March 22, 2011 | Nicholas Lovell

A free-to-play game is fundamentally different from a traditional game.

It no longer seeks to charge every user the same amount of money for the same experience (a business model that is rooted in the atoms-based world where differentiating between customers was prohibitively expensive.


Instead, a successful free-to-play game follows the rule of zero-one-one-hundred

Zero, one, one hundred

A free-to-play game:

  • Enables a player to play the game for ever, for free, and gives them a good – even a great experience while doing it
  • It makes it easy for them to spend a dollar. Getting gamers to reach into their pocket the first time is hard. Making it as easy as possible for them to spend a tiny amount is very worthwhile
  • It lets them spend $100 per month. I’m not expecting them to spend this every month. I’m not sure that’s sustainable for many people. But in a free-to-play game, many people will only spend $1. To achieve a high ARPPU for a free-to-play game, you need have spend some people spending a lot more.

Isn’t that immoral? To push for high spenders.

My objective is to get people to be prepared to spend a day’s wages on something they love. In other walks of life, this would not be seen as unreasonable. A football fan spends that in a month. An Xbox gamer does. A dinner out with a loved one. A ticket for a concert or a show.

In the UK, a day’s wages is about £100. Is it unreasonable to think that someone who loves what you do would be happy to spend that much?

This is a fundamental change to how we think about media. If I spend £40 on Homefront and hate it. Tough. But in free-to-play, no-one is suckered into it by clever marketing. They have been playing the game, for free. They have decided that progress, or self-expression. or gifting is worth paying for. The reasons for paying will vary from person to person.

The constant is that they have chosen to pay. A wise game designer will create a range of different things for them to buy. A wiser game designer will ensure that those who love the game can spend $100 a month.


There’s little worse than putting your heart into crafting top-notch website contentand blog posts only to discover that nobody has read it. Or ever will.

Given that there were some 152 million blogs live at the last count (BlogPulse: December 2010), the bad news is that most people will never find you online. Follow these 10 steps, however, by Demian Farnworth for, and the good news is you can beat online obscurity for once and for all…

1. Dominate LinkedIn groups

Joining LinkedIn groups in itself isn’t enough. Embark on a posting and commenting spree and the potential to become an online influencer is vast – even from groups that you haven’t started.

2. Give away content for nothing

Remember, visibility and exposure are the most important things for a nascent business blog. Farnworth cites online powerhouses Seth Godin, Hugh MacLeod and Leo Babauta among those who started off by giving away a large part of their best stuff for free.

3. Write guest articles (with a twist)

It takes time for a new website or blog to gain traction and reach the critical mass where people are returning regularly. While it’s naturally tempting to keep all the best content for your own blog, Farnworth suggests putting the best stuff on other established blogs to gain all-important exposure. The risk of using more mediocre blog content yourself is, he suggests, far outweighed by the risk of online obscurity.

4. Reply to comments

You cannot afford not to have a voice in the comment section of your blog. Rather than think of it as a time-consuming courtesy, see it as an absolute necessity. Ensure your comments are thought-provoking and always ask questions to lead the conversation.

5. Promote other experts in your industry

The first rule of blogging is to forget one’s fascination with oneself. Nobody really cares. But wherever you see excellence in others, spread the word. Use their case studies within your blog posts and spread exemplary work via Twitter or LinkedIn.

6. Facebook is your research laboratory

Ask questions, and then remember to listen. People like to be asked their opinions, and you can boost both popularity and visibility by working those questions and comments.

7. Follow 237 Twitter power users who follow back

Check out Social Media Watch’s list of Twitter users who will follow you if you follow them. It will take some time, but ask yourself whether you can spare an hour or two to see serious results in your Twitter marketing. Having rounded up the followers, maximise the relationship by asking questions and re-tweeting often.

8. Email key influencers

According to Farnworth, every single famous person that he emailed during the past ten years responded to him. Email works as a gateway into the minds of great people who can often help you. Don’t be shy.

9. Create SEO-friendly videos

Take a leaf from 20 year-old MC Lil B’s book, whose web repertoire appears lifted from a beginners guide to SEO. Constant tweeting, video dialogue with his fanbase and spars with other celebrities fire up his fans to make YouTube responses to his songs. Stick to the fundamentals of SEO (content, keywords and linking) to start showing up on more searches.

10. Wear an eye patch

Not literally, but think back to Ogilvy’s 1951 ‘The Man in the Hathaway Shirt’ campaign. For those that may have forgotten, Ogilvy put an eyepatch on its Russian aristocrat protagonist, and with that simple twist made his ad stand out from hundreds of others for men’s shirts. The point in all this: think unique, useful, urgent and ultra-specific to make your blog content stand out from the crowd.

Gamesbeat – Dean Takahashi

Mobile gaming is the wide-open battleground of the entertainment industry. While Zynga dominates social games and big publishers rule console games, the global smartphone game market is still up for grabs.

Since there are potentially billions of users in this market, mobile gaming could become the largest game market of them all. Who will win it?

Smartphone games have been growing as a market since 2007, when Apple’s iPhone debuted. Tablet games have been growing since the spring of 2010, when Apple launched the iPad. Now the fastest-growing mobile market is based on devices running the Android operating system. With triggering events such as the success of Angry Birds, the hit Rovio game that has been downloaded more than 200 million times, mobile game companies are raising tens of millions of dollars. Mobile game companies have garnered significant valuations, particularly overseas.

Tim Merel, managing director at Digi-Capital, says, “The time to act is now.”

The potential of mobile games

Mobile games could be a $13 billion market in 2014, according to Merel. Mobile and online games together could be a $44 billion market, or 50 percent of the global $87 billion market in 2014. Today, mobile games are around $8 billion, a small slice of the overall game market, which is still dominated by console games, web games, and Facebook games. (IDC estimates mobile games will grow to $5 billion in a few years; Gartner says that mobile gaming was $6.7 billion, or 10 percent of the $67.4 billion game market in 2010; the estimates vary, but few doubt mobile games will have a great growth rate).

How will a huge mobile game market come about? That’s one of the questions we’ll explore at GamesBeat 2011 on Tuesday and Wednesday at the Palace Hotel in San Francisco. We’ve got 80 of the game industry’s finest minds focused on the evolution of mobile gaming. We all want to figure out how to connect the dots in mobile games.

Backlash to the hype

The cynics among us shudder at the hype. Some companies that dove in too early found there wasn’t enough water in the swimming pool. That is, the ecosystem hasn’t been fully mature in the past. It’s a market where lots of companies have tried to succeed, but very few can claim successes. For every Angry Birds, there are thousands of failures. The tale has been similar for other gaming bubbles in virtual worlds, feature cell phone games, and casual web games.

Mobile gaming nirvana isn’t here yet. Platform owners such as Apple have made changes that have disrupted the businesses of game makers, such as when Apple recently banned certain incentives for marketing games. The Android ecosystem is fragmented and not as mature when it comes to making money. And other platforms are still fairly weak in terms of a proven ability to generate revenues.

Still, it would be foolish for game companies to avoid investing in mobile games, for fear that they might get more scars. Those who invest and fail and learn are the ones that get ahead. There was a lot of chaos and friction in the early days of Facebook as well. But that eventually turned into a solid platform for making money. The mobile ecosystem is maturing as well. There is plenty of evidence to point to progress on this front. It always takes a few years of trial and error before an investment pays off.

Nintendo and Sony once ruled mobile games via devices such as the Nintendo DS and the PlayStation Portable. But Apple has busted the market open with more than 200 million iOS devices sold since 2007. There are more than 425,000 iPhone apps and 100,000 native iPad apps that have been downloaded more than 15 billion times. That shows that the barriers to entry in mobile games have been lowered so that almost anyone can enter. Small developers such as Dave Castelnuovo’s Bolt Creative — maker of Pocket God — have sold millions of units. Big hits have emerged such as Tiny Wings, Talking Friends, Angry Birds, Infinity Blade and other titles. Apple has paid $2.5 billion to its developers to date.

But the competition is also nightmarish. The average revenue per app is about $5,882. That’s not enough to support the huge ecosystem of developers chasing the market, let alone big companies. Nintendo CEO Satoru Iwata (pictured holding the Nintendo 3DS) said in March that the presence of so much free and $1 software (the average mobile game price is $1.05) in the smartphone games market isn’t healthy and is a primary reason Nintendo is avoiding the market.

Trip Hawkins (pictured right), chief executive of Digital Chocolate, has also warned that the glut of games on the smartphone platforms means game developers will find it hard to make money, noting that the average revenue per game doesn’t even pay for a really good foosball table. Too much junk can ruin the market for everyone and make it hard for consumers to find the good games, resulting in a lot of bad experiences in mobile games. Today, there are 64,048 games on the App Store, including 291 new ones a day. The cost of making these games is in the tens of thousands or hundreds of thousands of dollars, a lot less than the multimillion-dollar console game budgets.

Making the right and wrong choices

By comparison, Zynga is bringing in $235 million per quarter with a base of 232 million monthly active users for its Facebook games. With 600 million users, Facebook is a smaller market than the worldwide mobile phone market. The land grab in social games took place from 2007 to 2009. The result is that Zynga has more users on Facebook than the next 15 rivals. That has positioned the company to go public, raising $1 billion or more in an offering that is expected to value Zynga at $20 billion.

That is how the market rewards companies that pioneer a new market in games and come to dominate it — at the right time. Will the same thing happen again in mobile? Social Gaming Network, which once looked more promising than Zynga in both social games and mobile games, shifted into iPhone games early on, abandoning Facebook games. That turned out to be the wrong move. MindJolt recently acquired SGN for an undisclosed price, but SGN was definitely far less valuable than Zynga by the time it sold out.

The interesting thing here is that Facebook has crushed a lot of its competition. Now both Facebook and Zynga are reaping the rewards. With mobile, Apple faces a bruising fight with Android, which has begun to win the race in terms of numbers of phone activations. The fierce competition is driving the mobile market forward at a faster pace, and that should result in a faster growing mobile games market. Android app downloads have crossed 5 billion, and there are about 40,000 games on Android now. The result is a spiral of competition, where Android and Apple are propelling each other forward at faster and faster rates.

At some point, the numbers game won’t matter. The platform that wins won’t be the one with the most apps. It will be the one with the most retention of users and the most engagement. As Bing Gordon, a partner at Kleiner Perkins Caufield & Byers, said at our last DiscoveryBeat conference, a developer’s job is not to get a first date, or a second date with a gamer. It is to get an anniversary.

The necessity of investing in the future

Some companies have invested a lot of money early to be out front in this fight. Electronic Arts bought Jamdat, a maker of games for feature cell phones, for $680 million in 2005. It used that position to ready itself for an even bigger mobile game market with the debut of smartphone games. EA now has some of the biggest grossing iPhone apps of all time, including Tetris, which has had more than 132 million paid downloads to date.

Other players that have made big investments include Gameloft, Rovio (it made 52 mobile games before Angry Birds took off), Ngmoco, Digital Chocolate, PopCap Games, Glu Mobile, GameHouse, Capcom, and Disney Mobile. Successful startups in mobile include Storm8, Pocket Gems, TinyCo, Craneball Studios, Gameview Studios (part of DeNA), Sunstorm Interactive, Backflip Studios and Outfit7.

John Carmack, one of the world’s greatest graphics experts and game designers, says that it is unquestionable that mobile gaming technology will surpass the current consoles within two years.

Distribution and discovery matter

These companies are building up user bases that can become distribution networks for future games. Recognizing that it has distribution power, TinyCo has started a $5 million fund to invest in small developers to help them launch their games. Why would a game company raise $18 million and turn around and invest $5 million in others? It is leveraging its newfound distribution power.

The distribution power is what the game developers need in order to stand out from the nightmarish competition. How to get your game discovered in a sea of content is still an unsolved problem. The problem of discovery gave rise to mobile social networks such as OpenFeint, which offer tools to socialize a game with achievements, leaderboards, and friend competitions. In Japan, DeNA became a billion-dollar company because tens of millions of Japanese phone users used DeNA’s Mobage network to find games.

But in the U.S., the mobile social networks have not yet become billion-dollar companies. Still, the potential is there. That is why DeNA, benefiting from its strong base in Japan, was able to buy Ngmoco for $403 million. That seemed like an extravagant price to pay for Ngmoco, but DeNA saw a chance to become a worldwide global player in mobile social networks. Gree, DeNA’s rival in Japan, had to step up on the global stage as well and it acquired OpenFeint for $104 million. Ngmoco’s Neil Young believes that the billion-dollar companies will be created in the mobile social network space in the next couple of years because of the discovery problem.

Beyond the mobile social networks, all sorts of supporting companies are attacking the discovery issue. Tapjoy is promoting games through its own powerful marketing networks. Applifier is adapting its Facebook promotion bar to mobile. Getjar is offering strategic placement in its app store to promote games. Even American Express, Paypal, Zong, Visa and other payment companies will get in on the act, finding ways to eliminate the friction in paying for mobile games so an ever-wider audience can enjoy them.

The investment juggernaut

Game companies raised $1.05 billion in 2010, up 58 percent from a year earlier. Only four of the top 20 companies on that list last year were mobile companies. This year, Zynga alone could raise more than $1 billion in one fell swoop with its expected initial public offering.

But now we’re seeing investors who are embracing mobile-first strategies, where game companies lead with mobile games. The momentum of this investment into mobile is clearly growing.

TinyCo raised $18 million. Digital Chocolate raised $12 million. Pocket Gems raised $5 million. Rovio raised $42 million. The investors are also getting more interesting: Accel Partners, Kleiner Perkins, Sequoia Capital and Marc Andreessen are all moving into the market. Storm8 hasn’t raised money, but it is generating considerable revenue, having recently reported its first $1 million revenue day.

This heavy investment is aiding and abetting a talent migration, as veteran game developers see more opportunity in mobile games and other digital arts. Jordan Weisman, who has made every kind of game imaginable from the Mech Warrior series to alternate reality games, recently started his own new mobile and social games startup, Harebrained Schemes. The Seattle company is creating Crimson, an iPhone game as the first game to be published by Bungie — maker of the Halo series of games — under its brand new Bungie Aerospace third-party publishing division. Asked why he did this, Weisman said that he’s old and doesn’t have too many more games left to make. The idea of taking a few years to work on one game just isn’t attractive to him; but the short cycles of mobile games changes that clock for him. Lured by the chance of riches or similar ambitions, there’s a whole generation of talent migrating to mobile games now.

Free-to-play paves the way

Free-to-play gaming has helped pave the way for a real business model in mobile games. Apple introduced in-app purchases — the ability to buy something such as a virtual good without leaving an app — in the fall of 2009. Google introduced in-app purchases this summer. On the App Store, about 65 percent of the revenue from the top-grossing games now comes from free-to-play games, according to mobile analytics firm Flurry. Back in January, only 39 percent of the revenue from the top 100 games were free-to-play. Separately, Xyologic reported in March that 40 percent of game downloads were free-to-play games.

That has drawn bigger companies such as Zynga, which recently launched CityVille Hometown on the iPhone. Last year, Zynga paid $53.3 million to acquire mobile game maker Newtoy, creator of Words With Friends, a hit Scrabble-like game. Zynga is acquiring mobile game companies regularly now, and it has 11 games on mobile phones.

But for every endorsement of the mobile game market, there is a setback. Apple wounded its own market in April when it abruptly cut off pay-per-install marketing, where developers paid marketers such as Tapjoy to offer incentives to users to install other apps. Apple felt that developers were buying their way onto the top 25 lists. That’s driving companies such as Storm8 to expand on Android. The effect is that it has become harder to launch new games which go on to be a top hit, said Matthaus Krzykowski, founder of app store search firm Xyologic and a frequent VentureBeat contributor.

The path to the future

But there’s hope that mobile games will become a great market. Nielsen Research says that games continue to be the most popular category for apps. About 93 percent of app downloaders are willing to pay for games that they play. On average, mobile gamers play 7.8 hours a month, while iPhone users in particular play 14.7 hours a month. In Japan and Europe, mobile game usage is huge, and it is growing in the U.S. A survey by PopCap said a third of U.S. and U.K. adults have played a mobile game in the past month.

Tablet games are likely to take the market in a new direction. Companies such as OnLive are streaming high-quality PC games onto tablets such as the iPad 2. With game-streaming, the power of the hardware for the mobile device doesn’t matter. Games are stored and executed in a distant server, and video is sent down to the user’s machine, which can display the video whether it running on a PC or a tablet or, eventually, a smartphone.

Rob Wyatt, chief scientist of game-streaming firm Otoy, believes that game streaming could make consoles obsolete, allowing devices of any kind to run high-quality games. Cloud-based games will require good wireless connections to keep the two-way stream from being interrupted, but that technology is in the works. Steve Perlman at OnLive is working on something called Dido that will have virtually unlimited bandwidth for delivering high-speed data to wireless users. It sounds crazy, but OnLive itself seemed crazy two years ago. Now it works.

Meanwhile, many game companies are beginning to adapt online web games so they run on tablets, with routines added to support touchscreen or accelerometer controls. The tablet market may be an even bigger free-for-all, as both smartphone game makers and PC/console/web game makers can target the platform.

Sony and Nintendo, meanwhile, are doubling down on their investments in mobile games at the high end to make sure that Apple and Android devices don’t steal their high-value customers. Nintendo launched glasses-free 3D viewing on the 3DS in March, and Sony is preparing to launch the PlayStation Vita handheld with console-like graphics this fall. Nintendo’s Iwata insists that the company won’t be doing smartphone games.

HTML5 vs Native apps

Another factor that will affect the future of mobile games is HTML5, the new lingua franca for mobile and web apps that allows a game written in the format to run on a variety of platforms and devices. Digital Chocolate’s Hawkins believes that the arrival of HTML5-based mobile browsers will set game companies free from the restrictions of app stores.

HTML5 games run fairly slowly right now, so native apps, or those designed to run on specific devices, perform the fastest. But that could change over time as developers learn how to fine-tune their games.The latest approach to doing this is the “hybrid app,” which is a native app that runs all of its components in a browser. The fastest games must still be coded in native formats, but that could change. The game engine makers and other tool makers may figure out how to make cross-platform games.

With games running in the browser, users won’t be dependent entirely on purchasing apps from app stores, which take a 30 percent cut. That would complete the revolution that began with the creation of the app store concept, which bypassed the gatekeeper carriers who previously had control over which apps were available for purchase. When the app store owners lose control themselves, content will be free. And that, Hawkins argues, will lead to a $100 billion game industry.

From “The Network Is Your Customer,” by David Rogers (Yale University Press, 2011)

As the adoption of social media, mobile computing and new digital behaviors continues to deepen, businesses today are faced with the challenge of rethinking many of their basic strategic paradigms. In thinking about customers, businesses are facing a shift from a paradigm of individual customers to one of customer networks. At the same time, many models for marketing need to be updated as well.

One of the oldest and most widely adopted marketing models is the “marketing funnel.” This model, based on psychological “hierarchy of effects” theory dating to the early 20th Century, plots marketing as a sequence of psychological states in the mind of a the customer: from Awareness (of the product category) to Consideration (thinking about a purchase), to Preference (for a specific model or brand), to Action (making the actual purchase). More recently, as the importance of customer retention to a company’s value became better understood, a fifth stage has been added: Loyalty. The funnel’s shape arises as each of the five stages is depicted as narrower than the last, indicating a smaller subset of customers (e.g., more people are aware of a product than consider purchasing it).

Businesses are facing a shift from a paradigm of individual customers to one of customer networks.

— David Rogers

For years, marketers have harnessed a traditional set of tools to marshal their target customers through each psychological stage.  These tools were traditionally all broadcast media: TV ads might drive awareness, a direct mail piece stressing product features might drive consideration… all the way to a rewards points card whose regular reminders were sent to instill customer loyalty.

Today, social media and the incredible diversity of digital content have transformed the process of the funnel. While the original five psychological stages still hold true, there are a host of new sources of information influencing the customer at each stage. Instead of broadcast messages dominating the decision-making process, network communications (often from other customers) hold increasing sway. We can see how by looking again at the five stages:

  1. Awareness. The 2011 Edelman Trust Barometer study revealed for the first time that search engines have become the first source of trusted information for today’s customers, ahead of any traditional media brands. Search results, then, including content on non-traditional media like blogs, are now critical in the first stage of the funnel where awareness is created.
  2. Consideration. As customers actively consider a purchase, they increasingly take an active role in researching it online. As they do so, they are often influenced by product reviews posted by other customers on sites like Studies by Nielsen and others have shown that product reviews by strangers are among the most trusted sources of product information.
  3. Preference. Before making a choice of a specific brand, customers often turn to their friends online as well. Brand attachments are increasingly formed, and shared, in social media platforms like YouTube, Facebook and Twitter. Local search (whether via Google, or Yelp or Urbanspoon) is influential too, as customers seek not just what is desirable, but what is nearest by.
  4. Action. When purchase does happen, it may not just be in a store, but done online via PC, smartphone or tablet (as e-tailers rush to create ever more enticing catalog apps for the iPad and others). Purchase may also be driven by social action, thanks to social discount services like Groupon.
  5.  Loyalty. Once a customer is won, social media allows far more options than just loyalty cards for keeping in touch with them and driving repeat purchase.  Today’s customer relationship management (CRM) spans database-driven emails, Facebook fans, Twitter followers, and private online communities for premium customers. Digital media also allow for much more customized interactions, communications, and offers to drive add-on selling and loyalty.

The biggest change to the marketing funnel, however, is in the addition of a new, sixth stage: Advocacy. Today, the most ardent and engaged of your customers not only make repeat purchases (loyalty), they take on the role of brand advocates and spread their own positive messages and testimony about your business online. This advocacy, in turn, feeds back into the customer network effects from the very top down through each stage of the funnel—showing up in search results, product reviews, Facebook “likes,” links, retweets, and social buzz.

The challenge for today’s marketers, then, is not to throw out the old funnel paradigm. (The validity of its psychological model has not changed amidst today’s technology.) Rather, marketers must continue to employ broadcast marketing tools where they are still effective, while learning to deploy, inspire, measure, and nurture the kind of communications and advocacy in customer networks that drive marketing through all six stages of the funnel. That may sound like a daunting challenge, but it’s the only path to strong, valuable customer relationships in our digital age.

The contents or opinions in this feature are independent and do not necessarily represent the views of Cisco. They are offered in an effort to encourage continuing conversations on a broad range of innovative, technology subjects. We welcome your comments and engagement.

article from July 2011

Behaviour Interactive CEO Remi Racine believes that a single game is changing the mobile market, and it’s not the one that most people think.

Speaking to from the company’s Montreal studio, Racine singled out Beeline Interactive’s controversial Smurf’s Village as both the most innovative and profitable mobile game on release.

“Everybody is talking about Angry Birds, but the game, to me, that is changing the market is Smurfs’ Village,” he said. “Smurfs’ Village is outstanding.”

“I’d be curious to see who is making the most money between Angry Birds and Smurfs’ Village. When you look at the charts it’s always among the top three of four grossing games of the last seven or eight months. It’s always there. Angry Birds is in the top ten, but Smurf is in the top three. It’s amazing.”

Smurfs’ Village is free to download, but features an in-app purchasing system that allows players to spend large sums of money on “smurfberries”, the in-game currency, in just a few clicks. The cheapest quantity of smurfberries costs £2.99, more than most apps, while a “wheelbarrow” is priced at £34.99.

Beeline Interactive, a subsidiary of Capcom, came under scrutiny earlier this year after the Washington Post broke the story of an 8-year old girl, Madison Kay, who unwittingly spent $1,400 on smurfberries.

The child’s mother, Stephanie Kay, accused the game of “preying on children”, prompting US congressman Edward Markey to write a letter to the Federal Trade Commission. The FTC responded by promising that it would, “look closely at the current industry practice with respect to the marketing and delivery of these types of applications.”

Following numerous complaints from angry parents, Apple placed a warning on the game’s iTunes listing. Beeline Interactive also introduced a cap on in-game purchases in May, limiting players to 5 transactions every 15 minutes.

Racine declined to comment on whether Behaviour Interactive had a similar game to Smurfs’ Village in development, but claimed that the freemium model will eventually become the dominant pricing structure in the mobile sector.

“About 30 or 40 percent of the top grossing games are freemium based,” he said. “It’s the new way.”

Fantastic views from Tim Merel on the video games business

We are entering a world where the games market is fundamentally splitting in two, like the media market of a decade ago. Back then what we now call “old media” scoffed at “new media” upstarts for giving away content, bizarre business practices, and products and services that made no sense to the wise old birds. “They’ll destroy more value than they’ll create,” was the mantra.

Well, welcome back to the future.

Today’s games market is fundamentally splitting into “Value” and “Volume” markets, both by sector and geography. The two-speed market this is creating may have more rapid and profound effects on the games market than it did on the media market, with meteoric rises for some and slow going for others.

Let’s start by defining what we mean by “Value” and “Volume.”


  • Users: thousands to tens of millions
  • ARPU (Average Revenue per User): $-$$$
  • Costs: $ millions to tens of millions
  • Operating profit: negative to 20%+
  • Growth rates: negative to <10%
  • Business model: unit sales, subscriptions, virtual goods


  • Users: thousands to hundreds of millions
  • ARPU: ¢ – $$
  • Costs: $ tens of thousands to millions
  • Operating profit: negative to 60%
  • Growth rates: negative to 20%-100%+
  • Business model: unit sales, free, virtual goods, ads

Please note that these are not hard and fast rules, so there will be exceptions (such as World of Warcraft in Retail MMO when we get to sectors). But as a way of thinking about how the games market is dividing and what it means, they are useful rules of thumb.

In terms of thinking about where each games market sectors fits, here’s a starter:

Value sectors

  • Pure console
  • Retail MMO

Volume sectors

  • Social online
  • Casual online
  • Mobile
  • Social-mobile
  • Browser-based MMO

This categorization may be relatively uncontroversial, but the geographic divide possibly less so. Please note that for geography we are discussing user markets, not necessarily developer markets. Companies from any geographic location can succeed in other geographic markets, such as Zynga (US) and Rovio (Finland) globally.

Value geography

  • North America

Volume geographies

  • China
  • India
  • Brazil

Mixed Value/Volume geographies

  • Europe
  • Japan
  • South Korea

Put all that together, and you get the “Big V.”

The Big V

The eagle eyed will have spotted the small categorizations in brackets under Value (large long-term niche) and Volume (mass market growth) in the Big V chart above. If there is genuine controversy in this world view, it is probably here. So let’s explore.

Our forecasts are that online and mobile games should grow total video games market size to $87B and take 50% revenue share at $44B. The historically strong pure console sector is flat to down.

Our forecasts are that Asia Pacific and Europe should take 90% revenue share for online and mobile games (China 49%, Europe 17%, Japan 14%, South Korea 11% in 2014). North America remains important.

The drivers of this growing and changing world are socio-demographic and cultural, as well as technological. The most concrete statistics are socio-demographic, for which we’ll look at China as an example.

In 2010 China had 29% internet penetration, with around 382M users. So more Chinese internet users than the entire US population. China is forecast to reach 56% internet penetration (754M users) by 2015, or more than twice the US population, with the bulk of Chinese games played in internet cafes and on mobile phones. So while ARPU for gamers in China is much lower than America, the huge volumes enable Chinese online/mobile games companies to use incredibly efficient business models to deliver 50%-60% operating margins. To give a sense of scale, China’s Tencent generates up to 20M peak concurrent users, or roughly the population of Australia playing a Tencent game as you read these words.

China and the various online/mobile games sectors are the poster children for the Volume market, and fit the “mass market growth” description well.

For the Value side of the divide, the US and console markets are good examples.

The US population is stable, so remains a large market. The console market is flat to down, and despite recent and anticipated hardware launches we are unsure that this trend will change. Yet gamer ARPU in the US is much higher than China, and good console titles still sell for high prices at retail (even if increasingly bought online or with digital downloads). So the US and the console markets remain great games markets.

Yet compared to countries like China, the US is no longer the leading games Volume market in terms of gamer population. Even compared to Europe, the US is smaller by volume. When it comes to the console market, volumes, revenues and profits across the industry are generally trending down despite blockbusters like Call of Duty.

So in global terms, these markets look like they may become large long-term niches. Still great places to operate, valuable, capable of producing great games companies and great games, but generally not on the same scale or with the same growth rates and profitability as the Volume markets. Some of these Value markets are trying to transform themselves into Volume markets, and they may succeed in doing so despite the challenges. As before, this is not absolute and there should be many exceptions.

Recent games investment, acquisitions and public company valuations (see the June transaction update of our Global Video Games Investment Review 2011 for the data) indicate that investors may be taking a similar view.

So what does this mean for your games company investment?

Whether you agree with this world view or not (and it’s certainly open to interpretation and discussion), the underlying trends are what they are. They can’t be ignored, so you may as well embrace them.

As a starting point, ask yourself some simple questions. Depending on your answers, you may start thinking differently about how to invest, plan and operate to take advantage of the brave new world.

  1. Users: are your games aiming at thousands, millions or hundreds of millions of users?
  2. ARPU: do you measure ARPU in cents or dollars?
  3. Costs: do you think of game development and user acquisition costs in thousands or millions, and do you have the right cost/revenue model for your markets?
  4. Operating profit: can your business be flexed to deliver super-profits?
  5. Growth rates: could your business deliver 20%-100%+ annual revenue growth?
  6. Business model: what revenue sources are most important for your games — unit sales, subscriptions, virtual goods (currency/items), ads?
  7. Geography: can your games operate across geographies and cultures, or are they domestically specific?
  8. Platforms: are your games platform specific, or can they operate across sectors?
  9. Value to Volume transition: what can you achieve in Value markets as they transform towards Volume, and how does that compare to what you can deliver in existing Volume markets?
  10. Scalability: are you building a genuine business platform with scale advantages, or a series of hits?
  11. Exit: can you become a “must-buy” for one of the major players in either Value or Volume markets, and what does that look like?

There are many more questions you could ask yourself, but deciding whether you are a Value or a Volume player (and keep in mind it is becoming increasingly difficult to be both) may have a profound impact on the future of your games business investment from valuation, investment, strategic and operational perspectives

Interesting article from

Nicholas Lovell:

Earlier this week, I gave a lecture to 25 students on a game design course. I asked them to put their hands up if they had bought a CD this year. Not one person put up their hand. I have a two year old son. We don’t own any DVDs of Bob the Builder or Chuggington, because we can get access to enough of his favourite programme of the moment via the BBC iPlayer. I consider myself a core gamer (at least I did until I had the aformentioned son), but I haven’t bought a single game so far this year. Instead I’ve been playing freemium games such as Stronghold Kingdoms, Cityville and Millionaire City.
These datapoints, while anecdotal, are symptomatic of a fundamental change sweeping through all the media industries. As we transition from atoms (CDS, DVDs, books) to bits (MP3s, streamed movies, ebooks), the cost of making one more copy falls to zero. The original costs of content creation remain broadly the same, but distribution costs trend towards zero.
That means that charging a premium – and possibly any price at all – for that content becomes harder.

It is harder because brands realise that when distribution costs are zero, they can fund and seed content that is high quality and far-reaching. Barclaycard invested a six figure sum, perhaps as much as €250,000, into the creation of Waterslide Extreme, which took the premise of their television advertisements and turned it into an iPhone game. Over 10 million downloads later, the brand is happy and millions of consumers have had a high-quality, free experience.
It is harder because companies are taking advantage of close-to-free distribution to develop new business models. Zynga has a secondary market valuation of $7 billion based on a business model of allowing users to play their games entirely for free, but with the opportunity to spend money on virtual goods or faster progress in the game. ngMoco and Playfish, both of which sold for around $400  million last year, allow users to play their games for free on the iPhone and Facebook respectively. These companies are developing new business models predicated on giving basic access to their content for free.
It is harder because once DRM is broken (which it always will be), pirates can distribute your content for free.
In short, when people with motivations different from yours – whether they be pirates, competitors with different business models or brands, push their prices down to zero – it will be very difficult to compete.
It won’t be possible to charge for basic access to content
So much so that, on a ten year view, I don’t believe it will be possible to charge for basic access to content at all. We will all expect to have access to all the music, all the books, all the television and all the games that we could ever want. Sure, someone could invest in content and tell me that I can’t have it unless I pay. But there will be so many alternatives, both legal and illegal, that the model of paying access will be close to impossible to sustain.
On the other hand, content creators will still need to be paid, and there has never been a better time to be a content creator. I am much less positive about the future of content distributors such as publishers though. In my next column, I will look at the things that consumers will pay for if they won’t pay for access. Things like self-expression, status, emotional connections and achievement. The trick will be working out how to harness the power of the Internet to distribute your content for free and still find a way to persuade consumers to pay you enough to pay for its creation in the first place.
Now excuse me, I got a Kindle for my birthday yesterday, and I’m off to download Great Expectations and The Wind in the Willows.
For nothing.