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Like last week’s post on mobile revenue models, gaming isn’t a revenue model itself, but it does offer a number of interesting revenue models and is worth discussing in a post in this series. This is the last post in the revenue model series, which is based on the peer produced revenue model hackpad we created at the start of the series.

Gaming is interesting because there are a number of revenue options that game developers can choose from when thinking about how to make money from their game. The hackpad lists the following:

Gaming

Freemium – Free to play w/ virtual currency – ex. Zynga

Freemium – Free to play w/ pay restricted levels. ex LOTR online

Free to play w/ cosmetic items – e.g. Dota 2, Team Fortress 2 (differs from freemium in that there’s no premium)

Subscription- ex. World of Warcraft

Premium – ex. xBox games

DLC – (Downloadable Content) – ex. Call of Duty

Ad Supported – ex – addictinggames.co

transaction fee ex tap.me

betting – e.g., betatgames.com

Refer a friend opens new levels

Part of a teleco/OTT partnership

There is still a sizeable business in selling a version of the game to the game player. That’s how the console game (xbox, etc) market works. It is also how downloadable games market works. And there is a vibrant market in mobile games that you have to pay for to play.

But the games market has been moving to newer models in recent years. In app upgrades is certainly one of the more important revenue models. Many of the most popular mobile games are free to play but offer in app upgrades to get more game elements or simply to eliminate the ads. This is an example of the freemium business model in action.

Advertising is another important revenue model. For many web based games, advertising is the dominant form of revenue. On mobile, advertising supports the free offer and the elimination of advertising is often the value proposition for the in app upgrade.

The revenue model that is mostly (but not totally) unique to gaming is virtual goods. Virtual goods (like a tractor in Farmville) allow the player to have more capability in the game and they can be earned over time but are often purchased to enhance game play. This revenue model was inititally created in the asian gaming market but has been adopted by game developers all over the world.

I have been waiting for non gaming web and mobile services to adopt the virtual goods model but have yet to see anything that feels like it is working really well. Virtual goods is another excellent implementation of the freemium approach to business model.

There are game developers who use all of these models at the same time. They might sell their game on certain platforms, they might offer a free ad supported version on mobile with in app upgrades and virtual goods. In many ways, I think the gaming market is the most sophisticated about revenue models of all the sectors in web and mobile. That may stem from the fact that most games have a finite life and so the developer has to extract real revenue quickly to get a return on the investment they have made in developing the game. I think there is a lot that the rest of the web and mobile services world can learn from the gaming market.

A VC: MBA Mondays: Revenue Models – Gaming.

In between the miles of booths at the Consumer Electronics Show, we stopped at the Gaming Summit to listen to a Q&A between Rick Thompson, the gaming investor who co-founded Playdom, and Michael Vorhaus, the managing director of Frank N. Magid Associates research firm. Thompson has had great successes as a tech investor, most recently selling Playdom to Disney for up to $763.2 million in 2010.

He left Playdom in August, 2011. Since that time, Thompson has funded the next generation of game companies, including mobile-gaming firm Funzio, which Gree bought last year for $210 million. He has also invested in Wild Needle (acquired by Zynga for $3.8 million), Idle Games, Red Robot Labs, Grand Cru, Rumble Entertainment, Project Slice, Fun+, Airy Labs, Noise Toys, Viki, Social Shield, Udemy, Triangulate, AdChina, and Iddiction. That probably makes him one of the most active investors in games to date. He serves on the advisory board and is a general partner of Signia Venture Partners.

mobstersIn his interview with Vorhaus, Thompson wasn’t shy. He said that Mark Pincus, the chief executive of Zynga, should give up his supervoting rights that give him control of the social-gaming company. If Pincus does so, said Thompson, Zynga’s stock price would double overnight. Thompson has had the luck of being at the right place at the right time. At Playdom, his team built Mobsters with six people in a week. Within a month, the game was generating $4 million a month.

Here’s an edited transcript of the interview between Vorhaus and Thompson.

Mike Vorhaus: Rick has been spectacularly successful, the founder of many companies with total exits well in excess of $5 billion. Flycast a lot of us remember from the 2000 period, $2 billion dollars there. One of the earliest engineers at Octel, a $2 billion dollar exit. Playdom, which we all know about. Adify, which some of you know about, a statistical ad network. Funzio is Rick’s most recent well-acknowledged success.

I will tell you that Rick does find time for other hobbies. Sometimes for a stand-up paddle board, which reflects the excellent shape Rick is in. He’s a remarkable poker player. Do not play poker against Rick Thompson. So, Rick, how the hell did you get into this whole world? How does a University of California Santa Cruz guy become the founder and entrepreneur of $5 billion worth of companies?

Rick Thompson: How did I get into investing? I remember my first investment. I was 10-years-old. Space was a new thing, the new frontier. I invested in a company called Rocket Research. I saw it double in the course of about six months, and I was hooked.

funzioI’ve always had an interest in the markets and the idea of investing. To me, it has some of the same properties of gambling if you will. Making smart bets. But I didn’t get into investing in private companies until I was an early employee at a successful startup. Even though I was employee number three, I didn’t get a lot of options. I started buying options from departing employees and ended up doing fairly well acquiring secondary shares. Obviously, I didn’t have a lot of capital to work with.

My career path was as an entrepreneur. I identified a new platform — a growing market — online advertising, in 1995. Started a company there. Had an exit and had some capital to work with. I started doing some social investing, I would say, investing alongside some friends angel-style. But I still considered myself an entrepreneur. I started up another company, Adify, in 2005. It was at that point I realized that I liked the early-stage startup process. If I spent my time around fundraising and investing, I could also bring capital to the table. Adify was an instance where it was self-financed by the founders. We got follow-on financing.

As a man approaching the middle 50s with a four-year vest, I wasn’t going to get that many new startup opportunities if I did it serially. I started working with really good teams, investing in them. Sometimes bringing the ideas, sometimes investing in their ideas. Helping with capital formation as a founder but not having an investing schedule. That led to a model that we’re now calling the founder-investor model, where we’ll take oftentimes a percentage of the common, provide some debt financing to the company, and be part of that early stage.

Vorhaus: Founder-funder, I’ve heard you say.

Thompson: Yeah. We’re struggling a bit with the name, but we’ve actually settled on founder-investor.

Vorhaus: Are you a super angel?

Thompson: No, not a super angel. Super angels are super because they do lots of deals — very high velocity — putting in fairly small check sizes. $100,000 to $250,000 dollars in maybe 50 or 60 companies a year.

Vorhaus: Why games? Adify was an ad network. Flycast was advertising infrastructure. But you’ve been in quite a few game companies – six or seven in your portfolio.

Thompson: I didn’t intentionally start out as a games investor. I found myself as one. I invested in a company that was doing applications on the Facebook platform. It was a young, pragmatic team. We looked around and saw what was working. It was pretty clear that there was a big opportunity in games. We had 200 million free users. They wanted games.

We spent one week building a game called Mobsters with six people. We were earning $4 million a month within a week of launch. I found myself in the games business. I gained some insights. My background was online advertising, so I understood customer acquisition, which was a big advantage on Facebook in 2008. As a founder-investor, I didn’t have an investing schedule. I was chairman of the company, but I was also free to invest in other gaming companies.

Vorhaus: Are you a gamer at all? Do you play any games yourself?

Thompson: I play chess. I play poker. My partner Dan Fiden taught me how to play craps last night. I like board games a lot.

How Rick Thompson became the über investor for gaming (interview) | GamesBeat.