The Free Future

This is an industry that I love, both as a player and a developer, and I get a chance to see things from both perspectives, so I'm grateful to GamesIndustry.biz for allowing me the opportunity to share my thoughts on where I see the future of the MMO industry going on the business model side. I also get the opportunity to travel a lot and see where the rest of the world is at on this subject. That's a fascinating part of my job and an eye-opening one. The world does not revolve around the US in our industry. It really is the US, Europe and Asia - particularly China and Korea, but also a growing MMO audience in Japan - as very distinct markets.

I've been playing online games since 1993. My first online game was the game Cyberstrike. I played it on Genie. I can remember my wife (literally the month after we got married) not being too thrilled with the $600 a month bill I was racking up playing Cyberstrike at $3 an hour. Since then the online gaming industry has really evolved a tremendous amount in gameplay, technology and business models. I'd like to take this opportunity to discuss the evolving business models in the online gaming industry and why I think we're headed towards a Free Future.  I'll let you know our current thinking at SOE and provide some insight on what we think they mean. I want to be very clear and say that this thinking has evolved over time and will continue to evolve. That means that we will necessarily have to change with the times so please keep this in mind if you're reading this a year from now.

The assumptions

For me to be able to explain where I think we're at with business models, I want to make sure I've provided the fundamental assumptions we make when we are making online games.

• 01. As game makers we are striving to make the absolute best quality games that we possibly can.
• 02. We are doing this to make a profit.

I recognise that ultimately gamers get to decide if we've succeeded in #1. It really is why we're in this business. We work in this business because we love to make games. We also make them to make money. We operate under the simple belief that if we make a great game then people will pay us for it.

These may seem simple and obvious, but I read a lot of forum threads where people say we should let them play absolutely free. In a perfect world where these games didn't cost us anything to make I agree. But if we spend $50 million making something we have to make that money back and make a profit on the investment.

I can't stress enough that the most important thing here isn't the business model. It's making a great, high quality game. As game makers that really is what we want to do… but today I want to talk about the business models.

Today you can see many different business models out there in online gaming. I'm going to broadly categorise them into Subscription (Sub), Buy the Box (BTB) and Free-to-Play (F2P).

Subscription

The current state of subscription gaming is that most of the larger MMO games in the west use a recurring subscription as a primary business model. There are some notable exceptions though such as our own EverQuest II Extended and Lord of the Rings Online (I don't mean to slight any of our other competitors by the way… just giving examples here) that have gone free-to-play. Subscription gaming is the dominant form of revenue generation in the West simply because World of Warcraft has such a huge subscriber base compared to other games.

Turbine's Lord of the Rings Online, one of the first subscription titles to switch to free-to-play successfully.

We see some very interesting trends in subscription gaming. In our cancellation surveys for EverQuest II, fully 40 per cent of the people that fill them out list subscription fees as one of the primary reasons they quit. Economic times are hard out there and a recurring subscription is something that glares at you from a credit card bill every month. For some people, saving money starts with getting rid of subscriptions that hit the credit card every month. We have some ideas on that which I'll address shortly. But it's fair to say that subscriptions are likely going to be a strong component of revenue for the foreseeable future, although I don't believe they will be remotely as dominant over time. There's another large juggernaut coming out soon in Star Wars: The Old Republic from EA/Bioware. That's a game that I think has a legitimate shot at a 2 million subscription user base and I believe they will stick with the subscription method. In my opinion this is going to be the last large scale MMO to use the traditional subscription business model. Why do I think that? Simply put, the world is moving on from this model and over time people aren't going to accept this method. I'm sure I'm going to hear a lot about this statement. But I am positive I'm right.

Buy the Box

As things stand right now the Guild Wars franchise is the best example of BTB in the MMO space. With Guild Wars, you buy the box and you get to play for free "forever". NCsoft has done very well with this model. It's very popular with consumers. It does have the disadvantage from the publisher's viewpoint of not covering the operational costs over time, but they have added microtransactions as a way to help offset those costs. You could say that games like Call of Duty: Modern Warfare 2 or Battlefield 2 and other retail games with an online component fall under this category as well. Most of these games sell some kind of DLC. The reason this is very popular with consumers is obvious - they like the idea of just buying the game and not worrying about paying for anything after. However, beyond the DLC and a few patches here and there the expectation level of significant changes to the game varies widely from game to game. Both Activision and EA are great about putting out DLC and frequent patches early on. However, over time you really expect to move on to newer versions of the game as opposed to significantly new patches. This is a very important distinction between traditional retail style games and games like MMOs. MMO games (and many of the newer breed of online games) are really software as a service (SAS) that gets upgraded over time. Both models work… but I bet you're going to see a lot more games using the SAS model over time. It's simply a far better return on investment if it's done right.

Free-to-Play

On a worldwide basis, free-to-play is the most widely used business model. There are a large variety of different models underneath the banner of free-to-play. This business model really evolved out of Korea and China predominantly. Both of those markets are PC gaming markets. It's interesting that most Americans my age (I'm 43) grew up being console gamers first. That's not true in either of those countries. Think for a moment what a profound difference that is. We all grew up with consoles being a part of our everyday lives in addition to computers. In my house I had an Atari 2600 and an Apple II+. Many kids in the US grew up playing Madden on the PlayStation. The key thing here is that our business models came from that console frame of reference. We buy the game at the store and we play it. We got used to it because it's what we knew. In China and Korea the culture largely was built around internet gaming cafes where the games were already installed. They were used to paying the café operators for time, but not necessarily paying for the game itself. New games would just show up on the PCs in the cafes. This is largely the reason that free-to-play games first took hold in Korea and China.

As these business models have moved over to the West they first came over in games imported from these countries and in many cases the early games simply weren't very good by the standards of the games we played in the west. I find it very interesting in my trips to China to see the quality of the shooters they have for example. People in the West don't realise that the world's largest shooter (in terms of number of players) isn't Call of Duty or Battlefield or Counterstrike. It's a game called Crossfire and it gets between 2 million and 3 million concurrent users. If you look at the game it doesn't look like a modern first-person shooter by western standards. But it's got an insanely huge user base… and it is a free-to-play game. There are many other examples like it in China and Korea and many of those games have been brought over to the US - a lot of players began to associate free-to-play with lower quality import games and it began to have a stigma associated with it. There were other games early on in the free-to-play genre like Runescape as well (which has been an amazingly successful game and one that is a lot of fun to play if people take the time… it's one of the hardest core MMOs on the planet).

DC Universe Online, the second title from Sony Online Entertainment to go free-to-play on the PlayStation 3.

Over the last few years we have slowly begun to see some very high quality free-to-play games come out, and we've seen some high quality games change business models to free-to-play. Some good examples of high quality games are League of Legends and our own Free Realms. Both games are very high quality modern games with free-to-play business models. There have been a lot of games that started out life as a more traditional subscription game that moved over to free-to-play. Perhaps the best example of this is Lord of the Rings Online from Turbine, which changed over to a free-to-play business model and has been very successful. They have publicly claimed a three times increase in revenue and a big increase in users from switching over to free-to-play. At Sony Online Entertainment, we also made the switch to free-to-play when we added EverQuest II Extended to our portfolio of games. We took EverQuest II and added a free-to-play server that's been very successful. We also just announced that we're taking DC Universe Online from a subscription business model to a free-to-play model.

Free to Play encompasses a lot of different business models. Some games like League of Legends are microtransaction only games… where there is no subscription. Other games like LOTRO offer a subscription tier as well. The key idea of a free-to-play game is that the game itself doesn't cost money to purchase and you get some amount of gameplay for free. Beyond that it's different game by game. This is what we're seeing today and I expect that in the future you're going to continue to see a lot of different ideas in the free-to-play space.

The Future is Free to Play

I firmly believe that free-to-play is going to become the predominant model in online gaming for a lot of reasons:

• The upfront cost of buying a game is a large barrier to most people. Let's face it, for those of us in the gaming space seeing a company like Zynga hit amazing numbers has been a real eye opener. I would absolutely classify Facebook games as free-to-play. If Zynga required every user to pay even $10 up front they wouldn't have remotely the number of people it has got. A lot of snobs in our industry are going to stop me here and say "those aren't real gamers". They are absolutely real gamers. They pay a lot of money (as evidenced by Zynga's recent IPO filing). This is perhaps the best example there is of getting a lot of people that never gamed before to try a game. I think it applies to all areas of gaming. As the quality of free-to-play games becomes higher it's going to make going out and spending money at the store on a game a lot more of a barrier simply because they have real options that don't involve a software purchase.
• Recurring subscriptions are going to increasingly be a barrier - like I mentioned earlier, when we do exit surveys of the people that quit EverQuest II, we see an astounding 40 per cent of people specifically mention that the recurring subscription is a real barrier. A lot of people are playing multiple games now and having something hit their credit cards every month is something they don't like to see. At Sony Online Entertainment, we believe that gamers should have options here. We're going to be introducing non-recurring subscription options. If you would prefer to buy a one-off pass and not worry about that subscription hitting your credit card every month we're going to give you that option.
• Console gamers aren't used to paying subscriptions for games - at SOE we currently have two MMOs on the PlayStation 3 - DC Universe Online and Free Realms. Free Realms is already free-to-play and DCUO is moving to a free-to-play model in late October. In the surveys that we've done, we see a lot of people who say they had a problem with a subscription being a part of DCUO because they expected to play for free after they bought the box. We believe that removing that barrier is going to result in a lot more console players giving it a try.  In Free Realms on the PS3 we've already seen that work extremely well.
• It works on a worldwide basis - Over time we are seeing more and more success stories of games making the jump from the US to Asia, and vice versa. As I explained before this model is the predominant one in Asia.
• It takes retail out of the equation and it makes a level playing field for smaller indie developers. As it stands right now, retail is a big hurdle for gamers. They have to physically go into the store and they get a relatively small selection of games. This means that games from smaller publishers and developers don't get shelf space. They also need to manufacture the boxes and take inventory risk. Digital by itself fixes the inventory and the retail issue, but what it doesn't do is allow smaller publishers to experiment with new ideas for games. There are a lot of examples of games that became very successful that no one would have even looked twice at if they had to pay up front for.

Free-to-Play - Doing It Right.

Since I think free-to-play is the future here are some thoughts on some core values I think we should adhere to for future free-to-play games. Note that this doesn't mean that every game that's switching to free-to-play from a different business model can go this way - this is more about new games.

• Let players be able to get most things that you sell in the store just by playing the game.  Even if it's difficult, giving free players the chance to get things without ever paying you a dime is the right thing to do.
• Convenience items are good ways to make money - selling things like XP potions are things players like because they can speed through areas of content they've already been through with another character.
• Customisation is a key thing to sell - players like to be different. Selling them options to appear different is a good money maker and something that's non-controversial.

Free-to-play is here to stay. I really think we're going to see a lot more AAA games going with this fantastic business model. It's something SOE is taking a close look at for our existing games and certainly for our future games.