Over the past decade, videogame monetization has changed drastically. The internet became an integral part of society –and now even more with high-speed bandwidths– new platforms arose (especially mobile devices) and game development costs skyrocketed due to the increased difficulty of creating more complex games.
This is an introduction to the current strategies that developers have available to monetize with their videogames.
Before continuing, let’s first talk about distribution.
At first, games were sold as a complete unit, there was no such thing as the Internet (or at least not as massive as today) and games were released either for home consoles, arcades or PCs, so it made sense to sell them as standalone physical goods.
With the advent of the internet, the practice has now extended to online distributors such as Steam, GoG, Green Man Gaming, GamersGate (no, not *that* one), Humble Store, uPlay, Origin, PlayStation Store, Xbox Live and plenty of others, each one of them splitting the revenues with the developers. The Humble Store, for example, splits it «3 ways: 75% to developers, 10% to charity and 15% to Humble Bundle» while the rest goes for a 30/70 split. Others, like Steam, while do not publicly display and often prohibit their disclosures through a NDA, are considered to work under a 30/70 scheme as well.
There are two principal ways to monetize in the digital era: by selling games as paid products (retail) or by offering them as freemium.
This method consists on the player buying the game; fair and square. This is like buying a book, a music album or a DVD movie.
Prices typically range between $15 and $60 (AAA games being more expensive) and while they may seem expensive it should be noted that, adjusted to inflation, nowadays they are cheaper.
Over the years, developers started developing extra content for their games. Let’s see how can they be presented.
Expansions / DLC
One of the earliest ways developer generated more income was by releasing expansions. As the name implies, they are extra content that expanded the original experience. They were released as a separate disc.
Downloadable Content, popularly known as DLC, were the natural evolution of expansions; with the rise of broadband internet, expansions could now be downloaded.
While expansions essentially added features to the core game, DLCs have also been used to give secondary content. They can be categorized either as essential (as in expansions) or superfluous (extra skins, guns, etc.), given their importance.
Typically, these downloadable contents are available a few months after the release of the core game; however, it isn’t necessarily so. There are times when the game ships with DLC already inside the physical disc and available to be bought immediately; such practice is called Day-One DLC and is not well received by the consumers (who perceive it as a deceitful and dishonest move). The guys at Extra Credits have more detailed info in this.
In order to incentivize people into buying them, these DLC are usually available as a bundle (which can be pre-ordered, sometimes with a minor discount) called Season Pass.
Although they could be just considered as aggressive DLCs (as they are not optional expansions but real chunks of the core game), I think it’s important to distinguish them as an alternative.
Episodic games are, by definition, narrative-driven. The whole experience is divided into segments that are offered individually to the player (although by nature they are all crucial and needed for a complete experience) or as a whole under a season pass. Sometimes, the first episode is available for free as an incentive to lure customers in.
The advent of videogames into mobile devices resulted in a new wave of monetization for the developers.
Free-to-play is a derivation of freemium, which is defined as «a pricing strategy by which a product or service (typically a digital offering or application such as software, media, games or web services) is provided free of charge, but money (premium) is charged for proprietary features, functionality, or virtual goods.»
To understand this new approach in the game industry, we must first analyze the context upon which it appears. Mobile gaming, although existent since the beginnings as extra apps integrated into cellphones by manufacturers (e.g. Snake), is nowadays considered a very important segment of the market. With the apparition of smartphones, they rose up to the position they currently hold and at a time when AAA games are experiencing high-definition.
Although smartphones are now more powerful than old-day computers, they are considerably underpowered in comparison to modern-day AAA consoles due to their portable nature. In a way, mobiles and handhelds consoles (Nintendo DS, 3DS, PSP, etc.) are not that far apart; the key difference, however, lies in their context: handheld consoles are usually gaming-oriented, while smartphones serve more an utilitarian role and are more passtime-oriented. Therefore, while handhelds inherited a retail + DLC plan from their big cousins, mobile games needed a better approach that could lure casual gamers into pouring money into them.
And even though console and PC games have begun to enter the F2P realm (LoL, DotA, Team Fortress 2, anyone?), the practice is strongly associated with mobile gaming.
There are two (non-exclusive) ways to monetize free games: ads and microtransactions.
One of the oldest ways to publicize on the internet was through those pesky images that appear on websites: ads. While they don’t necessarily qualify as free-to-play, I like to group them together as they are usually used in conjunction (most games have in-app purchases that include an item to remove ads, for example).
To better understand advertisements, we must first learn the necessary terminology.
Every time an ad is successfully displayed on-screen, it’s said to be an impression. It’s noteworthy to say that both clicks and impressions generate money, although the former is substantially better paid.
Standing for Effective Cost Per Mille, eCPM defines the ratio between the amount of earnings and the total number of impressions. In other words, it means how much each thousand impressions earns the developer.
Represents the percentage of ads that are delivered relative to the total number of requested; the bigger the number, the better. To avoid any possible exploitation, ad services limit the number of ads any person can see per day.
There are two types of ads: banners and interstitial screens.
They are commonly rectangular and found at one of the fours borders of the screen, as to not block normal user interaction with the app. They can be static or animated (e.g. a gif or a flash animation).
On the other hand, these can be images, animations or even videos; they cover the whole screen, interrupting the user, reason why they are better paid. Recent games have begun to offer in-game rewards to whomever watches a complete interstitial video.
IAP / Micro-transactions
The boom of social networks defined the so-called micro-transaction; meanwhile, social games began to expand. Aimed at even more casual targets, these flash-based games were relatively cheap to produce and worked as Skinner boxes. Because these games were apps that existed as services (and not products) inside of Facebook, they couldn’t be bought as retail; instead, micro-transactions offered a simple solution that was very effective (ask Zynga if not).
These in-app purchases work similarly to DLCs but usually represent in-game items that are helpful instead of extra material that expands upon the core experience. Another difference is that DLC are usually bought outside and IAPs inside of the game. Also, they are micro due their relatively low costs that when piled together make up for a great sum of money.
In order to buy them, the game must be linked to a billing system; for example, Google Play Services / Amazon Apps / Samsung Apps for Android, App Store for iOS and Windows Store for Windows 8 and WP8. Developers upload a list of the different things that can be bought and, sometimes, must wait until they are approved.
It’s important to remember that developers only see a fraction of the total sales revenue. For each transaction, a 30% fee is applied and discounted from the original price, leaving 70% of the earnings to the developers.
IAPs can be divided under three main categories.
While DLCs tend to be a one-time purchase, consumable IAPs can be bought several times and once used they are removed from the player’s inventory. Because of their sporadic nature, their purchase can’t be restored by the player if they change devices or reinstall the game.
Typical examples are potions, food, status buffs, temporal sidekicks, etc.
Some, if not most F2P, games also feature virtual currencies that can be used to purchase many kinds of virtual goods as an alternative to real money. Players can either work (play?) hard to earn them or take the easy way out and purchase packs of them using real money.
Contrary to consumables, these are forever linked to the player and aren’t removed from its inventory. Therefore, if the player changes devices or reinstall the game, they can recover these previous items.
Common examples are unlockable characters, weapons, skins, ad removal, levels, etc.
They can be thought of as temporary non-consumables; just like a cable tv or magazine subscription, they can be used for a certain amount of time until a renewal is needed.
I’m not a fan of F2P; more often than not, games following such design tend to be sloppy and constructed in such a way that the core experience is skewed in favor of monetizing. The practice isn’t inherently bad, though; the guys at Extra Credits, on their playlist on F2P, explain why it could be beneficial to the industry if done right.
Whether we like it or not, game development has changed. The appearance of open-source and otherwise cheap tools opened up the market to anyone interested. Furthermore, it’s now possible to monetize with simple games (e.g. Flappy Bird). There are plenty of services that can be used for mobile games, each with its own pros and cons, but that’s material for another post.
I hope this post covers all the basic theory to understand videogame monetization; please, feel free to comment in case I missed or misinterpret anything.