The world of online gaming has come a long way since it’s early inception.  We’ve all read articles in the New York Times, Cnet, and VentureBeat, but when Dan Miller, a Senior Economist on the Joint Economic Committee in the U.S. Congress writes up an article regarding free-to-play vs. subscription based fees, I for one sit up and listen.

Dan wrote an outstanding take on RMT (Real Money Transactions) vs. Subscription models last week.  Thankfully, this guy (probably) spends more time reading Law papers than most of us, and happened upon a paper written by Richard S. Eisert and S. Gregory Boyd titled “Virtual Property – Business Models and Pitfalls”.  It originally appeared in the September 2008 issue of The Metropolitan Corporate Counsel.  Both Eisert and Boyd are attorneys at Davis & Gilbert LLP.

Miller is quick to point out that a large majority of the paper is centered around (virtual) property rights issues, Eisert and Boyd make a few statements that are HIGHLY note worthy in the free-to-play/microtransaction industry:

“… traditional subscription models and even advertising are relatively blunt instruments for monetizing online worlds. Both of these methods tend to assign the same value to every customer. A subscription charges a customer a monthly or annual cost and advertising pays per user or per view at a set cost. But, people do not value goods this way. Each person places a different value or ‘willingness to pay’ to be a part of an online community. RMT helps companies extract that value.” (emphasis added)

They then continue on to explain the benefits of RMT if used correctly:

“… RMT allows game companies to satisfy that need and extract appropriate value as well by ‘fine tuning’ the price point so that each user pays the price the service is worth to him individually.”

Doing what he does best, Miller went on to break it down in everyday terms that not just an economist can understand.  He’s prepared two graphs for us illustrating a player’s willingness to pay.  Based on a flat rate subscription plan, this graph makes it clear to see that subscription based plans are losing money, quite literally, on both ends.  Miller charts out two unique types of players: Those that simply find the game (subscription) far too costly, and those that are willing to pay even more to enjoy their gaming experience.

This second graph shows the same willingness to pay curve, but cuts the flat rate out revealing an increasing scale of willingness to play AND revenue across the board.

Dan does carry on in the comments section of this article concluding that the graphs are meant only as a picture perfect world hypothetical situation.  It’s a duly noted fact that the willingness to pay curve will actually have a much steeper curve at the left side, as there is bound to be a large percentage of players that are simply unwilling to pay a cent, and therefore using up resources without paying for them, making those that do pay cover the costs for all.

In pure economic theory, these graphs make a clear cut case for free-to-play games supported by microtransactions.  Granted, you’ve got to take into account 1001 variables, but at it’s heart, I believe Miller’s principles to be sound and make a solid case for microtransaction based gaming.