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Plugged In

Virtual Economy, Real Money

Plugged In

While it might run counter to most people's common sense, the hottest trend in the video game industry these days is giving away games for free.

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Smurf's Village (Capcom)

Whether it's new titles, like "Smurfs' Village" on iPhone or old standards like "EverQuest," publishers are in a race to offer free-to-play games — sometimes known as "freemium" games — and in many cases, it's making them a fortune.

By offering well-known games — or new titles (generally featuring popular franchises) for free, publishers are tapping into people's bargain-hunting nature. And in fishing for those new players, they often find a whale.

A recent survey by Park Associates found that while only 5 to 10 percent of the player base of social and free-to-play games regularly pays out of pocket, those who do pay are generous. The average Facebook gamer who spends money on games spends about $29 per month, according to the report. And those who pay for virtual goods and upgrades in free-to-play games average about $21 per month.

And that adds up quickly when your player base is in the millions.

One area where free-to-play has seen tremendous success is on Apple's iPhone.

Capcom's "Smurfs' Village" and "Snoopy's Street Fair" have had a regular presence on Apple's list of the top grossing apps since their release. ("Smurfs' Village," released in 2012, still holds the sixth spot.)

Hoping to follow in that path is Electronic Arts, which recently launched a freemium title based on "The Simpsons" franchise.

"Consumers are looking for not only a freemium title, but one that's filled with licensed properties and characters they care about," says Bernard Kim, senior vice president of social and mobile games for EA. "Our goal is to have an evergreen title that makes consumers and users laugh and enjoy themselves. And we'd love to have that same kind of lifeline [as 'Smurfs' Village']."

It's a philosophy that seems to be working. EA was forced to pull "The Simpsons: Tapped Out" from the app store because of overwhelming demand that swamped the publisher's servers. (It's expected to be available again soon.)

"We see this product as having a tremendously long tail," says Kim. "The key to a product like this is to continue to generate new content. Just as the writers are creating new content for the program, that's our goal with this as well. ... I personally believe it's going to be one of our biggest release of 2012."

The trick to making money from freemium games is the availability of a premium currency. Players might pick up money in the game, but generally they're steered to create new objects. In "The Simpsons: Tapped Out," for instance, they must rebuild Springfield after Homer inadvertently destroys the town.

Building objects can be done with that easily found in-game cash, but to complete a project could take hours of real time. To hurry things along, players can spend real-world cash on premium currency to reduce the process to seconds.

Legacy games are also good candidates for free-to-play titles. Sony Online Entertainment discovered this in 2011, when it switched its catalog of multiplayer online games (which at the time, charged all players $15 per month) to a tiered model that included a free-to-play option.

The first of those games to make the switch — "DC Universe" — added 1 million players in the first week. The transition was so successful that John Smedley, president of the unit, was forced to take to Twitter to apologize for lag and login issues, noting: "Very bluntly, this has been a wee bit more successful than we planned on."

Premium currencies don't work as well for these sorts of games, though. To boost revenues, many publishers restrict the ability of free players to create multiple characters or limit the number of items they can carry in game, subtly encouraging them to pay for a subscription.

Other titles break the economic rules of currency, creating a system that is intentionally broken (from an economic standpoint), to improve the gameplay experience.

"If you're designing a game with an in-game currency, your design objects are different," says Vili Lehdonvirta, a research fellow at the London School of Economics who has studied virtual economies for eight years. "You're not trying to design for efficiency. You're trying to design for experience. … Certainly one part of the gameplay experience is overcoming challenges — and another is social interaction."

By making virtual currency hard to attain and something that requires players to interact when dealing with each other such as adding a haggling element, developers are able to use currency to make a game stickier — and keep players intrigued.

It's not exactly the same model as free-to-play titles, but those games operate along a very similar line.

"Efficiency is really easy to achieve in a virtual currency," says Lehdonvirta. "You can make everyone rich in the blink of an eye, but that's not fun. The value comes in that it was hard to attain."

© 2012 CNBC.com

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