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How microtransactions are shaping the economics of the Gaming Industry

business-articlesHow microtransactions are shaping the economics of the Gaming Industry
The gaming sector has seen substantial profits in recent years amid the Covid-19 pandemic. Industry giants such as Sony and Microsoft posted record growth figures at the end of 2021, with the console sector alone making over $45bn in 2020. Statistics show that time spent playing video games during the pandemic rose by 39% globally.

Gaming can become an expensive hobby however, with the average AAA video game retailing at around $70. This has led companies both big and small to pursue a model of in-app purchases, otherwise known as ‘microtransactions’. Record revenue figures for Activision Blizzard show just how profitable just an approach can be.


 

Mobile gaming & in-app purchases

Mobile gaming has become a crucial part of the in-app purchase (IAP) economy. Smartphones have become commonplace in the modern age and are therefore an effective vector for in-app purchases.

Revenue from in-app purchases saw a huge rise during the Covid-19 pandemic. Revenue grew drastically across both the Google and Apple mobile stores in 2020, rising by 51.3% and 30.2% respectively. Total in-app purchase revenue rose to $50.1bn in 2020, with $36.6bn of those purchases coming from the gaming sector.

As outlined by mobile marketing agency Udonis, there are four categories of in-app purchases:
 
  1. Consumable
These purchases are usually the most common IAP and refer one-off items or bonuses players can pay real money for. They are often utilised by designers to allow players to reduce wait times or limit repetitive actions.
 
  1. Non-Consumable
These are one-off purchases that allow players permanent access to certain in-game items. Examples of this include bonus levels and character cosmetics. These sorts of IAPs can give players the opportunity to upgrade their experience from a trial to a full version.
 
  1. Auto-Renewable Subscriptions
These IAPs occur on a regular basis to allow players access to a form of premium content. For mobile gaming, this can allow players access to a full version of the game for as long as they subscribe or daily items.
 
  1. Non-Renewing Subscriptions
With this form of IAPs, the players are given access to premium content for a set amount of time. In recent mobile games these often take the form of ‘battle passes’. Once these subscriptions come to an end then the player must choose to renew them manually.


 

The subscription model

Whilst consumable and non-consumable purchases have historically been the most prevalent IAPs, subscription models are on the rise. The model had previously been limited to non-gaming apps such as Netflix and Spotify which had seen increases of 41% to spending in 2021. The introduction of ‘battle passes’ and premium subscriptions, particularly for multiplayer games has led to fresh revenue streams for mobile developers.

There are many benefits of the subscription model that can lead to higher revenue for developers. Players are likely to remain with one title for longer to get their money’s worth which has the potential to develop a loyal player base. The purchase of a subscription is also likely to lead to less regret of over-spending from players.

The adoption of a subscription model can have some downsides for developers and publishers, however. Players who purchase a subscription will expect a regular feed of new content and features, increasing the pressure on development teams post-release.

For those on the fence, there are many notable case-studies that illustrate the benefits of a subscription model. PUBG Mobile employs two different ‘battle pass’ tiers as well as two other more traditional monthly subscriptions. As of November 2021, PUBG Mobile surpassed $7bn in lifetime revenue and was earning an average of $8.1m a day according to analytics provider Sensor Tower.

Moving away from the competitive space, Playrix’s Gardenscapes and Homescapes puzzle games have also seen great success from subscription based IAPs. Gardenscapes hit $3bn in lifetime revenue as of August 2021 and utilises a 30 day ‘battle pass’ priced at $4.99. These passes are designed around a different theme each month.


 

Microtransactions in the AAA Sector

The profitability of in-app purchases has not gone unnoticed by other areas of the gaming sector. IAPs in more traditional video games, or ‘microtransactions’ as they’re known there, have become increasingly prevalent.

A primary reason behind the move is the soaring costs of game console and PC game development. In recent years, the cost of development for a top-tier video game has ballooned from $1m to anywhere between $80m - $100m. Former PlayStation executive Shawn Layden has stated that the current model is ‘just not sustainable’, and that developers need to find additional ways to recoup costs.

The IAP models used for video games are similar to those seen in the mobile space. ‘Battle passes’ were in fact first popularised by free-to-play games such as Fortnite, with one-off purchases largely limited to cosmetic items. The battle royale behemoth generated $5.8bn in revenue last year, with other industry giants like EA and Activision Blizzard also seeing substantial profits from the use of microtransactions.

More and more often, the profits made from microtransactions outpace those from actual game sales. The company’s ‘Ultimate Team’ model, used in its FIFA game series, made more revenue in 2019 than the sales of that year’s entry.


 

The risk of a consumer backlash

The reception to the move from consumers has been mixed, however. The adoption of IAPs within this sector has often led to consumers paying for additional content in a product they have already paid up to $70 for.

The use of ‘Loot Boxes’ has come under particular scrutiny, with the aforementioned ‘Ultimate Team’ model from EA being one example of this. With loot boxes, consumers pay for the chance to open a virtual pack containing a random assortment of items. EA has faced harsh criticism for the use of this IAP model in the past, most notably with Star Wars Battlefront 2. Loot boxes have now in fact now become the frontline when it comes to legislative efforts surrounding gambling in video games.

When Battlefront 2 was released, players were able to pay real money to gain an advantage in Battlefront 2’s competitive multiplayer environment. This is sometimes also referred to as a ‘pay to win’ model and is very rarely received well by consumers. In Battlefront 2’s case, EA was forced to rework the game’s entire progression system to address concerns and suffered significant negative publicity.

When looking at the profitability of IAPs, it’s extremely important to consider the impact each payment model may have on the balance of your game. A report into consumers views of microtransactions found that even the general presence of IAPs in some games can hamper a player’s enjoyment. Poor implementation can also lead to hit to revenue, or substantial loss of face in the sector.


 

Conclusion

Through highlighting the various IAP models, it’s clear that subscription-based purchases are on the rise across the gaming sector. Developers need to ensure that implementing such a model comes alongside a robust plan for post-release content. Whilst this may mean a higher initial investment, the revenue generated can be substantial on a long-term basis.

The implementation of IAPs must also consider the genre of game. The use of microtransactions can create an unfair playing field for consumers, and can lead to significant pushback.
 
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