The Hidden Profits Behind Free Videogames

Star Wars The Old Republic
Star Wars The Old Republic

The recent announcement by Blizzard Entertainment that it would be giving its next game away for free might have startled some investors.

Blizzard, after all, is the talent behind some of the industry's biggest powerhouses, including "World of Warcraft" and "Diablo," and has generated billions of dollars for parent Activision. But the seemingly sudden burst of generosity could turn out to be one of developer's most savvy ideas to date.

Free to play games don't make a lot of sense to some investors, who are used to the $60 retail model (and its residual income from downloadable content). The concept of a small percentage of customers paying piecemeal for small items is hard to balance against the upfront revenue in their minds.

But free-to-play titles are fast becoming one of the most lucrative areas in gaming. Driven by the app revolution, where small developers are making hundreds of millions for giving away their games, and Asia, where the model has been flourishing for years, large U.S. publishers are finally coming around.

Electronic Art has been one of the beneficiaries of the leap of faith to free-to-play. Last quarter, it earned $25 million on iOS devices alone with its app "The Simpsons: Tapped Out". And the model has proven to be a savior for "Star Wars: The Old Republic."

Launched as a "World of Warcraft" killer,"The Old Republic" initially had the same model as most massively multiplayer games—a base cost for the game, followed by a monthly subscription fee of about $15. Developed by one of the industry's most respected developers, it seemed destined to succeed, but developers didn't count on how voraciously fans would chew through the game's content, then leave.

Seeing income fall, EA converted the game to a free-to-play model last November. Since then, the game has seen 2 million new accounts created—with thousands more jumping in every day, according to Jeff Hickman, executive producer of the game.

There's certainly something appealing for consumers about a free game. A recent study by Visa subsidiary PlaySpan found that 77 percent of gamers are spending more time with free to play titles these days.

They're paying, too. PlaySpan found that men were three times more likely than women to make in-game purchases, with respective averages of $13.38 and $4.84 per month. And younger players are proving especially receptive to the idea. Men aged 18-24 years old have an average spend of $30.59 per month.

Those numbers help, but the initial decision to make the jump to free-to-play is a scary one for publishers.

"Sometimes you make a decision and you're like 'Oh God, let's buckle in and hope everything goes well.' That's how it was with free-to-play," says John Smedley, president of Sony Online Entertainment. "Now we look back and wonder 'How did we ever survive before this?' Living in a world where retailers control your software was horrible."

Since the move to free-to-play, SOE has seen a 300 percent increase in new players for "EverQuest 2," a 125 percent increase in item sales for "EverQuest" and a 350 percent bump in overall registrations. "Planetside 2," its most recent release, has more than 1.6 million registered users—with 750,000 logging in to play every week.

Roughly 10 percent of those "Planetside 2" player send up paying for items, said Smedley. And while he acknowledges some parties might focus on the 90 percent who don't pay, he's not concerned about it.

"Everybody is content for everyone else," he said."That's the core of our strategy moving forward. A simple way to put it is: By allowing players to interact with each other, we're providing tools. We're like building a gladiator arena and throwing in the swords."

(Perhaps as a result of SOE's success in the free-to-play space, Sony has announced that the PlayStation 4 would be open to new business models, including free-to-play games.)

The Blizzard game—titles "Hearthstone: Heroes of Warcraft"—is essentially a collectible card game set in the popular "Warcraft" universe. Players will get free virtual cards they can play against others—with more available for purchase (a pack of 5 cards costs$1).

"It's kind of a step outside of our comfort zone," said Chris Metzen, senior VP of story and franchise development at Blizzard. "We're loosening up a little bit and we're developing, you could say, at a smaller scale, but with the same level of quality."

It's Activision's only true free-to-play game, but the company seems to be feeling around the edges of the business model with other titles. "Call of Duty," for example, recently introduced micro-transactions to the game, letting players pick up small items such as extra load out slots and gun personalization packs for prices ranging from $1 to $5.

While the company has not announced plans to convert its multibillion-dollar franchise in the U.S., it is also experimenting with a free-to-play "Call of Duty" in China.

While most major publicly traded publishers are still just beginning to explore the business model, some of the leaders in the free-to-play space say it's only a matter of time before they jump in completely. To ignore it, they say, is corporate suicide.

"I can see our space is getting a little bit crowded," said Victor Kislyi, CEO of privately held, whose "World of Tanks" has over 50 million registered users. "However, this is leading to the fact that lots of game are trying to copy [each other].… At the end of the day, there will be leaders who will think strategically, who will change the direction in free to play. You have to invest. You have to risk. You have to be strong. There are pretty much only two options. You're either following the crowd, copycatting successful formulas again or you want to become one of the leaders."