Free-to-play (FtP) business models

Why does Free-to-play matter as a part of the gaming industry?

The business of gaming is an incredible one and an important one. There are over 3 billion gamers worldwide (source) and the mobile gaming industry reached over $90B in revenue in 2021 (source). Gaming as an industry is growing with the introduction of new consoles, ever improving PCs, and faster phones that can handle more intense functions of gaming. There is even a massive peripherals market of $4.5B in 2020 (source). Of course, people reading this don’t need convincing that this is a subject worth talking about. The more important aspect is how is this revenue generated and what does it mean for some of these games to ditch the original way games were sold (packaged as a cohesive product up front and sold for $50-$60 per game) and evolve into the free-to-play business – what makes these companies believe the free-to-play market is something that can sustain them over time? 

For this I’ll mostly focus on mobile gaming and the way games like this make their money, but we will touch on console/PC games for some topics / examples. At the end of the day, this is more an edification of what’s happening today in the industry, rather than a discussion on what’s coming next, though we might touch on that. 

What does Free-to-play mean?

Free-to-play as a concept is the idea that anyone can have access to the game for $0 upfront, but the game could be monetized in other ways that the player can choose to take part in. 

The benefit for the consumer is that they get to play a game, have some fun, but not be committed to the game or face the hurdles associated with having to buy a game in order to jump into it. Some of these games are fully formed with exciting activities to play and can be continuations of mainline games that allow the player to interact with licenses that normally are in the buy up front category. 

For the business, the free-to-play market has become a hotbed for introducing new and differentiated monetization schemes that give players choice. They can choose to buy items, weapons, upgrades, assets, skins, etc. or simply play the game to unlock them or simply go without them. 

We also should discuss what free-to-play is not – there are a variety of ways for developers to continue to improve upon games or add additional features or fixes that extend the life of the game, but do not fit within the free-to-play model. Effectively, where the game costs an initial purchase up front, they do not count as free-to-play, though they can use similar business tactics as free-to-play games. We will discuss this further in the monetization models. Some games start as non-free-to-play and transition into that phase over time – Player Unknown’s Battlegrounds recently did this and we can look into this move in the context of monetization models

Monetization Models

For now, we’re not going to discuss the periphery of the market and focus on developers and publishers within the space in terms of monetization. The peripheral market, the consulting market, the think tanks, engines, etc. are going to be left alone for now given the gaming industry’s core is in the games themselves. 

Microtransactions

Micro-transactions are a monetization method in and of themselves, but they also support the monetization methods below. In and of itself, microtransactions are the act of making a minor purchase of something provided by the game developer/publisher to advance a player’s experience of the game. An example could be Halo Infinite’s multiplayer supporting buying in-game currency in order to buy accessories, skins, colors, or attachments to their character/weapons to enhance their experience while playing the game without impacting the players’ abilities while playing the game. 

This same tactic of allowing players to purchase an in-game currency is what enables monetization of other methods seen below. By allowing players to purchase in-game currencies, game developers have opened the doors to new forms of monetization and new psychological tricks to separate customers from their money. For example, offering accessories or dances at a discount in Fortnite using their in-game currency V-Bucks obscures the translation from one currency to another. Similar to the mental math required when making a purchase abroad, a player needs to perform the same mental math to determine if they want a particular skin or item, but the value of an item in Fortnite is subject to change, subject to sales or discounts, and can be gone so not only is there Fear of Missing Out (FOMO), but players may find it even harder to translate between the two currencies (e.g., buying 2,000 V-Bucks with $15, but a skin is worth 1,300 V-Bucks makes it difficult to figure out how much the skin actually costs). This method is used everywhere with Temple Run allowing players to buy additional lives, advantages, power ups to help prevent someone from losing their progress.

​​

Example from Fruit Ninja allowing players to buy into a special event for $0.99 to gain power ups and additional bonuses

Example of Temple Runner’s in-grame currency system and some items that can be purchased using the in-game currency (note the option to purchase “No Ads”) 

Ad driven

Ad driven monetization appears in a few forms, but we’ll be focusing on two: introducing friction via Pay or Wait and rewarding ads to make the game easier. 

Pay or Wait (PoW), players subject to this type of mechanic would be prevented from moving on in the game after being defeated, making a mistake, etc. In the classic game Temple Runner, a player needs to navigate a long track by swiping left, right, up (jump), or down (duck), to advance through a course and navigate obstacles. In the case where the players fails to complete the course, before making another attempt, they may be forced to watch an ad or pay to progress. In the case where they choose to watch an ad, the player may spend anywhere from 5-30 seconds to watch the ad before getting another set of lives to spend in order to navigate the course. If the player chooses to pay, they need to spend some of the coins they’ve gained through the game and lose their position or utilize in game items or advantages that they’ve purchased through either the coins they’ve collected in the game or with their real money. The requirement to make a purchase is not there, but either way, the more players and the more often the players play the game, the more the developers make on that particular game. 

Example of Temple Runner’s ad supported experience forcing players to either watch an Ad to continue or lose their progress. 

Loot boxes

Loot boxes as a concept do feel inherently like gambling – these are present in games where at the end of a level or via purchase or in some pre-programmed way, the player is presented with what amounts to an item bag from Mario Party. It’s filled with items that may or may not be beneficial to the player and sometimes these items are exceptionally rare (“Rare drops”), but mostly the player is given items they either already possess, do not need, or do not want (aka “Common drops”). These drops could then be used by the player as needed or simply remain unused. 

When initially introduced, the idea made sense to both gamers and developers/publishers. The random chance associated with getting loot meant that no one could buy their way to the best items, equipment, or abilities, but everyone was operating on a “fair” playing field. The unfortunate part is, the act of opening a loot box is akin to spinning slots and it has been linked to gambling (source). For this particular type of monetization, lawmakers are highly encouraged to start restricting access to this given voters will be the parents of those spending on loot boxes. About 5% of gamers generate half the entire revenue from the boxes and young men are the most likely to use loot boxes – with young age and lower education correlating with increased uses. Because of this, countries from Japan to Belgium have taken action against these mechanics (source). Some companies have completely taken down the games that have these mechanics in them e.g., Nintendo outright removed two of their mobile games, Animal Crossing: Pocket Camp and Fire Emblem Heroes, from sale in Belgium.

Pay to win

Of all the business models discussed before, the implication of these models is that the benefits derived from making a purchase, watching ads, or performing certain tasks are mainly cosmetic. The goal of this particular section is to outline a model that has become much less accepted recently called “pay to win”. In this scenario, players can purchase various items, equipment, boosts, etc. that would allow them an unbalanced advantage over their counterparts. For example, in certain games like PUBG or Destiny, players might be able to purchase a particular weapon, that allows them to more effectively eliminate enemy opponents. Or by using that particular weapon to accomplish tasks/gain experience, they might get a boost such that, over the longer term, their character growth and progression outpaces that of non-paying players. As a developer, allowing this type of game enables players to “buy-in” to better equipment or better positioning and hurts the game experience for others who may not be able to compete. Typically, this is found in Player vs. Player (PvP) gaming environments as opposed to in regular story progression in games, though this is not a rule. 

Customer Segments of FtP games

Customer segments of these games is hard to pin down – from an age and demographic perspective, it is highly dependent on the format of the game itself and type of game being played. Thankfully, there is a growing % of women in gaming and the number of gamers at older age groups is increasing given gaming really began in the 1970s and ‘80s with games like Pong. 

I’d like to them discuss which types of people fall into various monetization types

• Primarily ad based revenue generation
  • Given the prevalence of ads in mobile gaming, we’ll focus on this category
  • Females outnumber males by a wide margin in mobile strategy and puzzle games, while the opposite is true of mobile action, racing and shooter games. (source)
• Microtransaction revenue generation
  • Microtransactions occur across all monetization types, but are mostly engaged in with millennials (source) and represents an equal gender split (source)
  • As a generation, millennials are the first batch of “lifelong gamers”  which is an incredible thought because it means they have, at this point, begun to generate an income, have smartphones, and may have some level of disposable income (source)
• Loot box revenue generation
  • Loot boxes are, unfortunately, more prone to target younger gamers, though are not restricted to that age group
    • Of the 93% of children who play video games, up to 40% opened loot boxes (source)
  • Loot boxes are shown to be linked to gambling so we may see age restrictions come in the future (source), but for now there aren’t any
  • They do seem to be consumed primarily by younger males who do not necessarily have their own disposable income source
    • There have been numerous articles where parents complain about their child running up their credit card bill with purchases on gaming (example)

Thoughts on Free-to-Play and How I relate

As I’ve mentioned before with the monetization formats, microtransactions are a major source of the revenue generated from Free-to-play games as are Ads for Ad-supported games. In this context, I need to discuss my own biases. 

• First, I am not a gambler and do not support gambling
• I am miserly when it comes to making purchases beyond the initial purchase of a particular game
• I do not care about the aesthetics of my character
• I do not expect to be very good in group play environments relative to others i.e., I don’t think I’ll ever be a winner in PUBG or go on a killing spree in Halo Infinite

In terms of revenue generation, I fall into the ad supported revenue model because I’d be willing to watch an ad to earn a reward or make gameplay easier and I would be willing to sit through an ad in order to continue my game or avoid losing progress. 

The current debate in gaming around loot boxes is one I can support to make loot boxes more heavily regulated for the sake of consumers or treat them like a sports betting app where there are calls to action for gambling addiction and encouragements to use these products responsibly. At the end of the say, I do believe in consumers’ choice so microtransactions and pay-or-wait strategies are acceptable to me as someone who sees the business of gaming as a requirement to continue to push more enjoyment, fun, and engagement to the hands of customers. There should be consumer protections in place – there are tons of methods by which someone can get hooked to spend large sums of money they might not have on a game they do not need.