Friday, July 15, 2011

Business, F2P, MMORPGs and basic math

My past two columns have been digging into Zynga numbers from their S1 statement to see what we can learn about the real F2P business. Today, I'm going to do some basic math with the, Don't worry, its nothing worse the multiplication, division, addition and subtraction. just those simple tools can generate some very interesting results.

The big squawk in the MMORPG space right now is about MMORPGs turning to F2P/Micro-transaction models. Its being hailed as some great new trend, but I've always maintained that the economics were fairly clear. That this isn't a viable way to make money in this space. Why then do it? Because, I contend, in all these cases you have failed MMORPGs with sunk costs to recover and some income is better then none.

With the hard Zynga data, we can explore this topic a little bit better.

Two columns ago, I dug out of Zynga's numbers a clear data point-- that Zynga grossed $3.21 per year per active account in 2010; Last column, with a bit deeper analysis, I concluded that they see a raw margin over operating expenses of about 20%. This means a net before marketing and such of about $0.64 per active account.

So, lets make a few assumptions:
(1) Zynga is the master at this and represents a best-case long term return (a fairly reasonable assumption i think.)

(2) Your MMORPG costs $40M to develop. (Age of Conan was $40m as per http://forums.ageofconan.com/showthread.php?t=149585&page=3, Wow cost $68M to develop http://www.raphkoster.com/2006/06/13/what-wow-cost/. So that seems conservative.)

(3) Your MMORPG has a life-span of 5 years and maintains peak usership for all 5 years. (A very generous assumption.)

(4) Your MMORPG has no more cost of operation then Zynga's casual games and can reach the same profit margin. ( A very very generous and almost certainly false assumption.)

In this perfect storm, how many users does it take til you break even?

Well 20% of $3.21 is about $0.64 a year per active account. Over 5 years thats $3.21 again for the 5 years (not surprising, 5 is 20% of 100).

$40M/3.21 = 12,461,059

SO to even make back your investment in this model, you need to sustain an active user base of almost 12.5 million users over 5 years.

Seen many MMORPGs do that recently? WoW only has 11.4M current subscribers, took years to get to that point, and spent a lot of money on marketing in the process that isn't accounted for in the above overly-generous model.

Real F2P MMORPGs are sometimes a desperate way to get some revenue out of a failed product with sunk costs. But as a way to even break even its a fantasy, not a business model.

4 comments:

Unknown said...

You cannot compare Zynga numbers at all... everything about the userbase and the behavior is different. MMOs become profitable at a few hundred thousands, recouping over a couple of years.

CyberQat said...
This comment has been removed by the author.
CyberQat said...

At $15.00 a month subscription costs, a $40M MMORPG needs to average 111,112 total subscribers to break even in two years. (The math isn't hard. $15 * 12 * 2 = $360 per user. $40M/360= 111111.11 )

MMORPGs *can* be profitable if they charge a monthly subscription fee and are reasonably successful.

But they cannot be supported on the F2P/Micro-transaction model. The real, documented numbers show this.

if you have other documented numbers, I'd like to see them.

CyberQat said...

I should note that the above is gross. The fact of the matter is that MMORPGs indeed are different from casual games.. a big oen being that they have an order of magnitude *higher* server costs. They also require customer support.

So if you figure you make maybe 50% margin on that $15.00 a month after all costs-- servers, marketing, customer service and so on its more like an average of 222K active accounts that you actually need to break even in 2 years.

Still quite do able if you succeed, but many MMORPGs don't. Thats the risk in the game world.