Market Analysis Freemium Client PC Games Business Models May 2015
Conditions of Purchase Purchase of this multi-client study is on a nonexclusive basis. This study has not been commissioned or contracted for by any one person or organization. The information contained is confidential to the purchaser, and the purchaser agrees not to circulate or loan the study in whole or in part to: their subsidiaries or divisions, industry trade associations (if not the purchaser), the general public, the media, nor other parties not belonging to their company, agency or organization. Unauthorized reproduction and dissemination which is discovered by DFC Intelligence (the publisher) shall constitute grounds for legal prosecution and damages under U. S. copyright law. DFC Intelligence has made every attempt to verify the accuracy and completeness of information in this study from sources we believe to be reliable. It is understood, however, that our estimates, forecasts, opinions and recommendations represent the judgment of our analysts, based on the best information available at the time of publication. It is recommended that purchasers also consult other available business sources and not rely solely on this analysis as the basis for major strategic, financial, or management decisions. DFC Intelligence makes no warranty or representation, either expressed or implied, with respect to the information in this report. In no event will DFC Intelligence be liable for direct, indirect or consequential damages resulting from any defect or inaccuracy in this report, even if advised of the possibility of such damages. Information about specific companies is not intended to be a complete description, nor of their securities, nor is this study an offer to buy or sell such securities. DFC Intelligence s liability, if any, shall not exceed the amount paid for this study. 2015 DFC Intelligence, a California Corporation. All rights reserved. No part of this report may be sold, reproduced, or transmitted in any form or by any means, including photocopying, recording, or by any information storage and retrieval system, without the written permission of DFC Intelligence. This report is for individual use only. Redistribution requires a site license. Published by DFC Intelligence www.dfcint.com 858.834.4340 2
About This Report In the ever-changing gaming industry, it is a daunting task to properly define and analyze a market segment in the gaming industry. Especially in the relatively new freemium/free-to-play (F2P) segments everything is constantly changing and evolving. In an attempt to achieve such a goal, DFC Intelligence narrows down the research scope as specific as possible even though sometimes it may seems arbitrary. The report covers freemium online games that meet following criteria: 1) require a thick game client download and installation, 2) allow a user initially to play for free with optional microtransaction-based ingame item purchase and/or subscription for premium content, 3) run on a PC platform, and 4) target users outside of Asia (See the Definition section for detailed explanations.) The biggest games in this space include Riot s League of Legends, Valve s Dota 2, Wargaming.net s World of Tanks, and Blizzard s Hearthstone. Other popular games that fall into the category include but are not limited to Aeria Game s Shaiya, EA s Battlefield Heroes, Gala-Net s Flyff, Joymax Silkroad Online, KingsIsle s Wizard 101, Nexon America s Maple Story, Perfect World s Perfect World, and Sony Online Entertainment s now defunct Free Realms. This also includes some former subscription based games that went to a free model starting with Turbine's Dungeons and Dragons Online in fall 2009. The goal of the report is to provide an accurate measure of how an individual product is likely to perform in the market. This report provides a realistic assessment and is designed not to look at the monster success stories like League of Legend, but instead provide a business model for how a game might realistically perform in this market. Published by DFC Intelligence www.dfcint.com 858.834.4340 3
Table of Contents CONDITIONS OF PURCHASE... 2 ABOUT THIS REPORT... 3 TABLE OF CONTENTS... 4 INDEX OF TABLES... 5 I. EXECUTIVE SUMMARY... 6 A. WHAT IS A FREEMIUM GAME?... 6 B. MARKET SIZE... 8 C. ISSUES... 9 1. Consumer Mentality... 9 2. Payment Methods and Prepaid Cards... 10 3. Fraud, Chargebacks and Cheating... 11 4. Legal Issues... 12 5. Game Design and Localization... 14 6. Competition from Traditional and Mobile/Browser-Based Games... 15 7. The Entrance of Established Brands and Media Companies... 16 8. Marketing Challenges... 17 II. DEFINITIONS AND HISTORY... 18 A. INDUSTRY HISTORY... 18 B. DEFINITIONS... 22 1. Definition of Free-To-Play/Freemium... 22 2. Freemium Games by Distribution Platform... 24 3. Freemium Business Model Definitions... 25 III. BUSINESS MODELS... 27 A. OVERVIEW... 27 B. REVENUE SIDE ANALYSIS... 28 1. Revenue Model 1: Modest Success Freemium Game /Optional Subscription... 31 2. Revenue Model 2: Solid Hit Freemium Game /Optional Subscription... 35 3. Revenue Model 3: Slow Build Big Hit Freemium Game /Optional Subscription... 38 4. Revenue Model 4: Major Hit Freemium Game/Optional Subscription... 42 5. Revenue Model 5: Solid Hit Pure Virtual Goods Model... 45 6. Revenue Model 6: Major Hit Pure Virtual Goods Model... 48 7. Simple Revenue Business Models... 51 C. COST SIDE ANALYSIS... 56 1. Overview... 56 2. Development Cost... 56 3. Marketing and User Acquisition Cost... 57 4. Client Delivery Costs... 59 5. Payment Methods and Financial Infrastructure Costs... 60 6. Ongoing Costs... 61 7. Client-Based Freemium Cost Model... 62 Published by DFC Intelligence www.dfcint.com 858.834.4340 4
Index of Tables Table 1 Modest Success Scenario for a Freemium Game with Optional Subscription... 31 Table 2 Five Year Cumulative Revenue for Modest Success Scenario for a Freemium Game with Optional Subscription... 33 Table 3 Solid Hit Scenario for a Freemium Game with an Optional Subscription... 35 Table 4 Five Year Cumulative Revenue for Solid Hit Scenario for a Freemium Game with Optional Subscription... 36 Table 5 Slow Build Big-Hit Scenario for a Freemium Game with an Optional Subscription... 38 Table 6 Five Year Cumulative Revenue for Slow Build Big Hit Scenario Freemium Game with Optional Subscription... 40 Table 7 Major Hit Scenario for a Freemium Game with an Optional Subscription... 42 Table 8 Five Year Cumulative Revenue for Major Hit Scenario Freemium Game with Optional Subscription... 43 Table 9 Solid Hit Scenario for a Freemium Game with a Pure Virtual Goods Model... 45 Table 10 Five Year Cumulative Revenue for Solid Hit Scenario Freemium Game with Pure Virtual Goods Model... 46 Table 11 Major Hit Scenario for a Freemium Game with a Pure Virtual Goods Model... 48 Table 12 Five Year Cumulative Revenue for Major Hit Scenario Freemium with Pure Virtual Goods Model... 49 Table 13 Basic Revenue Model at 2% Conversion Rate... 52 Table 14 Basic Revenue Model at 5% Conversion Rate... 53 Table 15 Basic Revenue Model at 10% Conversion Rate... 54 Table 16 Basic Revenue Model at 15% Conversion Rate... 55 Table 17 Freemium Game Marketing Funnel... 58 Table 18 Standard Transaction Fee Comparison between U.S. and Korea... 61 Table 19 Client-Based Freemium Customer Acquisition Cost Model... 63 Table 20 Client-Based Freemium First-Year Profit/Loss Analysis... 63 Published by DFC Intelligence www.dfcint.com 858.834.4340 5