer online role-playing card game) and Legacy of Heroes (a free collectible card game). He doesn’t stray much into other platforms.

“To me, a game is only as good as its following and associated community,” he said. “Without quick queue times for competitive events and a bustling forum, games tend to lose interest with me.”

He’s not exactly glued to his computer screen, though. Genega says he plays for roughly 20 minutes in the morning and one to three hours in the evening. Just because he spends a lot of money doesn’t mean this routine conflicts with everyday living.

“When I’m at work, I barely have any time to think about games,” he said. “However, most of my social time with friends involves lots of gaming. Board games, card games, going to a casino, playing Magic [the Gathering], etc. So gaming is very important to my social life.”

That’s social life outside of games, not necessarily in them. Genega supervises a network operations center for a large company and enjoys active pursuits like hiking and eating out at restaurants. That’s part of why he doesn’t prefer single-player experiences.

“I’m a social being at heart,” he said. “When there’s nobody to share my experience with — whether it be some friendly trash-talking or a virtual high-five of an accomplishment — the games just become less interesting.”

He doesn’t leave those friendships solely online, either. “I have friendships going on 10 years or more with people I game with online that I’ve almost all met in real life at some point or another,” he said. “I would definitely say gaming has been the main driver in my social life both online and offline.”

Like most dedicated gamers, Genega actively follows news announcements related to the titles he plays, but frequent content additions are what keeps him coming back. With each break he took from Clash of the Dragons, for instance, he returned to check out a new update. And when he played World of Warcraft, he would quit for as long as a year — until Blizzard released a new expansion.

The more we talked, the more Genega opened up about his passions and thoughts on current issues in the industry, but one question remained: How does it feel to be called a “whale”?

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It’s already clear that free-to-play games are having a profound impact on the industry landscape. Their initial success is in large part driven by the frictionless reach being free enables. By removing the need to pay up front, a game can reach an audience that’s as much as 10 to 25 times larger. Anyone who owns a smart mobile device or a PC with an Internet connection is now a prospective player.

But to catapult the growth for free-to-play games to truly massive audiences, a subtle – and perhaps counter-intuitive – design philosophy is required: Your game’s free players are actually more valuable than its biggest spenders. It is free players who hold the key to creating sticky communities, driving virality through word of mouth, and maximizing the opportunity for long-term engagement and monetization of your game service. If you want to avoid the headwinds that companies such as Zynga have run into in recent months and instead ride the tail winds that are driving Riot Games into a multi-billion dollar enterprise, you must learn to love your free players.

To date, most free-to-play game developers have eschewed free players and instead focused (at times myopically) on a handful of big spenders, known in the industry as whales. Whale-driven games are designed to create monetization friction early in a player’s life cycle. This culling process effectively eliminates 98 percent-plus of the new players in a game so that it can instead focus on diving deeply into the wallets of those remaining 2 percent of players who pay. Among that 2 percent, only a tiny fraction has the desire and ability to spend large sums of the money. So the breakdown in some games can become scarily skewed, with as much as 50 percent of the profits coming from 2 percent of the paying players – or just 0.0004 percent of the total audience.

As the free-to-play game market has evolved and the number of competitive whale-driven games has increased on both Facebook and smart mobile devices, an uncomfortable fact has settled on the industry. Despite the ability to reach billions of potential players, the number of whales with a desire to spend thousands of dollars is relatively tiny. Moreover, whales are not going to be able to spend huge amounts of money across multiple games at any given time. As a result, companies are seeing new whale-driven games perform worse than their predecessors, while also cannibalizing their own whales in existing games.

Contrary to popular belief

The truth is that players who choose not to pay anything are far more valuable to any game company looking to create sustained value for its shareholders. Here’s why:

The best free-to-play games are socially driven. The entertainment value of playing the game is either intrinsic to playing with other players or at the very least materially enhanced. By designing your game to compel free players to stick around for a long period of time, you create social stickiness that will result in a higher retention of your paying users. This is common sense. Who wants to save for months to buy that shiny new BMW if there are no friends or neighbors to admire it?

Moreover, free players are by far your best means of low-cost, high-quality player acquisition. Free players who enjoy the game are viral in the old-fashioned sense: They actually tell their friends to try the game because they enjoyed it. Instead of paying for 50 percent of your new users and then watching them churn out in a week, design your game to ensure free users enjoy it and watch your cost of player acquisition drop dramatically.

And it’s a funny thing about those free users:  the longer they play any free-to-play game, the more likely they are to convert to paying players. The cohort of free players who continue to be actively playing a new game for a month are nearly three times as likely to convert as new users you paid to acquire. The financial advantages of focusing on free players are further enhanced when your game caters to a more diverse demographic and geographic player base. There are simply more players in the world who will happily spend $5, $10, or maybe even $25 on a game they love than there are those who are capable of spending thousands of dollars.

Games that get it right

It’s no surprise then that two most profitable free-to-play games currently in the market have eschewed whale-based monetization. League of Legends from Riot Games and World of Tanks form WarGaming.net decided to focus their game design and monetization efforts with a long-term view of value creation, which prioritized the free players.

Unlike their Moby Dick-obsessed competitors, LoL and WoT are designed to convert a far higher percentage of their players – in some cases ten times as many players as a whale-driven game. Instead of designing the game to optimize for a handful of big spenders, they’ve created economies that allow players to incrementally spend in lockstep with the time they spend in the game, which has resulted in higher retention, effective word-of-mouth virality, and a higher median lifetime value of players.

Both League of Legends and World of Tanks made a conscious decision not to force players into “purchase or else” decisions early in the game. Their pricing and merchandising systems are optimized for consistent small- and medium-sized transactions instead of a handful of big-ticket items. They thoughtfully open the vast majority of the game’s experiences to a free user while making sure value is delivered when a player makes the decision to pay. Thus, a virtuous cycle is born.

Happy free players lower overall acquisition costs, while paying players feel a stronger relative bump for their decision to spend. And all players are compelled to keep playing with one another, as there are plenty of teammates and opponents to fuel the multiplayer and social dynamics of the experience. That leads to higher retention; with higher retention comes higher conversion to paying, higher spending, and ultimately higher profits.

There are challenges in designing games to achieve those goals.  Basing your monetization systems off the game mechanics that generate real fun is the starting place.  Inspiring players to make themselves unique or benevolent in the eyes of fellow players are great incentives — while frustrating them by designing the game to be enjoyable only when you pay is not.  Don’t force failure for free players and make sure the forks you create with opportunities to pay come with a balanced frequency, and not as hard walls.

The opportunity for the free-to-play game space to grow is limitless. With browsers, smart phones, tablets, and Facebook, the digital reach of games is quickly going to reach a number closely approximating the entire population of this planet. The realization of this opportunity is going to be driven by great products that create real value, products that are designed and managed to entertain 100 percent of their players – not just the 0.0004 percent known as whales.

Greg Richardson is the founder and CEO of Rumble Entertainment, a premium free-to-play game company dedicated to create irresistible and beautiful cross-platform multiplayer game experiences for connected gamers.  A 20-year video game industry veteran, Greg was vice president and general manager of EA Partners, senior vice president at Eidos in charge of product development, and an investor with Elevation Partners, where he led the investment in Bioware and Pandemic, and served as chief executive of Bioware/Pandemic through its sale to Electronic Arts.

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GamesBeat 2013 is our fifth annual conference on disruption in the video game market. You'll get 360-degree perspectives from top gaming executives, developers, and analysts on what’s to come in the industry. Our theme this year is “The Battle Royal.” Check out full event details here, and grab your early-bird tickets here!

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In hardcore games, most of the fanatical customers are men. But many social mobile games appeal to women more than men. The data from Beijing-based Papaya shows that when the content suits women, they can be big spenders on games as well. Whales are extremely important to game companies, as Papaya says they account for 60 percent of revenue.

Papaya makes both a social mobile networking platform and the games that use that platform.Other game developers also use the Papaya platform to make their games more social.

Those games are free-to-play, where users play for free and pay real money for virtual items in a game. Usually, only a few percent of players will bother to pay. The company defines whales as customers who pay more $100 on a game. Those whales make up about 4 percent of the players. Mid-spenders — who spend $10 to $100 on a game — account for 17 percent of players. And minnows, who spend less than $10, account for 79 percent of the users. While whales are 60 percent of revenue, mid-spenders are 32 percent of revenue and minnows are 8 percent.

Whales spend their virtual currency on “consumable” virtual goods, which expire, such as energy in a game. About 96.65 percent of whale spending is focused on consumables. For minnows, only 80.93 percent is spent on consumables. The rest is spent on “durable” virtual goods which don’t go away, such as avatars.

Whales, it seems, have a profound lack of patience. About 86.9 percent of the money that whales spend on consumables is dedicated to accelerators, or things that speed up processes in a game. You can, for instance, accelerate the construction of a building in a game by purchasing an accelerator. About 7.5 percent of consumables purchased by whales are bonus items, while 0.6 percent are time savers.

As you can see in the chart at the right, the average spending by whales peaks in the second and third months of playing a Papaya game. Minnows, on the other hand, spend more than whales in the first four days after downloading a game. Then the minnows stop spending.

Whales are also more social. They spend 2.5 times more time in social network sessions than minnows do. The whales also reply to comments in mobile chat rooms about 2.5 times ore than minnows do. Whales also do six times more updates to their status bars than minnows.

In general, Papaya concludes that whales, particularly women, help drive monetization by extending the time of engagement with an app and by generating more revenue over a long period of time.

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GamesBeat 2013 is our fifth annual conference on disruption in the video game market. You'll get 360-degree perspectives from top gaming executives, developers, and analysts on what’s to come in the industry. Our theme this year is “The Battle Royal.” Check out full event details here, and grab your early-bird tickets here!

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