Why the lines between console and free-to-play games will dissolve

As Microsoft and Sony prepare to launch the Xbox ONE and PlayStation 4, game manufacturers are considering diversifying their business models.

Just ahead of the release of Microsoft’s new XBOX One and Sony’s new PlayStation 4 game consoles next month, the Wall Street Journal reported a Truce in the Videogame Wars between console game companies and free-to-play (f2p) game companies. It’s not so much a truce as console game manufacturers and free-to-play game developers seeing greener grass on the other side of the fence, leading them to test one another’s business models.

Console game manufactures Sony, Microsoft and Nintendo provide the venue for console game developers and game players to come together on their hardware consoles. Manufacturers make money by selling hardware platforms to consumers and taking a revenue share of about 30% from games sold though their game stores. Consumers tend to pay about $60 at retail for a “hit” title. Keeping the funnel full of hit titles like Call of Duty or Grand Theft Auto is a constant concern for console manufacturers. Building a “hit” console game is similar to creating a blockbuster movie; big budgets, rock star producers and developers, and years of development before the game debuts. The game console manufacturers are like film production companies dependent upon the Hollywood studios to produce films that bring in the crowds. And, like movies, console game developers are becoming dependent on sequels because the investment risk of introducing original games is so high.

Console game developers and the console game companies Nintendo, Sony and Microsoft are some of the last holdouts in the software industry to rely on perpetual license fees. Perpetual license fees simply mean that the consumer pays once for the game and never pays again. Other software market segments have taken the initiative to transition at least a portion of revenues to renewable revenue models, such as monthly license fees or usage-based pricing.

F2p games aren't really free. These games are free to download and play, but most consumers at some point purchase virtual goods to improve their game performance. Weapons, costumes, tools, and other virtual items are purchased within the apps. Although console gamers spend more per person, the 3:1 ratio of f2p gamers to console gamers produces much larger industry revenues. IDC forecasts free-to-pay revenues to grow by 25% to $31.85 billion in 2013 compared to console revenues of $26.24 billion.

Changing the historical industry stance, console manufacturers are now recruiting f2p game developers onto their platforms and console game developers, such as Arkham and CCP, are developing free-to-play games that have the same motivation - to learn how f2p monetization through in-app purchases of virtual goods works. After monetization is understood, these companies can build this more consistent line of business, stabilizing the boom or bust "hit" game business.

Gungho's "Puzzle and Dragons" gives context to this strategic shift from perpetual console game licensing. Puzzle and Dragons generates an estimated $2 to $3 million per day from 100 million users. Though f2p games have their own challenges, generating consistent daily revenues from a huge and diverse audience with short evolutionary development cycles is very attractive compared to the long development cycles and seasonal revenues of "hit" games.

F2p game developers, such as Spicysoft Corp and Gungho, have also built perpetually licensed games for the Nintendo 3DS console. Paid console games are attractive to the f2p game developers because it makes it easier for consumers to discover a console game compared to discovering one on Google Play or the Apple App store, because there are significantly fewer console games. The order of magnitude is huge; there are about 300 games available for Nintendo 3DS compared to the millions of game apps available of the Google Play Store.

The boundary between console and free-to-play games will erode over time. Console game manufacturers and developers will move towards the f2p model, seeking to attract f2p gamers into their bases and supplement their boom-or-bust “hit” game dependency with daily f2p revenues. F2p game developers will opportunistically port to consoles, seeking cover from the extreme competition of the app stores.

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