Aug. 19 (Bloomberg) -- Susan Choe, head of the online video-game startup Outspark Inc., figured she’d found the right strategy when a family of four spent $35,000 for virtual goods on her site.
“We actually called their bank to make sure they could afford it,” said Choe, 40, who serves as chief executive officer of the San Francisco company. “Apparently they can.”
Outspark offers free Internet games and then makes money by selling extras, such as $2 magic potions, $200 rings with special powers, and even $5 licenses that let players get married virtually (divorces are free). Several hundred families have now spent tens of thousands on the site, Outspark said.
The company is tapping into the so-called freemium model, where people play for free but shell out for premium features -- an approach that is spreading to the U.S. after taking off in Asia. Outspark is relying on a different tack than Zynga Game Network Inc., the maker of titles like “FarmVille” and “Mafia Wars,” by offering more involved games that coax individual users into paying bigger amounts.
The average paying Outspark customer spends about $55 a month, or as much as $400 during the life of a game. That compares with the $10 to $20 that paying customers typically spend monthly for a game like “FarmVille,” the most popular title on Facebook, said Atul Bagga, an analyst for ThinkEquity LLC in San Francisco.
Though most freemium players don’t spend a dime, the less than 5 percent of gamers who do buy items will generate revenue of $1.6 billion in the U.S. this year, said Justin Smith, founder of Inside Network, which tracks social games and virtual payments. That’s up 55 percent from last year.
“The virtual goods market will be a multibillion-dollar industry,” Smith said.
Outspark’s titles, such as “Fiesta” and “Fists of Fu,” rely on elaborate fantasy quests to keep players engaged. In “Fiesta,” archers, fighters, mages and clerics rely on weapons and magic to battle monsters and go on adventures. Customers tend to be more hard-core gamers than those who play most Facebook games, meaning they’re more likely to spend money enhancing their characters or improving the chance of advancing.
Outspark is competing for online gamers against larger companies, including makers of traditional video games. Electronic Arts Inc., the world’s second-largest game publisher, expanded into the market last year by buying Playfish Inc. for about $400 million. Last month, Walt Disney Co. agreed to buy Playdom Inc., another maker of online games, for $563.2 million.
Zynga, which is also based in San Francisco, leads the market for social-networking games. It may record more than $450 million in revenue this year selling virtual objects, ranging from tractors for “FarmVille” to machine guns for “Mafia Wars,” according to people familiar with the company.
Outspark is a fraction of that size: While the privately held company doesn’t disclose its finances, revenue is closer to the $10 million mark, Choe said. The company is almost profitable, she said.
Outspark also is grappling with the question of whether spending by some customers is excessive.
“We had this one family the other day -- they decided ‘Fiesta’ is the game for them, and they’ve been spending thousands of dollars a month,” Choe said. “I’m starting to wonder: Should we let them?”
Choe founded Outspark three years ago after stints with Yahoo! Inc. and NHN Corp., South Korea’s biggest Web search engine. She’s attracted more than $20 million from investors, such as Tencent Holdings Ltd., China’s biggest Internet company by market value. Backers also included Altos Ventures, Doll Capital Management and Syncom Venture Partners.
Choe is a woman in a male-dominated field, a role that isn’t new for her. Growing up in South Korea, she spent her time in the arcades of Seoul, challenging the boys at video games.
While about three-quarters of Outspark’s customers are men, she’s trying to broaden the audience with new titles, including a cooking game. Outspark plans to increase the total number of games it offers to eight.
The company currently has almost 7 million registered users, and hundreds of thousands of them spend money on virtual goods. It sells gift cards for virtual currency at Target Corp. and Best Buy Co. stores, among others.
“You have users who are very passionate about the games, who are willing to spend tons of money,” said ThinkEquity’s Bagga. Buying virtual items is a way for players to express themselves digitally, he said.
“My wife, she’ll go out and she’ll spend a couple thousand dollars buying a Coco Chanel bag -- for me this is completely useless,” Bagga said. “But this is her way of expressing herself, and it’s the same way for this generation. They are very comfortable expressing themselves in the virtual environment.”
While working for Yahoo in corporate development a decade ago, Choe saw smart people try and fail at starting new businesses because they had no way of generating revenue.
“The lesson learned there was if I was crazy enough to start a company, I would only start one that makes cash,” she said. Choe had the epiphany to start Outspark after a week of playing online games late into the night.
“When I found myself dying to go home so that I could jump on the computer and play, and then start whipping out credit cards at 2 a.m., that’s when I thought, ‘Wow,’” Choe said.
Outspark began in Choe’s house, with stacks of computer servers in her closet. Now her company has almost 50 employees and locations in San Francisco, China and South Korea. Choe also has forged a partnership with Shanda Games Ltd., China’s second-biggest provider of online games, to help translate Shanda titles for the U.S. and European markets.
“Susan is one of the few people who is responsible for bringing some of the models in Asia to the U.S.,” said Stan Smith, principal at Silver Spring, Maryland-based Syncom. “It’s no easy feat to build what she built.”
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