Microtransaction misunderstandings

This month we continue our look at alternative revenue models by moving the spotlight to the increasingly complex and often maligned world of microtransactions. The success of the microtransaction model in Asia has been repeatedly analysed. Its adoption in the West, however, has proven contentious.

Many continue to assert that Western gamers will reject titles where ability to pay can so directly influence gameplay. Proponents of these views may be surprised to learn that, as of December 2008, over half of all MMOs launched in the West now use a microtransaction revenue model and that this proportion is continuing to grow. Admittedly, it’s also true that microtransaction games still represent less than a quarter of the total market by value – although microtransaction revenues are increasing at a much faster rate than subscriptions.

The fact is that the MMO market has changed radically over the last few years. Late twenty and thirty-something WoW gamers are no longer the core of the Western market. The majority of MMO players are now teenagers and early twenty-somethings, strongly influenced by viral trends and drawn to easily-accessible and freely playable games. The claim that microtransactions won’t work over here is simply incorrect: microtransaction MMO players already represent over 65 per cent of total monthly MMO players in the West.

The economics of microtransaction MMOs are fundamentally different to those for subscription MMOs. While between 75 and 95 per cent of subscription MMO players will usually pay per month, typically less than ten per cent (and in many cases less than three per cent) of microtransaction players pay per month, with the rest playing for free. The average revenue generated per paying player tends to be very similar for both revenue models, although this varies significantly from player to player whilst paying durations are usually considerably shorter for microtransaction players. This flexibility is both microtransactions’ achilles heel and its forte: it can reduce average revenues per user [ARPUs] to low single digit dollar levels and can result in highly unpredictable month-to-month revenues; but it also lowers the financial barriers for players, allows them to set their own spending level and provides the potential for ARPUs above those achieved through subscriptions. We have seen a number of MMOs sustain ARPUs well over $20 per month.

The missing component which makes the commercial rationale for most microtransaction MMOs add up is the sheer scale that comes from providing addictive but simpler games for free. Their reliance on social components can generate snowball effects to create user bases that dwarf their subscription counterparts. A subscription MMO may reach mid-hundreds of thousands of subscribers if very successful. A popular microtransaction MMO can hit several million users, and experience triple digit growth annually. For some of the longer-established microtransaction MMOs, the use of microtransactions has lead to a revenue profile that is more akin to a gambling company. According to Three Rings Design, just 10 per cent of paying players of Puzzle Pirates generate 50 per cent of its revenues, whilst some players have spent over $2,000 in a single month and in excess of $10,000 on Puzzle Pirates over their lifetime. It would take over five decades for a WoW subscription to match this spending level.

Most microtransaction titles are casual MMOs and virtual worlds, often browser based or licensed from Asia and almost invariably developed or published with budgets of less than $2m, if not less than $1m. There have been a small number of big budget microtransaction-dependent services but none targeting the hard-core MMO industry overall, a situation that we do not expect to change any time soon. Aside from the unpredictability of revenues, microtransaction games’ free players would represent a major cost base for a hardcore MMO, especially one with sizeable initial and ongoing per-player hosting requirements. However, we do expect to see microtransactions adopted as an ancillary revenue stream next to subscription) for some major budget MMOs over the next few years. In addition, we expect that the uses of microtransactions will continue to expand with more titles using microtransaction-based subscriptions, for example.

Some major existing MMOs have begun to introduce microtransactions through back doors. Eve Online’s pre-paid subscription codes can be traded for in-game currency on a regulated exchange thus giving players the ability to buy, albeit indirectly, virtual assets using real money. This has not only boosted Eve Online’s ARPU beyond the usual average subscription price but has also substantially reduced the black market trade assets.

Microtransactions represent a remarkably versatile revenue model that offers substantial potential not just for MMO developers but for any developers of games featuring gameplay persistence. Few Western developers and publishers that have used them have switched to other models, and many of these companies count amongst the fastest growing in the industry. Microtransactions are most definitely here, and they’re here to stay.