Freemium 2.0 – Publisher paid player rewards are a powerful incentive that will drive gamers to deeper participation in MMO economies, directly resulting in far stronger conversions and higher ARPU.
The free to play business model has fueled the rapid rise of games on social networks and smartphones. Outside of advertising, which still remains relatively minor, revenue has grown organically but not exponentially. The growth is relative to the increasing audience size for freemium games, and revenue is largely based on a range of conversion rates from the 1% to 3% realized by easy to play games for the mainstream market to a higher rate of 5% to 25% (but typically around 10%) for an upper echelon of more challenging high production value games (sometimes referred to as “mid-core”) such as Kabam’s Dragons of Atlantis and Kixeye’s War Commander, appealing to a more niche audience. As alternative revenue streams like advertising revenue haven’t kept pace with transaction-based monetization and audience growth has started to show signs of a slowdown, we are beginning to see inherent limits to the potential upside for the freemium model.
While the freemium model in use for most Facebook, smartphone and web-based games does incorporate some economic items and credits that can be exchanged for items to use in a game, these are typically limited to some type of virtual currency and very general sorts of resources. Virtual currencies are often available in more than one type (but this is still a limited concept in implementation) and necessary resources are usually comprised of items such as “energy,” which allow for longer sessions, in a counter-productive mechanic that actually discourages longer unpaid play sessions.
It’s understandable that publishers tend to over simplify systems for exchange of virtual items and currency available in social, mobile and web games so as to clarify the benefits of purchasing and using those credits and items to enhance gameplay. It makes sense to facilitate real money transactions (RMT) for mainstream audiences, but this also limits conversion rates and average revenue spend per paying user (ARPU). However, virtual economic systems should be sufficiently complex to better reward those players who buy credits and play longer sessions.
The explosive growth of freemium gaming for the mainstream audience has effectively bypassed player rewards, perhaps the most lucrative incentives driving RMT. It may seem a counter-intuitive leap from play for free but paying gamers for playing will increase conversion and ARPU for freemium developers and publishers. Note that we are considering strictly RMT and service payouts here, not skill-based challenge/wager revenue models for payments between players, including professional gaming leagues.
The freemium business model has its roots in hardcore massively multiplayer online games (MMOs). The play for pay model as supplemental revenue to free to play transactions has grown out of experiments with secondary markets in subscription-based MMOs. Pay to play has been a primary revenue driver in MMO games as these have shifted away from pure subscription models to better compete with free to play. The basic idea derives from the simple economic reality of time and money resources unevenly distributed amongst players in challenging high end online multiplayer games. Some players have a surplus of time and others have more money relative to time. Typically time-rich players are younger while players with more financial resources tend to be older, although this is not always the case.
Magic: the Gathering from Wizards of the Coast was one of the first games to create an economy incorporating real money transactions for virtual items, using trading cards that could be used in either online play as virtual items or traded for physical cards used in live game events.
Empowering players by means of a secondary market is a primary element of Riot Games’ successful transactional model for action RTS game League of Legends.
Third party service provider Live Gamer has set up secondary markets for MMOs that benefit both players and publishers. CCP further developed the RMT-based secondary economy by bringing an economist on staff to help maintain value in the transition between real world currency and virtual currencies used between players and game markets in CCP’s very successful EVE Online MMORPG.
Now CCP is pushing pay for play further, with the upcoming PS3 console-based MMO first person shooter Dust 514 currently in beta on Sony Computer Entertainment’s PlayStation Network. Dust 514 is a planetary terrain based first person shooter that runs parallel to CCP’s PC based interplanetary EVE Online, which features space battles. In a secondary market established between Dust 514 and EVE Online, an EO player can hire Dust 514 players as mercenaries to fight battles on the planet that will further the EVE Online player’s interplanetary campaign.
Watch the Dust 514 Demo -
Dust 514 mercenaries can accept virtual payouts as credits or supplies and can base transactions as a campaign services or one-time events. CCP also plans to allow Dust 514 players to purchase the equivalent of an air strike from EO players to aid in their land battles, and Dust 514 mercs may also be able to attack EO airships from the surface for payouts from EO campaigners. In both EVE Online and Dust 514, as in League of Legends and other MMOs, players develop and maintain performance-based reputations that weight the value of their participation and services and influence pay outs.
This player reputation mechanic can be easily applied to referrals. Players could get pay outs based on recruiting new players and team mates. Paying players for referrals based on reputation and value of recruited players could have a revolutionary effect on freemium marketing, transforming the cynical CPI (cost per install) system publishers use to juice up user bases on Facebook and in the App Store to a positive player pay out that encourages not only greater recruiting efforts but also deeper engagement, conversions and higher ARPU.