How free and in-game purchases took over video games

In this weekly series, CNBC takes a look at the companies that made the inaugural Disruptor 50 list 10 years later.

Amidst the popularity of free downloadable games and gaming platforms like “Fortnite”, “League of Legends” and Roblox, it has become extremely rare for a high profile video game to come out now without some kind of game strategy. recurring payment – ​​a far cry from the typical $60 standalone game purchase that dominated the gaming industry less than a decade ago.

But as video games have moved from console-only experiences to more digital and mobile platforms, the business model and how gamers interact with the games they play has also changed significantly.

“Back in 2013, it was very controversial to say that the free-to-play business model would be the next big dominant model in all games,” said Kevin Chou, co-founder and former CEO of mobile games company Kabam. “Mobile games [then] were pretty much free games, but we were like, ‘You know, it’s not just mobile games, but games, in general, are going to go in this direction.'”

In-game purchases were a fledgling business for most console and PC games, but the success of social games like FarmVille showed the potential.

It has now become the very model for the biggest video game franchises. ActivisionBlizzard‘Call of Duty’, while maintaining its new annual run, saw over $1 billion spent globally on its free-to-play mobile version of the game while its ‘Warzone’ platform hit the 125 million mark players in June. It has also turned the latest version of its “Overwatch” series, which generated $1 billion in sales in its first year of release in 2016, into a free model. Interactive Take-TwoPerhaps the best example of a standalone game still enjoying success with nearly 170 million units sold in August, ‘Grand Theft Auto V’ said its GTA online platform saw its viewership increase by 49% since the first quarter of 2020.

Kabam, which was named to the inaugural CNBC Disruptor 50 list in 2013, initially transitioned from developing free-to-play games for Facebook to creating first-party and third-party games for social, web and mobile platforms. Like what Fortnite found success with, Kabam leaned into well-known properties, creating games around movie franchises like “The Hobbit” and “Fast & Furious.”

But although these games are considered free, they have a very lucrative side. While the initial download may be free, players are incentivized to purchase things like seasonal “Battle Passes” which provide new items and other cosmetic prizes as they progress through the game.

It turned out to be a gold mine for game companies. Activision Blizzard said it had $5.1 billion in in-game bookings for its fiscal year 2021, which includes things like “World of Warcraft” subscriptions, skins and items in “Warzone” and “Overwatch.” “, and other microtransactions — a 5.2% year-over-year increase. That compares to $8.35 billion in net bookings for 2021, which encompasses both digital and physical game sales.

Kabam also benefited, with its revenue rising 70% in 2012 to more than $180 million, helped by its “Kingdoms of Camelot: Battle for the North” game, which the company said was the iOS app most profitable that year.

Much of the growth in popularity of seasonal game passes is attributed to Epic Games’ Fortnite, which generated more than $5 billion in its first year after release from item sales. and seasonal passes.

But it also happened as the slowdown in the console and PC gaming market sought to replicate the rapidly growing mobile gaming landscape, as well as the flattening of the video game industry, so that there is less difference between different types of games and players.

Mobile gaming has outpaced the growth of the broader video game market over the past decade and is expected to account for $136 billion in global spending this year, compared to a combined $86 billion for PC, console and handheld gaming combined. , according to a study by and IDC.

“Consoles aren’t dead, PC games aren’t dead, but mobile games are a big driver of the whole market,” Chou said.

Part of that has come from improving the quality of mobile games, as well as developers pushing quality console-level games to mobile, Chou said. He pointed to “PlayerUnknown’s Battlegrounds”, a battle royale game similar to Fortnite. The game, developed by South Korean game publisher Krafton, was hugely successful on PC and consoles, but was also ported to mobile, where it grossed over $8.5 billion worldwide.

“What’s happening is you’re seeing companies taking games at the quality of PC and console gaming across the board and bringing them to mobile,” Chou said. “You still have gamers playing on PC and consoles, but you’re also able to grow the audience significantly.”

This has also been made possible by cloud gaming, which allows gamers to access their games or saved files remotely or through their phones or other devices. Whereas Google recently shut down its Stadia digital gaming service, Chou said other gaming services like Sony’s PlayStation Plus cloud streaming, Amazon’s Luna and Microsoft’s Xbox Cloud Gaming help bring “consistent quality gaming to mobile “.

“There are people who love their consoles and still buy consoles, but in other parts of the world you wouldn’t necessarily buy a console, but now they could play the exact same way – that’s a way to dramatically increase the user base without selling more consoles,” Chou said.

Investment in mobile games will likely increase as more mergers and acquisitions occur in the gaming space, which has seen a slew of deals this year.

Microsoft offered to buy Activision Blizzard in a $68.7 billion deal in January, which was followed by Sony announcing a plan to acquire developer Halo Bungie for 3.6 billions of dollars. Take-Two acquired mobile game company Zynga, known for its FarmVille game, for $12.7 billion in January.

NetEase, the Chinese game developer, which has released mobile games based on The Lord of the Rings and Harry Potter, acquired French developer Quantic Dream in August in a bid to expand internationally and further compete with rival Tencent. .

Sony is also looking beyond consoles, having announced plans for a dedicated PlayStation mobile gaming unit in August. The company said earlier this year that it expects to release around 50% of PC and mobile games by 2025, up from around 25% today. Nintendo has also sought to put more emphasis on mobile games in recent years.

Kabam himself was a target in 2017, being acquired by South Korean games company Netmarble.

Chou, who has since co-founded esports organization Gen.G and is currently the managing partner of crypto-venture studio SuperLayer, said he still foresees growth for mobile games, noting in particular the possibilities that Web3 can bring free games. and industry more broadly.

“There’s so much innovation in the game – I think if I could start all over again, I don’t think I would have sold the company,” Chou said of Kabam.

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