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Chapter 4. Marketing and Distribution Concerns: Retail Box, Download, or Both?

Chapter 4. Marketing and Distribution Concerns: Retail Box, Download, or Both?

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[ Team LiB ]



Downloading: Not (Yet) a Viable Option

There has been a lot of hype in the past couple of years about the possibilities of bypassing the retail channel with online games,

offering direct downloads of the client as an alternative. Publishers like the idea of bypassing all the middlemen in the retail process and

the need to pay marketing development funds (MDFs), creating higher margins on the client.

Unfortunately, the hype is once again overtaking the reality of the situation. While this is a fine idea and will eventually become a reality,

we're not there yet and won't be for years:



With over 90% of the US and world market still on 56k dial-up connections, only the most dedicated gamers will even

consider a download over 50–100 megabytes (MB). Compare this with an online game client, which has an average of well

over 500MB. It is true that hard-core gamers do tend to upgrade to faster Internet connections when they become available

and have remarkable tolerance for large downloads, but they are a small percentage of the overall market. Compare this to

the download figures for the much smaller 10MB episodes for Electronic Art's Majestic, of which fully 91.5% of downloads

[1]

started were never completed.

[1]



"Of those who started down the path of registration, only 8.5% completed," EA spokesman Jeff

Brown said. The rest quit halfway through, he said, in part because of the lengthy process, which

included over 10 megabytes in software downloads." See "Majestic Headed for Stores Before

Thanksgiving," USA Today, October 3, 2001.



Broadband access is growing far more slowly than expected. In 1997, most analysts expected a full 30 million people in the

US to be accessing the Internet on broadband connections by 2002; the actual total as of March 2002 is fewer than 11 million

connections and, due to the failures in 2001 of cable modem provider @Home and many digital subscriber line (DSL)

providers, the rate of new connections slowed throughout most of 2001 and the first quarter of 2002. Broadband access is not

expected by the authors to be a major force in the US and Europe until 2005 at the earliest, and possibly not until 2007 or

later. And even though Asia is laying broadband fiber far more quickly than the US and Europe, the broadband access

numbers in the region are roughly equivalent to those in the rest of the world.

The exception is South Korea, which is, by some estimates, almost 75% broadband-connected. The great bulk of these

connections and gameplay happen in cyber cafés, which are unique to that country and are a major force in online games. By

some accounts, almost 5% of the total population is registered for one online game, NCSoft's Lineage: The Bloodpledge,

which sees the great bulk of its revenues from cyber café access fees. Interestingly, however, the number of home

broadband connections in South Korea is growing steadily and is expected to reach parity with cyber cafés in the next year to

two years.



At any rate, for the foreseeable future, publishers should make plans to maximize retail distribution for the client.



[ Team LiB ]



[ Team LiB ]



Buying Shelf Space

Retailers treat an online game like any other game client. This is both good and bad. On the good side, if the title sells well, like

EverQuest (EQ) and Dark Age of Camelot did, then you can count on shelf space being available. On the bad side, retailers will want

what they always want for a retail game package, namely marketing development funds, or MDFs.

MDFs are the retail world's version of the old organized crime protection scheme; if you want prominent (or evenany) shelf space, room

for an end-cap, or to have the retailer show your product box cover in their omnibus newspaper ads, you pay MDFs. MDF costs for a

Class AAA project can easily run over $300,000.

Retail chains get away with this because shelf space is limited in most stores to 200–300 spaces and publishers send over 1,500 games

to the shelves each year. That makes it a seller's market, and chains are always willing to sell. It is part of the cost of doing business,

especially in the US.

Another challenge is keeping that shelf space over time. With persistent worlds (PWs) today, and at least for the next three to five years,

until we see how the growth of broadband connections in the home plays out, having a unit on the shelf is critical to the acquisition of

new subscribers. PW games tend to settle out at low, but consistent, sales rates. Retailers are accustomed to a three- to six-month shelf

life for a product that is selling well; getting them to retain your unit on the shelf after that can be difficult.

This is also a problem you might face with a publisher, who is also accustomed to that three- to six-month shelf life and may not see the

need to keep a (relatively) low-selling game client on the shelves.



[ Team LiB ]



[ Team LiB ]



Magazine Cover Mounts

Game magazines such as Computer Gaming World, PC Gamer, and Computer Games not only mount CDs on their covers, but they

also sell access to them. Prices range from $7,500–$15,000, but the magazine takes care of the disc duplication and, if you "own" that

month's disc, your art goes on the disc and the disc holder. This is a cost-effective way to reach 125,000–400,000 hard-core gamers.

Remember, however, that there is usually a minimum 90-day lead time on reserving these.



Original Equipment Manufacturer Bundling

Original equipment manufacturers (OEMs) love to bundle software with their hardware as a value-added attraction for potential

customers. This runs the full range of hardware, including joysticks, video cards, and on the hard drives of new computers. Some OEMs

do huge buys, in the four- to eight-million-unit range. Traditionally, they pay small fees per unit for Class AAA products and take demo

versions of only a few very popular products. If you're willing to take no fee or an at-cost fee for duplicating and shipping the discs to

them, however, many OEMs would love to talk to you. Bear in mind that the lead time on OEM bundling is quite long, as much as six to

nine months.



Downloads

If you're going to offer the client for free, there is no reason not to have a downloadable version available on your web site. You do need

to understand that if your client is as large in size as the average online game client—that is, a full CD-ROM of 500–600MB

compressed—the bandwidth needed to download it will cost you somewhere between 50 cents and $1.50 per download. With the cost of

goods for a shelf unit now running between $1.50 and $3.00 for most games, this is still significant cost savings, but it is a hard cost that

needs to be figured into the equation.

You also need to take into account that you must have registration codes, even for free downloadable clients, or you'll find that the 1% of

people in any group who tend to abuse any process will start creating multiple accounts simply because they can, and this can become a

significant cost.

Free downloads in general create their own set of problems. For example, how do you limit anonymous downloaders to one download

and one account to keep them from just creating new accounts and playing for free on the back of your bandwidth costs? The only way

to curb most of this is to insist they not be anonymous and provide a credit card number for registration and issue CD codes, but that

also provides a block to entry; many people are still leery of giving away a credit card number in general, and even more are hesitant to

do it for something they aren't actually purchasing. Online "pocketbook" initiatives such as Microsoft's .NET and Passport may provide

some relief in the future, but only if they become widely accepted.

And that is only one of the problems presented by free downloads today. Like the issue of the commercialization of the Internet in the

mid-1990s, companies are rushing in without thinking through all the potential problems.



[ Team LiB ]



[ Team LiB ]



Chapter 5. Calculating and Expanding the Profit

Margins: The Cost of Doing Business

KEY TOPICS



Some Numbers

Add-On Profits



Historically, persistent worlds (PWs) have been a 40–50%-margin business. For a developer or publisher, the only niche with

significant support costs are the PWs (we're assuming you don't run a web game portal or assume bandwidth or hardware costs for a

hybrid).

In an ideal world, PW post-launch support costs would be limited to approximately 40% of the total revenue generated (or 40% of the

revenue goal, for newly released games building a subscriber base). Often, the percentage is closer to 60%, due to a lack of concern in

[1]

the past for providing the customer service (CS) staff with the right tools to do their job quickly and efficiently.

[1]



Note that former SOE President Kelly Flock was quoted in the press during 2000, including the

Wall Street

Journal, as saying that supportingEverQuest cost the company approximately $1.5 million per month, which

represented slightly over 50% of basic subscription revenue from SOE's then 300,000-plus subscribers. The last

announced subscriber total for EQ in 2001 was 435,000. IfEQ's support costs have remained stable, SOE is

coming close to the magical 40% operating cost number.



More and more publishers are learning the value of building adequate CS tools during the development process instead of tacking them

on at the last minute. Well-designed tools allow each CS representative to do more in less time. During the next three to five years,

support costs should go down across the board, and PW games will have a better chance of making the 40% or lower support cost mark.



[ Team LiB ]



[ Team LiB ]



Some Numbers

In Table 5.1, it is assumed that a PW will achieve at least moderate to high subscriber numbers by current standards—that is,

200,000–300,000 monthly subscribers at about $10 per month each. Note, however, that subscription fees are on the rise, as with NCSoft

charging $15 per month for Lineage and Funcom's Anarchy Online (AO) and Mythic's Dark Age of Camelot charging $12.95. The second

column represents the approximate number of employees that ideally would be devoted to the CS task. The percentage at the far right of

each line item represents the approximate amount of an ideal 40% of subscription revenue that is devoted to supporting the MMOG/PW.



Table 5.1. Support and Operations



Costs



These numbers vary by company and customer niche; each PW customer niche differs greatly in its needs. For example, an RPG requires

a larger player relations staff than a vehicle simulation with fewer RPG elements.

Even at a level of 60% of revenue devoted to support, as shown in Table 5.1, a moderately popular PW (100,000 or more subscribers) will

generate significant gross profit over a minimum lifecycle of five years.

Table 5.2 considers broad subscriber income numbers alone, not factoring in revenue from initial stock-keeping unit (SKU) and add-on

SKU sales, which can and do amortize a product's initial development and launch costs.



Table 5.2. Moderate Support Costs, Subscription Games



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Chapter 4. Marketing and Distribution Concerns: Retail Box, Download, or Both?

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