How Microtransactions Impact the Economics of Gaming

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Video games used to operate like big-budget films. The games underwent years of development, rigorous testing, and debugging before the final product was released.

Then, the gaming industry was revolutionized by the concept of online gaming console connectivity. That opened up the possibility of downloadable content (DLC), which proved instrumental in getting gamers to pay for products after they’d acquired a game.

DLC is part of gaming’s secondary market and was a precursor to what gamers know now as microtransactions. Both microtransactions and DLC are ways for gaming companies to generate revenue during play or after games are purchased.

This revenue is especially attractive when games are free to play.

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Key Takeaways

  • Microtransactions are financial transactions made electronically while playing a game.
  • They have become increasingly popular over time (and yet are controversial as well).
  • Microtransactions allow gamers and spectators to make in-game purchases of items such as currency and loot boxes, and to tip players.
  • Most console releases made money through sales of hard copies or digital versions of the game itself.
  • Newer platforms such as Fortnite generate revenue almost entirely from microtransactions.

What Is a Microtransaction?

A microtransaction relates to a business model whereby users can purchase virtual items during gameplay.

Microtransactions often appear in free-to-play games. While there is no cost to download such a game, there are costs to buy appealing online virtual products players feel they need.

Impact of Microtransactions

The video game industry is in a perpetual state of change, and microtransactions have had a significant impact on it.

Game developers have learned to take advantage of this new revenue source. It is estimated that only 5% to 20% of game communities make microtransactions and the amounts spent vary. However, microtransactions are important because the revenue generated is enormous for free-to-play games.

Executives at these game companies aim to monetize that part of the player base that is not yet making microtransactions to drive even greater revenue growth.

Companies That Benefit From Microtransactions

Total consumer spending on video games in 2021 was $60.4 billion, according to the Entertainment Software Association (ESA) and the NPD Group.

Riot Games

Riot Games, the company that owns and runs the online game League of Legends (LOL) has benefited tremendously from microtransactions. LOL is played by hundreds of millions of people worldwide, and it is completely free to download and play. Almost all of its revenue comes from in-game purchases, or microtransactions.

LOL allows for the purchase of Riot Points. This in-game currency is used to buy skins, which are different aesthetic looks for the characters. Riot Points can also be used to unlock different characters.

Often, such options can be unlocked simply by extended gameplay, but microtransactions offer players the opportunity to unlock them immediately.

Most gamers choose not to make use of microtransactions. The majority of microtransactions are made by just a small part of the game’s player base.

Epic Games

Epic Games’ release of Fortnite proved to be a huge success. Fortnite is a free-to-play game where a maximum of 100 players join a match and fight until the last person or squad remains.

Like LOL, it relies upon in-game purchases for skins and power-ups. Epic announced in May 2018 that it would provide $100 million in prize pool money for an upcoming season of eSports competitions.

Controversy

However, microtransactions aren’t popular with all players or players’ families because they’re seen as an intrusive and exploitative feature. In fact, in 2023, Epic Games finalized a settlement with the U.S. Federal Trade Commission (FTC) to pay customers $245 million for unwanted in-game purchases.

The global microtransactions market is expected to reach $76.66 billion in 2023 and $117.95 billion in 2027.

The Rise of eSports

Counter-Strike: Global Offensive (CS:GO) is a classic example of an eSports game that also featured microtransactions. It was released in 2012 and launched at $14.99, which disqualified it as free-to-play. But that was a small cost compared to the $50 to $70 price tag of most big games at the time.

High-budget counterparts such as Call of Duty and Halo 4 outpaced CS:GO, and its player base began to slide until the company introduced something that added a new aesthetic flair to the game.

CS:GO is a first-person shooter game that introduced skins for its guns. This resulted in a fresh economic dynamic. At the end of each game, players were awarded random crates of weapons that could only be opened with a key that cost $2.49.

Once the crates were opened, players got multiple random weapon skins or rare items.

Making this microtransaction part of the game led to an increase in popularity and reignited its reputation among fans. Tournaments have prize pools of these items.

Examples of In-Game Microtransactions

Microtransactions assist in integrating a real-world market with in-game economies.

Fortnite

For example, Fortnite has an in-game virtual currency called “v-bucks” that its players either earned through gameplay or purchased with cash or credit. V-bucks could then be used to purchase skins and to unlock hidden features within the game.

On top of that, Fortnite players could also purchase a “battle pass” to accumulate game awards and advance through the game’s tiers more quickly.

CS:GO

There is also a CS:GO community of professional players who make real money, receive items that are paid for with real currency, and win cash prizes.

The microtransaction-based approach to generating revenue has been at the forefront of the industry effort to make money off of video games.

Are Microtransactions Good for Gaming?

While microtransactions may be good for gaming companies due to the revenue they generate, many gamers don’t like them because they intrude on gameplay and/or cost a lot (which is especially annoying when games are purchased, not free). Some players also don’t like them because they lure young players to spend too much.

What’s the Difference Between DLC and Microtransactions?

DLC is dowloadable content, which is content that can be added to a game. This would be things like story expansions, new characters, maps, and new missions. Microtransactions can involve purchases of currencies and cosmetic items. Or purchases that unlock features that are already part of the game.

Why Are Loot Boxes High Revenue Microtransactions?

Loot boxes purchased via microtransactions provide players with random items in a box. Players are encouraged to continue purchasing loot boxes until they find the item that they want or need within one.

The Bottom Line

The use of microtransactions in the gaming and esports communities changed the way that game companies monetized games and generated revenues. While they can be controversial, they allow for greater flexibility and enjoyment for gamers and spectators alike plus added ways to interact with video games.

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