The Social Gaming Summit in San Francisco a few weeks ago provided solid exposure to what’s happening in the games space. Jeremy Liew from Lightspeed Ventures, Andrew Chen, and Gamasutra all have great recaps on the conference.
One of the panels covered Monetization and Business Models for Social Games; Virtual Worlds News summarizes it well. Generally, gaming businesses make money in two ways, payments (such as microtransactions or subscriptions) and advertising. The Casual MMO panel at the conference acknowledged that kids 6-14 control $60B in disposable income. Tapping into that spending, however, is difficult.
There are unique challenges (and perhaps opportunities) associated with payments and advertising-based online gaming models for kids. First off, kids generally do not have credit cards. In addition, even though a growing portion of teens/kids have cell phones, at least in the U.S., handset-enabled payment mechanisms are limited. That means that parents have to be involved in the purchasing decision if kids want to subscribe to an online service. The benefits of a payment model, however, are that parents feel more invested in the product their kids are buying and may even encourage them to consume it more.
Advertising is the other revenue source. With kids products, the challenge is finding a large enough of base of brand advertisers, which is especially challenging given the youth (no pun intended!) of the in-game advertising industry. You also have the challenge of reassuring parents that the advertising will be relevant and safe for their kids, in addition to complying with any policy regulations that may exist. I was recently talking to an executive from Massive, the in-game video advertising company acquired by Microsoft, and was told that both from monetization and user experience perspectives, advertising to kids in a gaming environment was very risky and was not something they were investing in.
With payments, it seems that parents are more comfortable spending money for their children when some kind of physical asset is also delivered. Webkinz is a great example of such a product. In focus groups we have conducted, parents admitted that they bought the stuffed animal only so that their child could play in the online world — in many cases — the child would throw away the physical pet, and spend more time with its online counterpart!