When you work in the casual games space, it’s easy to become preoccupied with downloads. We give away 60 minutes of free-play in the hope that a fair percentage of those free downloaders (a.k.a. freeloaders) will decide during that hour that it is worth paying 20 bucks for the full version. Thus conversion rates have become a constant obsession.
Interestingly, however, research by the CGA in 2006 found that advertising and subscriptions account for nearly 60% of online casual games revenue—great news for the portals, but not-so-good news for the content providers. The revelation served to heat up a simmering debate in which developers and publishers are demanding a share of the revenue from the advertising that their games make possible.
Shockwave was the first to share advertising revenue with its content providers. Then at the Casual Games Association’s Seattle 2006 conference, both Microsoft and Real announced that they would begin sharing advertising revenue as well.
Were these large portals giving in to the inevitable, or did they simply recognize what it would take to maintain a healthy, growing industry? For that matter, what compelled Shockwave to establish the revenue-sharing precedent in the first place? We spoke to all three organizations to get a better understanding of this new monetization model.
Peter Glover, Vice President, Shockwave.com
Shockwave was one of the first to share advertising revenue with content creators. Why did you decide to share revenue with them, especially when no one else in the space was doing it?
It is pretty deep in our business DNA. Shockwave.com was originally created as a "United Artists of the Web"—a place for independent game developers to publish their web (play-in-a-browser) games. To that end, we developed the ad-operations and accounting infrastructure necessary to track and pay advertising-based royalties.
When the downloadable game market emerged, it was a natural extension for us to share all revenue: advertising, direct-to-consumer sales, and subscription. It helps attract the best games. It also mitigates risk for our developers by offering them a piece of multiple revenue streams.
To how many of your developers do you offer a share of advertising revenue? How do they like working with this model? What are the trade-offs compared to a straight download revenue share?
In our standard licensing terms, we offer royalties from advertising revenue. Thus, nearly all developers have advertising revenue sharing in their license with Shockwave.com—only occasionally does a developer trade advertising revenue for some other term sheet item.
All developers are really positive about the revenue they get from advertising. We've had a lot of success working with developers on custom, integrated sponsorship products. Recent examples of client work include Mazda (with the game Ciao Bella from Frima Studio) and Sonic (with Diner Dash from PlayFirst).
You feature three different monetization models: your premium subscription service, Shockwave Unlimited; a pay-to-play download service; and advertising-supported games. Do you offer the same games through each of the three?
Generally, yes—although some downloadable games do not have a web-version. Also, we publish many web-only games not available for download.
How have media planners and ad agencies reacted to the opportunity to advertise directly to the casual games audience? When you first approached them, was it hard to convince them that this is a legitimate, productive way to spend their advertising dollars?
It is a pretty easy sell to savvy media planners. Who wouldn't want someone to play with your brand for hours on end?
We can accurately target specific demographics by game genre and platform (web-only, download, etc.). There is a tendency in the casual games industry to think that the target demo is females 35 and over—but the reach of web-only and other deployment platforms is so much wider than that.
Chris Houtzer, Director of New Media for Games, and Dan Prigg, Sr Manager Developer Relations, Real
The industry currently offers both a try-then-buy, demo-driven model and a free, ad-supported model for casual games. Can you give us a little history of how these different models evolved?
The free, ad-supported model for web-based casual games has been around for ages, but when the Internet bubble burst in late 2000 and the online advertising market crashed, the try-before-you-buy model emerged with small executable “downloadable” casual games. Interestingly, when RealNetworks first launched RealArcade in 2001, we had to convince game developers to build downloadable games. We had to assure them that consumers would be interested in purchasing a game, as it was at then an unproven model. Since that time, however, the try-before-you-buy model has become a staple of the industry. Traditionally the trial demo period has yielded conversion rates of around 2%, on average, with only a handful of the most successful titles reaching the higher single digits. Yet as the industry evolved, and the online ad market rebounded, we have all looked for ways to monetize those remaining consumers who do not make any purchases. This is where the ad-supported model for downloadable games becomes an obvious solution. It directly targets and monetizes those consumers who enjoy playing downloadable casual games but may never actually buy one.
In addition, we’ve discovered that there is difference in consumer behavior between non-purchasers and purchasers of downloadable games. It’s not surprising that owners play more frequently and for longer periods of time. In testing various wrapper time limits, many non-purchasers complain the time limits are just not long enough to evaluate a game but actually never plan on purchasing the game. It is this insight into the consumption habits of casual gamers that is driving the industry to figure out creative ways to monetize “the other 98%.”
Do you think both advertising-supported and try-then-buy games can continue to coexist, or do you anticipate that the demo-to-purchase model will eventually be replaced by the advertising model altogether?
It’s too soon to tell. We believe that 2007 will be the year in which these innovative forms of advertising and business models take shape. There are a few different experiments in the marketplace today, but the jury is still out on which models, or more importantly, which combination of models will be the most effective. We’re currently focused on both business structures and are finding our customers enjoy choices.
How has your advertising model performed so far? How does reality compare to your original expectations?
We’ve always been optimistic about in-game advertising, but we weren’t sure what to expect. In general, casual games are a great medium and platform for various forms of advertising as ad dollars tend to follow where people spend a lot of time. It’s still very early, but initial results have surpassed expectations. A bit contributor to this is the combination of consumer and ad agency acceptance. Our sales team has found that Fortune 500 clients are embracing this new opportunity.
How many of your developers are currently offering advertising-supported games? How do they like working with this new model?
We are currently working with more than ten different developers on in-game advertising, and yes, we are sharing the revenue with them. Developer satisfaction is obviously key to the success of any new business models in casual games and our developer partners are very encouraged by the initial results.
Chris Early, Studio Manager, and Scott Austin, Group Manager, MSN Games
What made you decide to voluntarily give up a percentage of your advertising revenue?
The Ad-Share program opens up a brand new revenue stream for the developers creating dynamic, innovative game-play for the casual games space. The casual space has always been a playground of sorts for developers; companies and individuals have a bit more freedom to experiment with new in-game features and game-play dynamics because the overall development costs of casual games tend to be much lower than the multi-million dollar budgets assigned to blockbuster console features. Think of it as the “indie film” space in the games industry.
The current model of revenue for developers (only getting revenue from download purchases and subscriptions) does not reflect the multiple revenue opportunities that exist in the industry today. By sharing ad revenues, we’re allowing the industry to experiment with new business models like ads in game trials, web-only games and more. We are launching the ad share program as an incentive to ensure that developers continue to innovate in the casual space.
When you decide to shift away from pay-to-play in order to focus instead on an ad-supported version of a game, does a content provider’s revenue tend to increase or decrease? Why do you think that is?
We are not shifting away from pay-to-play. We are, instead, opening a new revenue stream for developers which will allow us all to try new and hybrid models. Because we’re adding new revenue streams, we expect content providers—such as MSN Games—to see an increase in revenue. We also expect developers’ revenues to increase as they will have more opportunities for new and different revenue streams.
How many of your developers are currently offering advertising-supported games? How do they like working with this new model?
A large percentage of our developers currently offer advertising-supported games. Almost all of our downloadable titles allow for interstitial advertising “commercials” during the free trial period. These ads are quick, highly targeted to game player demographics, and are designed not to disrupt game-play as they are served up in between game levels.
We believe that most developers are familiar and comfortable working within this advertising model. These “commercials” allow players to demo a developer’s game completely free for 60 minutes—in effect bringing the game to a wider audience of potential purchasers.
In your mind, what are the next steps to ensure that advertising-supported content becomes a long-term, stable, mass-market monetization option for the entire casual games industry?
We’re already well on our way to ensuring that advertising is a long-term revenue model for the casual games industry. Advertising has been involved with this market since day one—the shift has been from stand-alone, banner advertising to more immersive content, skinned games, and in-game product placement. Xbox Live Arcade is a great example of where the industry is going. Taking cues from in-game product placement in retail games, I expect we’ll see subtle integration of products into casual games—Coca-Cola products served up in Diner Dash, for example.
As an industry, I believe the most important thing we must do is uphold the integrity of casual game play and ensure that advertising enhances, rather than detracts, from the end-user experience. Our ad rev-share program is meant to allow the developers to have multiple ways to monetize their IP.
Peter Glover is the Vice President, New Products and Technology at Atom Entertainment, Inc. Peter has been part of Shockwave.com's Games Group since 2000, first running the company's internal development studio, and then later managing its games business as a whole. His current focus at Shockwave.com is new business development. His previous work experience includes Andersen Consulting, LeapFrog Toys, Zenda Studio (formerly Apple Computer's Discovery Studio), and Freelance Multimedia and Design Consultancy.
Chris Houtzer is the Director of New Media in the Games group at RealNetworks, where he's primarily responsible for the North American advertising strategy for games. Prior to joining Real in 2004, Chris was Senior Manager of Business Development at WetFeet, a recruitment solutions provider in San Francisco, where he developed a successful online subscription service for University Career Centers. In early 2000, Chris sold InternshipPrograms.com to WetFeet, a company he built his senior year of college. Chris holds a B.A. in Economics and Management from Albion College.
Dan Prigg is Senior Manager of Developer Relations for RealArcade at RealNetworks. Mr. Prigg’s primary responsibilities include: identifying content opportunities, securing new developer relationships and distribution rights to games, negotiating contracts, designing and producing games, creating strategic opportunities to enhance the service, as well as general partner account management. Prior to this role, he was Senior Producer of Games, responsible for overseeing third-party licensing for RealArcade.
Chris Early is studio manager for Microsoft Casual Games. A gaming industry veteran, he leads the Microsoft Casual Games group in expanding Microsoft's casual gaming audience and game experiences across multiple platforms. Microsoft's approach to casual gaming reaches beyond the traditional online segment, tapping into diverse markets that span MSN Games, MSN Messenger, Mobile, Xbox LIVE Arcade and Windows OS games. Prior to joining Microsoft, Chris served as chief operating officer of GameSpy and executive vice president and general manager of Mplayer. He holds a B.A. in Economics and International Management from Claremont Men's College.
Scott Austin, Group Manager, MSN Games, has been responsible for the MSN Games business since January, 2006, and has led the team to increase its focus on the consumer and on building scalable technology. Scott has been with MSN since 1999. His roles have been varied and include MSN Shopping, international and operations. Before joining Microsoft, Scott worked in IT management. Scott has received two degrees in Civil Engineering (which he hasn’t used since graduation). He has a Bachelor's Degree from the Coast Guard Academy and a Master's Degree from Columbia University.
