Many of us play free video games. We install these games from marketplaces like Google Play Store or App Store without paying a single dime. So, did you wonder how these game developers publish their games for free?
Don’t scratch your head. It’s not that difficult to understand how gaming companies generate revenues.
Earlier, when there were no mobile phones and games were available either on PCs or gaming consoles. Game makers made money selling game CDs and cassettes. However, with the advent of technology and the introduction of mobile gaming, developers found new means to generate revenue.
Modes of revenue
Currently, the revenue model of gaming companies is divided into two groups – 1) Paid by Ecosystem 2) Paid by Online Gamers
Paid by Ecosystem: This group includes in-app advertisements, in-game products or brand placements, and incentive-based advertisements. Among these three, you must be familiar with In-app advertisements (IAA). In-app and incentive-based advertisements are similar.
While playing games on your phone, you may have watched several ads when progressing from one level to another, i.e. in-app advertisements. These range from ads for different games to insurance company ads. The popularity of free mobile games has given a boost to IAA. Here, third-party developers pay game developers to display their ads.
Game developers also earn money when they endorse products or brands in their games. This model is called In-game product or brand placement. For instance, if you play Asphalt 9, you will see racing cars of brands like Lamborghini, and Mercedes, in the game. Here, the brands pay the game developers to endorse their products.
Paid by Online Gamers: This is a conventional route game developers follow to generate revenue. However, currently, a significant portion of revenue comes from the ‘paid by ecosystem’ model. Here, online gamers pay game makers to get access to their online games. There are four routes, which game makers use to generate revenue.
1) Purchase/pay per download– Gamers pay an upfront fee to purchase or download the game.
2) Freemium upgrades – A version of a game is available for free, but gamers must spend to access the next version or extra features of the game.
3) In App-purchases (IAP) – The game is available for free but gamers spend to purchase virtual objects (skins, new cars) or currency.
4) Subscription– Gamers purchase monthly or annual subscriptions to a game.
According to a recent Unity Ads global survey, 54% of the players choose ‘rewarded ads’ as their preferred way to pay for games, whereas ‘paying upfront and ‘IAPs’ account for 18% and 11% respectively.
Consumer spending is Low but can grow in the future
A majority of the mature gaming markets across the world started with PC and console gaming, which inherently deployed the ‘buy to play’ monetizing model. However, India, being a mobile-first gaming market, has seen the primary deployment of the ‘free to play model’. Thus, we see a relatively low penetration of paid models in online gaming.
The IAP in India is lower than the global average because of low GDP per capita compared to mature markets, gamers’ aversion to paying for online games, and the abundance of free-to-play games.
However, a new trend suggests IAPs are increasing. According to a KPMG report in FY21, the total IAP revenue for online casual gaming was Rs.~24Bn which accounted for ~40% of the total revenue of the casual online gaming segment and is expected to increase to Rs. 70Bn in FY25 at a CAGR of ~30%.
This growth will come when game developers invest in providing an immersive gaming experience, which is likely to attract more gamers.
Case study – How PUBG drove Indian gamers to spend
If not you, your child has played PUBG at least once. This game took the Indian gaming community by storm and got the conservative Indian gamer to spend.
Player Unknown’s Battlegrounds (PUBG) is a hyper-multiplayer game the Chinese tech giant Tencent developed. It was launched in March 2018 in India.
Before the Indian authorities banned the game, PUBG was downloaded on 7 of 10 gamers’ mobile phones. PUBG not only enticed the Indian gamers to spend, but it also became the first mobile game to release a TV commercial. Until its ban, PUBG raked in $40-50Mn through IAP. In 2019, PUBG tournaments accounted for 40% of all Esports tournament prize money.
PUBG employed IAPs to promote spending in the free-to-play game. All app purchases within PUBG were done through its in-game currency, which could be purchased within the game with real money. The virtual products in the game let players create their own individual characters. Players can buy, sell, or trade these products amongst themselves, creating a community market and an in-game economic system.
The sudden popularity of PUBG was an eye-opener for other game designers who suddenly realized the market potential for online gaming in India.
Did you find this aspect of revenue generation in the gaming industry fascinating?