The High Cost of Free Content: Games and Advertising
Peter Krapp / UC Irvine

Continuing (and concluding, as far as my Flow appearance goes) my concern with how industry forces directly shape the quality and availability of games in particular and game culture in general, I move on from the role of aggregators of criticism like Metacritic and GameRankings, and from real-money trade and secondary markets for games to the role of in-game advertising. As in my two previous Flow columns, I emphasize transaction costs – in the teeth of myths about frictionless digital distribution.

swords and Starbucks

Contemporary computing culture is changing under the influence of mobile gaming trends, and as game developers seek new markets – not just for Facebook games or mobile games that are cheaper to develop, but also in large-scale games for thousands or even millions of online players. While developers like PopCap, Zynga, and Playdom distribute casual games as apps for mobile devices or via portals such as Pogo, Yahoo Games, Bebo, or WildTangent, the low price threshold and short attention spans of casual gaming have not approached the profitability promised by popular synthetic worlds in the massively multiplayer online segment. Before launching its own site early in 2012, Zynga got more than 90 percent of its revenue from Facebook, and Facebook got 12 percent of its revenue from Zynga. Even as some test the limits of the ‘freemium’ model, the majority of ambitious developers and publishers stake their hopes on the purported magic bullet: advertising.

in-game ad expenditures

Most media are supported by advertising, so it was always just a matter of time until ads make their way into the game industry. Now what you play, how you play, and how you react to in-game stimuli is changing the game industry. The more consumers expect to consume information or entertainment “for free”, the more the hidden costs rise—to the point where some even argue that the history of information is the history of advertising. The 2008 Obama campaign ad in Burnout Paradise got a lot of attention, Zynga experiments with unskippable videos, and mobile games appear to be a natural venue for discount offers or ads for other apps. SONY recently filed a patent that would pause games to show ads, PriceWaterhouseCoopers predicts a compound annual growth rate of 13% for in-game ads while IBM anticipates up to 19%, and industry estimates of the current size of that market range from $500 million to over $2 billion.

advertising expenditures

It is an axiom of media economics that one observes a double market – an exchange of wares as well as the package and sale of attention. Technical infrastructure enables the creation of “content” to be distributed to buyers, but what is consumed is not only film, music, or computer games, but also attention. One might say the supply and demand of product and attention flow in opposite directions. Information can be packaged and be sold without being scarce or used up by that process; digital media bring a highly segmented and fragmented audience in contact with suppliers of content and distraction. While it is true that attention is limited, for media economics it is just as relevant that consumption of a film or a game does not use them up—they remain available for further circulation. Entertainment shows a growth rate that quantitatively as well as qualitatively exceeds that of attention: with each year, more music, film, and software becomes available, although the collective attention of the audience has not grown proportionally. When it was not easy to launch a new newspaper, a new television network or radio station, this meant a supply limit in the shape of barriers to entry; canonical examples are the vertically integrated Hollywood studios of the fifties and the sixties. In traditional mass media, distribution is limited by infrastructure, sales expenses and production costs, while attention seems relatively cheap. TV advertising in the US in 1982 took up 6 minutes per hour, but by 2001 it had grown to 12 minutes per hour, and recently, an hour’s broadcast in the US encompasses 12 minutes of national and 4 minutes of local advertising; much the same trend applies to radio, newspapers, and magazines. For these investments in attention it is relatively insignificant to distinguish between advertising time and advertising expenditures; as long as marketers find it plausible to invest in advertising rather than production quality or infrastructure, advertising budgets rise. Now that computer time rivals or exceeds TV time, advertisers are expected to flood in. For entertainment software, this has meant that attention is no factor in the creation of quality product, as long as it is cheaper to buy advertising than to invest more in game design.

One may wish for a market where quality translates into popularity, but mass media exhibit a rather loose coupling of production quality with market success, modulated by increased advertising expenditures. Although a film can be sold in cinemas, on DVD, on television, abroad, and in merchandising of toys, books, posters, T-shirts etc., film production has become increasingly dependent on the blockbuster effect, just the music industry depends on hits. Over the past 20 years, the computer game industry has increasingly emulated that model. However, the higher advertising expenditures spiral, the less of the budget will remain for quality production; thus either the investment in production must rise overall, or quality will suffer.

With the transition to digital distribution, the widely hyped assumption was that the cost of attention, not production cost, would dominate as new technologies try to lower the cost of production and distribution. Nonetheless it remains questionable that popularity under the conditions of new media will show a direct correlation with quality. Indeed, despite all the hype about frictionless markets and zero-cost distribution online, games are one cultural arena where industry studies can easily demonstrate how the market is not once and for all transformed by going online. If buyers and sellers are to find each other, there are still substantial search costs in increasingly diverse markets, information costs include but are not limited to privacy concerns for instance, and policing or enforcement costs that reassure participants that deals are trustworthy. While some neoliberal observers of net commerce celebrate how contracts trump other legal frames of online interaction, gamer communities (or fan groups, or audiences otherwise defined) are not assured that their interests are represented. Sure, search costs are lowered if one does not consider the trade-offs lurking in targeted advertising that frames individual, rather than generic, search results. Yes, websites can steer gamers’ attention towards walk-throughs, cheats, machinima collections, or other things of interest in gamer culture, but again only within the scope of what EULA and TOU permit, and that information is often obscured. My last column offered some observations about policing costs in WoW, but here I am most interested in whether advertising could in fact support a healthy gaming ecology.

in-game advertising

When Google acquired in-game ad server AdScape in 2007 for $23 million, it promised to share revenues with developers and publishers. The target market was casual game makers who would allow for video, text, and display ads. The Yankee Group estimated the scope of the in-game ad market would grow from $78 million in 2006 to $971 million by 2011, becoming gradually more mainstream in consoles. However, actual growth has been far slower—for a number of reasons. Microsoft, for instance, has few incentives to allow Google into its ecosystem. A digital dashboard was supposed to allow advertisers to buy and measure their placements across multiple media, including games, TV, radio, and billboards. Banks estimate that this approach might attract significant spending, but IBM at the same turn predicted “the end of advertising as we know it.” Furthermore, buyers might worry about conflicts of interest that arise between purchases of owned inventory versus partner ads—picture Amazon, Google, or Microsoft in this role, and speculate whom you might trust the most to be unbiased when it comes to their own product placements and ads, and why. Moreover, bigger advertisers who are advantaged in the old system due to pricing power might push back against a system that could give equal access to smaller advertisers. And if the metrics show a lower return on ad dollars for in-game ads, few buyers would want to bundle that into their campaigns. Proponents of in-game ads calculate that if 200 million US gamers play an average of 13 hours per week, then companies like SocialVibe, Flurry, WildTangent, or SponsorPay should exploit this fast-growing niche for banner ads, videos, and product placement. Critics point out, however, that tests for games including Gran Turismo 3, NBA Live, and Project Gotham Racing 3 yielded low recall and recognition for in-game ads, and little or no engagement using eye-tracking and other behavior monitoring.

lovin it


Saul J Berman, Bill Battino, Louisa Shipnuck and Andreas Neus, “The end of advertising as we know it”, IBM Global Business Services & IBM Institute for Business Value.

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Image Credits:



3. IBM Institute for Business Value



MMO Models: Crowd-Sourcing Economedia
Peter Krapp / UC Irvine

As the game industry seeks revenues beyond sales of shrink-wrapped entertainment software, massively multiplayer online games offer new models—particularly with in-game transactions. This column will compare the approaches of three major players: SONY, Blizzard, and Linden Labs.

US Online PC Gaming Segment Breakout

Business models for digital culture oscillate between box-office hit and niche product; what models can media studies develop to unfold how this influences both the quality and availability of computer games? Finance draws a distinction between rational expectations that the market naturally finds to a balance: one may realize ‘beta’ in the wisdom of the crowds—and the surmise of reflexive behaviorists that the world is always subject to fluctuating imbalance: one may realize ‘alpha’ in the mass mania of the markets. Media studies is likewise split between those which see crowd-sourcing as a source of progress and transformation, from the printing press to the differentiated scenarios of screen media; and those who warn that the dispersion of our collective attention in the noise of ever larger crowds drowns out everything of value, be it information or entertainment. To mediate between these incompatible positions, this column looks at MMORPG economics, despite the standard disclaimer that in financial history as in media history, the past is no guarantee for the future. Though the insights derived cannot be as formulaic as an alpha or beta deviation, they nonetheless promises some gain for media studies.

Xbox Live Members

As gaming devices compete with networked home computers, manufacturers like Nintendo, Sony, or Microsoft bet on convergence via Wiiware, Playstation Network, Xbox Live, hoping to reach a broader demographic and additional revenue streams beyond the one-time sale of shrink-wrapped software—through subscriptions, advertising, and secondary markets. Call of Duty Modern Warfare 2 by Activision racked up 1.75 billion minutes of online play in the first six months after publication, and prompted 20 million transactions for additional game content. Since November 2002, Xbox Live has connected more consoles than WiiWare since March 2008 or Playstation Network since May 2006, but the largest number of games is available for the Wii, and Sony has the smallest number of online participants. While both Playstation and Xbox soon granted access to Netflix, Facebook, and Twitter, the Wii added Netflix much later. Beyond subscriptions, game developers have begun to monetize in-game advertising, and some seek to profit from in-game transactions. Industry observers claim that as many as 80% of US Internet users occasionally work or play in synthetic worlds, and estimates for the growth of online entertainment bet on MMOs as a major driver.

Comparison of MMOs

World of Warcraft by Activision-Blizzard claims to have over 10 million subscribers, earning parent company Vivendi about a billion dollars in annual revenue; other online role-play games are often free to play rather than subscription-based, making money through in-game markets instead. Nintendo’s MapleStory for the DS Platform, Final Fantasy and DragonQuest from SquareEnix, and Electronic Arts with Ultima Online and Dark Age of Camelot entered into the competition for synthetic worlds with primary and secondary markets for exchange, barter, and trade. By design, auctions and sales offer money-sinks that delicately balance the time-sink that is online play, with alluring opportunities to earn or win gold or loot or points. The division of labor implicit in role-play creates secondary markets, so it does not surprise us to see virtual swords and elixirs, but also entire characters or player accounts up for trade or sale on eBay, IGE, PlayerAuctions, ItemMania, and other marketplaces. I first encountered these a dozen years ago when a neighbor was promoted from software engineer to usability manager with the task to analyze what drove the sales of an inexpensive alternative to Photoshop—it was used quite a bit by hobbyists to design virtual armor, flags, animals, and other in-game items. Some purists feel the purchase and sale of in-game goods that would otherwise be acquired through play degrades the experience. But other players embrace this new frontier and provide in-game services, trade goods, or start virtual real estate companies. Synthetic worlds allow players different styles – meet someone, explore spaces, solve puzzles, conquer and dominate, spy, heal, cast spells, and so forth. Many game developers count on user-generated content to enrich their synthetic worlds, allowing and even encouraging the creation and exchange of items, skins, and even maps. While some players turn virtual goods into real currency (which is certainly not free of virtuality), others dream of a different life through consumption. Economists like Castronova estimate the entire in-game market might be in the billions of dollars annually. (( Edward Castronova, Synthetic Worlds: The Business and Culture of Online Games. Chicago, IL: University of Chicago Press 2005 )) Some of that activity might be in sweatshops in China that harness cheap labor to level up characters for paying customers who would pay rather than play for gold or loot, weapons or horses, avatars or entire accounts. But this in itself is nothing new – MUDs in the 1980s had barter and trade, and Ultima Online players were already able to use eBay for virtual goods in the 1990s. There are currently three distinct approaches to this phenomenon among the operators of large synthetic worlds: Blizzard bans such behavior in its World of Warcraft, SONY segregates its Everquest servers, and Linden Labs require some real-money trade of players in Second Life. Here we want to observe transaction costs, and speculate what might happen if these companies espoused a different model in regulating the transfer of social, cultural, and economic values among participants.

MMORPG Services

Linden Labs provides stable and reliable tools not only for the design of your avatar and its world in Second Life, but also for currency exchange. Its exchange rate fluctuates only minimally, and players enjoy a stable economy, productive play, and a profitable market if they seek to participate in it. However, the terms of use for WoW and its end user license are draconian and clear: real-money trade is taboo, or your account will be banned. What this means for Blizzard is illustrated if we consider some of my students who admitted to as many as eight banned accounts. If we estimate that it takes 15 full days of play to level up to 60 for half of these avatars, 10 days each for level 40 for the other half, one single player paying $15 per month for a year, after an initial cost of $20 each for eight accounts, means more revenue than a participant whose accounts are not banned. Despite interruptions between being banned and signing back up again, this type of player is more lucrative for Blizzard by roughly a third. And are there players who quit WoW because they object to illicit in-game markets? Blizzard has not been able to demonstrate that this is so, even in court, yet asserts that secondary markets undermine their central planning authority, with design limiting risk and play as exploration of the remaining risk. Thus Blizzard pays around 1,300 game-masters $10 dollars per hour to guard against rule-breaking (a popular part-time occupation for my undergraduates), which for WoW means reduced liquidity, an unstable economy, and high regulatory cost. (( Nick Ducheneaut & al. (2006). “Building an MMO With Mass Appeal: A Look at Gameplay in World of Warcraft,” Games and Culture 1(4), 281-317. )) Sony Online, in turn, provides two kinds of servers for Everquest, some that permit auctions through the Sony Station Exchange, and some that do not, preserving the sanctity of play for those who feel better that way. When the station exchange was introduced in 2007, an in-game trade volume of $1.87 million produced $274,083 in commissions for Sony, and segmenting the game community reduced Sony’s administrative cost by 30%. (( Noah Robischon (2007) “Station Exchange: Year One (White Paper)“, Gamasutra (July 2) )) If we stipulate that demand for real-money trade is similar in both games, the roughly 8.5 million players of WoW in 2007 could have generated a trade volume of $8 million, yielding up to $1.3 million in potential commissions, and a far lower operating cost – paying 390 fewer game masters might have meant saving $8 million that year. The spectrum of these synthetic worlds demonstrates how crowd-sourcing revenues in MMOs poses significant challenges both to rigorous central planning and to playful self-regulation.

Station Exchange

Image Credits:
1: Deutsche Bank
2: Microsoft
3: Deutsche Bank
4: IGE
5: Sony Online

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Ranks and Files: On Metacritic and Gamerankings
Peter Krapp / UC Irvine

While media studies usually approach computer games either via media history or in terms of ideological critique, my question is what influences game development cycles. Here, I take a closer look at the role of Metacritic ( and Gamerankings (, two aggregators of game reviews that became influential in the industry – to the point of being used in employment contracts to calculate salaries and bonuses.

Game Rankings

Since 2007, the US computer game industry boasts about surpassing cinema and popular music in annual dollar volume. The $19 billion market in 2007 (three times as large as a decade before) was half software and half hardware, with consoles and mobile devices taking a larger share than computers and displays. While the music industry shrank by 10% between 2002 and 2007 and the film industry remained flat, games saw growth of over 28%. But of the $60 you pay for a new game, 25% is the profit margin of retailers, between 15% and 20% royalties and licenses (for instance for intellectual property from the realm of sports, comics, or movies), 10% reserves for complaints, loss, or theft, 10% to 15% amortize investments in software (such as the Unreal or Massive engines), and often about 10% is due to hardware manufacturers. After packaging and distribution, only 20% of the retail price goes into developing the game. Yet development expenses have grown faster than retail prices. A 16-bit game cost about $50,000 to make, while increasingly complex graphics and higher expectations for interactivity in newer games drive up development costs: on average, Playstation games cost $2 million, Xbox titles between $3 and $7 million, Wii games $12 million. Current computer games and those for the newest console generation (PS3, Xbox360) can run up development costs of $20 million, and some ambitious titles devour much more.

Since 1997, the market share of Microsoft, Sony, and Nintendo has fallen from 44% to 17%, of which Nintendo has 10%, Sony and Microsoft between 3% and 4%. The four large American third-party developers Activision, Electronic Arts, Take Two, and THQ grew from 16% to 47%; EA alone has 24%, Activision Blizzard 20%, Ubisoft 6%. As former industry titans like Disney or Sega faded, new names like Valve entered the fray. Third-party developers can port games to several consoles, as Take Two did with Grand Theft Auto or Ubisoft with Assassin’s Creed, while Nintendo, Sony, and Microsoft can discount hardware to stimulate software sales. Though the last development cycle saw many low scoring titles available for the Playstation, now Nintendo’s Wii and DS are the rare niches where game quality does not correlate directly with sales volume. Electronic Arts, Activision, and THQ used to rely on a broad array of niche products, often aimed at young at children or casual players; now major hits drive the industry. A major reason why Electronic Arts dismissed a tenth of its employees in 2009 to save $120 million is the fact that advance reviews of new products have increasingly influenced sales.

Yearly Sales

Unlike music criticism or film reviews, usually informed by an overall perception of the whole work, game journalists report without having fully explored all possible scenarios of a new title. Both Metacritic and Gamerankings belong to CNET (part of CBS Interactive since 2008). These websites turn reviews in a range of game magazines into an aggregate score, normalizing the rating systems of all publications into one scale. Scores are often posted before sales data become known – hence the influence scores exert in the industry and on Wall Street. For example, when Spiderman 3 came into stores on a Friday in May 2007, the lukewarm reception by critics (50/100) caused Activision’s stock to drop 5% that day, with further losses the following week. But in August of the same year, Bioshock received almost perfect early scores (96/100), and the stock price of Take Two rose 20% in a few days. As Activision CEO Robert Kotick disclosed, a study of 789 games for the Playstation 2 in 2005 showed a correlation between aggregate advance grading and sales volume; for every 5 percentage points above 80/100, Activision saw sales double. “Everyone wants 85 or better,” as LucasArts president Jim Ward told the Wall Street Journal in an interview. (( Nick Wingfield, “High scores matter to game makers too,” Wall Street Journal (20. September 2007),
Compare Joe Dodson, “Mind over Meta,” GameRevolution
)) Activision and Take Two made Gamerankings and Metacritic scores part of their employment contracts, and industry partners like Warner Brothers for instance calculate licensing fees for games based on movies in relation to review scores: better games mean lower licensing fees, worse games mean higher bills to offset volume and any impact on the intellectual property’s reputation.

The dominance of rankings continued until spring 2011, when Homefront, a THQ game that has North Korea attack the USA in the year 2027, sold well despite bad critiques. When the first negative reviews appeared, THQ’s stock fell 21% in a day, yet sales figures bucked the trend. Metacritic calculated an aggregate grade of 72/100 – twelve of the first 28 reviews had good things to say about Homefront, but the majority saw a flop, with grades ranging from 40 to 93. Nevertheless, Homefront continued to sell well, and soon allowed THQ to recoup its investment at 2 million copies sold. (( Matt Peckham, “Homefront Reviews torpedo THQ stock price, Metacritic broken,” PC World, March 16, 2011; Alex Pham & Ben Fritz, “Bad reviews of Homefront send THQ shares tumbling,” Los Angeles Times March 16, 2011. See also Alex Pham, “THQ may profit from Homefront video game despite poor reviews,” Los Angeles Times March 26 2011. ))

A closer look at sales data will help interpret the phenomenon. While film criticism rarely reflects the taste of the broad public, and music criticism has little in common with the pecking order of the charts and heavy rotation playlists, the game industry sees a direct correlation between game reviews and sales. Games with the highest aggregate scores – though these are merely the first impressions of a few dozen journalists – sell three times as much as games scoring between 80 and 90, and those again sell twice as well as games with an aggregate score between 70 and 80, while titles scoring between 60 and 70 only sell half as often as those between 70 and 80. A mere 4% of all titles sold between 2000 and 2006 were responsible for a third of all revenues, and a quarter of all titles represented 86% of industry revenues. In longitudinal studies, UBS (2007) and Deutsche Bank (2010) analyzed 1605 games. They found that the 3% scoring above 90 (50 titles) sold more than the rest of all games together; 23% received aggregate scores of 60 or lower.

Comparing the scores of their major titles shows that Activision did well with Call of Duty, Marvel Ultimate Alliance, Tony Hawk and Guitar Hero, while film adaptations like Spiderman 3, Shrek 3 and Transformers sold far worse. EA could count on Madden Football for 20% and on Need for Speed for 9% of revenues, while Harry Potter and Lord of the Rings made far less. CEO John Riccitiello blamed rankings: “We did not have any internally developed breakaway titles and none of EA’s internally developed titles reached a Metacritic rating of 90 or greater.” (( Matt Martin, “Riccitiello: ‘Short-term pain’ necessary for further growth”, Games Industry International (February 1, 2008), compare Andy Chalk, “Riccitiello Won’t Dodge ‘Short-Term Pain’ At EA”, The Escapist (February 1, 2008) )) Take Two relied on a single franchise, Grand Theft Auto, for more than half of all earnings, while titles like Midnight Club and Max Payne were worth a lot less. In the same period, THQ counted mainly on licenses from Pixar, Disney, Nickelodeon and World Wide Wrestling, and titles like Spongebob Squarepants, Scooby Doo, Rugrats, Finding Nemo, and Power Rangers showed less of a correlation between reviews and sales. Yet the trend is clear: a decade ago, the 25 top sellers took a quarter of the market, in the last few years the 25 top sellers took over 40% of the market. The result is that an increasingly narrow range of games tempts a hit-driven industry to place ever larger bets on major titles, in pursuit of that elusive high score.

Franchise rankings

Image Credits:
1. Screen capture from
2 & 3. Deutsche Bank Research, October 31, 2010.

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