Making money in the video game business is usually a pretty simple proposition: you make a game; other people pay to play it. There may be some middlemen like producers and retailers in there, and the actual payment could be a purchase, subscription or rental, but when you boil it down, the pay-to-play model has defined the business of video games since the days of the arcade.

But the world of free-to-play browser-based Flash and Java games has largely thrown this business arrangement on its head. This is partly because it had to. People have been trained by sites like Hotmail and Google to expect web services -- even good ones -- to be free to use. The New York Times recently abandoned its Times Select online subscription service, possibly after realizing that people weren't willing to pay good money for the kinds of opinions that were available for free on hundreds of blogs. Similarly, any online game site that starts charging money for content risks losing players to the myriad free alternatives.

Do Ads Work?

Like most other producers of free web content, Flash developers are increasingly looking to ads to monetize their games. It's a tough balancing act, though, because it doesn't take much overt marketing to turn off a potential player. "Waiting through even a 15 second pre-loader ad is really annoying," says Jim Greer, CEO of Flash game aggregator Kongregate. "It means if you send the link to your friend, your friend's going to be annoyed because he's waiting through this ad. It's significant." For this reason, Greer says, Kongregate only shows ads outside the actual gameplay, on a small sidebar.

Others don't think putting a short message before a web game is a major inconvenience. "Pre-loader ads are nothing new," says Jameson Hsu, CEO of MochiAds, an ad network that provides interstitial ads that run at the beginning and in the middle of independent Flash games. "We're not adding anything artificial into the ecosystem. These types of things have been around for a long time -- people have put their logos, which are basically ads, at the beginning of the game, during the pre-loader. When we created MochiAds, we looked at it and said, 'Is this going to offend people?' After surveying the market, we realized this is already happening. People are already used to it."

MochiAds' system has a leg up on portal sites like Kongregate, Hsu claims, because their ads will stay with the game no matter how many sites it eventually ends up on. "Advertisers are trying to come to terms with how content is spreading on the web," Hsu says. "More and more we're in a fragmented market. Not everybody's gonna visit major portals anymore -- it's not about Yahoo or MSN or AOL. We're moving beyond the walled garden and people are spreading out to MySpace and Facebook -- everybody has their sort of niche sites. As these things spread, content spreads. We're trying to educate advertisers that it's not so much about the site they reach, but the people they reach."

This diffuse, multi-site advertising strategy is working well for many Flash developers, Hsu says, with some making thousands of dollars a month from MochiAds. "We're already seeing people make a full time job of making games and using MochiAds as their main source of income. It's very inspiring for us to get emails saying, 'Hey, I quit my job and I'm making games full time,' and we see from the revenues they're definitely able to do that. The beautiful thing is, not only are they getting ad income now but they're seeing more opportunities, licensing deals, development contracts... a lot of doors open up once these guys are able to devote more time to it, and that's what we're trying to do, help these guys step up and do something they really believe in."

Deepening The Experience, And Making Money, Too

But Kongregate's Greer thinks that Flash games won't really get out of the gaming ghetto until developers are able to charge for them. As it stands now, the advertising and sponsorship money involved is just too small. "Let's say Armor Games gives you a sponsorship for $2,000. You get another $1,000 from ad revenue, another $1,500 from prize money, maybe Miniclip licenses your game for $5,000... you might make $10,000 to $15,000 on your Flash game -- and that's a really successful Flash game."

The relatively low ceilings mean the best developers tend to not stick around in the Flash market, Greer says. "What seems too bad to me now is that developers will have a big success in the Flash game world and then they're kind of forced to change platforms if they want to go beyond that -- they're forced to take a job at EA or scrape and scrounge and find a way to get a game on Xbox Live Arcade."

But convince players to pay a small fee for the games, and everything changes, Greer says. "If you made a Flash game that was good enough that you could get 50,000 people to pay $2 for the game -- or maybe it's a hit, you get 200,000 people to pay $5 -- now you've totally changed the economics of what you can do. You can get a really good artist to help you and work for six months. You can do deep multiplayer missions, you can do co-op, you can do all kinds of stuff that isn't really available right now."

Despite competition from free games, Greer thinks convincing players to make these small payments for web games isn't out of the question, as long as the content is there to keep people coming back. His inspiration in this regard is his previous employer, EA's Pogo, which has 1.5 million paid subscribers who get access to slightly enhanced versions of the site's freely available web games.

"Those Pogo people paying $40 a year, they rush to give their credit cards for that because they're spending hundreds of hours on that site," Greer says. "So they say 'Sure, I'll pay $40 if it makes my hundreds of hours better. Flash games, right now, it's something you spend ten or twenty minutes on... why would you pay for that?"

Just One Of Seven...

How do you get players to make that sort of time commitment? One way is to appeal to their vanity. On Pogo, only paid subscribers get customizable avatars and badges that advertise their achievements to the community. On Kongregate, players that complete specific challenges in games can earn virtual, collectible cards that will soon be usable in a Pokémon-style online battling game.

"One of the things that games do, besides being fun, is they do this trick that you feel like you're accomplishing something," Greer says. "If nobody else can ever see your accomplishment, it doesn't mean nearly as much. One of our investors said 'every successful consumer website has to appeal to one of the seven deadly sins.' For MySpace maybe it's lust, for a financial site it's greed, for a game site it's pride."

Even if you don't charge for your content, that pride can also work to your advantage if you've built a community of players that want to advertise their support of the game. Players that donate $5 via PayPal to free online games kdice and gpokr get a small star next to their online avatar. Some players have dozens of stars next to their names, telling the world that they've given hundreds of dollars for a game they could have played for free.

"I doubt [the stars] are a reason exclusively for anyone to donate, but it's definitely an added bonus," said Ryan Dewsbury, software consultant and developer of the games. More than vanity, though, what really convinces people to donate, Dewsbury says, is a sense that the money will go towards making the game better. "I love the sense of community that all the players bring to [kdice and gpokr]," he said. "We all feel somewhat motivated to see the games improve."

If that's not enough, Dewsbury says he's currently developing a change to the donation system that will give players even more reason to voluntarily hand over their cash. While he's coy on the details, Dewsbury says the change will help donators in the game without unbalancing the experience. "The change gives more value to people buying stars... I would call it meta-game value. People are more willing to support it if they get extra value back."

Though advertising still makes up 80 percent of his revenue from the games, Dewsbury seems less enthusiastic about the future of the ads on the site. "More ads doesn't necessarily translate to more money. I like simple interfaces, so I like ads to be clear and unobtrusive. It's also an image issue -- I think too many ads can push a developer away from a community."