Phish are a peculiar band. Their music is hard to define. They are a band that many fans think are best experienced live rather than via a recording. They have played together for so long, improvising, experimenting and performing, that no two gigs are alike. They’ve been going for thirty years yet only one of their albums has been in the top ten Billboard rankings. They’ve released over 800 songs and none of them have been radio hits. They have only made one music video in all that time.1
Yet, between 2008 and 2012, Phish made over $120 million from touring. In 2012 they grossed $28.1 million, more than Radiohead, Metallica or a resurgent Neil Diamond.2 Because Phish gigs are so heavily improvised, fans fear missing out by not attending. The fans who do go trade recordings of the live concerts with each other, a practice which the band encourages. John Ellis first saw them play in Toronto in 2002, since when he has been to more than fifty gigs.* I asked Ellis how much money he had spent on Phish.
‘At least $1,000 on the gigs. More when you add petrol and motels and food. Hundreds on CDs. Then T-shirts, books and so on. Perhaps $2,000.’
Ellis is one of Phish’s superfans.
*
Sharna Jackson is a thirty-year-old mother of one. By day she is employed at the Tate Gallery, trying to interest children in the art and artists housed in her workplace. By night she explores a gothic fantasy of Victorian London in an online game called Echo Bazaar.3
The brainchild of Alexis Kennedy, chief narrative officer of Failbetter Games, Echo Bazaar is part familiar, part intoxicatingly different. Described as ‘a free browser game that only takes a few minutes a day to play’, Echo Bazaar introduces players to a world of peasoupers and squidmen, detectives and nightmares through a series of short, interactive vignettes.
Jackson has spent over £250 ($400) on Echo Bazaar. ‘I love the game. I love the content and I love how the writers have evoked such an intriguing world. Echo Bazaar is brilliant because it is free. You can play it even if you have no money. You get a limited number of actions every day for free, and when I first played, I blew through all of my actions really fast. I spent money so I could get more access to content. I’m still spending.’
Whether she’s at work or at home, Jackson always has a browser window open, so she can see how many actions she has available to her. Her office computer is littered with giant Post-it notes showing her progress towards different goals. She is a superfan of Echo Bazaar.
*
We have met superfans throughout this book and will meet more. The players of Clash of Clans who spend thousands of dollars on the game. The supporters of Victoria Vox who paid $1,500 to hear her play a gig in their home. The people who pay $275 to attend a baking course in Vermont or £4,000 ($6,000) for a four-day residential cookery masterclass with Michelin-starred chef Raymond Blanc at Le Manoir aux Quatre Saisons.
Kevin Kelly was one of the first proponents of the idea of relationships with true fans, rather than with the mass market, as being the future route through which independent content creators would be able to fund their existence. Kelly, the founding executive editor of Wired, set out his views on how artists would be able to survive in an online world in a 2008 blog post entitled ‘1,000 True Fans’.4 Given that the long tail has increased both competition and downward pressure on prices, Kelly asks the question: ‘Other than aim for a blockbuster hit, what can an artist do to escape the long tail?’
Kelly answers his own question by talking about what he terms ‘True Fans’:
A creator, such as an artist, musician, photographer, craftsperson, performer, animator, designer, videomaker, or author – in other words, anyone producing works of art – needs to acquire only 1,000 True Fans to make a living.
A True Fan is defined as someone who will purchase anything and everything you produce. They will drive 200 miles to see you sing. They will buy the super deluxe re-issued hi-res box set of your stuff even though they have the low-res version. They have a Google Alert set for your name. They bookmark the eBay page where your out-of-print editions show up. They come to your openings. They have you sign their copies. They buy the t-shirt, and the mug, and the hat. They can’t wait till you issue your next work. They are true fans.
Kelly’s blog post is, inevitably, short and simplistic. He has been criticized for not understanding the true costs of making content. His contention that $100,000 is enough for a creator to live on has been criticized for ignoring the reality that many creative endeavours combine multiple talented people (even though his blog post says that if you have more than one creator, then you need to multiply the number of True Fans you need by the number of creators involved). Yet his idea – that the future of creative endeavour is more about making a connection with a limited number of committed fans, rather than relying on getting a lucky break – is more true than ever before.
The concept of the True Fan has evolved since Kelly’s original post. The technology has evolved too. The web has made it cheaper than ever before to connect with fans while production costs continue to fall. Yet the key transition is less about technology and more about how artists have chosen to build their audiences and sell to their fans. As we’ve already seen, it has become incredibly cheap to distribute content to fans. The iPhone, the web, the Kindle, the music streaming service and many other technologies have made it ever cheaper to reach a wide audience. (It has also made it much harder for an individual piece of new content to be found.) It is now also easier than ever to find fans who love what you do and who are willing to pay lots of money for things that they value. My primary criticism of Kelly’s thesis is that he was not thinking big enough when judging how much a fan would pay for products. His fans are not superfans. True Fans might spend an average of $100 a year, in Kelly’s theoretical example, but we know that averages are misleading. Businesses and creatives who struggle to embrace Kelly’s ideals are fixated in old-world thinking where an average is the price that most people paid. The web has freed us from the tyranny of the physical by allowing us to experiment with much more variable forms of funding. The truth is that the amount people want to spend is variable. Very, very variable.
*
Ian and David Marsh are twin brothers from San Diego. Their company, NimbleBit, makes games for mobile platforms, particularly the iPhone. Ian is the main programmer while David is the artist. ‘It really worked out well that one of us got the right brain and one of us got the left brain,’ says Ian.5
Initially, they charged up front for games like Scoops, a simple arcade game where players tried to build the tallest dessert they could by tilting their phones to catch falling scoops of ice cream. The game sold well, but NimbleBit decided to experiment with a different price point. They dropped the price to free, and made it possible for players to spend money to change the artwork in the background. Themes include monsters, cupcakes, burgers and hats, each of which could be unlocked for 99 cents. The game ended up making around the same amount of revenue as before but with a much larger player base.6 The Marsh brothers decided that if they had the choice between a game that was profitable with a small user base or a game that was profitable with a large user base, they would rather go free and have more players. In September 2010, NimbleBit announced that all their games in the future would be free.7
This decision was to stand them in very good stead when they launched a game that they had designed to be free from the ground up, Pocket Frogs. In Pocket Frogs, players collect, breed and sell cute little frogs, each of which have a different combination of colours and patterns. The game is free to download and can be played without ever spending a penny. Players can, however, choose to spend money on in-app purchases using Apple’s in-game store. As Ian explains, ‘All of the content in the game can be accessed whether you use the in-app purchase or not. Stamps can be earned in the game (or purchased), which instantly deliver frogs and other items you order in game or find in the pond. Potions can be earned in the game (or purchased), which instantly mature a frog.’
The game proved a very popular title. It launched in September 2010 and shot straight to number 3 in the Apple Top Free charts. By 4 January 2011, the game had been downloaded 4 million times and at its most popular 350,000 people played it every day.8 Pocket Frogs remained in the top hundred grossing games on the App Store for a year. (If that doesn’t sound impressive, remember that when Pocket Frogs was released, there were 46,466 games available in the App Store. By the end of 2012, that number had grown to 128,125.)9 NimbleBit had a hit on their hands.
What is even more impressive than the downloads was the revenue. NimbleBit is a private American company and doesn’t release full financial data. The brothers have nevertheless been open with their data to help people understand the benefits of the free-to-play model. They provided a breakdown of the split of the revenue from their different in-app purchases. Remember that apart from a limited amount of advertising, this is the only revenue that NimbleBit was making from Pocket Frogs, a game they were giving away for free to millions of users.
To make it easier for consumers to make a choice of how much IAP they wanted to buy, Pocket Frogs had only three price points. For 99 cents, you could buy a pack of ten potions. For $4.99, you could buy a pack of 100 potions. For $29.99, you would get 1,000 potions. (The same pricing applied to buying the stamps that accelerate the speed at which products bought from the virtual store were delivered. A virtual DHL, if you will.)
People spending $29.99 on an iPhone app? Really? Yes, really. Fifty per cent of purchases were of the 99-cent pack. The $4.99 pack accounted for 42 per cent. The expensive $29.99 pack represented only 8 per cent of transactions. It might seem as if 8 per cent was hardly worth the bother, until you look at the breakdown by revenue, rather than by volume, shown in Figure 2.
Figure 2: NimbleBit’s Pocket Frogs revenue breakdown
As Figure 2 shows, the story is very different when the source of revenue is analysed. NimbleBit’s 99-cent purchases accounted for just 9 per cent of its revenue from Pocket Frogs. The $4.99 pack stayed steady at 42 per cent, but the expensive package that attracted only 8 per cent of purchasers showed its true value: it made up 49 per cent of NimbleBit’s revenue from the game.10
At the time NimbleBit launched Pocket Frogs, the general strategy with a free iOS app was to use it to drive sales of a premium version, the so-called Lite + Premium strategy. The Lite game would offer stripped-down elements of the full game, or be heavily filled with ads. The Premium offering would be more full featured, but given downwards pressure on the amount that consumers were prepared to pay for apps, was typically priced at 99 cents. If NimbleBit had followed the traditional strategy, they would have left 91 per cent of the revenue that they made from Pocket Frogs on the table.
If a superfan of Pocket Frogs spends $29.99 (and many spend much, much more), NimbleBit is making nearly half its revenue from the 8 per cent of its audience who are superfans, the audience who love what they do and even ask the developers to build more things for them to buy.
That 8 per cent is not 8 per cent of the audience. It is 8 per cent of the paying audience. Pocket Frogs is a free game. Only about 4 per cent of users convert to spending any money at all.11 So half of NimbleBit’s revenue comes from just 8 per cent of 4 per cent of their audience, or slightly over 0.3 per cent of the people who are playing their game. In the first week, half a million people downloaded that game, perhaps 20,000 of them spent money and half the income came from just 1,600 players. Which is not far off Kelly’s 1,000 True Fans. I estimate that the game made at least $3 million in the first year, all through harnessing superfans.
You may think this was just a fluke, that NimbleBit got lucky with Pocket Frogs. If so, they got lucky again in July 2011, when they launched another freemium game, Tiny Tower, in which players strove to build a thriving tower for their little computer people, Bitizens, to live and work in. Again it was entirely free to play, with the ability to pay for virtual currency. Players spent in a similar pattern. The 99-cent package was the most popular transaction, making up 45 per cent of all purchases, but less than 11 per cent of revenue. That low price package made up nearly half the volume, but represented a small fraction of the total income.12 The most expensive IAP, priced at $29.99, made up only 4 per cent of transactions but nearly a third of revenue.
Perhaps this outcome is unique to NimbleBit? Not a bit of it. We’ve already seen that, for Bigpoint, 80 per cent of their 2009 revenue came from just 23,000 players. Hundreds of players were prepared to spend up to €1,000 ($1,300) on a single virtual good, the Tenth Drone, in DarkOrbit. Clash of Clans has superfans who have spent over $5,000. I have clients where individual customers have spent over €10,000 on a single game.
Simon Read is the developer of New Star Soccer, a game that took the iPhone charts by storm in 2012. Read released the game as a free title in March 2012. In June it was the top-grossing game in the App Store. The game was sufficiently compelling that an unusually high number of customers converted to paying users, around 39 per cent. Read sells packs of in-game currency that players can use to accelerate their progress through the game. At one point, the total sales of the six cheapest in-app purchases, priced at between 69p and £5.99, had generated around $50,000 in revenue. The £9.99 package had generated over triple that amount, $160,000, around 15 per cent of Read’s total revenue, despite only being 1.7 per cent of the total purchases. At its peak, New Star Soccer was bringing in $7,000 per day.
Across the games world, the understanding that going digital enables you to offer your customers the ability to spend as much or as little as they want is not only good for customers, allowing them to choose the price points that they are comfortable with, it is good for game makers too. They are not replacing physical dollars with digital dimes. They are replacing physical dollars with nothing for some digital customers, digital dimes for others, digital dollars for yet others and digital tens or hundreds or thousands of dollars for customers who love what they do. They are making more money than they could have made in a pre-digital age, and we are seeing the pattern repeated again and again.
Critics of the free-to-play business model in games, looking at some of these very high spenders, leap to the conclusion that these purchases must be made by mistake. They claim they are made by children who do not know, or perhaps care, what they are doing, or by grown-ups who are manipulated by misleading messages in the game into buying something that they had no intention to buy.13 There is no doubt that children can buy IAPs by mistake if their device is not set up correctly. The tabloid press loves to leap on a story like this, and there is still work to be done to ensure that people cannot buy virtual goods by mistake.*
Yet the criticism does not stack up. These games are seeing very high repeat usage. They are seeing the same users buying virtual currency and goods in their games over a long period of time, implying that players do understand what they are doing. As Torsten Reil, CEO of NaturalMotion, the publisher of hit iOS game CSR Racing, says, ‘Free-to-play games are not about exploiting poor impulse control or being misleading, because then you get buyer’s remorse. People with buyer’s remorse won’t pay again.’
The pattern of seeing substantial revenue from a limited number of players is not exclusive to the games industry. Trent Reznor made $750,000 in the first week of sales of Ghosts I–IV from the 2,500 people who bought the Ultra-Deluxe Edition. His total revenue that week was $1.6 million, meaning that the superfans represented 47 per cent of his revenue, but only a fraction of the number of people who bought the $75 Deluxe Edition, the $10 CD or the $5 digital download. Victoria Vox made over a third of her pre-order money from the five fans who wanted her to play in their house. App Cubby makes more money by giving its app away for free and allowing some users to spend ten times the average purchase price than it did when every customer had to pay.
In a world before it was possible for companies or creators to offer a wide range of price points to allow fans to spend as much or as little as they wish, they had to find a price that would work, on average, for the most number of people while still delivering a decent profit. They tried to squeeze prices down while maintaining their profit margins. They had to find the single price that would balance what the market would bear with the economies of scale they could achieve in production to deliver the highest profit. Now companies and creators are instead having to think about how they can allow users to experience what they have for free, while letting their biggest fans spend lots of money on things they value. Where is the best place to see this in action? In the world of crowdfunding.