Casual Games SIG/Whitepaper/Business Models

International Game Developers Association

Table of contents 1 Notice from the editor 2 Introduction 3 Understanding the Value Chain 3.1 Developer 3.2 Publisher 3.3 Distributor / Aggregator 3.4 Retailer / Portal 3.5 Consumer 3.6 Various Permutations 3.7 Revenue Shares 4 Business Models 4.1 Try and Buy 4.2 Free Web Trial 4.3 Subscriptions 4.4 Pay-for-play / Ad Sponsored hybrid 4.5 Tournament/skill-based 4.6 Around/In-Game Advertising 4.7 Item-Buy (micro transactions) 4.8 Packaged product / retail 4.9 Alternate platforms 5 Contractual Issues 5.1 Length of term 5.2 Termination Rights 5.3 Compensation (revenue sharing, fees, etc) 5.4 Milestone Descriptions 5.5 Trademark usage / guidelines 5.6 IP rights 5.7 Audit clause 5.8 Exclusivity 5.9 Territory 5.10 Guarantees / indemnification 5.11 Non-disclosure 5.12 PR / press releases 5.13 Geocultural Issues 6 Conclusion

[edit] Notice from the editor

Hello! If you are reading this, then that means that you are here to help edit the Business Models section of the whitepaper. Fabulous! I do ask, however, that you follow some simple guidelines in helping contribute to this section of the Wiki:

• Do not change the overall structure of the section. You're welcome to add sections of sub-sections that you think were left out, but please do not rearrange sections. If you have feedback on how this is organized, please send email to me at the address below.
• If you have personal experience or a story to share with any of the sections below, then you may have the perfect material for a sidebar! My hope is to illustrate many of the points below with real-world examples. Feel free to go ahead and add one if you think it would help add round out coverage of a topic.
• I am hoping to add a number of illustrations or graphics to help explain the topics in this sectin. While writing, if you have the idea for an illustration, simply add a comment in the text to that effect. Or, if you are graphically inclined, simply go ahead and create one!
• The old business model section is still in here down below; feel free to draw from it while filling in the new section.

Thanks again for your help! Don't hesitate to email me any questions you might have. James Gwertzman james - at - popcap.com

[edit] Introduction

As the casual games sector grows and becomes increasingly competitive, it is critical for anyone who has a stake in casual games to fully understand the business models that support the industry. Any successful casual games entrepreneur can tell you that relying on tried-and-true formulas established in traditional gaming sectors will limit your ultimate success in casual games.

Furthermore, the transition of casual games from a cottage industry to one of the highest growth sectors in gaming over the past few years means that new business models are emerging all the time. New players, some bolstered by significant private or venture investment, are continually entering the casual games market. One of the best ways to compete with existing companies in any market is to change the rules – and that’s why there is starting to be widespread exploration of alternate business models. Through greater investment in this sector and consolidation, these new players are aggressively seeking to gain a competitive advantage over existing companies, many of whom may not be able to keep up as 2006 progresses.

Another factor resulting in new models is the increasing globalization of the casual game industry. Companies who are successful in one country are starting to expand into others, and are bringing new ways of doing business with them. This is especially apparent when considering Asian countries like China or Korea, where extremely high rates of piracy have forced companies there to invent new business models.

This Business Models section focuses predominantly on the PC/Mac market, but much of the content of this section applies to alternate platforms as well, such as set-top boxes, handheld gaming devices, mobile phones, consoles, and more

[edit] Understanding the Value Chain

A value chain encapsulates all of the various stages or processes that any product goes through on its way to the consumer. It is called a value chain because each stage presumably adds value to the ultimate product or service – or else will eventually be optimized out.

The profit earned at each stage is generally commensurate with the value contributed at that stage, with some stages inherently more profitable than others. Consider the PC business. Most stages of the PC business are highly competitive, and hence not especially profitable. The companies that create motherboards, memory chips, hard-drives, etc are locked in what are essentially commodity businesses. Microsoft, however, has a near-monopoly over the operating system, and therefore captures a huge piece of the overall cost of a typical computer.

In mature industries, the force of competition has typically driven value chains to evolve over time to be very efficient. Companies tend to specialize on a particular stage of the value chain, doing one thing and one thing only, but doing it extremely well.

In new or emerging industries, however, value chains tend to be very fluid. No one knows yet which stage will emerge as the most profitable – and so companies are reluctant to specialize too early for fear of becoming trapped in a very competitive, commodity business.

Consider the movie industry. Originally, movie studios sought to control every stage of the value-chain, from writing their own screenplays, to hiring & managing actors, to developing their own proprietary camera technologies, to producing films, and distributing those films to movie theatres that they themselves owned.

Today, of course, the movie industry value chain is highly decentralized. Entire industries have emerged to service just a single stage of the entire value chain: movie theatre operators, physical film distribution, completion bond financing, visual effects creation, film stock production, etc.

Now consider the casual game industry. The casual game industry is still very new, and so the overall value chain is still very fluid. There has been relatively little specialization, and it is marked by a high degree of “co-opetition” in which companies compete within one stage of the value chain, and cooperate on another. The market continues to change on a monthly basis, and it is difficult to predict exactly what it will look like as it continues to mature.

Nevertheless, it is possible to define a few distinct stages of the current casual-game industry value-chain, even while it is not yet possible to define which of these will end up as the most lucrative.

Most companies who operate today in the casual game space fill more than one of these roles. There are developer/publishers, distributors/retailers, developer/publisher/distributors, and all of the above. Nonetheless, considering each stage in isolation is still helpful for understanding the overall industry and especially in trying to predict the direction it is heading.

[edit] Developer

The value-chain starts with a developer creating a new game, and involves the contribution of designers, producers, programmers, artists, sound designers, music composers, and more. The output of this stage is a game, ready to be passed up the value-chain on its way toward the eventual consumer.

One could argue that there are at least two other value-chain stages that feed into this stage – tool providers and sub-contractors. Tools do play an important role in building any game (e.g., Photoshop, Visual Studio), but at least so far today a distinct market providing casual-game industry specific tools has not yet emerged. Many successful developers can and do provide all of their own technology. Also, much of the technology required to create a casual game is available for free over the Internet. Likewise, while many casual game developers outsource parts of their work to other companies (e.g., sound effects, music, art), a casual-game specific outsource market has not yet emerged.

This is typically one of the most competitive stages in the entire value-chain, since there are so many developers eager to make games for a living and there can only be so many “hit” games. The only real way to build value at this stage of the chain is to create and own valuable IP which can then be successfully monetized by the other steps in the chain.

Examples of high-profile casual-game developers include PopCap Games, gameLab, Large Animal Games, Skunk Studios or Sandlot Games

[edit] Publisher

In the traditional game industry, the publisher plays a key role in the overall value-chain, working with developers to create games on one side, and then selling and marketing those games on the other.

On the game creation side, publishers generally provide services such as funding, production oversight, quality-assurance (QA), and release management. Publishers typically have an entire portfolio of games under development at any one time, and often license well-known brands or other sources of IP which they then work to turn into marketing games.

On the sales side, publishers typically package games to be sold, localize games for international sales, handle end-user marketing and PR, and work with retailers and distributors to physically get the games out into sales channels.

In the casual game industry, the relative simplicity of casual game development and the existence of efficient online sales channels have historically minimized the need for stand-alone publishers. Most developers self-published their own games, funding their own development and negotiating their own distribution deals. Developers typically paid little attention to marketing or PR, relying on the games to ‘sell themselves’.

This is changing, however. As the market matures and competition increases, the role of the stand-alone publisher is becoming more defined. Several online retailers, not interested in working with dozens (or hundreds) of different developers, are limiting the number of partners they work with. Securing prominent placement or promotion is no longer so easy, and managing effectively all of the various channels that exist is becoming a full-time job.

An example of a high-profile casual-game publisher is PlayFirst.

[edit] Distributor / Aggregator

In the brick & mortar world, the role of a distributor is to physically move product from a manufacturer to the retailer. In some cases, value-added distributors also handle inventory management and even some manufacturing. Distribution is typically not a glamorous business, with relatively small margins.

In the casual game business, however, distribution has emerged as one of the more interesting aspects of the business, even as paradoxically the need for distribution would seem to be minimized given the ease of distributing content on the Internet.

Instead, in many cases distributors are adding value to portals by offering to outsource their game retail operations, operating their day-to-day sales, managing their promotions, and aggregating together many games into a single feed that is much easier for retailers to handle.

On the flip side, distributors add value to publishers by helping them publish their games on hundreds of channels to which they would not otherwise have the bandwidth to manage. A publisher can hand a game off to a distributor once, and let the distributor handle the process of getting the game out onto many channels. This especially makes sense for smaller sites which are too small for a publisher to justify managing directly, but which in the aggregate still represent significant sales, especially internationally.

Examples of high-profile distributors include Oberon Media and Trymedia (now part of Macrovision).

[edit] Retailer / Portal

The final stage of the value-chain is the retailer or portal. In the casual-game industry, these are typically web-sites which consumers visit to try out or purchase games. The ultimate value of a retailer is determined for the most part by the number of users who visit the retailer on a regular basis, since that determines its revenue potential (assuming a fixed average revenue per visitor).

Several years ago, a portal could be successful by just listing a games on its site, and investing in a basic payment-processing system for charging credit cards. Sites generally had the same games and the same prices, and there was little differentiation between the portals.

As the market has matured, sites are starting to compete more aggressively with each other for users, and are looking for ways to stand out. Exclusive content, subscription programs, contests, and community features are all examples of ways in which sites are trying to differentiate themselves.

Services that retailers require include Digital Rights Management (DRM) technology, E-commerce / billing solutions, user account management, and site statistics and tracking. Several companies have sprung up recently to provide these services, and many more are on their way.

Examples of high-profile retailers include Yahoo Games!, RealNetworks, Big Fish Games, and the MSN Zone.

[edit] Consumer

No discussion of the value chain would be complete without mentioning the consumer, the ultimate end of the value chain and the source of the money that trickles back to all of the links in the chain.

In some cases the consumer provides that money directly by paying for a game outright. In other cases advertisers provide money on behalf of the consumer by “sponsoring” game-play through ads, product placement, or other means.

[edit] Various Permutations

As mentioned earlier, nearly every possible permutation of value-chain roles is being tried in the market today. The most common include:

• Developer direct-to-consumer. Many developers operate their own websites and try to sell games directly to their fans. Most developers do not actively promote their sites, and instead rely on consumers discovering their site after first coming across one of their games on another site. This creates obvious tension, however, between developers and their distribution partners.

• Distributor / Retailer. Some of the biggest portals operate their own websites, and actively solicit games from developers, rather than outsource that role to a distributor. Likewise, most of the distributors also operate their own websites (though this does cause some conflict with their white-label clients).

• Publisher / Distributor. Many distributors also act as publishers, a natural step considering that they interact with dozens or hundreds of developers on a regular basis. When a distributor spots a successful developer or a successful game, it can offer to represent and publish that game more broadly.

[edit] Revenue Shares

Each of the players in the value chain can receive different portions of the revenue depending on a wide variety of factors. For more information on this, including reference revenue share percentages, refer to the survey data included in the Publishing section of this paper.

[edit] Business Models

With an understanding of the casual game industry value chain, it is now possible to discuss business models currently in use. An understanding of the value chain is important, since each model affects companies at various stages of the value chain differently. For example, the “try and buy” model in which consumers purchase games outright accrue more value to the game’s developer than the “subscription” model which accrues the most value to the company who holds the subscription itself, generally the retailer.

It should be noted as well that the business models below, used within the casual games industry to varying levels of success, are not necessarily the only ones possible. Companies in the industry continue to experiment with new models and hybrids. It is important to understand who accrues value within any model (not only direct monetary value, but also things that may be monetizable in the future. e.g. credit/attribution or brand value, customer retention, etc).

[edit] Try and Buy

The “Try and Buy” model is the simplest model to understand, and is also the model historically associated with the casual game industry. This model is also most similar to the shareware model which has been around for many years. Under this model, consumers may download and play a trial version of a game. Trials are limited in some way, most commonly by time (a one-hour free trial is typical), but trials may also be limited by features, by number of plays allowed, or by some other mechanism.

Throughout play the consumer is typically encouraged to purchase the full version of the game (“up-sell”); once the trial expires the consumer is required to purchase the full version in order to continue playing. In some variants of this model, the player may continue playing the feature limited version indefinitely, in others the player must sit through increasingly annoying “nag screens” encouraging the user to upsell.

Enforcing the trial is generally the task of Digital Rights Management (DRM) software; usually the game is “wrapped” with DRM software, though sometimes the DRM is built directly into the game itself. The DRM software is typically also responsible for handling the up-sell itself, accepting the user’s payment information and handing the transaction off to a back-end payment processing system.

Providing the DRM is generally the responsibility of the retailer or the distributor; the publisher generally hands off an unlocked version of the game to be wrapped along with marketing collateral to help in building the up-sell screens.

Under this model, revenue from game sales by the retailer are generally shared with partners “upstream” with pre-determined royalty rates or revenue shares. A typical developer revenue share is anything from 20%-50%.

One way to measure the success of a game under this model is to look at the “conversion rate”, or the percentage of downloads which get “converted” into sales. Conversion is typically low – anything over 1% is considered okay, anything over 2% is considered great. Game sales can be increased in one of two ways: encouraging more users to download the game, and increasing the conversion rate of those users who do download the game. As a result of this small conversion ratio many companies are searching for alternate methods to monetize unconverted downloads and game plays in an effort to optimize the market.

[edit] Free Web Trial

A common variant on the “try and buy” model is to offer a free web version of the game which can be played within a web browser. Web games can generally by played over and over again, however they are typically very limited compared to the “deluxe” versions, with fewer features, less content, lower quality sounds & graphics, etc.

A good web game is designed to encourage the user to download the deluxe version. Many users (especially those with slow dial-up modems) will not download a game without first trying the web-game version, though others will only ever play the web games and will never download deluxe versions for a variety of reasons. Some users are simply not allowed to download & install software on their computer (e.g., office workers). Others have been told “never download software on the Internet” and are fearful. Still others simply don’t want to “clutter up” their computers with lots of random software.

Increasingly web sites are looking to monetize users who play the web games without ever downloading the deluxe versions through advertising (see the section on advertising below).

Providing a web game for use ad-sponsored free play, especially in the (currently common) case that advertising revenue is not shared, can be viewed as counter to the interests of the developer/publisher, who's interests are in selling downloads. However, many view it as a successful tactic to getting websites to keep a less-than-stellar selling download game within their catalog, where it might otherwise be dropped. The theory being that the extra 'long tail' downloads justify the cost of developing the web version of the game. Increasingly retailers and portals are starting to share advertising revenue with developers, and this should be discussed as part of any distribution agreement that includes a web version.

[edit] Subscriptions

Retailers typically report that only a small percentage of their customers buy more than one game under the “try and buy” model. Subscriptions are one way to try and earn more revenue per consumer by creating an ongoing revenue stream.

There are several types of subscription models in wide-spread use:

• “All you can eat” The consumer pays a fixed amount per month in return for unlimited play of all games in the program. The user must maintain the subscription in order to continue playing games; when the subscription ends the player’s access to the games also ends. Revenue is generally shared based on game-play starts since it is the only statistic that can be accurately measured.

• “Book of the month” The consumer pays a fixed amount each month in return for getting one (or more) games free. Additional games can generally be purchased at a discount.

• VIP membership. The consumer pays a fixed amount each month in return for special privileges. This model is most common in Asia, where casual games are often free and monetized through other means (such as item sales, see below).

Models for sharing revenue with developers/publishers whose titles are offered within subscriptions varies between vendors, subscription type, and platform. Common ones are based on game starts/plays (i.e. If a player played nine games of game A, and one of game B, ninety-percent (90%) of the share allocated to developers would go to game A's developer); or game time (i.e. nine hours logged playing Game A vs. one-hour playing Game B would result in the same split as the previous example).

[edit] Pay-for-play / Ad Sponsored hybrid

At the 2006 Game Developers’ Conference, WildTangent announced a new business model for games sold through their ‘WildTangent Games Network’ (WGN). This new model is an online version of the classic arcade where you insert coins into the machine for each game play. The WildCoins is a ‘pay for play’ model that is adapted to the existing try and buy model. End users get their first two game sessions for free (the trial period), then they have a choice to spend $20 and convert to a full purchase, or spend about $.25 for the next game play, and the next, and the next. Another interesting component of this new business model is that advertisers can buy the WildCoins and sponsor a game session that is then free for the players.

The combination of free play, sponsored play, $.25 cent play and full purchase creates a payment structure that could possibly yield much higher revenues per game, and closely ties the value of a game as measured by the number of times it is played, with the money it generates. Other companies are also looking into this type of advertising based system, although it is still too early to tell how effective it is at generating additional revenue.

[edit] Tournament/skill-based

This economic model involves players paying a cash entry fee to enter a tournament and play a game. The tournament can be a small as two players, or as large as thousands of players. A player's score is posted on a leader board, and the winner (or, in larger tournaments, winners) gets a cash or merchandise prize.

The tournament provider makes money by keeping a portion of the cumulative entry fees, rather than returning all the entry fees as prizes. For example, a 5-player tournament with a $1.00 entry fee might pay a $4.00 prize to the first-place finisher, with the tournament provider keeping $1.00.

In order to be legal in the locations where such tournaments are offered, the games must be substantially skill-based, rather than relying on luck or chance; thus the name "skill-based" to refer to this economic model.

Skill-based games are discussed more fully in the Market Overview section of the whitepaper.

[edit] Around/In-Game Advertising

[to be completed]

[edit] Item-Buy (micro transactions)

• Clothing / avatar
• In-game items

[edit] Packaged product / retail

• Quick comparison of traditional retailing to online retailing

[edit] Alternate platforms

• Mobile phone / PDA
• Consoles
• Set-top box / interactive TV
• Handhelds

[edit] Contractual Issues

Types of contracts used in casual game market

• Work-for-hire agreement (subcontractor -> developer)
• Publishing agreement (developer -> publisher)
• Distribution agreement (publisher -> distributor)
• Reseller agreement (distributor -> retailer)
• End-user-license (retailer -> consumer)

Key contractual points

• Disclaimer: this section is no substitute for a real lawyer

[edit] Length of term

Defining the length of the term of the agreement is a very important detail that should not be overlooked in the contract. A typical term can last between twelve months and perpetuity.

Envision what will happen after the contract has expired. Will IP rights revert back to the developer? Will the developer be able to take the game to another publisher? Will the partner have the ability to continue selling the game for a period of time after the contract has expired (common for retail products, it may be called a sell-off period)?

Negotiating an agreement which automatically renews after the initial term will allow a bit of caution as everyone will have an "out" after the initial term has expired. An example of this might include a contract with a 12 month term, which will automatically renew for additional 3 month increments until one party chooses not to continue.

This can work in a developer’s favor if the game is an absolute hit. The termination clause would allow the developer to choose not to renew, and then bring the game to another partner for more favorable terms.

This can also work against the developer if the game is a flop, as the partner may then choose to discontinue a distribution agreement after a short twelve months.

[edit] Termination Rights

• who can terminate
• when they can terminate
• what are the consequences of termination

[edit] Compensation (revenue sharing, fees, etc)

• payment terms
• Minimum price per unit
• Gross revenue vs. net revenue
• Definition of net revenue (what’s in, what’s out)
• Guarantees / royalty advances

[edit] Milestone Descriptions

Typical development milestones are:

• Project Start - This is typically when the contract is signed, and is only significant if the contract calls for payment on project start.
• Feature Complete - This is where the game’s core features are complete, but many of the ancillary elements are still in progress.
• Alpha - At this point the game and ancillary elements should be functional, but will probably still have bugs and graphic / audio pieces missing. All agreed to functionality should be present at this time.
• Beta - The game and all features should be in and nearly finalized. No placeholder graphics or audio should be present, but bugs and further playtesting are still expected at this stage.
• Gold Master / Release - The game is completed and ready to be sent through to distribution for end consumers.

[edit] Trademark usage / guidelines

[edit] IP rights

While a brief discussion of IP rights is provided here, there is much more information including an IP Rights White Paper at the IGDA’s IP Rights SIG: http://www.igda.org/ipr/

[edit] Audit clause

The audit clause is an essential staple of every distribution and publishing agreement. It gives the right of the developer to access the pertinent accounting records of the publisher/licensor without the need to sue for disclosure. The audit clause, however, is very rarely exercised. While the developer has the legal right to exercise it, it projects distrust of the publisher/licensor - which is clearly harmful to a long-term relationship. Only when developers suspect severe accounting abuses should this be exercised. To avoid needing to exercise an audit, a developer should require the publisher/licensor to provide online or frequent (monthly) reporting by channel including Gross Sales, Gross Revenue, itemized expenses and Net Revenue to developer.

What follows is audit language to include that is bipartisan and widely accepted by publishers/licensors. The five percent (5%) is sometimes seen as ten percent (10%), but negotiate to the more standard five percent (5%).

"Audit Rights. Subject to the confidentiality provisions set forth in Section X, and upon the thirty (30) day prior written request of DEVELOPER, DISTRIBUTOR shall make its books and records directly related to payments pursuant to this Agreement available for inspection during normal business hours by an independent certified public accounting firm retained by DEVELOPER, for the purpose of verifying the payments owed to DEVELOPER, at DEVELOPER’S sole cost and expense. DISTRIBUTOR shall keep records in reasonable detail and supporting documentation consistent with normal industry practices. DISTRIBUTOR agrees to reimburse DEVELOPER on a prompt basis for the cost of such audit in the event such audit reveals that the amount paid to DEVELOPER during the period covered by such audit is less than the amount actually due for such period by an amount greater than five percent (5%) of such amount actually due for such period. Audits shall be limited to one per year. If such audit uncovers an overpayment to DEVELOPER, DISTRIBUTOR shall receive appropriate credits against future sales of the Programs."

[edit] Exclusivity

[edit] Territory

[edit] Guarantees / indemnification

[edit] Non-disclosure

[edit] PR / press releases

[edit] Geocultural Issues

One often overlooked aspect of game content development is the aspect of "geocultural" content issues, which can be defined as those content elements - whether in-game or related to the game – that might have potential for cultural and/or political sensitivity in local markets (the US as well as abroad). While such issues are typically more a problem for thematic, non-casual games that employ a generous use of real-world history, symbology, religious themes, geographies and other related aspects, it should be noted that any type of game content – including that of casual games - can be affected.

How does a game developer best manage the potential sensitivities of their content? At least three steps can help:

1. Establish proactive processes: Ensure that the content design and development accounts for the cultural and political implications of the content. While localization personnel/resources sometimes touch upon these topics, it is not a typical focus of most localization efforts and thus may require additional subject-matter expertise.
2. Evaluate the "reasonable risks" versus "overt offenses": Content of reasonable risk is of a type that it could be sensitive but not so much to cause serious repercussions, thus it can be left intact given the local market conditions. Content with overt offense contains well-known sensitivities and should be avoided.
3. Post-development process: Establish clear procedures for responding to and mitigating end-user feedback and/or complaints, in the event that a content element in your content caused a problem in a local market. The key here is to have a clear rationale and defensibility for content that can be easily conveyed.

Again, the great majority of casual games (and any game for that matter) may not encounter such geocultural sensitivities, but in today's world of heightened cultural awareness and interaction as well as the growing ubiquity of games, it's prudent to at least be aware of the potential.

[edit] Conclusion

The Casual Games business is still a very nascent marketplace, and as a result the business models being employed are in an almost constant state of flux. There is a general feeling that there is as much room to improve and innovate on the business side of casual games, as there is within the games themselves.