Why 'freemium' is actually the best business model for video games

The "Freemium" model dominates mobile games. From Candy Crush Saga to Clash of Clans, "freemium" games and their in-app purchases account for about 70-80% of the $10 billion or more in iOS revenue each year.

But they aren't limited to mobile. Today, many of the most popular computer games are freemium games as well.

Such games have generated plenty of criticism for seemingly favoring money over skill, since players need to pay for in-game currency and special features. But game designer and former pro StarCraft player Sean Plott thinks it is actually the best business model for popular multiplayer games like League of Legends, Defense of the Ancients 2, and Hearthstone.

To Plott, it's about an alignment of goals.

The freemium model offers users the core product - the game - for free and then optionally charges them for premium content such as in-game currency, extra content, or customizations.

In multiplayer games, the goal is to create a game that brings players back for hundreds of hours of gameplay, says Plott. If developers don't have a strong monetary incentive, it's difficult for them to constantly improve the game experience. With freemium games, players are continuously spending money on the game, as opposed to paying once and forgetting about it. Developers are then incentivized to put that stream of revenue directly back into the game to improve it.

"If people are playing your game and there is something they are frustrated with, the developers can fix it and make the players happy, and the players will continue to stay on the product. If they don't, players leave," says Plott.

For example Plott offers up League of Legends. While League of Legends is 100% free to play, it generated more than $1 billion last year in revenue. It did so through its micropayments to buy champions (new characters) and skins (new color schemes or appearances of a champion). Any person can play League of Legends - and play it well - endlessly without spending a dime.

Here's what the League of Legends store looks like. The prices of items are marked in RP (Riot points):

And here's how much RP equates to real dollars:

Spending money just adds customization to the experience. It's a benefit that many players are more than willing to do. However, some players - as evidenced by this League of Legends subreddit - complain of spending more than $2,000 on the game over the course of several years.

A considerable portion of the profits from League of Legends micropayments go right back into the game. Riot is constantly updating the mechanics of the game to make them more balanced and fluid, redesigning the artwork and character designs so they look sharp, and adding content so the game stays fresh. All of that is given to players free. As Plott notes, that would be an impossible proposition for any gaming company that releases standalone games.

Plott is so convinced of the model that he thinks we could see traditional console games splitting their products between single-player games, which would cost a flat fee, and multiplayer games, which are free-to-play.

Freemium games have generated most of their criticism over the mobile gaming experience. Last year, South Park famously skewered the concept as a money grab that preys on addicts and leads to boring games. The singer of the Sex Pistols, John Lyndon, claimed last year that he spent over $15,000 on iPad apps.

In 2013, Apple settled a class-action lawsuit for parents who alleged that Apple didn't make it clear that free apps could charge money.

The "freemium" model has proven itself to be incredibly profitable. The question now is how game developers use it to grow without alienating a large share of the gaming community.