With free-to-play, the price is right

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Online gamers who are given the option to "try" before they "buy" are doing a lot of the former and very little of the latter. In the casual game space, fewer than 2% of games played are actually purchased. That means an awful lot of time and energy is being spent by developers to create games that are literally being given away.

In Korea, they claim to have a better idea. Some publishers of both casual and larger games aren't even trying to sell them. You want to play? Go ahead. No charge. It's a business model that understandably thrills gamers ... and brings in hundreds of millions of dollars in revenue for publishers, a win-win if ever there was one.

Now these same South Korean publishers are about to set up shop and give it a whirl in the U.S., convincing some domestic publishers they ought to do the same. Or, at least, keep an eye on how well the business model works in a country where gamers are used to being charged for their entertainment.

Called "free-to-play" (F2P), the model works like this: Gamers visiting a Web portal can scan the game inventory, pick any title that suits them and start playing right away at no cost. And they can continue playing for as long as they like with no expense, ever. The catch? The game serves up all sorts of opportunities to enhance the experience, and for each of these micro-transactions, there is a small fee, perhaps as little as fifty cents, maybe as much as five dollars. There's no overt pressure to buy any of them, but many gamers do.

Early next year, NHN Corp., South Korea's largest Internet content service operator, intends to take the wraps off a new U.S. gaming portal, called ijji.com (pronounced "idgy"), which is currently in open beta. Plans are to launch with 40 to 50 games and add new titles each month. All were created in South Korea, half by NHN and the other half by other Korean developers.

While they'll run the gamut from casual games to sports games (such as "Golf King" for golfers and "Pocket Masters" for pool players) to fighting/action games (such as "Gunz," "Gunster" and "Kuon Ho"), the common denominators will be that they'll all be multiplayer, all are designed for broadband Internet -- and, of course, all will be free to play.

NHN's revenue last year from what it calls its "item-based sales model" was $96 million in Korea alone, which doesn't include what it made from its successful Japanese site or from its Chinese site, which currently has over 170 million registered gamers. Richard Chae, marketing manager at NHN USA, is optimistic that ijji.com will be equally successful here.

"We'll be catering not only to hardcore gamers, but to what I call the social gamer," he explains. "They enjoy spending some time playing games, but they don't want to spend $300 to $400 for a console system and they don't want to spend $50 to buy a retail game. On our site, everyone from kids to students to professionals can jump in, play some games at their leisure -- maybe 15 to 30 minutes -- and just relax and have some fun with no investment of any kind."

In South Korea, says Chae, it's that sort of gamer who is spending on average $20 a month on micro-transactions, about $5 more than competing Web sites are getting for their subscription-based services in the U.S.

In a typical micro-transaction in, say, the golf game "Golf King," which is currently in closed beta, one could choose among three different sets of clubs. One might improve your shot's distance but lower its accuracy, another might increase your shot's accuracy but lower its distance and the most expensive might improve both distance and accuracy. Prices haven't been established yet but will probably vary from fifty cents to a few dollars. Or, of course, one could play with the standard clubs which cost nothing.

NHN's sites encourage social interaction, promoting matches and team play. And they regularly feature contests and raffles with such extravagant prizes as game systems, large-screen TVs and gift cards.

"We just gave away a $500 Nordstrom gift card," recalls Chae, "and, in Korea, we actually give away cars, like BMWs and Mercedes Benzes. We hope to do the same in the U.S. because, as you can imagine, it tends to attract gamers."

Gamers have raised questions about the fairness of micro-transactions. To wit: If buying better sets of clubs or more powerful weapons increases the chance of winning a game, won't the players with the deepest pockets always be the winners?

Chae acknowledges the concern and says that it is vital for F2P sites to be "carefully balanced in order not to favor spenders over non-spenders." For example, in order to buy some of the better golf clubs in "Golf King," one must first prove a certain level of golfing ability. "The unskilled cannot suddenly become expert by buying the right upgrades," he says.

Virtual golfers have other choices as well. Seoul, South Korea-based developer OnNet runs its own F2P golf tournament, called "Shot-Online". Gamers with extra cash can shell out, for example, $1.30 to eliminate fatigue for 250 holes, $3.80 to get much better offers when selling virtual items or $4.40 to get "double experience" on 250 holes and, at the same time, put a little more speed into your game. At the same time, Shot-Online's publisher, SyNet Entertainment, is hedging its F2P bet and is selling a $30 retail version which comes boxed with many of the items a gamer might have bought through micro-transactions.

While the F2P invasion into the States is fairly new, Irvine, Ca.-based K2 Network has a five-year history of serving up free-to-play gaming here with all of its titles imported from Korea where game development is considerably less expensive.

"It might be more difficult to run a service using the F2P model if we were offering pricier games like those developed in the U.S. where wages are higher," says K2 CEO and co-founder Joshua Hong.

K2 currently stocks two massive multiplayer online games (MMOGs) -- "Global Mu Online" and "Knight Online" -- and will release a multiplayer online first-person shooter, "War Rock," which is currently in open beta, sometime in the first quarter of 2007. In addition, by partnering with NHN, it plans to offer the "Golf King" multiplayer online golf game.

While Hong wouldn't discuss his company's success in terms of revenue, he reveals that K2 currently has over eight million registered users, all of whom found the site by word-of-mouth. (K2 does no advertising.)

"It just shows you the power of the F2P model," says Hong. "We have a huge community of gamers who located us through Google and other search engines and then proceeded to play our great, free games. What happens then is they become immersed in the gaming world and, as they play, their competitive instincts kicks in, and they choose to buy certain assets to become better quickly since they usually don't have a lot of time to improve their skills without them."

Hong says K2 intentionally selects games that are "live-event-friendly," meaning that K2 frequently sponsors tournaments that encourage competition. And what better way to become a stronger competitor quickly than to purchase assets like power-ups?

For example, K2 runs about 16 different events each week for the three million registered players of its most popular game, "Knight Online." Any single two-hour event might be limited to perhaps 2,000 participants. While admission is free, Hong says, "in order to be very good, you need to purchase certain items. So the competitors will come to our virtual power-up store and stock up on enough potions and spells to be able to withstand attacks from other players."

When "War Rock" launches early next year, players will be able to buy an additional "slot" enabling them to carry a fifth weapon instead of the standard four. That's the sort of thing that gives players an advantage, enabling them to switch weapons faster in a firefight. While prices haven't been set yet, Hong estimates that gamers might pay about $8 for the competitive boost.

"In the online world, being able to level up [proceed to the next level of a game] is like moving up in real society," says Hong. "It shows social status. People treat you differently in the game. While you can certainly choose to achieve that on your own, the F2P model allows you to pay to level up easier and faster. It would be like getting an MBA from Harvard in the real world; it's an investment that puts you in a different class of society."

The F2P model was borne out of necessity in Korea where there is essentially no retail market for video games.

"Korea was so overrun by game piracy, that developers and publishers couldn't sell a boxed product," observes Jason Della Rocca, executive director of the International Game Developers Association (IGDA). "And so, essentially, there was no retail market to speak of. Video games all had to be online. They started with subscription models, but soon discovered that giving the games away and then selling items through micro-transactions was much more lucrative."

Here, in the States, says Della Rocca, publishers are viewing micro-transactions as an additional revenue stream, one that has already proven itself for giant publishers like Activision.

In August, Activision CEO Bobby Kotick revealed that his company had sold close to $1 million in downloadable map packs for the company's popular first-person shooter "Call Of Duty 2" for the Xbox 360.

Surprisingly, the bulk of the money came not from the $5 Skirmish Map Pack, which was downloaded 105,000 times to net $368,000, but the $10 Invasion Map Pack that had 66,000 hits and raked in half a million dollars.

"This holiday we'll look to further capitalize on the success of the franchise and its online capabilities," Kotick said.

"What's most surprising was that the million dollars in downloads was for the Xbox 360, which doesn't have a huge installed base and it was sold on the Xbox Live online service," notes the IGDA's Della Rocca. "Not all Xbox 360 gamers are on that service."

At AOL, there is free gaming to be had as well, but the 200 or so games in inventory are all supported by advertising, not micro-transactions. Ralph Rivera, vp and general manager of AOL Games, expects that to change -- and sooner rather than later.

"Ad-supported games aren't going to go away, but they will definitely be supplemented by games that offer players the opportunity to enhance their gaming experience with item sales. We are looking for those sort of games from developers right now," he says, "and you can expect to see them on AOL within the year. In fact, check back with us in three or four months."

Rivera believes all that's holding F2P from exploding in the U.S. is that American gamers aren't accustomed to micro-transactions in general.

"But that's changing," he observes. "The fact that people can go onto iTunes and pay 99 cents for a song is familiarizing them with that sort of consumption model. And the prevalence of broadband is making online gaming more viable. I see this model taking hold and I'm a big believer in it."

How quickly it will take hold is anyone's guess. K2's Hong believes it just needs U.S. gamers to accept a different sort of gaming experience.

"People used to have similar concerns about free checking," he says. "I remember when I came to the U.S. many, many years ago, I used to pay for having a checking account. These days, a checking account is a freebie; it's also bait. Banks give away free checks but make lots of money on late fees and other ancillary services.

"With the F2P model, we're not really giving anything away at all," he explains. "I mean, if you really study the underpinnings of the business model, nothing is really free. We're just making it easier for gamers to try our games and see if they want to pay. We're just giving them more choices. It's just not so easy for them to see that."

Paul "The Game Master" Hyman was the editor-in-chief of CMP Media's GamePower. He's covered the games industry for over a dozen years. His columns for The Reporter run exclusively on the Web site.
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