Vrije Universiteit Brussel Marlen Komorowski Faculteit Letteren en Wijsbegeerte Study Area Communication Studies Revenue and Payment Models of Digital Games The Power of Innovative Revenue Models in the Media Industry taking the Example of Massively Multiplayer Online Role-Playing Games Thesis submitted to obtain the grade of Master of Communication Studies – New Media and Society in Europe Supervisors: Dr. Valérie-Anne Bleyen & Olivier Breat Academic Year: 2012-2013 39,882 ABSTRACT Marlen Komorowski Vrije Universiteit Brussel / 2012-2013 Title: Revenue and Payment Models of Digital Games The Power of Innovative Revenue Models in the Media Industry taking the Example of Massively Multiplayer Online Role-Playing Games Supervisors: Dr. Valérie-Anne Bleyen & Olivier Breat Our economy had changed significantly through digitization bringing new business opportunities but also threats which especially influences the media industry. One possibility to deal with these new circumstances is to implement innovative online revenue models. In order to find successful revenue models the youngest media industry, the digital game industry, is in a position to show meaningful findings. The integrated online revenue models of representative massively multiplayer online role-playing games (MMORPGs), revealed that the subscription model and free-to-play model, based on freemium and micro- transactions, are crucial in this segment. Trends can be identified expressing a strong shift to free-to-play and the importance of accessibility and social interaction in MMORPGs. The free-to-play model seems to be the future not only for MMORPGs but also the whole media industry. Key Words: disruptive innovations, media products, digital game industry, massively multiplayer online role-playing games, revenue model, payment model, sustainability, subscription, free-to-play, accessibility Words: 39,884 I TABLE OF CONTENTS ABSTRACT I TABLE OF CONTENTS II LIST OF TABLES AND FIGURES IV ABBREVIATIONS V ACKNOWLEDGEMENT VII PREFACE VIII Chapter 1: Introduction of the Research 1 1.1. Research Background: Revenue Models for Digital Media 1 1.1.1. The Significance of a Changing Economic Environment 1 1.1.2. The Unpredictability of the Changing Economic Environment 3 1.1.3. Online Revenue Models as Promising New Opportunities 4 1.2. The Purpose of this Research 6 1.2.1. The Questions in the Scope of this Research 6 1.2.2. Relevance of MMORPGs and the Chosen Cases 7 1.2.3. Epistemological Foundations in the Context of the Master Programme 8 1.3. The Research Methodology 9 1.3.1. Current Research on Revenue Models and Digital Games 9 1.3.2. Toward a Theoretical Framework 11 1.3.3. Study Design and Structure 15 Chapter 2: Findings of the Digital Game Industry 19 2.1. History of the Digital Game Industry 19 2.1.1. The Beginnings: Arcade Games and Consoles 19 2.1.2. Consolidation of the Console Market and Rise of PC Games 21 2.1.3. The Rise of Massively Multiplayer Online Games 23 2.2. Digital Games: Definitions and Taxonomy 25 2.2.1. Digital Game Components and Platforms 25 2.2.2. Content- and Purpose-Based Taxonomies 26 2.2.3. Online Game Attributes and MMORPGs 28 2.2.4. Technological Infrastructure of Online Games 30 2.3. The Online Game Ecosystem and Market Structures 31 2.3.1. The Traditional Distribution Retail Value Chain 31 2.3.2. The Main Actors of the Value Chain and Economic Implications 32 2.3.3. Data and Prospects of the Online Gaming Market 36 II Chapter 3: Findings of the Three In-depth Case Studies 45 3.1. Case One: World of Warcraft in a Leading Position 45 3.1.1. About the Game and its Development 45 3.1.2. Value Network 47 3.1.3. Functional Architecture 49 3.1.4. Value Configuration 51 3.1.5. Revenue and Payment Model 52 3.2. Case Two: Aion under Strong Market Pressure 58 3.2.1. About the Game and its Development 58 3.2.2. Value Network 60 3.2.3. Functional Architecture 62 3.2.4. Value Configuration 62 3.2.5. Revenue and Payment Model 63 3.3. Case Three: Rune Scape as Innovative New Entrant 68 3.3.1. About the Game and its Development 68 3.3.2. Value Network 70 3.3.3. Functional Architecture 72 3.3.4. Value Configuration 73 3.3.5. Revenue and Payment Model 74 Chapter 4: Concluding Discussions and Future Prospects 79 4.1. Cross-case Comparison of the Case Studies 79 4.1.1. The Similarities and Differences of the Game-Play and the Developments 80 4.1.2. The Similarities and Differences of the Value Networks 81 4.1.3. The Similarities and Differences of the Functional Architectures 82 4.1.4. The Similarities and Differences of the Value Configurations 83 4.1.5. The Similarities and Differences of the Revenue and Payment Models 84 4.2. Final Discussions 86 4.2.1. Key Issues 86 4.2.2. Key Trends and Future Prospects 95 4.2.3. Final Remarks 99 REFERENCES 100 ANNEX I - SOLMN DECLARATION 119 ANNEX II - EXPERT INTERVIEW QUESTIONNAIR 120 ANNEX III - PROTOCOL OF EXPERT INTERVIEWS 122 III LIST OF TABLES Table 1.1 - The business model matrix as analytical tool for this research Table 1.2 - Legend for the elements of the value network diagrams used in this research Table 1.3 - Methodologies used in this thesis Table 3.1 - System requirements to play the MMORPG World of Warcraft Table 3.2 - System requirements to play Aion Table 3.3 - System requirements of RuneScape Table 4.1 - The similarities and differences of the game-play and the development of the three cases Table 4.2 - The similarities and differences of the value networks Table 4.3 - The similarities and differences of the functional architecture Table 4.4 - The similarities and differences of the value configuration Table 4.5 - The similarities and differences of the revenue and payment models LIST OF FIGURES Figure 1.1 - US recorded music revenue ($ per capita) in dependency of its medium Figure 2.1 - The traditional game value chain Figure 2.2 - Global digital game market from 2004-2012 Figure 2.3 - Digital game market size, by geographical area Figure 2.4 - Total sales since 2010 of the seventh generation consoles Figure 2.5 - Revenue of successful players in the digital game industry Figure 2.6 - Global end user spending split by platform, 2008-2013 Figure 2.7 - Global online gaming revenues ($ million) and share of total video game segment (%) 2008-2017 Figure 2.8 - Total MMORPG subscriptions and active accounts Figure 2.9 - MMORPGs with more than 1 million subscriptions at their peak Figure 3.1 - Screenshot of the game-play World of Warcraft Figure 3.2 - The value network of World of Warcraft Figure 3.3 - Screenshot of game-play in Aion Figure 3.4 - The value network of NCsoft’s Aion Figure 3.5 - Screenshot of game-play in RuneScape Figure 3.6 - The value network of Jagex’s RuneScape Figure 4.1 - Revenue models for MMORPGs IV ABBREVIATIONS 3D Three-dimensional USD US Dollar EUR Euro AOL America Online ARPU Average revenue per user B2B Business-to-business CAGR Compound annual growth rate CD Compact disc Cf. Compare CPA Cost per action CPC Cost per click CPI Cost per impression CPU Central processing unit DVD Digital versatile disk E.g. For example EA Electronic Arts E-commerce Electronic commerce EMEA Europe- Middle East-Africa ESA Entertainment Software Association Et al. And others Etc. And so on Ff. Following pages FY Fiscal year GB Giga-bite GDP Gross domestic product GHz Giga-hertz GTA Grand Theft Auto HD High definition V ICT Information and communication technology JRC Joint Research Centre Mac Macintosh MB Mega bite MIT Massachusetts Institute of Technology MMOG Massively multiplayer online game MMORPG Massively multiplayer online role-playing game MUD Multi User Dungeon NASDAQ National Association of Securities Dealers Automated Quotation NWN Neverwinter Nights P2P Peer-to-peer PC Personal computer PvE Player-versus-environment PvP Player-versus-player PvPvE Player-versus-player-versus-environment PwC PricewaterhouseCoopers Q Quarter SKU Stock keeping unit VES Video Entertainment Systems VRAM Virtual random-access memory WoW World of Warcraft VI ACKNOWLEDGEMENT Firstly, I greatly appreciate my supervisors, Dr. Valérie-Anne Bleyen & Olivier Breat, for their guidance and support during the course of this research. This research was successfully carried out under their supervision and assistance. I am really much looking forward to work with them and the whole team of the SMIT on challenging and interesting projects together. Thanks to the participants of the expert interviews. Their data, information and especially their evaluation of the issues rose during my work on this thesis gave me a lot of insights and different point of views to improve my conclusions. I would like to thank my study colleagues and involved members of the SMIT at the Vrije Universiteit Brussel in the Master Program Communication Studies – New Media and Society in Europe for a cheerful year full of new experiences and nice company. Special thanks to Freya Duncker, Sandra Gerasch and Verena Kern for supporting me at any time. I express my deepest gratitude to Jonas Albert, who explained me a lot about digital gaming and supported me during my deepest hours of distress in endless night shifts. Without his geeky knowledge this thesis would not have been possible. He backed me up in so many ways and his ideas and enthusiasm gave me energy in my research. I would like to thank my dear sister, Marlies Komorowski for her support in the progress of this thesis and her valuable comments and feedback on the final script.