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The Rise of Free-to-Play
    Core Gaming
          Mitch Lasky
       Benchmark Capital
bizpunk.blogspot.com

twitter: @mitchlasky
Free-to-play is the most
important disruption in the
 core video game business
Distribution innovation in video
 games has historically created
       the greatest wealth
What is free-to-play?

•   Free-to-play is not a genre ...
•   Free-to-play is not a business model ...
•   Free-to-play is a MARKETING STRATEGY
•   Free-to-play is also a value creation strategy
Part of Trend to Un-bundle Media

   Bundle          Disruptor            Result

   Album         Napster/iTunes        Song/MP3

TV Prime Time   DVR/Netflix/Hulu      Show/Episode

 Newspaper      Internet/Twitter      Story/Link

 40 hour/$50
                F2P/virtual goods   Game as Service
 Video Game
F2P & The Activity Chain

                                  Market

                                           Distribute

    Develop
t
    Develop

              Beta   Distribute

              Analyze & Market
F2P and Revenue
Cumulative Recognized Revenue




                                                   Re-orders

                                                                Returns




                                         Initial Order



        t
                                Launch
F2P and Revenue
Cumulative Recognized Revenue




                                                      free-to-play

        t
                                Launch
F2P is eCommerce
F2P is eCommerce

 Interest/Intent
      Clicks
     Installs
   Activations
  Repeat Visits
    Payments
Repeat Payments
Many business models are
  compatible with F2P
F2P Business Models




     “Freemium”
F2P Business Models




   Advertising-Based
F2P Business Models




Micro-Transactions (Virtual Goods)
F2P Business Models




“Crippleware” is not F2P
Why does the free-to-play +
virtual goods model work?
Player’s Willingness to Spend
                                Demand Power Curve




                                       # of Players
Player’s Willingness to Spend
                                    Packaged Goods


                                     Single point of demand/
                                       pricing optimization



                                               $50
                                $

                                            # of Players
Free-to-Play
                                “whales”
Player’s Willingness to Spend




                                           Elastic pricing scales
                                               with demand


                                  $                                 non-payers
                                                   # of Players
Strategic Rationale for Free
• Rather than pay millions for conventional
  marketing, use power of free to create reach,
  build brand, and generate virality and community
• Transform AAA games into services that can
  command a share of customers day with
  engagement that transcends social game churn
• Generate revenue and earnings by capturing
  elastic demand and pricing with virtual goods
• Allow valuable, long-lived franchise properties,
  which have always been the drivers of publisher
  economics, to arise organically through
  continuous development rather than sequels
Rise of F2P Core Gaming
Why Core?
From 2005 to 2009, core F2P was
 primarily an Asian phenomenon
Plenty of evidence from social gaming and
 mobile gaming that casual consumer in
West would embrace F2P / Virtual Goods
For core gaming, high production costs, uncertain
  monetization, and “innovators dilemma” led
  traditional publishers to favor hybrid models
Investment Thesis (c. 2007)
• Free-to-play removed issues of brand and
  entry barrier for new core publisher
• Core gamers would be willing to pay for
  virtual goods in context of a free title with
  high production values and great game play
• DotA audience was large, passionate, under-
  served, and accessible online
• Had to go “all in” with pure free-to-play
  model; not hedge like traditional publishers
Risks
• Core gamers might perceive F2P as code
  for crappy Facebook games
• Higher production costs required higher
  conversion & monetization to break even
• Had to build next gen e-commerce
  business on top of great game
• To attract desired audience, had to be
  authentic and legitimate heir to DotA; not
  opportunist but “for players, by players”
... it worked.

32.5 million installs
11.5 million MAU
4.2 million DAU
1.3 million PCU



              Source: Riot Games public release; November 2011
The Ten Success Attributes
    for F2P Publishing
The Ten Success Attributes
#10 Scalable, virtualized hybrid cloud infrastructure.


                                 Public Cloud


                   Data Center             “GaaS”
The Ten Success Attributes
   #9 World-class e-commerce system.
The Ten Success Attributes
                                #8 Publishing platform allowing 3rd party integration.
Publishing Abstraction Layer




                                                             Publishing APIs



                                 Identity &     Matching &   Item Store &      Analytics &   Customer
                               Authentication   Messaging       Billing        Telemetry      Support
The Ten Success Attributes
#7 Aggressive focus on reducing distribution friction.


 Interest/Intent
     Clicks
   Downloads
   Activations
  Repeat Visits
    Payments
Repeat Payments
The Ten Success Attributes
    #6 Social marketing competence.
The Ten Success Attributes
 #5 Data-driven analytics and smart analysts.
The Ten Success Attributes
 #4 Virtual goods merchandising competence.
The Ten Success Attributes
   #3 Customer acquisition leverage.
The Ten Success Attributes
#2 Profound commitment to customer service.
The Ten Success Attributes
    #1 Great games designed for F2P.
What’s Next?
The internet has leveled the
 publishing playing field and
  de-centered incumbents
The Value of Scale
• Amortize e-commerce platform and cloud
  infrastructure across multiple titles
• Customer acquisition made more efficient
  and less costly by audience aggregation
• Decreased risk and dependence on single
  hit title / title longevity
• Potential access to public markets for
  capital, currency
The Value of Scale


   Reach matters!
Who are the contenders?
    Company                        +                              −
                           Huge hit with LoL
                                                             Single title
  Riot/Tencent            Great, focused team
                                                        No platform approach
                          Resources of Tencent
                             Steam user base
                                                       Packaged-goods mentality
   Valve/Steam          Online scale & experience
                                                         Distribution-focused
                         Great brands for F2P
                         Experience in Asia, BF3
                                                            Legacy business
    EA/Origin              Nucleus user base
                                                             Execution risk
                           Financial resources
                            Huge Asian base
                                                      Limited success outside Asia
     Nexon                   Experts in F2P
                                                        Lack of relevant content
                           Financial resources
                          Great brands for F2P
                                                      Packaged-goods mentality
Activision/Blizzard        Financial resources
                                                      “Have cake and eat it too”
                            MMO experience
                               Huge reach
                                                        Rep with core gamers
      Zynga                  Great analytics
                                                       Core development assets
                      Managers with core experience
Opportunity exists to create a
    new, multi-billion dollar
publishing business as packaged
  goods and console erode
www.playhawken.com

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GDC 2012: The Rise of Free-to-Play Core Gaming

  • 1. The Rise of Free-to-Play Core Gaming Mitch Lasky Benchmark Capital
  • 3. Free-to-play is the most important disruption in the core video game business
  • 4. Distribution innovation in video games has historically created the greatest wealth
  • 5. What is free-to-play? • Free-to-play is not a genre ... • Free-to-play is not a business model ... • Free-to-play is a MARKETING STRATEGY • Free-to-play is also a value creation strategy
  • 6. Part of Trend to Un-bundle Media Bundle Disruptor Result Album Napster/iTunes Song/MP3 TV Prime Time DVR/Netflix/Hulu Show/Episode Newspaper Internet/Twitter Story/Link 40 hour/$50 F2P/virtual goods Game as Service Video Game
  • 7. F2P & The Activity Chain Market Distribute Develop t Develop Beta Distribute Analyze & Market
  • 8. F2P and Revenue Cumulative Recognized Revenue Re-orders Returns Initial Order t Launch
  • 9. F2P and Revenue Cumulative Recognized Revenue free-to-play t Launch
  • 11. F2P is eCommerce Interest/Intent Clicks Installs Activations Repeat Visits Payments Repeat Payments
  • 12. Many business models are compatible with F2P
  • 13. F2P Business Models “Freemium”
  • 14. F2P Business Models Advertising-Based
  • 17. Why does the free-to-play + virtual goods model work?
  • 18. Player’s Willingness to Spend Demand Power Curve # of Players
  • 19. Player’s Willingness to Spend Packaged Goods Single point of demand/ pricing optimization $50 $ # of Players
  • 20. Free-to-Play “whales” Player’s Willingness to Spend Elastic pricing scales with demand $ non-payers # of Players
  • 21. Strategic Rationale for Free • Rather than pay millions for conventional marketing, use power of free to create reach, build brand, and generate virality and community • Transform AAA games into services that can command a share of customers day with engagement that transcends social game churn • Generate revenue and earnings by capturing elastic demand and pricing with virtual goods • Allow valuable, long-lived franchise properties, which have always been the drivers of publisher economics, to arise organically through continuous development rather than sequels
  • 22. Rise of F2P Core Gaming
  • 24. From 2005 to 2009, core F2P was primarily an Asian phenomenon
  • 25. Plenty of evidence from social gaming and mobile gaming that casual consumer in West would embrace F2P / Virtual Goods
  • 26. For core gaming, high production costs, uncertain monetization, and “innovators dilemma” led traditional publishers to favor hybrid models
  • 27.
  • 28. Investment Thesis (c. 2007) • Free-to-play removed issues of brand and entry barrier for new core publisher • Core gamers would be willing to pay for virtual goods in context of a free title with high production values and great game play • DotA audience was large, passionate, under- served, and accessible online • Had to go “all in” with pure free-to-play model; not hedge like traditional publishers
  • 29. Risks • Core gamers might perceive F2P as code for crappy Facebook games • Higher production costs required higher conversion & monetization to break even • Had to build next gen e-commerce business on top of great game • To attract desired audience, had to be authentic and legitimate heir to DotA; not opportunist but “for players, by players”
  • 30. ... it worked. 32.5 million installs 11.5 million MAU 4.2 million DAU 1.3 million PCU Source: Riot Games public release; November 2011
  • 31.
  • 32. The Ten Success Attributes for F2P Publishing
  • 33. The Ten Success Attributes #10 Scalable, virtualized hybrid cloud infrastructure. Public Cloud Data Center “GaaS”
  • 34. The Ten Success Attributes #9 World-class e-commerce system.
  • 35. The Ten Success Attributes #8 Publishing platform allowing 3rd party integration. Publishing Abstraction Layer Publishing APIs Identity & Matching & Item Store & Analytics & Customer Authentication Messaging Billing Telemetry Support
  • 36. The Ten Success Attributes #7 Aggressive focus on reducing distribution friction. Interest/Intent Clicks Downloads Activations Repeat Visits Payments Repeat Payments
  • 37. The Ten Success Attributes #6 Social marketing competence.
  • 38. The Ten Success Attributes #5 Data-driven analytics and smart analysts.
  • 39. The Ten Success Attributes #4 Virtual goods merchandising competence.
  • 40. The Ten Success Attributes #3 Customer acquisition leverage.
  • 41. The Ten Success Attributes #2 Profound commitment to customer service.
  • 42. The Ten Success Attributes #1 Great games designed for F2P.
  • 44. The internet has leveled the publishing playing field and de-centered incumbents
  • 45. The Value of Scale • Amortize e-commerce platform and cloud infrastructure across multiple titles • Customer acquisition made more efficient and less costly by audience aggregation • Decreased risk and dependence on single hit title / title longevity • Potential access to public markets for capital, currency
  • 46. The Value of Scale Reach matters!
  • 47. Who are the contenders? Company + − Huge hit with LoL Single title Riot/Tencent Great, focused team No platform approach Resources of Tencent Steam user base Packaged-goods mentality Valve/Steam Online scale & experience Distribution-focused Great brands for F2P Experience in Asia, BF3 Legacy business EA/Origin Nucleus user base Execution risk Financial resources Huge Asian base Limited success outside Asia Nexon Experts in F2P Lack of relevant content Financial resources Great brands for F2P Packaged-goods mentality Activision/Blizzard Financial resources “Have cake and eat it too” MMO experience Huge reach Rep with core gamers Zynga Great analytics Core development assets Managers with core experience
  • 48. Opportunity exists to create a new, multi-billion dollar publishing business as packaged goods and console erode
  • 49.