Games Brief » Ecommerce

Why Facebook won’t charge 30% for payments and leave billions of dollars on the table

Nicholas Lovell — Tue, 26 Jan 2010 16:12:39 +0000

“Pay with Facebook” is coming.

It’s already live on Happy Aquarium from Crowdstar. Later this week, it’s coming to Farmville, the most popular application on Facebook with over 70 million monthly players.

It’s big news. And most commentators and industry insiders are expecting Facebook to charge 30% commission to companies using “Pay with Facebook”.

And I think they’re wrong. Facebook would be leaving billions of pounds on the table. I don’t believe that Facebook would be so short-sighted when there is a far bigger prize at stake.

I have no doubt that Facebook could charge 30%. Hell, it could probably charge 50% and few people would complain. Developers would get a trusted payment system on a distribution platform that is second to none. I’d expect the lower payment friction to lead to significant growth in virtual goods sales, more than enough to offset Facebook’s costs.

Anyone who thinks that Facebook is going to do this is small-minded. Think bigger, guys!

Do you really think that Facebook’s future is predicated on taking a 30% slice of a limited pool of virtual goods revenues. Can you defend a $15 billion valuation on the basis of 30% of a market estimated to be $1.6 billion in 2010 (that’s the US only, but still).

I don’t think so.

But how about if they were shooting to become the de facto payment system on the web. A business that would be simpler than Paypal and more effective than Western Union. A business that would compete with Visa and Mastercard.

Now that’s worth doing.

So I think that Facebook will price its service cheaply. I think it will be under 5% and probably 4%. And we will very quickly see Facebook trying to tie up retailers with “Facebook” money” so it is as widely dispersed as Facebook Connect, perhaps even more so. Companies like Amazon, Walmart and then a long tail of smaller partners.

That would make it more valuable than Paypal (acquired by ebay for $1.5 billion in 2002). It could even make it more valuable than VISA, a listed company with a market capitalisation of $69 billion.

That would make it bigger than Google.

Royalty statements, digital downloads and the evilness of publishers

Nicholas Lovell — Thu, 10 Dec 2009 17:22:38 +0000

Too Much Joy have published their royalty statement from Warner Bros. It’s ten pages long,but the summary looks like this:

=== Summary ===

Beginning balance: . . . . . . . . . . $395,277.18-

Total digital earnings . . . . . . . . .$62.27

The whole post explains the nature of the “recoup” system, which will be familiar to most developers.

But it goes into detail arguing that major record labels don’t track lots of small transactions well (either through laziness or avarice). And this will be a very big problem in the era of digital downloads and lots of small bands (as opposed to a few superbands).

Will this problem emerge in the games industry? Has it already? Are major publishers set up to handle digital distribution for independent developers? I really want to hear from anyone who can talk about their experiences or opinions.

(Thanks to @alexandraha for the story)

Lara Croft goes digital only, drops Tomb Raider name

Developers: Stop trying to sell levels. The public don’t want them.

Nicholas Lovell — Thu, 10 Dec 2009 12:35:50 +0000

I spend a lot of time talking to games developers about downloadable content.

And they always say “We’re going to make bonus levels and maps and sell them as downloadable content”.

Which is a terrible idea.

it’s a terrible idea because of all the different types of microtransaction content, consumers are least likely to pay for levels, map or extra content,.

They’re more likely to pay $2 for a Santa hat or to have their weapon recharge faster.

So why do developers keep trying to sell levels?

Selling what is expensive to make, not what customers want to buy

The problem is simple.

Making a new level is expensive. It takes lots of artists and designers lots of time.

Making a new Santa hat or shirt for your virtual world avatar is laughably cheap.

So developers want to make money from the thing that is most expensive to make.

Which is logical but utterly flawed. That’s putting supply needs ahead of demand needs. And that usually ends in tears.

Developers should accept that their role now is to make a world in which consumers play, and make money from it by selling players the things that they want (which may in fact be the cheapest items to develop of all).

The alternative is to spend a lot of money building expensive assets that consumers won’t pay for.

(Note: I acknowledge that this analysis holds more closely for PC/browser-based games than it does for console titles. Console gamers are more used to paying for content, and are therefore happier than freemium players to pay for extra levels. However, I think that this is likely to change over time.)

New business model alert: Lite is dead as freemium comes to iPhone

Nicholas Lovell — Mon, 19 Oct 2009 08:44:00 +0000

Apple has announced a change to its terms of service which paves the way for new business models on the iPhone.

Historically, virtual goods could only be purchased in paid apps. That led to a series of anomalies, in particular that developers had to follow an upgrade path of:

Lite version -> paid version -> virtual goods/add-ons

The change is likely to eliminate Lite versions. Developers can offer a single version with a clear upgrade path to new features or content. There are some limitations, though: no virtual currencies and no “rentals” – i.e. if a user downloads content, it can’t be time-limited.

I think we’ll see a lot of changes to the iPhone business models very quickly.

Head over to InsideSocialGames and TechCrunch for more details of the changes.

Ten reasons microtransactions are better than subscriptions

Nicholas Lovell — Thu, 08 Oct 2009 09:36:00 +0000

As a developer, making money from games has never been more important. You’re considering (or have already started) making games that you publish yourself. But you’re torn between whether you can make more money from subscriptions or from microtransactions (principally the sale of virtual goods). Here are ten reasons to tell you it’s a no-brainer.

1. Microtransactions are user-led, not developer-led

With microtransactions, the user decides how much they want to pay, and when. You don’t have to fret over whether your game is worth £3.95 or £14.95 per month. The user will pay what suits them.

2. There is no “gate”

With subscriptions, you let the user play your game for, perhaps, 30 days. And then you say, abruptly, “pay up or git orff my land.” Not friendly and not smart. The biggest challenge for a game company is acquiring a customer; you had one but you just kicked them out. That customer ain’t never coming back.

3. Players can spend when they want to

When does a consumer want to pay? When he’s just been paid? When she’s just had a hard day at work? On a Monday (because money at the end of the week is reserved for partying)?

More importantly, why should you determine the day that they have to spend? With microtransactions, a user can spend the day after they’ve got paid, or when they know they haven’t got a hot (and expensive) date for a week or two, or whatever. Let the user be in control.

4. Players can spend as much as they want to

Bigpoint has some players who spend over $1,000 per month on virtual items. Others, I’m sure, spend only a dollar or so. But the key point is that for those players who have lots of money have the opportunity to spend it. With subscriptions, users have a binary choice: zero or, say, $4.99. There’s nothing in between and, more importantly, nothing higher. Imagine how much money you are leaving on the table from your biggest fans.

5. Microtransactions make it easy to keep the game fresh

With micro-transactions, it’s easy to think of how to refresh the game: add new items. It provides an easy path for development.

6. Microtransactions are trackable

The curse of development is not knowing what users like: it’s why Lionhead spent so much money on a pointlessly overspecced movie maker within The Movies instead of focusing on the strong and entertaining sim game it came bundled with. With microtransactions, that goes away. You can see what users like because they spend money on it. And then you can adapt the game to make your players happy.

7. Microtransactions are flexible

Some players like wearable items. Some like power-ups. With microtransactions, you can offer different items for different customers, and endlessly test what works. (See Free to play gamers will pay for power-ups and self-expression, but not for new content to see what gamers pay for)

8. Microtransactions offer A/B testing opportunities

Does a pink coat sell better than a blue coat? Do players want bigger swords or better armour? Do players want swords that look good, or do they want swords that are more effective?

With A/B testing (nothing more complex than randomly offering half your users one item and half another and tracking conversion rates), you can fine-tune your sales to give better monetization.

9. Consumers have a limit to the number of subscriptions they are comfortable paying.

Your average human has a short term memory for seven items. Sony has said that most consumers are happy paying for about seven subscriptions. There is a link.

A list of more than seven items (actually between five and nine depending on the person) seems endless. That’s because as one item drops out of your short-term memory, another one drops in. (That’s why to-do lists can make you feel more in control – you’re removing the tyranny of your short-term memory and can see everything that you need to do).

Utilities like water and electricity don’t seem to count, but a subscription to Sky does. As does the gym, magazine subs and your subscription to Warcraft. (Mobile phone contracts used to count, but increasingly it’s seen as a utility for many people).

It’s easy to see why people won’t sign up to a new subscription if they are already feeling oversubscribed. In essence, you need to encourage them to drop another sub to let yours in. Are you really so confident in the power of your marketing that you believe that someone will give up their gym membership in order to play your game?

10. Microtransactions make more money

Given the existence of Warcraft, this is obviously contentious, since Blizzard is making over a billion dollars a year from WoW. Perhaps it is better to say that for the a number of successful games companies, microtransactions have convincingly shown an ability to monetize well. By reducing the barriers to entry, they’ve also enabled companies to make higher revenues with lower marketing costs than for subscriptions. And, in many ways, it’s lower risk, since you have a powerful marketing channel (your free game) with a route to monetization (your microtransactions.)

11. Bonus reason: consumers are coming to expect it

This hasn’t happened yet, but as more and more games go free to play, consumers will expect that. By going down the “30-day trial then subscribe or you’re out” route, you’re alienating customers who have many other choices to satisfy their gameplaying habits.

So there you have it: 11 reasons why microtransactions beat subscriptions. Am I too biased? If you think so, tell me some reasons why subscriptions are better in the comments below.

Two reasons why Facebook is about to become bigger than Google

Nicholas Lovell — Mon, 05 Oct 2009 11:23:49 +0000

Facebook is on the cusp of becoming the dominant company on the Internet. The company has realised that the web is about so much more than just searchable information, and it is on track to beat Google to be the web company.

When Microsoft invested in Facebook at a valuation of $15 billion in October 2007, many people scoffed. (I confess I was one of them).

But we were wrong.

Facebook is just about to crack two elements that will give it unrivalled power across the Internet.

Facebook Connect

The first is Facebook Connect. If you want to comment on this blog, you can sign in via Facebook Connect. Facebook Connect takes your connections with all of your friends away from the closed environment of www.facebook.com and out into the worldwide web. You can play games on your iPhone against Facebook friends. Before long, you’ll be able to log-in to the majority of websites through Facebook Connect, rather than having to register individually for each one.

What’s in it for the websites?

Websites will soon start falling over themselves to implement FB Connect. It reduces the friction that stops visitors from registering. It makes a user’s interaction with that website appear in the user’s Facebook stream, which is both a vote of approval and a viral marketing tool. And, pretty soon, users will just expect it.

What’s in it for users?

A single login, that you can take with you across the web. Add a comment to a news story and your real friends will see it, and perhaps start a conversation with you, instead of the anonymous trolls who currently inhabit forums. It will be the first step towards the socialization of the Internet and it will be a huge improvement.

Facebook payments

But the real weapon for Facebook is payments. It is an open secret that Facebook is building a payments system, and they are clearly working on making sure that they get it right.

I can’t overstate how important I think payments will be. The first thing it will do is make a lot of money for Facebook. Companies like Zynga and Playfish are making tens, maybe hundreds, of millions of dollars from selling virtual goods on Facebook, and Facebook is getting no direct revenue from that. Yet Zynga and Playfish have to work with many different partners to generate their revenue. When Facebook offers a simple, easy-to-use, standardised payment system, it will make billing much easier and drive usage.

But that’s only the first part of the story. Let me walk you through a scenario:

You buy me a beer. I don’t buy you one back so I want to give you a fiver (I live in London. Beer’s expensive). Under your profile picture will be an option: “Send money”. I can transfer £5 to you in seconds, with no need for sort codes and account numbers, and I’m know it’s you, because we’re friends on Facebook.

"Facebook becomes a payment system more global than Western Union, more ubiquitous than PayPal and as trusted as Mastercard and Visa."

Now let’s imagine that you’ve never used this modern “Facebook payments” system. You don’t really like it. But now, you’ve got £5 in it. You could spend that money on virtual goods. Before long, I’ll bet you could spend it at Amazon or any number of other online retailers.

Or you could give Facebook your bank account details and ask them to deposit the £5. And at the same time, they’ll ask if it would be OK to take money out of your account in the future if you want to buy something using your Facebook credentials.

And Facebook becomes a payment system more global than Western Union, more ubiquitous than PayPal and as trusted as Mastercard and Visa.

Your social graph and your bank account, following you across the web

With these two elements, Facebook has blown Google out of the water. Google helps you find stuff on the web. But with Facebook, wherever you go on the web, your friends and your wallet will come with you. Microtransactions on every site becomes realistic. (Maybe, just maybe, this will allow Rupert Murdoch’s idea of charging a penny to read a single article on his sites come true).

And Facebook’s valuation of $15 billion begins to look like it might have been a bargain.

Free to play gamers will pay for power-ups and self-expression, but not for new content

Nicholas Lovell — Fri, 25 Sep 2009 10:19:09 +0000

A recent report from PlaySpan looks at purchases of virtual goods in the last 12 months. The key conclusion is that building a business that aims to sell extra levels just ain’t going to work.

The survey of 2,425 respondents identified that free-to-play web games generated the highest revenue ($75 on average) and that virtual currencies were the most popular purchase. But the report unveiled a number of valuable insights into what works and what doesn’t in the world of microtransactions.

Methodology

Let’s start with the methodology. (Ben Goldacre would be proud).

PlaySpan operates the PlaySpan Marketplace, Spare Change, and Ultimate Game Card. The respondents therefore include people who pay for their virtual goods with credit cards but also those who buy payment cards in stores. As a result, it runs the gamut from young children to credit-card-wielding adults. This is a comprehensive survey, but since buying habits for children may be very different from those for older casual gamers, the results should not be treated as gospel for business planning purposes.

I’ve asked the company for full definitions of their game categories. (These are interesting in their own right as a way of breaking down web-based games)

Free-to-Play Games – Virtual worlds that do not require a paid monthly subscription, such as Runescape, Silkroad Online, and War Rock

MMOs – Virtual worlds that require a monthly paid subscription, such as World of Warcraft, Final Fantasy XI, Warhammer Online

PC Games with Online Play – Any PC game with online capabilities, such as Orange Box and Battlefield

Console Games with Online Play – Any console game with online capabilities, such as Madden and Call of Duty

Social Networking games – Facebook and MySpace games, such as Mafia Wars, Mobsters 2, and Sorority Life

Casual Games – Web-based games through services such as Pogo, BigFish, and iWin

These aren’t games from small publishers, either. PlaySpan’s clients include K2 Network, Turbine, EA, IMVU, Bigpoint, and hi5 and the games they work with include RuneScape, Ragnarok, Knight Online and War Rock

The survey took place between July 15 and July 31, 2009 and asked respondents about their spending habits over the preceding 12 months.

Most popular digital goods

Analysis

The first element that leaps out of this chart is that virtual goods players will not pay for new “content”. Maps/levels represent the least popular category for purchases, both in terms of number of transactions and by dollar spent. If your business model involves building a core game and then selling additional levels, you’re in trouble.

No surprises that in-game currency is the most popular element. We can essentially discount it from any analysis since it can be used to buy any of the other categories. It’s a bit like saying that because people often buy Euros when going on holiday that the most popular item sold in airports is banknotes.

So we see other big categories:

Performance enhancement: both weapons (40%) and power-ups (29%) increase a gamer’s ability

Self-expression: Wearables (32%) and Virtual Gifts (20%) are both items of self-expression

The data is global (PlaySpan operates in 180 countries), so we can’t generalise by culture here, but it is clear that gamers will pay meaningful money to improve their in-game performance. In fact, they’ll pay more for that than they will pay for self-expression.

The web games that are generating the highest revenue

Analysis

Every one of the respondents had purchased something in-game in the last 12 months, which means, for example, that we cannot extrapolate to the proportion of users who purchase *anything* in an MMO from this data. But there are some interesting datapoints:

Casual games are hard to monetise by virtual goods (I think we all knew this)
Paid-for MMOs, with regular subscriptions, can still persuade some players to pay an average of $60 for additional virtual goods.
A free-to-play game can extract an average of $75 from a paying player. If we assume that the average player plays a game for nine months, that’s an Average Revenue Per Paying User (ARPPU) of $8.33.
Although social network games have a smaller average spend ($50) and fewer paying users (23%) than free to play games, their marketing costs are much lower due to the viral marketing benefits of Facebook and MySpace.

This data doesn’t give us one critical piece of information: what percentage of registered users become buyers, but it is a helpful guidance on ARPPU differences between different genres of web games.

Conclusion

When building your micro-transaction game, you should put equal weighting on creating virtual goods that make players more powerful and on those that offer them the chance for self-expression. But if you were thinking about selling extra levels (a standard model for puzzle/casual games), forget it. The market just isn’t there.

Chinese gamers are pro-democracy, anti-microtransactions and hate “over-commercialisation” Who’d have thought it?

Nicholas Lovell — Wed, 09 Sep 2009 08:18:00 +0000

Tiananmen Square, eat your heart out.

Nothing gets a gamer so riled as “suits” messing with their favourite franchise.

So when a new version of The Legend Returns was launched, with shocking features such as allowing players to “spend real money to get in-game advantages, rather than having to earn their spurs in combat”, a protest was organised.

The protestors crowded around city gates and major roads to block traffic and stop new players from entering the game, according to the Telegraph.

Seems that angry gamers who hate the idea that games might be commercial enterprises that aim to make money exist the world over.

And of course, the Telegraph ends the article by reminding us that “a report earlier this year described the popular World of Warcraft game as ‘more addictive than cocaine’”.

Always good to see balanced reporting.

Note that I’ve been busy, and haven’t verified that this event took place, or even that the game exists. If you like the story, tell me how much you like it in the comments. If you hate it, go tell the Telegraph (only you can’t because they don’t let you comment, the wimps.)

Dungeons and Dragons Online goes free

Nicholas Lovell — Thu, 11 Jun 2009 07:45:00 +0000

Turbine has just announced that Dungeons and Dragons Online is about to change its business model.

It’s moving from being a traditional subscription based MMO where users pay $14.95 per month to being a game that anyone can download and play for free. Users will be able to “purchase additional content and items in the new DDO Store to enhance their experience.”

GamaSutra quotes Adam Mersky, Turbine’s Director of Communications, as saying “Looking at DDO having moderate success, but definitely a niche game, it was definitely well-suited [to trying a new business model]”.

So what are the implications?

Turbine is trying to take a fully-featured MMO that was previously making subscription revenue and gambling that the business model that has been successful in Asia will take over in the US
Atari, which was the publisher of Dungeons and Dragons Online, will presumably struggle to sell a boxed version, when the game can be downloaded from the web for free
Codemasters has stated that it will not be implementing the new business model for DDO in Europe. This seems likely to be difficult in the long term, and I wonder if it really means that Turbine didn’t consult them in advance?

I’m hard-pressed to tell if this is an innovative approach from a mainstream developer or if Turbine was finding that DDO was no longer generating sufficient revenues to justify its continued existence and had to do something or else simply shut it down.

Either way, it will be an interesting experiment in whether a premium subscription MMO can successfully transition to a micro-transaction business model that has been predominantly exploited in browser-based MMOs in the past.

Zynga making $50 million in revenue from virtual goods

Nicholas Lovell — Mon, 06 Apr 2009 07:54:25 +0000

Social gaming company Zynga is reported to be making substantial revenues, and possible even be profitable, from its games on social networks.

Venturebeat reports that “it’s making between $50 million and $60 million annually in revenue, mostly from virtual goods like poker chips in its Facebook poker application, according to an industry insider.” Venturebeat also guesstimates costs to suggest that the company may in fact be profitable.

A lot of commentators were sceptical about the business model of companies like Zynga and its rivals Playfish and SGN, often on the grounds that they could not justify their venture-backed valuations on an advertising model.

Well, it looks as if Zynga has wrong-footed those commentators, and the virtual goods model seems to be working.