Gameconomy: Monetizing Prolific Games and Services
Comparing the Business Models of the Gaming Industry and Software Industry
Comparing the Business Models of the Gaming Industry and Software Industry
I recently wrote an article about how the gaming industry is years ahead of product design than Silicon Valley. In fact, the gaming industry has been mastering the craft of app design to increase the most important metric for social media companies: time spent on the app.
In essence, three components are critical for creating captivating games: 1. An attractive goal (motivation), 2. Users’ ability to act, 3. Reward
The Craft of Game Design: 3 Components that Can Make Your Apps Addicting
Learnings from the techniques of “fun games.”medium.datadriveninvestor.com
This article will deep-dive into the evolution and types of business models in the gaming industry. And how it can be used as an analogy for the software industry.
Business Models in the Gaming Industry
There are four types of business models in the gaming industry:
1) Pay per play: Arcade Games (PacMan, Space Invader, Dance Dance Revolution, UFO Catchers)
It is the most archaic business model in the gaming industry. I only play this once or twice a year when I go to a facility with a game center. Since the playtime is so short (~3 minutes), you need to give the user a sense of satisfaction within the time frame.
Also, you need to provide a gratifying experience to the user, which is not possible at home. For example, the newest arcade games have VR functionalities that you can’t replicate at home.
Another critical factor is to set an attractive yet aptly difficult challenge to encourage multiple plays per user.
Poor games come in three forms: ① The hurdles to overcome are boring in the first place ② The difficulty is too high to overcome the hurdles ③ It is difficult to understand how to overcome the hurdles — Yoshida, Producer and Director of Final Fantasy XIV
However, despite the difficulty in monetization, the business model has a low return on investment because it is only a 1 to 1 experience with the user. Hence, you don’t hear about the next Unicorn being an arcade game.
2) One-time purchase: Game Consoles (Nintendo Switch, Wii, Playstation, Xbox)
These are the immersive role-playing games that captivate the user for 20+ hours. I remember when I started playing Pokemon on Gameboy, I couldn’t stop playing for hours.
Building and designing such addictive yet captivating games is an immense feat, as you have to keep the user satisfied and in need for a long time. Furthermore, the social aspect is also essential as users will want to play if close friends play.
This business model was the bread and butter for the gaming industry, but it started to conflict with the modern lifestyle. As a result, the next two business models have been prominent in the current gaming industry.
People don’t have time. If the design is such that “satisfactory results cannot be obtained unless it takes 20 hours”, the choice is not to do it from the beginning. In that case, I think it would be more comfortable for everyone to aim for a game design that would give a sense of satisfaction just by playing for 30 minutes a day. — Yoshida, Producer and Director of Final Fantasy XIV
3) Subscription: World of Warcraft, Playstation Plus
Subscription in the gaming industry has two value propositions: 1) Ability to play certain games for a flat fee (free play), 2) Online play with multiple users and saving game progress.
Large gaming corporations started incorporating subscription services about ten years ago. For instance, Sony began Playstation Plus in 2010.
4) Item Purchases: Maple Story, Fortnight
This is similar to the Freemium (portmanteau of the words “free” and “premium”) model of the software industry, where the game itself is free, but the items for powering and leveling up are charged.
In this case, the key is to develop a sense of excitement to purchase the item. Some item purchases are determined, but some have certain randomness to them. If a user presents a “rare item,” it will develop a sense of FOMO within users, leading to more item purchase revenue for the companies.
You can see that the major gaming corporations have a mixture of the above business models. Players like Nintendo and Sony with iconic hardware have a combination of both one-time and subscription models. Gaming corporations with solid games such as Activision Blizzard and Electronic Arts have a mixture of one-time subscriptions and items. And currently, new players such as Playco, Epic Games, and Roblox capitalized based on a freemium model mainly basing their revenue on items purchase.
Business Models in the Gaming Industry Analogized to the Software Industry
It is interesting to analyzing the trajectory in the software industry and compare it to the gaming industry. In the software industry, the trend has been similar: one-time purchase → subscriptions → freemium model.
Pre-SaaS: Before Salesforce, software solutions cost a huge one-time installment fee similar to the gaming industry's 2) one-time purchase business model.
SaaS Era: With the advent of Salesforce and SaaS, software solutions have become subscription-based — a flat monthly fee for all of the functionality a software offers. The gaming industry has also deployed the 3) Subscription model.
Saas Era 2.0: Then social media apps started to be provided for “free,” leading to the boom of the freemium model with corporations such as Facebook, Twitter, and Google. To access additional features, you will be charged a premium price. The gaming industry has also deployed a similar model: 4) Item Purchases model.
What’s Next?
A new pricing model is starting to gain traction in the SaaS industry. The next SaaS giants are beginning to offer usage-based pricing. For instance, Shopify started with a subscription-based model, but now most of its revenue, ~70%, comes from payment fees. So basically, Shopify will only charge you when you use their payment system.
Stripe also uses a similar business model, charging 2.9% + 30cent for a transaction on their platform. They don’t have a subscription fee.
It is interesting to see that this is actually the archaic business model found in the gaming industry: pay per use. The critical difference is that it is a pay per use, on a digital scale.
It is often insightful to compare and analyze the mechanisms in different industries. For example, when I was at an MBB consulting firm, we often used analogies to learn from other industries. In this case, the software industry can learn from the gaming industry and see what mechanisms they developed to flourish in each business model.