Analysis of Electronic Payment Systems for Network Gaming

1. Analysis of Electronic Payment Systems for Network Gaming Thesis written at Sulake Corporation in Helsinki Author: Toni Saikkonen Supervisor: Prof. Heikki Hämmäinen Instructors: FM Hanna Rajatora, BBA Marko Orenius Presented 18.10.2005 at TKK Toni Saikkonen - Analysis of Electronic Payment Systems for Network Gaming

2. Agenda • Background, Research Problem and Methods • History of Electronic Payments and Payment Cultures • Electronic Payment Architectures and Roles in Payment Business • A Framework for Evaluating Payment Systems • Conclusions, Results and Future Considerations • Questions Toni Saikkonen - Analysis of Electronic Payment Systems for Network Gaming

3. Background, Research Problem and Methods Toni Saikkonen - Analysis of Electronic Payment Systems for Network Gaming

4. Background • Electronic payment systems are required to make the digital content business profitable for content providers. • A single transaction is usually no more than 10 Euros. These small value transactions are commonly referred to as “micro payments” (under 10EUR). • This is a problematic aspect because the share from actual payment that goes to parties other than the digital content provider itself can be enormous. • That is why these digital content providers are constantly seeking cost-effective solutions for timely and low-risk processing of high-volume, time-sensitive transactions. Toni Saikkonen - Analysis of Electronic Payment Systems for Network Gaming

5. Research Problem • The market potential of highly profitable network games with thousands of simultaneous users is tremendous provided the total costs of electronic transactions can be lowered. • The research problem investigated here revolves around an analysis of different electronic payment methods used in network gaming to better understand the cost structures, pricing principles, buying behaviors and their inter-relation to the relevant cultural context. • It is intended that this analysis will provide a good ground theory and strategic framework for improving payment systems in network gaming. Toni Saikkonen - Analysis of Electronic Payment Systems for Network Gaming

6. Research Methods • This study is conducted primarily through analyzing an existing business case, namely, the Habbo Hotel -network game. • The game is analyzed first by comparing some Habbo Hotels in a country specific context and then introducing a new payment system for a specific country. • Materials for the case study are collected from expert interviews and actual statistics available which contain information about payment culture, payment architectures, cost structures, pricing models, legal issues and other restrictions. • Applied background theory is collected from literature, newspapers, Internet and other available sources. Toni Saikkonen - Analysis of Electronic Payment Systems for Network Gaming

7. History of Electronic Payments and Payment Cultures Toni Saikkonen - Analysis of Electronic Payment Systems for Network Gaming

8. Brief History of Electronic Payments • The shift from physical to virtual payments has brought enormous benefits to consumers and merchants. • This has placed extra pressure on payment service providers, including banks, card companies, and mobile operators, to provide robust security and interoperability. • During the last 30 years electronic payment systems have evolved in many directions. • The resulting variety and complexity of the systems has turned out to be one of the obstacles for broad acceptance of electronic payment. • Solely for the Internet, more than 100 payment methods are available, some of which are still being used commercially. • The advent of mobile payments has added another layer of complexity through the use of constrained devices with different capabilities and network limitations. • History shows how problematic the concept of high volume electronic micro payments can be. Toni Saikkonen - Analysis of Electronic Payment Systems for Network Gaming

9. Payment Cultures • Countries can be divided to “giro countries”, “cheque countries” and “cash countries”. • The use of the different instruments varies substantially from country to country. • The overall preferred payment instrument of choice, mainly for international purchases, is the credit card. • Credit transfers (giro), payment cards and cheques are the most important payment instruments for retail payments in the EU. • Direct debit contracts are very popular in many countries when buying continuous services (subcribtion based). • In 10 years, Payment Cards has gone from being one of the least used to being the most widely used form of payment. (substitute to cash for lower value everyday payments.) • When examining the possibilities for Internet payments, we have to deal with a large number of different approaches in each country and between the countries. Toni Saikkonen - Analysis of Electronic Payment Systems for Network Gaming

10. Payment Cultures - Examples • Cashless transactions • Debit Card vs. Other Cards • Prepay vs. Postpay in mobile payments Toni Saikkonen - Analysis of Electronic Payment Systems for Network Gaming

11. Electronic Payment Architectures and Roles in Payment Business Toni Saikkonen - Analysis of Electronic Payment Systems for Network Gaming

12. Roles in Payment Business • Different Roles can be identified: • Consumer • Content or Service Provider • Merchant • Payment System provider • Acquirer • Issuer • Infrastructure Provider • Support / Service Provider • These 8 most common roles identify how the system works and how money amongst value network parties is divided Toni Saikkonen - Analysis of Electronic Payment Systems for Network Gaming

13. Electronic Payment Architectures • Telecom Payments (SMS/IVR) • SMS Transaction cost; micro level 50%-75%, macro level 30%-50% • IVR Transaction cost; 25%-50% • Tight to usage volumes and price point (fixed and variable part) • Credit Card Online Payments • Transaction costs tight to to usage volumes (fixed and variable part) • Typical online payment transaction cost; 0,50EUR + 3%-5% of purchase amount • one-time micro payments problematic • Stored Value Online Payments • transaction cost (typic. 5%- 30%) based on provider’s transaction costs sources; infrastructure, billing, marketing, maintenance, development and other external transaction costs. Toni Saikkonen - Analysis of Electronic Payment Systems for Network Gaming

14. Case Study – Habbo Hotel A Framework for Evaluating Payment Systems Toni Saikkonen - Analysis of Electronic Payment Systems for Network Gaming

15. Case Study - Habbo Hotel • Habbo Hotel, a virtual multi user online community and game, is the main product of Sulake Corporation in 16 countries • The basic business model is to selling virtual goods (furniture, pets etc.) to users. • Customers can use various payment methods (SMS, IVR, Credit card etc.) to buy Habbo Credits (the currency of the Habbo Hotel). • Habbo Credits are sold in bundles to lower transactions costs per Habbo Credit. • GOAL: A Framework for Evaluating Payment Systems and Finding Optimal Payment Systems for Habbo Hotels Toni Saikkonen - Analysis of Electronic Payment Systems for Network Gaming

16. Payment System Evaluation Framework • Payment System Evaluation Framework can be used to: • Identify weaknesses of current payment systems per method and per system. • Tool to support strategy/priority making per system and with within all systems • Measure effect of changes in payment methods and systems • Finding optimal payment system for every Habbo Hotel • Input values for a single payment method evaluation (criteria) • Target group coverage percentage • Revenue share percentage • Response time value • Usability value • Uniqueness percentage • Risk percentage • Output values for a single payment method evaluation • “Primary Usage Likelihood Percentage” • “Method Viability Score” Toni Saikkonen - Analysis of Electronic Payment Systems for Network Gaming

17. Payment System Evaluation Framework (2) • “Primary Usage Likelihood Percentage” for a payment SYSTEM tells how many methods a single user on average can and will use from available methods. • Method Viability Score for payment SYSTEM tells how good the whole system is for generating profit to a company. • In order to support multiple user buying behaviors we need micro and macro level payment methods in both online and offline environment. This is why SYSTEM’s “Usage Likelihood” can and should be over 100% • To have this mix of methods we need for example: • Micro level telecom payments (micro = below $10/$5) • This type of payment methods generates usage VOLUME • Macro level online payments (macro = above $10) • This type of payment methods generate good PROFIT • Micro/Macro level offline payments • This type of payment methods have access to users ”pocket money” e.g. Cash Toni Saikkonen - Analysis of Electronic Payment Systems for Network Gaming

18. Payment System Evaluation Framework - Example • Comparison table of systems A, B and A+B that contains methods (A1,A2,A3,B1,B2 and B3) • Example output values of systems A, B and A+B in XY-chart Toni Saikkonen - Analysis of Electronic Payment Systems for Network Gaming

19. Conclusions, Results and Future Considerations Toni Saikkonen - Analysis of Electronic Payment Systems for Network Gaming

20. Conclusions and Results • Internet purchase behavior is a mix of existing purchase behavior, set by surrounding culture, and a more global Internet purchase behavior, established by other cultures. • The roles in different payment method architectures are fairly similar throughout the global scale and are currently quite stabile in nature. • It is hard to find alternative architectures or bypass roles to have easy cost savings on transaction costs. • In Network gaming, users normally do not want to be tied to one game for a long period of time which is why a transaction based model functions best here. Subscription only to support business. • When there are several competing methods for buying single product or service over the internet, the purchase is made based on method’s availability to user, usability and response time. Toni Saikkonen - Analysis of Electronic Payment Systems for Network Gaming

21. Conclusions and Results (2) • The payment system evaluation framework may be used for planning and evaluating payment systems for transaction based online gaming and other similar services. The framework illustrates how viable the system is not only from a user’s point of view but also from a merchant’s point of view. • The near future of electronic payment for network gaming systems will still be divided to subscription based and transaction based models in both micro and macro level. These models are more frequently being divided into 3 categories: Telecom payments, online payments and offline payments, where Offline methods are much more used than they currently are. • To define the future trend for payment systems in network gaming and similar services, one may see that having different viable options for payments to cover the real target group’s needs is a key future success factor. Toni Saikkonen - Analysis of Electronic Payment Systems for Network Gaming

22. Further Studies • The primary subject for future study in this area is to find a model illustrating how the impact of pricing affects a payment system’s ability to generate revenue. • It would also be useful to study more deeply how the subscription based model differs from the transaction based model, advantages and disadvantages of both methods, where they work better and possible options to combine them successfully. • Finally, analyzing and uncovering how limiting telecommunication billing for this target group effects to actual revenue holds intriguing potential. Toni Saikkonen - Analysis of Electronic Payment Systems for Network Gaming

23. Thank You! Toni Saikkonen toni.saikkonen@hut.fi Toni Saikkonen - Analysis of Electronic Payment Systems for Network Gaming