Postcard From Austin: 'The Economics Of MMOs'

Author: by Jill Duffy, Austin

Online gaming is, as usual, a huge theme at the Austin Game Conference this year. The show has four distinct tracks this year dedicated to online games: Online Business & Production, Online Multiplayer Design, Online Multiplayer Tech and Online Multiplayer Services and Support. Even the keynote that began Thursday’s conference was given by John Smedley, president of Sony Online Entertainment, who spoke at length about the challenges online game makers face. In the panel session titled "ROI: The Economics of MMOs" four panelists, moderated by Gordon Walton (currently unaffiliated, though formerly of Sony Online Entertainment and EA) discussed the various methods of billing online game players and in which markets those methods work. The panelists were major figures in the MMO industry - Jon Grande, vice president of business and legal affairs of Sigil Games Online (Vanguard); Robert Garriott, CEO of NCsoft (City Of Heroes, Guild Wars publisher); John Needham, CFO and senior vice president of finance for Sony Online Entertainment (EverQuest series, Star Wars Galaxies); and Jeff Anderson, president and CEO of Turbine Games (Dark Age Of Camelot, Middle Earth Online). With a nearly full house of attendees, the session began with comments about various opinions on what makes a massively multiplayer online game successful, both in terms of popularity and dollars and cents. John Needham joked regarding “SOEbay,” remarking on how players buy and sell between themselves on many of Sony’s MMOGs. The panelists agreed that greatest difficulties in making money off MMOGs is player retention. But drawing the players in initially is nearly as important, especially when game creators begin to assess the intended audience’s cultural makeup. “Our job is to provide entertainment to customers in a way they want to pay for it,” said NCSoft's Garriott. “Lots and lots of varieties and different games will find different ways of delivering games and making money. People will be paying in lots of different ways.” Though both the Asian and European markets were addressed, the panelists focused more on the unique Korean market, occasionally drawing comparisons and similarities between it and the Taiwanese market. In Asia, the panelists agreed, there is practically no retail market, because one never developed. In Korea, player might pay $26 per month for their game’s subscription fee, but the client is free. Many Korean games also allow players to participate for free, but pay for items in the game. Garriott showed how this model wouldn’t work in the U.S. The value of something for Americans is determined by what they pay for it. If you give them a product for free, they think it’s worthless, he suggested. The panelists tried to make sense of Korea’s ability to sell games without a retail channel, selling virtually all its game content over the web. “In Korea, we [at NCSoft] don’t use retail because there is no retail channel. One of the things that drives the U.S. retail market is consoles. Until a year ago, consoles were illegal in Korea,” Garriott said. “In Korea, a retail channel will have to develop. In the U.S., just the way the markets have developed, retail is critical. Retail will continue to be critical,” Garriott said. The conversation also heavily covered pricing structures of MMOGs. Turbine's Anderson described what he called “the Ultima Online hangover,” and suggested that it did not result in good examples of how to price MMOs. “In retail, what are you really paying for?” he asked. His conclusion: “What we’ll see over time is the market drifting away from retail” - the U.S. markets will rely less on retail sales driving the game market. “What is the potential appeal of your title?” asked Sigil's Grande rhetorically. “Can you rely on digital distribution” based on the content of your title and the players it speaks to? Asian players, he contends, are more “technological savvy” compared to U.S. consumers. In fact, young people in Asia grow up believing in digital distribution, that they should be able to purchase and play almost instantly via online channels, he suggested. Gordon, addressing all panelists, asked them to expand their earlier comments on trends in pricing. “I think there’s a good chance prices will go up. $15 [per month] is not a price point. I don’t think our player base if affected by the price. If it’s a good game, they will pay $20. If it’s a good game, they’ll pay $25,” said Garriott. Unfortunately, making a game is becoming so expensive that developers need to think of new ways to up their returns. “It can cost $30 million to develop, $10 million to market,” said Garriott. “What do we make? The idea that we’re going to do this and charge less money is a joke. We have to drive more revenue in order to fund these sort of things. It’s not a price issue, it’s a business model issue.” Grande agreed that the ballpark budget to bring a really strong MMOG to market might cost $30 million or even $50 million. “Somewhere on the order of half of that will be invested in creating new content,” he said. “How to take that base of content and expose it to people in different ways, coming up with smart ways to utilize and reuse that content” will help increase the ROI. “How many game companies do you know that make a profit in North America? 50? The companies in this business are teetering on the cost structure,” said Anderson. He compared these rough statistics with the film industry, which is capable of recovering multimillion dollar budgets with a handful of blockbuster movies. “I hope subscription rates do go up soon,” quipped Needham. “I assure you we’re not decreasing our rate for [upcoming MMO] Tabula Rasa,” added Garriott. On a serious note, Sony Online's Needham explained, “The big barrier is subscription itself. We offer 40 to 80 hours of entertainment for $20 a month. You can’t find a better rate for entertainment. What’s driving cost for us is next-gen platforms and timing of when we’re going to be on those platforms.” Those factors “will up the development budget,” said Needham. Walton asked what was the highest run cost for MMOGs, and not all the panelists agreed. Anderson cited customer service, though Needham said maintenance because customer service can be outsourced. Managing the development team, he added, was an equally weighty cost. “Costs are going down except content. There is no end in sight,” said Garriott. “The one big X-factor is in casual and that’s opportunity costs,” claimed Grande. “Do you perpetuate existing franchise, create new ones, or iterate existing ones?” Overall, the panelists and audience in this well-received talk seemed most interested in puzzling over the Asian markets, particularly Korea’s, and pondering almost in wonderment, hoping a similar phenomenon might crop up in North America, once barriers such as broadband are surmounted. [Gamasutra will continue to provide live coverage from the Austin Game Conference as the week progresses.]