Howard Marks is a big believer in brands. In 1991, he and Bobby Kotick invested in ailing publisher Activision, parlaying the strength of the company's name into an industry giant again; Kotick still serves as CEO.
Now, Marks is hoping to do the same with defunct publisher Acclaim, using that company's name and image to bolster a new publisher whose stock in trade is free-to-play MMOs catering to a number of audiences, including its PonyStars (pictured). During the ongoing Paris Game Developers Conference, the CEO spoke on the rise of the free-to-play model, and why he became involved in it.
Opened Marks, "I'm fascinated by the idea of people playing together. This is a multi-billion dollar industry, and it's all free."
"What is a revolutionary?" he asked, drolly revealing a slide of Che Guevara and answering that he is not one. "But some people in Asia created this free to play model, and it is some sort of revolution," he added.
He pointed to the recent example of Radiohead, whose free release of the album In Rainbows spurred web traffic and awareness, and then led to sales.
Marks described how the free-to-play model can supplant subscription- or time-based models. At one point, he explained, games in China frequently operated on time-based point systems, but that system quickly became obsolete when free-to-play games were imported from countries such as Korea. Those time points quickly became repurposed into microtransactions.
Both Korea and China have surpassed 2 billion dollars a year in sales in the area, with China growing more rapidly.
"I don't know if you've sold a game in China before," said Marks, "but there was no money. There was piracy, copying, no money. But now, with free-to-play, it's huge."
"What's going on right now? We have a revolution that started in Asia," he continued. "It's expanding. Is it huge, enormous? No. It's starting to become big."
Marks noted that with free-to-play having largely formed in Asia, Acclaim focuses on bringing it to the Americas and Europe.
"We're seeing that people are using the internet for Facebook, blogs, and whatnot," he said. "They are learning that they can use this PC for games as well, but they're not sure what to do."
He pointed to Blizzard's World of Warcraft as a bridge between two gaming markets. "It's the greatest thing because it opened up a market that people didn't think was there. It opened up the hardcore and went to millions," he said. "But with this game you have to pay. Imagine if World of Warcraft were free. Would you have ten times the users? It's possible."
Marks then listed a number of titles, accompanied by encouraging figures. "Results [for Runescape] look like it's about 5-10% of players that pay, and it makes millions," he said. "Audition does about 70 million dollars a year in revenue. Club Penguin got sold to Disney, but they sell about $35-$40 million in virtual goods every year."
He brought up one of Acclaim's own titles: "This is our game called BOTS. It's free, there's a little ad in the corner, and our entire model is to sell items, that's all we do."
"In video games, 5 million is a hit. In online games, that's not a hit, 50 million is a hit," he said, underscoring the scale of free-to-play.
Like many others, he points to social networking as an important part of the genre's future. "Facebook is free, and all the games on Facebook are free. But we're releasing a game in a weeks that will have in-game purchases, within Facebook," Marks stated. "I don't think anyone else has done it, but we will do it."
Though monetization is an important part of the free-to-play industry, Marks stressed that free games must still be playable when free.
"It has to be really free," he said. "You can't have many closed zones, you have to be able to say that this game is fun to play even for free. You also have to have an item-based economy."
Already, the microtransaction model is becoming normal to a young generation of gamers: "The interesting thing I found is that the younger kids today understand items. You don't have to explain it to them, they understand exactly what's going on."
Marks gave an example of an item transaction. "We have a game called 2Moons, and there are about two million players," he explained. "You can play it for free, and you pick up lots of items, but your backpack is small and you have to start dropping items. For $20, you can buy a bigger backpack. It's simple."
In addition to player payments, Acclaim seeks out advertisers to subsidize its games. He pointed to both hypothetical and actual examples. "Imagine a Red Bull powerup," Marks offered. "We had, in our company, our dance game for example. AT&T paid us for three months to sponsor our competitions. It's not a big business, but it exists, and it will get bigger."
One of the draws to the model is that there need be no risk to a prospective player - one can try out the game without financial obligation before deciding to get more invested. This principle introduces metrics of success specific to the genre, some of which demonstrate regional divisions.
For example, profitability is often measured through average revenue per user (ARPU). "Most of the time ARPU is $30-$40 a month," said Marks. "A month! Not just one time."
"The next thing is percentage of uniques," he continued, defining "uniques" as players who spend money on a given game. "We've found in Asia, in Korea, we've found that 10% of people will spend money! I think it's great! In the United States it's less, more like 5-10%. But we're getting there."
The average lifetime for a player in the free-to-play space is 3-4 months per game, less than what is generally expected for a more traditional subscription MMO.
That statistic leads to churn rate, which describes player loss per month. "It turns out you lose a lot," admitted Marks. "You should be prepared to say, 'I only brought in 100,000 players this month, but only 10,000 stayed.' That's okay! That's okay. Some of them will come back, and you can always get more."
Marks laid out a simple reality of the space: "You have to prepared for the fact that most people will not spend a single dollar. But free players invite their friends, who may come and pay."
The upside of the low payment rate is the sheer scale of the segment's audiences. "We've found that when it's free, the game has at least ten times more people who play it," Marks indicated.
"And what we found is that at one point you have the monetization line - that's associated with the average revenue per user. Advertising generates about a dollar per user. Most of the cost of getting a user to your site can be paid for by that advertising. And then, you enjoy the free players, because it doesn't cost you, and then the paying users give you between $15 and $100. This shows you that it works. You can make money."
In response to an audience member who asked if Acclaim is in fact making money, Marks admitted the company is essentially breaking even, but that is largely because it is still young and investing heavily in R&D.
"If you take out our investments, since we're making new games, we're not making much money. We're kind of breaking even," he said.
"But it's a volume issue. If we stopped investing and just let these games go, we'd make money. We're not the best example. If you want to talk to someone making money, go talk to the guys who made Runescape. They're making tons of money. We made $30 million this year, but we're not there yet. We've just started."