What are Free-To-Play games?
The video gaming business in particular has seen some drastic changes over the past decade. Free-to-play (F2P) games at times hold a bad reputation in the industry because they have shifted towards a hybrid model, blurring the line between what is considered truly “free” and what requires additional purchases or investments from players. Nevertheless, developers and publishers are still introducing new F2P titles and franchises into the ecosystem.
To throw in some statistics:
A whopping 85% of gaming revenue comes from F2P games.
But for non-gamers, what exactly are F2P games and how do they generate revenue?
F2P games allow players access to most of the game’s content without paying. They generate revenue through selling in-game cosmetics, season/battle passes, or advertising.
Currently, Mobile gaming generates the most F2P revenue, ahead of PC and Console gaming in that order.
First Glimpse of F2P
Back in 1993, id Software, the creators behind Doom, were distributing their game as shareware.
Shareware is a type of proprietary software that is initially shared by the owner for trial use at little or no cost.
In other words, the games distributed through this method had a significant chunk of the game accessible to users for free. Players could then purchase and unlock the full version of the game directly from id Software if they were hooked.
The alternative was for developers to put these game discs into retail as packaged goods. Even so, the developers would only be able to earn small royalties and get paid 15% of net revenues on their games while publishers were racking in most of the profits.
Shareware, however, allowed developers to monetize and promote their games at the same time. The developers were able to cash in 100% of the upsell. So even if they were selling around 5 times fewer games through the shareware model, they could’ve made more money than going through with the traditional distribution model.
With the help of the local area network, third-party access to building mods on the Doom Engine, and its pioneering use of F2P, Doom was a cultural phenomenon. This was the first major time we saw a glimpse of early stages F2P coming to life.
Unfortunately, companies were banning Doom from their local area networks for disrupting corporate America from downloading resources. id Software had to turn back to legitimate distribution for Doom with GT Interactive, which was when we saw the F2P model drawback.
What Did F2P Solve in the Video Game Business?
Piracy
Back when video games were still in the packaged goods business, consumers had to purchase shiny disks for $40~$60 at retail. Unethical “entrepreneurs” back then would then take bits off of these disks to distribute for free or at a lower price.
Piracy was a major problem back in the 90s, as it was considerably easy to copy physical media off floppy disks and cartridges. To this day, publishers are working on multiple forms of digital rights management and authentication systems to combat piracy.
To quote Mitch Lasky, a general partner at the Silicon Valley venture capital firm Benchmark and a former entrepreneur and video game executive, in the first episode of his podcast Gamecraft:
Piracy is just mispricing, which is just the fact that you haven’t found the price at which the product is buyable
Piracy was particularly an issue in Asia due to the currency power of local Asian markets. Video games were relatively expensive for them due to their lower average incomes. South Korea for example, had average incomes ranging from $5,000 to $15,000 per capita, as opposed to the United States' average income of $25,000 to $35,000 per capita in the 1990s.
Even if publishers were selling their games at local prices, pirates could capitalize on this by reselling them back to Western countries at a markup that was lower than the retail price point.
This gave consumers two options:
- To not play the game
- Steal the game
To add to previous points, PC Bangs were also extremely popular in areas like South Korea. These were places where owners of PC Bangs could buy games and sell metered access to players locally. Even though it was being sold on metered access, there was always an incentive for consumers to steal the games. If owners stole the games initially to install at their PC Bangs, it would’ve compounded the piracy issue.
Coincidentally, it was also Asia that brought F2P back to life to solve the piracy problem.
Actual Addressable Market
The innovation of F2P transforms the actual addressable market. With the removal of the paywall, developers and publishers gain access to a broader audience — more potential customers. They can reach untapped regions to unlock new streams of income.
Changes in the actual addressable market are also crucial in promoting diversification. As publishers expand their business into other regions, they reduce the reliance on specific demographics, allowing their games to remain resilient amidst market fluctuations.
Elasticity in Video Game Pricing
The ability to publish a game with such a low barrier to entry all the while allowing in-game cosmetic purchases accommodates both consumers that are price-sensitive and price-insensitive.
Publishers can offer a variety of monetization options that cater to player budgets and willingness to play.
How Did Asia Solve the Piracy Problem?
Nexon, a South Korean video game publisher, published MapleStory in 2003 and KartRider in 2005. The innovation here was that they decided to give full access to their games with no financial barriers to consumers.
The major distinction with the original shareware model was that consumers didn’t have to make additional purchases to complete the game. There was essentially no friction on the consumer end.
Nexon successfully applied the Razor-RazorBlade Model of marketing to their games, specifically KartRider. Their revenue came from selling virtual cosmetics to players.
The razor-razorblade model is a pricing tactic in which a dependent good is sold at a loss (or at cost) and a paired consumable good generates the profits.
What’s even more fascinating is how the F2P model allowed the player base to grow into millions, being one of the most played online games in the mid-2000s. This compounding of the player base formed a huge community, which only gave the in-game cosmetics even more value, giving consumers a larger incentive to make in-game purchases.
Modern Influence of F2P — Good or Bad?
As developers and publishers began to realize the prevailing financial success of the F2P model, we now see many renowned titles like Apex Legends, Fortnite, League of Legends, and Warframe.
This model has influenced core game design choices in terms of game development.
The Good
F2P games have changed the incentive model of game publishers. Publishers are now shifting their focus to increasing customer lifetime value.
Customer lifetime value indicates the total revenue a business can expect from a single customer account throughout the business relationship.
We use games like League of Legends, published by Riot Games, as an example. Since their debut in around 2010, they’ve been routinely pushing out seasonal updates, balancing gameplay, and introducing new playable characters and skins to effectively maintain a loyal player base.
They started implementing Event Passes in League of Legends back in 2018, the first one being PROJECT: Hunters, which allowed players to unlock additional awards by completing in-game challenges within a specific time period.
These are great mechanisms to keep the player base engaged, however, there are also many reasons why F2P games face much criticism in the industry.
The Bad
Many games have gone off the deep end of monetization, to the point where game designs have pay-to-win mechanics implemented within them. While the game remains F2P initially, publishers are enabling players to buy certain upgrades or items within the game, granting an unfair advantage to those who refrain from making any purchases.
Additionally, the introduction of loot boxes and the lack of transparency have generated a negative community perception. Loot boxes have been a controversial component of the modern gaming industry, as they can resemble gambling mechanics in which players can obtain in-game items on randomized chances. Poor communication of the odds of obtaining rare items through loot boxes can lead to mistrust within the player community.
Conclusion
The initial adaptation of the current F2P model by id Software was way ahead of its time. The lack of internet and friction in retail posed as a barrier to entry. While Western publishers continued to struggle with the traditional distribution of games as packaged goods, Asian publishers were able to innovate on the previous shareware model to develop the current F2P model we see nowadays.
This not only served as a solution to piracy, which was a huge issue in the packaged goods business but it also transformed the actual addressable market, allowing players to join the gaming community despite their financial stability.
As the F2P model evolved, we now see new monetization mechanics being implemented into modern games. It also effectively had an impact on game design, giving developers and publishers an incentive to focus on increasing the lifetime value of the player.
F2P is here to stay as we continue to see new titles like The Finals being published. However, publishers must strike a balance between monetization and player satisfaction to make their games sustainable in the long run.
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Disclosure
The majority of this post is based on the first episode — Steal This Game — on the Gamercraft Podcast. As an avid gamer with a keen interest in the video gaming business, I am publishing this in hopes of engaging with other gaming enthusiasts who share a passion for the business aspect of gaming. Feel free to reach out, I’m always open to connecting and learning from like-minded individuals!