Opinion: The Future For Casual Game Revenue Growth?

Author: by Jack Hart

[In this opinion piece written exclusively for Gamasutra, Jack Hart, President and CEO of game security and networking firm ECD Systems discusses the future for independent and casual PC game developers, focusing on how in-game ads, direct developer-consumer connections, and perhaps even price increases can help casual game developers build a viable business.] For a newcomer to the video game industry, the numbers look glum. Despite overall market growth and strong profits for large developers and publishers, the margins for a new game remain thin. This is especially true for independent developers who invest tens or even hundreds of thousands in development costs but see little return. And in the casual game space, one of the fastest growing segments of the market, conversion rates from “try” to “buy” remain at 1-2 percent; the top 20 games still account for 75 percent of the market. Given the long odds of making money off a new game, independent and casual game developers must seek new ways to increase their share of revenue when their creations are sold through online portals. At the same time, site owners, game marketers and publishers are looking for opportunities to profit on all of the titles they sell, not just the five or 10 blockbusters. In-Game Ads? In-game advertising remains a strong revenue source for developers, but the approach to in-game ads has changed. Rather than a static image on a billboard or sidewalk placard, advertisers want to see their products presented in a way that integrates seamlessly with the game play experience. We are beginning to see a convergence of three worlds: the game industry, Hollywood and Madison Avenue. As the video game and advertising industries continue to reach new levels of sophistication, the entertainment factor becomes the glue that binds them together. A classic example is Activision’s title Tony Hawk’s American Wasteland, which incorporates several bands, along with their music, merchandise and branding, within the game. Similarly, Electronic Arts’ Madden football franchise has featured in-game ads and cross-brand merchandising since the beginning. The emergence of ‘advergames’ is evidence that advertising is not just a method for making money, but also a viable form of video game entertainment in its own right. Think of the Burger King games developed for Xbox and distributed by Burger King – these titles feature a character from a TV commercial as the hero of the story. Having already bought into the humorous entertainment value of the “King” by watching the commercials, players are now reinforcing the strength of the brand by purchasing the video games. With rapidly increasing market share, casual games are largely available by download and/or played online. Most games are available for free, at least for a demo period. Facing the reality of low conversion rates of ‘try-ers’ to buyers, the games’ creators and site owners depend on advertising in-game or on-site to support the business model. This has spurned some debate over whether players will be willing to sit through commercials or tolerate ad space within games in exchange for playing. It’s a valid concern, but as industry veteran and former MumboJumbo president Paul Jensen observed, casual games are like sitcoms: in exchange for the ability to play and be entertained for a short period of time, people are willing to watch ads. Also, with the increase in Internet-based games, publishers and developers use companies, such as NeoEdge Networks, to integrate dynamic in-game advertising platforms into the game. With the constant connection, the adverts can be altered based upon a player’s moves, or even their geographic location, providing targeted and more effective advertising. The casual games industry, like the rest of the gaming world, has relatively high development costs and relatively low margins. It will continue to use advertising and sponsorships to underwrite the cost of delivering games, whether online or on retail shelves. It wouldn’t be surprising if in-game ads soon become integral to the content of a game, offering clues, extra levels or other hidden rewards for the player who clicks through. Developers stand to benefit from the continued evolution of the video game/Madison Avenue relationship, but that benefit may be limited. Currently, small development shops depend on larger distributors and publishers to bring their games to market. These publishers, who often take on most of the marketing and promotional costs, generally take a large percentage of revenues as well. The biggest returns on advertising dollars may not be going to the creators of games at all. The Direct Route Within the current system, most independent developers partner with big publisher/distributor houses, or work for one of those organizations as a sort of outsourced development arm. In other words, the best route to being in the black is, as they say, selling out. Recently EA spent $107 million to acquire independent developers Mythic Entertainment, Digital Illusions CE and Headgate Studios. With such hefty investments, some designers have benefited enormously from this approach, but it means the developer gives up a large degree of artistic freedom and financial control. One way around the so-called sell-out is to seek private financing, but unknown titles carry a high risk in the eyes of investors. A more viable approach might be making a direct connection between independent developers and gamers. The increasing number of downloadable games, especially casual games, is opening up new opportunities in this area. New portals powered by social networking technologies will enable game players and creators to connect directly. This will open up new and potentially lucrative new markets for indie developers, while giving players a chance to shape the content and game play experience. This is the Game 3.0 future, to borrow a term from Sony: one in which gamers and developers have a direct line of communication rather than relying on big-name publishers’ advertising hype to bring them together. Game portals, such as those powered by FairShare, ECD’s own social networking engine, are beginning to come to light, and while conversion rates remain a challenge, the increase in downloads that an effective social network referral system helps spur will accelerate the rate at which developers recoup investment costs. By example. one of the advantages of the direct-connect model, though, is that players can develop profiles as experts on certain games or genres available within the portal. These experts, who have a direct line of communication with indie developers, earn points for ‘converting’ others to certain games, and become ambassadors for specific titles. This grassroots effect could be a key factor in addressing the volume problem. Increasing The Price Tag? Facing the reality of the 1-2 percent conversion rate, big publishers and small-time developers alike know that volume, even if it increases, cannot account for 100 percent of the return on a game investment. How, then, can game makers see green? The answer may be very simple, but very counterintuitive: raise prices. In a world where many games are free or cheap, especially online, some developers may be underpricing in order to establish a fan base, as with free online sites like MSN Games or MostFun.com. Casual games on these sites are constantly marketed at the price of $19.99 per download, without consideration to the value of the game itself. While the temptation to underprice is great, it’s like lowballing during salary negotiations because you’re desperate for a great new job. In the long run, it will only hurt you. Gamers are a picky bunch, but one thing is certain: they place a high value on great games. The recent release of Madden NFL 08 proves that gamers are still willing to hand over $59.99 for a game they want. And once the small fan base is created, the chat rooms, message boards and blogs buzz with the news. Rarely is that buzz about the cost of a title – it’s about the play experience. And thus a fan base grows. Developers have a chance to increase the perceived value of their games by upping the price, but it’s an approach that requires some degree of sophistication and a bit of luck and of course, the game has to be good. The truth is that in the current market, especially for casual games, there is a surplus of content. Supply, in other words, exceeds demand. Economics 101 tells us this means price wars are inevitable. But using the power of social networking, it is possible to decrease dependence on volume by increasing price – just be sure you’ve got the backing of the bloggers behind you. A Combined Solution? This article has explored just three of the ways that game makers and marketers will be making money in the near future, but there are many other roads to profitability. Some site owners, for example, use promotional contests to award points to those who purchase new games, thereby increasing sales and loyalty. In-site ads, merchandising and game trailers, which are sold as advertising elsewhere, are among the other tactics. Successful developers and site owners will choose not just one, but a combination of approaches to maximize the return on their investments. Smart independent developers, for example, should directly connect with game players to develop new markets; both creators and distributors should price wisely, perhaps aiming higher to increase perceived value. Those going the in-game or in-site advertising route should partner with companies whose advertising content aligns closely with that within the games themselves in order to create integrated experiences that players want to return to. By combining innovative ways to address the money challenge, independent developers and portal owners will increase their chances of standing out and rising above a crowded marketplace. [UPDATE 09.26.07: In the original version of this article, Paul Jensen was referred to as MumboJumbo's current CEO. Jensen has since left the company, where he served instead as its president.]