This paper explains how we came to adopt the monetization models currently in use in the industry, and explains how and why you can quadruple the revenue of a product by shifting to advanced monetization models. Hopefully this will bring this group one step closer to solving various world problems. I place it here also to increase attention to this great site.

Evolution of Interactive Media Monetization
By Ramin Shokrizade
September 16th, 2011

Note: this paper assumes the reader has read and understood my paper on Real Money Transfer Classification ( http://gameful.org/groups/games-for-change/forum/topic/real-money-t...).

Disclaimer: this paper draws upon the experiences of the author, including but not limited to four years as a professional gamer, four years as an interactive media journalist (500k unique readers daily at peak), 20,000 hours doing QA in virtual worlds, and six years developing the field of applied virtual economics. It paints a picture of the industry that is contradictory to conventional wisdom and is not meant to be “the truth”, but just a useful framework from which to create “what comes next” in the field of game design.

My tale starts in 1999 when I turned my experience doing QA and CS for Everquest into a new career as a top producing 2nd party RMT agent. In this early era, there was no 1st or 3rd party RMT activity, just a few very hardcore players camping the best item drops and selling them to other players on Ebay. In all cases, this was their “day job” and they spent at least 12 hours per day in virtual space. This activity was not yet against the EULA, so this activity was highly social, and virtual goods buyers often got tips on how to play and get the most use out of their expensive new toys.

Even though I was making a lot of cash, I became concerned that by having so many players camping the best drops, we were essentially harassing the more casual players and making them pay an additional fee (to us) in addition to their subscription in order to play. I also realized that I could make several times as much money by hiring some kids at the local high school to work for me. This got me to thinking that it was only a matter of time before a factory was set up in a country with lower labor costs to farm virtual worlds like EQ.

I decided to go to the Los Angeles Times and suggest an article be written about this. I was paired up with Ashley Dunn and the two of us wrote the article over the course of a week (http://articles.latimes.com/2000/apr/20/news/mn-21581). The result ran on the front page of the Times on April 20, 2000, and for security reasons I gave only my middle name in the article (Lee). I had intended the article to be a warning to the industry, but instead the affected parties (SOE, Ebay, etc.) treated it merely as negative PR and reacted accordingly. It may have even accelerated the process I warned about since now tens of millions of people were aware of what we were doing.

By 2001 I had assisted the LA Times with a number of articles and then joinedhttp://www.unknownplayer.com as their senior writer. That year a Chinese company, IGE, was quietly forming and setting the foundation for what would become 3rd Party RMT activity. I ended up defending Dark Ages of Camelot (Mythic Entertainment) and Anarchy Online (Funcom) from a domestic 3rd Party RMT group called Black Snow Interactive that relied on hacks to dupe virtual goods. This led to a lawsuit and a court setting precedent that declared EULAs were enforcible. I got enough positive good will from industry that I had access to essentially all developers worldwide from 2001 to 2004. I would always spend at least 200 hours on a product before doing a review, so this also made my reviews trusted by consumers. I did not take advertising but would pay my way by doing 2nd Party RMT while I was evaluating products.

2001 also saw the arrival of the earliest 1st party RMT products. The first product I can recall using it was Ultima Online, where they sold an expansion with enough PvP goodies in it that you basically had to buy it to stay competitive. I complained about this at the time and described it as “whoreware”. Soon afterwards Nexon did the same thing on their Shattered Galaxy product, which I had spent three full time man years on doing QA and design. Obviously I was a bit disappointed.

The success of EVE Online and later World of Warcraft in 2003 kept the subscription model going in the West for a while. The open PvP in EVE made 3rd Party RMT a bit inefficient compared to 2nd Party RMT, so this game became essentially the only subscription game in the last ten years to avoid the ravages of 3rd Party RMT activity. 3rd Party RMT agents depend on not investing in their avatars and selling all gains in the real market. The highly competitive environment in EVE Online makes this impossible. This model also presents a large barrier to entry for new and casual participants, which is why the game has not done even better than it has so far.

Blizzard went in a totally different direction with World of Warcraft. By encouraging the mod community, their product was easily ravaged by 3rd Party RMT agents. What saved WoW, besides the strength of the franchise, was its weak economy. You see, back in 2003, a weak economy was considered good since almost all products at the time had no economy. WoW’s in-game auction house was so popular that it became essentially a minigame within the larger game. Some players would spend hours every day just having fun by buying low and selling high.

Damage from 3rd Party RMT activity in WoW led to extremely high customer service costs for Blizzard, and the damage to the virtual economy required frequent expansions and patches to keep the world interesting. This was not a huge obstacle for Blizzard since they could spread these costs across a relatively large customer base. This also had the effect of raising the bar constantly for game content, and thus creating a barrier to entry for competing products.

This did not stop competitors from trying, as they saw how high the potential profits were in the creation of sustainable virtual worlds. Almost universally these competitors (such as Tabula Rasa, Auto Assault, and WarHammer Online, to name a few) attempted to challenge the graphics and content of WoW (where WoW was already pretty strong) at huge expense, and were dumbfounded when customers bought in enthusiastically at first and then stopped playing soon afterwards. Without player trade occurring in these worlds, there was no incentive for player interaction, and these games were essentially “Massively Single Player”. Allowing players to kill each other in PvP does not adequately replace this desire for social interaction unless you create grand scale strategic warfare that requires it.

By 2005, Asian companies (except perhaps Square Enix) had all but abandoned the subscription monetization model and were rapidly evolving their 1st Party RMT (microtransaction) models. With the exception of Square Enix and NCSoft, no Asian company was seriously considering direct competition with Blizzard and they saw microtransactions as a way to compete with lower budgets.

While microtransactions are good for small game companies, they are bad for gamers. Nonetheless I could see that microtransactions would be profitable enough, especially in light of the horrible design and investment errors occurring in the West, that this model would soon spread beyond Asia. This alarmed me enough that I left journalism and devoted myself full time from that year on to the development of the field of applied virtual economics in order to provide alternative monetization and design options to emulation-prone interactive media companies.

I remember being a bit excited when I saw how many people were playing FarmVille in 2009. This seemed to indicate that games were truly becoming mainstream. While the game was primitive, I figured it would act as a gateway to harder games. What wasn’t so primitive was the intense marketing that was built around it. In the absence of competition, this was enough to capture substantial market share.

The success of interactive media has brought a lot of new executive players from a variety of other industries. Many of these people have business backgrounds which appeal to investors and corporations. On the downside, many of them have little or no game experience, and even less of them have design experience. When they see a product like FarmVille, they look at the numbers and assume these games are what customers want. They see that only 1 or 2% of players are actually paying and just assume that is the fault of consumers, that they just don’t have any desire to pay. What the numbers don’t tell them is that as the quality of games has gone down since 2003, the value of games to consumers has moved in a linear fashion. This is the fault of industry, not consumers.

Playing games is time consuming. Many of the best games ever created are not even running anymore. New industry players don’t have time to play catch up so they turn to something called “analytics”. The assumption is that analytics will tell them everything they need to know about a product in real time. They don’t even have to survey their customers anymore. This has so many inherent errors that I could write an entire separate paper on it and probably will. Looking around at job postings on LinkedIn, it seems that currently there are more “analytic specialists” than game designers being hired by game developers. This can only bode poorly for consumers and the industry as a whole.

Let me explain some alternatives to these negative trends. In 2009 I completed my main overview of how to create and defend an advanced sustainable virtual economy (the proprietary paper entitled “Sustainable Virtual Economies and Business Models”). It stresses social interaction as the goal to both successful game design and monetization, and explains why current trends in industry are anti-social while consumer demand is intensely for social products.

Let me give some numbers so that the more quantitative readers can get a grip on where I am heading. Let’s assume we present consumers with a WoW clone, something like Trion World’s RIFT game. Since this game has a number of advanced social elements, but a very weak economy, customers are willing to pay a total of $6M dollars a month (a totally hypothetical number for ease of math) on this product. Of this $6M, $3M will go to Trion and the other $3M will go to 3rd Party RMT agents since there are limited defenses against these. Subscriptions will peak in the first month or two and then drop off as players exhaust the existing content. Thus these numbers will go down.

Realize that in this case $3M is being paid by customers that are willing to pay more than the subscription rate for an unfair advantage in the game. Now if Trion had decided to make this product “free to play”, they would be surrendering their subscription revenue in return for ALL of the 3rd Party revenue, which puts the 3rd Party RMT folks out of business and yields no net benefit to Trion (ending up with $3M in either case) except perhaps reduced customer service costs. The worse your product, the less you can earn in subscriptions compared to 3rd Party or 1st Party monetization methods. So in this case, Trion is gambling that their product is so good that they will earn more in subscriptions than people would be willing to pay to 3rd Parties.

Zynga has similarly come to the conclusion that their products are so inferior that if they tried to use a subscription model, very few people would play their games. Thus for them, the microtransaction model makes total sense.

My 2009 “Sustainable Virtual Economies and Business Models”, conversely, is designed to eliminate ALL 3rd Party RMT activity, while also capturing customer demand that would normally be filled by same. So instead of trying to decide which $3M to target, you get the whole $6M. Except that now it’s not $6M. Since the economy is stable, gamers can now invest in the virtual economy and trust that it will hold its value a year later. The presence of 2nd Party RMT activity means that gamers are building real equity that will hold its value better than many real life investments, and which are highly liquid. Thus they are willing to invest more heavily so the amount that consumers are willing to spend goes up substantially. Let’s say $12M as a conservative number. Now you are monetizing at four times the rate you would with a weak and vulnerable economy. Your customers also like you more, as do investors, which makes rolling out additional products much easier. Customer service overhead also drops since fraud is largely reduced. Note that the only RMT activity occurring in this model is 2nd Party.

In August of 2011, I finished the first iteration of a newer model that does something very different. It PROMOTES 3rd Party RMT activity, but it also introduces an inescapable passive tax on all RMT activity without the need for an external construct. This means that when any RMT activity occurs, whether 2nd or 3rd Party, you get a cut. This allows you to relax the rules on your economy and let it float where it may. The hotter it gets, the more you make. I won’t even begin to suggest how profitable this model might be if attached to a fun game that follows most of my 2009 model rules.

Once you get a virtual economy running that gets so hot that it is more popular than the “real” economy, then you set the stage for marketing of almost any real product in this environment. I have another model that allows you to sell everything from toothpaste to cars (real cars) in virtual environments. This does not work unless your virtual economy is stable. From here the discussion gets very proprietary, but this should open up new lines of thought for developers and producers wondering “what’s next?”