It is clear that the growth of high-speed broadband connections and low cost, high capacity digital storage is changing all facets of life. Consumers read news online, share pictures, buy individual songs, watch videos on YouTube, you name it. The game industry is no exception to this shakeup. However, because games are the most resource intensive form of media, their move to digital distribution has been slower than many expected. This is changing fast.
DFC Intelligence has recently released an entire series of reports looking at the movement of games online and the continued growth of digital distribution. These are extremely complex issues that impact all facets of the industry: distribution, marketing, development, legal issues, payment mechanisms and overall global and platform strategy. These changes will shake the established power structure and open up the market for a whole series of new entrants.
In DFC's overall forecast, it is estimated that by 2014 over 50% of global game software revenue will be generated by delivering a product online, not at retail (not including the purchase at retail of cards or coupons that allow for digital distribution). This movement to online business models has already occurred for the majority of PC games. Therefore we believe many lessons learned in the PC market will eventually apply to console and portable platforms.
One of the big trends in PC games is the growth of consumers buying and trading virtual goods using virtual currency. Of course, much of this virtual currency is purchased using real money. In the new report, Virtual Property and Real Money Trade: A Business and Legal Survey, DFC, with the help of attorney S. Gregory Boyd, looks at the legal and business issues of consumers buying and purchasing virtual goods, whether directly from the game publisher or unsanctioned trading between players. As games operate more like ongoing services the entire business relationship between service provider, distributor and customer also completely changes. This is a complex area that in the past year has greatly accelerated with the growth of virtual goods on social networks like Facebook.
Another new DFC report, The Market for English Language Client-Based F2P PC Games, looks at a very specific type of product: games that are free-to-play (F2P) online but require users to download and install a large client of 50 MB or more. DFC chooses to isolate this market for several reasons:
1) For years, there has been an established market for simple browser games and products with small file downloads (under 50 MB). However, technological limitations have meant more robust games were not suitable for this business model.
2) In Asia the market for large client-based F2P games is now billions of dollars. Top individual games can general over $100 million in annual revenue for a period of several years.
3) The quality of the large F2P games is slowly starting to rival that of the top subscription and retail games. Furthermore, these games directly target the core game consumer market. In other words, client F2P games are direct competition to the established game companies.
In North America and Europe the market for large client F2P games has been slow to emerge. DFC estimates 2009 revenue of English-language client F2P games at only $249 million. There are single games in Korea and China that can generate that much revenue.
There are several reasons why client-based F2P games have been slow to emerge. However, DFC believes the number one obstacle has been the continued difficulty of delivering a large client to consumers. Game publishers like to talk about having millions, or even tens of millions, of registered users. For DFC registered users is almost a meaningless number. A major issue is a large portion of registered users never use the product because they are not able to get it to download and install.
The good news is the technology to successfully download large files of digital content is rapidly improving. DFC is also releasing a report from Pando Networks that examines global network speed. Pando specializes in providing a back-end for publishers to deliver games. Games that are distributed have an average file size of over 1 GB, but the success rate for downloading is over 87%. This is far above what DFC estimates for most large client downloads in the U.S., where the success rate would be 50% or less.
However, the Pando report shows the success rate varies significantly by not only country, but region. For example, in the U.S., the Northeast has the highest download speed. Not surprisingly, Korea has the strongest technology infrastructure in the world. 8 out of the 12 fastest cities in the world were in Korea (among the slowest 12 cities, 4 were in the U.S., 3 were in Brazil). The lesson learned from Korea is that if you build the infrastructure consumers will flock to use it for digital content. The growth of client-based F2P games in Korea has been amazing to watch. The rest of the world is just starting to play catch-up.
Of course, technology isn't the only limiting factor for F2P games. In North America and Europe, these games must compete with sophisticated console and PC games that have budgets that can approach $100 million. So it is about not just consumer acceptance of paying for digital content. In the competitive game environment, consumers finding clear value in virtual items still has a long way to go.
Over the past two years, DFC has surveyed thousands of consumers in North America and Europe on their attitudes towards issues like digital content in general, virtual goods and payment mechanisms. Based on these surveys it looks like the core game consumer is not only buying digital content for online delivery, but they are also coming around to the idea of buying virtual goods with virtual currency. In the DFC survey of core PC gamers last spring, 60% said they had purchased an in-game good or extra level at some point.
Much of the challenge comes down to game design. There must be concern that current Western game design around virtual goods is turning consumers off. Over the years, Asian game developers have learned how to design games so that users are encouraged to spend money on in-game goods but don't feel constant pressure. Many Western game designs seem to want to force the consumer to get out the wallet at every step. This can be a big turnoff, especially if a consumer already paid over $50 at retail.
An April 2010 project by Bowen Research/DFC studied the buying of virtual goods in the form of micro transactions among almost 1000 U.S. gamers. Results showed that heavier gamers (who buy 6+ games a year, vs. those who buy fewer), and younger gamers (age 35 and younger) are leading the charge in making micro transaction purchases in online games. The primary negative consumer attitudes of gamers toward micro transactions in free to play games are: the items are too expensive or useless, they give too much of a performance advantage, and the benefit of a given item is often unclear. (For instance, the most preferred price point was shown to be three dollars and under, almost 3/4 feel performance items should only be earned through play, and most feel publishers only do an “average” job of explaining why to buy an item.) For many the feeling is that publishers are “greedy,” not respectful of consumers. All of these are largely “fixable” issues, given better execution.
In the long term it is all about games becoming an ongoing service. Successful companies will be those that solve game design issues quickly via trial and error. As this occurs, all the evidence points to widespread acceptance of virtual goods in games. This evidence is provided by not only the success of virtual goods in Asia, but also the growth of browser-based games and games on social networks. The big success stories in North America and Europe have been products like Habbo, Farmville, Runescape, Bigpoint and other games that DO NOT require a large client download. DFC believes that consumer acceptance of these products is a major indicator that the technological obstacles in downloading a large client have been the number one limiting factor. Remove those obstacles and the market grows.
DFC Intelligence forecasts the market for English-language client-based F2P to reach $2 billion by 2015. Of course, this is only one small chunk of the global game industry. Furthermore, the issue of profitability is an entirely different one. Development and distribution costs for client F2P games tends to be significantly higher than for browser based games. Nevertheless, it can be said that the successful game companies in Asia have been very profitable with digital distribution models. Nevertheless, as always, there will be a wide gap between the winners and losers.
In a better effort to cover many of the complex issues facing the game industry, DFC is pleased to be teaming with IndustryGamers to offer an ongoing series of briefs, profiles and forecasts to provide timely analysis of key issues and trends. These reports will be significantly shorter than full DFC reports and will be available for immediate purchase at prices ranging from $50 to $1,000.
If you signup for our mailing list we will not only be sure to send you more information, but we will also send you a complimentary copy of one of these astute and forward-looking reports for free.
