I’m  the  CEO  &  Co-­‐founder  of  Kongregate.  If  you’re  not  familiar  with  Kongregate,  we’re  a  pla=orm  for  browser  games  on  the  web  –  think  YouTube  for  games  -­‐-­‐  supported  by  both  ad  revenue  and  in-­‐app  purchases.  We  get  a  ton  of  games,  around  1300  new  games  a  month,  95,000  total  across  preLy  much  every  genre  you  can  imagine.  That  gives  us  a  lot  of  opportunity  to  do  interesMng  research,  which  I  love  because  I’m  a  big  data  geek,  as  you’ll  see  in  this  talk.  Most  of  it  is  web  data,  but  about  18  months  ago  we  expanded  to  mobile,  where  we’ve  now  published  15  games,  again  across  a  variety  of  genres.  That’s  nothing  like  the  depth  of  our  web  data,  but  we’ve  had  more  than  35M  installs  and  quite  a  few  games  in  the  top  grossing  chart  so  there’s  quite  a  lot  that’s  interesMng  there,  too.  I’ll  be  using  both  in  this  talk.  

1  

I’m  the  CEO  &  Co-­‐founder  of  Kongregate.  If  you’re  not  familiar  with  Kongregate,  we’re  a  pla=orm  for  browser  games  on  the  web  –  think  YouTube  for  games  -­‐-­‐  supported  by  both  ad  revenue  and  in-­‐app  purchases.  We  get  a  ton  of  games,  around  1300  new  games  a  month,  95,000  total  across  preLy  much  every  genre  you  can  imagine.  That  gives  us  a  lot  of  opportunity  to  do  interesMng  research,  which  I  love  because  I’m  a  big  data  geek,  as  you’ll  see  in  this  talk.  Most  of  it  is  web  data,  but  about  18  months  ago  we  expanded  to  mobile,  where  we’ve  now  published  15  games,  again  across  a  variety  of  genres.  That’s  nothing  like  the  depth  of  our  web  data,  but  we’ve  had  more  than  35M  installs  and  quite  a  few  games  in  the  top  grossing  chart  so  there’s  quite  a  lot  that’s  interesMng  there,  too.  I’ll  be  using  both  in  this  talk.  

2  

In the 6 years since Kongregate.com launched support for in-game purchase of virtual goods about 2.1% of accounts active in that time frame have bought something. Those 2.1% of accounts have driven 75% of all of our revenue in that time, and the % has been increasing.

3  

Average  lifeMme  spend  across  all  buyers  is  $117,  but  the  median  is  under  $10.  The  54%  of  buyers  who  have  spent  less  than  $10  represent  only  1%  of  our  revenue.  72% of our virtual goods revenue on kongregate.com has come from the 4% of buyers who have spend $500+, 4% of 2%, so 0.1%  of  our  players  brought  in  about  half  the  revenue.    

4  

This is the breakout of revenue by spender category for the top 8 grossing games on Kongregate.com in 2014. 6 of the 8 top games get at least 70% of their revenue or more from buyers who’ve spent more than $500 in that game lifetime, and all 8 get a clear majority of their revenue from people who’ve spent $100 or more.  

5  

Our  top  grossing  mobile  games  are  not  quite  as  extreme,  in  part  because  most  of  them  have  not  been  out  as  long,  and  in  part  because  of  the  game  selecMon  –  individual  games  look  similar  between  web  &  mobile.  With  the  excepMon  of  one  game  the  vast  majority  of  revenue  comes  from  those  spending  $100+.  

6  

Swrve  reported  that  in  January  2014  across  all  the  free-­‐to-­‐play  apps  using  their  services  1.5%  of  players  bought,  and  that  from  that  1.5%  50%  of  all  the  revenue  came  from  the  top  spending  decile  –  so  half  the  revenue  came  from  0.15%  of  players.  And  this  is  with  the  majority  of  games  surveyed  not  having  price  points  over  $20!    

7  

And  yet  it  makes  us  really  uncomfortable.  Whenever  I  menMon  that  our  top  spenders  have  spent  $50-­‐80k  people  nearly  always  react  with  a  mix  of  awe  and  horror,  and  when  people  start  criMcizing  the  ethics  of  free-­‐to-­‐play  they  always  jump  on  the  amount  top  spenders  spend.  And  it’s  not  just  ethical  concerns  –  people  worry  that  f2p  games  are  too  financially  dependent  on  a  few  people,  so  much  so  that  Zynga  listed  it  as  a  risk  in  its  IPO  prospectus.  

8  

So  let’s  take  a  look  at  who  is  buying.  This  chart  shows  the  ARPU,  or  average  revenue  per  user,  on  kongregate.com  by  the  age  of  the  user.  Young  users  spend  very  liLle  on  average,  with  spend  rising  gradually  through  college  age  then  rapidly  increasing  ader  they  graduate,  peaking  in  middle  age  when  disposable  income  is  highest.  The  sharp  dips  at  25  and  35  are  likely  driven  by  people  who  don’t  want  to  give  their  true  birth  date  on  registraMon  pueng  in  January  1  1980  and  1990  birthdays.  People  pueng  in  fake  birthdays  is  also  driving  those  older  ages  down,  too,  as  our  registraMon  form  anchors  at  1940  and  everything  age  57-­‐72  is  immediately  visible.    

9  

Decomposing  ARPU  between  the  %  of  players  who  buy  something  and  the  average  revenue  per  paying  user  helps  show  what’s  going  on.  The  youngest  players  generally  don’t  have  a  way  of  paying  –  no  credit  cards  or  paypal  accounts  –  but  the  %  of  players  buyer  rises  very  rapidly  with  age  and  independence,  plateauing  through  30s  before  starMng  to  decline  in  the  40s,  perhaps  because  that’s  the  first  generaMon  that  grew  up  with  video  games.  The  increase  in  ARPPU,  though,  increases  much  more  gradually,  and  peaks  in  the  late  40s  and  early  50s.  Again  ignore  most  of  the  data  from  57  up  –  that’s  distorted  by  our  registraMon  process  and  the  fact  that  there  aren’t  many  real  players  in  those  age  groups.  What  is  clear,  though,  is  that  spending  grows  first  with  the  ability  to  pay  and  then  with  the  means  to  pay.    

10  

ARPPU  growth  mirrors  growth  of  disposable  income  by  age.    

11  

This  chart  shows  our  top  20  spenders  on  Kongregate.com  from  youngest  (24)  to  oldest  (68).  Both  the  average  and  median  age  is  40.  The  older  big  spenders  all  come  from  the  US  and  Western  Europe,  while  the  few  younger  spenders  come  from  more  assorted  countries.  Our  customer  service  team  has  talked  to  most  of  these  buyers  via  phone  and  email,  both  as  part  of  verifying  that  they  are  fraudulent  and  assisMng  them  with  various  in-­‐game  issues  and  say  that  they  are  very  polite  and  reasonable  people,  many  of  whom  own  their  own  businesses,  or  are  doctors,  CPAs,  engineers,  or  similar.      The  columns  show  how  much  their  spending  breaks  out  by  different  games,  and  though  most  big  spenders  spend  in  mulMple  games  their  spend  is  generally  concentrated  in  one,  maybe  two  games.  Only  in  relaMvely  rare  cases  is  a  player  a  serial  big  spender,  spending  significant  amounts  in  game  ader  game.  

12  

Spenders are the most active players – even before they spend. And the big spenders are the MOST active. This chart show the # of sessions by active users over time for Tyrant Unleashed, a CCG by Synapse Games that we’ve published on mobile. It’s broken out by the category of the spend the player eventually reaches, and you can see that from the start the biggest spenders are incredibly active at around 20 sessions per day, 3-4x more active than active non-spenders and 2x more active than lesser spenders.

13  

The majority of people who play Tyrant Unleashed a long time do end up spending. But non-spenders aren’t driven out even in a high-spend game: more than 1/3 of active elder players have not spent.

14  

A lot of spenders spend quickly – 18% on the first day and half make their first purchase in the first week of playing. But if they keep playing there is a lot of gradual conversion. Nearly 30% spend for the first time after playing the game for at least a month, and some people make their first purchase as late as a year in. Bigger spenders do convert a little faster, but there’s not a huge difference.  

15  

Steady investment over time for most bands of buyers, with the highest decile the most steady.  

16  

You can see the lower deciles better by removing the top 2, but there’s steady investment there as well. The only ones who do not increase much over time are the bottom 2 deciles, people who’ve spent $20 or less.  

17  

Now  to  beLer  understand  the  individual  dynamics  let’s  take  a  detailed  look  at  just  one  big  spender    

18  

PvP  is  the  single  biggest  driver  of  spend,  cosmeMc  items  get  preLy  short  shrid.    

19  

20  

21  

Figure  skaMng:  gamified  for  over  60  years.  

22

I  definitely  haven’t  even  hit  my  max  spend  –  I’m  actually  parMcipaMng  in  relaMvely  few  compeMMons  because  I  have  to  travel  so  much  already  for  Kongregate.  And  while  I’m  naturally  on  the  thridy  side  I’m  HAPPY  to  spend  the  money  I  do.  I  love  skaMng  enough  that  a  10%  increase  in  my  skills  is  sMll  a  good  deal  at  10x  the  cost.   When I make this comparison people will dismiss it as being fundamentally different because skating is exercise, I can resell my skates if I stop, etc. Skating is good for my health, but you can see her that all of my spend is going towards competition and skill progression – the same things that fuel spend in game. Nothing that’s listed here has any resale value –even the equipment is really services like skate sharpening and my locker.  

23

And  people  spend  a  lot  on  their  hobbies  

24

So how did I get to the point where I spent thousands of dollars a year? The answer is gradually. I started in the fall of 2004 and was picking up steam/spend through June 2006 when we started Kongregate, at which point I cut way back until the end of 08 because I didn’t have either money or time, then returned to the trend line. Spend jumped in 2010 when I invested in custom skates (should last 3 years or so) and then in 2011 I started competing locally. & joined the synchronized skating team. It made a big jump again last year when I traveled to compete at my first adult nationals, and it’s likely to go up from there this year as I’m starting to work with a second coach on choreography, and I’m likely to go back to the Dorothy Hammil fantasy camp, which I attended as a gift last year. I could picture myself spending $20k in one year fairly easily if I compete at both nationals and the big international competition in Oberstdorf, Germany. Up-and-coming young skaters can spend $50-$75k annually on the sport, and it’s well into 6-figures for olympic-level competitors, though they usually get support and sponsorships. While the choices that I’m making here may be a little unusual, they have bee gradual, thoughtful investments put to something that I love. I’d rather spend my money on skating than almost anything else.  

25

So  I’m  lucky  enough  to  have  a  lot  of  disposable  income  to  put  towards  skaMng,  especially  as  I  don’t  have  kids.  But  that’s  not  true  of  all  skaters,  nor  all  gamers.  Here’s  a  friend  that  I  skate  with  on  Facebook  posMng  about  her  decision  to  forego  compeMng  at  adult  naMonals  while  her  husband  is  out  of  work.  She’s  prioriMzing  her  budget  for  mortgage,  etc  first,  then  a  trip  to  her  nephew’s  wedding.  Several  other  people  chime  in  with  similar  decision-­‐making  not  to  do  it.  They  are  making  raMonal,  though=ul  decisions.    Now  is  every  skater  or  gamer  making  their  spending  decisions  totally  raMonally  and  within  their  budget?  No.  There’s  always  a  spectrum  of  human  behavior  in  any  group,  and  people  trying  to  fit  unmet  emoMonal  needs  in  unhealthy  ways.  But  we  don’t  blame  department  stores  for  the  occasional  compulsive  shopper,  and  we  shouldn’t  blame  games  for  the  occasional  compulsive  spender,  either.  

26

The  music  industry  is  in  many  ways  similar  to  free-­‐to-­‐play,  especially  from  the  arMst’s  point  of  view.    Radio,  Streaming,  and  Piracy  get  their  music  exposure  to  hopefully  mass  audiences  with  very  liLle  revenue  to  them,  in  the  hopes  that  a  small  %  of  which  who  will  go  on  to  actually  buy  a  physical  or  digital  copy  of  their  music  to  keep.  An  even  smaller  %  will  buy  Mckets  to  see  the  band  live,  perhaps  even  traveling  to  see  them.  And  as  revenue  from  music  sales  have  declined  over  the  last  few  years  musicians  have  started  geeng  creaMve,  creaMng  VIP  experiences  for  their  most  avid  fans.      

27

Millions  of  people  may  hear  an  arMst  songs,  but  their  revenue  is  concentrated  in  the  small  %  who  spend  $20-­‐$500  to  go  to  concerts  and  buy  merchandise.  And  even  within  that  it’s  concentrated  on  the  repeat  concert  goers,  who  are  likely  also  to  be  the  people  buying  VIP  packages  –  here’s  one  for  U2  that  is  $1500  for  a  Mcket,  hotel  room,  premium  access  to  merchandise  (where  you  can  spend  again)  and  the  possibility  of  being  close  to  the  band.    

28

The  split  between  Pro  and  Basic  members  is  not  a  public  number,  but  you  can  esMmate  that  the  Pro  members,  spending  $500+  annually  and  likely  less  than  10%  of  GameStop  customers,  represent  40-­‐50%  of  total  revenue.  And  that’s  just  what  they  spend  at  Gamestop.    

29

So  uncomfortable  that  many  people  jump  to  mental  illness  and  malfeasance  by  the  game  as  the  explanaMon.  

30

Before  free-­‐to-­‐play  the  knowledge  of  who  the  big  spenders  were  in  the  game  world  was  a)  much  more  dispersed  among  different  sources  and  b)  in  the  hands  of  retailers  and  other  distributors.  And  unMl  recently  the  retailers  themselves  probably  had  very  liLle  picture  of  it.  I  worked  in  data  analysis  and  markeMng  for  several  retail  companies  before  starMng  Kongregate  and  while  we  had  full  customer  pictures  for  anything  sold  online  or  through  catalogs  we  had  liLle  but  anonymous  transacMon  data  from  the  stores.  An  individual  store  manager  might  have  a  good  sense  of  who  the  big  customers  were  and  what  they  spent,  but  it  took  loyalty  programs  for  retailers  to  be  able  to  understand  customer  paLerns  at  a  corporate  level.  And  in  any  case  retailers  are  more  comfortable  with  concentraMon  of  spend  because  that  is  normal  whatever  you  sell.  My  story  about  a  billionaire  and  his  boat  

31

Another  reason  is  that  spend  is  more  concentrated,  and  the  biggest  spenders  are  spending  more.  This  table  shows  off  the  dynamics  of  the  mobile  &  web  markets,  starMng  with  a  base  case  of  a  paid  mobile  app.  These  are  all  made  up  but  I  think  reasonably  plausible  as  above  median  but  way  below  the  real  successes.      In  the  current  mobile  market  it’s  hard  to  get  much  of  anyone  to  buy  a  game,  there’s  too  much  free  content.  When  you  go  free  installs  can  explode  but  conversion  goes  down  (and  lives  within  a  relaMvely  narrow  range)  so  what  ends  up  maLering  is  whether  players  keep  playing,  and  keep  spending,  and  drive  the  average  amount  spent  up.  And  that’s  why  free-­‐to-­‐play  is  generaMng  more  revenue  than  paid:  it’s  not  because  more  people  are  geeng  into  your  game  and  having  a  chance  to  convert,  though  I  think  that’s  what  people  commonly  think.  The  total  #  of  people  buying  is  almost  certainly  lower,  as  the  more  casually  interested  will  not  pay  unless  compelled  to.  It’s  because  the  most  invested  players,  who  in  a  paid  world  spent  the  same  as  someone  more  casually  invested,  is  now  uncapped.  So  some  people  who  would  have  spent  before  enjoy  the  game  for  free,  and  the  most  invested  spend  much  more  than  they  would  have,  essenMally  subsidizing  a  free  experience  for  everybody  else.    

32

Console  games  have  beLer  graphics  and  more  content  to  play  through,  but  the  average  player  only  plays  a  small  porMon  of  the  content.  CompleMon  rates  on  even  the  top  games  tend  to  be  30%.  While  some  mobile  and  PC  games  are  quite  short  –  like  Monument  Valley  –  the  delta  in  play  Mmes  is  likely  much  less  than  the  delta  in  price.      Now  these  numbers  are  rough,  but  the  market  size  of  each  of  these  games  marches  roughly  in  step  with  the  average  sales  price  of  a  game,  though  in  theory  mobile  &  PC  should  be  much  bigger  than  console  games  because  the  devices  you  play  on  are  more  broadly  distributed.    

33

The  reason  that  average  price  has  such  a  big  impact  on  the  size  of  the  market  is  that  demand  for  games  is  inelasMc,  ie  that  when  price  drops,  the  total  amount  sold  increases,  but  not  enough  to  make  up  for  the  drop  in  price  

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So  I  know  you’re  like,  no  way  is  demand  for  games  inelasMc.  If  that  were  true,  why  do  PC  game  developers  make  so  much  more  money  on  Steam  Sales  and  Humble  Bundles?    That’s  because  of  increased  promoMon  &  a  sense  that  they  are  geeng  a  “good  deal”.  If  you  dropped  the  price  of  the  game  permanently  and  without  any  addiMonal  promoMon  your  sales  wouldn’t  increase,  they’d  drop.  Steam  sales  help  draw  more  people  in  to  play  PC  games,  which  increases  the  sales  for  that  category  overall,  and  exposed  consumers  to  a  lot  broader  range  of  games  and  developers,  which  I  think  is  good  for  the  industry,  but  it’s  probably  mostly  cannibalizing  revenue  that  would  otherwise  have  gone  to  console.    

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Pricing  studies  have  shown  that  we  make  our  decisions  based  on  our  perceived  sense  of  value  rather  than  price,  and  interesMngly  price  in  itself  is  a  signal  of  value  to  most  of  us.  We  assume  that  if  the  price  being  charged  is  higher  it  MUST  be  beLer,  which  is  why  we  assume  expensive  wine  is  beLer  and  brand-­‐name  drugs  beLer  than  the  store-­‐brand.    

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hLps://vine.co/v/hxrzVeMjhFi    We’re  all  familiar  with  the  terrible  race  to  the  boLom  on  paid  game  pricing  that  happened  on  iOS  a  few  years  back.  There  was  no  retailer  or  pla=orm  who  cared  about  the  total  sales  to  organize  and  control  price  wars,  and  the  going  price  for  games  was  quickly  pushed  down  to  $0.99.  Games  you  can  play  for  many  hours  are  priced  at  or  below  a  cup  of  coffee,  or  a  renMng  a  movie  that  lasts  90  minutes.      A  few  games  can  come  in  at  higher  prices,  like  Minecrad  or  Final  Fantasy  TacMcs,  when  their  value  has  been  anchored  high  on  another  pla=orm.  And  prices  are  slowly  creeping  up  a  bit.  But  for  paid  games  to  be  viable  for  more  developers  prices  need  to  rise  a  lot,  among  other  things  so  that  sale  events  can  be  more  meaningful.  A  $0.99  drop  may  be  50%  on  a  $1.99  game,  but  it’s  not  going  to  get  a  lot  of  people  excited.    

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In  a  free  to  play  game,  nobody  can  sell  a  good  that’s  useful  except  you,  which  makes  the  game  a  liLle  monopoly,  though  an  insecure  one  since  players  can  leave  at  any  Mme.  There’s  no  point  price  shopping  packages  of  gold  between  game,  the  other  games  items  have  no  meaning  in  the  game  you’re  playing.  The  more  compelling  and  engaging  the  game,  the  more  that  players  care  about  their  status  and  progress,  the  higher  value  the  goods  in  the  game.    

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Which  gets  me  to  the  next  reason  affecMng  our  percepMon  of  big  spenders,  which  is  that  we  don’t  value  virtual  goods.  Our  brains  easily  pin  value  on  physical  objects  –  part  of  the  reason  console  games  have  been  able  to  conMnue  to  anchor  their  value  high  relaMve  to  digital  versions  is  that  disk,  even  though  the  distribuMon  of  that  disk  is  a  Mny  %  of  the  cost.  Even  out  of  context  physical  goods  are  always  perceived  as  having  value,  but  out  of  the  context  of  playing  the  game  virtual  items  have  no  meaning  to  people,  and  therefore  it’s  almost  impossible  for  us  to  assign  a  value.    

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I  think  a  large  part  of  the  success  of  Skylanders  is  that  it  bridges  the  gap  between  physical  and  virtual  value,  allowing  a  parent  to  buy  something  concrete  and  real  to  them,  while  giving  the  kid  the  virtual  item  that  they  value  more  than  a  staMc  toy.    

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Spending  $5-­‐$10k  on  specialized  PC  Gaming  rigs  that  improve  your  skills  and  enhance  your  compeMMveness  is  not  really  that  different  from  spending  money  for  in-­‐game  items  that  doe  the  same.  But  I  bet  you  all  find  it  a  lot  easier  to  contemplate.  While  it  might  not  be  how  you  would  choose  to  spend  your  money  you  are  more  likely  to  walk  into  this  room  and  say  “wow”  than  “what  were  you  thinking”.  But  for  the  person  spending  in-­‐game  the  items  have  context  and  value  equal  to  these,  and  just  because  that  experience  isn’t  yours  doesn’t  make  it  less  valid.    

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Or  even  other  forms  of  entertainment.  A  few  weeks  ago  I  was  looking  for  a  comprehensive  history  of  games  back  to  ancient  Mme  and  was  surprised  to  find  there  wasn’t  one.  Most  universiMes  have  enMre  departments  devoted  to  studying  literature,  film,  and  theater  with  virtually  nothing  about  games,  even  though  we  have  spent  as  much  or  more  Mme  playing  games,  both  now  and  historically.  Games  are  a  waste  of  Mme,  games  are  for  kids,  etc.,  etc.    It’s  not  hard  for  me  to  talk  about  my  obsession  with  figure  skaMng  with  non-­‐skaters,  people  generally  think  it  quirky  but  kind  of  charming  that  I  care  so  much  about  something  a  liLle  strange.  Caring  about  sports,  even  unusual  sports,  is  broadly  accepted.  But  if  it  were  a  game  I  was  talking  about  I  think  I’d  be  more  defensive,  especially  with  non-­‐gamers.    

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The  bias  against  games  is  so  insidious  that  even  within  the  industry  we’ve  internalized  it  enough  that  we  quesMon  someone  with  means  spending  tens  of  thousands  of  $s  on  a  game,  especially  when  you  combine  it  with  the  low  value  we  place  on  mobile  and  PC  games  and  especially  virtual  goods.  And  so  people  jump  to  explanaMons  like  “mental  illness”  or  “evil  games  manipulaMng  players”  when  the  real  explanaMon  is  that  they  are  raMonal,  wealthy  people  who  are  dedicated  fans  invesMng  in  a  parMcular  game.  

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And  Hobbyists  are  earned  by  good  gameplay  and  customer  service,  not  caught  by  tricks  or  manipulaMon.  To  call  them  whales  is  to  dehumanize  them,  to  talk  of  catching  them  suggests  they’re  blundering  into  your  net,  rather  than  choosing  to  spend  their  Mme  and  money  in  a  game.  And  if  we  as  developers  don’t  respect  our  players  and  the  value  of  what  we  create,  who  will?  

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