Measures of Success: Game Audience vs. Revenue
Over the years that the web has been mainstream (from about 1995 to the present) Internet companies have been fascinated with large audience numbers instead of traditional revenue figures. They believed that if lots of people came, then lots of people would pay (or advertisers would pay for them). The problem, as we learned in 2000, is that companies can’t pay office rent with eyeballs.
Unfortunately, I see game companies doing this as well. For example, a recent article on the rise of online games over console games discussed only the rising audience numbers with online games. Though I don’t argue against the premise that online games are rising in popularity compared to console games, the article seemed to ignore the big question of revenue. Console games have proven revenue, since the user needs to pay for the game to play it. Most Free-to-Play online games are not that way.
With the advertising industry collapsing wholesale and consumer spending down in most sectors, more online games (both F2P and subscription) are finding themselves struggling for air. Microtransactions are still in a relative infancy and larger percentages of players are holding off on buying more Gold, Points, Rewards, etc. Most of the F2P games are monetized by advertising with a minor (though growing) microtransaction component using either real money or CPA ads.
A lot of F2P game companies are now learning what the rest of the web industry learned in 2000 (and subsequently forgot). Eyeballs do not equal revenue. The Average Revenue Per User (ARPU) is the critical component to viability and success. In the past, the rule of thumb was 10% of users become paying users. Now I think that number is dropping significantly. I wouldn’t be surprised if more games are doing 5% or even less paying users. Unfortunately, such numbers are super-secret to each company.
As the economy recesses further, many companies that relied on eyeballs, registrations, audience size, etc. will be finding themselves without a revenue base to pay the bills and payroll with. This will cause an even greater shake-up in the industry than we have seen thus far.
This does not mean the end for gaming is coming, just as the dot.bomb crash did not kill the web. It means that our industry needs to focus on how to provide value to players that they are willing to pay for, instead of hoping that someday they will pay. Bubbles are founded on the hopes of future revenue, hopes for future ARPU. True growth is based on a foundation of current profit and incremental future growth.
Niche games based on a common platform are the future. A number of companies have worked on developing a platform that can be used for many different games. Make a niche game that pulls in 2k-3k paying users with a solid ARPPU (Average Revenue per Paying User) and a profit can be made provided development costs are kept in line. This would mean 20k – 30k active users, if we wanted to assume a 10% paying user rate which is common. The masses want everything for free. The costs involved with getting 1M active users (100k paying users) is becoming more difficult to cover.
Don’t try to make a blockbuster for the masses. Make a tight, focused game that can be developed to a beta stage in 2-3 months, released after a month testing, market within the designed niche and start making revenue. Use cheap pre-release marketing and buzz to gauge interest and market viability so that if the game has a low chance of success it can be canceled before all development and testing costs are incurred.
Once a base game is released, use the initial revenue to expand the game if justified. If the game flops (as Pareto’s Law of 80/20 says will), kill it and move on to another game. Only a maximum of 3-4 months of expenses are lost (instead of years with blockbusters). That leaves the company with enough capital to live another day with another game.
Remember the lessons of the dot.bomb. Active users alone do not make payroll. Only paying users pay the bills and the hosting costs. Find niche markets who are focused enough to be willing to pay for the game. When online game companies focus on that, the industry will recover.