Revenue Models Used by Game Producers - Research Proposal Example

RESEARCH PAPER ON: SPECIFIC REVENUE MODEL FOR ON-LINE GAME PRODUCERS Contents Introduction 2 2. Revenue Models used by game producers for online video games 3 2.1 Real World Examples 5 3. Barriers to Success 6 4. Summary / Key Findings 8 5. Recommendations 9 6. Conclusion 10 7. References 11 1. Introduction: The online video gaming industry has grown by leaps and bounds, from its humble beginnings as a niche market in the mid 1970’s to an increasingly challenging and competitive industry with several players entering the arena. The popularity of free online video games has increased manifold with the U.S. gaming industry grossing USD 9.5 million in 20071. Online games are heralded by industry experts as the future of the interactive gaming industry, considering the fast pace of its growth and increase in popularity across all age groups. According to research, nearly 26 percent of Americans above the age of 502 played video games, which is an indication of the growing trends and popularity of the industry. The rise in the profitability of the industry has further driven the adaptation of different revenue models, micro payments being one of them. Micro transactions is a relatively new concept and has found wide spread acceptance amongst the MMO (Massively Multiplayer Online) games. These games are widely available for free on the internet, without having to pay any kind of monthly charges / fees. This revenue model, offers the customers / gamers an option to buy in – game currency which can further be traded for game items such as specially designed weapons that enable the players to beat their opponents. 2. Revenue Models used by online video game producers for online games The main sources of revenue for online video games include paid subscriptions, sponsorships, advertising revenue, as well as pay per download. However the increasing popularity of free online video games has led to a drastic change in the revenue models, with more and more producers of online gaming adopting these newer models to capitalize on this growing craze. Online Game Value Chain3 Among several revenue models adopted by this industry, some of the most popular ones are discussed below: Virtual Item Sales: This revenue model was popularized in Korea and later on adopted by several other Asian countries. It is widely used by Nexon – online game providers, who are considered as pioneers in propagating and popularizing this model, and have grossed $2304 million in 2005. Subscription Tiers This model enables the users to play the basic game for free but charge for the “weapons” or other similar accessories required for playing the games in a better way. These extra accessories are charged nominal fees and constitute a crucial source of revenue for free play games. Advertising Game related advertising are another form of revenue source widely used by providers of free to play online video games. These advertisements are frequently included within the game by game ad agencies and considering the sheer number of customers for free to play video games, has increasingly becoming the most preferred revenue source amongst the producers offering free online gaming facilities. Merchandise Selling of game related merchandise is also a lucrative source of revenue. Targeted at kids and pre teens, toys associated with virtual world heroes and characters from online games as well as collectible card games are rapidly gaining popularity amongst this particular age group and are selling like hot cakes. Event / Tournament Fees Several online gaming producers who offer free to play games are resorting to such measures for increasing revenues. Nominal event fees are charged to users for entering into online gaming tournaments and officially prizes worth thousands of dollars are declared for the winners. This aspect is attracting customers in huge numbers. Donations This source of revenue is comparatively less popular than those listed above but nevertheless, it has successfully been able to attract some steady revenue inflows for certain online game producers. 2.1. Real world Examples The following is the list of online game producers who offer free to play video games who have grossed several million dollars worth of revenue from various revenue models listed above. The three major players in the free to play online video game industry, Habbo Hotel, Runescape and Gaia Online have together, grossed USD 14.5 million as Advertising revenue. The revenue from subscriptions have totaled USD 10 million, whereby World of Warcraft have contributed USD 9 million, and USD 1 million by Lineage. Revenue from sale of Merchandise totaled 4 million with contributions from Webkinz while that from other models such as sale of virtual items, expansion packs, etc totaled USD 17.2 million by companies such as Club Penguin, Guild Wars, Second Life and Puzzle Pirates. The use of micro transactions revenue model is gaining widespread acceptance amongst the producers of free to play online video games. The NCsoft Corporation, for instance, which is the world’s leading developer as well as publisher of online computer games, recently unveiled NCoin – a new micro transaction system, that shall allow its users to real world money for buying in – game items and upgrades5. EA, another leading producer of free to play online game has also uses the micro transactions model to support its free to play and download online video games and is in process to implement the same model for its other franchisees owing to the success of this model6. 3. Barriers to its success Factors such as availability of proper infrastructure, such as broadband coverage, legal regulations, governmental policies in relation to the online gaming industry, taxation policies, and other factors affecting the payment infrastructure of the producers of free online video games could prove to be harmful for the producers of such games in terms of profitability and stagnancy of revenue flows and hamper its overall growth and development in the process. Since such games are largely dependent on the internet for downloading and playing, the availability of proper broadband connectivity is crucial for its sustainability. The existence of wide spread diversity in the types of internet connectivity across several areas, such as high speed internet or low speed internet, also plays a crucial role since the online content have to be customized in accordance with the levels of speed available. According to research, the number of broadband subscribers across the five largest EU countries, including Germany, is expected to increase in the coming years to approximately 136.1 million people7 and similar trends have been observed in the US where the percentage of households with broadband connectivity is on the rise, as shown in the following figure8. Market for online Games: The market for online games is a crucial factor that acts as a barrier depending on the favorable / unfavorable legislations surrounding the gaming industry. Other factors such as piracy laws cross national legislations, and existence and applicability of legal frameworks related to copyright for operating in foreign countries also largely affect the market for such services. The existence of acts such as Juvenile Justice Reforms Act, Children’s Internet Protection Act, etc aimed at protecting the young gamers also plays a vital role. Availability of proper skills / skilled personnel: The online video games industry is a highly competitive industry where graphics and themes are ranked highly by the serious gamers. Thus the existence and availability of skilled personnel or video game developers is of substantial significance. According to the key findings of a 2007 Census report on online game developers the number of gaming professionals involved in developing or publishing online games in the U.S. total more than 39700 professionals9 while similar research carried out in EU countries reveal Germany, as the most dynamically growing market10. 4. Summary / Key Findings The key findings of the research are listed below: A significant rise in the number of online gamers (free to play games) has been observed during the recent years, which could mainly be attributed to the availability of advanced softwares, effective and adequate infrastructure such as broadband internet connectivity, rise in skilled and sophisticated gaming developers as well as the rising popularity across the globe. The age group of gamers is drastically increasing encompassing within its gamut, people of all ages. Games, especially targeted at young gamers, are assuming greater popularity. It has boosted the sales of merchandise as well. Free to play online video games are increasingly becoming popular amongst the younger age group since it is directly related to the availability of time as well as resources at hand. 5. Recommendations The rising popularity of free to play online video games and the rise revenues from advertising could be perceived as an opportunity by the advertisers who can market their products by sponsoring such free to play online games and thus increase their product visibility. Tie- ups and associations with such popular online games shall ensure a wide market reach and specific products could be targeted at the respective customers according to their collective profiles. More and more, free to play, online video games can be embedded into social networking sites such as Friendster, Hi Fi, and Facebook which have also grown in popularity alongside the online gaming industry. This will further expand its markets and attract customers from diverse geographical regions. Interactions with users across borders can further help in developing more sophisticated games with high definition video quality and realistic backgrounds that appeal to all age groups. The free to play on line games can also be offered on mobiles which is a relatively untapped market. The Asian markets such as India and China are rapidly emerging as gaming professionals struggle to provide wide range of games to cater to these emerging new markets. The online game developers should tap this market segment in order to expand their market reach and gain additional revenues through other sources such as advertising and subscriptions. The online game producers should exercise adequate caution, as the rapidly growing gaming market brings along with it several legal and contractual issues such as breach of piracy laws, copyright of online gaming content and the likes. 6. Conclusion The development and introduction of new software, creative and innovative gaming concepts directed towards attracting a large customer base, as well as the availability of advanced technology have together fuelled the growth of this industry. The market for online games has seen a steady rise which has grown from below $5000 million in the early 2000 to about $15000 million by 200811. The online gaming industry is highly research oriented since it involves huge R&D costs to studythe market demand for types of games available in the market as well as those preferred by the gamers and develop games accordingly. Besides, the increasing popularity of this industry has captured the interests of Government, trade associations, as well as other promoters who have expressed keen interest in the growth potential of this emerging industry. The United Kingdom for instance, enjoys tax incentives for the development of online games, with similar policies being adopted by other countries in the EU as well such as Germany and France. REFERENCES Entertainment Software Association Report, Aug 02, 2008. Available from: Revenue Model for online free to play video game industry, Aug 2, 2008. Available from: Gamasutra: Industry News (2007). Aug 2, 2008. Available from: < http://www.gamasutra.com/php-bin/news_index.php?story=15425> Business Wire, (2008). NCsoft rolls out NCcoin a new micro transaction system for online games, Aug 2, 2008. BBC News, EA pushes ad – backed video games, Jan 21, 2008. European Online Users, Electronic Retailer Magazine, Aug 2, 2008. Available from: < http://www.electronicretailermag.com/info/ere07_face.html> Home Connectivity in the U.S., Web site Optimization Newsletter, Aug 2, 2008. Available from: < http://www.websiteoptimization.com/bw/0706/> Focus on Technology, Jun 28, 2007, News Release. Aug 2, 2008. Available from: < http://ubmtechnology.mediaroom.com/index.php?s=43&item=1727> Postnikov A. (2007), Eastern European Casual Games: A market Overview, Casual Connect Magazine. Aug 2, 2008. Available from: < http://www.casualconnect.org/content/analysis/postnikov-eecasualgames.html> Read More