April 12, 2009

Gaming Industry Seeks Big Returns From Micro Payments

Micro payments are playing an increasingly important role in generating revenue for the gaming industry amid a downturn in advertising profits.

Indeed, a recent poll at the GamesBeat conference in San Francisco found that 66% of those surveyed "were excited about this growing trend," something typically seen in so-called 'free to play' games.

In free to play games, developers instead sell items or different levels within the gaming experience.

"Micro payments have been proven to work very well in the far east, Korea and China," said Dean Takahashi from VentureBeat, which organized the GamesBeat conference, told BBC News.

"Initially they took off there because there is such a big problem with piracy and with a micro transaction, you can always verify the credit card transaction or the payment system so you are assured people will pay up."

"The big test is whether North American gamers, the biggest market, are really going to go for this or not," Mr. Takahashi said.

Michael Cai, an analyst and vice president of video games at Interpret, said that although young gamers like the new scheme, that doesn't guarantee its success.

"As this generation grows up the big question is what are they going to adopt and embrace? A lot of the publishers have started to embrace these (payment) models as well and everyone is looking at micro-transactions very carefully," he told BBC News.

The video game Mob Wars, in which players rise through the mob ranks by fighting other players and committing various crimes, is often referenced as a game that well capitalizes on the benefits of micro payments, with players using real money to purchase weapons and other virtual items on the site. 

Meanwhile, the free-to-play game company Playfish has grown from 20 million users to 60 million in the last 18 months alone. The company now has five out of the top 10 games on Facebook, with games such as "Pet Society" and "Who Has The Biggest Brain?" also available on Apple Inc.'s App Store.

"We are huge believers in the free to play model because it minimizes the barrier to entry for gamers and gets as many people involved for free as quickly as possible," Playfish co-founder Kristian Segerstrale told BBC News.

Once players become captivated by a game, that is the ideal time to lure them to part with some cash.

"Pets Society is our biggest playing game with 3 million daily users. In the game, gamers adopt a pet and take care of it. They can win coins to spend on, say, food or clothes or furniture," said Mr. Segerstrale.

"But not everyone has time to earn money in the game so they can spend $5 and buy 2,500 coins, which normally takes days to win and spend it on what they like."

"Micro transactions will win over subscription fees because they are more flexible," he said, adding that players spend an average of $7-$22 a month.

"As games become a service, it doesn't make any sense to make users pay up front, no one does that with their gas bill or telephone. You pay over time."

VentureBeat's Mr. Takahashi predicts that if it takes off, the market for micro payments could grow to a multi-billion dollar business.

That might be one reason why Apple will launch its commerce app within its Appstore later this year.  The new app will let developers introduce new layers into games, for which they can charge customers and gear up the micro-transaction aspect of the business.

"It's important for developers to boost their revenue stream and look at how to monetize software, especially if you are a business person, " said NGmoco founder Neil Young. 

The company makes games exclusively for Apple's app store.

"My sense is that taking the friction out of purchasing things inside the gaming experience itself is going to lead to more usage and a better revenue stream for developers," Young told BBC News.

Both MySpace and Facebook are working on their own payments systems, but according to TechCrunch it is the "nimbler start ups" that are leading the charge into this field.

For instance, Spare Change Payments is processing $2.5 m a month in micropayments, for a "$30m annual run-rate," TechCrunch said.

The use of mobile phones as a payment model is also taking hold in the world of micro payments.

Although a recent KPMG survey found that most Americans have concerns about security, the majority said they would nevertheless consider using their mobile phones if these issues could be addressed.

Mobile payments are one of the most popular ways to pay for virtual items in Europe and Southeast Asia,  since nearly everyone there has a mobile phone.

In the U.S., the adoption has been slower due to the high fees charged by carriers "“ typically 40% of any mobile payment compared with 5-10% in Asia and 25% in Europe.

Gaming is by far the most significant driver of business for mobile payments, according to mobile payment firm Zong.

"Most of our transactions are coming from in game payments," Zong founder David Marcus told BBC News.

"The average transaction is five to six dollars with people mostly buying either virtual goods or virtual currency. It's a new kind of entertainment and if you look at certain games that cost $30-$40m to produce, it's a full entertainment industry that is looking to monetize these things," he said.

"Now that Electronic Arts is launching their first free to play game, virtual goods and virtual currency will no doubt be a part of it and mobile payments are going to be a big part of it also."

Micro payments have generated significant interest amid the current economic slowdown.  However, some worry there is too much focus on making money.  

"The revenue model always dictates the shape of the content and so different types of games will need to be created to support this type of mechanism," said Rob Tercek, chairman of GDC Mobile and president of mobile at the Oprah Winfrey Network.

"If it's a game where you are meant to pay for micro transactions, then the designer has to design into the game the need for these upgrades or items for sale that may or may not be a great model, especially when played on a mobile device," he told BBC News.

"My feeling is that a game is either a good game or a bad game and just because you bought a bigger gun or some better shoes shouldn't change the game."

NGmoco's Mr. Young is also cautious.

"As long as developers don't prioritize greed over game play. You need to remember that at the end of the day, we are there to provide fun gaming experiences for people. Not something where they are constantly badgered to pay up for something," he said.

"It's a careful balance we will have to learn as game makers."


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