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Free Online Games Sink Pirates for Emerging-Market Growth

August 28, 2012

Free Online Games Sink Pirates to Unlock Emerging-Market Growth

Ubisoft, based in Montreuil-Sous-Bois, France, and founded 25 years ago by the Guillemot family, sees the model as a way to overcome piracy and attract new players. Photographer: Patrick Fallon/Bloomberg

Video-game makers that once steered clear of emerging markets to avoid getting ripped off by copycats are returning with free online offers to make money from customers willing to pay for add-on features.

Electronic Arts Inc. (EA:US), whose “Command & Conquer” is ranked by researcher NPD among the top-five best-selling PC franchises of all time with more than 30 million copies sold since 1995, will make the game free online next year. Ubisoft Entertainment SA (UBI), known for its “Assassin’s Creed” and “Tom Clancy,” introduced seven browser-based free-to-play titles at the Gamescon event in Germany this month.

Free games with extras that cost often less than $1, a model pioneered by Zynga Inc. (ZNGA:US), are poised to push sales in countries where disposable income is low and piracy has hurt revenue. Latin America, Africa and the Middle East made up 6 percent of the industry’s almost $67 billion in revenue last year, according to researcher Idate Digiworld.

“With the growing availability of mobile devices and PCs, the number of potential customers is rapidly expanding, especially in emerging markets,” said Frank Gibeau, head of labels at Electronic Arts, the world’s second-largest game developer by revenue. “The free-to-play model makes our games accessible to these audiences.”

Eastern Europe

Gamers in emerging markets are more likely to use a handset than a recent Microsoft Corp. (MSFT:US) Xbox or Nintendo Co. Wii games console. More than half of U.S. households own a current- generation console, according to research firm Nielsen Co. Ownership in emerging markets is about 25 percent to 33 percent of the level of that in Western countries, said Peter Warman, chief executive officer of researcher Newzoo.

“Emerging markets are where the growth is,” said Jan Ten Sythoff, a Brighton, England-based analyst at Pyramid Research.

In many countries, people don’t often buy games, according to the Interactive Software Federation of Europe. In Eastern Europe, 81 percent of gamers had played free online games in the previous three months when questioned in spring 2010. At the same time, 51 percent of gamers in the region hadn’t bought or been given a game in the previous year.

Overcoming Piracy

Those gamers may be willing to pay for in-game items or skills, new content and maps. The purchase of a fashionable lamp in Electronic Arts’s “Sims Social,” where gamers can lead a second life in a virtual village, costs about 91 cents in a virtual currency that may be purchased with real money, while a designer rug is about $1.60.

Ubisoft fell 1.6 percent to 6.10 euros at 3:31 p.m. in Paris trading, paring the advance this year to 18 percent. Electronic Arts rose 0.7 percent in New York and has fallen 37 percent this year. Zynga climbed 0.3 percent and has retreated 67 percent this year.

Ubisoft, based in Montreuil-Sous-Bois, France, and founded 25 years ago by the Guillemot family, sees the model as a way to overcome piracy and attract new players.

“Online games are a way to stay in connection with players and tie them to our products,” said Geoffroy Sardin, Ubisoft’s chief of marketing and sales. “It is a service that adds value to gaming and thereby incentivizes players not to get our games through illegal channels.”

To avoid piracy, game developers only enable social and interactive features, such as chat windows and multi-player modes, once a player is registered with the digital distribution platform. Web-based games can only be played if the user is connected with the game’s server.

Profit Path

In China, revenue from all video games is expected to grow to $9.2 billion by the end of 2014, up 39 percent from last year, according to Pearl Research.

There is little data available about sales lost to piracy in emerging markets. In the U.S. and Canada, piracy causes $3.5 billion of lost revenue every year for the computer-game industry, according to the Entertainment Software Association of Canada. That is about a fifth of total sales in the U.S. last year, based on data compiled by NPD.

“Many companies tried to enter emerging markets in the 80s and 90s and failed because of piracy,” said Allison Luong, managing director of Pearl Research in San Francisco. “With online gaming, they have managed to grow the markets into billions of dollars.”

The global market leaders are following the lead of smaller competitors, which pioneered the online model of cheaper, relatively simple games that reach profitability more quickly.

‘Song Pop’

Zynga, the biggest developer of games played on Facebook Inc. (FB:US)’s social networking site, had revenue of $1.14 billion last year. By comparison, Ubisoft had 80 million euros ($100 million) of online sales during the last fiscal year, out of total revenue of 1.06 billion euros. Electronic Arts had $1.2 billion of online revenue, with total sales of $4.1 billion in the last fiscal year.

Zynga raised $1 billion in its initial public offering in December 2011. The San Francisco-based company, which makes money by selling virtual goods, produces the four most popular games on Facebook, including city simulation game “The Ville” with 60.6 million monthly active users, according to data posted Aug. 21 by AppData.

Other startups are also grabbing their share. New York- based FreshPlanet’s “Song Pop,” a free song-guessing game, is available for Facebook, where it has about 15.8 million users. About half of daily players of the game are from Latin America.

Crowded Market

Such competition means that success in the online market isn’t guaranteed for Electronic Arts and Ubisoft. While the companies traditionally relied on sophisticated blockbusters which cost tens of millions of dollars to make -- meaning there were fewer rivals -- they now face a slew of little competitors willing to settle for smaller profit.

“Electronic Arts and Ubisoft have made reasonable progress in increasing their exposure to the online business,” said Christopher Hickey, a London-based analyst for Atlantic Equities LLP. “Considering that the online market is already a crowded place, digital markets represent not only opportunities but threats -- intense competition and low barriers to entry may impact profitability.”

To contact the reporters on this story: Joseph de Weck in Frankfurt at jdeweck@bloomberg.net; Marie Mawad in Paris at mmawad1@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net


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Companies Mentioned

  • EA
    (Electronic Arts Inc)
    • $48.33 USD
    • 0.27
    • 0.56%
  • ZNGA
    (Zynga Inc)
    • $2.67 USD
    • -0.04
    • -1.5%
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