Series Info...Engines of Creation #2:

Strange Business

by Dave Rickey
June 17, 2003

Well, I get to start this episode with good news; I'm now the Lead Designer on Wish from Mutable Realms. This is probably the last time I will mention it for a while, but it's a significant event for me and I wanted to make a note of it here. It's another Fantasy-themed project, which allows me to leverage what I have learned along the way to maximum effect, but it also means it will be getting into a very competitive market, and it's going to be a real challenge. Probably going to be my last Fantasy project, though, another 2-3 years of elves and dragons will probably give me a phobia.

But it does give me a certain sense of perspective on the topic for this column. Like the sign says, EOC is about the theory, business, and process of making online games, and this week I'm going to be looking at the business side of things. And what a very strange business it can be.

First, you have to understand that it is almost sane compared to the normal Games software industry. Sane in business terms, at least, we certainly have a colorful cast of characters to work with. But the traditional boxed unit side of things is nuts. Almost no-one makes any money, even "successful" game developers are living milestone to milestone. The list of developers that made great games but went out of business goes on and on at disgusting length. Even publishers aren't immune. Computer games earned more than Hollywood box-office receipts last year, but no-one is quite sure where the money goes.

Anyway, online games are a lot different. If a developer can create a successful game, and if they maintain control of the revenue stream, they are Set For Life, or at least for years. These games don't die, not unless they are deliberately killed off. Even when they are killed, they tend to come back to life like Meridian 59 and The Realm. When a game has got that indescribable "something", it's going to last forever. And in an industry of lukewarm booms and long, soul-destroying busts, the steady revenue stream of even a moderately successful MMO is a rock of stability not to be found anywhere else.

But those are some very big ifs. Since Ultima Online launched a little over 6 years ago, several hundred MMO projects have been launched. Very few of those have reached the point where even the hardcore players have heard of them. Only a handful have launched on any significant scale, only about half of those have reached 5-digit subscriber levels, only 5 qualify as clearcut successes. That's pretty steep attrition.

But not really any worse than the single-purchase side of the industry, where 99 titles out of 100 fail to earn back their development costs. Even the lower-profile games like M59 or A Tale In The Desert are viable businesses, earning more than they cost to operate. So compared to the roulette-wheel odds of making a normal boxed title, an online game looks pretty tempting.

There are basically three business models for online games: Pay for time, pay for stuff, and monthly subscriptions. Pay for time (aka "Pay by the heartbeat") is not found very often anymore, but until 1997 it was the standard. Until the release of UO, game time was paid for at a rate of 5 to 15 cents a minute. Those days are gone, and good riddance, and anyone who thinks we're ever going to see time-metered payment schedules again hasn't been paying attention. Not only were they frustrating for the customers, but they were bad for business. The Asian market is currently dominated by an indirect form of pay for time (where players pay cafe operators by the hour to play at computers that are licensed to play the game by the month), but even that is looking to be a transient stepping stone with various flat-rate plans coming to dominate.

Monthly subscriptions are currently the dominant business model, accounting for over $100 million a year of revenue in the US alone. Just working backward from announced subscription levels, it's clear that EQ is earning around $50M annually, with another $25M each for UO and DAoC. This isn't play money, and when you count in all the boxed units sold (core product and expansion packs) EverQuest, UO and DAoC combined are closing in on $1B worth of lifetime gross revenue. In a successful game, month to month "churn" (percentage of subscribers who cancel) tends to be in single digits, so MMO developers who control their revenue stream can operate with a security and confidence almost unknown in the rest of the industry.

Not controlling your own revenue stream, on the other hand, is tantamount to indentured servitude. You become a contractor being paid to maintain your own brainchild by the real owners. But even there, firing you and bringing in a fresh team isn't really an option for the game's continued healthy operation, so your staff can at least count on a steady paycheck. This is far from a given in the rest of the business.

Pay for stuff is not yet proven on a large scale, the largest game to use it in practice so far is Magic The Gathering: Online, with a few thousand regular customers. But the model is very tempting, if only because it seems to extract a lot more cash per customer (upwards of $100/month each), with little or no additional cost. There is the largest and most high-profile game currently in development to be based on this model, and the industry will be watching it very carefully.

The key factor in all of these is the ongoing revenue. Where a single-player developer is constantly trying to outrun entropy, living from one milestone payment to the next and never more than one really poor title from bankruptcy and dissolution, online game developers can count on a regular supply of cash. Although a new game may come out and take anywhere from 5% to 20% of your customer base, history shows that you can count on a hard core base of customers that will never leave you. This kind of security has been hard to come by, and changes all of the rules for interaction between publishers and developers.

Just for starters, it raises the question of whether developers need, or even want, a publisher, at least in the normal fashion of the relationship. Originally publishers were primarily distributors, taking games from developers and getting them into the retail stores where they could be sold. Like book publishers, they offered "advance payments" to attract the game creators, bringing money to the table always helps close a deal. However, that was a long time ago, and the developers long since have become dependant on the money from the publishers, as they were the only ones willing to gamble on the high-risk environment of games. Of course, since the developer's need for the publisher comes long before the product, the publisher is in a very strong negotiating position, and they have gotten very good at feeding the developers just enough money to keep going, but almost never enough to break free.

Although EA and SOE are behind three of the current 5 "successful" games, and Microsoft effectively owns a fourth, there's one glaring exception that is making more traditional investment channels take notice: DAoC from Mythic Entertainment. Initially funded by Abandon Entertainment (who normally invests in movie and TV projects), and now counting the very traditional (and highly respected on Wall Street) venture capital firm TA Associates as an investor, Mythic is in complete control of its own revenue stream (author's note: Mythic is my former employer, but this information is public knowledge). Also standing out is NCSoft, which has been propelled by the phenomenal success in Korea of Lineage: The Bloodpledge to become the single largest online game company in the world, and a publisher in their own right after the acquisition of Richard Garriot's Destination Games. NCSoft is funding no less than 8 different MMO projects, ranging from the obvious successor to their original hit to completely new titles like City of Heroes. At this point the discussion stops involving mere tens of millions of dollars, and starts edging into the billion-dollar neighborhood.

That's a very nice neighborhood, and a lot of capital that until now has ignored games is starting to pay attention. My new employer, Mutable Realms, is itself privately funded, and my job search revealed many others in a similar position. At the same time, the most recent GDC and E3 painted a picture in the rest of the industry of increasingly aggressive negotiation by publishers, with the result that the long-lamented decline in creativity for games has become almost a self-parody, almost no sign of innovation or really creative gameplay is to be found in any upcoming standard title.

Unlike others in the business, however, I do not think that online games are doomed to become increasingly derivative, in fact I think that they are inherently more demanding of innovation. In single-player games, you can clone the latest hit and hope to sell to many of the same people who bought the original, in online games the original is not going to let go of its customers, and they are not going to abandon their investment in their current game to go to something new that is just more of the same. There may be a lot of games out there that are just refining the EQ formula, but the vast majority of the titles that are successful in the future are going to have to bring something new to the table. In this game, the safest bet may be a long shot.

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