The Business of Games

It wasn’t that long ago that premium mobile games were primarily offered as paid downloads. The usual cost was $.99 but there were examples where the price was more. Then the market rapidly shifted to the freemium model. For those unfamiliar with this designation, a freemium app is free to play but requires users to pay to unlock certain features and virtual goods that enhance the gameplay experience.
What a difference a year makes. In his post describing this shift, The fall of Angry Birds, Trey Smith points out that of all available apps, not just game apps, 18 of the top 25 grossing are now freemium games. They accomplish this by offering lots of options for in-app purchases with a clear call to action at key moments in the gameplay.   

The freemium model can also incorporate advertising in a novel way. DEV has just released a game called Mad Humans Election 2012 which allows the user to battle political figures and their minions by throwing tomatoes. Users can access characters like Joe Biden and Donald Trump for free but they have to pay to battle Obama or Romney. Now we are adding an option for users to view a 30 second ad to unlock these key characters for free. We believe that although this will lower the revenue per transaction, it may significantly increase the audience for the game and thus the number of transactions.

While freemium games are dominant, little has been done so far to build a business around console-style games for the tablet. There are a few initial entries such as Infinity Blade, but the real explosion in triple-A games is just ahead of us. This will change the economics of tablet gaming. Players may not be willing to pay the $50 they shell out for console games, but $10 should be a reasonable price point for eight hours of very high quality, immersive tablet gameplay.
Then there is crowdfunding. Several game makers I know have benefited from using Kickstarter to raise money and spur word of mouth in the marketplace. According to The Economist, of the ten most funded Kickstarter Projects, five are related to video games. This model of crowdfunding allows developers to take risks, developing games around untested IP and work in underserved genres.
Building a Game Company
A business can have an app but rarely is a single app a business. Ask Rovio how many games fell flat before they scored a hit with Angry Birds. They were formed as a mobile game studio in 2003, but the Angry Birds phenomenon didn’t occur until 2010, so the answer is, “a lot!” Now, Rovio is a multi-dimensional media company that includes broadcast media, merchandising, and publishing.
The successful companies in gaming will have a broader strategy than developing an individual app or game. They will have a comprehensive business concept that targets a specific audience, type of game, production method, revenue model, and marketing approach. They will build a company that over time carves out an identifiable niche and supports both the hits and misses.
It is also worth noting that being in the game business doesn’t just mean forming a game studio and developing a roster of game titles. There is a wide assortment of businesses that are key components of the gaming ecosystem from development and promotional tools to ecommerce and advertising platforms. In the gold rush years of the Red Dead Redemption game, it was the purveyors of mining tools that consistently made all the money.

 Source: http://www.forbes.com/sites/alanmcglade/2012/09/14/the-business-of-games-part-2/