Freemium Gaming Economics, Personal Fiscal Discipline, and Why Developers Should Not Be Demonized
by NorseGamer, HSM Editor-in-Chief
For years, I’ve had to listen to a small chorus of voices on the Sony forum clamoring that Home is coming to an end, Home is going down the wrong path, Home doesn’t care about community any more, Home’s just a giant money-grab now, Home’s population is dwindling, and Home needs to turn things around or risk immediate and instant implosion. And this has really crystallized in the last couple of days, with Xi Continuum being released as a pay-access game.
The proposed solution from these people is inevitably the same: lower prices and more freebies.
Here’s the catch with simply assuming that lower prices in Home will drive more aggregate sales revenue from more people: it isn’t true.
I’ve seen this sentiment pop up with increasing frequency, and the problem is that it assumes Home’s economy follows a normal distribution, rather than a power law distribution.
In a normal distribution, simply lowering the price increases the number of sales in direct proportion. Except that social games don’t follow normal distributions; they follow power law distributions (so-called “whale economies”) in which the majority of revenue and sales are driven by a very small percentage of the overall user base.
For instance: Zynga (which is by itself responsible for 12% of Facebook’s revenue) just posted Q3 revenues of $317,000,000 — half of which was generated by less than one percent of its user base (148,000,000 unique visitors).
This means that somewhere in the neighborhood of 750,000 people — out of a whopping 148,000,000 — spent a collective total of $158,500,000 (a little over $211 per whale per quarter).
That’s one hell of a whale economy. And Home, on a much smaller scale, functions almost exactly the same way.
Social games developers (both for Home and elsewhere) have figured out what behavioral economists have known for ages: once you get a user to cross “the Penny Gap” — moving someone from a point of not spending any money to spending something — the actual price of the commodity is far less of a deterrent. In other words, once you’ve mentally and emotionally committed to spending money on a particular item, the probability is quite high that you’ll still buy it even if the price is somewhat higher.
And here’s the beauty of starting with higher prices: you can always lower them later by running a sales special, grab a second spike in sales, and look like a hero for doing so. If you open low, you have nowhere to go and you left money on the table with consumers who would have spent more anyway. And not to put too fine a point on it, but anyone who thinks that developers are raking in piles of cash from Home is sorely mistaken.
I know this all sounds horribly cold and heartless. But this is the legacy of freemium economics, which the gaming industry has only truly discovered in the last few years. Other industries already work this way. Thanks to airline deregulation and the rise of the internet, airlines play freemium games with travelers every day, and rake in enormous sums in discretionary service fees. Automakers have been doing this for god knows how long; as Top Gear‘s Richard Hammond once quipped, “Porsche is quite good at selling you the car and all the air inside it — everything else is an extra.” In hospitality, which I have a decade of firsthand experience with, we laugh every time someone thinks they’re getting a great deal by booking through Priceline, Travelocity, Hotwire, et cetera — because we already built that into our budgets when we projected our ADR (Average Daily Rate) and RevPAR (Revenue Per Available Room) for the year, and we make up for it with back-end charges at checkout.
And now, finally, the video game industry has gone freemium. And just like the first-class check-in line at the airport, the right of way goes to the whale who spends the most money. Welcome to power-law distribution economics, Home community. If we dislike it, let’s remember that we created it.
Before anyone laments that Home wasn’t always this way, and Home’s just a big money grab now…keep in mind that Home was always going to go this way, because it’s formatted to. You cannot fight human nature, or the capitalistic forces which drive it. The problem is that Home, four years ago, had practically nothing to sell and had to incur significant promotional expenses (such as Xi) to get people to stick around. Had Home 2008 launched with the kind of resources Home 2012 has, it would have been a freemium gaming platform from the very beginning, and no one would be upset about it.
This does not absolve Sony of some of their questionable business decisions with Home, nor does it mean that every developer’s pricing experiment has worked to perfection. But it also doesn’t mean that we as consumers, if we are truly engaged in building community — which requires a fiscally successful Home to sustain — are all-knowing and infallible, either.
So. What can we, as consumers, do about Home’s rising prices?
Simple. Pick and choose. Spend cautiously, and only spend when it’s a virtual commodity you know you really want, particularly since Sony was silly enough to not include a “delete” option with Home commodities. You are not obliged to spend a single penny in Home.
Upset that Sony isn’t giving you enough community outreach? Fine. Remember that before you spend.
Upset that Sony isn’t fixing problems fast enough for you? Fine. Remember that before you spend.
Upset that developers aren’t giving you enough warm-and-fuzzy feelings in compensation for rising prices? Fine. Remember that before you spend.
But let’s stop clinging to an over-romanticized memory of a non-capitalist Home that never truly existed, and let’s stop the dangerous trend of setting up an us-versus-them mentality when it comes to developers trying to make a buck. Of course they’re trying to make a buck. They’re in business. And if they’re not worth your business due to any bloody whim you might have, then withhold your business.
No, it really is that simple.
Because here’s what happens: as prices are raised, and developers walk the tightrope of seeing how far they can push prices before they lose too many sales as a result, there’s a real economic incentive for them to study what we as consumers are willing to go whale on, particularly since the competition today is so ferocious. And this creates a very real economic incentive for Home’s developers to focus on community outreach — not just for consumer insights, but to provide those warm-and-fuzzies which are so critical to making people feel good about spending more money. Hell, why do you think there’s been such an increase in third-party developer outreach on the forum and various fansites over the last year?
Again, this boils down to personal responsibility. It is unrealistic to assume that Home’s economy will do an about-face and revert to 2008 pricing levels. Leaving aside the very real development costs for some of these things we’ve been asking for as a consumer base, there’s simply no economic incentive to reverse the current trends with pricing.
Does Home have some real problems? Absolutely. But let’s stop trying to tilt at the economic windmill (or, worse, declare it detrimental to the community, which it ain’t) and focus instead on personal fiscal discipline. You’ll be happier with what you end up buying and happier with what you chose not to buy.
If I sound overtly pro-developer with this article, it’s because I am. Sony may be providing the platform, but it’s the third-party developers who are today providing the bulk of the content. It is they who, with limited financial reserves, incur the cost to develop innovative items, sit through the agonizing QA process, and do their best to market their wares to an increasingly fickle audience. It thus grates on me to no end when I see developers being blamed for ruining Home’s community by trying to actually make a living, because that’s simply not true.
You know what would hurt Home’s community? If Home became a subscription service. Because then a massive chunk of the community would simply disappear, due to the aforementioned Penny Gap. But as long as Home is free to access, then there’s no penalty for hanging out, dancing, chatting, and doing all those wonderful community-building social activities which are ultimately the heart of Home. All the developers are doing is selling us window dressing to enhance that experience; how on Earth is this detrimental to it?
If we as a community are so weak that we lack the initiative to enjoy each other’s company without Sony giving us heavily-subsidized freebies to do so, and we have gotten to the point where we are demonizing content developers for trying to sell us ways of enhancing our Home experience, then frankly I question whether or not we are truly a “community” at all. All we’re doing is giving those content providers a reason to look at taking their work to other platforms — and then we, ourselves, are ultimately diminished.
It’s time for us to take some personal responsibility. After this many years, if the Home community is to thrive, it must be built from within, not handed to us on a subsidized plate. This community survived in Home’s earliest days, when there was little to do and even less for sale. Let’s not forget that, or blame developers for trying their best to make a living by augmenting it.
December 14th, 2012 by NorseGamer | 20 comments
NorseGamer is the product manager for LOOT Entertainment at Sony Pictures, as well as the founder and publisher of HomeStation Magazine. Born and raised in Silicon Valley, he holds a B.A. in English/Creative Writing from San Francisco State University and presently lives in Los Angeles. All opinions expressed in HSM are solely his and do not necessarily reflect the views of Sony DADC.
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It is hard to understand whats really going on at Sony considering we do not see that side but your read makes a lot of sense. Here is how I see it. Yes, some prices have gone up a bit in four years. Yes Home is still kicken tires. It’s still has had a great run even if it ended next week.
Such an undertaking to create Home with all these different partners and make it work! I wish more home users would just play the game instead of trying to set policy. This is Sony’s baby and it has worked since day one. pretty simple really.. Offer constructive feedback and go enjoy the product. That has been my intention.
Terrific read. Appreciated.
Once again you hit the nail on the head with this one. If you use the real world as a template, you will find that there are many community driven events out there, such as the Christmas party my parents went to last nite for seniors at the local senior center. They didn’t have to pay to have a nice evening with others like themselves, and yet they did. This is because taxes paid for it, so ultimately they contributed to the experience with money.
As I said before very few things in this life are truly free, we pay for them one way or another, so stop getting upset if Sony and the people who have hitched their wagon to this wonderful place try to actually improve it and earn a living doing so.
The funny thing is that in a sense though we don’t pay for Home directly we still pay for it. Internet, your PS3 and your electricity and television weren’t free after all. So why should the extra content you decide to pay for be free? Decide being the operative word there, after all no one is being forced to do this as you pointed out.
Nice article again Norse.
People forget home is a business first community second , without the business there is zero community and zero home. But no other business i know of functions like home where the consumer advertises and basically sells what the seller is selling as much as the sellers does. how many fan sites and users of home big up new product and developers saying how great stuff is. how times have we seen this user has organised a developer q&a, this site has interviewed this developer etc etc.In real life, id recommend a good place to shop, a good product to buy or a good person to buy from. But it would be a bit over the top if I buy something and then start saying to the person that sold it, can you store manager be available for a question and answer session please or would they do an interview for my web site or blog. Particularly as most products are no better than normal. On the other hand if it was really that bad id never buy from there again. If it was something truly special then I could understand it, But generally its not. Thing is generally when you get extremes you get 2 opposite extremes. The people that demonize developers go over the top due to they keep hearing this is great, that is great by over the top community members that think developers can do no wrong. And then on the flip side the people think developers can do wrong see users demonizing developers so they counteract that by implying developers can do no wrong. neither are innocent and neither are guilty. We all read articles that wind us up and start us thinking of the other extreme, just with modern day media its easier to voice our thoughts. there will always be exceptions to this like trolls and trouble makers. Perhaps home is just a magnified over the top version of reality
Da fing is tho dat I bot a tv yea but it duz noffink! Sony R muny graberz and day r greedee 2 coz wen I ast 4 my muny bk day sed day wer gonna keep it yea witch is so unfair I GAV U MY MUNY SONY AND U STOLE IT so I am dooin a kampane yea dat is anti Sony yea so if u want 2 join send me a frend inv and we can get lodza ppl 2getter in Home an bring dem doun frum da inside XXXD
SONY R BLOOD SUKERZ WE WILL RUIN HOME 4 DEM!!!!!1!!
Whay do I gotsta do sumz 2 post numberz r 4 ritin yea????
I gotta know: was that as hard to write as it was to read?
Haha! Well, when you’re submerged in bad grammar/spelling in Home most days of the week it becomes second nature after a while! It’s like when the Proclaimers come on the radio, no matter how much you try to ignore it, it still sticks in your head! : P
I actually banged my knee on the table from laughing so hard when I read that.
“I GAV U MY MUNY SONY AND U STOLE IT”
LOL. LOL. Genuine LOL.
Easily one of the funniest things I’ve read in quite a while — and eerily accurate, too.
Thanks for that.
But you must admit. There is much more modern and elegant way to steal money
Have to say, funny has hell. Quite a good laugh with my morning coffee;.
It’s funny, Norse, that just 5 minutes ago I responded to a poster on the Forum citing the similarity between Facebook, Home and their respective 3rd party developers. Then I came here and read your article.
He used Facebook as an example of a thriving company that makes billions while giving away all their content for free. Forgetting conveniently about premium content and 3rd party developers, of course. Oops.
I also tried to explain the huge philosophical difference between squabbling over price versus refusing to accept a pay-to-play model at all.
The price matters little in circles where the prevailing attitude is that the content should just be available for free.
All fell on deaf ears, naturally.
Problem is a lot of these I want stuff for free circles forget without Home being a business there is no new content free or paid for. The trick is, if you dont like it dont buy it or use it, if enough people dont buy it or use it the developers wont do it again, good example is Mercia, Lockwood at a Q&A the other night have gone on record saying that it wasnt as successful as they wanted, so thats it for Mercia, Its going to stay as it is until its switched off. On the other hand if someone likes something dont jam it down someone who doesnt like its throat. I like Mercia as I can along side a gang of friends go hacking and slashing, but I know its flawed and has been since release, so why would I go singing from the rooftops about it, when all it does is make my integrity just as questionable as if I say its rubbish without trying it first. Anyone thats ever sold anything would love someone saying ill buy your unique product risking that it maybe flawed, knowing full well if i wasnt a member of this community your product isnt really unique and actually behind the times outside this community. A sales person dream come true. But we buy it, why , because we all like Home. But dont let the community decide what you have to buy, as per article let your budget and what you like decide.
I also remember reading the bulk (or entirety?) of this article that you posted in a different Forum thread a couple days ago. If I had read more closely, I could have responded with actual numbers.
Not that it would have mattered.
I read with great interest your points on the Xi Continuum freemium discussion, and you are (quite literally) right on the money, Liza.
Here’s the thing, though: there is no possible way that your opponents can agree with you, because the fear is that if they do so, they must then accept the business realities of how things actually are, rather than how they wish them to be. And how do you save face after something like that?
There is a disturbing trend from some on that forum to ignore reality, demand things function a certain way, and decry any prompts for critical thinking and personal fiscal responsibility. The entitlement attitude is astonishing, and I’ve never quite seen it this bad before. Most of the people there are pretty awesome, but there’s a group that’s getting quite shrill.
This doesn’t mean Sony is perfect, or that every business decision they’ve made was necessarily great (far from it, in some cases). Nor am I at all opposed to the consumer leveraging their voice and their wallets to try to make a difference. But they perhaps do not realize that they could make a far more *effective* argument if they actually first understood why things are the way they are, and worked from that baseline.
The forum would also do well to realize that it is a shockingly small microcosm of the overall user base, and that actual consumer trends, as indicated by SCEA’s monthly sales lists, are often quite separate from what that particular gaggle thinks is best for Home. Doesn’t mean the feedback isn’t useful, and that it shouldn’t be given — but it’s very easy to be forum-centric with our thinking, and that’s a dangerous trap to fall into.
I learned, quite some time ago, that my goal with that forum is not to convince the people opposed to my point of view. That’s impossible. Trying to do so only leads to a classic Internet Argument(tm), and those inevitably end in stalemate. The forum will continue as it has, reinforcing its own beliefs, convincing itself that it’s unassailably correct. And hey, if that adds to the fun of the Home community experience for them, there’s nothing wrong with that. There are a lot of good people there, and some fun discussions take place, but like any community it will have its rabble-rousers, muckrakers, specious popularity queens, et cetera. Fortunately, they appear to be in the minority. Even still, the forum is a useful tool for other purposes, which is why I periodically dive into a discussion, even knowing what the outcome will probably be.
You brought up a lot of great points on the forum, Liza, and though some chose not to see them, they were most certainly not overlooked.
I think the problem is most people still see businesses as nothing more than profit makers. I was talking with a customer casually about personal Christmas budgets the other day and when I said this year would be hard for me he just scoffed and said “Ha! And with ALL that money I give you!?”. I wasn’t insulted because he just obviously can’t see that I have two rents, four phone lines, two electricity bills, insurance bills coming out my ears etc etc. All he sees is the money he gives me disappearing somewhere apparently into my pocket.
When you own a business people automatically assume you’re living the high life, when really it’s a constant financial tightrope you’re walking.
It does frustrate me to read the childish, banal, ignorant posts (like the parody above) that are strewn across the Sony forums day in day out but it’s simply a case of these people not having the capacity to understand the fundamentals of what a business goes through in order to keep itself afloat.
Well, I was called a shill for making the general statement that businesses have the right to charge for their products. Talk about disconnect from reality.
If there is so much money in this, then how come the new developers are getting smaller and smaller? EA, Lucas Arts and Disney have left. In their place we have JAM Games (2 people), Juggernaut (2 people), Game Mechanics (2 people) and Atom Republic (1 person). Greed is the wrong word.
I did a comparison of items sold in 2010 and now -prices for the same items are basically the same. The one notable difference is that European and Japanese developers are charging more, but that can be explained away by currency differences.
Apartments are different now in that back in the day, $4.99 got you a beautiful box. Now for $9.99 you get an apartment, a game and a companion. The value per dollar level is much higher now. I remember adding a refrigerator door and microwave door to a plain apartment and getting rave reviews for months.
There will always be someone who is unhappy. I don’t know if you all noticed but most people who complain about prices eventually admit they are not doing well financially right now. So let them rain and we all can continue to be the parade.
Not sure if I feel educated or mentally violated with economics crash course. However, it was very informative and I do feel all warm n gooey inside knowing I gave at the office,and the beach,and the casino,lol and the list grows daily. Would I do it again, yep and probally spend more
(trying to be responcible)
Fantastic read! Thank you, Jason, thank you <3
Personally, I find the prices of some things to be justified, but others outrageous. For example, there are a few $50 bundles, that I think are excessive. I have quickly learned my lesson, that’s for sure.
I want to give the product a chance, purchase it, and often do not find it on the same level as more fully developed games outside of the Home universe.
While I have the right to keep my money in my pocket the next time I am enticed, I also have the right to express my displeasure at the inflated price tag that is attached -- Whether or not I am as elegant a writer as Norse.
I think part of the problem is market saturation. It seems every update increases the choices of where and how to spend our money. Don’t get me wrong, I think it’s great that we have such a wide variety of content available every week!
I feel that is one thing that your model does not consider. When faced with a decision, who among us will not choose the product that leaves a little more in our wallet? That is where developers are failing. We should be seeing more competitive pricing with all of the content being released.
Also, if the item needs updating or is unsatisfactory, the point of purchase should not be the last we hear from the vendor about said purchase.
I have to say I do agree that the quality has increased as well. I’m not saying I think all developers are over-charging, but I do think it is becoming a more commonplace practice.
I do love that developers are becoming more prevalent among the community! It’s great to know that you will be heard -- and answered. It creates faith in your customer base. I hope more developers take note from companies like nDreams and Digital Leisure, in that aspect.