How Microtransactions Impact the Economics of Gaming

Investopedia

Video games used to operate like big budget films. The games underwent years of development with rigorous testing and debugging before the final product was released. Then the industry was revolutionized by the concept of online connectivity. Additions such as downloadable content (DLC) proved to be instrumental in getting gamers to pay for products after the game had already been released. DLC is part of gaming’s secondary market, and a precursor to what gamers know now as microtransactions.

What Is a Microtransaction?

A microtransaction is a business model where users can purchase virtual items for small amounts of money. Microtransactions often appear in free-to-play games, meaning there is no cost to download the game, just a cost to buy the online virtual products.

The video game industry is in a perpetual state of change, and microtransactions have had the biggest impact. Game developers have learned to take advantage of this new revenue source. It is estimated that only 5 to 20% of game communities take part in microtransactions, and the amounts they spend vary. However, this is still a significant amount, as the revenue generated is enormous for free-to-play games. Executives at these companies aim to monetize the player base that is not partaking in the microtransaction community for driving further growth.

Companies That Benefit from Microtransactions

The video game industry reached a record of $36 billion in revenue for 2017, according to data from the Entertainment Software Association (ESA) and the NPD Group.

Riot, the company that owns and runs the online game “League of Legends” (LOL) benefits tremendously from microtransactions. LOL is played by tens of millions of people worldwide, and it is completely free to download and play. Almost all of its revenue comes from in-game purchases.

LOL allows for the purchase of Riot Points, and this in-game currency is then used to buy skins, which are different aesthetic choices for the in-game characters. The in-game currency can also be used to unlock different characters. These options can often be unlocked with extended gameplay, but the microtransactions offer incentive to unlock them quickly.

Many of these microtransactions come from a small amount of the player base, since most gamers choose not to take part in microtransactions.

Epic Games release of Fortnite has proven to be a huge success. Fortnite is a free-to-play game where a maximum of 100 players join a match and fight until the last person or squad remains. Like LOL, it relies upon in-game purchases for skins and power-ups. Epic announced in May 2018 that they were planning to provide $100 million in prize pool money for their upcoming season of eSports competitions.

The Rise of eSports

Counter Strike: Global Offensive (CS:GO) is a classic example of an eSports game that also features microtransactions. It was released in 2012 and launched at $14.99 – a cost which doesn’t qualify as free-to-play, but is small relative to the $50 to $70 price tag of most big games.

Its high-budget counterparts such as “Call of Duty” and “Halo 4” outpaced CS:GO, and its player base began to slide until the company introduced something completely cosmetic that added a new aesthetic flair to the game.

CS:GO is a first-person shooter that introduced skins for its guns. This added an entirely new economic dynamic to the game. At the end of each game, players were awarded with random crates of weapons, and they could only be opened with a key that cost $2.49. Once the crates were opened, players would get multiple random weapon skins or rare items.

Introducing this to the game led to an increase in popularity and reignited its reputation among fans. Tournaments have prize pools of these items, and there is even an in-game economy being created around this feature that has real-world economic consequences.

Microtransactions assist in integrating a real-world market into in-game economies.

For example, Fortnite uses an in-game virtual currency called “v-bucks” that its players can either earn through gameplay or purchase using real cash (or credit). V-bucks are used to purchase items such as skins and to unlock several hidden features within the game. On top of that, Fortnite players may also purchase a “battle pass” to accumulate game awards and advance through the game’s tiers more quickly.

There is also a CS:GO community of professional players who make real money, receive items that are paid for with real currency and win cash prizes. The microtransaction-based approach is at the forefront of the industry to make money off of video games.

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