The Daily Reckoning UK

The Race To The Bottom Of The Brain Stem

Sean Keyes

by

Posted 5th May 2017

Eleven years after I hung up my spurs, the release of a new Zelda game last month persuaded me to come out of video-game retirement for one last score.

I was reminded of Zelda last week when I was writing the latest issue of the Penny Share Letter.

The company I’m tipping in May’s Penny Share Letter makes computer games too. It makes “free to play” games for mobile phones – the types you see a lot of ads for on TV nowadays.

The ads feature celebs like Arnold Schwarzenegger, Liam Neeson and James Corden. And the games are usually called CLASH OF TITANS or GAME OF WAR or somesuch.

I didn’t know much about these games at first. I just knew that the company in question had eye-popping numbers for its revenue and earnings growth, and was chucking off lots of cash. So I started digging.

It turns out that the free-to-play business model is a hell of a thing. It’s basically taken over the mobile game industry, and now it’s starting to take over console games too.

The basic idea is that the publisher gives the game away for free. It tries to get the game in the hands of as many people as possible. It ploughs big money in to marketing in order to do so – hence the celebrity ad campaigns.

Then once the game has been downloaded, it offers players shortcuts, bonuses and add-ons for a small fee. The game is designed in such a way as to be fun and addictive… to keep players coming back… and to keep offering them goodies for money.

Strangely enough this business model – in which publishers spend heavily on marketing, and then give their game away for free – is way more lucrative than the old-fashioned method of just charging to play.

It’s more lucrative because players pay money in proportion to how much they like the game. Super-fans have the opportunity to spend lots of money if they want to. And greater numbers of people will try it out in the first place, because it’s free.

In the old model, the game’s biggest fan would pay £5 to play and so would the casual player who’s barely bothered. In the new model, everyone pays a different price. Economists call this “price discrimination” – when businesses try to charge different prices for different types of customer. Price discrimination is hard to do in real life because people feel maligned if the student/woman/infant/OAP beside them is getting a cheaper price.

Think of Man United. Man United is leaving money on the table by charging everyone the same price for tickets. Some superfans are willing to pay 10x face value for their seats. If Manchester United were to practice price discrimination – by auctioning off tickets to the highest bidder – it would make way more money. And the touts would go out of business. But Man United wouldn’t get away with it of course, there’d be uproar.

Games developers don’t have that problem. In the world of gaming, nobody knows what anyone else is paying. Free-to-play games are the equivalent of Manchester United auctioning off seats in the stadium – they’re getting as much as possible from each customer.

If all this makes you a bit queasy, well, fair enough. Designing super-addictive games to make as much money as possible from players isn’t the gentlest business in the world.

I was thinking about it as I played my new Zelda game. Now, Zelda games are the Marcel Proust of the video game world. They’re loved by fans and critics. As close are games come to high-art.

But I can tell you from personal experience, Zelda games are addictive. Zelda hooks you in, and doesn’t let you leave. That’s why fans love it! The only difference is that Zelda doesn’t charge players for add-ons, extras and bonuses. If it did, I’d be paying up.

So what’s my point here? I suppose there are two points. The first is that modern software is designed to be addictive. Squads of software engineers dream up ways to get people picking up Zelda, or downloading Clash of Titans, or scrolling through Facebook for the fifth time in a day. That’s basically the goal of modern consumer software. I’ve heard it called “the race to the bottom of the brain stem”.

The other point is that if you marry addictive modern software to a highly efficient business model like free-to-play, it’s a chance to make a lot of money.

Click here to read the full story – the tiny game developer which has perfected the free-to-play game model. 





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