Insights Into Tomorrow: Episode 2 “Video Game Monetization”

We take a deep dive into the effect but sometimes controversial monetization strategies of videos games. We’ll look at the various types of monetization outlets, strategies and pro’s and con’s of each methodology. We’ll also take a briefly look at the history of video games and how they’ve traditionally been monetized in the past before we look at today’s modern crop of video games and how developers are making money on them.

We’ll explore concepts such as subscriptions, micro-transations, free to play, advertising and much more. We examine traditional retail as well as digital distribution models and how to fit into the evolving technology available to game manufacturers. An examination of past game companies and where their business models failed gives us a glimpse into today’s strategies and money making decisions.

Finally we’ll look at the future of gaming monetization. From the economics of the current models and how they align with other similar subscription based industries to the government regulation that micro-transactions and loot crates are forcing various legal entities around the world to investigate for potential violations of gambling ordinances. We look at the direction of the video game industry and how it’s going to impact us in the coming years not just in the video game industry but across the board.


Speaker 1: 00:01 Insightful, informative insights, a podcast network.

Speaker 3: 00:25 Welcome to insights into tomorrow where we take a deeper look into how the issues of today will impact the world of tomorrow from politics and world news to media and technology. We discuss how today’s headlines are becoming tomorrow’s reality.

Speaker 4: 00:59 Welcome to insights into tomorrow. This is episode two, video game monetization. I’m your host, Joseph Waylon and my intelligent and insightful cohost Sam Waylon. How are you doing today, Sam? Okay, so we are broadcasting live on Twitch right now. Unfortunately we seem to be having some technical issues, so it might not look so great on Twitch at the moment. We apologize for that. So what we’re talking about this week here was actually a topic that you had proposed. You wanted to talk about Luke crates and the effect that they’re kind of having economically and legally in some cases and on the, in the gaming industry itself. And in doing the research for that it in, in my experience doing the research, it turned out to be a lot deeper than just loot crates. And I thought it would be worthwhile to touch on some of the additional details of that. So what was originally, what I thought was a fairly straightforward topic turned out to be a lot more complicated. So we’ll start off talking about what we’re referring to when we say video game monetization and we’ll go from there. Okay, sounds good. All right.

Speaker 4: 02:24 So what is video game monetization? Well, for the purpose of this discussion, video game monetization is the ever evolving process that a video game publisher can use to generate revenue from a video game product. The methods of model monetization may vary between games, especially when they come from different genres or platforms, but they all serve the same purpose to return money to the game developers, copyright owners and other stakeholders. As the monetization methods continue to diversify, they also affect the game design in a way that sometimes lead to some criticisms. Now before we start the discussion, I do want to throw out there in the interest of total disclosure for the better part of the last 20 years. I’ve worked in the software industry in some form, not specifically the game industry, but the software industry from a commercial software standpoint. So there’s a certain familiarity that I do have with the development process and the market drivers for us. So I just want to throw that out there right off the bat. And to start this off, I do wanna, you know, let me ask you, Sam what do you think of the current monetization methods? Do you think video games are overly oppressive and how they’re trying to get money out of people at this point?

Speaker 6: 03:50 Yeah, I do. I mean, I think, I mean there are some exceptions, but for the most part, I think most games triple a games coming out today are designed to get as much money out of the consumer as possible. And we’ll touch on it later. But the different methods used for that can vary from, you know, not as bad cosmetic items to super aggressive game altering mechanics that can give some players an advantage just because they’ve got a bigger, you know, bigger bank account.

Speaker 4: 04:18 Yeah. And I think that’s where some of the criticism really comes from is when you get into that played a wind sort of model that we, that we see a lot these days. So let’s talk about some of the, the main methods of monetization. And we go back, you know, we’re going to start off with the original retail model. You know, you go to a video game store, you purchase a title, whether it’s for PC or console or whatever, you take it home, you own that title for as long as you want. And for as long as you use that equipment that you’re playing it on. That’s a fairly antiquated model at this point in time, wouldn’t you say?

Speaker 6: 05:05 Yeah. I mean GameStop is still around, but they’re routinely laying off people and they actually recently just changed some of their stores to make them more they, they change the interior so they have more computers and game console set up to try to make people stay in the stores. And they also saw a lot more physical merchandise like shirts and, and other kind of non-video game kind of items like that. So GameStop, who was the biggest probably distributor, the first one that comes to mind when you think of physical retail? They’ve been struggling for probably the last five years.

Speaker 4: 05:37 Yeah. And recently GameStop had acquired ThinkGeek and they’ve been basically carrying all the pop culture merchandise that think he can, is another stream of revenue for, for what they’re trying to do. And I think that change in attitude from a retail standpoint is sort of by the move that we’ve seen with the release of to a certain extent the Xbox three 60 and that generation, you know, the PS threes and then the PS fours and the Xbox ones where you’re moving to a digital subscription mode or, or digital retail mode is what they often refer to it as. Where when you purchase your games, you don’t walk into a store now you don’t put money on the counter and walk out with a physical item. You’re making a purchase through your online account now and you’re downloading the software to the hard driving your device.

Speaker 4: 06:35 Now. and this is, this is a method that that first hit computers, I mean computers with steam and other origin gaming services had sort of this model in place well ahead of the consoles and the consuls were kind of late coming into this, this mode of pushing it to you. And that was really one of the big concerns a lot of people have when the current generation of counsels came out. And you’re going to be able to buy your content. Cause the one concern that that this brings in is the mobility of your content. Now. So in a retail standpoint, you could go out and purchase a, a CD that had your game on it, you could take it out of your console, go over to your friends and play it at your friend’s house. And when it’s not digitally signed to your console, you’re much more restricted in how mobile you can go with that, aren’t you?

Speaker 6: 07:37 Yeah. And it’s also, it takes up more storage in general on your console cause you have to download the whole game where instead of just having the disc. And that’s kind of part of why the digital distribution has risen in the last couple of years is because consuls are getting bigger storage, they’re able to use a external hard drives and internet in general has gotten more high speeds. So you can download those things. Whereas before you just didn’t have the bandwidth to do it.

Speaker 4: 08:01 Yeah. And in fact, I know I was telling you earlier before the show that I had just picked up, picked up, figuratively speaking, of course, the latest star Wars jet iPhone order game, and I bought it digitally through the Microsoft store and it was almost 38 gig of a download that I managed to pull down inside of less than an hour, which from a technology standpoint, it’s pretty, pretty impressive. You know, that I can get that kind of content down at one shot and never have to leave my house for that.

Speaker 6: 08:36 Yeah. But part of that that comes with that is you’re only licensing the game so you don’t have that physical copy. So if for some reason tomorrow Microsoft said, Oh, Oh, you can’t have that anymore, they could yank that off your account. Theoretically, even though you’ve made that purchase, which is kind of where some of the people that are die hard physical copy users, that’s kind of their argument that they say, I’d rather have something I can hold that, you know, can’t be taken back and someday, you know,

Speaker 4: 09:00 And that is a very good point that actually kind of takes us into the next method of monetization. And that’s subscription-based in general.

Speaker 4: 09:12 In a subscription based general model itself, you don’t even own the licensing for it. You own it for as long as the company allows you to play it. And a couple of examples of this are

Speaker 4: 09:26 Origin access PlayStation plus the newer ones that are coming out, Google has stadia that’s coming out now.

Speaker 4: 09:36 Basically you pay for a subscription, you get that subscription for as long as you have the service itself or until they pull the games off of that service.

Speaker 6: 09:47 Yeah. I use on Xbox games pass, which is 15 a month, I believe, 15 or 16 and you get access to a lot of games. So for someone like me that might not want to spend, and I know subscription kind of sounds bad because they could take away even more at any point. But for someone like me that doesn’t want to spend $60 on three new games, I can pay $15 and play play them after the fact because as Xbox games best has when first party Xbox studio games come out, they go right to games pass. So you can get something like whenever the next halo comes out, you can, instead of, instead of paying $6, you could theoretically get a free trial of game spazz play for free for a week or whatever and see if you like it. So for people that are not looking to spend that much on games, it does give them, you know, more economic option.

Speaker 4: 10:33 Now do you feel that you’re getting your money’s worth out of that?

Speaker 6: 10:35 Absolutely. Yeah. I don’t really, everything I play on my Xbox, I played the games best. So

Speaker 4: 10:41 Yeah. See, and, and prior to this model your subscriptions cause you had games subscriptions in the past, but those subscriptions really were services. And the, the first one to come to mind is the, is a world of Warcraft. So you, you pay for the initial install of world of Warcraft, but the game itself doesn’t work unless it’s online and unless it’s online with the world of Warcraft servers. So basically you’re renting that service at that point in time. And with our new subscription models that we’re seeing, instead of being a single game service, now you’re getting an all you can eat buffet. Apple arcade is a similar type of service that’s out there. And, and that’s sort of where the industry’s going. And, and that’s media in general. I mean, everything’s going to services from,

Speaker 4: 11:38 Your video games to your movies, to your cable, your online radio even your, your office related software. Microsoft office three 65, your Adobe suites, everything’s moving to a subscription model. And from a business standpoint, that’s, that’s guaranteed return re recurring revenue. And the other thing that it does is it kills the piracy that was rampant in the software industry despite various attempts to, to thwart it in the past. So there’s two other things that, that I did want to mention before we get to really the, the heart of the matter that we have here. And that is lesser known ones. You have player trading and player trading is a business model where in game items and digital currencies can be traded between players. And usually a lot of this has to look the video game that I play now.

Speaker 4: 12:45 Star Wars, the old Republic kind of follows this model along with microtransactions and that is they have an end game, Karen Z, various end game, Karen Zs. And in order to buy the vanity items that they produce on a regular basis, you need to buy with a currency that requires cash to buy. So you convert money, real dollars into this endgame game, currency, purchase the items off of their market, then you can take those markets and sell them for another end game currency to other pliers. So a lot of what are labeled whales in the industry wind up buying off of this select market so they can sell to other users who don’t have the cash. So what will happen is they’ll go out and they’ll grind various tasks in the game to generate this other in game currency. Then they’ll pay the whales for the stuff that they’ve paid cash for.

Speaker 4: 13:48 And then the whales then take that cat, that end game currency and then sell large amounts of that endgame currency to other people for cash to get back. And so this is where we’re getting into the real world consequences and this kind of thing because you’re converting real money, you’re dealing with real money adjacent to in game items and currency. Absolutely. and, and this crosses international boundaries because these games are played around the world and it’s almost like a legalized form of money laundering when you get down to this. And it’s a, it’s an economy that, that really is self-sustaining. And as a result, and here’s one of the negatives that comes out of that. The video game developers are driven more to produce items and, and services for this artificial market that can be sold rather than to produce enhancements, real enhancements to the game, other content or bug fixes or whatever to keep the game itself going. And you know, the over public is a great example of that where BioWare has dramatically shifted their development over to what they call their cartel market. So the cartel market uses cartel coins, which you acquire with cash through their website. And the majority of their development work now goes towards making different outfits to wear or vehicles to drive or whatever it is, and that’s driving what they’re developing and investing in the game more than actually doing anything productive in the game. So that’s, that’s a concern. What are your thoughts on that?

Speaker 6: 15:35 I mean, they do that and it’s not just BioWare, but companies do that because it makes them the killing. I mean they make so much money off of these and we’ll touch on in a second microtransactions plus the end game trading that it’s just, they’d be ridiculous not to from a business standpoint, that doesn’t make it right. But I mean it’s difficult to fight that when that is the driving force of a business is to make profit and they’re going to find the best way to do that, you know, maximize efficiency and maximize profit.

Speaker 4: 16:02 Yeah. And ultimately it’s the end users who wind up losing out on that because you, you ultimately have the lower quality game. The one other thing I did want to mention before we get into microtransactions is advertising. You find advertising as a form of indirect monetization. So apart from the aforementioned methods of monetization, indirect monetization generates revenue from other sources and doesn’t directly come from the player. So most frequently, this is in the placement of ads within a game. These make may take the form of a banner ad, a commercial breaks in play or product placement in the game. Games that rely on advertisements for return usually are the free to play games and are cheaper than other games in their production costs. A lot of times you think of a mobile games. Yes. Thank you. Mobile games. So Bejeweled what’s the one? Candy crush is another one. I can’t, I keep thinking the one that had had Arnold Schwarzenegger doing the advertising, it’s one of the tactical forge of empires or something like that. So yeah, it’s these little mobile games that, you know, they’ll let you play the game as long as you want for free, but they’re going to get advertising revenue out of you for that.

Speaker 6: 17:24 This is crossing over to councils as well. Recently it was either NBA two, K 19 or 18. There was an update to it where they were showing commercials for an, some show on FX. Like as your game was loading, it would play these commercials. Now you could turn them off in the settings, but initially they’re enabled by default. So they got a lot of flack for that because we’ll touch on probably later. NBA sports games already heavily monetized. So to have commercials for a TV show on top of that, I mean, people didn’t really take kindly to that, especially because most of those games are broken. In terms of bugs and glitches to the point where they can be on playable. So to focus on advertising for a television show instead of fixing the game, you know, they’ve got a lot of outreach from that.

Speaker 4: 18:07 Well, and I think it was, I forget which one of the NHL games from EA went up doing the same thing because just like NBA teams do for real, where they sell advertising in the arenas themselves. The game was actually selling advertising in an arena setting and as a result you were getting all of these theatrical camera pans and stuff like that that was slowing the game down and causing all kinds of problems just so they could pan the camera on and show you all the various advertisements that they had sold that were on like the, the, the boards there or the banners up top and stuff like that. So they were creative ways of having advertising creep into it but they weren’t non-disruptive. And the last thing here that I did want to mention here that was kind of the driver for this entire discussion is microtransactions.

Speaker 4: 19:09 So sometimes just abbreviated MTX. Microtransactions is a business model where aspects of a games content can be purchased to enhance the game experience for the plier. These aspects may range among new playable content in game currencies, cosmetic options and otherwise unavailable or unrestricted gameplay advantages. Traditionally these purchases tend to be relatively inexpensive. It’s the microtransaction, but numerous and variety microtransactions are often common in social and mobile games where potential customers maybe hesitant to purchase a full game but more at ease with smaller yet more numerous payments. So the old adage of death by a thousand cuts this was your focus on the topic. So let’s get your thoughts on this and I’ll give you the soapbox so to speak, to, to talk about this.

Speaker 6: 20:11 Well there’s a lot to cover. We’re going to break it down in a second, but I think micro transactions are kind of, like I said earlier, businesses are getting companies make so much money off of them and that’s why they put their focus there. And where you run into issues is where these are these micro transact. It’s hard to say MTX is or whatever are affecting game play for other people. So if you can get better on a weapons and RPG or better armor that make you better because you paid more, that directly affects everybody else’s gameplay, which then encourages people to spend more money on the game money that they might not have. And this is a problem when it comes to children. And when you get to loot boxes, how those are surprise mechanics, how those work. In terms of GAM, like a gambling aspect with there not being a guaranteed return for what you’re paying your money for. Kids are being targeted because they’ve got, they, you know, they can get their parent’s credit card and they can spend tons and tons of money because they want to get the best skins or the best equipment out of this random gambling system, which is where a lot of the real world consequences can come from.

Speaker 4: 21:18 Yeah. And when we talk microtransactions is there’s two large areas that we talk about. One is downloadable content. So for instance, you may purchase modern warfare, one of the games from the modern warfare series and you get the base game. And one of the large aspects of, of these first person shooters is really online player versus player. You’re going out there, you’re playing against other people. And what we find nowadays is that that base game only gets you so far. Not soon after the initial release you start getting map packs to come out. And those map packs tend to be a good percentage of what the base game is. So in a given year you could get five or six map packs and then those five or six map packs could total two to three times. But the original base game costs,

Speaker 6: 22:12 It’s actually funny you mentioned that cause the most recent modern warfare that came out last month has actually moved away from that model. They the map packs are all free now, but instead they’ve replaced that with a battle pass system, which fortnight kind of popularized. Whereas you’re getting all your content for free, but you’re ranking up in this battle pass by playing the game so you can, it’s more macro transactions where you can spend money to advance that battle pass faster and to get better in game. Typically it’s all cosmetic items, but still people spend a lot of money on that.

Speaker 4: 22:45 Right? So even the game industry itself is, is developing even just in the last couple of years. It’s, it’s from having these major changes. And the the other aspect I did want to focus a little bit more on is the loot boxes where the loot boxes of variation of a microtransaction in which it’s, it’s a random reward for cash. And this has been looked at by district attorneys around the country and it’s been found to be illegal outside the country as well as a form of gambling. And as you had mentioned previously, they’re targeting these towards minors. And because of the very nature of the currency exchange that’s happening here, they’re starting to crack down on these. Overwatch is, is one that’s faute been focused on a lot with this, with the cosmetic skins. So the argument that the game developer makes is that, well these have no effect on game play itself. And that’s countered by the fact that if I give you money and I have a random chance of getting something in return for it, that by its very definition is a gamble . And if you’re only going to focus this on 18 and older, it’s one thing. But because you’re targeting these specifically at under 18 then there there’s a major issue that people are running into with these.

Speaker 6: 24:16 Yeah, and I, I play a lot of Overwatch on my love that game. But it is definitely, there is an aspect of gambling to it and I think on the developers side, well they see it as it’s not effecting gameplay. You still have the same chance of winning no matter what kind of skin you have, no matter what kind of cosmetic things you have. So you’d sound like you’re getting that pay to win like I had mentioned earlier. But you have to accept some degree of responsibility and be realistic about it, that people are spending lots and lots of money because these things aren’t regulated and they have no idea what they’re getting in terms of rarity chances, which I think some companies are do publish it. Yeah. Because they have to cause they’re going to crack down by that.

Speaker 4: 24:53 Well, and the idea is, well, if we self-regulate, the new government doesn’t have to come in and regulate,

Speaker 6: 24:58 But they’re not going to self regulate because they’re making all the money in the world, you know?

Speaker 4: 25:02 Well, and that’s a thing. What they’re doing is self-reporting, not self-regulate. So they’re trying to give that illusion at this point in time so the government doesn’t crack down on them. I think they really understand the whole idea of, of modernization, of a monetization of the video game industry. It’s worthwhile to sort of take a look back at where the whole idea came from historically and how it evolved. So we’ll talk about that when we come back.

Speaker 5: 25:35

Speaker 4: 25:36 So in the eighties and nineties, we had what was affectionately referred to as shareware gains. And this was almost exclusively the PC era. They were released in limited content versions. Wolf Enstein being a very good example of this. You could get Wolf and Stein play a certain number of levels just to get a feel for the game. But if you wanted to unlock all the levels, you had to buy the full game. So it was playable up to a certain point and that was enough to sort of dip your toe in the water there and figure out if it was a game that you wanted to apply. And they, they didn’t cripple the game as other people tended to do. Then we move into the 90s to the 2000, two thousands and we’ve run into the try before you buy where it was perfected by big fish games.

Speaker 4: 26:32 Lot of people may or may remember some of the games they dominated the mobile markets for awhile there and the web based games and they released via download a game every day that was free for the first hour and he can play it unrestricted and then the player would have an option to buy the full game. So they basically gave you an all you can eat for a period of time and then I’ll give you the option to buy it and then try before you buy moved, morphed into the more familiar free to play models that we know of today. We’re in this model, gains were free and over 90% of the players would never spend money on them anyway. So the game developers would focus on that 10%. The whales as we refer to them as however they were built to get the most engaged players to spend an improve to speed off.

Speaker 4: 27:30 So this is where we got the Plato wind models out of our free to play error up until the 2000 tens and some of the, the household names here, like a Atari and a claim and, and THQ they wound up going bankrupt because these were the traditional video game guys who were trying to be, you know, they were stuck in the, in the original markets. And then you had people like Zynga who solved their valuation within a year, reached $10 billion on these new models. And it was sort of this time up until, you know, in the early two thousands where the idea of video game monetization really started to evolve. And we had a lot of people with a lot of different ideas, but a lot of money changed hands here. And then up into the 2010 to 2020 range is when we started getting into the subscription models that we had already talked about.

Speaker 4: 28:32 So this evolution of game monetization is really a pretty fairly new thing. It was small iterations here and there up until this point until we really hit the con connected model that we have now. And, and the other thing to mention is not only do we have the model monetization, but there is an incredibly high amount of tracking that goes on now on these video games. So, you know, we’re granting and people don’t realize it, but when you install one of these games, you’re, you’re giving an access to your microphone and your camera and do your GPS and to notify you and you know, you’re in, in some cases, giving it access to external accounts, like your social media accounts. And there’s this wholly connected model that they’re using now where instead of the game being a revenue model for the software company, the player is now the revenue model and it’s not just from the money coming out of your pocket, it’s from a demographics and the infographics that are coming out of the user. What are your thoughts on that?

Speaker 6: 29:47 Yeah, this is actually something we talked about in one of my classes. I’m at college. It’s a, I think it’s called a dual product market where as a consumer you are giving money but you as the consumer are also a product. And especially nowadays you’re more value. Your money is not what’s valuable. Your information is what valuable, your data’s what’s valuable. And we could probably make a whole nother show about it, but especially with these kinds of things how, what you buy and how you buy them or where you live, everything about you is what’s valuable to advertisers because then they can target and sell more products and that information is critical for that industry.

Speaker 4: 30:25 Yeah. And you know, not to, to go too much off on a tangent here, but that this is the same model that social media uses now. So you have a Facebook and you’ve obviously heard of Cambridge Analytica and the effect that that had on the 2016 election that was basically using Facebook’s model that it’s, it’s users are its product, the information that you generate is the product. It may be used to generate advertising, it may be used to sell that information to a political campaign. It may be used to sell you a product. One of the things that people are concerned about constantly now is they may have a conversation talking about an obscure product and then all of a sudden they start getting advertisements for it. It’s like, okay, who’s listening to me at this point in time, which my devices is listening to me. And that’s really how marketing is, is pushed now cause there’s so much information that’s gathered and our video games on our cell phones mostly are analogous, a huge driving factor in them. And it’s kinda scary.

Speaker 6: 31:39 Yeah. I think I’m talking about listening specifically. I think a while back, I believe it was Microsoft got into some trouble because they were testing audio software with the connect, well not the connect anymore, but whatever their, I think it’s Cortana, whatever their voice services on their Xbox is. And in testing it, they recorded children talking. And to tie it back into what we’re talking about here, they got in a lot of trouble for that because you can’t record miners without their knowledge or consent. And they got, you know, I don’t know if they got any legal trouble for that, but they definitely had to, you know, shut that down.

Speaker 4: 32:10 Yeah, yeah, I remember the article itself. So that kind of brings us, that’s a good segue into the next topic that I wanted to talk about on this. And that is the impact of a video game monetization on the gaming industry itself. And there’s really three key areas where we see that impact itself play out. The first is in market growth. So in 2014, the digital download made up 52% of all game sells and overtook retail purchases. Now, that was five years ago now. So you have to imagine it’s got to be pretty significant now. The video game industry now continues to grow and generated over $130 billion and this is across the board, all video games in 2018. And the model has, has shifted significantly to, to all connected games with consoles quickly falling by the wayside.

Speaker 6: 33:12 Yeah, I mean if you look at it, video games had been around for what like 45 years, 50 years, and to make an already $130 billion industry by 2018 like that, that level of growth is not seen that often. And now, especially developers with that monetization mindset want to maximize that profit as much as they can, you know, for even longer.

Speaker 4: 33:33 Yeah. I mean you figure $130 billion, even if you get 1% of that with a new game on the market, that’s enough to put any game developer over the top at that point in time. So market growth is definitely something that monetization has had an impact on. The other is game design itself. And we’ve sort of touched on this earlier in the show. So since the method of monetization must be decided before the game production, it may affect the game’s overall design and how players will interact with the game. So if the first thing that they’re thinking of, and really from a business standpoint, they should be is how are we going to make games that’s going to drive how the game itself is developed. So they’re not, they’re not altruistic trying to make the best game people want to play. They want to make the most money, and that’s always going to drive design monetization trends like games as a service will shape how new games are designed as well, potentially making genres that are easy to monetize, more popular than others. So, for instance, sports games are notorious for modern monetization. Usually it’s one and done and you might get a recurring revenue out of roster updates and stuff like that. There’s really no need for microtransactions. So as a result, that’s a completely different design strategy than these mobile games that we get.

Speaker 6: 35:11 Well you actually, you do get a lot of monetization with games like FIFA and they’ve updated that more in recent years with a FIFA ultimate team, which is basically you get loot boxes which have players in them and you can range from good players to bad players in like a rarity scale. And then you build your team to play online against other people. So that’s where they get all their money from. Is this the ultimate team? And it’s not just FIFA. I think all the sports games have a version of it, but they’re making a ridiculous amount of money just from ultimate team alone. And I think it hasn’t been around, it only came out in like 2014, but every FIFA has had it. And if, I don’t know the numbers off the top of my head, but a significant portion of the revenue from these games come from this online ultimate team style of, of monster.

Speaker 4: 35:55 Well, I know I’ve played the EA NHL and it has an aspect of that to it. I guess maybe cause I never really got into making the purchases myself. I’ve never experienced that, but I could totally understand seeing that in FIFA with how popular it is nationwide and internationally. The other thing that, that, that monetization has had an impact on is legal consideration, which is what we’re talking about with the loot boxes. So some forms of monetization have become government con have become a government concept as the, as the as an element of gambling. And this is particularly when they’re targeted at miners. So not only do you have video games now driving how we market them, how we design them, now you have how governments are reacting to them now where you’ve got a loop. Boxes for instance, are considered a form of gambling in several Asian and European countries.

Speaker 4: 37:07 And are heavily regulated in those countries now in the United States is looking at regulating loot boxes as well. So it’s really the first time in history that you’re seeing laws that are being developed to handle video games where you’ve had questionable practices in video games before with depictions of violence and sexual acts and stuff like that have always sort of danced around the fringe of, of legal at that point. But now you actually have governments that are forming legislation now to deal with the effects of these loot boxes. Now I, I think that’s probably the most significant development that we’ve seen in monetization at this point in time is the fact that it’s now driving legislation. What do you think about that?

Speaker 6: 38:02 I think it’s just a natural progression of the industry. I mean, before mortal combat, there wasn’t a rating system for games. I think it was mortal combat, but mortal combat was so violent that they had to, people didn’t want their youth exposed to this kind of stuff. And that’s a debate for another time about video games and violence. But regardless the type of game that moral combat was warranted some kind of regulation and I think that the rating system is self regulated by the video game industry. I don’t think it has government oversight. It is. Yeah. So I think that this gambling aspect of it is just something that falls under that umbrella as well. It should be regulated. I mean when electricity was invented you could have 10 different companies on the same block, but eventually the government had to step in and regulate that as well because it was affecting the consumer. And I think that this is no different.

Speaker 4: 38:47 Well that’s an interesting take on it. I mean I can certainly see us going down that route of, I guess, I don’t know. I never thought that we would have to regulate video games from a legal standpoint. Of course. I also didn’t think that we would be targeting minors with early gambling too and it’s to the point, you know, some of these games are like crack dealers at this point. We’re the first ones for free and then we were going to charge you for the rest. At that point in time. And we’re getting kids, you know, as young as nine and 10 years old hooked on it.

Speaker 6: 39:19 Yeah. And I mean a lot of the two, you have a lot of big lobbyists that are in Washington on behalf of large Vega and corporations like EA. Infamously a while back they had the debate where the lobbyist from AA used the term surprise mechanics, which kinda got made fun of across the internet because obviously that’s not the same thing, but you have the lobbyists that are trying to minimize the impact that this gambling has when the reality is much more much different, which of course, you know, that’s how you have to deal with what you see being dealt with with politicians is, you know, minimizing to get their eyes away from it.

Speaker 4: 39:52 Exactly. It’s smoke smoking mirrors as it may be. So I think we’ve touched on most of the, the aspects that I wanted to talk about. One thing I did want to talk about when we come back is what the future of we gain monetization is that we think it’ll be, let me come back.

Speaker 4: 40:16 So you know, I, I put a couple of things in just as what, what my thoughts are here and I want to run them past you and see what your thoughts are and, and really what I think the, the biggest future of monetization is, is probably going to be, this is subscription services that we’re seeing now and not the, the wild subscription models. I’m talking more of the Google, Arcadia, Apple, you know, PLA arcade plus whatever they’re calling it, but basically the, you pay for this subscription to get your gains and we’re going to give you an all you can eat type of gaming you. What do you think of the future of that model?

Speaker 6: 41:02 I think it’s definitely going to be where everybody’s headed to. I mean, like you just said, you named like three off the top of your head and there’s countless more where that came from. I mean, someone did a tally of all of the streaming services for movies and television and it equals like more than the cable bill. And it’s only going to get worse because there’s so many that haven’t launched yet. Lincoln, peacock and HBO max and all these, and that’s just for television and movies. And I don’t see any reason why video games wouldn’t follow suit. I mean, it’s a, it’s a, it makes them tons of money and people forget that they have subscriptions that, you know, hit their credit card every month and you think, Oh, it’s only, what, 10 bucks, 11 bucks, you know? Oh, sorry about that. You know, I’ll cancel the next month. And then they don’t. But then if you ma, if you multiply that number by what 22 million people sign up for Disney plus, then you’ve already made $120 million just by that.

Speaker 4: 41:51 Yeah, yeah. And, and you know, you’re right. It’s a model that works. Everyone’s doing it. And now you’re seeing it with movies, with, with television, with your office products, with your software development products. Everybody, literally everyone is going to it. Even with these the random loot crates that you get at home, not even just the ones that you get in game, like you’ve got subscription services for miscellaneous boxes of stuff. Everyone goes subscription, you’re getting food services as a subscription. So this, this idea that I could pay a little bit of money here and I get a value for it without me having to worry about it, I don’t have to, you know, pick up the phone and call someone to buy a license or go out to a store to buy a license for this. I think it’s a convenience of, of not having to manage it yourself because it’s a subscription that manages itself.

Speaker 6: 42:54 Yeah. It’s also kind of like what I said earlier, just to progression of the industry. I mean, before blockbuster was the biggest thing or you know, you could rent and it wasn’t a subscription, but you could rent DVDs, which was huge at the time because you know, not everybody had all the latest movies. And I think that subscriptions are the next step of that where now that we’ve got digital IP that all these companies are fighting over, then your IP is what will make your, your brand the most profitable and the most attracted to consumers. And I think that’s exactly where it’s heading.

Speaker 4: 43:23 Yeah. And it’s a model where, you know, it’s a clinic catchphrase. Everybody wins, you know, consumers win because the subscriptions succeed in better aligning their customers to the business models that they’re looking for. Rather than a linear model of selling a product to a customer. This, the subscription model creates a dynamic where the company constantly is trying to please the customer to keep them as a customer. It’s not this buy something and come back to me and what have you done for me lately? And they allow companies to, to start their month or their year with a guaranteed base of business. So it kind of works across the board. Fundamentally,

Speaker 6: 44:10 There are a little bit of negative aspects to it where smaller content creators and producers miss out on getting market share because of they can’t compete with these streaming services or with subscription services. So you know, smaller indie developers for games. There are places for them where the clientele can purchase their games. But when you’re compared to something like an Xbox past that has, you know, over 150 games or something like that, for $15 a month, triple a games that each would be $60 on their own. Right. The smaller producers and creators kind of get pushed by the wayside, which is, you know, that’s what happens in big business. Anyway, we sit a little time.

Speaker 4: 44:47 Well, and that’s kind of one of the concerns that I had had with Apple and, and their new arcade. They’re releasing games on a regular basis and they like, they, we kind of saw the same thing with Apple news plus or Apple news plus one of the be an aggregator of various news magazines and other publications. And the problem that you had was there’s a fixed amount that, that each of your readers is going to read and they get everything. So that $10 a month that I’m paying has to be theoretically divided among a hundred or more vendors at that point in time. So there comes a point where even in economies of scale, it doesn’t scale. And because in order for that model to work from a consumer standpoint, you have to have the amount of producers and the volume of content to make it worthwhile. And when you reach that threshold, even if you continue to double your membership rates, if you don’t increase the cost of that to spread that money further, as you spread your content base out you don’t like spread the butter so thin on that piece of bread.

Speaker 6: 46:11 Yeah. And you talk about that volume of content. I think we’re way past that threshold now for every kind of content. I think there’s too much to watch. There’s too much to play for video games that it’s, you fall behind and you have to pick and choose. And as a consumer, if I can save $60 or not $60 but save $45 and get a subscription service that allows me to play these games as they cycle in and out, then I’m going to go for that instead of, you know, dropping $60 on a game that I might forget about and in two weeks.

Speaker 4: 46:38 And that’s the thing, like you get a game, you know, I’ll go with a jet, I fall in order again. So Genifone order on average may give you 20 hours of game play before you finish it. What’s the replayability? Is there an online gaming aspect of it where I can play against other people? I don’t think so. I haven’t found that. If there is, so it’s a game where I just spent $65 on this game, that’s $65 could have got me half a year of is of a subscription service to play anything on that service that I wanted.

Speaker 6: 47:13 And it’s, it’s, it’s unfortunate because that example in order, it’s an example of a great AAA single player game, which the industry does not have that many of anymore. And it’s because of things like this and the model is that they set up for games as a service to be, to have a game, you pay your $60 and then it’s monetized over the course of two years. Something like a destiny that single player games getting pushed out. And not everybody can afford to keep up with a games as a service model. So some people want just a single player. I don’t want to be online, you know, I just want to be, I just want to do my own thing. And unfortunately with what the way things are going, you’re not going to get that many games like that.

Speaker 4: 47:49 Well, and I’ll show you also look at the production costs of something like a fallen order where it’s got a production budget of a major motion picture. And in order to be profitable, you need to overcome that budget before you even see a dollar of profit come out of it. So you need to sell that $60 game to X number of people just to reach profitability. And in that kind of scenario, a subscription model just doesn’t work because in a subscription model, that $10 that someone’s paying for the subscription that they get your game through, you’re getting 30 cents out of that. So the scale of the number of people that have to subscribe to it is so astronomically high at that point in time that the producers can’t justify a budget for $150 million movie or, or game rather than this case. So that’s gonna have a huge impact on the video game market moving.

Speaker 6: 48:49 And that’s where you get the same four sports games every year. But it was small changes because they take the same thing, they release it, call it NBA two K 20 and make millions of dollars off of the ultimate team stuff that they, that is the real reason people play for the most part, you know? Right,

Speaker 4: 49:03 Right. So, you know, bottom line, let me ask you straight up, where do you think the video game industry is going? And do you think it’s a, a good direction that it’s going?

Speaker 6: 49:15 Well? I think it’s definitely, sorry, I did it again. I really don’t mean to keep hitting that mic. It’s definitely adding more towards all the subscription services, especially with Google stadia. That’s the big one that’s coming out that’s going to be as a service. But a lot of the differentiating thing here is that some of these subscriptions are, is, are streaming based. So you’re not, like with games pass, you’re downloading the games to your console, whereas with stadia and the PlayStation version of that, you’re streaming it, right? So if your internet can’t handle that then, and there are lots of places where people’s internet can then, that service has nothing to you, it’s meaningless. So I think we’re still kind of, it’s still kind of in its infancy and I think as the internet continues to grow and get more high speed, then the streaming and the subscriptions will become probably the dominant way of doing business. But now I think we’re kind of in between, you know, we’re still getting big single player games like fall in order, but we’re also still getting things like destiny where, you know, it’s, it’s supportive for two years and monetize the same way.

Speaker 4: 50:13 Yeah. Do you think that you think the gaming industry is, is looking up or do you think we’ve got a rough road ahead of us?

Speaker 6: 50:22 That’s a good question. I think, I think in terms of profits looking up, but I think in terms of creativity and art, it’s probably looking down because when the business, the investors behind these companies realize that they can make triple the profit with half the work by doing, you know, things that can be easily monetized, then I think that’s going to stifle more creative endeavors, more creative projects, and they’re going to be harder to get made. For the sake of the art form.

Speaker 4: 50:51 And I think I tend to agree with that assessment that there’s always going to be profit in there. And I think what’s going to suffer is the quality of what we get. And ultimately, you know, the consumer, we’re going to be paying more money for lower quality product. And I just think that’s the way things go in general until it reaches a point that we have to turn things around.

Speaker 6: 51:14 Always hanging on a positive note. Yeah. Yeah. Wow.

Speaker 4: 51:17 Given the topic, it’s a positive though from what we’ve talked about in the last couple of episodes. Yeah. That was all that I had. Was there anything that you, that we missed?

Speaker 6: 51:27 Just one thing. I, I know you had mentioned the other shows we did and they were more serious topics, but I do think that this is a very serious topic as well because it is affecting minors and it is a huge economic machine that I don’t think many people take seriously. And that’s part of the reason why they can make so much money off of children and if people that, you know, are sucked into this monetization. So I think the more serious we take it, you know, it’ll be easier to regulate it. And I agree.

Speaker 4: 51:53 And you know, when you had first proposed it I, I didn’t think it, it really fit in line with the other shows until I did the research. And, and after doing a couple of days worth of research, I realized that this is serious, you know, the fact that we have governments that are forming laws to govern this the fact that we have kids who are highly susceptible to cyber addiction and gambling to begin with are being targeted by this. This is a significant topic and I don’t think it’s any, it’s one that’s going to be going away anytime soon. So any closing remarks before we hand out, I think that’s all I got. Alright, that’s it for today. Thank you for listening. If you folks want to get in touch with us, we would love to hear your feedback. You can email You can check out the video version of the podcast at into things. You can get the audio You can hit us on Twitter at insights underscore things. And obviously if you’re watching now, you can see us on Twitch at into things. And finally you can get us on Facebook at into things podcast. And I think that’s it for us. Another one in the books. Bye

Show Notes

  • Introductions
    • Insights Into Tomorrow: Episode 2 “Video Game Monetization”
    • My intelligent and insightful co-host Sam Whalen
  • What is Video Game Monetization
    • Video game monetization is the ever evolving process that a video game publisher can use to generate revenue from a video game product. The methods of monetization may vary between games, especially when they come from different genres or platforms, but they all serve the same purpose to return money to the game developers, copyright owners, and other stakeholders. As the monetization methods continue to diversify, they also affect the game design in a way that sometimes leads to criticism.
  • Main methods of monetization
    • Retail
      • Retail purchase is the traditional method by which games are sold from brick and mortar stores or online retailers. Customers pay for a physical copy of the game and any other game related peripheral devices required for play in-store. Retail purchasing has previously made up the bulk of game-related transactions, but it has been on the decline in recent years due to the rise of digital distribution and mobile gaming. However, the importance of brick and mortar game stores as a place for gamers to gather and show their passion still remains. Furthermore, some retail purchases may come with collectible boxes and possible in-game items to attract customers over digital download.
    • Digital distribution
      • Digital distribution or digital download is similar in practice to retail purchasing, but is different in venue. Instead of acquiring a game through a physical store, customers buy their games online and download the game’s data directly to their devices. Many games sold through digital download are distributed by means of a third-party service that functions in the same way as a physical store, selling a variety of games from many different developers in one location. Valve Corporation’s Steam is an example of digital distribution platforms for PC gaming.
    • Subscription
      • Subscription model is a business model where a game requires continuous, ongoing payments from customers in order to play the game. Games that utilize subscription often sell access in blocks of one-month increments or in multiples thereof. Once a subscription runs out or is canceled by a customer, their access to the game ceases or is reduced until they re-subscribe. This method is most often associated with games that require an online connection or services that require capital to operate on the part of the publisher or developer. An example of games that use subscription model is World of Warcraft.

        Subscription service is, on the other hand, not a direct subscription to a game but a subscription to gaming-related services. These services may include, but not limited to, monthly games such as Humble Bundle, temporary access to game library such as Origin Access, and access to multiplayer online session such as PlayStation Plus.
    • Player trading
      • Player trading is a business model where in-game items and digital currencies can be traded between players on the game marketplace that allows the publisher to get a cut on transactions that players made. Most of the times, The publisher can get a percentage from every transactions, like Steam community market, or from a difference between buying and selling price of the in-game currency, like World of Warcraft.
    • Advertising
      • Advertising is a form of indirect monetization. Apart from aforementioned methods of monetization, indirect monetization generate revenue from other sources that does not directly come from the player. Most frequently, this is the placement of advertisements within a game; these may take the form of banner advertisements, commercial breaks in play, or product placement in the game. Games that rely on advertisement for returns usually are free-to-play or are cheaper than other games as their production cost has already been subsidized.
    • Microtransaction
      • Microtransaction (sometimes abbreviated to MTX) is a business model where aspects of a game’s contents can be purchased to enhance the game experience for the player. These aspects may range among new playable contents, in-game currencies, cosmetic options, and otherwise unavailable or restricted gameplay advantages. Traditionally, these purchases tend to be relatively inexpensive but numerous in variety. Microtransactions are often common in social and mobile games where potential customers may be hesitant to purchase a full game, but more at ease with smaller, yet more numerous payments.
        • Downloadable content (abbreviated as DLC) is a kind of microtransaction that expands the base game by providing additional contents. Depending on the game and publisher, a downloadable content may be a huge expansion that greatly impacts the game, or a series of smaller expansions. These expansions can be either skins, maps, story, or even a new game mode based on the main game.
        • Loot Box is a variation of microtransaction of which the rewards are random. The player has no control over the rewards they receive for paying in-game or real world currencies although the game often shows a list of possible loots that the player may get from the loot box. The content of the loot box may range from purely cosmetic items with no effect on gameplay, such as skins in Overwatch, to powerful items with a gameplay advantage that otherwise the player has to grind to achieve. Some games may require the players to rely on loot box system to obtain characters and items more heavily than other games. They are sometimes referred to as a Gacha game.
  • Brief history of Gaming Monetization
    • 80’s-90’s Shareware
      • Games (Mainly PC) were released in limited content versions such as Wolfenstein that encourage player based distribution of the limited game with the intent to drive retail sales of the full game and other offerings
    • 90’s-2000’s Try Before You Buy
      • Try-before-you-buy was introduced in the early 2000s and perfected by Big Fish Games, who released via download a game every day that was free for the first hour and then the player would have the option of purchasing the full game. While the model did not have a huge impact on the traditional game companies it brought an entirely new demographic into gaming. For the first time, gaming was not dominated by teen age boys playing in their parents’ basements but saw an influx of female players, particularly older women.
    • 2000-2010 Free to Play
      • In this model, games were truly free and over 90 percent of the players would never spend a penny. The games, however, were built to get the most engaged players to spend to improve or speed up their gaming experience, and many of these players would spend tens or even hundreds of thousands of dollars in their favorite games. Social gaming companies, led by Zynga, gained millions of daily players, pulling them from other gaming or entertainment companies.
  • Household names like Atari, Acclaim and THQ (which had earlier reached over $1 billion in sales) went bankrupt. Zynga saw its valuation reach over $10 billion. Disney and Electronic Arts both spent hundreds of thousands of dollars to acquire companies in the space. The concepts behind free-to-play have grown to shape the video game space, even those old-school companies that still monetize with an upfront purchase use in-game monetization to drive their revenue growth. 

    Given the impact of free-to-play and the millionaires it, everyone has been looking for the next disruptive business model. Based on how other industries are evolving, subscriptions are likely to be the next disruptive model in the game industry, 

    • 2010-2020 Subscription Games
      • Originally single game subscription systems for infrastructure cost recoup. Players would pay a nominal fee for the game and a reoccurring cost to use the software developers servers for game play. This was commonly used in MMO’s such as Everquest and World of Warcraft
      • Console providers latched on to the idea to allow multiple player experiences with traditional console games with services like Xbox Live and Playstation Plus
    • 2020 and beyond Subscription Service
      • A move from individual game subscriptions to “all you can eat” game buffets
      • Services like Apple Arcade, Google Stadia and others are offering up an ever increasingly large pool of low cost often easy to build games to flood the user with. Each developer getting a portion of the take and sharing it like other distributed subscription services such as news clearing houses.

    • Impact on the gaming industry
      • Market Growth
        • In 2014, digital download model made up 52% of all game sales and overtook retail purchase
        • The video games industry continues to grow it generated over $130 billion U.S. dollars in 2018
      • Game Design
        • Since the method of monetization must be decided before the game production, it may affect the game’s overall design and how players will interact with the game
        • Monetization trends like games as a service will shape how new games are designed, potentially making genre that are easy to monetize more popular than others
        • Improper consideration of balance between good game design and effective monetization can lead to either players feeling extorted by the game and its developers or a failure of the game to produce enough revenue for the game to turn a profit
      • Legal Considerations
        • Some forms of monetization have become governmental concept as they may trend close to elements of gambling, particularly with games that are targetted to minors
        • Loot boxes have been of concern for several governments, with more attention given to them after 2017 and 2018
        • There are various laws and regulations that apply to video games offering them
        • Loot boxes are considered a form of gambling in several Asian and European countries, and thus are either heavily regulated (such as publishing of the odds for loot boxes) or illegal to offer.
    • The Future of Gaming Monetization
      • Subscription Services
        • Everyone is doing it
          • Developments in other industries show the likelihood that subscriptions will emerge as a disruptive force.
          • The largest retailer in the world Amazon, uses its Prime subscription service to lock in customers.
          •, the most important company in the enterprise software space, eschewed the high fixed fee model for a subscription model that left its established competitors in the dust.
          • Adobe, the largest provider of graphics software, abandoned its old business model to move to a subscription model and is now valued at $135 billion.
          • Netflix, the second most important entertainment company in the world, gained its position with a subscription model.
          • Microsoft the largest maker of desktop publishing software moved its venerable Office suite to a subscription service
          • Even Disney is betting its future on subscriptions with Disney Plus.
        • Everybody wins
          • Consumers
            • Subscriptions have succeeded because they better align customers with providers than other business models.
            • Rather than the linear model of selling a product to a customer, the subscription model creates a dynamic where the company constantly has to please its customers.
            • Subscriptions allow companies to start the month (or year) with a guaranteed base of business.
          • Providers
            • Rather than having to estimate how many units you will sell, you look at your subscriber base and can accurately forecast your revenue.
            • This stability of predictable cashflow allows companies to market aggressively, invest in new content, etc., as they can predict cash flow.
            • The subscription model also aligns companies with their customers.
            • Companies driven by a subscription model have direct ongoing relationships with their customers.
            • They no longer have to segment customers, they now have individual subscribers.
              • With the industry leaders (Amazon, Netflix, etc), every subscriber has:
                • their own home page
                • their own activity history
                • their own red flags
                • their own algorithmically derived suggestions
                • their own unique experiences.
  • As companies can never be too close to their customers, subscriptions create the loop that makes customer intimacy a reality. 

    • It works!
      • Google has seen global growth in game subscriptions of 70 percent year over year.
      • Game companies that have integrated subscriptions experience 20 percent higher retention.
      • They also have seen higher overall monetization.
      • Subscriptions offset risk in developing and launching new content.