Move over Halo 3: Online games offer free play

Some video game publishers have stopped charging for their games in the hope that once hooked - players will pay for special features.

By Yi-Wyn Yen, Fortune

(Fortune) -- For all the hype about Microsoft's Halo 3 video game, 10 times as many people have played the hit online game Diner Dash.

Unlike Halo 3, which is played on Microsoft's Xbox 360 game console and targets hard-core gamers willing to part with $60, Diner Dash is a so-called casual game - an inexpensive, easy-to-learn online game that appeals to a wider audience.

Casual games are played on a Web site or downloaded and, due to the cheaper format, they don't bring in the kind of money that traditional video games generate. While Halo 3 took in $170 million in the first 24 hours after its release last week, the casual game industry struggles to get players, particularly young ones, to pay up.

"We have no problem reaching hundreds of millions of users," says CEO John Welch of PlayFirst, publisher of Diner Dash, which stars a businesswoman who becomes a restaurant entrepreneur. "We've had a problem reaching hundreds of millions of dollars."

Publishers have typically charged players $20 to access online casual games. Now PlayFirst has become the first leading casual gaming startup to experiment with a "microtransaction" concept that's been a hit with kids' social networking sites like Club Penguin. They're offering free access to online games but charging a premium to upgrade features and unlock new levels of play.

"For casual games, we have to be cautious with how much we give away for free," Welch says. "Let users play for 5 or 10 hours, and hopefully they'll spend money to get that t-shirt or just to see what happens with the story."

The microtransaction model is hugely successful in South Korean and China. To combat piracy, Korean casual gaming companies started charging consumers to purchase skill levels or the right to change avatars. Nexon made $250 million in revenue in 2005, mainly from microtransactions off two hit games, Kart Rider and MapleStory.

That same year Chinese casual gaming companies like Tencent caught on to the concept. "The casual gaming market is pretty young, and the microtransaction model is really new, but it's really taken off in Asia, so it could be just as successful in North America," says James Kuai, a research analyst at Parks Associates.

Popular casual gaming sites in the U.S. are now importing the model. Earlier this year, Boonty launched gaming platform Cafe.com, which offers casual games for free and charges for game items and personalized avatars.

Pogo.com started microtransactions last November and reported $6.7 million worth of virtual gems were purchased to upgrade features through June.

Ads have been the major source of revenue for Kongregate, a new Web-based gaming startup that attracts nearly a million users a month. But the site will soon allow game developers to charge players a premium to play in a multiplayer mode.

"For browser-based games, we eliminate the barrier to download something," says Kongregate CEO Jim Greer. "Let's say you're talking a couple bucks to play with your friends. That's an impulse buy that a younger audience is willing to accept."

In the last decade, casual gaming followed a strict subscription or try-it-before-you-buy-it model. While that worked for 1.5 million (mainly adult females) who paid annually to download Bejewled and Solitaire on Pogo.com, gaming startups today are discovering that a new generation of gamers don't like to pony up to play.

"Kids want things for free for a lot longer," Welch says. "The 'let me play for 60 minutes for free and pay 20 bucks to continue' is not a friendly model."

PlayFirst estimates that consumers have spent more than $35 million on the Diner Dash franchise games. More than 200 million have played the game, which launched in 2004 and generates sales from the $20 model. The move to let users play for free is a risky one for PlayFirst, but Welch says he is optimistic about the early results. (See correction below.)

"Purchases from users are now skewing much younger," Welch says. "I think we've hit the formula."

Correction: An earlier version of this story incorrectly stated that Diner Dash has generated $40 million in revenues. Top of page

Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.
Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.