How do big budget Free MMOs become profitable?

How does a free game make money? Sounds like a dumb question, but it deserves an answer because it leads to a lot more interesting questions down the line.

A free game makes money by selling products and attracting advertisers, whereby the former generates a lot more revenue than the latter. If only because in-game advertisement is difficult to cram in a fantasy setting ("ye olde coca cola castle"?)and it has a bad name.

Free MMOs can sell all kinds of content, but it can be divided in three categories:

1. vanity items (makes you stand out in a crowd, but serves no other purposes)
2. useful items (exp boosts for grind MMOs, more inventory space, run speed buffs, stat increases... it's a broad range of items that go from "kinda useful" to "game-breaking" with shades of grey in between.
3. actual content (quest packs, access to extra zones, new characters, instances)

All three of these categories are worth delving into. In the coming weeks I will write short articles about: pay to win, freemium, how much is your entertainment time worth? and exactly how terrible is it that there are cash shop lotteries? I might add more subjects to this list as we go.

In this article I would like to talk a bit about an interview with APB: Reloaded on Gamesindustry.biz (Massively's article about that article (it's articles, all the way down) can be found here).

It's this specific quote that interests me: "Free-to-play games can hit their peak revenues 1000 days from launch," Bjorn Book Larsson explained. "Which puts us at the beginning of year four. That's stunning when you work for a traditional publisher. This model is built on creating long-term sustaining gameplay, which is not an easy task."

How much money are we talking about anyway? Most MMO publishers won't be caught detailing exactly how much money they're making, for understandable reasons, but a quick Google search comes up with a $ 1.6-$2.0 billion figure for the total MMO market value. While a different source  gives a ballpark estimate of the US+UK+Germany+France+Belgium+The Netherlands of 2,980,000,000 (ie: almost 3 billion). The problem with these figures is that they are [1] estimates, [2] do not take into account the non-Western market and [3] the actual reports are locked for people not willing to pony up cash (me).

So lets ignore the numbers, but lets assume we're talking at least 7 digits, here. Numbers so big we're talking about investors, year reports and people in suits. It's not very indie, at any rate.  How can you even get investors interested when you have to tell them that everyone can play the game for free. No simple "x customers=x money" equations, but one gamer might spend 50$ while another spends 0$ and yet another is planning on spending 100$, but is first going to play the game for free for a year.

This brings me to the main point I want to make here: most big F2P titles started as P2P and most F2P titles are either small projects or imported from Asia (where the game economy functions very differently). It seems like the big projects got their investors by pitching a P2P game and after it failed to make a profit/attract enough customers they rebranded it as F2P to either recoup their losses or get a bigger profit margin going. When Lord of the Rings Online went F2P it had already received two expansions and roughly 14 big patches, would it have worked if it started out as a F2P game? I think it would have never been released that way. Sure they are now one of those F2P games I can recommend to anyone wanting "something like WoW, but free".

Is F2P a sustainable business model? There have been free games online for forever, but this is the first time big companies are heading in this direction. At the moment it appears to be very successful for a few of these games, while a few other P2P-->F2P titles have failed miserably (Chronicles of Spellborn, Fury,...).

One solution a lot of big companies are going for is "freemium", which I will discuss in more detail soon. What it boils down to is that you take one or more important parts of the game out of the free part of the game and sell it in the cash shop instead. I don't think it's very elegant, but it gets the job done and it opens up a lot of quality titles for us players. It seems to be the only way big budget Free MMOs can even exist today.

Discuss this article in the thread here: http://forums.penny-arcade.com/discussion/144525/the-free-mmo-ueberlist-exciting-news-and-dead-games-unrelated or leave a comment here.