The Rarest of Lawyers
No, I am not talking about lawyers who are disinclined to sue at the drop the hat (my apologies to all my lawyer friends out there). What I am talking about is a lawyer who understands economics. We all specialize in our field of expertise, and it’s refreshing to see a specialist in one field demonstrate insight in another.
Such understanding is on display in article by a pair of attorneys, Richard S. Eisert and S. Gregory Boyd in an article entitled “Virtual Property - Business Models And Pitfalls” that appeared in the Sept. 2008 issue The Metropolitan Corporate Counsel. Eisert and Boyd are lawyers at Davis & Gilbert LLP. Although the article is ostensibly about property rights issues, I found a couple of observations worth noting.
First, in talking about the contest between subscription based models (a la World of Warcraft), they distill the core argument for why RMT makes economic sense over the subscription model. As explained by Eisert and Boyd, RMT allows for the greatest extraction of value from an MMO by allowing customized levels of commerce.
"… traditional subscription models and even advertising are relatively blunt instruments for monetizing online worlds. Both of these methods tend to assign the same value to every customer. A subscription charges a customer a monthly or annual cost and advertising pays per user or per view at a set cost. But, people do not value goods this way. Each person places a different value or ‘willingness to pay’ to be a part of an online community. RMT helps companies extract that value." (emphasis added)They describe the benefits of RMT if properly implemented:
"… RMT allows game companies to satisfy that need and extract appropriate value as well by ‘fine tuning’ the price point so that each user pays the price the service is worth to him individually."To illustrate this point, I’ve prepared a couple of graphs. In both, the curved line represents the willingness-to-pay of the users. All the line says is that some people are willing to pay more for a game, while others will only pay less. The first figure depicts a hypothetical flat-fee subscription-based virtual world. I’ve indicated areas where revenues could be higher in two places. First, there are some potential players who simply find the game too costly: the flat-fee is greater than their willingness to pay for the game. Second, there are current players who are in fact willing to pay more for the game than they actually are, but since the game has a flat fee structure, there is no way to capture that untapped willingness-to-pay.
The second figure shows a hypothetical game based on RMT. In it, each player decides how much money he or she wants to spend in the game. Players who only want to pay the minimum can do so, while others can pay up to the maximum amount they are willing to spend. The result is that players end up paying much closer to their individual willingness-to-pay amount. It may not be a perfect match, but it comes much closer to the willingness-to-pay-curve than the flat-fee world. 
The revenue for each game is represented by the area of the red- or blue-shaded rectangles. If you were to actually do the math, you’d find that (in this hypothetical example) the blue-shaded area was larger than the red-shaded area.Before I conclude, there’s one last point to mention about the Eisert and Boyd article. Toward the end of the article, they make a rather curious, albeit 100% accurate observation about virtual currencies.
"… most anyone would rather have World of Warcraft gold, supported by its 10 million player subscriber base, than the Zimbabwe dollar, which is currently in the midst of a hyper-inflation crisis."Notwithstanding its virtual nature and the difficulties in converting it to U.S. dollars, virtual gold (or other virtual currency) would still be preferred over real world currencies that suffer from hyperinflation.
** As requested, I've edited the figures to add labels. For additional discussion on the issues raised here, see Matt Mihaly's post at The Forge, and Raph Koster's post at his blog. **
11 comments:
I think in principle this is right - however, the main concern with a F2P model that your illustration does not demonstrate is the situation where there is a long tail at the front of the curve, with many customers who do NOT value paying at all for the game, but yet occupy resource. If this group is sizable enough, and overwhelms your Marginal cost (servers, bandwidth, etc.) then you can wind up losing money on a per customer basis. And if you load in amoritization of dev costs, there is still a revenue per user hurdle that you need to overcome.
All of that being said - good game design should get enough users paying for the right items, in which case you do maximize WTP.
Good analysis, and I'd also add to what Paul said an additional point: the willingness to pay curve isn't necessarily the same for subscription vs RMT/micro-transactions. Generally, people are willing to pay a little more via subscription that what they would be willing to pay via micro-transactions. Something to do with irrational fear of overspending, the per-transaction cost being less (set and forget vs evaluate value everytime), and of course the nitwits that forget to unsubscribe when they no longer play.
Nice graph, but Paul's correct. The graph illustrates the concept nicely, but it's a question of whether the total area under the graph is greater than that of the 'block', and more importantly, whether that is true once the fixed cost per user has been taken into account.
Phrased differently, if you showed the same graph for NET revenue per user, the "long tail" portion would show a net loss per user, and so the "head" has to support this.
It goes back to the last sentence in Paul's comment...if you design your game properly, then the microtransaction model will reap the most financial reward.
The quality of game design is proportional to the chances of your game succeeding financially. That's why we've seen games of both types (sub-based and micro-based) fail lately; a good game will make money no matter the revenue model; a poor game will not...again, no matter what the model.
I am gratified to see that my post has stimulated so much discussion (see the discussions at The Forge, "MMO Subscriptions vs. Free to Play" and at Raph Koster's "Economics of Virtual Worlds: The Rarest of Lawyers"). The comments I've read have been quite good and thoughtful. But let me clarify a little what I intended with the graphs. The graphs were meant to be pedagogical, not conclusive. They simply illustrate how an RMT model can yield more revenue than a subscription model. The exact difference in revenue depends largely on the shape of the demand curve. Just out of habit, I used the basic upward-sloping curve, but there could obviously be a long-tail at either end, and the demand curve for RMT worlds could differ from subscription worlds. An interesting question, I think, relates to revenue consistency. With a contractual, subscription model, there’s a predictable revenue yield each period (net of churn). But with an RMT model, the revenue from each player can vary greatly from month to month. I suspect a key challenge is locking players into regular sales. (Perhaps instead of a single $15/month subscription, players could sign up for mini-contracts, like $3/mo for a castle or $0.75/month for special outfits.) Thus far, I’ve just talked about revenue. The metric that ultimately matters is profit, and the profit difference depends on marginal and average cost per user... but that’s another topic altogether.
You have to, of course, take into account your audience. A lot of the kids virtual worlds have gone subscription because kids are not in control of the money they want to spend, and subscriptions make more sense to the parents, whereas older demographics understand the benefits of microtransactions better.
Either way, I'm glad that banner ads are starting to be phased out. That was (and continues to be) an overly annoying element of the Internet.
Please include titles for you X and Y axis when you make any graphics - it makes analyzing them easier.
Only reason why, at this point in time, RMT seems to work is because RMT games are virtually all free to download and play. However, they have to be this because they are all inferior to sub based ones because of lower budgets.
Once these MMO developers start trying to retail their MMO then charge additional fees (or nickle and dime) that is when developers will see why RMT is a flawed concept for MMOs. People don't want to pay $40, $50, or $60 then get nickled and dimed to death just for a 'game'.
RMT, in fact, work against themselves in many respects. In a good sub mmo that polices itself people are on a fair playing field however an RMT is completely about how much you can invest into it. So in essence your real world wealth gives you advantages over other players. MMOs were always about being different and being in a virtual world, an escape from reality so to say.
I'm willing to predict that the end of the day there will be but one or two RMT games that will dominate while the rest will simply fail. Why? Because once the best RMT comes out (ala WoW for subs) others will try to mimic it but people will have so much invested into that RMT that anything new will be nothing but a retread. You're seeing it with WoW clones already. Why go to the new game when I've invested thousands into the old?
Ultimately, I think RMTs are going to fail from the get go (for Sony or whatever big western mmo developer tries), I hope, because if they do not then they may very well ruin MMOs for everyone. Personally, I'd rather not see a buncha templates being used to create another mmo with just another name and some character touch-ups (you're already seeing).
Anonymous, that's more a consideration about game design and herd mentality. Subscription model games suffer the same way.
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