Game Monetization Lessons from Magic: The Gathering

This was originally posted on Betable's Game Monetization blog.

Adam Summerville, a Co-founder of CircleCat Games, and I started talking about doing a guest post on this topic after I saw his post on Magic The Gathering on his blog. It turned out so well that I wanted to share it here. If you need to, grab a glass of water and get comfortable: this post is a long one but it's a good one, and well worth the read.
 

We live in a bold, new era in game monetization. A full-production desktop game that is free-to-play makes on the order of $37.5 million every year. Games companies that see less than 5% of their users ever spend a cent make almost $1 Billion a year in revenue. Entirely new ways of selling games are being devised every day. How should a game developer pick a monetization method in these crazy times? To help us understand what really drives consumers to open up their wallets for their favorite games, I suggest we look back to one of the progenitors of micro-transactions, Magic: The Gathering(MTG from here on out).At first glance, it would seem to be easy to answer the question "What is the monetization method of MTG?"  "Simple," you might say, "They sell packs of cards," which is true of course, but there is a lot of nuance rolled up in those packs of cards. The rules are public knowledge, as are all of the cards, so there is nothing to stop a player from writing down the information of cards on note cards or printing off scans of cards. In a sense, MTG is even more pirate-able than a normal game. So why is MTG a financial success? And understand this, it is a huge financial success. Wizards of the Coast, the company behind MTG, had a yearly revenue of $237 million in 1999. They have since been bought by Hasbro, so their revenues are no longer public knowledge, but during Hasbro's earning conference call this year the MTG family of products was credited with helping buoy Hasbro's game and toy division's revenue by undergoing 30% year on year growth. To make this even more remarkable, remember that this is an 18 year old game! I believe that there are three main reasons why people consistently buy MTG cards when they could so easily avoid it or just play with the cards they have.

Let me elaborate on these three topics below.  

Competitive Play is an engine for sustained growth

One of MTG's greatest innovations was the creation of a tournament scene. Most competitive gaming tournaments have sprung up around preexisting games, e.g. Chess, Poker, etc. Rarely is the competitive gaming scene developed in conjunction with the game itself. Now, while a kitchen table MTG player might be able to get away with a scribbled on note card, a player who wishes to play in an official, sanctioned tournament has to have legitimate copies of all the cards that he/she wishes to play. Many players have the dream of going pro and earning a living playing MTG, a dream created whole-cloth by Wizards of the Coast. In order to pursue this dream, they are going to have to pay for the legitimate cards and pursue the rarest, most powerful cards in order to be competitive at the highest level of the game.This leads to the second aspect of competitive play that makes it such a powerful revenue and engagement engine: hardcore players. Catering to the hardcore player segment can be tricky, but it is necessary if you want to build a successful, lasting franchise like MTG. Engaging hardcore players is often a challenge of giving them something to do even though they’ve invested significantly more time and resources into the game than the average player. Competitive play is a great outlet for this time and energy, giving players a way to hone their skills against the most challenging, dynamic opponent available to game developers: other players. To establish and promote competitive play, you should ensure that hardcore players will see their deep investment in your game rewarded with status and prizes.

Lesson: Make game accessible to casual players but make sure that there are depths available for serious players to explore. In modern social gaming speak, this means designing your game for both hardcore and casual players. For hardcore players, a sustainable competitive system will keep them coming back. If it is possible to “top-out”, hardcore players will eventually get bored and leave.

Actual versus Perceived Value

The MTG economy is fueled mainly by “booster packs”, a collection of 15 cards.  A booster pack has 11 common cards, 3 uncommons, and 1 rare.  ⅛ of the time the rare of a pack is replaced by a Mythic Rare.  ⅙ of the time a common is replaced by a foil card with rarity following the aforementioned scheme, e.g. 11: 3 : ⅞ : ⅛ . This "Mystery Box" approach is a powerful one: 37% of all virtual goods purchases by males were for randomly determined prizes. Since players always have the potential to open a powerful & valuable Mythic Rare, each pack is like a tiny gamble on the value of the cards inside. But the question remains: "How do I make this the basis of my game economy, not just a lottery held on the side?" Let's look at the value of a pack of Innistrad, the most recent set of cards: A pack costs $3.99 if bought at retail. However, if one buys in bulk the cost can be as low as $2.50 per pack. Bulk purchasing is available to all consumers to self-identify “whales”. Let’s look at the actual value of an average booster pack of MTG versus its perceived value among players. For this next part, we will use the following variables:

Ignoring foils, this means that the upper bound value of a pack of Innistrad should be:

Now, if we look at the average cost of Innistrad cards online (as of 10/17/11), we get the following:

Plugging these into our equation we see that the expected value of a pack of Innistrad is $5.48.

That means that MTG players’ perceived value per booster pack is 37% more than the actual value!

Due to this phenomenon, the average players’ expectation is that opening a pack of Innistrad will be worth the money. Now, this assumes that there are no transaction costs and that all cards are perfectly liquid, neither of which is a reasonable assumption. However, it is still a better value for a player to open a pack of Innistrad than it is for them to buy the cards on the open market, and the end result is that players buy more booster packs. That said, it is important to note the confluence of events that has led to this overvaluation of Innistrad cards:

Let the Invisible Hand guide you

When players are trying to adapt to new cards and evaluate new strategies for gameplay, the Internet acts as a hive-mind, accelerating the process of deck creation far beyond what a small set of humans (e.g. Research and Development at WotC) is capable of doing. The same is true for the evaluation and pricing of cards. The Invisible Hand of Adam Smith is going to do a much better job pricing cards than WotC could ever do, so they do the smart thing and let the Invisible Hand run the after-market.

Leveraging the “Mystery Box”

Another key lesson of MTG is to use the randomness of the “Mystery Box” delivery method to your benefit. Certainly, a big part of the appeal of opening a random pack of cards is the lottery aspect. You never know when you are going to hit it big and open up a card worth $100.00 (the current top end value of a card in Innistrad). That's a 25X return on your investment! But as a digital game developer, you can do even better than that by incorporating the randomness into your game. There is a whole subset of MTG devoted to the opening of packs of cards and the subsequent variance called Limited. In Limited formats, each player starts with only a small amount of packs and must use whatever they get to build the best possible deck. Typically groups of 6 to 12 people supply 3 packs of cards (of agreed upon sets, such as Innistrad) and an entry fee. They then construct a deck out of the cards and play with that deck in a tournament. Personally, I think this is probably the most genius form of MTG. It perfectly encapsulates everything about MTG that makes it interesting and exciting for players: the randomness of cracking open a booster, the game knowledge of which cards to use, the skill of constructing a deck, and the tactical test of playing competitively with the deck. Limited games are frequently organized by hobby shops & toy stores that sell MTG cards because it brings business into their store and can fill the store during off hours. Limited is also great for WotC and the players for the following reasons: 1) It connects players by bringing them together around the game. Considering that MTG is a competitive game, multiple players are required to play and the more players that are in the field, the more interesting the game gets. An event that takes place in a central location on a consistent schedule (most stores do an event weekly) provides a “home base” for a local MTG community. 1) It gives any player the chance to win, regardless of skill, because they can open the best cards out of the group and be at an advantage. This encourages participation from players that are not as skilled or experienced as others in the group. 2) It encourages players to open more cards, because opening new cards is required to play in the Limited tournament. This helps WotC's bottom line and helps keep the MTG economic machine running. 3) The winners of the Limited tournament get prizes in the form of more card packs. This means that if a player wants to "go infinite", i.e. use their winnings to keep playing, they either need to convert the cards they open or excess packs they win into money via the game’s secondary economy.

Collectable doesn’t inherently mean Valuable
The final lesson of MTG is a somewhat cautionary tale. One of the classic uses of microtransactions is to limit them to aesthetics, e.g. buying a new skin in League of Legends or horse armor in Oblivion.  This appeals to a lot of game developers because it doesn't hurt the "purity" of the game by allowing players to "cheat" by purchasing enhanced powers, abilities, etc. While I don't think it is a bad to limit microtransactions to aesthetics alone, MTG would seem to indicate that it has only limited value. In a pack of cards, there is a ⅙ chance that a common card will be replaced by a foil card.  As stated earlier, a foil card shows up at a rate relative to its rarity type (uncommon, rare, etc). A foil card only shows up in 1 out of 6 packs and it is only 1 card, not the 15 normally found in a pack, so this means that any given foil card is 90 times rarer than its non-foil counterpart. Given the massive increase in rarity, one might expect a similar increase in after-market price. However, this is far from the case. At Star City Games, the cost of a complete set of Innistrad (all of the cards of all rarity levels, bought as singles) is $420.28. The cost for the equivalent foil set?  $953.40, or a 2.26X increase for something that is literally 90 times rarer. Obviously, the price is extremely elastic which makes sense in a strategy-focused game. A player can easily replace a foil card with its non-foil counterpart with no effect to their deck. This is evidence that for a competitive hardcore game, gameplay value and rarity are much stronger indicators of after-market value than aesthetics. This isn't to say that offering aesthetic upgrades is a bad idea. Whether your players will take to aesthetic upgrades depends on what audience your game appeals to and how the game is structured. For instance, in non-competitive games, studies have shown that aesthetic improvements account for a significant portion of purchases by female players. However, the audience and the goals of the game both play a part in this shift in purchasing patterns.

Conclusion

MTG has been a successful business model for 18 years, and WotC has benefited greatly from this. Be sure to capitalize on the following lessons from MTG to help you maximize your game’s monetization potential:

Designing an economy for a game isn’t an easy task, but if the economy is handled thoughtfully and holistically it has the potential to deepen gameplay, enhance replayability, and provide a sustainable revenue stream. Hopefully, this will give you some tips for implementing an economy in your game.