Retrospects & Prospects of Monetization in Video Games
From Quarters to Free2Play and a Look at What’s to Come
Back in 1972, Atari released its Pong arcade machine that became the first ever commercially successful video game. Evidence of future success could be seen as early as during the prototype phase, when the developers installed the machine at a local bar and it went out of order a few days after — the acceptor box was overflowing with coins.
From today’s perspective, it might be difficult to comprehend what exactly it was that attracted people to a game with two paddles moving back and forth at the opposite sides of the screen and a square bouncing in between. Looking ahead 50 years, people might also raise their eyebrows when hearing about our current preferences. The world is changing at a fast pace and what is successful today will be squeezed out by something else tomorrow. Just as coin-operated arcade games lost their popularity, the present monetization models are bound to be superseded.
Before speculating about the future, let us look back at the history of monetization in games. Unless monetized, games cannot generate income, and without income the game industry won’t survive.
So, the year of 1972 marked the dawning of a boom time in arcade video games. In 1977, Atari released the innovative Atari 2600 console. Prior to this, the market had seen other consoles that could be connected to a TV set, however, they offered a limited set of pre-loaded games that the player eventually got bored with. The Atari 2600 became a pioneer model where games were stored on ROM cartridges and could be purchased separately to the console. Since then, games have been sold independently from hardware as a standalone product.
It should be noted that they sold extremely well. The world was experiencing a boom of video games with every new product swept off the counters in an instant. Cartridges were being produced in their millions, irrespective of the product quality. However, in 1983 the golden age of arcade video games came to an end. Consumers were no longer willing to buy poor-quality items and industry revenues crashed by 97% over a span of two years (from $3.2 billion to $100 million).
In 1983, Nintendo launched the Nintendo Entertainment System known as NES that eventually helped revitalize the video game industry. Having learned from the difficulties experienced by their predecessors, the company exerted tight control over all of the games released on its platform, in particular, by implementing special authentication techniques in their cartridges. However, such measures only instigated piracy, including the manufacture of clone consoles and unlicensed cartridges. We can see examples where the spread of the pirate product, on a national scale was so great, that the entire market for the official product collapsed. For instance, the Dendy console, which was a Taiwan clone of the NES and marketed under the name Micro Genius, was especially favored in Russia.
In their desperation to keep control of the situation, Nintendo only made things worse for official developers, who switched their allegiance to the peer console Sega Mega Drive, which was created in 1988. This prompted Nintendo to reconsider their stand towards developers and they removed the authentication chip from cartridges.
This period was also distinguished by the development of home computers and games for home computers. In the meantime, piracy remained a nagging issue and games were frequently supplied together with plates having authentication codes as evidence of legality, which were required to launch the game. This measure however proved ineffective and failed to stop the piracy. These circumstances gave rise to Shareware, a monetization model where games were accessible free-of-charge and could be copied without any restrictions, however, additional content was to be paid for. For example, when only one episode was available and the rest of the episodes had to be purchased. As a rule, a unique code was generated at the point of sale that linked the game to the respective computer.
Among the games distributed through the Shareware model, there was Doom 2. As a result, the number of computers with this game installed exceeded the number of computers running on Windows. This prompted Gabe Newell to leave Microsoft and establish his own company Valve in 1996. In 2003, Valve opened an online store called Steam, to distribute the brand’s games. In 2007, large third-party publishers were admitted to the store. The most exciting chapter began in 2008, when small independent developers were granted an opportunity to sell their games on Steam.
Prior to this game-changing moment, everything was controlled by publishers. They had autonomy to decide what games to produce and how and where to allocate funds. Developers had no alternative given that publishers not only agreed with platforms on the placement of games, but also took charge of the whole logistics process from the manufacturing of discs and cartridges to their delivery to retail outlets. With the emergence of Steam, this was no longer necessary.
In the same year of 2008, the mobile games market faced a similar scenario. The Apple corporation opened its online AppStore that offered games for Apple devices, including those for iPhone, whose popularity was then gaining traction. Developers no longer needed publishers’ assistance to have their games distributed by whatever store.
The ability to make their own decisions without having to give away the lion’s share of their profit to the publisher, stimulated growth in both the number of developers and the number of games popping up on the market every day. Most developers did not have access to the level of resources required to run extensive marketing campaigns, therefore price lowering was used to gain a competitive advantage and became a major tool in grabbing the player’s attention. Once being ready to pay $60 for a game, the audience was now reluctant to spend a mere $5.
Meanwhile, fuelled by the spread of the internet and surge in torrent technology, piracy rates increased to a record high. The problem was especially acute in Asia, where releasing games for sale was impractical as they were instantly pirated and distributed free-of-charge. This led to the emergence of a new monetization model — free2play — which granted players free access to games, however, additional content (such as useful in-game items) was offered by in-game stores in exchange for real money.
These developments helped remove the major entry barrier to games whereby users were no longer expected to make a purchase decision before starting a game. Online advertising now became a new game promotion channel. Just a short time before this approach had proved inefficient because the percentage of users who ended up visiting the game’s page and purchasing the game was nearing zero. Now that players were no longer required to buy games and could install a game ‘just to check it out’, this percentage rose significantly.
The evolution of the monetization model had a paramount effect on game design. Now having the opportunity to easily join the game, the player could just as easily quit, unlike when they had to pay in the region of $60. Developers now realized that the player should be engrossed in the game from the very first moments and be continuously incentivized to return to the game. This could be achieved through the introduction of in-game items and encouraging the player to make purchases over and over again.
In contrast to the Shareware model, where the user only made a purchase once, in the free2play model there was no limit to the user’s spending opportunities. This enabled free2play games to both conquer piracy and outperform the predecessor’s fixed-price model by generating larger incomes. Games as such underwent a qualitative change, having transformed from a product that is released just once and generating a single sale into an entertainment service that collects payments from players over the course of many years.
Shortly before the invention of free2play, a subscription-based monetization model sprang up — online games that maintained their own servers and served players for years, could hardly be satisfied with one-off sales only. This scheme was adopted by market leaders such as World of Warcraft and EVE Online, with the rest having to switch to free2play. As the years passed, the market witnessed the revival of the subscription model, which is primarily used by platforms that offer access to games and additional services on a recurring fee basis.
We currently find ourselves at a remarkable moment. The long-established dominance of the free2play model is now starting to display symptoms of a decline. The underlying reason is the same: an overabundance of games. Each is competing for new players, which leads to ballooned user acquisition costs and as a result, games end up closing at the phase of business model calculation, when it becomes clear that the audience acquisition costs will exceed the potential income to be generated by this audience.
This means that we are on the verge of welcoming a new monetization model. Looking back at the history of monetization, initially games cost a lot of money, then they cost very little, currently they are free of charge, and the natural progression would be to start paying players. In other words, games will let the player earn money. Of course, the developer won’t be able to stay afloat by giving out all the money to players instead of generating income. However, with the advent of blockchain-powered games, it became possible for players to financially benefit by interacting with each other. In Crypto Kitties, players can gain income by trading kittens with other players, while the developer can charge transaction fees and is not deprived in any way.
This is just an early sign of the emergence of a new model, where players would purchase items from each other, rather than from the developer. In addition to the exchanging of items, they could also exchange services. For example, lease their in-game items to other players or pay for the services rendered by a game trainer. At Expload, we call it ‘open economy’ and believe that this is where the future of video games lies.
We haven’t as yet seen any other projects attract the levels of attention as Crypto Kitties. While other crypto games are trying and at times succeed in achieving notable results, they haven’t received much reaction. However, an open economy (with respect to games) appeared long before blockchain, as far back as in the 80s-90s, when the secondary market of video games was thriving — players would buy cartridges and discs and having played enough would resell them to other players at a smaller price. Together with MMO games, black markets popped up, where players would pay real money to other players for the purchasing of in-game currency, buying items, for the developing of their accounts and for a range of other services.
There is no denying that black markets breach the rules of the game and deprive developers of a portion of their profits. However, as bad and profoundly immoral as they are, black markets lend an impetus for changing the status quo and giving players what they want — they will sooner or later get their share of the cake. The only question is whether this will harmonize with the game’s design or ruin it.
Just as free2play once transformed numerous approaches to game design, today an open economy is challenging game designers again, demanding of them to change their pattern of thinking. Games no longer resemble a dictatorship state, where the player is puppetted by the developer, being unable to take a single step without the developer’s permission. A new generation of games is destined to become an analog of Europe, where every player is free to establish economic relations with other players without requesting the developer’s approval. It is starkly obvious, which of the economies is healthier and more developed: that of the European states or that of a dictatorship state.
How can we be sure? Imagine a world, where you can only buy Apple stocks from Apple and sell solely to Apple at the rate they quote. A world, where investments into real estate do not offer the potential for profits, because you can only buy residential property, but cannot sell it. A world without eBay, Avito, Yula, YouDo and even Uber, because you are neither allowed to sell anything nor to render fee-based services. Banks do not offer loans, because there is no such entity as banks and there is no such benefit as healthcare insurance, because likewise — there are no insurance companies. You don’t have to think what store to visit, because there is only one store. You are even unable to lend money to your friend until payday. And if you want to relocate to another country, you will have to abandon all of your possessions and start from scratch.
Did you imagine it? Did you notice that everything around you turned into black-and-white and hear somber music playing? Would you like to live in such a world? However, modern games are exactly like that, when it comes to their economic setup. We do not notice this because we are used to the existing setup and have no other benchmarks.
Almost every third person on the planet is a gamer. For many people, games are more than just a fun way to occupy their leisure time and represent a huge part of their lives. Chatting with friends while night playing Fortnite, joining clan wars in Clash Royale at the weekend, marking E3 and The International broadcast dates on the calendar, putting a statuette from the collection edition of your favorite game in a prominent place, planning a vacation just before the release of Cyberpunk 2077… Once we invest so much of our lives in games, it would be great to enjoy as many freedoms and opportunities within games, as we now do in our daily lives. Therefore, as was said, we see the future of video games with an open economy.
