Yes, good money can actually be made in the rapidly-growing world of free-to-play massive multiplayer online games (MMOs), but just how much can micro-transactions actually generate? Unfortunately, average revenue per user information is often concealed behind the fog of competition by privately held game makers reluctant to report either very high or very low results.

To add to the confusion, some developers choose to report their "average revenue per paying user" (ARPPU) which, by definition, is always more impressive than their "average revenue per user" (ARPU). (Both of these statistics relate to monthly logged-in users, and the amount of monthly logged-in users cited in ARPU is often a fraction of total registered users -- a common metric used in press releases.)

The inability to get at the real "metrics-to-success" can make it extremely difficult for a developer mulling whether or not to enter the free-to-play MMO sector.

According to Daniel James, this "reluctance to clearly report revenues is a deliberate attempt to obfuscate the numbers." James is CEO of San Francisco-based Three Rings Design. "There seems to be a perception," he explains, "that there is a business advantage to not being transparent. But I disagree."

As James blogged recently: "People often ask me, with a wary look such as you'd give a lunatic, 'Why do you dish out your numbers like this?' It's a good question. There are possible downsides, but they are limited; if a competitor looks at my numbers and then goes on to execute better than us, I don't think that has much to do with our numbers. They executed better, that's the hard bit. Well done to them.

"The upside," he continued, "is that the more information that circulates the startup and games community, the more people will share their data. This rising tide will raise all boats. If I can shame my fellows into parting with their data, we'll all benefit."

Indeed, James reveals that Three Rings' MMO Puzzle Pirates takes in approximately $50 each month from each paying user (ARPPU) for a total of $230,000 a month, all resulting from microtransactions.

In February, 2005, James chose to launch a free-to-play version of Puzzle Pirates alongside the original subscription model (which contributes an additional $70,000 each month from subscription fees).

Three Rings' Puzzle Pirates

He admits he really didn't know what to anticipate in terms of revenue; there was nowhere to go to research how well microtransaction-based MMOs did elsewhere.

"We just jumped in," he recalls. "There were no data points and, frankly, every game is different, every play population is different, and extrapolating from one developer's data to your own is, well, an interesting intellectual exercise but it doesn't necessarily tell you what to expect."

Four and a half years later, James has learned a lot -- that the average revenue per user (ARPU) is between one and two dollars a month, but only about 10% of his player base has ever paid him anything. As a result, he says, approximately 5,000 gamers are generating the $230,000 in revenue he sees each month.

"The pivot number -- the number to focus on -- is not the $50 ARPPU but the $1-2 ARPU," he says. "That's the number that a new paying customer is worth to you. If that number were, say, 20 cents, you'd probably have a difficult time building a business."

"But if that number were, say, $3 then you have a good business that enables you to go to a flash distribution site and say, 'Hey, put my game up on your site and I'll give you a dollar for every new user you send me.' They'd surely be interested in that."

(Regarding registered users, a late 2008 press release from Three Rings noted that, over the lifetime of Puzzle Pirates, the game has seen seven million accounts created -- showing that the 'registered user' metric is not particularly helpful in extrapolating revenue-based success stats.)

While Raph Koster says he'd like to discuss how much revenue Metaplace generates, he can't. That's because his social web site is brand new, having just moved into open beta last month.

But, having chosen to adopt a free-to-play model, Koster -- who is both founder and president of San Diego-based Metaplace -- has certain expectations. [In his previous life, Koster was associated with more traditional subscription-based MMOs, including Ultima Online and Star Wars Galaxies.]

"Free-to-play is all about upping your ROI," he explains. "All the costs of boxes and distribution that are associated with a subscription model go away. The cost of development is significantly lower. Even your marketing budget changes radically; our product's reputation will spread primarily via word of mouth. And because it lowers the barrier to entry for people to come in and try things, it gives you a huge shot at acquiring large numbers of customers."

The biggest reason to go with a micro-transaction model, says Koster in a recent blog post, is because "it opens up both ends of the curve. People who would not be willing to pony up the full $15 a month [subscription fee] are enticed to pay at least something, thereby hugely broadening your market."

However, he continues, the big reason not to go with a micro-transaction model is that it "doesn't have the commitment fallacy in its favor. Once we make a choice, we tend to stand by it. A subscription can be seen (like buying a game in a box, which is also a hugely powerful psychological buy-in tactic) as essentially making a commitment; you then attempt to live up to the commitment, which is why two games of comparable quality will have different first-month conversion figures depending on whether the user had to buy a box to get in or not."

While Metaplace's earnings will come primarily from an assortment of micro-transactions, the only one currently in place is a relatively unusual one, which Koster calls "an event."

"In Metaplace, everyone gets a world of their own," he explains. "Because you're not paying for it, it's not a very big world and there's a concurrency cap, so you can't squeeze more than 10 people into it at once."

"But, if you want to hold a party or host something special, for example, you can pay us $10 and, for the next 24 hours, your concurrency cap goes up to, say, 100 people. That's just an example of one way to monetize your product without restricting it to selling virtual goods."

Koster says it's way too early in the game to share financial results, although he says he'll be happy to when there are numbers to share. "It's been kind of a habit inside the industry to keep your budgets and revenues a secret, which I personally think is kind of silly. Especially since, now that much of this is happening on the web, you can go to comScore and see how many people are actually playing a site. So it's getting harder and harder to hide your numbers."

Despite his having no Metaplace data, Koster's observations of other free-to-play MMOs are that they typically earn from 30 cents a head up to $2 or so in terms of ARPU and from $10 to $60 in terms of ARPPU.

Jeremy Liew seconds those numbers, even though he isn't a developer. Liew is managing director of Menlo Park, CA-based Lightspeed Venture Partners, a major VC firm which has recently focused on funding free-to-play MMOs, mostly multiplayer, web-based games like Friends for Sale by Serious Business, which is on Facebook.

In a recent blog post, Liew reports that, according to his research, ARPU at several popular sites averages $1.25 per month, specifically $1.62 at Club Penguin, $1.30 at Habbo, and $0.84 at RuneScape.

"Having spoken to many other MMOs and virtual worlds on a private basis," he writes, "this estimate seems to be a good gauge for what a well-performing MMO can aspire to from a free-to-play business model."

In terms of ARPPU, he says, the range is from $10 to $50 per paying user per month, which typically comes from 5-10% of the total number of users in any given month. Sports and gambling games tend to be a bit higher, social games a bit lower.

Liew believes that free-to-play MMOs present a huge opportunity for smaller companies, which is why his firm invests in them, of course. He sees the business model as a "disruption" that, he says, larger companies have a difficult time surviving.

"The business policies that made big companies so successful can sometimes blind them to the things they now need to do to become successful on the other side of the disruption. It's hard for them to change," he observes. "Small companies transition much more easily."

Another advantage to building free-to-play MMOs compared with subscription-based games is, simply put, that peoples' expectations of their quality is dramatically different, says Liew. And with the bar set lower, development time and expense are easier on the budget.

"If you're putting out a World of Warcraft and are charging $60 for it, people are expecting a pretty good game for their money," he explains.

"But if it's free, you can practically throw anything up -- even if it's buggy, even if it's not feature-complete, even if it crashes sometimes -- and see how people react to it. If they like it, great. If they don't, you can either fix it and watch what your customers do -- or abandon it altogether. That's the great thing about the Web and about free-to-play."

His best advice to developers is to jump into the sector only if you can get your mindset around a lower-level of quality when launching your beta... and then iterating quickly.

"If you are a master craftsman who likes to spend six years making everything just so before releasing it to the public, then you're probably better off sticking with the older business models," Liew says. "Because you're going to have a tough time reconciling much, much lower revenue with high cost.

"But," he adds, "if you can wrap your head around the implication of less money in and less money out ... and you can develop the games with relatively small, multiple teams that are constantly turning them out like an assembly line ... you're going to find that free-to-play MMOs are an exciting and worthwhile place to be."