Video game monetization

Methodologies

There can be more than 20 ways for the game monetization, and some can be combined to create new business models.^[1] Here are some of the methods based on the general classification.

Retail purchase is the traditional method by which games are sold from brick and mortar stores. Customers pay for a physical copy of the game and any other game related peripheral devices required for play in-store. Retail purchasing has previously made up the bulk of game-related transactions, however in recent years, it has been on the decline in favor of digital downloads.

In-game microtransactions are when aspects of a game’s contents can be purchased by players with the goal of enhancing their experience with the game. These can range from new forms of playable content, in-game currencies, cosmetic options, and otherwise unavailable or restricted gameplay advantages. Traditionally, these purchases tend to be relatively inexpensive but numerous in variety. Microtransactions are often common in social and mobile games where potential customers may be hesitant to purchase a full game, but more at ease with smaller, yet more numerous payments.

Digital download is similar in practice to retail purchasing, but is different in venue. Instead of acquiring a game through a physical store, customers buy their games online and download the game’s data directly to their computer/console/other storage format. Many games sold through digital download are distributed by means of a third-party service that functions in the same way as a physical store; selling a variety of games from many different developers in one location.

Subscription models are when a game requires continuous, ongoing payment from a customer in order for them to play a game. Games that utilize subscriptions often sell access in blocks of one-month increments or in multiples thereof. Once a subscription runs out or is canceled by a customer, their access to the game ceases or is reduced until they re-subscribe. This method is most often associated with games that require an online connection or service that requires capital to operate on the part of the publisher or developer.

Indirect monetization is any method of extracting returns from a game that does not directly come from the game’s player. Most frequently, this is the placement of advertisements within a game; these may take the form of banner advertisements, commercial breaks in play, or product placement. Games that rely on advertisement for returns usually are free-to-play or are cheaper than other games as their production cost has already been subsidized.^[2]

Effects on game development

The specific method by which a company elects to monetize a game may affect its overall design and the manner in which users will interact with the game. Some monetization strategies may have a more noticeable interaction with a game's design than others, but proper consideration of any strategy must be given during the design process. Improper consideration of balance between good game design and effective monetization can lead to either players feeling extorted by the game and its developers or a failure of the game to produce enough revenue for the game to turn a profit. In both scenarios, a game in question is likely to fail once on the market, the difference being whether it fails critically or financially.^[3]

The games industry has continued to explore new business models with increasing frequency; diversifying its methods beyond that of retail purchase, the previous industry standard. Despite the new variety, the digital download model however appears set to become the new standard. Due in part to the democratization of technology, digital downloads made up 52% of all game sales in 2014.^[4] With the rise of digital downloads came a proliferation of “Indie” developers; the simplification of game retail from digital downloads allowing smaller studios to produce and sell games on larger scale than was previously possible through the retail purchase model.

In the case of microtransaction-based monetization, overuse or improper application of microtransactions can make a player base feel forced to pay money too frequently and will discourage play, while oppositely, underuse may lead to too few microtransactions taking place to support the game and its developers, leading to the game’s failure.^[5] Microtransactions have seen a recent rise in popularity as a monetization model in the massively multiplayer online game genre, or MMO. Previous to this development, the majority of MMOs relied on the subscription model, where users paid a monthly fee to the developer for continual access to the game. Some MMOs have had difficulty in turning a profit under this model however, thanks to too few subscriptions to cover operating costs. This has prompted several MMOs to experiment with alternative monetization strategies, ultimately leading to the adoption of microtransactions. While some MMOs continue to operate under the subscription model, many now have moved to microtransactions to ensure financial stability.^[6] With this shift, numerous virtual goods and services in MMOs that may have previously been available through normal play under the subscription model now can only be obtained through real currency transactions and it was expected that the microtransaction model would continue to be used under this model.^[7]

Indirect monetization has undergone a recent surge in popularity as well; through a combination of the propagation of both smartphones and Indie developers, the mobile games market has flourished. Both due to generally lower development, marketing, and maintenance costs as well a large target audience of players these games are able to survive on a smaller income than most other varieties of games. The process is risky however as mobile games may often be hit or miss in their success; those that pull in large numbers of players do well thanks to their advertisement model, but those that fail to garner wide appeal do not last long on the market. Some have also criticised games implementing the indirect model as many games are made under it that are of low quality, or are non-user friendly with their monetization methods so as to maximize their income at the expense of player enjoyment.^[8]

Pre–1980

The tradition of video game monetization can be traced back to the monetization of real life games, before the existence of the computer. A game is usually constructed with players, tools and rules. The tools for the game were made by skilled craftsman, usually with valuable materials, as described in the history. Thus, selling game tools for money became an understandable business long before the development of video games.

The history of video games leads back to the 70’s and 80’s, when arcade video games become popular worldwide. Following the same sales model of the electro-mechanical arcade game, precedents were set from the first arcade game to cost a quarter per play, Periscope (arcade game),^[9] from the 60s, most arcade game machines are coin-operated. Players have to insert coins to play for certain time or certain lives. This can be classified as a type of microtransaction, and was highly successful during the golden years of arcade games. One of the most popular and influential arcade games, Taito's Space Invaders was reported to cause a shortage of 100-yen coins in Japan, 1978.^[10] By 1982, the game grossed $2 billion in quarters^[11][12](equivalent to $7.26 billion in 2015), with a net profit of $450 million.^[12] When the Namco released Pac-man in Japan on May 22, 1980, it became immensely popular from its original release to the present day. Later, it became one of the highest-grossing video games of all time,^[13] having generated more than $2.5 billion in quarters by the 1990s .

1980s

With the development of computer technology, the home computer industry has packed with competitors from 1980. The home computers started to prove their gaming capability not long after they were introduced to the public, since they are able to run multiple game programs, and release the full potential of the hardware. Compare with arcade machine, people are able to switch between games and play at their homes. Although early computers were weak in compatibility,the IBM PC compatible platform became statetake overeover the fragmented market and ruling the PC game platform. On the other hand, the Third generation of video game consoles, represented by the famous NES console released in 1983, was able to help the north America game console market recover from the major crash during 1983 to 1985. From the 80s, video games on the market were mostly sell in the way of retail purchase. Although the home computers were not specialized in gaming, gaming consoles were. Most games had to be sold in physical mediums, such as a ROM cartridge, a floppy disk or even a Compact Cassette. For the game console users, buying the hardware cost extra money, but they had more choices on games and suitable input/output device designed for gameplay.

1990s

While old retail selling kept strong at 1990s, new way of game monetization emerged. The CD-ROM and other optical discs were taking the place of the cartridge, became the major medium of retail games. The development of web technology and bandwidth in the late 90s made many online games possible. The web based game Adventure Games Live revealed the possibility of the game running purely on a webpage, ever free of charge.

The handheld gaming devices were invented long before 1990s, but the Game boy was a milestone on portable game history. The remarkable game innovation^[14] in this decade created a series of game consoles and devices. Handheld game devices with no changeable cartridges were also widely sold. In those cases, buying the hardware and software went together. An example can be the Tamagotchi sold by Bandai from 1996.

2000s

In the first decade of the century, the game monetization was affected by the booming of the e-commerce, as well as hardware, software and other information technology developments. All kinds of online games and multiplayer games were connected through the faster Internet. The craze of MMORPG by made the subscription model a profitable way to support the game developers. Many browser games became free to play in order to attract more visits. At the early age of smartphones, mobile games were paid to download because there was usually no interface for a smartphone to install a physical copy. Standardization and the ubiquity of mobile platforms that allowed for easy purchases by customers, brought on initially by the iPhone App Store and followed closely by the Android Marketplace and other competitors, resulted in a wide spread move towards microtransactions and indirect monetization. After the social network became a big part of the Internet, more games started to take this platform as a way to sell or promote the game.

The 2000s also introduced the concepts of microtransactions and downloadable content (DLC). In 2005, Microsoft envisioned the ability to buy digital add-ons for Xbox 360 games through the Xbox Live Marketplace, allowing players to purchases specific content they wanted at a low price ($1-$5) rather than having to buy a more expensive complete expansion; this would thus provide alternative revenue streams to publishers.^[15] Though some content was offered before, this concept was cemented with the release of "horse armor" pack for Bethesda Softworks's The Elder Scrolls IV: Oblivion in 2006, and subsequently followed by many similar content packs over the next few years. While many player expressed outrage at the cost of what was decorative elements in-game, the horse armor pack was one of the top ten expansions that Bethesda sold for the game by 2009.^[16] Oblivion's microtransaction model was considered extremely successful, and was replicated in many other games that followed.^[17]

2010s

In the second decade of the century, game monetization models using microtransactions and indirect monetization, moved rapidly towards becoming a mature market. Game production moved from focusing purely on monetization models after competition for player attention became more intense. As a result, the industry has widely moved from a direct focus on monetization metrics in game design to focus on metrics such as player retention and daily active users. This can be visibly seen in the decline in valuations of several prominent free-to-play companies, as well as by studying the differences in game design for top free-to-play to games.

This approach is considered "games as a service", as analysts have found that players put more value in games that provide a regular stream of new content than a title that does not receive updated.^[18] This model helps to assure a long revenue stream from the publisher as well as to allow them to publish fewer games and reduce development costs while still providing new content to players, with the potential to profit twice as fast from the traditional model.^[18] This approach also helps to insulate publishers from impacts of discounts and sales on digital game redemption keys from third-party sellers by requiring additional purchase of content as part of their services to gamers.^[18] Digital River estimated that the industry's value in 2017 had tripled from previous years due to the use of the "games as a service" model.^[18] Take-Two Interactive, in an investor call in November 2017, reported that 42% of their revenues were from "recurrent consumer spending" in their latest financial quarter, obtained through the Grand Theft Auto Online component of Grand Theft Auto V, and the "MyCareer" mode of NBA 2K18, both which offer players additional content and activities over time. Take-Two anticipates they will be using this model going forward for future games.^[19] Ubisoft, around the same time, reported that revenue from microtransactions and other in-game sales exceeded their revenue from direct digital sales of games during the first two quarters of their financial year for the first time.^[20]

The use of online passes emerged in 2010, primarily as a means to combat the used game market. While publishers could not prevent players from selling and buying used games such as through the retailer GameStop, they discovered that providing a one-time code within a new game that was needed to access online features, they were able to secure more revenue from selling these online passes to players that had bought the game used.^[17] Electronic Arts (EA) had developed the idea of "Project Ten Dollar", attaching content to a code packaged with the game for its upcoming titles for that year, Mass Effect 2, Dragon Age: Origins, and Battlefield: Bad Company 2.^[21] Successful in this area, EA transitioned this towards limiting a player from online play without either having purchased the game new or purchasing its online pass for a used copy, adding this into their popular EA Sports titles, starting with Tiger Woods PGA Tour 11.^[17] EA justified this as necessary to support their online servers for these titles.^[22] Ubisoft followed suit with "UPlay Passport" system, followed by several other publishers.^[17] However, due to changes in digital rights management for the upcoming eighth generation of video game consoles and player complaints, EA ended its online pass program by 2013, with other publishers following within the next few years.^[17]

Simultaneously, the use of season passes to assure access to a large number of downloadable content items that were to be doled out several months after the release of a game become popular. Season passes were priced to offer the items at a total discount than buying them separately, aiming to draw in players to purchase the passes who would unlikely desire to buy all the content separately. This can be seen as equivalent as pre-ordering the downloadable content, often without knowing exactly what that content might be.^[17] Publishers were able to gain another retail revenue by selling "deluxe editions" of games that included the season pass as well as other bonus features.^[17] The first such season passes arose from 2011 with Rockstar Games' L.A. Noire, offering additional cases and costumes, and Warner Bros.'s Mortal Kombat, providing access to all fighters to be added to the game. EA followed a similar approach with its "Call of Duty Elite membership" for Call of Duty: Modern Warfare 3 that provided access to all of its maps planned for the following year.^[17]

Another monetization approach developed in the 2010s was the use of loot boxes. Loot boxes, which go by many different names, are earned by players as part of progressing in a game, can be purchased with in-game money or through real-world funds, or otherwise offered as promotional items; when opened (either freely or by purchase of a special "key"), they contain a fixed number of random in-game items, doled out based on a rarity system, and which may include both cosmetic items as well as gameplay-affecting equipment.^[17] Since loot boxes are designed as part of a compulsion loop in video game design, some players will be enticed to purchase more loot boxes with real-world funds, providing a further revenue stream to publishers.^[17] While loot boxes had been present in games prior to 2016, specifically from the Chinese game market and introduced to Western audiences through a 2010 update in Valve's Team Fortress 2, they were most visible as a result of the popularity and success of Blizzard's Overwatch in 2016.^[17] Loot boxes started becoming more common in full-price games, leading to several titles released in 2017 to be criticized for egregious implementations of loot boxes that were seen as anti-consumer, including Microsoft's Forza Motorsport 7, Warner Bros. Middle-earth: Shadow of War, and EA's Star Wars Battlefront 2.^[17] Because of their random nature, loot boxes are seen by some as a form of gambling, and several national governments have banned or regulated loot boxes under gambling legislation, or are looking to implement such legislation in wake of the loot box controversy arising from Star Wars Battlefront 2.

The fatigue over loot boxes led to a new monetization approach in the form of battle passes. Initially used by Valve's Dota 2, the battle pass concept was popularized by Fortnite Battle Royale in early 2018 and began to be used in other popular games. Battle passes provide a tiered approach to providing in-game customization options, all visible at the start as to avoid the randomization of the loot box approach, and requiring the player to complete various challenges and early in-game experience to unlock these tiers to gain the rewards; some games also provide means for players to use microtransactions to purchase tiers. Battle passes allow developers to roll in new content, encouraging players to purchase a new battle pass to obtain this content.^[23] Fortnite had proved a successful model, as while the game is free-to-play, microtransactions to purchase battle passes or to directly buy certain items have brought in hundreds of millions of dollars per month in revenue following their introduction.^[24]