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Defend Your Kingdom What Game Publishers Need to Know About Mone8za8on & Fraud

TOP 6 THINGS GAME COMPANIES NEED TO KNOW ABOUT MONETIZATION IN 2017 Execu&ve Summary

1. The games industry today is valued at $96.5B. Following a decade of unparalleled growth, interac4ve entertainment today is one of the largest in the world. Its success, however, has also a;racted some bad habits and new risks as game companies seek to adapt to a direct-to-consumer model.

2. Games as a service is a rela;vely new revenue model that has tripled the industry's value. Game makers of all sizes earn from a steady stream of in-game content that both serves player expecta4ons and increases their revenue per user. And this does not just apply to free 4tles: In 2016, a quarter of all digital revenue from PC games with an upfront cost came from addi4onal content.

3. PC players are more price conscious than their console counterparts. There are far more low-priced and free game op4ons on PC than console: The average price of a premium PC game sold last year was $22.27 versus $49.41 on console. PC gamers are more likely to wait for a sale, which contributes to their lower spending. This audience also visits game key selling sites in search of deals.

4. A gray market of key-reselling has emerged but hurts both players and publishers. Third-party sellers buy game keys from publishers using stolen credit card informa4on and then offload the keys on gray-market sites at low prices. When the fraud is detected, publishers who sold the keys are hit with chargeback fees. Game makers can deac4vate illegi4mate keys, but the players who bought them do not usually know they are part of a scam. Gamers may believe their keys have been deac4vated for no reason, and this can cause a nega4ve backlash.

5. The digital marketplace is here to stay, and so publishers must act to prevent fraud. Game makers who distribute their own 4tles must invest in proper payment safeguards. This way, they can stop fraud at the point of sale and deprive markets of illegi4mate game keys. Publishers should also clearly state which third-party sites are authorized to sell their products, since hardcore gamers are becoming aware of the issues with gray-market fraud.

6. Titles that make it easy to trade in-game goods are most vulnerable to account theG and money laundering. Virtual items are becoming more valuable to players and fraudsters. A miniskirt for PlayerUnknown’s Ba0legrounds recently fetched over $400 on the Steam Marketplace (where users sell in-game items for Steam store credit). Hackers commonly steal game accounts to trade away their virtual goods. Similarly, users can open a new account, buy items with stolen credit cards and sell or trade the items on gray-market sites. Developers will make fraudsters’ lives harder by adding safeguards like trade wai4ng periods and trade blackouts for new accounts.

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THE EVOLUTION OF THE DIGITAL GAMES MARKET AND FRAUD

More publishers than ever are seizing the $96.5B digital games market, making it essen=al to safeguard their revenues in order to survive the compe==on.

Like in many other entertainment markets, digitaliza4on has forever changed the economics of the video games industry. Today, digital games are on track to earn $96.5B this year, a 10% growth over last year. With lower barriers to entry, compe44on has goGen fierce and players expect more from game makers. Consumers are less willing to pay $60 for a boxed game and instead choose 4tles with a steady stream of new content. Publishers seek to meet these expecta4ons and have adopted a “games as a service” model, releasing fewer 4tles over 4me while keeping players engaged longer with regular updates and add-ons.


2016 2017 2018 2019 2020

$9.2B$8.7B

$8.0B$7.8B

$7.4B

$41.1B$40.1B

$39.3B$38.4B

$36.5B$73.2B

$66.0B$58.1B

$50.3B$43.6B

$96.5B

Worldwide digital games revenue

$87.5B

$114.7B$123.5B

Mobile

Console

PC

$105.4B


Revenue per user is expected to grow 2x faster than the overall addressable market (10% versus 5%), as the market relies less on upfront purchases and more on con4nuous player spending. This benefits players sa4sfac4on, but also opens both consumers and publishers up to fraud that can jeopardize the long-term sustainability of an entertainment property.

Players have changed, too, and are now dedica4ng more 4me looking for deals before they buy. On average, PC players in key markets like the U.S. hold off purchasing for 21 days to take advantage of flash sales or bundle deals.

Gamers are gaming the games market. In response, a growing number of third-party resellers have cropped up to meet the demand for discounts. Among them are resellers,

sites that let consumers unload game keys they do not want and sell them to others at a steep discount.

Considered part of the ‘gray market’ these resellers are prone to fraud. Scammers, for one, are able to buy keys from publishers with stolen credit card informa4on and then sell those keys to unsuspec4ng consumers. This increases the likelihood of chargebacks, and their associated

processing fees. So while digitaliza4on has increased the revenue poten4al it also asks that publishers take a more ac4ve role in how their content is sold and distributed.

Small developers are especially at risk as they o^en do not have the resources to fight back. In one instance, indie game maker 4nyBuild saw its “shop collapse when [they] started to get hit with chargebacks.” The developer used its store to provide fans with 1

discounts and game key giveaways. But a growing number of chargebacks soon overwhelmed 4nyBuild’s opera4onal resources and it was forced to shut down its store.

This new type of piracy has emerged as an unfortunate by-product of the changing mone4za4on models in games. Previously, publishers simply lost revenue from a pirated boxed game. Now, many developers prefer piracy over credit card fraud so they don’t end up with nega4ve revenue. Game makers, in fact, prefer losing sales over losing the ability to successfully complete transac4ons. Defender’s Quest developer Lars Doucet pleaded

“G2A sold $450k worth of our game keys.” 4nyBuild. h;p://www.4nybuild.com/single-post/2017/04/28/1

G2A-sold-450k-worth-of-our-game-keys (accessed August 15, 2017).


On average, PC players in the U.S. wait 21 days a:er they decide they want content to buy it in order to take advantage of flash sales or bundle deals.


with fans to pirate his game over buying keys from gray-market resellers on his blog a^er he was inundated with fraudulent transac4ons. 2

This doesn’t just affect smaller developers — large publishers, too, are looking for ways to protect themselves. Ubiso^ put together a list of approved digital distributors to deter consumers from using gray-market resellers. Publisher advocacy against gray-market sites 3

helps themselves and consumers. Many players do not know if their keys are legi4mate or not, so if publishers deac4vate keys purchased by fraudsters, it punishes the unsuspec4ng players who bought them. By providing players with a safe and streamlined storefront, publishers can build their audience base, keep them engaged, and grow revenue — free from the cost of fraud.

“G2A, Piracy and the Four Currencies.” Lars Doucet. h;p://www.fortressofdoors.com/g2a-piracy-and-the-2

four-currencies (accessed August 15, 2017).

”List of Approved Digital Distributors.” Ubisoc. www.support.ubi.com/en-gb/Faqs/000023753/List-of-3

authorised-Retailers (accessed August 15, 2017).



PUBLISHERS CAN STOP FRAUD NO MATTER HOW THEY MONETIZE

Free-to-play games are more suscep=ble to gray-market resellers, but publishers don’t have to sacrifice protec=on in pursuit of this $80B market.

In 2017 free-to-play games earn four 6mes what all other games combined will make. The top five grossing games of 2017 are all free-to-play, including hits like League of Legends, Honour of Kings, Dungeon Fighter Online, Fantasy Westward Journey and CrossFire.

Revenue grows, even as the addressable market is showing signs of satura6on: from 2017 to 2020, free-to-play revenue is on track to increase by 47% with audience numbers expected to rise ‘only’ 14%. The legacy of this revenue model par6cularly in Asian markets means publishers have to adapt to free-to-play.

At the same 6me, the “games as a service” model is more prone to fraud. In fact, every transac6on presents an opportunity for both mone6za6on and fraud. And consumers who stock up on valuable items are at an even greater risk, because fraudsters can hack into their accounts and resell their items. To thwart this, publishers can safeguard their consumers and their revenue by crea6ng secure storefronts with in-game transac6on security such as two-factor authen?ca?on or login IP detec?on and verifica?on.


5%

14%82%Free-to-play-based gamesPremium-driven gamesSubscrip8on-based games

2017 digital game revenue


Premium and subscrip=on games are taking lessons from free-to-play, reaping the rewards of greater long-term revenue but also needing to protect themselves from greater fraud risk.

Many dedicated players on console and PC are s6ll willing to spend $60 on full-priced games. But publishers are also taking mone6za6on lessons from free-to-play PC and mobile 6tles in order to lengthen 6tle longevity. EA’s FIFA 17 has sold $411M in packs of Ul6mate Team cards since September 2016.

Premium games are also the most lucra6ve for gray market sellers and remain the easiest piece of digital content to sell on the gray market, as unredeemed keys are usually not 6ed to any account. Because the point-of-sale is the best place to detect and stop fraudulently-obtained premium game keys from cycling onto the gray market, publishers and storefronts must invest in detec6ng suspicious game key purchases.

Beyond free-to-play, subscrip6on-based games are also supplemen6ng monthly fees with op6onal add-ons or offering exclusive benefits with op6onal subscrip6ons. The Elder Scrolls Online, to name a popular example, has found a way to cater to every type of spender as it emulates the premium, subscrip6on and free-to-play models. Players must purchase the game upfront and then have the op6on to pay for a membership, which gives them free access to new content. But they also have the ability to purchase content à la carte if they don’t want to subscribe.

Because of these growing hybrid models, the industry is becoming increasingly suscep6ble to a variety of risks that touch all types of mone6za6on. This is not new. World of WarcraJ players have long been targets of those who aim to hijack accounts and trade away years’ worth of in-game items and currency. Players also purchase and sell gold on poten6ally unsafe gray-market sites. Publisher Blizzard worked to limit the appeal of the underground World of WarcraJ economy by introducing an official real-money element into the game. The WoW Token, introduced in 2015, can be used to pay for subscrip6on 6me and even other Blizzard games. Players can trade tokens with others, and buy new ones with real money or in-game gold. This lets cash-rich players subsidize the game for 6me-rich players without either group turning to third-party sites to buy or sell items, accounts, or in-game currency. What is new is the ability to effec6vely combat fraud.


In fact, every transac.on presents an opportunity for both mone.za.on and fraud.


PROTECTING CONSUMERS FROM THE RISE OF GRAY-MARKET RESELLERS

Online marketplaces where users can sell digital game keys at discounted prices are the result of both consumer demand for cheaper games and an over-supply of content. Many players are willing to hunt for deals while others find themselves with unwanted game keys a^er receiving them for free as gi^s, part of bundles, or rewards for crowdfunding.

Most popular PC/Mac storefronts for purchasing digital game content 4

Gray-market key-reselling sites such as Kinguin and G2A provide a seemingly beneficial arrangement for online sellers and buyers, but leave both vulnerable to fraud. Fraudsters can purchase keys using stolen credit cards and then offload them quickly for discount prices. By the 6me the credit card fraud is detected, the sellers have made their profits while game publishers are on the hook for lost revenue and chargeback fees.

As a way to combat these scams, game makers some6mes deac6vate illegi6mate keys. But consumers who bought them do not usually know they are part of a scam in the first place. This can cause a nega6ve backlash from a game’s fan base since the users may not know why their keys

Based on a September 2016 survey of gaming consumers in U.S., U.K., France, Germany, Italy, Spain, 4

Russian and Poland.


Steam

Amazon

Origin

BaGle.netGameStop

Microso^

Uplay

GOG

G2A

14%14%15%20%24%25%28%

44%

60%


were deac6vated and already spent the money. This situa6on can be par6cularly overwhelming for small game makers, especially if they do not have a large customer support staff or effec6ve PR team.

Fraudsters also take advantage of how much smaller publishers rely on word-of-mouth over paid marke6ng. Individuals claiming to be popular YouTubers or social media influencers can request review copies of games and may seem like an easy way to access poten6al players. However, companies without the bandwidth to inves6gate every media request may inadvertently give away keys that end up sold on gray-market sites.

Publishers are not the only ones at risk: hackers see opportunity in accounts with valuable in-game items. Consumers who spend 6me and money to obtain these items can be robbed while the perpetrators sell their goods on the gray market for a cash profit. This led Valve to implement new safeguards in its digital games storefront, Steam, to reduce account the^. A^er Steam introduced in-game item trading in 2011, account the^ rose 2,000%. And in 2015, Valve stated that roughly 77,000 accounts were stolen every month. While users can only trade on the Community Market for Steam credit, they are not restricted from selling goods and accounts on gray-market sites. 5

To combat this, Valve implemented trade restric6ons like a wai6ng period for players without mobile two-factor authen6ca6on enabled, or requiring a user to have a successful purchase of 30 days or older. Like Valve, game companies of all scales have tools at their disposal to improve 6

demand for legi6mate game content and protect their players.

Gray-market sites are not going away, so publishers need tools to keep them and their players safe from fraud.

So long as publishers distribute game keys, there will be a gray market. The safest place for game makers and players alike is the publisher’s own storefront. Players and game makers both get the most out of a seamless and secure online store that is connected to the game itself. This provides publishers greater pricing flexibility, and gives them the opportunity to bundle their content so they can combat lower prices on gray-market sites. Game makers are free to sell and distribute keys to Steam copies of their games without giving Valve a cut. The company has stated it will only crack

Eddie Makuch. “77,000 Steam Accounts Hacked Every Month, New Security Measures Deployed.” 5

Gamespot. h;ps://www.gamespot.com/ar4cles/77000-steam-accounts-hacked-every-month-new-securi/1100-6433003/ (accessed August 15, 2017).

“Security and Trading.” Valve. h;p://store.steampowered.com/news/19618/ (accessed August 15, 2017).6



down “in extreme cases like when a game has sold 100 units [on the Steam storefront], has mostly nega6ve reviews, but requests 500,000 Steam keys.” 7

Publishers must keep fraud in mind at every stage of development — even while implemen6ng their gameplay mechanics. What add-ons they produce and how they offer them to players can help enhance the gamer experience while also offering protec6on to both sides. For instance, League of Legends and Overwatch offer limited-6me content or rare items that only appear in random packs. These cosme6c items are not tradable, so hackers need to sell en6re accounts on the gray market to profit. Doing this is harder than simply selling or trading away a single in-game item. This gives developers the freedom to take a more hands-off approach to the gray market than Valve.

But the best way to keep consumers safe is offering a storefront, ecosystem and marketplace that provide players the best possible experience. Although the safest restric6ons can cause some fric6on between publishers and players, it is bener for both in the long run. Making it harder to scam players means developers can put their money and efforts into fostering their player community instead of puong out the fires that come from account the^. A player’s sense of security posi6vely affects spending. The publishers who take the most control over their storefronts are in the best posi6on to succeed as players start to value virtual goods as much as real ones.

Eddie Makuch. “Valve engineer comments on restric4ons to high-volume Steam key requests.” Gamasutra. 7

h;p://gamasutra.com/view/news/304003/Valve_engineer_comments_on_restric4ons_to_highvolume_Steam_key_requests.php (accessed August 18, 2017).



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