Casual Games SIG/Whitepaper/Market Overview

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[edit] Introduction

The casual games market has become a big business, attractive to investors and entrepreneurs alike. Over the past few years, casual games have gone from a cottage industry to one of the highest growth areas in the overall video games sector. The casual games industry has grown from almost nothing in 2002 to well over $600 million in 2004 in the United States (US). By 2008, industry experts anticipate that the market will surpass $2 billion in the US alone. For the past several years, thousands of casual games have sprung up all over the Internet, as well as on mobile, console, and even in boxes at brick-and-mortar retail outlets.

When you are in the business of casual games, you are reaching virtually all demographic sectors. Women in their forties comprise the typical casual game player – but so do men, teens, kids, college students, seniors and international audiences. Even hard core game players take a break every now and then to play free online poker games and online pool.

In December 1999, Media Metrix reported that 54.1 million people played a PC game, with 36.5 million of the total players playing Solitaire and other Windows-bundled games such as FreeCell. Perhaps this explains why men and women over the age of fifty comprise of the largest age group playing online Bridge on the America Online (AOL) game service at any given point in time. Without a doubt, more people from around the world play casual games than any other kind of video game.

Although Internet access and broadband adoption have played a significant role in the growth of the casual games sector, it’s the game industry’s embrace of online distribution for casual small file web and downloadable games that has been the major driver. By leveraging the Internet as a unique platform for the creation, monetization and promotion of gaming content, the industry has created a new channel that both drives and is driven by consumer demand. Today, casual games are among the stickiest, most sought-after content online, and major game sites routinely top Internet site rankings. Interestingly, the major form of online game content is no longer game reviews, but it’s the games themselves. Whether played in a web browser or as a fully featured download, casual gaming has moved well beyond the realm of niche into the mainstream.

Additionally, the ease of online distribution has made casual games eminently accessible to non-traditional gaming audiences, particularly female players who may have never even considered themselves “gamers” per se. This overall accessibility, combined with uncomplicated gameplay and risk-free business models such as try-before-you-buy, has been the key to the success of the casual games industry.

Despite the ubiquity of casual games on a variety of gaming platforms, however, this white paper mainly focuses on casual games found on PC and Mac platforms that are played as online or downloadable games. For more information about the presence of casual games on mobile gaming platforms, please refer to the International Game Developer Association’s (IGDA) 2005 Mobile Games Whitepaper (http://www.igda.org/online/IGDA_Mobile_Whitepaper_2005.pdf) or refer to the IGDA's Mobile Games Special Interest Group (SIG) website (http://www.igda.org/mobile).

[edit] What Are Casual Games

The term "casual games" is used to describe games that are easy to learn, utilize simple controls and aspire to forgiving gameplay. Without a doubt, the term "casual games" is sometimes an awkward and ill-fitting term – perhaps best described as games for everyone. Additionally, the term "casual" doesn’t accurately depict that these games can be quite addictive, often delivering hours of entertainment similar to that provided by more traditional console games. To be sure, there is nothing "casual" about the level of loyalty, commitment and enjoyment displayed by many avid casual game players – just as there is nothing "casual" about the market opportunity and market demand for these games.

[edit] Video Game Audiences: Hardcore, Core and Casual Gamers

A recent AP-AOL study indicates that forty percent (40%) of all people in the United States turn off their televisions in favor of playing some type of video game (Source: "Poll 4 in 10 Americans Play Video Games" (http://www.mercurynews.com/mld/mercurynews/business/technology/14526158.htm, May 8, 2006). It is estimated that almost one hundred million people in the US will play a computer game this year alone and yet not all gamers are alike. Within the games industry, players are often assigned to one of three broad (and overlapping) categories:

  • Hardcore Gamer: Gamers who typically play high-action, extremely competitive games that require a greater degree of involvement or dexterity in order to progress.
  • Core Gamer: Gamers who typically play games with a steeper learning curve or games that require some level of deeper involvement or complex tactical challenges.
  • Casual Gamer: Gamers who play games for enjoyment and relaxation rather than games with steep learning curves or requiring high levels of commitment or involvement.

While these audience segments are not mutually exclusive, these distinctions are useful for understanding the different types of video game experiences and play patterns that typify each group.

[edit] Characteristics of Casual Gamers

For the purposes of this whitepaper, we are focusing on casual game audiences. To some extent, though, the typical casual gamer is hard to define, especially since casual games are played by so many kinds of people from around the world. Despite the limitations imposed by these categories, here are ways in which casual games audiences are generally conceived of in terms of demographics, their favorite genres, and what's understood as their typical gaming patterns:

[edit] Demographics

Generally skews older (35+), though casual game players can be found among college students, teens, school-aged children as well as seniors.

While the gender break-down of casual game players can vary greatly from genre-to-genre and even from game-to-game, the largest audience remains women aged thirty-five to fifty.

The proliferation and popularity of casual games has greatly contributed to an explosion of women on the video game scene. Women comprise forty-three percent of all video gamers, according to a 2005 survey conducted by the Entertainment Software Association, up from thirty-eight percent in 2003 (Source: Pioneer Press (http://www.twincities.com/mld/twincities/living/14502122.htm), May 7, 2006).

Furthermore, a recent study conducted by the Consumer Electronics Association (CEA) puts forth that there are more women gamers than males in the twenty-five to thirty-four age range, with the average age being around thirty years. In this age bracket they say sixty-five per cent of women play video games compared to only thirty-five percent of men. (Source: New York Times (http://www.nytimes.com/2006/04/17/technology/17drill.html?ex=1147233600&en=4ee4dae89714ecea&ei=5070), April 17, 2006.)

While the typical core gaming audience is male and aged eighteen to thirty-four, casual gamers tend to be both women and men between the ages of thirty-five and sixty-five, with a slight demographic skew towards women.

Gradually, the number of men playing casual games is increasing, but today’s market reality requires a focus on female players.

Women represent the largest category of consumers for these games, although they may also be buying these games for their husband, children, household or even as gifts.

[edit] Typical Gaming Patterns

The play patterns of each audience segment vary dramatically, with some female players over the age of forty spending upwards of nine hours per week playing online games. These long online play periods are often divided into small game sessions.

Pick up and drop games multiple times per day.

Relaxation, diversion, socialization and community are key drivers for casual game play as opposed to overt competition.

This average play time is much lower than hardcore gamers’ title play commitment near release, but is much higher than the mass-market retail gamers’ average play time.

[edit] Favorite Genres

  • Puzzle Games
  • Card or Solitaire
  • Light System Management
  • Casual Action

[edit] Primary Points of Access

  • Downloadable PC & Mac versions to play offline
  • Online play
  • Increasingly other gaming platforms (e.g., mobile, console)
  • A wide variety of users now see the Internet as a primary entertainment medium, and casual games comprise a main staple of the entertainment value of the Internet. As the audience for online content grows, so does the amount of money spent in the space.

[edit] Responding to Audience Needs and Demands

Keeping the play and consumption patterns of this worldwide mass audience in mind, successful casual games must:

  • Seem accessible to players with varying levels of familiarity and dexterity with computer controls;
  • Engage players who may not be familiar with various game genres
  • Attract players by offering easy-to-learn games that are inviting and generally non-violent;
  • Interact with players who are accustomed to user interface conventions from the traditional retail market.

Clearly, growth in the market shows that gaming is no longer reserved for traditional gaming audiences and that it is only a matter of time before the right casual games spark interest for the mature consumer at large, both men and women alike. When this happens, casual games will truly move from mass market potential to mainstream reality.

[edit] Common Industry Trends and Market Forces

While there is no disagreement about the tremendous potential of the casual games industry as a whole, its component segments have widely differing growth rates, accelerators, inhibitors and key participants.

The following table describes some of the key market forces at play that impact all of these game types one way or another

Market ForceImpactExplanation
Increased Investment in Casual GamesHighPublishers, Retailers, Aggregators and Developers have significantly increased their investments in the space over the past few years. A large number of new entrants into this space, including traditional console makers, are driving the market forward. Costs for production also continue to rise.
Consumers Spend More Time OnlineHighThere is a continuing shift of consumers who spend more time online as compared with other forms of passive entertainment, including watching television or listening to music. Increased broadband penetration gives players easier access to casual game content.
Consumers Increase their Comfort with GamingModerateAs non-gamer consumers increase their gameplay capabilities, they become progressively more comfortable with gaming, increasing the future likelihood that they will try a gaming product from a trusted source.
Developers Push Forward New Genres or ThemesModerateThe development of new and unique game types, modes of play and genres will increase the addressable market opportunity. Examples include adult or mature themed titles (Leisure Suit Larry) and Core/Casual combinations (Ricochet).
Core-Casual CrossoverModerateIncreased game availability, regardless of genre, raises consumer awareness and willingness to try games online. This helps attract new players to the casual games space.

The following sections will explore the definitions, trends, accelerators, inhibitors and future potential of each vertical profiled in this White Paper, namely:

  • Core and Casual Downloadable Games & accompanying Web Versions
  • Web and Community-based games (games played only online)
  • Skill-Based games
  • Advergaming

[edit] Web Demo/Downloadable Games

[edit] Overview

The core and casual downloadable games sector grew over one hundred percent (100%) from 2003-2004, reaching over $115 million in North America alone (Source: US Online PC Gaming Forecast & Analysis, 2004-2008: Growth Continues. IDC, Schelley Olhava, Dec 2004). The industry caters primarily to a mass-market audience of consumers that have little overlap with traditional game buyers. Although numbers for core and casual downloads are not separated in the IDC forecast, most industry experts believe casual games comprise the majority of this revenue today. An explosion in the number of titles, distribution points and marketing investment is driving growth in this sector. The casual game audience is relatively untapped both in terms of potential consumers and volume of downloads.

The downloadable games market is a North America-centric business today with less than twenty-five percent (25%) of revenues coming from other territories. Global sales are increasing quickly with top English-language games selling well internationally – even to non-English speaking consumers – as a result of the games’ more casual and intuitive play pattern. Additionally, leading channels are increasingly focused on developing localized distribution channels and pursuing localized content, which will be a key revenue driver in 2006 and beyond as evident by the recent purchase of Zylom in Europe by RealNetworks.

Downloadable games are typically offered in try-before-you-buy (TBYB) mode and/or as part of a subscription service, often with a free web game demo that is available to provide cross-marketing to the TBYB version and/or as an advertising revenue generator in its own right. The free online version usually offers consumers unlimited game play but with a restricted feature set, while downloadables typically offer the entire feature set but only one hour or less of trial play, forcing users to purchase the game for unlimited, offline gameplay.

Distribution of these TBYB games is carried out by major portals filling the “retail” role (Yahoo! Games, RealArcade, MSN Games, Shockwave.com, AOL, and Pogo), developer sites (WildTangent, PopCap, GameHouse) and aggregators providing game channels to numerous third-party websites (Oberon Media, TryMedia/Macrovision, Boonty). Core games are distributed mostly by major gaming portals (Gamespy/IGN, Gamespot), Peer-to-Peer Networks (KaZaa, Grokster) and distributors (TryMedia/Macrovision, RegNow).

The casual download market was historically devoid of publishers, with game developers distributing directly to the portal “retailers”. While developers still distribute directly to these portals, recent growth in the market is fueling the emergence of publishing entities -- enabling more successful developers to even start publishing third party titles as well. The upside to this trend is that this new breed of publishers provides industry experience, funding and distribution to content developers. However, developers who work through publishers will often lose control over the distribution and ownership of their intellectual property (IP) creations – something they’ve traditionally held onto up to this point.

A full-service publisher should ideally provide technology infrastructure, focus testing, quality assurance testing, and marketing and PR services for its titles/developers. We expect this trend towards the emergence of publishing entities to continue as the market matures and conditions become less friendly to new developers self-funding and self-distributing their content.

The core and hardcore downloadable market is dominated by the major traditional publishers, such as Activision and Electronic Arts (EA), with some notable exceptions. Independent, large developers have had some recent successes in self-distribution, including the breakthrough of Valve’s Half-Life 2 and Team17’s Worms. Online core game publishers like GarageGames are also evangelizing the opportunity for independent developers to produce games explicitly in the downloadable format. Although there is some disagreement, most industry observers expect a healthy online market to develop for both niche core games and franchise add-ons that will bypass the retail channel completely. The greater penetration of broadband and faster connection speeds will greatly reduce download wait times and increase consumer acceptance.

With relatively low development costs ranging from under $50k to over $200k (and rising), developers face a unique set of opportunities and threats in the casual games market. On one hand, low development costs improve the chance of a positive return on investment. On the other hand, low development costs increase the volume of new titles entering the market, resulting in greater royalty and distribution competition. In contrast, the development requirements for core games are almost identical whether retail or online distribution is being used.

[edit] Casual Genres

The top-selling casual genres today are Puzzle, Mah Jong, Sudoku, Casual-Action games, Word games, plus Card & Board games. “Fun” and “accessible” are key attributes that determine market potential for casual games. However, it is important to read the genre list with the understanding that there is no set common definition in the mind of the casual game consumer. The casual nature of the games provides a huge opportunity for developers to innovate and explore with new creative styles and types. Some representative examples of downloadable casual games include:

Game GenreExamples
PuzzleMagic Match, http://www.oberongames.com (Oberon Media/Codeminion)

Mystery Case Files: Huntsville, http://www.bigfishgames.com (Big Fish Games) Tropix, http://www.gamehouse.com (GameHouse/Robot Super Brain)

Mah JongMah Jong Adventures, http://www.skunkstudios.com (Skunk Studios)

Mahjong Escape – Ancient China, http://www.mahjongescape.com/ (Playtime) Mah Jong Quest, http://www.iwin.com (iWin)

Word GamesBig Kahuna Words, http://www.reflexive.net (Reflexive)

Pat Sajak’s Lucky Letters, http://www.playtonium.com (Adveractive/Playtonium) Super Wild Wild Words, http://www.gamehouse.com (GameHouse)

Casual-ActionCake Mania, http://www.sandlotgames.com (Sandlot Games)

Diner Dash, http://www.playfirst.com (PlayFirst/ gameLab) Feeding Frenzy 2, http://www.popcap.com (PopCap)|

Card & BoardAncient TriPeaks, http://www.toybox-games.com (Toy Box Games)

Hotel Solitaire, http://www.zylom.com (Zylom) Sudoku, http://www.gamedesire.com (GameDesire)

At this point in time, most casual games are consumed as either downloadable or online games. Downloadable games are principally single-player experiences today. The free web demo versions that upsell the premium downloadable games are also usually single player experiences that offer very limited replay value. The goal of the free web demo is to upsell a player to download the offline version of the game, though they often generate significant ad revenues in their own right.

Web demo games are not built for evergreen online game play. This is very evident by comparing simultaneous game player numbers on online gaming services that offer web demo games and online games that are built for true online game play experiences like Poker, Hearts and Yahoo! Games Pool. Some companies have added community elements to web demo games such as high scores, chat, and award challenges in order to try to increase web demo game usage and try to further monetize the web demo game time with advertising and sponsorships. It will be interesting to see if downloadable casual games start offering multiplayer experiences and more robust online game play like true online single and multiplayer games that are built for online play as its main focus.

[edit] Business Model Considerations

Try-Before-You-Buy is a central characteristic of downloadable games, although 2005 has seen a resurgence around advertising revenues generated through online game play. To a large extent, however, developers and distributors of games make money only when offline versions of their games sell. While on the surface this is no different than packaged goods sold at retail, the reality is that marketing and promotion of casual games only drives free trial downloads – and this is associated with some bandwidth cost. Therefore, it is the sole job of the game during the trial period to create an experience that is rewarding enough to drive a purchase or conversion to sale. As mentioned in the preceding section, companies are trying to integrate advertising into the web demo as well as the free trial period of the downloadable game in an effort to monetize free game play time, however developers often do not benefit directly from the generation of these ad revenues. A movement is underfoot in the casual games industry to get online retailers to share their advertising revenues with publishers and developers in order to support the creation and further monetization of their game brands.

The core gaming market offers PC downloadable games that most people are familiar with because PC game publishers spend millions of dollars advertising and building their brands. The challenge is that PC publishers to date have largely used online distribution to generate incremental revenue from PC box games that have been in the retail channel for at least several months. This trend is, however, changing. By contrast, the majority of casual downloadable games have no brand recognition, and developers lack the resources to spend significantly on advertising or marketing. Therefore, those casual developers without a strong web presence in their own right are very dependent on portals and gaming sites to promote their games.

Viral marketing can also help online titles succeed. Whether it’s by word-of-mouth or explicit viral features, the pass-along rate of a title can have a significant impact on its revenue. A highly viral title may experience anywhere from seven (7%) to seventeen (17%) percent pass-along sales under ideal conditions. This number will be highest if viral marketing is built into the game, peer-to-peer distribution is used, and the anti-piracy technology allows for revert-to-trial capabilities.

Industry conversion rates to sales vary dramatically from channel to channel, and region to region but a good rule of thumb for an average game is around a one percent (1%) conversion from download to purchase, with top performing games converting at significantly higher rates during different periods of a game’s lifecycle. Although the majority of game sales tend to take place in the first twelve to sixteen weeks after a game has launched, mass-market, and especially casual games, tend to have more “evergreen” sales patterns, often generating significant revenue for years. In the following sections of the white paper content strategies will be outlined to improve overall conversion rates.

[edit] Key Players in the Casual Games Space

[edit] Major Online Retailers

AOL Games: aolsvc.aol.com/onlinegames

Big Fish Games: http://www.bigfishgames.com

MiniClip: http://www.miniclip.com

MSN Games: zone.msn.com

Pogo: http://www.pogo.com

RealArcade: http://www.realarcade.com

Shockwave.com: http://www.shockwave.com

WildTangent: http://www.wildtangent.com

Yahoo! Games http://games.yahoo.com

[edit] Aggregators Providing Retail Game Channels to 3rd Party Web Sites

Boonty: http://www.boonty.com

Oberon Media: http://www.oberongames.com

Trymedia/Macrovision: http://www.trymedia.com

Zylom: http://www.zylom.com

[edit] Publishers

GameHouse: http://www.gamehouse.com

GarageGames: http://www.garagegames.com

iWin: http://www.iwin.com

MumboJumbo: http://www.mumbojumbo.com

Oberon Media: http://www.oberongames.com

PlayFirst: http://www.playfirst.com

PopCap: http://www.popcap.com

Reflexive: http://www.reflexive.net

[edit] Developers

GameHouse: http://www.gamehouse.com

gameLab: http://www.gamelab.com

Hipsoft: http://www.hipsoft.com

LargeAnimal: http://www.largeanimal.com

MumboJumbo: http://www.mumbojumbo.com

PopCap: http://www.popcap.com

Reflexive: http://www.reflexive.net

Sandlot Games: http://www.sandlotgames.com

Skunk Studios: http://www.skunkstudios.com

[edit] Web and Community-based Games

[edit] Overview

Web games are games that can be executed from within a web browser without the need of external (.exe) installers. Common examples include Flash, Shockwave and Java games found on many game websites, as well as custom C++ games delivered via an ActiveX control.

Community-based games can be loosely defined as those game experiences where the game is built for true online game play and can be both single- and multi-player games. Because portals are aggregators of audiences, community becomes an important way for users to define themselves and for portals to define and target their services accordingly. It is also widely understood that community elements within games are an extremely powerful retention tool: audiences feel that they have an investment in their community personae. Unlike web demo games that upsell downloadable games, web and community online games not only offer community elements integrated into the game but the games themselves are also robust and offer long periods of game play. Single-player web demo games, in contrast, tend to have low game duration and retention rates.

There are a number of business models that rely on web games, many of which are complimentary to each other and will be discussed in greater detail in the business model section:

Game TypeDescription
AdvertisingThe most common examples are web games deployed on destination portals surrounded by advertising units. These units are either sold by a company’s direct sales team or purchased from an advertising network. Revenue increases with a game’s traffic popularity, the surrounding units’ sell-through rates and the units’ market values.
SponsorshipThese are games developed with deep integration of sponsor branding. Sponsored web games are deployed either on destination portals or on the sponsor’s websites. Some of these sponsor websites have enough traffic and game selection to be considered a portal in their own right. Some developers offer turnkey solutions that include games, website design, hosting and management. For more information, see the Advergaming section.
SubscriptionMany community-based gaming services generate significant revenue from end-user subscription fees, usually in the $5-10/month range.

IDC estimates advertising and sponsorship revenues in online gaming at over $200M in 2004, growing to $500M by 2008. Although web games do not account for all this revenue, a significant portion can be attributed to the traffic generated by web games.

[edit] Top Genres

Web game genres vary as widely as every other game platform. And like other platforms, genre popularity varies between age and gender groups.

Action / Arcade, Sports, Strategy, Role-Playing Games (RPG) all tend to skew to a younger and more male audience.

Board / Card, Casino, Puzzle, Action Puzzle, Word typically command an older but gender equal player base.

Certain Puzzle and Action Puzzle titles have mostly female audiences. All of the above genres can be created as multiplayer, but today this is typically only seen with Card/Board, Word, and Casino games.

[edit] Characteristics of Successful Games

Features that are typically associated with community-based gaming include: chat, points based rewards systems, prizing, persistence features, tournaments, ladders, message boards and friend/buddy lists.

The types of games typically found on community gaming services range from single-player to group and competitive games with persistent identity. Most services also offer cash competition options, allowing users to play a ladder or tournament for prizes, otherwise known as skill-based gaming. On the whole, most community gaming services focus on casual games and generate their revenue from subscription fees and advertising. Although not totally dissimilar to persistent-world MMOGs, community-based games differ in that their focus is almost exclusively on casual games/gamers and the game play experience is built for quick and short game durations. The games exist primarily online – however there are various examples of sites with minimal downloadable/retail product crossovers that include things such as prizes and points based rewards systems.

Many portals develop their own community-based game titles, although they are often based on existing game concepts such as Hearts, Backgammon, Mah Jong and Go. These simple titles, typically delivered as Java applets (but increasingly moving away from Java and towards Flash), provide little room for third-party developers to bring licensed content to the experience because they are more expensive. However, there is increasing potential demand for such applications.

Because the major portals are also key distributors for downloadable, skill-based and ad-supported games, there is some inherent conflict in the revenue mix they pursue. Community-based games, with their internal development, sunk costs and recurring revenues are a huge attraction for most portals. One other added advantage to sites including community-based elements is that they can add significantly to the amount of time users spend on the site. For example Jupiter/Media Metrix reports that in 2004, casual gaming portals had the highest time-spent per user online of any type of site. As portals increase the amount of time spent on their site, they also increase the opportunity for users to subscribe, download or view advertising – all of which increase their revenues.

However, recent trends suggest that more and more portals are moving toward web content that supports downloadable games without the inclusion of community elements. This trend is commoditizing sites that do not invest heavily in community-based games. There are also instances where portals will ask for joint development of community-based web games in support of downloadable offerings. The advantage of this model is that developers can leverage users’ familiarity with existing community-based games to increase the sales of the corresponding downloadable. The development of community-based titles typically requires the integration of APIs that will allow the game to integrate fully with the community services offered on its intended distribution sites. Providing such services and APIs is seen as the key way for portals to maintain their unique identities and to continue to add value as development shifts more and more to outside developers and publishers.

[edit] Key Players

The following list represents the most highly trafficked websites that publish web and community-based games. Many of the sites listed also offer other game content (casual downloads, game reviews and other editorial, console previews, cut-scene movies, etc.).

[edit] Skill-Based Games

[edit] Overview

The skill-based gaming industry has had about seven years of operating history, led mostly by privately owned firms striving to achieve or maintain profitability in a competitive market. FUN Technologies, who is 51% owned by Liberty Media, was already the owner of SkillJam, one of the two leading U.S.-based skill game sites. During 2006, FUN acquired WorldWinner, the other U.S. leader, and is in the process of merging SkillJam and WorldWinner. King.com, a private company based in the United Kingdom, is the skill-based gaming leader in Europe. The U.S. and European companies are entering each other's territories of dominance to try to be the worldwide leader.

In this context, a “skill-based game” is a web game played in a tournament format, with each player paying a cash entry fee to play, and with a cash or merchandise prize going to the winner or winners of the tournament. Skill-based games are named accordingly because the outcome of each competition is based on the players’ ability and performance, with any elements of luck either eliminated or greatly reduced. This is critical, in order to be legal and avoid falling under anti-gambling statutes.

The laws governing skill-based gaming in the U.S. are on a state-level; there is no applicable federal statute. Even with scoring based on factors of skill rather than luck, skill-based games are not legal in every state. The exact states where skill-based gaming is proscribed vary from provider to provider, based on the readings of each state’s law by their respective legal counsels. The most significant states where skill-based gaming is not permitted, on which all skill game providers appear to agree, are: Arizona, Florida, Iowa, Louisiana and Maryland.

Although there is nothing inherent about skill-based gaming that makes it applicable to casual games but not applicable to non-casual games, to date all economically successful skill game sites have been those that offer casual games as the basis of their tournament offerings. There have been several companies that have attempted to use the same economic model with more hardcore offerings, such as first-person shooters, but have failed and subsequently shut down.

There is a dearth of accurate market data publicized on this nascent industry. As is typical of most early stage market assessments, the limited amount of publicized skill gaming market data has generally been restricted to "top down" macro economic extrapolations. Although this document contains macro economic research, it also includes "bottoms up" micro economic estimates based on empirical operating information.

As a sub-category of the overall online gaming sector, the skill-based gaming industry will likely experience similar growth. In 2004, there were roughly 20-30 companies that could be categorized as skill-based game providers. Today, that number has decreased to fewer than a dozen companies, which generated roughly $100 million in revenue in 2005. With a compound annual growth rate of between 25 and 35 percent, skill game tournament entry fees should exceed $1 billion by the year 2009.

Although still not a household term, skill gaming continues to experience increasing consumer awareness. Arguably the biggest contributors to this increased awareness have been portals that have developed an appreciation for the skill gaming business model and transcended their initial regulatory concerns. Currently, the network of portals partnering with at least one skill game service provider includes Yahoo, AOL, Pogo, MSN, Lycos, RealNetworks, BoxerJam, Shockwave and Miniclip.

Further contributions to consumer awareness of skill gaming are expected to come from the large online casino and sports book operators who view skill gaming as a logical (and more regulation-friendly) extension of their core business. Additional consumer awareness will be derived from the increasing number of mobile and iTV skill game applications.

[edit] Characteristics of a Successful Skill-Based Game

  • Outcome not based on luck – In order to be legal in most states, a player’s score in a skill-based game must be substantially based on skill, and not on factors such as luck and randomness. Skill-based game creators have employed a variety of techniques to turn otherwise luck-based games into skill-based games. Example: in a game where the initial setup of the game would have a huge impact on the scoring – such as the shuffle of cards in a card game – all players in a tournament could receive the same shuffle.
  • Cheat-resistant – Because money is at stake based on the result of a tournament, the impetus to cheat in skill-based games is far higher than in other online game offerings. Games offered by successful skill-based game providers need to be designed and implemented in ways that make it impossible for even fairly technically-savvy players to cheat. Companies employ a variety of mostly proprietary techniques to foil and/or catch cheaters, which are discussed in more detail in the Technology Overview section of the whitepaper.
  • Short-playing time – Experience has shown that games with a short playing time have generated the most money for skill-based game providers. The reason is that, like slot machine players in a casino, skill-based game revenues come from a relatively small number of players (relative to the entire population of casual game players on the web) who tend to play repeatedly. A short game length means a greater number of tournament entries per unit time. For example, chess – which seems like it should be a natural for skill-based gaming – has not been economically successful, in part because of its fairly long game length. Furthermore, skill-based game players are predominantly women, more than half between the ages of twenty-five and fifty-four. Given these players lead busy lives, and many of them are moms with even less free time, they enjoy games that can be played in short 10 to 15 minute bites, or even less.
  • Highly replayable – Again, because skill-based games need to be played many times by each player to be commercially successful, games whose design and/or amount of content makes them highly-replayable without starting to seem repetitious have an advantage. Examples of highly replayable games would be a solitaire, in which the millions of potential card shuffles make the game different with each play; a Boggle-style game, in which the layout of the letters adds variety from play to play; or a jigsaw puzzle game, in which a large supply of different shaped pieces and images keeps players playing.
  • Narrow scoring range – Players are mostly likely to keep playing in skill-based tournaments when they win, or at least lose by a small margin. So devising a scoring system for a game that keeps a fairly narrow margin between the most-skilled and least-skilled players will promote replayability and avoid discouraging newer, less-skilled players.

[edit] Player Ranking

In order to give less-skilled players a chance to win, successful skill game sites employ a ranking system of some type to match players of similar skill level into tournaments. Thus, very skilled players play only against other very skilled players, players of moderate skill play only against other players of moderate skill, and so forth.

To be legal, the outcome of online cash competitions must be based primarily on skill and not luck. Thus, a player's score range in a certain game will tend to fall within a narrow band. If all players were allowed to compete in the same competitions, a handful of the best players would win every challenge. This would discourage the losing players from playing on the site, which would, in turn, hurt even the best players by narrowing the field of potential competitors. However, the task is a lot harder than it sounds.

One issue is how to measure the skill of a player. If it is done by average score, a player can "game" the ranking system by deliberately scoring low in low-prize tournaments in order to be able to easily win high-prize tournaments. Thus ranking systems are based on complex formulas that take into account many factors, such as win-ratios, lifetime winnings, average scores, and number of cash competitions played.

Another issue is how to handle new players. If new players start out at a middle rank, but are not very good, they will lose all of their initial competitions, get discouraged, and leave before the site has collected enough information to give them a more suitable rank. But if new players start out at a low rank, and are already skillful in the given game, they will "eat up" the competition until their rank adjusts to a more suitable level. The typical way to deal with this problem is to make a new player's rank much more volatile than a veteran player's rank, in order to move them more quickly to a suitable level. Another strategy is to lock beginner players out of high-prize tournaments, until their rank has been more solidly ascertained.

A final issue is how to use a rank once it is established. A rank can be used as merely a guideline, in an environment where players choose their own opponents, such as in a lobby-based matching system. Or, a rank can be used invisibly to funnel players into competitions of similarly-ranked players. But what does "similarly-ranked" mean? If defined too narrowly, there are too few players to form a competitive community. If defined too loosely, an unfair environment exists wherein certain players have a slim chance of winning. This is a delicate balance which requires constant monitoring and hard decisions.

Ranking systems work best when there are a lot of players being matched and a lot of tournaments in which to match them. This allows skill game providers to create narrow margins of skill within a given tournament, increasing the percentage of time that a lower-skilled player can win. Thus sites with high traffic volume will inherently be able to provide a more “fair” experience for their players.

[edit] Types of Online Skill Game Competitions

  • Limited Entry competitions -- (also called "Fixed Entry" or "Matched" competitions) The identifying characteristic of a Limited Entry competition is that it contains a pre-established number of competitors; generally between two and 10 players. The competition ends when the final player signs up. Thus, while the number of players and the final prize (or prizes) are known in advance, the ending time is not. A Limited Entry competition might remain open for only a few minutes, or for days, depending on the number of players on the site, and the popularity of the game in question. Players rarely enter a Limited Entry competition multiple times.
  • Progressive competitions -- (also called "Progressive Prize" or "Progressive Cash" competitions) These are tournaments where the ending time is set in advance, but there are an unlimited number of participants. Players are encouraged to enter multiple times, and generally do. Progressives generally last for a period ranging from one day to one week. The prize (or prizes) rise with each entry, so while the end time is known, the final number of players and the final prize(s) are not. Progressives in popular games frequently attract hundreds or even thousands of participants.
  • Unlimited Entry competitions -- (also called "Guaranteed Jackpot" or "Guaranteed Cash Pot" competitions) These tournaments are similar to progressives, in that the ending time is established in advance, but the number of entrants is not. The difference is that the prize (or prizes) is fixed, rather than rising as the number of entrants rises. The prize is often in the form of merchandise rather than cash, such as consumer electronics, jewelry, gift certificates or travel packages.
  • Head-to-Head Challenges -- These are two-player matches played in real-time, generally in a turn-based game, such as chess or pool. Players select their opponents via some type of game lobby. If a ranking system is used, it is merely as a guide to help players choose their opponents, rather than a dictatorial matching system.
  • Ladders -- A ladder is a permanent, or at least ongoing, competition composed of many sub-competitions. Players are arranged on the ladder from best to worst, based either on a preliminary "seeding tournament" or a metric such as rank or lifetime winnings in that particular game. Once qualified, a player can challenge another player who is above them on the ladder. Typically they are only permitted to challenge those who are several "rungs" above them. If the challenging player wins, or if the challenge is ignored, the two players swap positions on the ladder. If the challenger loses, both players retain their positions. Thus, players attempt to battle their way to the top of the ladder. In addition to the prizes for each individual ladder challenge, there may be prizes for the top player or players, as well as the bragging rights the leaders gain from holding the top spots.
  • Brackets -- A bracket is a series of two-player competitions, with winners playing each other in a progressively-narrowing field, until a final competition decides the winner of the bracket. Because of the structure, the number of participants must be a power of two -- i.e.16, 32, 64, 128, and so forth. Therefore, a bracket involves some type of pre-competition registration period, in order to fill the fixed number of competition slots. Players have a set period of time, such as 24 hours, to play their bracket game. If the game is not played, they forfeit the game and their opponent moves on. Like progressives, brackets can be competitions with many players and large prize pools. Unlike progressives, however, which reward a single stellar performance; brackets reward players who maintain a consistently good level of play.
  • TopThis! -- This is a one-player competition. A player is given a target score based on his or her own past performance in the game. The player then attempts to beat that target score. If the player beats the target score, a prize is awarded. This type of competition is not offered to brand new players because of the need to collect a history of player scores in order to establish a relevant stretch target score.

[edit] Case Study

[edit] Royal Flush: Designing an Original Skill-Based Game

In recent months, poker has continued to ride a wave of popularity. Televised poker tournaments fill key timeslots on ESPN and the Travel Channel, and web sites devoted entirely to poker continue to thrive. With consumer demand for poker at an all-time high, WorldWinner’s design team set out to translate the unique flavor of poker into a single-player skill-based game.

The following goals were laid out for the design:

  1. Format the game as a single-player experience, in which the player gets a score based on his/her performance.
  2. Create a game that new players can quickly learn.
  3. Limit the play time for a single game to less than five minutes.
  4. Include as much of the look and feel of poker as possible.
  5. Minimize the “luck factor,” as is required for the game to legally qualify as skill-based.
  6. Create a fun and compelling game that will entertain players on an ongoing basis.

[edit] Rules of the Game

After initial brainstorming sessions, WorldWinner decided the first four goals would be met by designing the game as a form of solitaire in which the player plays through a deck of cards, one at a time. The player scores points by arranging the cards according to pre-determined rules. The game was dubbed Royal Flush, and a simple set of rules was created, borrowing game mechanics from poker wherever possible.

In Royal Flush, players begin with a deck of 52 cards, a stack of four “Raise” chips and four rows with space for five cards each. They have four minutes to play through the deck of cards, solitaire-style, to create nine different five-card poker hands. Just like in real poker, players can raise some of their hands to earn extra points or fold the hands that don’t look promising. The game ends when either all 52 cards have been flipped over or the timer reaches zero. If the player finishes the deck before running out of time, a time bonus is awarded.

By allowing the player freedom to create four hands at once, a large amount of strategic options are made available, and the element of luck affecting the game is far less significant than with regular poker. Additionally, the luck factor is further reduced in actual tournament play because each player receives a deck of cards arranged in the same exact order.

Image:RoyalFlush.jpg

[edit] But is It Fun?

With five of six goals accomplished, the most challenging part came last: evaluating the level of fun, and determining whether the game would keep players entertained. WorldWinner’s programmers created a functional alpha version of the game, and the designers spent several days play-testing.

A problem with Royal Flush immediately became apparent. The player had so much freedom to create poker hands that the order of cards in the deck had too minimal an impact on the outcome of the game. One winning strategy was to simply sort the cards into four rows by suit, scoring points for a flush with each five-card hand. No points would be received for the higher-ranked poker hands, but a player could apply this strategy with such speed that the time bonus made it worthwhile.

After a bit of trial and error, a solution was found by borrowing an idea from the dice game Yahtzee. The rules were changed so that each ranking of poker hand could only be made once. After the first time, no further points could be scored for the same hand. The goal of the game was now to make nine different poker hands one time each, and the order of the cards became much more important to the strategy of the game. To obtain a good score, the player needs to constantly evaluate his opportunities and look for his best chances of creating the top scoring hands.

[edit] A Royal Success

A final, polished version of the game was created, and on March 2, 2006, Royal Flush was launched on WorldWinner.com. The game has been well received by the WorldWinner player community, quickly rising to become the third most popular game on the site during its first week, and it continues to perform strongly with over 12,000 cash competitions played each day. As marketing efforts get underway, WorldWinner hopes to introduce the game to poker fans everywhere as a fun and legal way to put their poker skills to use.

[edit] Key Players

Key players in the skill-based gaming industry include (listed alphabetically):

[edit] Advergaming

[edit] Overview

Advergaming continues to become a larger niche within the casual games industry. Advergaming is loosely defined as “the use of games to deliver advertising messages, drive traffic to web sites, and build brand awareness.” Advergames are now used to sell everything from cars and shoes to servers and soda, and cover most major industries, companies and product types. Branded games can be found in instant messaging applications, banner ads, rich media placements, mobile devices, interactive billboards, traditional websites and pop-ups.

The core premise of advergaming is a simple value exchange: the user gives a brand their eyeballs for three to five minutes at a time, and the brand gives them an entertaining game (usually for free) with embedded marketing messages touting the product, service or industry. Advergames are distinguished from in-game advertising and product placement by the fact that they are designed explicitly for the purpose of marketing a brand.

Advergaming is one model for cutting through the clutter of today’s ad-saturated environment. The average American child today is exposed to forty-thousand ad messages each year and American adults are often exposed to thousands of ads per day in one form or another. The advantages of advergaming reside both in the amount of time a user is willing to spend with the brand as well as in the stronger associations created through effective gameplay.

With syndicated advergames ranging from $10,000 to $35,000 and custom-built games with budgets from $25,000 to $500,000, these small games can be cost effective, attractive alternatives to traditional integration into console games.

Unlike the rest of the casual game space, advergames have a much more limited distribution network. These types of casual games primarily receive their distribution in one of three ways:

  1. Microsites - Custom sites typically developed around the game, or the messaging surrounding the particular ad campaign's branding. These sites are usually hosted by the brand, and need to drive revenue in and of themselves. The best examples become virally spread, and can receive millions of visitors.
  2. Branded Portal - These are portals that are built and paid for by a brand. One of the longest running examples of this is Candystand.com which has a large number of games supporting Wrigley brands. Other examples include Nabiscoworld.com and Postopia.com.
  3. Traditional Portal - There are a couple portal sites that also offer advergame content. Within the past year Shockwave.com has had several advergames built for various clients.

A special case exists for entertainment companies with sites like Nickelodeon’s www.nick.com, DisneyBlast.com and CartoonNetwork.com. The games found on these sites serve a dual-purpose of advertising and promoting the brand, while also being an end product for site visitors to enjoy.

There is also a growing trend of integrating games and advergames into larger, multi-channel campaigns such as Nike's multi-channel advergaming campaign on www.NikeGridiron.com. Interestingly, Nike created both a web-based version of MVE that ran on the site, and a stand-alone arcade version for select NikeTown retail stores in the US.

The number of specialist advergaming developers has grown alongside increased interest in the sector. Shops like Blockdot, Freshgames, Fuel Industries, Powerful Robot, and Skyworks now also market themselves as experts in the advergame industry.

Traditional advertising agencies are also taking a more active role in advergames, with some opening entire divisions devoted to marketing in the video gaming world. Examples include Starcom Media Group’s Play division, as well as The Bounce Interactive Gaming Group at Young & Rubicam.

Although advergaming is a relatively new field, its growth has been extraordinary. By combining the major strength of gaming (user immersion) with the capital of advertising, this sector of the industry is poised to continue its significant growth rate. Venerable industries such as food, entertainment, automotive and financial services have all had significant success with advergames, propelling developers like Skyworks, Blockdot and Freshgames forward. The increased attention to games from all sectors of industry, notably the advertising agencies, promises that advergames will form an increasingly large percentage of the marketing mix.

[edit] Top Advergaming Genres

Traditionally there have been two styles of advergames, and the developers who create them. On the low-end, are quick reskins of existing games and game mechanics with logos incorporated into the experience. These are generally very cheap to build for the developer, and have somewhat limited returns for the advertiser. An example of this would be a typical match-three style game with the pieces replaced with pieces of candy. Most casual game developers can potentially reach the types of advertisers who are looking for this style of simple advergame. However, the pay-off may or may not be worth the effort and the market for this is shrinking as advertisers realize the limited value of such offerings.

On the other end of the spectrum are custom built game experiences tuned to promote an advertisers brand and marketing message. These games are much more time consuming to build, often reaching budgets of over $100K with a few having budgets in the $1 Million+ range. However, this type of game is not something a traditional casual game developer has the ability to deliver. These games are only financed by the largest corporations and typically go through their ad agencies. In order to reach these agencies, a developer must focus on advertising, and realize that their main function will be that of a marketer or ad agency, not a game developer. Additionally the sales cycle for these projects is extremely long, often lasting twelve to eighteen months between initial contact and closing the deal, with an additional six to twelve months of development.

That said, there is room within the advergaming space to expand out into genres that are otherwise not profitable in the casual game space. The goal of an advergame is to provide a fun play experience while promoting the positive aspects of a brand. They are meant to be played, but do not have to be commercially successful. This means that advergames can expand into genres that generally do not sell well, such as racing, or retro-arcade, while focusing on fun gameplay that accentuates the brand.

[edit] Retro Arcade

There is a certain nostalgia for games of the past, and often they are considered chic and trendy. Some marketers attempt to capitalize on this “retro chic” movement with new takes on old games.

[edit] Puzzle

Puzzle games are well established, cheap to make and easy to re-skin for multiple clients. With simple mechanics and rules, they are very safe interactive options for brands, but usually offer limited messaging immersion opportunities compared to other options. Examples:

[edit] Racing

Racing games are another genre that can easily be re-skinned for multiple clients. They also incorporate simple mechanics, and are obviously attractive to car companies looking to create a virtual experience for potential buyers. Examples:

[edit] Strategy

Strategy games come in many different forms and levels of complexity, but this flexibility allows marketers to make strategy games as simple or complex as they like. Deeper gameplay often allows more messaging to come out. Examples:

[edit] Trivia

Trivia games can be used to educate the user about the brand or product. They are also easy to update and re-skin. Examples:

[edit] Traditional Sports

With the massive popularity of sports-themed video games, marketers consistently look to them to connect with audiences. The sub-genre of Extreme Sports allows marketers to align with hipper, younger audiences. Examples:

[edit] Role Playing Game (RPG)

The entertainment and car industries have developed a few RPGs. The narrative structure allows them to create a more complex mood, interaction and story line for a more immersive experience. Examples:

[edit] Micro Games

Often companies want something small to accompany their campaigns. These short micro games can accomplish this for a fraction the cost of other games. Examples:

[edit] Multiplayer

Multiplayer games can create a sense of community around the brand, enhance viral distribution of the game and create a loyal user base. However, there are many performance issues, and corporate liability prohibits most un-censored communication during the game. Examples:

[edit] Key Players

[edit] Advertisers

The Internet Advertising Bureau (IAB) reported in its 2005 year end report that total Internet advertising revenues grew to a record of $12.5 billion in 2005. Consumer advertisers continue "to represent the largest category of Internet ad spending, accounting for fifty-one percent (51%) of the 2005 full year revenues." Within the consumer related categories, "Retail represents forty-seven (47%) percent of 2005 full year revenues followed by Automotive at twenty percent (20%), Leisure (travel, hotel & hospitality) at 14 percent, Entertainment (music, film & TV entertainment) at ten percent (10%) category, and Packaged goods at five percent (5%)."

The following table provides an overview of the key industries investing in advergames.

  • Alcoholic Beverages: Long a target of activist groups, the alcohol industry is always looking for new ways to reach their targets. With gaming being so popular, edgy and viral, it’s a natural fit. Coors, Corona, and Budweiser have all recently developed games.
  • Automotive: Many car companies see games as a way to provide a virtual simulation of what it’s like to drive their cars. It allows them to showcase different models, and to provide an exciting, edgy test drive for perspective buyers. Recent high-end games have been developed for Dodge, Lexus, and BMW.
  • Food & Beverage: With physical product differentiation being minimal for many competitive products in the food & beverage industry, games have become a successful way to speak to specific target markets about their brand message.

Whether aimed at an older market with Sprite’s retro Game System 600, giving young kids colorful mazes in Teddy Grahams’ Park, or targeting Bejeweled fans with M&M’s Flip The Mix, this industry sees games as a fun way to compliment the personality of their brands and products.

  • Hollywood Entertainment: Advergames offer entertainment companies a way to offer viewers a continued experience of a show and its characters beyond the theatre and a 30-minute timeslot. TV network FX’s Lucky’s Run Game, for example, allows viewers to explore the characters and environments of the show at their own leisure. They can also experience enhanced plotlines and stories not covered by a given show or movie.
  • Online (Vertical) Portals: Many web-based companies have viewed games as a way to break through the clutter and entice users to consider their service. The most notable of these is Orbitz, who has used a constant flurry of simple pop-up banner games to drive traffic to their site.
  • Retail Sporting Goods: Nike, RBK, Adidas, Puma, and others have all entered the web-games sphere. Nike has developed the most games, creating a number of high-end, web-based Wild Tangent games, as well as game experiences for AIM Expressions, and SMS Location Based Games (http://www.nike.com/operation6453/).
  • Serious Games & Recruitment Games: Web-based games are not only being used to sell products, but they are also being used to sell and educated about causes. Games are being produced to teach volunteers how to help political candidates with their campaigns (Dean for Iowa Game), to present points of view on major world and political issues (AFKARMEDIA’s UnderAsh), and to recruit for the armed forces (U.S. Army).

There are also educational games being produced by organizations to educate people about the dangers of salty foods (UK Food Standards Agency’s Sid Game), as well as to encourage users to take care of their prostate glands (Prostate Cancer Charity’s Journey to Planet Prostate). If the effectiveness of these interactive applications can be proven there will be many more funded in the future by these causes.

  • Telecom: Many of the largest advertisers (in terms of dollars spent) are in the telecommunications industry. There is a lot of money to be made in this industry, and telecom companies are all trying to capture their target markets by any means possible. Many have already attempted to use games (web and console) to correlate their brands with speed, reliability and fun.
  • Toys: Toys and games have always gone hand in hand. With the inanimate nature of many physical toys, interactive web-based games offer the perfect opportunity to bring these characters and toys to life in the virtual space, jump starting your imagination in the physical space.

Few of these advertisers develop their games in-house. Usually they have their interactive agencies build the games or outsource to a game development company.

[edit] Developers

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