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How free-to-play and in-game purchases took over the video game industry

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How free-to-play and in-game purchases took over the video game industry appeared on by Ian Thomas.

In this weekly series, CNBC takes a look at companies that made the inaugural Disruptor 50 list, 10 years later.

Amid the popularity of free-to-play, downloadable games and gaming platforms like “Fortnite,” “League of Legends,” and Roblox, it’s become extremely rare that a high-profile video game is released now without some sort of recurring payment strategy — a far cry from the typical $60 standalone game purchase that dominated the video game industry as recently as less than a decade ago.

But as video games have shifted away from solely console-based experiences to more digital- and mobile-driven platforms, the business model and how gamers interact with the games they play have significantly shifted as well.

“In 2013, it was very controversial to say that the free-to-play business model would be the next major dominant model within all of gaming,” said Kevin Chou, the co-founder and former CEO of mobile gaming company Kabam. “Mobile games [then] were pretty much free-to-play games, but we were saying, ‘You know, it’s not just mobile games, but gaming, in general, is going to move in that direction.'”

In-game purchases were a nascent business for most console and PC games, but the success of social games like FarmVille showed the potential.

That has now become the model for even the biggest video game franchises. Activision Blizzard’s “Call of Duty,” while still maintaining its yearly new edition release, saw more than $1 billion spent worldwide on its free-to-play mobile version of the game while its “Warzone” platform hit the 125 million player mark in June. It also made the newest version of its “Overwatch” series, which generated $1 billion in sales in its first year of release in 2016, into a free-to-play model. Take-Two Interactive’s “Grand Theft Auto V,” perhaps the best example of a standalone game that’s still finding success with nearly 170 million units sold as of August, said its GTA online platform has seen its audience grow 49% since the first quarter of 2020.

Kabam, which was named to the inaugural CNBC Disruptor 50 list in 2013, had initially evolved from developing free-to-play games for Facebook to creating first- and third-party games for social, web, and mobile platforms. Like what Fortnite has found success with, Kabam leaned into well-known properties, creating games around movie franchises like “The Hobbit” and “Fast & Furious.”

But while these games are considered free-to-play, there is a very lucrative side to them. While the initial download might be free, gamers are incentivized to buy things like seasonal “Battle Passes” that provide new items and other cosmetic prizes as they progress through the game.

That has proven to be a goldmine for gaming companies. Activision Blizzard said it had $5.1 billion in in-game bookings for its 2021 fiscal year, which includes things like “World of Warcraft” subscriptions, skins and items in “Warzone” and “Overwatch,” and other microtransactions — a 5.2% year-over-year increase. That compares to $8.35 billion in net bookings for 2021, which encompasses the sales of games both digitally and physically.

Kabam also benefited, with its revenue growing 70% in 2012 to more than $180 million helped by its game “Kingdoms of Camelot: Battle for the North,” which the company said was the top-grossing iOS app that year.

Much of the growth in the popularity of seasonal gaming passes is credited to Epic Games’ Fortnite, which generated more than $5 billion in its first year after release through the sale of items and seasonal passes.

But that also has come as the slowing console and PC gaming market has looked to replicate the fast-growing mobile gaming landscape, as well as the video game industry flattening even further so there’s less of a line between different types of games and gamers.

Mobile gaming has outpaced the growth of the broader video game market over the last decade and is estimated to take in $136 billion in global spending this year, compared to a combined $86 billion for PC, console, and handheld console gaming combined, according to a study by and IDC.

“Consoles are not dead, PC games are not dead, but mobile games are a big driver of the entire market,” Chou said.

Part of that has come as the quality of mobile games has improved, as well as developers pushing quality console-level games to mobile, Chou said. He pointed towards “PlayerUnknown’s Battlegrounds,” a battle royale game similar to Fortnite. The game, developed by South Korean game publisher Krafton, was wildly successful on PC and consoles but was also ported over to mobile, where it has grossed more than $8.5 billion globally.

“What’s happening is you’re seeing companies take games at the quality of the PC and console game in every level and bringing it on mobile,” Chou said. “You still have players still playing on PC and consoles, but you’re also able to grow the audience a tremendous amount.”

That has also been enabled by cloud gaming, which allows gamers to access their games or saved files remotely or via their phone or other devices. While Google recently shut down its digital gaming service Stadia, Chou said that other gaming services like Sony’s PlayStation Plus cloud streaming, Amazon’s Luna, and Microsoft’s Xbox Cloud Gaming are helping to bring “constant game quality to mobile.”

“There are people who love their consoles and are continuing to buy consoles, but in other parts of the world you wouldn’t buy a console necessarily but now they could play the exact same way – it’s a way to increase the user base dramatically without selling more consoles,” Chou said.

The investment in mobile gaming will likely increase as more M&A happens in the gaming space, which has seen a flurry of deals this year.

Microsoft proposed buying Activision Blizzard in a $68.7 billion deal in January, which was followed by Sony announcing a plan to acquire Halo developer Bungie for $3.6 billion. Take-Two acquired mobile gaming company Zynga, known for its FarmVille game, for $12.7 billion in January.

NetEase, the Chinese game developer, which has released mobile games based on Lord of the Rings and Harry Potter, acquired French developer Quantic Dream in August in a push for international growth and to further compete against rival Tencent.

Sony is also looking beyond consoles, having announced plans for a dedicated PlayStation mobile gaming unit in August. The company said earlier this year it plans to release about 50% of games on PC and mobile by 2025, up from roughly 25% today. Nintendo has also looked to put more emphasis on mobile games in recent years.

Kabam itself was a target in 2017, being acquired by South Korean gaming company Netmarble.

Chou, who has since co-founded esports organization Gen.G and is currently the managing partner of crypto venture studio SuperLayer, said he still sees growth ahead for mobile gaming, specifically noting the possibilities that Web3 can bring to free-to-play games and the industry more broadly.

“There’s so much innovation in gaming – I think if I could do it all over again, I don’t think I would have sold the company,” Chou said of Kabam.

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