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Cost of Entry
Everyone sees the dollar signs associated with online games, but few people trulyunderstand the costs.Classic games are cheap and easy for anyone to do. It is hard to provide any kind of meaningful differentiation from the hundreds of competing products on sites around theworld. Development costs range from a few thousand to $60,000, trending toward thelow end. However, unless you own a gaming portal or plan to repurpose a game as aretail solo-play home unit, it doesn't make a lot of financial sense to get into this arena.Hybrids are fairly easy to get into as well; such a project adds only one or two people tothe development team, and the code and processes for adding Internet connectivity to agame should be well-known. Because publishers and developers normally don't supporthybrid gameplay with a host site, but merely fix bugs, optimize network code over time,and sometimes add new multiplayer maps and play styles, hybrids are very cost effectiveas a means of entry into the field. These are "fire and almost forget" projects; post-launchcosts are minimal. There is some change developing in this area as publishers begin tooffer minimal "play areas" for their games on their sites, but these are not yet "the" placesto play.In general, persistent worlds (PWs) are hideously expensive, but even a medium hit can bring in millions of dollars per year for 5–10 years. The absolute minimum developmentcost we've heard is around $2.5–$3 million, but that was for a project that reused clientand server code from a previous PW and didn't add any new bells and whistles. In other words, this will produce a product that doesn't have the production values of a top-of-the-line hybrid, which most large publishers would find unacceptable, given the addedfinancial outlay required to launch and support a PW.The average PW development cost today runs well over $7 million, and $10–$12 million projects are more typical than unusual. The launch costs of a PW are decidedly non-trivial, too, and are currently at between $3 and $5 million and rising. This figureincludes all the hardware and bandwidth to host the players, plus the customer service(CS), player relations, technical support and billing, and account management staff needed at launch to support the game.
 
Budgeting and Return on Investment (ROI) Factors
"No one thinks of everything needed in the beginning, or they probably wouldn't startthese games in the first place. They are really big, have a lot of unknowns, and can present serious surprises during development. I'm not clear anyone has ever done one tothe budget initially planned. As overall massively multiplayer (MMP) industryknowledge improves, I expect this will change." —Gordon Walton, executive producer for The Sims OnlineDuring our interviews for this book, what Gordon expressed was a common theme for those who had been through the design, development, and launch processes of a PW atleast once.
Business Models
"The business model for the game should be well-developed before you commencedevelopment. Make sure that everyone in your team and organization understands the business plan, as this one is fundamental for everything you will do the next couple of years." —Thomas Howalt, project manager for Funcom AS' Anarchy OnlineInterestingly, most teams start design and development without a clear idea of their exact business model. This can lead to major confusion, with the pricing model changingseveral times during development, thus resulting in confusion among the team of justwhat they are supposed to be building and for whom.When you come right down to it, there are just two business models for online games:either the players pay or someone else does. Up to now, the three main models used for revenue generation have been advertising, promotions, and sponsorships; retail hybrids;and subscription fees.
Advertising, Promotions, and Sponsorships
During the dot-com boom, which resembled a land rush with everyone trying to snare allthe eyeballs possible in hopes of being able to find a way to monetize them later, thehighly touted model was advertising. This was always a spurious model; well over 50%of all supposed "ad buys" on the Internet from the period of 1995–2000 were simply adexchanges between major sites, a sort of "I'll put up $10 million in value of your ads onmy site, and you return the favor on yours." Each site then recorded a $10 million ad buyand $10 million in ad revenue. Naturally, someone forgot to tell the press, so the growthof Internet advertising looked quite nice in news stories.
 
Internet users are notorious for not clicking through on ads. For a few years, before ad buyers woke up and realized they were being swindled, sites were paid solely by howmany people viewed an ad. Now, ad buyers want to see evidence of click-through rates because that's a figure that means something to the advertiser. More and more, we'reseeing payment based on click-through rather than the elusive and easily manipulated sitevisitors number, paid by CPM, or cost per thousand viewers.The ad-based model was never going to work for more than a few big sites anyway, andthen only as relatively low incremental income. That doesn't mean you shouldn't do it; just don't think it will fully pay for development and management—the chances areoverwhelmingly against it.Promotions and sponsorships (in which an advertiser gets his/her logo plastered all over aweb site or product for a certain period of time) are ancillary revenue generators that areseeing a small resurgence lately. This isn't creating much revenue for many sites; you'relucky to get $5,000 for a month of sponsorship or a promotion program. However,advertisers seem to see some value in it and it is on the rise again.These are all incremental revenue sources, however, and the amount of income yougenerate from them is never going to match expenditures; for that matter, online gamessites are fortunate to have them make up 10% of costs.
Retail Hybrids
Some publishers see hybrids as a good balancing point among the Golden Fleece-likerewards of intense player loyalty, visible Internet presence, a built-in market for follow-up products associated with a successful, actual online-only game, and the Scylla andCharybdis–like dangers known to be involved in actually developing, launching, andsupporting one. The theory here is that Internet connectivity and multiplayer options in anotherwise solo-play home game boost sales. No publisher has yet provided proof of whatthose additional sales might be like, although common wisdom projects 10–15%additional sales.To get a significant boost from adding Internet playability, however, you have to investtime and money into more than just adding to the retail game's code, as Blizzard did bysetting up the no-charge  battle.nethost servers for their games. There is more than a casual connection between the fact that battle.nethosts hundreds of thousands of gamesessions per week and the fact that Blizzard's Diablo II shipped two million units to retailestablishments in the first publishing run and did a second run a couple weeks later of areputed one million additional units. Compare this to the baseline of performance in theretail game industry, where an average number for first printings is less than 50,000 andfirst runs of even 250,000 are only seen for much-anticipated products from establisheddevelopers and publishers.It is unknown what Blizzard pays in host hardware, bandwidth, and network operationscosts, but the play obviously paid off for them. At the industry average calculation figure
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