Sunday, September 9, 2012

Stop the Madness

This is an appeal to an industry. An industry I love.  And an industry that I think is marching itself to destruction.

I am going to make a statement and then explain why I believe it is true:

"Free to play" is the worst thing that has happened to online games in its short history.

Why is this true?  It is true because there is a well known psychological factor in sales.  No one really knows what anything should cost.  Therefor their perception of value is built by outside factors.

 Every direct sales pitch you have probably ever seen somewhere has the line similar to this: "You would pay xxx if you payed full price..."  In sales this is called "anchoring."   Its establishing the value in the mind of the customer.

When we take a project that cost tens of millions of dollars to create and say, "its FREE!" we are doing the same thing, but in the wrong direction. We are establishing that the value is zero.  And spending tens of millions of dollars developing an artifact with a street value of zero is not very good business.

Once you have established that the value of something is zero in the minds of your customers, you can never go back. People will accept reduced prices easily, but increases create great customer dissatisfaction.  Microsoft fell prey to this mistake.  You might not be old enough to remember this, but there was a time when we paid for internet play.  In fact, there was a time when we payed by the hour  and it wasn't cheap.  Microsoft invented the idea of "free online play" a decade ago when they introduced Direct Play and encouraged game developers to give away internet play for free.   But it wasn't until Blizzard shipped Diablo with free internet play that it became a reality.

Microsoft and Blizzard made it impossible to charge for internet play of traditional packaged games because they had taught PC players it was worth nothing.  Ironically, Microsoft themselves were hoist by their own petard a decade later when they tried to get people to pay $50.00 a year for PC Live.  It was the same service as XBox Live, which people gladly pay for. The difference is that no one had set the expectation on game consoles that internet play was free.  Same service, different history, different valuation by the customer.

The flood of "f2p" conversions of high development cost MMORPGs right now is doing the same thing. It is teaching customers that the only thing that has value is being an early adopter, and many of them don't see enough value in that alone to do it.  On the release of a new MMORPG now, the most commonly heard meme is "I'll wait til it goes f2p."

And this is robbing the industry of the income necessary to create such games.  If it doesn't change, the entire segment is likely to go the way of the dodo, replaced with content made so cheaply that they can actually make a profit of some kind this way. (* cough cough zynga games cough cough*).  To understand why the economics don't work its necessary to go deeper into what f2p is and isn't.

"f2p" is actually an empty market buzzword, so I would like to take a moment to draw a distinction.  There are free trials ("freemium") and there are micro-transaction based income models. Free trials have always been a part of the industry.   It goes back to the shareware days.   You got a limited sample of your content distributed to lost of people in the hope that some of them would buy the full package.  This act of becoming a paying customer  is called "conversion" in the industry.

In order for this to pay however, you need to keep what the non-converted cost to you low.  The cheaper your distribution costs, the more this made sense,   Shareware counted on our users and bulletin boards to distribute the free trial for us.  In this day of rampant broadband, we can do the same thing direct to our user.  But, again, I stress, the key is to keep what the unbuying users cost you near zero, because thats a loss on your balance sheet.

If a user is going to hang around burning systems resources forever then they become a significant loss over time  And if you need to keep a team of developers feeding them content in the hopes that they might convert that ups the loss.  This is the inherent fallacy in any "f2p" model on a  game with a  significant server back-end.  Its not like shareware because non-paying customers aren't free to the game developer.  The only way to make freemium really work in a connected model is to drive away those customers that aren't going to convert so they don't cost you ongoing resources.

Microtransactions are based  on the idea that, rather then getting all the money upfront, you bring the customer in and extract in drips and drabs.  The problem with this is really pretty simple, it doesn't work. Not at the same level.  Again going back to sales psychology, salesmen know that the hardest part of any sale is getting the customer past the buying decision.  We instinctively shy away from it.  Its the only irrevocable decision in the transaction and, as long as we haven't made it yet, we sill have options.

The theory behind microtransactions is that you eliminate the buying decision getting the customer in the door.  And indeed not charging a fee to get in does that.  The problem is that it replace that one big buying decision with many many small ones, and each one brings back the psychological barriers.  The result is that, to reach Zynga's level of success, requires a constant re-sellign to the customer.  This puts the focus of game development on selling, not entertainment and creates what I call "gamevertisements", not games.  (Even at that level Zynga has only managed to squeeze out a gross income of about $3.00 a year per person, net of $1.00.)  And remember, these users are still costing you resources whether they buy or not.

If we don't want this to be the only online industry we have, our only other option is to push back now, hopefully before its too late.  Resist the temptation to jump to f2p when a game doesn't hit huge right off the bat.  F2P may have a place, but only on the waning tail of the typical bell curve an online game goes through.  Cut-outs should be routinely discounted.  But if virtually new product is routinely discounted, that just becomes the new price.

I love the online space. I love multi=player games.  To me they have a lot more value then single player games.  Certainly they cost more to produce.  And a world where we still charge a reasonable amount for single player games, but people expect online multiplayer to be free, is a world that soon will not have  any online multiplayer.  The economics dictate that.

WoW spoiled us, and damaged us, by making us think that to be "successful" you need a ton of players.  In a bottom-line industry, Zynga/Facebook hype distracted us by focusing our attention on huge crowds of players, not the bottom line.  (As prooved by the revelation that Zynga grossed about $3.00 a year per person at its height, and the tumble both Zynga and Facebook took once they went public and had to actually reveal their bottom lines.)

If MMORPGs are going to continue to develop and deepen, rather then regressing to the cheapest possible content to produce conversions, we need to get away from that thinking.  We need to accept that a mature market splits into segments.  The good news is that tighter, more specialized segments are more willing to pay for content that addresses them specifically.  We can build Yugos, or we can build Volvos. But, if we continue to tell the market that Volvos are only worth  a Yugo price, our ability to sell Volvos will go away and all that will be left for anybody are the Yugos.

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