Picking casual gaming's top model

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It's called the "99% problem" by those in the casual games business and, like something out of a Sherlock Holmes novel, the search is on for the "99% solution." Translated, that means that for every 100 people downloading a casual game, only one will actually purchase it. The other 99 will just take advantage of the free trial period and, once it ends, will move on to another freebie. In effect, the casual games industry is being supported by only 1% of its fans. That's got the industry -- especially the online portals that publish and sell the games -- on the lookout for a different, more lucrative business model, a situation closely resembling that of the publishers of massive multiplayer online games (MMOGs). There's a wide variety of models, and determining which is most effective is an ongoing process.

Erik Goossens was the co-founder of Eindhoven, the Netherlands-based game studio Zylom. Today he is the vp of game content at RealNetworks in Seattle, which owns RealArcade, the fifth-largest online casual games portal on the Web, according to Nielsen//NetRatings, with a March audience of 6.2 million unique visitors. (The four larger portals are Yahoo! Games with 10.6 million uniques, EA Online with 10.2 million, MSN Games with 8.3 million, and IGN Entertainment with 6.8 million.) Goossens discusses why he believes in-game advertising is the most effective revenue-generating strategy, and why he disagrees with developers who say that portals are taking advantage of them.

The Hollywood Reporter: What is the business model that's most successful for you these days?
Erik Goossens: We've been experimenting with all sorts of business models to generate higher revenues. Initially, RealArcade pioneered a kind of book-of-the-month club model, where gamers paid a fixed fee each month -- today it's $9.99 -- and, in return, got a monthly credit that they could redeem for any game, which they then owned forever. Then we added an all-you-can-eat subscription model that charges $19.95 a month and allows you to play any of the 450 games in our catalog for as long as you're a member. You don't get to keep any of the games.

THR: And you've most recently supplemented those with in-game advertising?
Goossens: We launched an in-game streaming ad model last year and, let me tell you, that was really a stretch for us. We had no clue whether it was going to work. We're using an Israeli-based technology called Eyeblaster to stream rich-media advertisements into the games' natural breaks, usually between levels. Eyeblaster creates a little software development kit that we integrate into our games and those of our partner developers.

THR: How's that working for you?
Goossens: Well, there're two sides to the story. If we were selling our entire inventory, it would be working fantastically. For example, we have a game called "Jewel Quest" that's a twist on "Bejeweled." We enabled it for in-game streaming media and use a metric -- dollars per download -- to see how it's doing. At the end of each month, we calculate how many dollars we generated, and we found that we were actually tripling our revenue for that game by using in-game ads.

THR: The ads are enabling you to give away the games for free?
Goossens: Not at all. There's a 60-minute free trial period, which is pretty much standard in our market, and then you can either purchase it or the game locks up. And within those 60 minutes, we've now added the advertising as well, which goes away once you buy the game.

THR: What has the in-game ad program done for you?
Goossens: It's enabled us to monetize games that might not have generated any money because people were just playing the free trial versions. If they do buy the game, well, we are then generating multiple layers of money out of the same game.

THR: Which raises the question, Why aren't other game portals following suit?
Goossens: You should ask them. I believe we are the only one using in-game ads on the scale that we do. That is because, I believe, it's just not easy to do. You need to have the technology to deliver the ads and RealNetworks is an organization built on the foundation of streaming content. And you need to be able to generate the kind of audience that we do. Most portals can't match our numbers. But I believe that others will follow suit. Eventually.

THR: I've spoken to studios who say that developers ought to be scared to death of advertising on portals. They believe that portals don't really want visitors to buy games because, as soon as they do, they go away to play the game and don't look at the ads anymore. They say that the portals would prefer gamers to stay, keep downloading the free trial versions, and watch the ads.
Goossens: I say that's a very cynical view. Perhaps they don't know that we share with the developers all the revenue we generate on both purchases and on the ads we serve in their games. The developers can choose to participate in our ad program or not; it's not mandatory. We show them that it can be very valuable and, if they are convinced, they can opt in or not. It's a very positive sign that all of the bigger developers have chosen to participate and let us put ads in their games. And they seem to be very happy about it because it brings them additional revenue.

THR: Are you also sharing the revenue you receive from the static ads on your site?
Goossens: No. But, then again, the static ads aren't generating nearly as much as the in-game ads. Without question.

THR: Talking about criticism from studios, developers tell me that the best way to crack down on the copycat games that, they say, are hurting the casual games business, is for the portals -- which choose and sell the copycats -- to tighten up on their selection process. But, they say, portals seem relatively uninterested in doing that because they make just as much money selling a clone as they do on an original game.
Goossens: Our approach is to use some very sophisticated systems to determine what consumers want -- and then to deliver those games. We launch two games every week. All of them go through our review board which is made up of people who have been in the industry for many, many years. Their job is to weed out the ones that they feel won't sell well, and the others go into a beta environment where a couple of thousand users play the game and we track various elements like how long they spend on each game and what level they reach; we also ask them several survey questions. Based on all that data, we can pretty accurately forecast how much revenue a game will generate in its first 30 days, and that is what drives our decision whether to launch that game or not. The bottom line is whether the consumers want the game or not.

So the question then is what is a copycat game? If a game is a blatant copy that uses art from previous games, we would not be inclined to publish it. But if, say, a match-three game uses flowers instead of jewels, if it has a nice story line to it, if we think our customers might like it, then we'll put it in front of them to decide.

THR: How important then is innovation to you? It sounds like a developer doesn't need to make a lot of changes in a game for it to get published.
Goossens: I believe it comes down to what is innovation? If you look at the film industry, there's not a whole lot of innovation going on. If you look at the hardcore video games industry, how many different shoot-'em-ups are there and how different is one from another? Innovation is difficult, but we have many more kinds of games in our service than just, say, match-three games. We have seven or eight different game categories with many different variations within each. And we get a new category -- a true innovation -- almost every single year. The year before last, for example, the big category was restaurant management, like "Diner Dash." Last year, the new category was "I spy" games in which you get a picture and, based on clues, you have to find something within the picture. It looks like this year will be the year of the light simulations. So I think the industry is actually doing pretty well in terms of innovation. In fact, within the next couple of years, I don't expect there'll be much casual game innovation left. It will become kind of like the hardcore games industry. What was the last innovation you saw there?

THR: Then why is it that the casual game developers are complaining that clones are hurting their business? You don't hear that from the hardcore game developers.
Goossens: I believe that's because the life cycle of casual games is decreasing. If you go back four years, portals were happy if we could launch a game each quarter, because there just weren't many games available. Today, we put out two a week and turn down 15 games each week. That allows us to set the bar higher when we do our initial cuts. After that, it's the customer who decides which games are successful.

THR: You've said that now is a good time for the casual games sector to experiment with various business models, but that you believe only a few will succeed. Which will be the winners?
Goossens: Today most of the revenue comes from customers paying for games, either one at a time or on a subscription basis. But I believe the in-game ad model will be a big driver of revenue going forward. Another model is taking place in China, where people don't generally own their own computers. So they go to cafes and play games there, which means that downloading a game to own doesn't make a lot of sense. Instead, the micro-transaction model has become popular in casual games. I believe that's an area where our industry is going to figure out how to put that in front of the existing U.S. audience over the next two or three years and really take it to the next level. I refer to that as the "Casual Games 2.0" strategy.

THR: Micro-transactions have become popular in the MMOG world, but I don't believe I've ever heard of them existing in the casual games space.
Goossens: Perhaps not yet. But a lot of people are talking about it. PlayFirst in San Francisco is experimenting on its site, and we're doing some experiments in the U.S. which we haven't announced yet. I think that within the next 12 months to 18 months you're going to see micro-transactions surfacing in a big way.

THR: And these would be similar to the MMOG micro-transactions where gamers can buy inexpensive power-ups and personalized items to enhance their gameplay?
Goossens: Yes. Perhaps you'd pay $1 for a power-up that would, say, enable you to play "Super Collapse! 3" in a head-to-head version. That's just an example. I'm not aware of any existing casual games that now include micro-transactions.

THR: But you'll be launching some soon?
Goossens: We don't have anything to announce right now. I wish I could be more concrete. I can say that, at the moment, we're concentrating on what we're calling our "China Games Platform From RealArcade" which is up and running in China where we have a studio. In the game, there's a virtual world where you come in, pick from a set of virtual tables, and sit down and play against one, two, or three other people. During gameplay, micro-transactions allow you to make life more difficult for your opponents. You throw stuff onto their screens that makes their finishing the game tougher, and that's how you win.

THR: Do you foresee a time when either micro-transactions or in-game ads will make up 100% of a game's revenue?
Goossens: Not really. Mainly because casual games have such a wide audience, some of whom want to own their games outright and others would prefer to venture into an online world and pay micro-transactions. I think the buzzword here is to give the gamers more choices and let them decide how they want to pay for their fun. The developers who will succeed will be the ones who make the smart choices in what they build, who have the best understanding of the people who buy their games and why they buy them, and who are able to get their games out in front. Because with the increasing amount of content flowing into our market right now, it's going to be really, really hard to differentiate yourself.

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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