While the videogames business continues its diversification, the rise of browser- and client-based free-to-play online games has been one of the startling growth segments in the past couple of year.
Here, Ralph Frefat, from one of Germany's main online publishers Gamigo, explains how the scene is changing, why traditional publishers haven't been early to the scene, and why the company is betting €10 million on one of its free-to-play titles.
Q: Tell us a bit about Gamigo - where did the company come from?
Ralph Frefat: Well Gamigo was originally the number one games website in Germany. When I was working at Atari, I was advertising there, back in 2002. They were a very solid company at that time - but then the whole online industry broke down, but Gamigo started to pioneer the free-to-play massively multi-player online games - they had successful brands there, including Anarchy Online, for example.
Nobody was really focusing on these games at that time, and after a while they realised they could make more money in games than with the website - so they went on with the publishing business. But initially it wasn't so successful, and nearly went out of business, but they got some investment, some new management and started again with two or three games in 2007.
From then on everything's been very successful, with several hundred per cent growth each year.
Q: So where is the business now?
Ralph Frefat: At the moment Gamigo is the number three in our business segment in Europe, and we opened an office in the US last month. We have the biggest portfolio of its kind, worldwide - more than 20 titles actively running - and we've signed eight or nine more titles which will be coming out this year.
I think this is a must - you have a hit-driven market, as with retail, but nobody will tell you which ones will be hits, or not. There are really huge games coming out from Gamigo this year.
Q: How would you characterise those games - by genre, depth, and so on.
Ralph Frefat: At the moment we look after our casual users, so around half are games you know already - fantasy role-playing games, and so on - because those are the cash cows. But we're also experimenting with new kinds of games, including on Facebook and iPhone platforms - and combinations of all of them.
So we have one game that will run on the PC as a client, on iPhone and on Facebook, and we'll see how it works. We're open to all kinds of new games.
The company originally invested in client download games, but we've now got three browser games in the portfolio, as well as others in development - so we're going in a similar direction to Bigpoint, while Bigpoint is moving more towards us... I think we'll meet somewhere in the middle.
Q: And do you have a sense that the people that play your games are generally casual gamers, or core gamers?
Ralph Frefat: To be honest I believe that most of our customers are either core gamers, or very close to core gamers - maybe they've been core gamers in the past, but don't play that much any more. I wouldn't say that we have casual gamers who are playing our fantasy RPGs - our target is more-or-less young male adults.
Some of our games - Fiesta, for example - has about 40 per cent female users. It's very cartoony, doesn't have violence, and so on. And we also have a golf game which has a target audience of people in their 40s or 50s. You can see there are a lot of opportunities for lots of other target groups.
Q: So just there are several different demographics - how important is it for businesses, particularly in the online space, to spread risk like that?
Ralph Frefat: It's the most important thing at the moment. For example, I don't want to judge competitors, but if you take Frogster for example - also a German company - they have Runes of Magic (which was offered to us, but unfortunately we didn't take it...). But if they didn't have that one title, they'd be dead today - the other one they had before was a flop.
That's a risky strategy, but they had some luck. But in the future, if you sign a new title, you really don't know if it will be a success or not.
Q: We've seen the social, browser and - to an extent - iPhone spaces dominated by non-traditional publishers, although obviously they've made (or are making) moves. Why haven't they been first to those markets, though?
Ralph Frefat: They never have been - they always waited to look into the markets a little bit, and then they acquired someone. And this is what will happen this time again - but on the other hand it was a completely new business model in an area where they didn't have any experience.
If you look back a few years the revenues weren't that great, so it wasn't a lot of interest. But now those revenues are starting to grow you have some under-developed countries - even in Europe - where the free-to-play model isn't working so well, but I suspect it will grow in the next couple of years there and will be more successful.
Q: Isn't it just the nature of business though? Looking at the early days of the traditional games industry (where core games were casual, but anyway -), EA and Activision were two of the names that pioneered that space. Shouldn't those companies also pioneer these new game areas?
Ralph Frefat: I think it's a lack of experience. That's the first thing - but they're all under pressure right now. In the last few years everything was fine and they had good numbers - but now the revenues are still increasing, but the profits are going down. Shareholders are demanding new ways to make money, and this is one of the opportunities that they have.
Q: By spending a lot of money on an acquisition...
Ralph Frefat: Yes, but shareholders are investing for the future, not the present. If you tell them that this is the business model of the future, and you expect numbers that are much higher then today...
Q: There are a lot of intelligent people at these companies, paid an awful lot of money to steer them in the right direction. Why does it at least seem to have taken them by surprise? In other industries you'd expect the latest footwear innovations to come from Nike or Adidas, not from a start-up with four people on board.
Ralph Frefat: I think online has helped a lot, because it's not a closed system, so every kind of company that had a good game could spread it - people could get into those games, play them, and if they spent money then the company gets that money directly.
If you're talking about Nike or Adidas, it's a retail system that's dominating there - and that's what's happening at retail in the videogames space with the big publishers. It was a secure business for them because they owned the shelves - they bought them. But online was completely different.
Q: So it's a bit like bypassing trainers altogether and buying some Crocs...
Ralph Frefat: Look at it this way - if you have a retail game and you have a good brand then people will go into the shop and see that brand. They'll see that the screenshots are good, the text on the back of the box is good, and they'll buy it. If they take it home and that game is s*** then okay, the money is gone.
But in the free-to-play model you have to convince the person to stay, and deliver quality. That's the most important thing for the future of a game - you have to produce quality so that people stay there. It's so easy for them to go away and try something else.
Q: There are so many good reasons why free-to-play should be the most attractive business model for consumers - so why is it a bit of a dirty word, with historically a bad reputation. How do you change that perception?
Ralph Frefat: Honestly, in the past it was true. If you look back four or five years there was a lack of quality. But if you look at the future, we've signed a space-opera game that has a development cost of €10 million, and the game looks like it should be published by Electronic Arts.
This is the future of free-to-play - it doesn't mean that it's a cheap experience, just because it's free to the consumer. The game is the same kind of quality that you're used to getting at retail.
Q: Is there a communication issue here? If a significant proportion of your gamers are core gamers, they'll tend to go to the consumer websites like Eurogamer to get their information on games - they're used to looking at a review score before deciding whether to spend their money. But with free-to-play there isn't that upfront risk... so in a way they don't need the games media to tell them about it - and so the media doesn't then really report on it - so how do you bridge that gap?
Ralph Frefat: People are searching for it. They want these games - they look at Google to find them. For every company - it doesn't matter if it's browser games or client games - the majority of new consumers come via Google, via direct advertising.
And there are also websites that are just reporting on free-to-play - so you can find this information. Type into Google: "Free-to-play fantasy game" and you will get a lot of nice games, which you can try.
But it's getting tougher and tougher, because there's more competition, so it's harder to be found on the internet.
Q: And with rising development costs, if you're making a game for €10 million, then after all the marketing and everything else, you need to make back... more than €10 million to be happy. Is that a tough challenge for a free-to-play game? How many players do you need to get to that point, and how long does it need to be in the market for?
Ralph Frefat: It depends on several things - on the lifetime, the ARPU, on how many players you can get into the game that are playing actively and purchasing.
But compare it with retail - if you have a big game there, you have a time frame of let's say 8-10 weeks when the game is hot, before it drops. The lifecycle of a normal free-to-play online game is 3-5 years, so I don't care if it's not that successful in the first six months - it might be in the next four.
If you summarise the revenues that we did with certain games, even if you just make €100,000 per month, add all that up over a lifetime and it's much more than some retail games make.
Q: It will surprise people, however. There's still a lot of risk associated with a €10 million investment - it doesn't matter how long you've got to make it back. It's still a lot of cash, and does that mean that the free-to-play sector is heading down the same arms race path that has been experienced by the retail sector?
Ralph Frefat: I can tell you, we're not sure if we'll get that money back - but it helps us in terms of public awareness. The game looks so awesome that everybody is willing to report on it. It's called Black Prophecy, and it's out towards the end of this year.
Q: When you say "towards the end of this year" - as an online game, do you have a specific release date, or do you just emerge from open beta at some point and then start commercialising the model?
Ralph Frefat: You have a completely different approach to your customers, compared to retail. But let me go back one step - when we're looking at whether or not we'll make back that €10 million, we can do that because of our portfolio.
It's a mix of opportunities and risks - we also have browser games that don't even cost €1 million, just a few hundred thousand, and we'll make that money back in the short term. It's a mixed calculation.
Ralph Frefat is director of media partnerships at Gamigo. Interview by Phil Elliott.