Evolve or Die

Back in the ancient times of the late 1990s, 3D graphical MMOs were these fantastic worlds you could inhabit only if you paid a monthly fee. Games like Ultima Online and EverQuest were expensive undertakings, but their makers became extremely rich from the fees they charged. Then, in 2004, one world was created whose success quickly eclipsed the rest. Blizzard’s World of Warcraft stole time and money away from the creators of the other worlds; games like Age of Conan and Warhammer Online tried to gain enough subscribers to stay afloat but ultimately they were unable to compete. Developers looked to Asia and Europe, where games fueled by microtransactions had flourished, for inspiration, and the evolution to free-to-play saved many MMOs from destruction. The games that evolved survived in the new ecosystem, while those that did not still struggle.

The perception was that all you needed was a polished MMO for gamers to line up and throw $15 at you every month.

In such a landscape, it seems like evolving doesn’t require much brain power. “It’s actually not a ‘no brainer,’ not to most of the US game makers and publishers. They are kind of trapped in this mentality that every single player has to pay something to access the game,” said a man who made quite a lot of money charging people to enter his game world.

Mark Kern was the team lead on World of Warcraft at Blizzard (and had his hands deep in the Diablo and Starcraft franchises as well) before he left to form his own company. Founded in 2005, Red 5 Studios began work on an MMO vastly different from WoW – a sci-fi shooter eventually titled Firefall. At a time when World of Warcraft was rapidly growing in population and revenue, the perception was that all you needed was a polished MMO for gamers to line up and throw $15 at you every month. Firefall was to be no exception to the subscription model.

“We felt that with a AAA quality game, a subscription was still the way to go,” Mark Kern told me. “I was pretty skeptical of free-to-play five years ago. We had observed the phenomenon in China and it seemed like the ‘failing’ games were quickly converting to free-to-play out of necessity rather than any new or novel business model.”

The free-to-play model of charging for games is nothing new. PC games were frequently distributed as shareware in the late 80s and early 90s with a version of the game on a floppy disc that was limited in some way. Pay the creator a price, usually around $10, and the full game was unlocked. Selling MMOs as free-to-play is a relatively new concept though, as the traditional model set by the genre’s pioneers gained notoriety by charging monthly fees. But in the post-WoW market, subscription MMOs have to fight for a regular commitment from their customers, some of whom found it very hard to afford games of any kind, especially during a recession.

“Around 2009, when the economy tanked, I started to really worry about people’s ability to pay for games, and a subscription, and new hardware,” Kern said. “Free-to-play was looking like a better way to get the game into people’s hands. I started to look into it in depth, talking to companies in China and Korea, and mining the data I could find from public companies and anecdotal evidence. What I found surprised me; free-to-play wasn’t just a successful model, it was an incredibly profitable one.”

The evidence Kern investigated is overwhelming. Lesser-known titles, or those games concentrating on a younger audience, have gained substantial popularity in the last decade. Take Runescape, for example, which launched in 2001 and now boasts over 10 million players, more than 1 million of which are paying customers. Sony Online Entertainment has seen so much success from Free Realms that CEO John Smedley has experimented with a free-to-play version of one of the old guard of MMOs, EverQuest. Other publishers have had success converting from the subscription model to free-to-play, with Turbine’s Lord of the Rings Online and Dungeons & Dragons Online being among the most well-known. Cryptic and Funcom have followed suit and the games that have switched models seem to enjoy moderate success.

The perception, in America at least, is that if you are giving your game away for free, then it must not be very good.

“I think they are probably more than a moderate success, but nobody wants to say it publicly. You don’t hear public figures from successful free-to-play companies operating in the West like Nexon, Turbine, Riot, etc.,” Kern said. “I would suspect it’s because they found they are onto a good thing and don’t necessarily want to wake up the larger publishers to the fact.”

Luckily for the companies smart enough to evolve, competition among free-to-play MMOs is low because American publishers don’t want to see the dollar signs on the wall. “We’ve gotten into this mode where games are so expensive that nobody is taking risks or fully engaging new models. Larger publishers are essentially shepherds of a model that they’ve been optimizing since the developers started it,” Kern said. “You have executives now, not visionaries, and they are very good at maximizing the existing model. Ask them to think outside the box and they can’t, even if their future livelihood depends on aggressively evolving.”

Kern had to work aggressively to get his own team on board with the free-to-play model. “It was an uphill battle. The then CEO of Red 5 and our CFO both felt that free-to-play wasn’t profitable and even if it were, that we had nobody with expertise to develop it,” he said. “That sounded like an opportunity and a challenge to me, but to be honest, it seemed like a huge risk to most everyone else.”

The people at Red 5 who disagreed with Kern believed in the stigma of free-to-play MMOs. The core gaming audience often seems to disregard such games as child’s play or not worth their time. I myself am guilty of having been excited about an upcoming MMO only to dismiss it after discovering it was free-to-play. The perception, in America at least, is that if you are giving your game away for free, then it must not be very good.

“What we’re trying to do is change the perception out there that free-to-play games are B-games or C-games,” Kern said. “We asked ourselves: Why not release a top-quality game under this model? There are free-to-play games out there making hundreds of millions of dollars per year on this model. That is more than enough to support top quality development.”

What seemed so clear to Kern was a hard sell for the former executives of Red 5. No one likes to take risks, especially when people have invested millions of dollars into a project. Kern’s dedication to the free-to-play model almost caused his dream company to fall apart.

“It was only after we went through a tumultuous time where we nearly closed the company – and we lost the ‘baggage’ of prior thinking – that we were able to reinvent ourselves in 2010,” he said. “By mid-2010 we were convinced that free-to-play was incredibly profitable when done right, and that we had the chance to bring AAA quality to free-to-play games in a way that hasn’t been done before, especially with shooters.”

Now firmly in control of his destiny, Kern is ready to prove to the world that a well-designed free-to-play game can be just as profitable as World of Warcraft, if not more. And Firefall will have the advantage of being designed with that business model in mind from the onset, instead of tacked on as an afterthought when the subscription model fails.

“You’re trying to say ‘look, if you just pay me X dollars, I will let you see what you’re missing.’

“I do think it is much better to design your game with free-to-play in mind rather than retro-fitting it to an existing game,” he said. “Of course, there will be a stigma if you release a game with a monthly fee and then move to free-to-play. The only reason that is done is when the game is failing as a subscription based game. That’s the only reason you do it, because it’s a very expensive and time-consuming transition.”

Not only is it expensive switching over after the game has launched, there are very real reasons why it makes good business sense to start the game’s design with free-to-play as a goal. “[Switching] doesn’t capture the momentum curve as much as it would have if it launched free-to-play to begin with. You miss the launch buzz and the strong referral effect, because there is a zero entry cost to have your friends try the game with you,” said Kern. “With an older game that converts, it’s already ‘old news’ in a sense. The word-of-mouth or organic growth effect isn’t as strong. It’s far better to design and release your game as free-to-play to begin with.”

There are several ways for free-to-play MMOs to make money, but Kern believes that most publishers, even the ones that are currently seeing profits, are doing it wrong. “You see so many broken models out there. Publishers are charging download fees or whole package prices and then attempting to do item-based sales on top of that. Or they try what I call the ‘velvet rope’ model where they restrict content and what parts of the game you can play until you pay up,” he said. “You’re trying to say ‘look, if you just pay me X dollars, I will let you see what you’re missing.’ The natural response is to say ‘But if I don’t see what I’m missing, how do I know it’s worth paying for?’ That limits your sales.”

By compromising and trying to serve two masters by charging up front and having micro-transactions, publishers unwittingly curtail their own revenues. “These attempts really distort the model,” said Kern. “They not only generate a lot of cynicism on the part of gamers who rightly feel nickel and dimed, but they also result in lower profits because they are not following a pure free-to-play model. Then publishers look at that and wrongly conclude that free-to-play is a marginal business only suited to B-grade or C-grade games.”

With Firefall, Kern wants to concentrate on offering a mix of convenience and aesthetic items for sale, while staying away from “power items” that give temporary boosts. As anyone who plays an MMO can tell you, the most precious commodity in the game is time. Offering a way for people with full time jobs and more disposable income a way to concentrate on the parts of the game that are fun is what “convenience items” like expedited travel through the game world are all about. Aesthetic items that let you customize how your character looks can, as Valve’s Team Fortress 2 hats and WoW‘s minipets have proved, sell like freaking hotcakes.

Kern doesn’t want Firefall to be a game where those who spend gobs of money are uber-powerful

It’s important to note that Kern doesn’t want Firefall to be a game where those who spend gobs of money are uber-powerful while the more frugally minded are second-class citizens. “We are much more about letting you obtain more opportunities to acquire power, but you still have to go out and earn it,” he said. “We think of it as sending your children to a good school: You may have paid more for a better education, but it is still up to your child to make the most of it.”

Firefall is still a bit away from release, and only its launch will prove whether Kern’s insistence on the free-to-play model was justified. But even if Firefall fails, Kern is still right in surmising that the most successful business model for selling videogames is shifting away from expensive pre-packaged goods to a more fluid distribution of bite-sized chunks. The rise of free-to-play MMOs is only part of a sea change in the gaming industry that includes EA’s Project Ten Dollar, the rise of GOG, Steam, PSN, XBLA, and $15 map packs for Modern Warfare 2.

“How many times have we seen this before?” Kern asked before listing similar scenarios in other industries. “IBM’s mainframe business dragging down their PC business. The music industry and downloadable music. Blockbuster vs. Netflix and digital distribution. Large established [game] publishers are at a huge disadvantage during this period due to immense inner drag. Even as they take tentative steps, will that be enough? Or will it be too little, too late?”

Greg Tito’s subscription for WoW has lapsed for the first time since launch and he doesn’t think he’s going to resub anytime soon.