Free-to-Play MMORPGs: A Fertile Yet Fragmented Field

The current market for MMORPGs (massively multiplayer online role-playing games) that are free to play and generate revenues through virtual goods is similar to the casual gaming market of five years ago. Entry barriers are relatively low, and many new publishers are entering the market. Even established players in the market are operating under the gaming industry’s radar screen. Compared with AAA, subscription-based MMORPGs and retail console games, the development or licensing costs for free-to-play games are relatively low.

Many publishers import their games from Asia, but local development is becoming more common. For gamers, free-to-play games cost nothing to adopt, but while the switching cost is low, so is customer loyalty. In addition, digital distribution and viral marketing can help a new game to grow its player base quickly.

Because of all these factors, the free-to-play category is fairly fragmented. Quite a few companies are active in this marketplace, many of them based in Asia and unknown to the larger gaming industry.

Growing Competition

The free-to-play market in the U.S. will become much more competitive in the next couple of years. A variety of new market entrants are emerging, which is closing the windows of opportunity for new start-ups interested in entering the free-to-play space. Incumbent game publishers such as Electronic Arts and Sony Online Entertainment (SOE) are actively working on free-to-play games.

Electronic Arts already offers “Battlefield Heroes” as a free-to-play game and caused a stir when the CEO announced plans to release “Star Wars: The Old Republic” as a mid-session, free-to-play MMO to indicate their commitment to this business model. Electronic Arts has since stepped back from that comment and says that “no statements have been made about the Star Wars business model.” SOE has several free-to-play MMOs slated for the next two years, including “The Agency” and “Free Realms.”

More Asian companies are entering or re-entering the U.S. market. With Nexon America proving the market potential, companies such as CJ Internet from South Korea and Perfect World from China — both industry leaders in their local markets — are setting up offices in the U.S. The Korean government has promised US$200 million in funds to stimulate export of gaming services and content, which will drive even more Korean gaming companies to the U.S. market.

Roping In Retailers

Many virtual worlds companies focused on the KT&T (kids, teens and tweens) market have microtransaction business models to generate revenues while using games as the major attraction for their worlds. Several virtual worlds, including “Gaia Online,” are launching their own MMORPGs. The line between virtual worlds for kids and MMOs continues to blur, and they will increasingly compete against each other for the minds, time and money of young consumers.

In 2008, a larger percentage of MMORPG players in the U.S. played free-to-play games than subscription-based games. Parks Associates data show that roughly 46 percent of MMORPG players in the U.S. play only free-to-play games.

On a business-model continuum, free-to-play MMORPGs in their current incarnation are positioned between social networks on the one hand and subscription-based MMORPGs and niche virtual worlds on the other. With this unique status, free-to-play games can attract new demographics into the gaming market. The allure of a new and expanding audience is bringing new companies into this arena, prompting the increased availability of retail game cards at major stores such as Target, Wal-Mart and Best Buy, and leading to a growing variety of content from both traditional and emerging game publishers.

The popularity of this model is also expanding acceptance of virtual goods among social networks, virtual worlds and online games. All these factors will continue the expansion of free-to-play MMORPGs within the MMORPG industry.