The online gaming industry. The relationship between pricing mechanisms used by game developers and the online gaming communities. What is the impact of DLCs (downloadable content) and micro- transactions on the community and what are the factors influencing the player's willingness to pay? Name: Bogdan Berbece Student ID: 10824421 Date: Final version, 29th June, 2015 Program: MSc in Business Administration Track: Entrepreneurship and Innovation Institution: University of Amsterdam Supervisors: Dr. Roel Van der Voort and Dr. Tsvi Vinig KEYWORDS: micro-transactions, DLCs, free-to-play, subscription, packaged games, willingness to pay, lock-in, competition, interaction, virtual goods, eSports, flow state, platforms, addiction, business model 1 Statement of originality This document is written by Student Bogdan Berbece who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents. 2 1. Foreword and acknowledgements This piece of research was written as part of the Business Administration Masters of Science program of the University of Amsterdam, specializing in Entrepreneurship and Innovation at the Faculty of Economics and Business Studies (FEB). The topic of the thesis revolves around the relationship between online gaming platforms and game developers, and online gaming platforms and the gaming communities. The focus lies on the impact that DLCs (downloadable content) and micro-transactions could potentially have on the game developers and the online gaming community. Besides its theoretical relevance, the paper also tries to provide practical information for the game developers, in order to help them make better informed decisions when thinking which approach to follow when choosing the best viable pricing strategy for their products and services. Since I can remember, computer games have been part of my upbringing and have shaped my development throughout the years. Although the academic field of entrepreneurship and innovation came as a novelty to me during my studies in Amsterdam, being able to link a lifelong passion with my academic aspirations has helped me acquire vast knowledge on a topic that I love and that I believe is of great importance nowadays. I would like to thank Dr. Roel Van der Voort, the leading supervisor of this piece of research for his constant involvement and guidance throughout the whole process. Furthermore, I would like to express my appreciation for Dr. Tsvi Vinig, the second reader of this research. In addition, I would like to thank all the interview participants from the online gaming community (professional players, professional casters, team representatives and managers) that have spent their time and consideration throughout the interviews. Furthermore, I would like to express my gratitude to the 290 respondents to the online questionnaire which immensely helped the research. Lastly, I would like to express my appreciation towards my friends and family, who have been alongside me, throughout the whole process of conceiving this research paper. The ideas expressed in this thesis are those of the author, and do not automatically reflect the views and beliefs of the business organizations that are part of this phenomenon. Amsterdam, 29th of June, 2015 Bogdan Berbece. 3 2. Abstract The gaming industry has seen a fast changing environment during the past decade. This has put a great pressure on gaming developers to shift their business strategies from selling their products in a tangible form through retailers, through offering them in a digital format through their own, or separately developed gaming platforms. This shift has brought changes in the way companies engage with the platform operators and the gaming community as a whole. Nowadays, the community plays a crucial role in the development of the industry. Amateur and professional gamers have become the foremost important customers of game developers, and are shaping the way in which the products are offered to the market and the characteristics of these products. Companies need to adapt to this shifting tide and place a great emphasis on what the market desires, and how their products need to cater to the needs of the end users. The research utilizes a mixed methods approach. Through semi-structured interviews with game casters, production managers, professional players and professional team managers that aimed to identify the characteristics of the games typology and the benefits and downfalls of free-to-play versus pay-to-play games, a conceptual model was established. Afterwards, the importance of characteristics such as satisfaction and willingness to pay were tested through surveys among several types of participants in the market. The data collected through the semi-structured interviews gave a holistic approach to the gaming environment, but several limitations need to be considered based on the methodology followed. The surveys also provide an in-depth understanding of what people's expectations are in terms of pricing mechanisms used by game developers, but its scope may be limited and generalization might be hard to established due to the diversity and heterogeneous choice of participants. We are positive that this piece of research does indeed help build on the existing online gaming literature, which, at this point in time is relatively scarce and divergent, and also provides valuable insight into this emerging and constantly changing field. 4 Contents 1. Foreword and acknowledgements...........................................................................................................3 2. Abstract....................................................................................................................................................4 3. Introduction and Research Questions......................................................................................................7 3.1 Theoretical relevance................................................................................................................9 3.2 Practical relevance...................................................................................................................10 3.3 Thesis structure.......................................................................................................................11 4. Literature review....................................................................................................................................12 4.1 Communities............................................................................................................................12 4.2 Culture.....................................................................................................................................13 4.3 Addiction..................................................................................................................................15 4.4 Platforms..................................................................................................................................16 4.5 The business behind the games...............................................................................................18 4.6 Lock-in mechanisms.................................................................................................................19 4.7 Virtual goods............................................................................................................................21 5. Business models......................................................................................................................................21 5.1 Packaged game sales...............................................................................................................22 5.2 Subscription based model........................................................................................................24 5.3 Free-to-play model..................................................................................................................26 5.3.1 Virtual goods............................................................................................................28 6. Conceptual model...................................................................................................................................29 6.1 Propositions.............................................................................................................................30 7. Methodology..........................................................................................................................................32 7.1 A mixed research approach.....................................................................................................32 7.2 Semi-structured interviews......................................................................................................33 7.3 Online questionnaires..............................................................................................................34 7.3.1 Measures.................................................................................................................36 8. Results.....................................................................................................................................................38