Tobold's Blog
Monday, March 10, 2014
The economics of content creation

I have been reading a lot of interesting blog posts lately about the economics of content creation. Apple Cider Mage argues On Funding and Revenue "that people should be compensated for their time and efforts" of creating content, including blogs or podcasts. Herding Cats replies that Blogging for Cash is a zero-sum game, where "financial support received by Blog A is financial support not received by Blog B". Meanwhile Chris from ihobo argues that Games are not Shoes, trying to counter the argument of Nicholas Lovell that in shoes it is the marginal cost of making another shoe that determines the price of shoes, so the marginal cost of games being zero would drive the market towards free games.

I think that there are a lot of good ideas here, and a lot of confusion. First of all, not all content is created equal. Some content is made because the author has a need to express himself, while other content is made because a client wants it. Think of it that way: If by law tomorrow it would be illegal to pay for content, what content would survive? Lots of blogs wouldn't be affected at all, while triple A games and blockbuster movies would disappear.

I don't know how many people have read content that I wrote. My blog had 6 million visitors, but the same person reading this blog every day is then counted as a visitor every day, so it is far less than 6 million people. But even if I just say that "thousands" of people read my content, there is less than 1% of them who use the donate button on the upper right of this page to give me money. That makes me think that the market value of my blog posts is very close to zero. If we say that opinions are a dime a dozen that might actually be rather close to the economic truth of blogging in general.

If Apple Cider Mage says "that people should be compensated for their time and efforts", then I need to ask where that "should" is coming from. If I decide to build a cathedral out of matches in my garage, why should anybody compensate me for my time and effort? I could then put the finished cathedral in a public place and ask for donations, but there is absolutely no "should" involved. Just like the donate button on my blog, people *can* donate to show their appreciation, but there is absolutely no moral requirement for them to do so.

Just as I blog basically for free, somebody could make games for free. The kind of games this results in would be akin to Flappy Bird. Most of the games we play are too complicated for that, and require a team, with some people coding the game, others making the artwork, others the music, and so on. A garage band type of game development team is theoretically possible, but not very common. Most games are produced with the intent to make money of them. And that reverses the notion "that people should be compensated for their time and efforts", into the consideration of an entrepreneur: Can I make more money with the game than the compensation I will have to pay to people for the time and effort to make it? That means that sometimes the entrepreneur is wrong and we get a game for cheap because he miscalculated. But overall it means that we as the community of players need to pay the cost of making games, otherwise games won't be made.

"Free" games in this discussion are a red herring. The reason why we get more and more "free" games counter-intuitively is that game companies often make more money with free games than with fixed price games. League of Legends made $624 million last year, so Riot Games makes a big profit on it, and can continue to make games. As LoL has 30 million active players, and we need to assume that at least 90% of those never pay a cent, many of the people who pay of League of Legends actually pay more to play this game than they would pay to play a game that comes in a box with a price tag and has no subscription. If the EU comes through with their proposal to ban the use of the word "free" for games that aren't actually completely free, "free" games would mostly disappear.

Free opinions on the internet on the other hand are here to stay. Attempts to monetize them are mostly doomed to failure. You can ask for donations, but you would get more donation money with a fake charity website or a scam Kickstarter project than with a blog that requires a lot of time and effort.

I'm not sure why you assert that 90% of people who play LoL don't pay anything. I know lots of people who play LoL and I don't know of a single one who hasn't bought at least one skin.
"we need to assume that at least 90% of those never pay a cent"

I also find this highly questionable. You are basing this on Zynga's claims. They make very cheap games with very expensive purchases (like $20 for a different colored tractor), it is no surprise that almost no one pays in a Zynga game.

On the other hand, when DDO first became Free2Play, they said most players paid at least something. I think this is the better comparison to LoL, a triple-A game with reasonably priced purchases at lots of different price levels.
What data do you have to support that claim? I only found links saying that the conversion rate of League of Legends is low, that is few players pay.

I am also repeatedly told that League of Legends only sells fluff that gives a player no advantage. And in a world where people pirate Humble Bundles, I have serious difficulties believing that many players give Riot money just out of the goodness of their hearts.
Well, some of the characters seem to be a bit more potent than other characters in LoL.

I probably dropped $20 in the month I played. But then I'll do that if I'm having fun.

And Tobold you could be making some money if you wanted to, but commercial entertainment sites are pretty solidly in the advertising model. I get why you don't want to do that, but you could get paid (a bit) if you wanted.
Here is a comparison of conversion rates by game. It doesn't include LoL, but as you can see the rates are all over the board. Team Fortress, a game that "only sells fluff," is at 25%.

On top of that, we know the total revenue for LoL is $624 million, MUCH higher than other Free2Play games. And the game's cash shop simply doesn't lend itself to spending huge amounts of money. It is filled with mostly one-time purchases (you buy the champion skin, now you own it forever).

We can do this a bit more scientifically, though, if you have the patience. Over the next 50 games or so, I will track how many players have a skin for their champion. This will exclude a huge amount of paying users (spent money buying the champion but not the skin, bought skins on other champions just not this one, bought IP boosts, etc.). However, every player with a skin has undeniably spent at least some money. My estimation is 33-50%, but we'll wait for the numbers.
" If the EU comes through with their proposal to ban the use of the word "free" for games that aren't actually completely free, "free" games would mostly disappear."

What's the reasoning behind this ? Also the project is more mixed than what yuo make it sounds. I am all for bannin the word "free" to qualify games like Dungeon Keeper for mobile where you are pretty much forced to buy stuff and there is heavy advertisment to do so.
Upon reflection, for games at least, perhaps instead of "a near zero marginal cost means near zero selling price" we should think of it as a "high fixed cost, low variable cost" industry for which we have many examples e.g. most utilities. So it makes sense for these industries to be very competitive. Also for them to be if not natural monopolies at least very volume dependent. So if it costs $200mm to make the game and $0.1 to sell each copy then the larger/dominant game is going to be a lot more profitable. Maybe it is economics as well as network effect that pushes us towards one MMO, one MOBA, etc.

So while low fixed cost blogging and high fixed cost game development both have low marginal costs, I think they will behave differently.

Tobold, the linked blog post fails to cite any data on conversion rates for LoL or any other game. From this site I found while googling makes a 10% conversion rate spectacularly good. True that it focuses on mobile games.; but even assuming 10% conversion on 30 million players means the average converted player pays in excess of $200. That is high enough to be unlikely (doubly so when the market is not purely western).

This, and my personal experience, leads me to believe that the conversion rate on LoL is quite a bit higher than 10% in the west for regular players.

Shi Fang is an automated spam bot and is not actually participating in the conversation.
I get several spam bot posts per day and delete them, but I can't be online 24/7.

I don't consider $200 per paying player to be highly unlikely. You need to consider that it is an average, and some "whales" spend hundreds or even thousands of dollars.
League of Legends does only sell fluff that gives a player no advantage. Some time savers and skins, that's it. And yet plenty of people (read: every single person I know who plays) pay in for some skins.

Frankly, if only 10% of players ever paid money I would rarely expect to see anyone using a skin. Games have 10 people in them and people who pay in won't have a skin for every champion they play. Personally I bought skins for 16 of the champions but there are 118 champions total. If I was choosing at random you'd only expect to see me with a skin in 13% of the games I play, even though I have spent ~$100.

I'm not choosing at random, and I am more likely to buy skins for champions I play a lot, so the odds of my having a skin on in any given game are probably higher than that. But even doubling it to 25% if only 10% of people ever paid money you'd be looking at going 4 games before you saw even a single person with a skin.

Which simply isn't the case. My friends and I joke about winning the 'skin war' in games where we want to have more skins on our team than on the enemy team. I don't know that I can remember a game recently without multiple skins on between the 10 people in the game.

I know plenty of people who buy things in a free to play game just to support the developer. And even if that wasn't the case it's not like someone could go and pirate a skin. If you want your opponent to see you wearing a top hat and attacking with a guitar you have to buy the Slash themed skin for Yorick, there is no pirate choice.
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