Free Business Models in the Games Industry

(Stanford BUS-21)Martin Westhead

Mastering Marketing

Free Business models in Games

How to make money by giving things away

Overview

Game Monetization Examples- Virtual Goods- Subscriptions- Advertising- Virtual Real-Estate- Pay-to-Win

What Valve is doing- User Generated Content- Relinquishing Control- Abundance thinking

GAME MONETIZATION MODELS

Virtual Goods

Virtual Gold

Subscriptions

Advertising

Virtual Real Estate

Merchandise

Pay-to-Win

Pay-to-Win

WHAT VALVE IS DOING

Gabe Newell

Cofounder of Valve Corporation

https://www.youtube.com/watch?v=t8QEOBgLBQU

Valve

Grow 50% per year for 18 years Higher profit per employee than Google,

Facebook, Amazon… 4th largest bandwidth consumer

- bigger than most countries Corporate culture

- Insanely (suicidally?) flat corporate structure- Laser focus on facilitating productivity

Games

Innovative Games- Half-life- Team fortress

Platform for- Digital distribution- Digital rights management - Multiplayer- Communications

Steam

Steam machines- Steam OS- Console boxes- Controllers

Consoles

Free to play games- Isn’t that a crazy idea? - How do you make money?

Goods that are created to satisfy - personal expression - Status- Affinity- Hierarchy

Game experience is free but if you want to be cool you’ll have to pay

Free to Play

Incremental value of audience member is greater than incremental cost of adding them

Typically- Audience size goes up by 10x- Revenue goes up by 3x

But profitability goes up by a lot more than 3x

Network effects

Trade in in-game goods between customers

Uptick in User Generated content (UGC)

10x more content comes from users in TF2 (Jan 2013) than from Valve

User Generated Content (UGC)

UGC store

UGC profits

Interfaces for users to sell content- Split proceeds

First 2 weeks they did this we broke PayPal Top user seller makes over $500K per year Some games professionals employed in other

companies make more selling hats on TF2 than at their day job- Succeeding in enabling their productivity

Monetary problems

Inflation Deflation Users creating their own currencies Countries adding regulatory structures

- Korea there’s a W4 equivalent for players Liquidity problems

- mini-financial crises at certain times of day Worried about asset bubbles Probably should get an economist involved!

Economist on Staff

Yanis Varoufakis 2012

- Valve hires economist Fascinated by

economies with all the data

http://www.develop-online.net/news/valve-hires-economist-yanis-varoufakis/0112279

Creating markets

Maximize productivity… of users- how do you think about what is the value- UGC goods and services

Markets determine marginal value of activities Creativity and the frameworks for that will

vary Probably going to exist a central economy Games specific instances hanging off that

Creating Value

Many ways that people are adding value- Arbitrage and trading opportunities

- designing, - Trading- Collecting

- Others create a whole game- Models- Artwork- Story

Plumb “ownership” and “authorship” though out the system What about playing?

- Good players bring spectator value- How to monetize?

Video game parents

But… Being a really good player is valuable Dota 2 – Dendi

- When Navi is playing you can purchase a banner

% of the banner goes to the team More direct way to engage with the

audience than ads on YouTube Quickly making $100K per year on

banner sales Dendi made over $200K in 2012 in

prize money alone

Game value

Things that you do have value

Need to have persistence between games

- Preserve value as you move from one game to another

Need to be exchangeable and retain value

Steam

Today Steam is a curated store - Accept 3rd party games but- becoming a bottleneck to content creators and

consumers Creates artificial scarcity

- Controlling the distribution model- artificial shelf space - but that's not what we are trying to do

Relinquishing control for developers

Steam should really be a publishing model

Anyone should be able to publish anything through steam

Steam => network API

Enable productivity of developers

Relinquishing control for players

TF2 anyone can make content- People make a shanka (Russian hat) for characters- No notion of privilege content- should be open

Anyone should be able to create a store Able to trade games

- people buy from my collection and I get a % Some will go to a lot of effort to create a store experience Rethinking two valuable assets:

- who should be on steam- how store should look be created

Rethink them both - let go of control - enable productivity of users

Steam becomes…

Generalized network service

People will add value

Audience will reward people for creating entertaining stores (market mechanism)

Steam becomes an agnostic platform

Productivity and Reward

Working through the notions of authorship and ownership

Texture -> Model ->Level -> Seller sells level to customer - tracking the rev share

Build frameworks to help people be productive and rewarded

Even with primitive versions we are helping some people be more productive than they are at their corporations

Constantly thinking about the most useful fundamental ways of enabling productivity

Summary

Game Monetization Examples- Virtual Goods- Subscriptions- Advertising- Virtual Real-Estate- Pay-to-Win

What Valve is doing- User Generated Content- Relinquishing Control- Abundance thinking