DFC INTELLIGENCE P R O P R I E T A R Y

Eating An Elephant One Bite at a Time:

March 2010

DFC Intelligence(858) 834-4340www.dfcint.com

David Coledcole@dfcint.com

DFC INTELLIGENCE P R O P R I E T A R Y- 2 -

DFC Intelligence Overview

Founded in 1994 to focus on games and digital entertainment content

From 1994-1997 a major focus was digital distribution and online games

DFC was a little too early to the online party From 1998 to 2001, DFC’s primary focus was on U.S. retail Starting in 2001, DFC once again started to focus heavily on the

online game market looking at casual games, MMOGs and being one of the first research companies to start looking at the Korean game market

DFC Intelligence offers: Off-the-shelf reports with market forecasts, company profiles Detailed surveying of consumers on a global basis Custom consulting

DFC INTELLIGENCE P R O P R I E T A R Y- 3 -

DFC’s Theory

The game model where all products are released at a price of about $50 (less for portable) is whacked and not sustainable

We have had that theory since 1994 Sony brought prices down towards $40 with the first PlayStations With the Xbox 360 and PS3 they brought prices back up to $60!

The fact that prices remained so high for so long is a testament to how popular games are in modern society

However, technology has caught up and allows for new pricing models

We have reached the point where there will be massive variation in game prices based mainly around usage

Research shows consumers are rapidly adapting to this change

DFC INTELLIGENCE P R O P R I E T A R Y

How did the Game Industry Get Its Start?

In the arcades where consumers spent 25 cents at a time

It became a multi-billion industry by the early 1980s

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DFC INTELLIGENCE P R O P R I E T A R Y

Entering the Home

Home cartridge systems had a high cost of goods

High cost of goods = The start of $30+ games

People like being able to play at home

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DFC INTELLIGENCE P R O P R I E T A R Y

It Took About 15 Years for Home Game Revenue to Reach Arcade Revenue

25 cent

s$30

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DFC INTELLIGENCE P R O P R I E T A R Y- 7 -

Lessons Learned

People love games and are willing to pay for them People like playing games at home on a regular

basis Technology has limited home delivery options and

forced artificially high prices Technology improves and allows for more flexible

product delivery to the home Economics 101: Offer people more efficient

options and they will take them

DFC INTELLIGENCE P R O P R I E T A R Y- 8 -

Economics 101: Game A and Game B

The past 20 years Game A

Fun for 2 hours Total Cost: $50 Cost Per Hour: $25

Game B Fun for 100 hours Total Cost: $50 Cost Per Hour: $0.50

This is not sustainable for Game A With Game B, the market is undervaluing the product

DFC INTELLIGENCE P R O P R I E T A R Y- 9 -

Compare with Other Entertainment

Going to a Movie: $10 for 2 hours or $5/hour Assume a game is valued at only $1/hour

Game A should cost $2 Game B should cost $100

Assume a game is valued at $2/hour Game A should cost $4 Game B should cost $200

We are still unclear how consumers will value games Because new methods of charging based on usage are just

being introduced consumers are still setting a valuation However, we know consumers increasingly have more

choices and are starting to make more efficient decisions

DFC INTELLIGENCE P R O P R I E T A R Y

Xbox Live Users Flocked to Call of Duty: Modern Warfare 2

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DFC INTELLIGENCE P R O P R I E T A R Y

World of Warcraft: People Try it and Continue to Play

DFC survey of PC gamers in North America and Europe conducted Jan-Feb 2010. Based on percentage of total subscribers that identified themselves as former subscribers not current subscribers. Respondents per game 2,512-2,526

Game Lapsed Subscribers

World of Warcraft 58%

EVE Online 60%

Everquest II 74%

Lord of the Rings Online 75%

City of Heroes/City of Villains 84%

Warhammer Online 84%

DFC survey of PC gamers in North America and Europe conducted Jan-Feb 2010. Based on percentage of respondents that identified themselves as never having played the game. Respondents per game 2,512-2,526

Game Never Used

World of Warcraft 42%

EVE Online 72%

Lord of the Rings Online 80%

Warhammer Online 80%

City of Heroes/City of Villains 84%

Everquest II 89%

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DFC INTELLIGENCE P R O P R I E T A R Y- 12 -

The MMOG Model

$15 a month = $180 a year for all subscribers User A plays 30 hours/yr = $6/hour User B plays 500 hours/yr = $0.36/hour User C plays 1,000 hours/yr = $0.18/hour

Can you get Users B and C to pay more by getting them to pay for in-game enhancements?

The answer increasingly seems to be yes. Economics 101 says Users B and C are getting high

entertainment value for their $ Nov 2009: Blizzard adds pets available in WoW for $10

DFC INTELLIGENCE P R O P R I E T A R Y

Gamers are Getting Comfortable Buying In-Game Goods

Region No Yes

Europe 49.33% 50.67%

North America 37.30% 62.70%

UK 36.42% 63.58%

Grand Total 40.05% 59.95%

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DFC survey of PC gamers in North America and Europe conducted Jan-Feb 2010. Based on percentage saying Yes to question “Have you ever purchased an in-game good that is not a full game, but consists of a game component such as virtual currency, avatars/characters, items/weapons/vehicles, extra levels, etc?” Respondents 2,674

DFC INTELLIGENCE P R O P R I E T A R Y

Gamers are making recent purchases: 80% of in-game good buyers have purchased in past 3 months

Amount Spent Europe North America UK Grand Total

None 24.3% 19.7% 19.2% 20.5%

Less than $5 24.3% 17.8% 22.8% 20.9%

$5-10 14.4% 17.2% 12.3% 14.9%

$11-20 14.1% 18.5% 19.7% 18.0%

$21-50 13.8% 15.6% 18.0% 16.1%

$51-100 4.5% 5.1% 3.5% 4.4%

More than $100 4.5% 6.1% 4.4% 5.2%

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DFC survey of PC gamers in North America and Europe conducted Jan-Feb 2010. Questions asked only to respondents that have said they have purchased in game goods. “In the past three months how much have you spent buying in-game goods?” Respondents 1,580

DFC INTELLIGENCE P R O P R I E T A R Y

Free-to-play games are popular: 53% are current users

Region Every day Several times a week Once a week or less

I used to play F2Ps but no longer play them I never play F2Ps

Europe 20.76% 19.81% 13.95% 33.28% 12.20%

North America 21.26% 18.06% 18.52% 30.71% 11.46%

UK 15.40% 15.65% 13.57% 37.16% 18.22%

Grand Total 19.25% 17.72% 15.79% 33.43% 13.82%

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DFC survey of PC gamers in North America and Europe conducted Jan-Feb 2010. Based on answer to question “How often do you play F2P games” Respondents 2,540

DFC INTELLIGENCE P R O P R I E T A R Y

Converting Users from Free to Paying Can Vary Significantly by Product and Business Model

GamePercent Paying of Total Users

Runescape 39.5%

Club Pogo 37.8%

Real Arcade 36.4%

Texas Hold-Em 29.1%

Maplestory 26.8%

Club Penguin 26.4%

Silkroad Online 22.9%

Combat Arms 19.6%

RF Online 19.3%

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DFC survey of PC gamers in North America and Europe conducted Jan-Feb 2010. Percent of respondents in North America that identified themselves as former or current users that had PAID. Respondents 1,069-1,085 per game

GamePercent Paying of Total Users

Free Realms 19.0%

Knight Online 16.7%

Cabal Online 16.6%

Flyff (Fly for Fun) 15.2%

2Moons 11.6%

Farmville 9.5%

Neopets 9.1%

Mafia Wars 8.9%

DFC INTELLIGENCE P R O P R I E T A R Y

iPhone and iPod Touch owners are purchasing games for the system: 60% of owners bought a game in the past 3 months

Region None

More than none but less than $5 $5 to $9 $10 to $19 $20 to $29 $30 to $39 $40 to $50

More than $50

Europe 49.14% 13.79% 4.31% 11.21% 4.31% 5.17% 1.72% 10.34%

North America 40.37% 12.96% 13.33% 14.44% 5.56% 5.19% 1.85% 6.30%

UK 34.25% 14.17% 13.39% 13.39% 9.84% 5.91% 2.76% 6.30%

Grand Total 39.53% 13.59% 11.72% 13.44% 7.03% 5.47% 2.19% 7.03%

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DFC survey of PC gamers in North America and Europe conducted Jan-Feb 2010. Based on answer to question “Over the past 3 months, please estimate the total amount you have spent on iPhone / iPod Touch games purchases.” Question asked only to owners of iPhone or iPod Touch.” Respondents 640

DFC INTELLIGENCE P R O P R I E T A R Y

Xbox 360 Owners Are Comfortable Buying Digital Content: 66% have bought a digital game or game component

Region

Xbox 360 - I have purchased a full downloadable game for more than $10

Xbox 360 - I have purchased downloadable games or game components priced at under $10

Xbox 360 – I have purchased downloadable games or games components at any price

Xbox 360 – I have purchased non-game content such as music or a movie

Xbox 360 - I own this system but have never purchased digital content for it

Europe 36% 23% 52% 7% 45%

North America 47% 38% 69% 16% 27%

UK 42% 39% 69% 13% 28%

Grand Total 43% 36% 66% 13% 30%

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DFC survey of PC gamers in North America and Europe conducted Jan-Feb 2010. Based on answer to question from only those that indicated they owned an Xbox 360. Respondents 1,248 Xbox 360 owners

DFC INTELLIGENCE P R O P R I E T A R Y- 19 -

What Does it Mean?

Consumers are increasingly spending money based on product usage Multiple types of usage based models are going to become

increasingly popular Usage based models can take all forms Charging a set price for unlimited usage is a usage based model

For certain products a $50+ retail price and/or $15+ monthly subscription is a bargain because it allows for unlimited usage For these products there is a growing ability to upsell digital

content to heavy users Most products will not have the luxury of getting consumers to make a

major commitment up front and will need to rely on getting consumer payments in smaller increments

For all products quality of the user experience becomes more important A high profile license can bring consumers in, but it can’t get

them to stay around

DFC INTELLIGENCE P R O P R I E T A R Y

Online Usage Models are Already Major Revenue Generators, Especially in Asia

Online Usage Revenue includes subscriptions and virtual item models where the product is consumed and/or no longer usable once the consumer stops paying.

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2009 2010 2011 2012 2013 2014$0.0

$1.0

$2.0

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DFC Forecasted Online Usage Revenue

North America and Europe Online Usage Revenue

Asia Online Usage Revenue

in b

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on

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Contacting DFC

The Data in This Presentation is From Our Latest Report: Downloadable Content: The Future of the Game Industry Survey of nearly 5,000 gamers in North America and Europe

Partnership with Live Gamer to analyze seven years of actual micro-transaction data from games in Korea, U.S., Japan, Germany, Philippines and Vietnam

Strategic Market Reports, Forecasts and Analysis of Established and Emerging Investment and Partnership Opportunities

Emerging Markets Research: http://www.dfc-niko.com/

Monthly DFC Dossier report available for download. Profiles emerging markets, products and companies

Sign-up to receive the report https://www.dfcint.com/DFCDossier/signup.php

If you know of a company or product that should be profiled contact George Chronis gchronis@dfcint.com

If you would like access to past reports or more info give your business card to David Cole or contact Ozzie Monge at omonge@dfcint.com