How to select Key Performance Indicators for an Online Game?

Key Performance Indicators (KPIs) are very important in evaluating how your game is doing.  Some people believe that it is important to have every indicator measured as a KPI while some believe it should be a set of a few indicators.

In my opinion, KPIs should be high level numbers that encourage research and discussion.  If it was up to me, I would use the following KPIs:

• Peak Concurrent Users (PCU):  PCU is the most basic of online KPIs because it shows many things such as the following:
• Technical Issues:  Sudden drops in PCU indicate there was a major service issue or if there was a small technical issue.  For example, a small drop hints that one shard / server may have crashed while a total drop means the entire service went down. 
• High Level Player Engagement / Retention / Acquisition:  PCU over time tells you how your player base is trending.  If you have an acquisition program and your PCU changes at a rate higher than before, then it was successful.  If it remains the same, it was not successful.  If it drops, well you had a campaign that hurt the user base.  If you are not doing any acquisition and your PCU goes up, maybe a new consumer base found your game.  Who are these people how do you get more of them?  If your PCU is drop rapidly over time, your player engagement and retention is horrible.  If your PCU stays flat without any acquisition, your player engagement is good and your retention might be good.  You will need to look deeper to see if you have high organic acquisition and low retention which also might cause this.
• Informs Service Strategy:  PCU tells you at what time people play and when you would except the most service calls. PCU also dictates the amount of servers you need to support your game.  Not everyone is online at the same time so you need to make sure you do not over commit on server hardware.
• Competitive Impacts:  PCU will also change based on what your competitors are doing.  If you get a high drop in PCU, that means your competitors really hurt your game.  You will need to play for a counter attack.  If your PCU is not affected, that game was a different audience than your user base.  Should you check to see what type of user plays that game and why?  That is up to your longterm strategy.
• Operating Profit (OP):  OP is the most important financial measure besides ROI.  ROI is not a KPI because it should be campaign, program, or development based.  OP is a daily, weekly, or monthly measure that tells you if you should keep your game alive.  OP is more important after the initial launch of the game because it might lead to bad decisions before the launch of the game.  Only revenue and costs that can be made or saved by turning off the game should be factored in this number.  OP is an indicator of the following:
• Sustainability:  Remember that the investment in the game and all other prior investment are SUNK COSTS.   Keeping this in mind, this metric shows you how profitable the run rate of the game is.  Even if you do not cover your fixed costs, you are covering the costs of doing business and making enough to support other projects.
• Right Sizing the Business:  Once you launch, you will be able to see how successful your game really is.  Based on this, you can project your monthly OP.  If your OP is negative, you can lower some of your support costs.  Remember the vicious circle of Online Game Failures, cutting marketing to save money = lower acquisition.  Cutting Service to save money = lower retention.  Cutting new content to save money = higher churn.  Cutting everything to save money = no users.   Right size your business so that you have enough marketing, service, and content to maximize your OP!
• Economic Costs:  Even if your game is OP is positive, your OP% might be next to nothing.  You will need to compare keeping the game alive versus investing that monthly run rate into another project.  If you are doing your job well, the game should have a 70-80% operating margin or higher for an MMORPG.   This should make the economic costs of keeping the game alive very low.
• Churn:  Churn is very important metric because it shows you how well retention is and what average life is.  This metric is similar to PCU but is more focused on retention and average life.  Remember using the change in the subscriber base IS NOT CHURN.  Churn is the % of players leaving who had the chance to play the game!  The key ways this KPI is used is as follows:
• Retention Measure:  While PCU tells you how your overall user base is doing.  Churn, when used as Volume Churn, tells you how retention is.  Volume Churn is defined as follows Total Players Who Stopped Playing / Total Players Who Played the Game That Period.  Volume Churn controls for acquisition.  If you use just change, acquiring users may hide the any lose in players.  This metric does not do that.
• Average Life Estimate:  1 / Volume Churn is an estimate of your average player life.  If a service has a 33% churn.  1/ 33% =  3 months.  As you can see, this metric does work.
• ARPU:  As discussed before in a previous post, ARPU is a key indicator of your overall profitability by user.

Other KPIs that should be considered are based on your type of game:

• Conversion Rate:  Subscription based MMORPGs use Trial to Playing conversion rates versus Free2Play games use the % of their active player base who play.
• Daily Users:  A measure of player usage of your product.  PCU is a better indicator because of all the other factors it helps measure.
• Daily New Users:  A measure of player acquisition.  More important for Free2Play games that subscription based games.
• Average Weekly/Monthly Playtime:  A measure to tell you how longer your players are engagement.  Based on amount of content you have, you can project how long it will take people to complete the game on average.
• CS Satisfaction Scores:  How well is you Customer Service team is doing is very subjective.   Player Surveys or Satisfaction metrics are good at keeping your CS Support on the proper cost level.  The goal is to balance costs with good CS Support.  Free2Play games should have minimum support.  Statistics that should be included in this calculation are average response time, average resolution time, and player CS scores.

These are overall good high level metrics that after one glance can help you quickly evaluate how your game is doing which is the purpose of a KPI.  Any deeper metrics is a way to analyze the games performance and should be done in a more in-depth manner.  KPIs belong in a dashboard for all key stakeholders to review.  Once a problem is highlighted, then metrics to help explain the issue should be reviewed in EXTREME detail.  Metrics without context lead to BAD DECISIONS.  Every game is different so remember to keep that in mind.  Not all metrics are applicable to all things.

In addition, I personally like to use dashboards that list all key marketing and production activities that occured so you can visusally see the impact!

What is the future of Anime and Manga in the US?

This week there is not much "big news" about the gaming industry except for the large black friday sales and the IPOs of both Nexon and Zynga, so I will talk about the Anime and Manga industry this week.

Over the last few weeks, I have been expanding my reading of Manga to beyond the most popular Shonen and Shojo manga.  The amount of Manga being written is actually Manga being written is actually very incredible.  What is even more interesting is that a lot of anime is actually based on light novels, and if these light novel based Anime become popular, they are  turned into Manga.  Light novels are basically like the name implies, light novels.  They normally have only a few pictures.

Currently, anime has gained a foothold in the US market and has expanded to be accepted by most youths.  There are cable channels that now show Anime and the Cartoon Network has a dedicated time slot to Anime.  Disney also shows some popular Anime such as Naruto.  Because of this, manga has also grown with the growth of Anime.  A lot of good light novels are also being published in the US, but as to how successful they are I am not sure.  

Hopefully as these children grow older, Anime and Manga become more mainstream.  The video game market took a long time before it became as mainstream as it is today.  The same can be said about a lot of new forms of entertainment.  Some forms of new entertainment like Reality TV are adopted quickly because of its broad appeal.

The issue that Anime and Manga have is the stigma that is associated with it.  Even in Japan, Anime and Manga fans are looked down on and are called Otaku's.  Female Otaku's are called Fujoshi which means rotten women.  Also, in Japan, Hikikomori or "shut-ins" are normally associated with being gamers or anime fans.  These are all stigmas that the video game industry had to overcome.

There are studies in the West about how video games negatively affect people and there are the same studies about Anime and Manga. 

Hopefully, today's youth who are accepting of Anime and Manga will help make it a mainstream form of entertainment accepted by all.  

Micro-transactions and Social Gaming Adoption

If you do not subscribe to eMarketer.com, you should.  They always have nice data points such as the two charts below.






These two data points are very important trends because it helps justify what many people are writing about which is that micro-transactions and social networking games are here to stay.  Why are these facts important?

First, Social Networking Gamers are getting younger.  This is very important because it means that social networking games are becoming a broader audience.  The majority of social network gamers are older women.  Though some companies like Kabaam focus on male social network gamers, the majority of companies fail in that market.  The fact that younger gamers are playing social networking games versus mobile games (the traditional stronghold of young gamers) shows that as these gamers grow-up.  The core social networking gamer will also expand beyond its current market.  The male oriented social networking market will grow and become more viable.  The great part is that the current generation of youth will have access to social networking games not just by computer but also by tablets and smart phones!  That means that social networking games will become even more ubiquitous.  Of coarse, as I wrote previously, social networking games also need to evolve into higher end games which we are starting to see with the games being released during the 2nd half of 2011.

Second, the main method of monetization for social networking games is no longer advertising or trial offers.  Some game companies do succeed in creating advertising partnerships and in-game branding but banner adds are no longer as profitable as they were before as user tracking and ROI analysis has become more accurate.  Trial offers have become a negative source of income as users and especially adults find these payment options very untrustworthy.  Fortunately, micro-transactions are a viable source of revenue.  Right now, whales are the main source of revenue, but as the micro-transaction graphic suggest.  Micro-transactions are growing and become a widely accepted form of payment.  When I first started working on a micro-transaction game company in the US in 2005/2006, many people doubted that users would be willing to do this.  Now it seems like everyone is questioning why people still offer subscriptions.  Micro-transactions are growing every year and micro-transaction acceptance is almost universal.

Social networking gamers will grow and they will be able to pay with micro-transactions, but people must remember that console games and subscription based online games will still succeed.  These "premium" game markets will exist in the premium market, but the majority of the population will migrate to social network games or other forms of free-2-play games which are powered by micro-transactions.

What is the big deal with Kindle Fire?

The last week and a half the news has been filled with Kindle Fire and Barnes and Noble's equivalent.  Because the Nook nook only allows 1GB of storage for non-Barnes and Noble bought apps and the fact that most websites and reviewers have noted that the Kindle Fire is superior, I will ignore the Nook for now.

The most important thing for me to consider is how important is the Kindle Fire to the gaming industry?

The most interesting facts that have been reported the last week in the 1/2 are as follows:

• Ipad is now considered the #1 most requested / wanted gaming platform for kids per Nielson.
• By the end of 2011, iOS and Android based gaming revenue will surpass portable game revenue (ie DS, PSP, etc...)
• iOS and Android games have or will soon surpass mobile game sales.
• Developers support development for the Kindle Fire because of its low purchase price and current demand.
• According to surveys, Kindle Fire has the 2nd highest purchase intent after the Ipad and Ipad users are considering switching to the Kindle Fire.
• Users who are intending to purchase a table in the next year find the Kindle Fire a better option than an Android based Tablet.

Based on all these facts, the Kindle Fire has the potential to be a strong player in the portable gaming market.   Since tablets are being adopted by adults and now by children alike, they will be here to stay.  In fact, once they become powerful enough, they will probably replace netbooks and laptops.  Remember watching those sci-fi movies or shows where people used very thin tablets to do computing, that maybe coming in 5-6 years.

What will determine a platforms viability is content, which is why the support from developers is essentials.  With game companies already making products for the Kindle and other developers also expressing support.  Content will probably not be an issue.  Also, Kindle already gets content from Amazon's expansive book deals.  Kindle Fire, like the Ipad, also offers web browsing and other features.

At $199, Kindle Fire has a very low price point that will probably fall in less than a year.  This makes it a perfect medium to be adopted by the mass consumer.    For the gaming marketing, $99 and $199 is considered the ideal price points for a console to go mainstream.  Since Kindle Fire is not just a portable console, but can be used for many other things.  This gives it added utility.

Kindle Fire has the support, usability, price, and distribution reach (tons of people use Amazon.com right?!) to be a strong #2 player for tablets.  It maybe the Android equivalent to the iOS on smart phones for Tablets.   Unlike the Android, whose market place was not very strong in the beginning, Amazon's awesome marketplace will make selling games and other apps very easy right off in the beginning.

Remember what everyone says, once someone says that a platform has arrived, you just missed the boat.  Kindle Fire is in its infancy and maybe a great partner to break into the portable gaming market with.






ADDITIONAL NEWS FROM MOBILE BEAT:

http://venturebeat.com/2011/12/02/kindle-fire-ships-3m/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+Venturebeat+%28VentureBeat%29

Kindle Fire ships over 3M units, may already be no. 2 tablet after iPad

December 2, 2011 | Sean Ludwig

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Amazon’s ultra-cheap Kindle Fire has already shipped between 3 and 4 million units. Combined with news of excellent Black Friday sales last week, the Fire may already be the number two tablet after the Apple iPad.
As far back as August, analysts have predicted that a less expensive, Amazon-made alternative to the iPad could sell up to 5 million units before the end of the year. Amazon appears to be making those predictions a reality with its Kindle Fire, which retails at $199 and can be used to read e-books, browse the web, play casual games and download content like movies and TV shows. If it sells more than 5 million units, the Fire would be the best-selling Android-based tablet in the world, beating high-profile tablets from Samsung and Motorola.
The 3-to-4 million Kindle Fire unit shipping estimate comes courtesy of Digitimes. Citing unnamed sources, the report says Quanta — Amazon’s manufacturer — has already shipped up to 4 million units and will likely have 5 million shipped before the end of 2011.
The Kindle Fire launched Nov. 15 and features a 7-inch screen with 1024 x 600 resolution, a TI OMAP4 dual-core processor and 8GB of on-board storage. The tablet offers applications from Netflix, Facebook, Rovio, Electronic Arts, PopCap and more, which likely fueled adoption.
The Kindle Fire’s two largest competitors are the iPad, which retails for a minimum $499, and the Barnes & Noble Nook Tablet, which runs for $249. The iPad does a whole lot more than the Kindle Fire, but because it costs at least $300 more, penny-pinching consumers may decide they can do without those extra features. The Nook Tablet offers better base specs and performance than the Kindle Fire, but it lacks a content ecosystem of movies, TV shows and music to download.

Are Subscription Based MMO's Dead?

With World of Warcraft losing 800K subs the last quarter and over 1.3M the last 2 quarters, a lot of people are writing that subscription based MMO's are dead.  Some are touting that Star Wars:  The Old Republic will be the last large subscription based MMO.

Warhammer 40K: The Dark Millennium noted that they will be using different business models based on the region but will still use subscription in the west.  Blizzard's next MMO, Titan, and Elder Scrolls Online may still be subscription based.  These games may switch to a Free2Play model but as I noted earlier there are a lot of factors that must be considered.

A good case study would for the possible direction of the market is the Korean Online market.  Over 10 years ago, Korea was only dominated by subscription games such as Legend of Mir, Mu, Lineage, and Ragnarok.  Because of the highly competitive nature of the market and the extreme costs of development, new MMORPGs were unable to gain any traction.  In order to survive, publishers started created extended open beta programs.  These are different than US beta programs in that these games were basically live versus just restricted to a select number of customers.  These allowed Publishers to showcase their game and try to make users tied to their game before they started charging a subscription.  Players were not wiped, but to continue playing their character they had to pay a subscription.  Soon all publishers adopted this strategy, but this actually hurt the overall market.  Players started just moving from beta to beta now that they constantly got free access to new games every couple months.

Soon the Free2Play market developed as game companies turned to Free2Play models to monetize and retain players.  The market started to divide as between Free2Play games and MMORPGs which is what is happening in the US.  Free2Play game have different cost dynamics that Subscription based MMOs so both have their own niche and continue today.  Korea's top 20 game list is always dominated by Free2Play games but LineageII, World of Warcraft, and Tera are still strong subscription based games.  Rift also just got a publishing deal in Korea showing how subscription based models are still doing well in Korea.  I believe this will be the case in the West for a few more years.

Subscription based models will eventually fade if the following factors occur:

• Free2Play MMORPG content is just as good as Subscription MMORPG content.  Subscription based MMORPG content costs more than 50M-150M to develop.  The PC hardware requirements and online service requirements are also very high which make the audience limited and the costs of hosting Free players too expensive.  A lot of successful Free2Play converted MMORPG games that have profitable operation models but will take a long time to recoup their original development and investment costs.
• The barriers to playing premium subscription based MMORPGs disappear.  By barriers, I am referring to any fiction that prevents players from entering the game.  This includes costs of a box.  Either, players pay $20-50 to be able to access the game early or downloading the game is just free.   The other major barrier is the time and effort it takes to download a premium MMORPG.  With the lowering costs of bandwidth and the increasing speeds of bandwidth, this may be a mute point in 1-2 years.   For a Free2Play game to succeed, the hurdles to trying it must be close to zero.
• Free2Play monetization strategies are adopted by designers of Premium MMORPG games.  Current, Premium MMORPG games are not normally designed to maximize the monetization of Free Players as most designers believe that buying gold or selling items that effect gameplay will ruin the game.  These are actually some of the best selling items in some Free2Play games.

Subscription based models will continue to be viable for the next few years but as the market evolves and technology changes. Subscription based models may become obsolete but that will not be for a few more years.

Converting Subscription MMOs to Free2Play MMOs

Over the last few months, City of Heroes:  Freedom, Lego Universe, DC Online, Lineage II and yet to be release Neverwinter Nights (by Cryptic) have all announced that they will be converting from a Subscription Model to a Free2Play Model.

DC Online noted that in 2 days they had an increase of 200K subscribers while Lego Universe announced they will be shutting down.  Previous MMOs that have converted to this model also had a mix of success and failures.  The most successful conversions have been Dungeons and Dragons Online and Lord of The Rings Online which are both run Turbine.  The majority of other games that have undergone this conversion have failed.

What separates the winners from the loser?  The most important thing to note is that converting form Subscription to Free2Play is not a panacea.  It will not fix your game if your game inherently is not very good.   Developers need to take a deep look inside to see if a game is not doing well because it is fundamentally flawed or if having a subscription is causing too much friction.  If the game is fundamentally flawed, what changes need to be made to make it "fun"?  Switching to Free2Play can help give your now improved game a 2nd life because players can now experience the "new and improved" content with no blockers.  Free players can then help evangelize your game, but if the game is not very fun, these free players will just help spread negativity about the game.  If the game is fun but is not superior to an older competitor, going free might give the game the edge to overcome your competition.  In a market where you need to steal market share, going free will allow players your competitors products try your game for free.  Playing for free will helpfully help "hook" these players and thereby increase your usage and revenue.

Going Free2Play is just half the battle.  What made Dungeon and Dragons Online and Lord of the Rings Online successful is because they spent a lot of time redesigning the game and testing the F2P model in the context of their game before fully converting.  Converting to Free2Play is not just simply adding a free component monetized by a combination of area fees or micro-content.  Converting to Free2Play means adding a frictionless in game payment system, adjusting the economy to account for free versus paid items, developing a complex and dynamic business model, creating natural friction that not only increases micro-transaction purchases but does not lead to so much friction that causes free players to quit, and developing a more streamlined registration to login system.  Working on Free2Play games, one of the biggest hurdles one faces is just having a player register and download a client.  You will experience drop off from these steps so they need to be optimized.

As Mike Morhime noted in an interview with Eurogamer.net, Free2Play is not for everyone and subscription is optimal for games like WoW and Star Wars: The Old Republic.  The game you develop must be developed with the business model in mind.  Converting from one model to another means you need to change fundamental aspects of your game.

Some things to also note is that you need to adjust your costs per user to account for free users if you convert from subscription to Free2Play.  Your Customer Service, Billing, and Server Infrastructure all need to be adjusted.

ADDITIONAL NOTES:
Lineage II and Star Trek will both be going F2P.

Viz Media and FUNimation

Viz Media and FUNimation are both well known Anime / Manga distributors based in the United States.  Viz Media is in San Francisco, California while FUNimation is located in Flower Mound, Texas.  Their strategy is very similar to each other as the Anime has grown in popularity in the US. 

When I first attended AnimeExpo in Anaheim and FameCon in San Jose in 1998, both were still very "Underground" as the majority of showings were Fansubs and, in fact, a lot of the the merchandise being sold was not even legal imports.  In 1998, AnimeExpo had 4,883 attendees and in 2011, AnimeExpo had 47,000+ attendees according to Wikipedia.  Today, both anime conferences no longer show fansubs and only sell legally licensed merchandise. 

Traditionally, Anime and Manga were only sold in boutique specialty stores.  This later expanded to retail book chains and some video retailers.  A few years ago, websites such as CrunchyRoll.com started to monetize these products digitally by offering a premium subscription to those who wanted instant access to new anime and full access to a complete catalog versus the free version which was always one to two weeks behind.

This leads me up to where Viz Media and FUNimation are today.  As they own both retail and digital distribution rights to some of the most popular Anime / Manga in the West, they have started a combined digital and retail strategy.  If you go to there respective websites, you will notice that you can watch any anime that they have for free and they help monetize this by up-selling on their website.  

Will this strategy be effective? 

First, the fact that is free makes one wonder, but with the high amount of piracy in the industry websites that show this Anime for free on their own.  Showing Anime for free is an Anti-Piracy measure.  Since their Anime is higher quality with better subbing, they are able to compete with illegal fansubs.  Also, this helps grow their audience and their user base.    FUNimation is known for their aggressive anti-piracy stance suing a lot of illegal torrent downloaders, but this in itself is not 100% effective.  Per a recent anti-piracy case involving US movies, ISP's cannot disclose user information unless it is that user is confirmed to have downloaded the IP versus someone stealing bandwidth.  As in the case of the US movie lawsuit, after the action is filed, the ISP has 1 month to get these users confirmed and submitted to the plaintiff.  So some suspected users are able to avoid this by not identifying themselves. 

Second, this digital strategy helps promote the sales of their Anime / Manga / Other related products.  As hardcore fans will purchase these items as they are collectables, it will help increase overall sales box products.

Third, this strategy helps build a loyal fan community and an effective marketing tool.  FUNimation seems father along in this sense than Viz Media.  Building a community is very difficult, but very important as you can grow this community into evangelist to help spread your product.  Also, these users can be used as a test bed for what products will be successful to your core audience.  Of coarse, if your looking to expand your audience, these users would not be as helpful. 

In the future, I expect these websites to evolve their monetization strategy to include one or more of the following monetization techniques:  pre-post add rolls, a premium subscription for unlimited views and no ads, pay-per-view system like WildTangent (get involved with the community get more views), etc.  I eventually feel that other items such as games, icons, and other fan items should be included to increase the stickiness of the site.

In the long-run, content is king as everyone says in the gaming industry.  These two Anime/Manga heavy weights have the content.  It is a matter of time until they become king unless they rush it to fast or make any mistakes.  I for one believe the current path they are following may work.

Conversion Rates

As some of you might have read, Team Fortress 2 saw users increase by 5x with a 20-30% conversion rate versus the typical 2-3% which is considered the norm for F2P. 

See http://www.geekwire.com/2011/experiments-video-game-economics-valves-gabe-newell for more information on the Valve Team Fortress 2 Experiment.

Conversion rates should be based on your target audience versus your platform.  Consider the following:


Female Oriented Games:

• Female Oriented Casual Games Downloadable Games (Bejeweled, Luxor, Diner Dash, etc.) have standard conversion rates of 1-4%
• Female Oriented or predominately Female Social Network Games (FarmVille, CityVille, Restaurant City, etc.) have standard conversion rates of 2-3%
• Young Adult or Female Oriented F2P client games had conversion rates of 2-6%

Male Oriented Games:

• Male Oriented Downloadable Games (Fate, Torchlight, etc.) have standard conversion rates of 8-20%
• Male Orient or predominately Male Social Network Games (Kingdoms of Camelot, etc.) has conversion rates of 6-12%.  Kabam noted in a GamaSutra article that they had a 10% conversion rate for one of their smaller games.
• Male Oriented F2P client games had conversion rates of 6-18%

As you can see from the above data points, the conversion rates for male oriented games are a lot higher than for female oriented games.  The main issue is that a lot of male gamers also play hardcore console and PC games so their expectations are a lot higher as they compare their gaming experience in the console world with casual games.  If you follow XBLA converge, you will always notice that XBLA sales are always impacted by large console game title releases such as Call of Duty, Grand Theft Auto, etc... 

What is great about male oriented Facebook games and iOS/Android Games is that these games are not only free but always available to play when you cannot play hardcore games.   They also are on networks that are now ubiquitous.

 Male Oriented Facebook games are currently a small market compared too Female oriented Facebook games, but with War Commander and Maple Story games showing how the technology for Facebook games are now reaching the same level as some F2P client downloadable games.  I believe that Male Orient Facebook games will start to grow.  Pretty soon action arcade games and RPGs will be found in facebook games and this will be when the market really grows.

Mobile games can be played whenever your waiting in line or sitting in the bus.  The reason why freemium games are doing very well on iOS/Android is that players who are hesitant to pay for the game because they would rather spend their money on other items like console games.  Letting players play the game for free and spend as much as they want will maximize the monetization the game while increasing viral marketing.

As I noted before, just make sure you the costs of the games you develop match the opportunity.  If you are a male oriented game, use the lower portion of the male conversion rate and bench market MAU/DAU against male oriented games.  Do not expect to have a top 10 game.

Why Some Games Just Do Not Translate Well?

NOTE:  I wrote this in July 2009 for my friends blog.  I thought it might be interesting just to include it here.  

The original blog this was posted on is below:
http://www.thisisgame.com/go/2009/07/27/editorial-why-some-games-just-do-not-translate-well/
 BTW if you want gaming news on Asia this is an interesting blog.

Looking for the Big Bucks:
Regardless of whoever’s statistics you use (DFC, PWC, Screen Digest, etc.), the North American (NA) online gaming market is one of the 3 largest in the world.? As a result, various groups have looked to this segment as a means to expanding their revenue.? Traditional US retail publishers see the NA online market as an additional platform to grow their revenue; entertainment companies like Disney see it as an additional way to reach and expand their consumer base; while international online game stalwarts such as NC Soft, NHN, and Nexon see this market as a natural place to leverage their online gaming expertise.
Unfortunately, success has been very elusive to most.? For every, World of Warcraft, Runescape, Dofus, or MapleStory, there have been hundreds of games that have failed.?? This is particularly true with the “Free2Play” market.
Many see the “Free2Play”?market as next big thing.? Some even say that the “Free2Play”? market will replace the console market entirely.? Like many of you, I have my own opinion on this, but what I wanted to discuss today is why so many so-called “Free2Play”?experts who enter this market fail.? Many companies trying to enter this market are either importing Asian “Free2Play”?games or using Asian expertise developed by partnering with a “Free2Play”?developer or learned by developing games for Korea and/or China.?? The reason why people who enter the US market using these methods have a 90%+ change of failing is because a slight cultural differences that make a HUGE impact on the “Free2Play” market.? Success in Asia does not necessarily translate to success in the US and vice versa as many US companies have already found out.
US and Korean Cheaters Follow Different Rules!
One important cultural difference that has been pointed out to me by many different Asian Operators in the US is how widespread cheating is.? The reason why cheating is more widespread in the US is not because Americans are smarter or Koreans are more honorable, but it is because Americans like to share their cheats while Koreans do not.
Let us take a look at how this one small fact has a large impact on how a company would operate in Korea versus US.? For example, a handful of customers discover that you could exploit the game by doing “XYZ.” In the US, these customers would actually share this information to either gain the respect of their peers or just be popular.? In a few days, this exploit would be in the forums and be abused throughout the community.? Because this has become a widespread problem, the game team must develop a patch to fix this issue as soon as possible and must make the customer support team monitor this issue.? If this issue is completely widespread, the customer support team would have to go though the logs of every player suspected of cheating.
On the other hand, in Korea, these customers would try to exploit this issue for as long as possible and keep the information to themselves.? The game team and customer support team will have a more difficult time to find this issue, but once they do, the damage will limited and easier to control.? Of course, if this does become widespread, the Korean game company will have the same issues as a North American game company does.? Game logs and the ability of customer service to analyze them quickly and accurately is the only to correct widespread cheating.
“Free” is a Free Pass to Cheating!
Exploiting the “Free”?in “Free2Play” games is easy in the US versus Korea.? Any time a US subscription based game does a “Free Trial” program; the company must create restrictions on the “Free Trial” account for this reason, to prevent cheating.? For example, 4 years ago I was working on an MMORPG that decided to do a “Free Trial” program to boost the user population.? After the first day, Marketing declared it a success, but it was actually a customer service nightmare.? Thousands of new accounts were being created because a few people figured out you could make as many free accounts you want and “gift” yourself the “in-game” money you get for creating an account.? This became widespread knowledge overnight as it was posted on all the forums and talked about in-game.
Furthermore, hackers have exploited the “Free”?in “Free2Play”?games by making thousands of accounts with illegal credit cards.? Even if you ban accounts used by hackers and exploiters, they can always make another free account.? In Korea, this exploitation will never occur because by law every game account is tied to one unique personal identifier which is similar to your SS# in the US.? When Korean companies come to the US, they are normal victims of these “Free” account schemes.? To combat these issues, publishers of “Free2Play” games have implemented the following solutions:

• Limit gifting by either limiting the items that can be gifted, limiting the level when one can start gifting, or limiting gifting to paying players.
• Limit spending by transaction amount and or volume of transactions
• Limit account functionality until it is verified

Do not forget that every game is unique and every game needs its own form of regulations to correct for these issues.
Practice! Practice! Practice!
Another issue that many Asian companies fail to notice or address properly is the importance of a tutorial or single player experience for Americans. ? Many “Free2Play” games in Korea are player versus player such as Audition, KartRider, Gunbound, Dungeon Fighter, and others.?? In?Korea, a lot of companies say that it is okay for newbie’s to get beaten by superior players, and some have ventured to say that free players are cannon fodder for good players to pawn.? In the US, this considered poor match making design and a horrible customer experience.
Unfortunately, most online players actually do not like competitive multiplayer experiences.? I have seen a lot of statistics on this, and one person I talked to mentioned that 80% of WoW players like to play by themselves.? In fact, most studies show that players do enjoy the social aspects of the multiplayer games such as chat and guilds, many prefer to quest by themselves and at their own pace. Some players us online games as a way to stay connected with their friends, but prefer to not play with people they meet “in-game”. ? Ironically, the must successful “Free2Play” games in the US are very single player based.? MapleStory, Runescape, Dofus, and Club Penguin does not require you to play with other but rather you kill npcs or play mini-games.? According to research I have conducted, the majority of players playing multiplayer games would like to be able to learn how to play the game first before playing with or against other players.? They do not want to get embarrassed or pawned over and over.
One of the keys to being a successful multiplayer game in the US is the ease of transition from actually learning to play to competing.? Another key is proper matchmaking system or skill-based match making system that a lot of Korean games do not employ.

ARPU vs ARPPU

ARPU is average revenue per user
ARPPU is average revenue per paying users

When people develop metrics for games, many people debate the importance of ARPU vs ARPPU. Everyone agrees both are important but people debate what should be the key metric. 

Traditional game companies that originally started off with only subscriptions models always note that ARPPU is more important because its important to see what your revenue for paying user is since your free users are going to quit really fast anyways.  This especially true for traditional subscription based models where players buy a box for the trial and only have 30 days but have to pay to play the game afterwards.

Free-to-play companies on ARPU because they have a lot of free players and need to make sure their variable costs are covered by their variable revenue.  ARPU also helps you understand the overall revenue for everyone in your system. 

When looking at them as a pair, ARPU tells you how profitable you are and ARPPU tells you how well your monetizing your paying users.    So what is more important?  I would say ARPU because of the following reasons:

• Profitability is the most important number for any business.
• APRU tells you how much revenue your making for every player not just paying ones.  It is important to remember that free players also costs money to support.
• Free Players use up customer support costs, bandwidth, network infrastructure, and other hidden variable costs such as player experience (if you have negative free players) and latency if its a p2p game.
• Player acquisition is a marketing intensive activity.  If your average cost per acquisition (People should NEVER use cost per click) higher than your average lifetime ARPU then you might as well give away your money unless you have other goals that losing money supports.
• Free players are just as important as paying players.
• The most important thing is free players may eventually convert.  Yes the majority of Free 2 Play (F2P) games are powered by big fish or whales.   Some games have 2-20% conversion rates (depends on the platform and target audience - though mainly the target audience) with only 1-5% of those players making up the majority of revenue for the game, but your goal is to increase revenue not just from the 1-5% who pay the highest but also everyone else.
• Free players provide social networks and opponents for paying players.  Many people do not pay for Facebook games but you hear about them from your friends playing them.  It is very viral and maybe one of those random friends will be your next whale.  Also, in some client based games there is no AI to play with players are your only opponents.  Free players provide paying players people to compete with.  Free players also become friends of paying players which make them more likely to stay longer and pay more!
• ARPU is easier to forecast than ARPPU
• This many not be an important many people.  The larger the sample size the easier is it to use trend analysis as your combining many factors into ARPU, namely conversion %, retention % or average life, and ARPPU into one number.  To do a assessment of a business, you every number but if you need a simple model ARPU will do.

Remember these are just ramblings of an analyst so please give me your feedback, argument for or against this, or any topics that might be interesting to discuss.

12 Months Free Subscription for 1 Free Copy of Diablo 3 Analysis

The office has been buzzing about the Blizzcon announcement of giving a free copy of Diablo 3 to anyone who signs up for a WoW Annual Pass.  Below is the link to the Kotaku coverage of it.

Kotaku Coverage of Annual Pass and Free Diablo 3

As an analyst, it is hard to resist analyzing the impact on ATVI stock and the future earnings of Blizzard.  Why would you give up a free copy of probably the best selling PC game of 2012Q1?

Lets do a simple costs benefit analysis.

First, we need to understand the current economics of WoW in the western hemisphere.

• WoW is roughly at 5-5.5M Subscribers in the West paying between 12.99-14.99 depending on your method of payment.  Lets use an average revenue of $14.00 (the actual number is actually higher by a few cents I believe).  The east uses a pay time card model and makes a LOT less revenue per month and will have a very different impact
• Let's assume for simplicity sake that WoW loses 5% of its subscribers every month starting at 5M.  For ease of calculation lets assume its 250K subs a month.  
• WoW subscribers normally drop per month until the month prior to an expansion release were they either return to close or exceed the prior expansion's high.  Their expansion release in Nov normally exactly 2 years after the last one.  That would be 9 months of decline assuming there is a bounce back of subs in October. 
• 9 Months of lost subscribers * 250K * $14 + 8 Months of lost subscription * 250K * $14 ... + 1 Month * 250K * $14 = $157M of Lost Revenue due to subscription Lapse and a drop of 2.25M subscribers by the beginning of October.
• As you know MMOs are dynamic and we will assume the launch of SW:TOR, Guild Wars 2, and other MMOs will off set the gains made by their big content patch.

Second, we need to estimate the number of subscribers who would bought Diablo 3 and kept their subscription other wise.

• Of the remaining 3.5Million subscribers, how many people are actually unique players?  As most people know many MMORPG players in general own multiple account.  Some own over 10.  Some games I have worked on had crazy ratios of subscribers to players.   For this analysis, lets be conservative and assume 1.25 accounts per player.  It is probably higher but WoW as you know is a different breed of animal as it is "casual" compared to EQ, Lineage, and others have a ratio higher than 2.0 accounts per player. That would 2.24M Unique players.
• Of these 2.24M unique players lets assume 80% would have bought D3 other wise.
• 2.24M X $59.99 * 85% to account for SRA = $114M.

Third, we need to estimate the number of  subscribers who we kept that would have purchased Diablo 3 otherwise.

• We assumed we lost 2.25M subscriptions at 1.25 accounts per player equals 1.8M Unique players
• We will assume that 70% would have bought D3 which would have been 1.8M unique players times 70% or  1.26M copies.
• 1.26M X $59.99 * 85% = $64M

Fourth, lets do the simple math!

• +$157M of Lost Revenue Regained - ($114M + $64M) of lost revenue from not selling D3 equals $21M of  loss.   This may seem bad but there are other factors that need to be considered. 

Other Factors:

• Diablo 3 AH impact:  Assuming you get 1M additional Diablo 3 Users and using traditional F2P metrics.  We will assume that 10-20% will conduct microtransactions and spend an average of $60 a year.  Lets use 10% and $60 for conservativeness.  1MM X 10% X $60 = $6M of of Revenue
• Blizzard Publishing Impact:  More Battle.net users = higher royalties and higher platform sales!  More players more money!  With Blizzard DOTA and other titles being released, blizzard is very motivated to keep their Battle.net users high.
• Stock Market Impact:  Now blizzard can count Free Diablo Downloads as D3 sales and can maintain their subscribers number for 1 year!  That makes them a attractive investment.
• Blizzard Micro Content Impact:  Blizzard sells virtual pets and other items and with changes to their game they can add even more micro-content.  Blizzard will now have kept all the wow subscribers it might have lost so that they can easily buy a pet even if they are not super active.
• Other Positives:  Marketing benefit.  Its easier to reach consumers you have not ones you lost.

Please leave your comments as I want to know your opinion.

Identifying Market Potential

As I noted in my earlier post, you need to find the right product with the right costs for the right market.  Even if you have a cheap product, it will not matter if the market does not exist.

Evaluating the market can be easy or can be very difficult. As many people say, if everyone knows about it.  It is probably already too late.  The market is probably near saturation and there are tons of other players trying to enter the market.  If your a big player, you can afford to take these gambles but if your small you really can not.

I have worked for 2 publishers.  When I worked for one of the top 2 publishers, the strategy was to maintain its lead and grow by adding what it lacked which was innovation.  Too that effect, it would wait till markets matured and bought IP and studios that were at the top of that market.  A small publisher cannot do that.  The other publisher I worked for was a top 10 publisher but as you know, the top 2 publishers dominate all other publishers below them.  Some publishers such as THQ find a niche such as PC RTS games, Children's Titles, and the WWE/WWF and UFC licenses.    Ubisoft got lucky betting on the Wii and was able to grow they were also very fortunate in tying up the Tom Clancy Franchise. 

The publisher I was working with decided to try to gain market share by trying to enter two, at that time, dormant markets, XBLA/PSN and F2P games.  I am going to focus on the XBLA/PSN market for the purpose of this write-up. 

When we first entered the XBLA/PSN market, no other publishers were making games for it except for Microsoft, Sony, and small independent studios.  We quickly discovered that the we could make small games that quickly made a few million dollars of profit.  That type of ROI is not something any of the big publishers cared for, but it was good for our small publisher.  After publishing over 5 games and getting data from some of our competitors who were in talks with us, I was able to develop an accurate forecast model.  When compared to the sales of games today, the model is still proven to be sound.  Based on this, we knew what we could make assuming we had a hit title.  This helped narrow our market opportunity down.  If we knew what the costs to enter the market was, we would know the opposite.

We were very successful in the beginning but then everyone started entering the market and the cost of doing business started increasing.  Eventually developers wanted to spend millions of dollars to develop titles that would only sell a max of 1M units.  With platform fees and other costs included in development, these titles, though being top 10 titles, would actual lose money.  One title that is a top 10 title, that I will not name, costs 2x more than it made.  It was hailed as a success but the developer as they were able to make a profit but the publisher did not make any.   They, in fact, lost money.  It is important to understand the market to make the right title to fit it.   Just because a title is perfect for a segment does not mean it will make money.

Just remember that the license and costs need to fit the market.  You can create a new market but that is rare and reserved for players with first mover advantages or who can revolutionize a genre to make it mass market.  Just because you are smart does not mean you can do it.  I always say the best example of a good entrepreneur is someone with strong self-belief, a strong team, an unbend-able will, and a good exit strategy. 

Personal Feelings Vs Money

Today, I am going to give an example of why personal feelings should not be used to evaluate products.  

When evaluating products, you need to know both the market you are going to sell the item and the costs.  Today I will focus on making sure the market and the license / IP mix using One Piece as an example.

One Piece is one of the most popular anime/manga properties in Japan.  In some rankings, it is higher than Naruto and just lower than Dragon Ball Z.  All 3 are top Shonen Jump properties and have a huge hardcore anime following.  Naruto and DBZ both did very well in the US.  BDZ games were a mainstay for THQ and even spawned a horrible US Real Life Action Movie (please do not watch it...)   Naruto also is also very successful in the US.  One would expect that One Piece, a anime / manga based on a pirate theme would be successful.  But that is not the case.  One Piece has been released in the US twice and both times have met with very limited success.

I believe, and please tell me if you disagree, that the reason Naruto and DBZ succeed where One Piece fail is because the content does not work well when translated to the US because of cultural differences. 

DBZ would probably be pitched in a boardroom as Monkey King meets X-men.  Super heroes with the abilities to fire energy balls is actually very acceptable to US culture.  People may not be familiar with the Monkey King references, but combat is actually the main focus of the story.

Naruto would probably sold as a Comedic Ninja story.  The powers and abilities that the characters have in the beginning are actually normal ninja abilities that American's are used to from how Ninja's are depicted in the US.  As Naruto and company grow older, their stronger and more outlandish powers are acquired by a "natural" progression and thereby easily acceptable.

One Piece would hypothetically be summed up as Pirates of the Caribbean meets Anime.  You have an idiotic captain who is seemingly not that bright trying to become the Pirate King.  The overall pirate setting would translate well, but Luffy's actual power does not resonate with audiences in the US.  He is made of rubber?  When I first heard of it, I thought it would be extremely stupid.  In the Japanese version, the voice actor is a female and Luffy is made to sound more childish and playful which is his nature in the manga.   In the US version, he sounds a lot older and is voiced by a man.  The way he acts and sounds do not mix.

It will be interesting to see if an Anime like Fairy Tale would do well in the US mainstream.  I find the manga a lot more compelling than the anime.  

Also, its important to know that if you hate it, it still might sell.

Introduction

As part of the many hats I have worn in the past, I have evaluated intellectual property or IP to understand what would sell.  The fun part about this is that you actually get to read the screenplays, pitch docs, and concept work that goes along with it.  If it is an existing IP, you have an excuse to buy the DvD collection, Book, or whatever median that IP is published in.

As a huge anime fan, I want to write my objective option on what types of anime currently in Japan may sell.  I know video game companies and cartoon distribution networks have started seriously looking into importing anime when Naruto became a huge hit a few years ago.  Today Anime gets licensed to the US even before its created.

As a fan I also what to write my own reviews of Anime, which has nothing to do with market potential but a lot to do with my personal interest.

The most important thing you must do when evaluating anime or a game is to separate your personal and private interest.