Whenever I think about web services that require money in exchange for service, I think of Josh Kopelman’s terrific post: The Penny Gap. From Josh’s post:

The truth is, scaling from $5 to $50 million is not the toughest part of a new venture - it’s getting your users to pay you anything at all. The biggest gap in any venture is that between a service that is free and one that costs a penny. I can’t think of a single premium service that has achieved truly viral distribution. Can you?

Josh argued well that difference between selling a product for $.01 and giving the product away for free is HUGE. There is a relationship (linear, exponential, whatever…) between the price of a web service and the adoption of a web service, but that relationship falls off a cliff as soon as you require any payment at all in exchange for use of a web service.

Well, in answer to Josh’s question about premium services that have achieved truly viral distribution: what about games?

Games are web services. A game asks for your attention (and sometimes money) in exchange for service value. In the case of a game, the value is entertainment. Entertainment is such a valuable proposition to a user that the user will think through the decision to open their wallet for a game very differently from most web services. Susan Wu’s description of her thought process to spend US$ on MMO virtual currency is a terrific example of the power of entertainment:

A couple of years ago, I spent 10 real dollars to buy 1 million gold in a game… My friends mocked me and told me I was throwing money away, so I tried to explain it to them: 1 million gold would give me 20 hours of entertainment. If I were to go to the movies, 10 real dollars would buy me 2 hours of entertainment. Assuming that 1 hour of movie watching entertainment gives me the same personal satisfaction as 2 hours of game playing enjoyment, I would have been willing to pay $50 in exchange for that 1 million of virtual currency. In fact, I felt like I had gotten a bargain paying only $10!

I go though the same thought process when I buy a new game. I think to myself, “This $20 game will likely provide 20 hours of entertainment. $1/hr is a heck of a lot cheaper than most cost/hr-of-entertainment ratios in competing entertainment products.

Does the thesis of The Penny Gap breakdown in the games sector? Perhaps. GigaOm just did a breakdown of the MMO space, and it’s interesting to note that World of Warcraft (WoW) tops the list in terms of subscribers. WoW is one of the more expensive MMOs because it requires both a fixed cost to purchase the game and a monthly subscription fee. Other games on this list, such as #2 Habbo Hotel and #4 Club Penguin are free, but rely on purchasing virtual goods in order to make money. WoW’s position at the top of the list isn’t consistent with the Penny Gap. That’s the power of the value proposition that the best games offer. The entertainment factor is so great that in overcomes the Penny Gap.

I wonder how Yahoo’s casual games, such as Chess and TextTwist would fit into this list? I can’t find any total user numbers of these games, but it seems like Josh’s Penny Gap should carry over if you include the casual gaming sector. Can anyone point me to current numbers on casual gaming adoption?