Editor’s Note: This story has been changed from the print version to correct the spelling of the company Live Gamer.
A series of recent moves in the L.A. video game world shows that the evolution from console-based games to free Internet games has moved to hyperspeed.
And contrary to what you might think, the evolution away from expensive console games may yield more money for game companies. That’s because players seem willing to spend a couple of dollars here and a few there for little add-ons.
Agoura Hills video game publisher THQ Inc. recently inked a deal with New York company Live Gamer to handle players’ payments for extra features for its first free online game. Meanwhile, Santa Monica’s Activision Blizzard has sold 20 million downloads that allow online gamers to play “Call of Duty” on different terrains.
“Online games are definitely where the growth for the industry is over the next few years,” said Mike Hickey, an analyst with Janco Partners in Greenwood Village, Colo.
The model that will help publishers tap into the most growth, Hickey said, is the free-to-play system, where games are offered for free but dedicated players may pay small fees to buy extra features. Activision Blizzard’s “World of Warcraft” recently charged $25 for players to purchase a ridable horse. Tens of thousands of players snapped up the horse as soon as it was released.
Although free-to-play games eliminate the revenue that publishers could make from selling games for $60 each in stores, industry experts said that the online model has the potential to increase revenue because there’s no limit to the amount users can spend on extra downloads, including access to higher levels or new game landscapes.
“When you look at some of the Chinese online games, the top players are spending hundreds of dollars a month on virtual items,” said Andrew Schneider, president of Live Gamer, which performs the monetary transactions that take place when a gamer buys extras online.
The move toward free-to-play online games comes as retail sales for the video game industry have been lagging. Industrywide sales fell to $20.2 billion last year, down 8.6 percent from 2008.
Industry researcher DFC Intelligence projects that the market for virtual transactions like those provided by Live Gamer could grow to as much as $7 billion by 2015, up from $800 million in 2009.
THQ plans to take advantage of the free-to-play market when it launches the online version of its WWII battle game “Company of Heroes.”
The game, first released for PCs in 2006, will be available online in September. This is the first time an online version of a THQ game will be available to gamers in the United States; the publisher began testing the model in China in 2006.
“We’ve been a big believer in this model for several years,” said Brian Farrell, chief executive of THQ. “It lowers the barrier of entry to new customers.”
Farrell acknowledged that the majority of the users of THQ’s free online games won’t pay any money to the company, but he believes that significant revenue can be generated from the small portion who do. He estimated that a dedicated player could spend as much as $24 a month on extras.
Farrell’s recent deal with Live Gamer, which isn’t limited to “Company of Heroes,” shows that THQ is ready to move its business online. Live Gamer also recently contracted with Redwood City publisher Electronic Arts, another industry leader.
Social games
THQ also plans to use microtransactions for four Facebook games that it will roll out in coming weeks. These so-called “casual games” will build off brands that the company already owns.
“The idea we have is to create content and promote it across three screens – TV monitor, PC screen or social networking site – to build a franchise,” Farrell said.
By releasing Facebook versions of the company’s most popular video games, Farrell said he hopes to tap into a new customer base that has recently developed an interest in gaming.
A turning point in social network games came with FarmVille, created by San Francisco game company Zynga in June 2009. The game, which lets users cultivate a virtual farm by planting and harvesting crops, skyrocketed in popularity on Facebook, amassing 61 million users by June 2010.
“What FarmVille has done is brought new people who may not have been gamers,” Farrell said. “That creates an opportunity.”
THQ is not the only company looking for a piece of the social gaming market.
Walt Disney Co. announced July 27 that it had paid more than $563 million to buy social game developer Playdom Inc., a Mountain View company that has developed Facebook games such as Sorority Life and Social City. The Burbank media giant plans to use Playdom to launch games for social networking sites that will feature characters from the Disney pantheon.
Atari, the game company renowned for games such as Pong and Missile Command, is looking to make a comeback by tapping into the social gaming craze. The company plans to release Facebook versions of some of its classic games, including Missile Command and Centipede.
Casual games are attractive to publishers because they are inexpensive to develop and distribute, so they yield greater profits, Hickey said.
But LiveGamer’s Schneider said social network games such as FarmVille appeal to a different audience than the crowd that plays “Company of Heroes.” The Facebook crowd won’t spend as much time or money on games.
“‘Company of Heroes’ falls into a pretty hard-core gamer demographic, which has higher retention rates and a greater average revenue per user per month,” he said. “Social games can acquire a larger audience, but at a lower level of monetization.”
Subscription model
Online games are nothing new to the video game industry. Blizzard Entertainment, the Irvine subsidiary of Santa Monica-headquartered Activision Blizzard, released its first online game, “Diablo,” in 1997. The company also owns Internet powerhouse “World of Warcraft,” released in 2004, which had 11.5 million users at the end of 2009.
But “World of Warcraft” and “Diablo” differ from the free-to-play model that’s gaining traction because users are required to pay a subscription fee – which costs $15 per month for a month-by-month subscription, or $13 per month for a six-month package.
“(‘World of Warcraft’) is emerging into a social network itself,” Hickey said. “It’s very forward in realizing digital opportunities.”
Despite the game’s success, Schneider said that eventually the subscription model will lose out to free-to-play games because free-to-play allows users to spend more than the fixed subscription fee each month.
Activision did not return calls for comment. However, the company has also started online transactions. The publisher offered new terrains for players of “Call of Duty: Modern Warfare 2.” The company said that 20 million players paid $15 each for the maps. That would mean Activision sold $300 million worth of those add-ons.
Nevertheless, Farrell doesn’t see consoles and discs disappearing. Instead, he expects the industry to move toward a model that combines retail sales with online microtransactions. That’s what the company will do when it releases a new version of its road racing game “MX v. ATV” in 2011. The retail price of the game will be cut in half, but users will then be able to download extra features online for a small fee.
“Retail and online can co-exist at the same time,” Farrell said.
