Microtransactions, an Asian perspective

One question that has showed up more than a few times at the recently concluded GDC08 is the viability of microtransactions in MMOs. What are microtransactions, anyway? For those not too familiar with the term, it refers to an interesting game revenue model whereby users pay for individual game components, whether it be items, unlocking new levels, access to dungeons, etc. When the question about microtransactions was brought up at the Future of MMOs panel, there were many strong reactions from the panelists. Most of them scoffed at the idea, Blizzard -- supposedly popular for creating some sort of fantasy MMO -- in fact, has already officially rejected the model. Cryptic Studios'Jack Emmert called microtransactions "the biggest bunch of nonsense," (some transcripts show that he had harsher words for it) and that they "make (him) want to die". Although I can't attribute this quote directly to anyone, microtransactions have been defined as "any transaction whose value is currently too small to be worth bothering with" -- pegged at somewhere below US $1. The only one at the panel who defended the revenue model was Nexon'sMin Kim, notably the only Asian among the panelists. Why is this notable? Well, Blizzard's Rob Pardo defined it as an "East vs West question", which Emmert dismisses. But Pardo is actually on to something, and I'll try to explain why.

Free-to-play MMOs supported by microtransactions is the dominant revenue model in Asia. This isn't an accident of design. It's an evolution of revenue philosophy shaped by social and economic conditions. Let's put that in perspective. Most people in the world do not have computers let alone an Internet connection. This is why Internet Cafés are so prominent in Asia. In South Korea, these Internet Cafés, or PC baangs, are ubiquitous, with more than 20,000 serving up games and other Internet content all over the country. Although of course, South Korea is exceptional. 90% of the population is wired and PC baangs became popular because of LAN games. But elsewhere in Asia, Internet Cafés or LAN rooms are a popular, if not dominant, way to access LAN game and MMOs particularly China, Taiwan, and the Philippines.

This brings me to the point: if a players are already paying a rental fee for their machines (roughly US $1 an hour), paying a monthly fee for their MMOs is not an entirely enticing option. For many people, the cost is prohibitive and even if it weren't, some players simply have no means to pay. Most Western MMOs take payments through credit cards, which most Asian youth don't have -- 70% of the world's population don't even have a bank account. Roughly two-thirds of the world's population earn less than US $1000 a year, making microtransactions not only a viable revenue option but a necessary one. It's a fairly recent concept in gaming revenue models, but it's a tried and tested sales form for other commercial products. It's called sachet marketing.

In countries where most of the population live on less than US $5 a day, such as the Philippines (yeah, chew on that for a moment), it simply didn't make sense to sell expensive bulk products designed for a market where people easily earned ten, twenty times that such as 1 Liter bottles of shampoo. Enter the sachet, a micro-selling method aimed at low-income households who wanted quality products that were manageable within their cash flow. Manufacturers packaged shampoo in 5mL sachets good for a few uses and sold for less than US 10c. The idea is to sell low-cost, low-profit margin merchandise in large amounts. The idea translates electronically, as well. In the Philippines, telco provider Smart Communications pioneered an electronic top-up system that allowed insane user-to-user air time transfer for as low as US 5c. In Bangladesh, where some villages don't have fixed-lines, "phone ladies" ply their trade by lending their GrameenPhone mobile phones for a few taka at a time. Emmert said, "I like paying one fee and not worrying about it - like my cellphone," but that's probably because he doesn't live in Asia, where microtransactions in all forms is not just standard, it's big business.

Microtransactions are clearly a viable revenue model for consumer goods, but could its applicability in many electronic forms as evidenced by the success of Smart and GrameenPhone also translate to gaming? The relative success of many microtransaction-driven free-to-play MMOs in Asia such as RF Online or Perfect World seem to indicate that it does. Kim, whose MapleStory's success even in the United States has him convinced that the US market is ripe for a microtransaction revolution. The idea isn't to compete with the market of other MMOs such as World of Warcraft, who obviously have the resources and avenues to pay on a regular basis, but to target gamers outside of what Kim calls the 'core'. He says that a lot of kids (in the United States) can't afford the regular fee that some subscription-based MMOs charge and opt for microtransaction models that allow them to purchase only the items or services that they like on top of the basic game which is free.

In Asia, certainly, that holds true for many games. A lot of the upgrades and so-called item mall merchandise are also mostly cosmetic, and many games are driven by appearance upgrades. MapleStory, for example, offers near unlimited character customization with items from the gallery -- provided you have the NEXON Cash, of course. It's curious to note how, in a game driven by saccharine cute 2d graphics, appearance seems to be imporant. But cosmetic upgrades aren't the only thing that microtransaction models offer. There are items such as 2x EXP Timer Cards, which as advertised increases XP gained. RF Online and Perfect World sell consumables such as potions or even creative items such as Body Doubles (comes in packs of 10) that prevent the loss of XP upon death and instead consumes the item. Perfect World also sells raw materials for crafting, if players are too lazy to farm the materials in-game. More than cosmetic changes, the items have potentially imbalancing ramifications that favor those with the money to burn.

Game balance issues aside, it's clear that microtransactions have its place, even in the world of Massives. It began as an Asian phenomenon simply because there are clear differences in resources, economies of scale.
Whether it is the future of MMO gaming, however, is debatable. As Pardo put it, microtransactions are not the "magic bullet". He admitted the hurdle that World of Warcraft encountered when entering Asia, where free-to-play was the dominant form. For Emmert, who seems enthralled by WoW's success and uses it as a benchmark for most of his reactions, he considers microtransactions as simply not the answer. Others on the panel are more open-minded, such as BioWare's Ray Muzyka, who believes that hybrid forms of revenue might be sustainable.

The dominance of microtransactions in Asia doesn't restrict it to being an Asia-only revenue stream, however, as MapleStory proves. Just as the subscription method, which many argue is more reliable (the game company's accountants love that) and has a predictable and trackable churn rate, was proven to work even in Asia, the microtransaction method targets the users that subscriptions simply can't cover. Never mind that the subscription model that made it big in Asia is Blizzard's industry-changing WoW, it simply proves that there are viable markets for both revenue streams. The fact remains, however, that developers must build what is a compelling game experience in order to expect any revenue at all. If a game isn't fun, it doesn't matter if it's free; although if I'm only earning US $5 a day, a free game wouldn't hurt, either.