This is a mini-thesis I prepared in December, 2014 over three weeks for Full Sail University as part of my Game Design Master of Science program and adapted for a Gamasutra blog article. I have included URLs for all publicly-available websites. Peer-reviewed sources from research databases require access to said databases, and these articles are not free to redistribute.
Many of my sources in the reference section, though not directly cited in this paper, served as inspiration for this article, and are useful for a more complete understanding of freemium gaming.
This paper is constructed in APA format.
Modern freemium video games (that is, video games with a permanently free section with a la carte real money addons, such as consumables, new characters, new cosmetics, new areas, and new gear) rely heavily on impulse purchases for their revenue. These paid addons are appealing for a number of reasons, including convenience, perceived short- and long-term in-game benefit, and for the sheer joy of shopping, including the adventure, excitement, and discovery that comes with finding something new to buy, buying it, then using it in-game. However, this freemium model in practice is often seen as draconian and exploitative to the player. Regardless, this freemium model for gaming is here to stay, at least for now, but will still contend with more traditional payment schemes, such as pay once to own and ad-supported free games.
Keywords: Freemium, Microtransaction, Micropayment, Free Game, Impulse Buy, Video Game, Exploitative Business Practice
A freemium game is one with permanently free content, but which has in-game purchases for real money, such as to unlock new levels, characters, or areas, or paid-for cosmetic aspects, or convenience features such as more inventory space. Some freemium games allow players to spend tremendous amounts of time instead of money to overcome obstacles intended to be solved by swiping a credit card – an impulse buy done in response to frustration. This practice of grinding – that is, spending a tremendous amount of time doing repetitious and typically boring tasks – is not new to games in general, but is often seen by developers as a core component of the freemium model, and one that heavily incentivizes paying money – often as an impulse buy – instead of spending time (Portnow, 2012a).
What are impulse buys and how do they relate to freemium gaming? What are the advantages and disadvantages of this freemium model, and why is there such an outcry against freemium games and in-app purchases? How does this payment model compare to other, more traditional payment models for games?
Impulse Buys and Freemium Gaming
According to the 2011 article "See It, Like It, Buy It" by Činjarević, Tatić, and Petrić, the term 'impulse buy' refers to a "non-planned, 'spur of the moment' purchase" (p. 4). Impulse purchases are prevalent in modern society due in large part to at least one of these factors: recreational shopping (that is, shopping done as a leisure activity where one's mood is boosted by the buying of something and not necessarily spending money for utilitarian purposes); the primary reasons for recreational shopping (that is, shopping for adventure, entertainment, and excitement); the prevalence of credit cards and discretionary income; product involvement (that is, a person's interest in buying a specific type of thing, such as food or clothes or appliances, as well as this person's commitment to buying a specific brand, like Tijuana Flats or Tommy Hilfiger or Whirlpool (BusinessDictionary.com – Product Involvement, 2014)); and a reliance upon incomplete information before purchase.
In their 2011 article, Činjarević, et al define an impulse purchase (compared to a planned one) as a purchase made with the following factors: "(1) [the buyer] feeling a sudden and spontaneous desire to act; (2) temporary loss of self-control; (3) psychological conflict and struggle; (4) reduced cognitive assessment [that is, a person unable to think clearly through the ramifications of a potentially difficult and far-reaching purchase]; (5) spending regardless of the consequences."
According to Nash's 2014 article, many, many modern developers are adopting a freemium model for their games due to its wild success: A full 76% of all 2013 iPhone app revenue was from in-app purchases, freemium games included. This information alone shows a strong trend toward freemium games as an enduring part of the gaming industry's future.
Freemium: The Good, The Bad, and The Ugly
Compared to a traditional pay once, an ad-supported, or a subscription model, the freemium model, at least in theory, has advantages for developers and players. For players, it means that they can get a strong taste of the game's full experience for free and buy pieces of the game as they see fit. It also means that those without access to a credit card and ample funds can try the game and get a feel for it, even bringing their friends into the game. For a freemium game that allows players to spend time instead of money to get what they want, such players can at least play in the same game space as those who have paid money. For developers, it means protection from piracy since initial access is free and addons (which are tied to a player's account) require either real money (via a credit card) or in-game currency, both of which are traceable (Portnow, 2012a).
` There are many downsides, too. In short, freemium in theory is different from freemium in practice (Portnow, 2014d). First, a player can never fully own a copy of a freemium game, merely license it. Though he may acquire every paid addon in this game's freemium space, it is not his to redistribute, nor does it confer the benefits of ownership in the same way a game disc or cartridge does. This is due to a freemium game, by its very nature, requiring a user always to be online to play and therefore be able to pay. Since a player is always online, he is always part of a community, whether he likes it or not. Many social games (like Zynga's Farmville) are specifically built to capitalize on a player's place in the community.
` In Farmville, an attractive farm may take weeks or months of real time to build due to the very slow nature of the game, with the payoff being the ability of a player to show off his farm to his friends immediately, and participate in the Farmville community. Progress in Farmville can be expedited by a player spending real money (this being the easy way, and one which the game frequently suggests), or having his friends play Farmville on their own accounts and give the original player free gifts which are generated on a daily basis (this being the more difficult way since it requires others to agree to play, and is one way which the game also frequently suggests).
What Farmville and many other social games do is disempowering to the player due to the need (perceived or actual) for a player to get his community's aid to make notable progress in a game. For someone to make quick progress in Farmville and similar games – for example, constructing in a week's time a farm that looks like a football field – he requires money (which a player can provide on his own) or a community to agree with and assist him (which a lone player cannot). Even if a player makes a variety of accounts to act as his own 'community,' he is still spending a notable amount of time to play this game. From a game development perspective, this strategy is done to incentivize paying real money, and especially for the players who want to participate most or be 'top dog.' Oestreicher-Singer and Zalmanson, in their 2013 article, call this phenomenon – the direct proportion of a user's willingness to pay for premium content in a freemium space to this person's participation in that freemium community –the "ladder of participation" (p. 1).
One other factor usually disadvantageous to the freemium game player is that the game maker has total control over his in-game content and economy. The developer sets every price, makes every time sink, and places every hook to keep players playing and paying. Depending on the amount of randomization in the game (for example, getting upgrades in random packs instead of being able to pick an upgrade specifically), a developer knows at least roughly how much each game feature will cost to acquire in terms of real money and possibly also time. Thomas Baekdal, in his 2012 article "Optimizing Your Industry to the Point of Suicide," wrote about Asphalt 7, a freemium mobile racing game wherein players eventually are required to pay real money to have a fair chance of winning each event. A player who wanted to unlock everything in this game using real money would need to spend "almost $3,500" (para. 35). For $3500, a person could instead buy and own 52 full games at $60 each, assuming 10% tax, or the equivalent of one $60 game purchased per week for a year! Such freemium practices are exploitative and game developers know it!
Baekdal, in his 2012 article, quotes Electronic Arts CEO John Riccitiello from a 2011 stockholder meeting:
[…] The second thing and this is a point that I think might be lost on many, is a big and substantial portion of digital revenues are microtransactions. When you are 6 hours into playing Battlefield [a first person shooter game sold at full retail price], and you run out of ammo in your clip, and we ask you for a dollar to reload, you're really not very price sensitive at that point in time. And for what it's worth the COGS on the clip are really low, and so, essentially what ends up happening and the reason the play first pay later model works so nicely, is a consumer gets engaged in a property they might spend 10, 20, 30, 50 hours on the game, and then when they're deep into the game they're well invested in it, we're not gouging, but we're charging, and at that point in time the commitment can be pretty high. As a personal anecdote I spent about $5000 [in this] calendar year to date on doing just this thing, this type of thing, on our products and others, I can readily attest to how well it works. But it is, it's a great model and I think it represents a substantially better future for the industry.
` Riccitiello, in different words than Činjarević, Tatić, and Petrić, describes the very notion of an impulse buy and how it is good for the industry, but makes no mention of how it helps the average player. Baekdal sees this as exploiting a ludomaniacal problem – that is, getting players addicted to a freemium game and having them pay regardless of the negative consequences in a similar fashion to compulsive gambling. Przybylski, Weinstein, Ryan, and Rigby, in their 2009 article, call this notion of paying to play regardless of the results as an "obsessive passion for an activity [which] is compelled or driven and leads activities into conflict with other facets of one's life" (p. 2). Riccitiello is inciting game developers to create destructive addictions that are intended to be best sated by the frequent spending of money, far beyond what a full-priced retail game would cost; keep each player feeling minimally aware of the total amount of money he has spent; and in a state of mind to keep spending regardless of the ramifications. In Matt Patrick's 2014 video, "Candy Crush, Designed to ADDICT," he calls freemium games "gateway drugs" for similar reasons.
` One such game developer strategy is to get people involved in the game and the community then slowly take away players' in-game power until paying real money becomes an actual requirement to progress or merely stay involved in the game and its community. This exploitative practice is dangerously similar to bait and switch pricing, an "[illegal] practice of baiting customers with unrealistically low prices to bring them into the store, and then trying to sell them higher-priced goods on the pretext that the advertised bargain-priced goods are sold out" (BusinessDictionary.com – Bait and Switch Pricing, 2014). Such exploitative practices tremendously damage the reputation of the developer, the trust between players and developers, and how people view the gaming industry as a whole.
` Furthermore, according to Nagel's 2008 article, such practices play upon a person's "need for closure" (p. 3). Closure, in this case, "marks the switch from the formation to the possession of a belief. Prior to closure we are trying to figure out what to believe, searching for information, and weighing various alternatives; after closure we have the subjective sense of a solid result" (p. 3). A freemium game is effectively a game with a storefront attached. People in general are curious about what aspects of the game are enhanced at what price. A new player may want to discover how the game becomes fun with the insertion of money. A veteran player may believe that this is the purchase that will finally give him the edge he needs so he no longer needs to pay to keep up with the game's demands. Regardless, every freemium player who pays money to satisfy his curiosity in this way, even by accident, enriches the game developer at a cost to himself.
` Not every freemium game aims to be this exploitative. Turbine's Dungeons & Dragons Online (DDO) was once a subscription-only MMORPG. However, in 2009, DDO diverged in its payment models. A subscription still exists, and grants access to most content (races, classes, and areas) as well as a monthly allotment of store credit. Whatever access players buy in the store – access to races, classes, or areas – is permanently tied with that player's account. Thus, a player who buys access to every race via the DDO store will have permanent access to them, subscriber or no. In addition, all players patient enough can earn access to all content without paying any real money, and this content is also permanently unlocked as if a player had paid real money for it. This model boosted DDO's revenues at the start of 2010 by 500% and its player base by 1 million (Masnick, 2010).
King's Candy Crush Saga is a freemium turn-based match 3 game that does not require players to pay money to complete any of its levels, but, instead, offers players the ability to pay real money for extra turns for the potential to turn a losing game into a win. Players pay, on average, $6.97 per 30 days (a 'month') for the game (Dickey, 2013). As of August of 2013, 132.4 million players spent a combined total of about $633,000 per day on the game. King also seems proud to announce that, as of September 10, 2013, 70% of people on the game's final level have not paid any real money to reach that point (Dredge, 2013).
Buying Victory: Ethan Levy's 20 Hour, $100 Hearthstone Experiment
The following is an experiment conducted by Ethan Levy in May of 2014 with his results published in his Gamasutra article, "Hearthstone – Heroes of Warcraft monetization analysis." Levy was a new player to the digital collectible card game of Hearthstone who spent his first 5 hours with the game in tutorials and training against AI opponents, then started tracking his competitive multiplayer performance without paying any money. After about 7 hours, he spent $100 to buy 80 packs of random cards for a total of 200 cards. He then played for about 7 hours more with these new cards. These are the results.
A brief analysis of this data shows a drastic increase in Levy's performance after spending $100. The 200 cards he received offered him many, many more options, including the ability to build solid Priest and Warlock decks. He ended his experiment at rank 20 (the lowest rank for competitive players), still in the territory of new players but in a position to potentially rise through the ranks quickly. Though Hearthstone allows players to purchase packs of random cards with in-game currency or with real money, Levy had saved himself a notable amount of time by spending $100.
Having played Hearthstone extensively myself in 2014 and paid over $1100 to get the deck limit of every card, I learned a player's skill matters as much as his deck. I could get to rank 18 without much thought. Around rank 15, opponents were no longer easy wins for my complete set of Hearthstone cards, but by understanding how my cards worked individually and in tandem, I could still fairly reliably win. Around rank 12, I was repeatedly schooled by more skilled players who had every important card (just like I did) and could generally beat me in ways I could not counter or anticipate. I knew that I could overcome my opponents if I practiced enough, but I had other interests and demands to fulfill. I suspect rank 10 is the general cutoff for players not wanting to invest more than 30 hours per week playing and researching the game, while someone who played Hearthstone as a full-time job (40-60 hours per week) could learn Hearthstone's innermost workings and achieve Legend rank (effectively 'rank 0' for the top 1000 or so players per server, or, in short, tournament-quality players).
Note in the previous paragraph an important statement, one easy to overlook: I reached about halfway through the competitive ranks mostly on the merits of my deck (which I modeled after a Legend-rank player's deck I found on the Internet) and with perhaps 5 hours of research over the 3 months I played intensely. I had basically spent hundreds of dollars to skip ranks 18 and below and to ease through ranks 17 and 16. Starting around rank 15, my deck alone was no longer carrying me – I had to carefully think about my moves – and by rank 12, my wins were few. I had hit a limit I could overcome by making Hearthstone something like a full-time job, but this limit would have been too expensive time-wise. I was still a Master's student and chose to make my identity that of a Master's student, not a professional-level Hearthstone player. My initial reasoning of wanting to compete at a tournament level – and therefore why I spent over $1100 on digital cards I could not trade or sell – was no match for my more immediate needs of getting my degree (which I did) and for playing a game that I simply enjoyed, instead of treating it like an obligation or a part-time job. I suspect many other big spenders in Hearthstone and other games have justified their purchases this way.
Hearthstone is intricately and exquisitely balanced with one's deck and skill each accounting for about half his performance, but acquiring said deck requires a tremendous amount of time or money to even reach halfway through the ranks of competitive play.
Addon Analysis in Fallout: New Vegas
From a gameplay perspective, all freemium purchases are addons to an existing game. Even a game that obsessively compels its players to play has a solid enough foundation for its core game mechanics to entice players to play. How financially successful and satisfying to its players would a game be if it were built with post-release addons in mind, but the developers did not automatically assume players would buy any of these addons?
According to the April, 2014 RPGWatch article, Fallout: New Vegas has sold slightly more than 2.63 million copies on PC alone. At an average cost of $30 (a moderate price considering the frequency of discounted sales of this game compared to its $60 initial asking price), that makes the total revenue of New Vegas for PC to be about $80 million, excluding downloadable content (DLC). While sales figures were not available for the DLC, it is possible to compute whether, economically, these DLCs were considered worthwhile to the player.
Fallout: New Vegas originally cost $60 for the base game. This is an expansive open-world RPG with an average play length of 66.6 hours (GameFAQs – Fallout: New Vegas, 2014). The cost-per-hour is 90¢.
New Vegas had four official DLCs released, each originally costing $10. Each of these DLCs is a self-contained scenario meant to extend and enrich the game. Compare this to Fallout: New Vegas – Ultimate Edition that includes the base game all four DLCs and has an average play length of 76.7 hours (GameFAQs – Fallout: New Vegas – Ultimate Edition, 2014). This means that each DLC extended the play length of the original game on average by slightly longer than 2.5 hours. The cost-per-hour of each DLC is $3.96, or 440% that of the base game. From a purely quantitative data standpoint, this is not worth it. However, as mentioned above with freemium games, many New Vegas players were invested in this game and its community and wanted an expanded experience, an experience that the DLC scenarios provided. A player invested this money from a qualitative standpoint (due to his satisfaction with the game), not a purely quantitative one (cost per expected unit of play time). Also, there was no in-game manipulation to guilt players into buying DLC. These purchases are assumed to be voluntary.
Traditional Payment Methods
$633,000 per day for a freemium game is quite notable compared to a more traditional payment scheme, the "pay once to own or fully license" (POTO) model. As of October 10, 2014, Mojang's Minecraft has sold over 17 million copies worldwide, making it the best-selling PC game of all time in terms of copies sold, despite the up-front price tag of $26.95. Microsoft was so interested in Minecraft's success that it bought the brand for $2.5 billion (Spanier, 2014). What was the secret? It was not microtransactions. It was not complicated psychology. It was not bait and switch pricing. It was not glamorous realistic graphics, nor glossy cartoon imagery. Simply put, Mojang made a game of such a high quality that people wanted to play it and buy it. This is the same Minecraft game about exploring, digging, building, and experimenting with combinations of objects – all in a low-polygon, very blocky graphics style. In Spanier's 2014 article, Vu Bui, Mojang's COO said regarding the Minecraft brand, "We make merchandising that is cool and people will enjoy – not to make money… For us, it's really difficult to find [merchandising opportunities to] be interested in because of the [hype surrounding Minecraft]. We're saying no to nearly everyone" (para. 8). Mojang, at its heart, believes in the desirable quality of its games and merchandise as the primary means of marketing and selling its wares.
Flappy Bird was another suddenly successful game – this time on a mobile platform – that was ad-supported but completely free to play. Flappy Bird was a skill-based mobile game about tapping a screen to make a bird 'jump' in midair to maneuver through a series of randomly-generated pipes. Score was calculated by maneuvering the bird (the playable character) through a series of pipes without touching them or any other obstacle, including the ground. Players got one point for every pipe they successfully moved through. Each attempt of a Flappy Bird game was short, typically measured in seconds, due in large part to the game being very easy to learn but difficult to master.
Flappy Bird as it was had no economy, no powerups, and no in-app purchases. It was completely free to the user and ad-supported, and at its height (in February of 2014), was generating about $50,000 per day in ad revenue (Palsovic, 2014). The most compelling thing about the game was how engaging and enjoyable it was. It was a game that people played because they enjoyed playing despite or because it was difficult, not because they were threatened with any sort of loss if they failed to achieve, nor were there any built-in clever marketing tricks to keep people playing and paying.
According to Jack's 2014 article, Dong Nguyen (the creator of Flappy Bird) was offered a position at EA due to the success of Flappy Bird. This anonymous EA employee saw the marketing potential of turning Flappy Bird into a microtransaction-based time sink with lots of real-world promotional tie-in merchandise, such as clothing. This EA employee saw business, but Nguyen saw the start of a dangerous trend. To quote the anonymous EA employee, "I'd like to get started on licensing [Flappy Bird] because it sure beats putting effort into the game" (para. 6). Perhaps Nguyen saw the true intent of this offer. This EA employee had no interest in loving the game for what it was, but for the possibility of using it to make lots of money, quickly, and further perpetuating the exploitative freemium model.
Had Nguyen accepted EA's offer, Flappy Bird could have been just another game. Instead, Flappy Bird became its own genre. This agrees with Campbell's 2012 presentation wherein he says, "No game is good because it is a copy. A game is good because it is copied."
The current freemium gaming space has many games of greatly varying quality and marketing tactics, from the very exploitative to the much less so. While the freemium model is a wonderful short-term boon for developers from a financial standpoint, many developers tremendously damage their reputation and their relationships with their respective playerbases in pursuit of higher short-term profits. More traditional payment models of POTO, subscriptions, and ad-supported games still have their place, and can still make a significant profit without the shortsightedness that exploitative freemium games practice.
Whether a company is exploitative and manipulative in its freemium game creation, or is as patient and quality-centered as Mojang, a game's quality and a company's reputation will eventually speak for themselves. In Ng's 2013 article, he writes of how people outside the US would pay far more than listed price on eBay for an iTunes gift card (such as paying $225 including shipping for a $100 gift card) just to get access to the US iTunes download library. This speaks of the quality of the service the purchasers of these gift cards are eager to receive.
Considering the manipulative tactics of exploitative freemium game developers, one must wonder where the tremendous amount of money earned goes. It seemingly does not go to covering the profiting game's development costs, as Candy Crush Saga's hundreds of millions of dollars in yearly revenue far exceeded the game's development costs – perceived or actual. In addition, freemium games in general do not cap the amount of money a person can spend on one account, and from many a developer's point of view, that is exactly the point. With all this revenue, one must wonder how much money a person or a company needs to be satisfied, if such a thing is possible.
James Portnow, in his 2014 video, "Shovelware – The Causes and Consequences of Bad Licensed Games" – conveys similar feelings about the state of purpose-built rushed movie-licensed games to that of exploitative freemium games. He says, "Nobody likes a bad game, and nobody likes to be swindled, but for the most part, that's exactly what these games are and what they're trying to do. They're specifically targeting the uninformed consumer." Regarding why he and many others aged around 30 got into video games, he says, "A lot of us grew up loving [video games] specifically because we weren't raised on shovelware like this. We grew up on games like Mario, Final Fantasy, Halo, and Civilization, and The Sims, and Minecraft. These are the games that got us to dedicate so much time to the medium. Kids whose parents bought them that Barbie game or the G. I. Joe games [that is, poorly-made games intended to make a quick buck rather than offer the player a desirable experience] were much more likely to lose interest and take up other pastimes because they never got to see all the incredible things this medium had to offer. This industry lost potential lifelong consumers so that a few companies could make a quick buck." With the mobile gaming space so fertile due to cheap development costs and a wide potential audience, Portnow warns that a heavy trend of low-quality or otherwise exploitative games may turn the current generation of children away from a lifetime of game playing and game buying due to initial or frequent bad experiences with low-quality games.
Ultimately, each game developer must decide how much their game should cost in time and money initially, per month, and to unlock everything for the average user and the user who wants to be at the top of the ladder of participation. Before getting involved with a game, especially a freemium one, each user is encouraged to research the game and its development company to answer this most important question, "Is this game intended to be great for me, or is it intended to encourage micropayments and buying addons for no real benefit to me?"
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