-[Unfortunately, I can't be at PAX this year, since it's the GDC Advisory Board meeting this weekend. But fortunately enough, Gamasutra and Game Developer folks like Chris Remo and Brandon Sheffield are covering the show - and here's Remo's write-up on rather smart Jamie Cheng - interested to see how his Nexon title does!]

Just a few years ago, Jamie Cheng was an AI programmer at Relic Entertainment working on the well-received hardcore strategy game Warhammer 40,000: Dawn of War.

Now he is the CEO of independent studio Klei Entertainment, which has released its own original downloadable games, including Eets, on PC and Xbox Live Arcade, and helped Metanet develop N+ for XBLA.

Klei recently teamed up with Korean free-to-play publisher Nexon (MapleStory) for its next game, Sugar Rush, described as an "online arena combat game."

In a Penny Arcade Expo panel, Cheng reflected on how he got into free-to-play games and what he has learned about making them.

Changing Segments

Cheng's move into free-to-play was not deliberate at first. "While I was at Relic, I decided I was going to make my own game on my own time, so I got some friends together," he recalls. The small group started working on Eets, a 2D puzzle game, out of a rented basement.

"I never really intended to sell it, I just wanted to see what we could do," says Cheng. But his peers encouraged him to take the game further, and he decided to move into commercial game development. "I used all the savings I had at the time, then I used borrowed money from my brother, then I started using government money after that."

Eets was released for PC in 2006 "to much indie fanfare," and the followup Eets: Chowdown later came to Xbox Live Arcade.

At that stage, Klei consisted of four developers working in a 120-square-foot office whose windows faced west. "We were stripping to stay cool," Cheng notes ruefully. "It was fun times."

In regards to the Nexon deal, he says, "We didn't start working with Nexon because we were afraid of taking risks, or because we wanted the money. We felt Nexon really felt they wanted to do the right thing for a North American free-to-play game. We are their first North American free-to-play game."

What Is Free-To-Play?

In Cheng's experience, people have a difficult time understanding the concept of free-to-play games -- they tend to assume free products are inherently inferior to paid products.

He doesn't accept that rationale. After all, "you use free every day, and you still expect it to be quality," he says, pointing to Gmail, Facebook, and Craigslist as examples of free products about which people don't have low expectations of quality.

Outside the game industry, he cites the band Radiohead, which gave away its most recent album and charges for concerts, as well as, conversely, Woodstock, a free concert that drew revenue through other means like merchandising.

Revenue Streams

The two main revenue streams for free-to-play games are advertising and microtransactions. "Yes, we do have advertising. No, we don't force it right in front of your face and force it on you," Cheng stresses. "What we want to do is incorporate advertising right into the games and make it enhance the experience."

For example, Electronic Arts' Fight Night games include licensed Everlast products, which tie into the boxing subject matter.

On the microtransaction side, Cheng cautions against allowing for purchases that would radically unbalance the game. "If you sell a stronger sword, people are going to be pissed off," he says.

He believes paid items should rather allow players who are invested in their characters to further express themselves: "For example, if you go to a concert, if you're into it, you can spend more an get a t-shirt."

So far, Klei's microtransaction-to-advertising revenue ratio is "heavily weighted" towards microtransaction income. "You have to have a huge amount of volume before advertising becomes a large part of your revenue," Cheng says.

What A Free-To-Play Game Needs

With a free-to-play game, a positive initial experience is crucial. Cheng recently played Jonathan Blow's Braid, and very early in the game came upon a puzzle that was so frustrating he put the game down. His main motivation for returning and giving it another shot, after which he very much enjoyed it, was that he had already paid for the title.

Free-to-play games don't have the luxury of player obligation, he says, because they haven't made a concrete monetary investment. Games that don't immediately grab players simply won't be played.

For a similar reason, games need to have depth and complexity beyond their approachable entry point -- after all, free-to-play games are only monetized if players keep playing them, as opposed to retail games, which are monetized as soon as the player buys them. "If nobody spends their time, we're not going to make any money," Cheng says.

By extension, a social experience is crucial in creating the word-of-mouth marketing that will allow the game to reach a long-term dedicated audience.

"For example, I've bought probably 40 additional tracks for Rock Band, as well as the N+ cooperative levels. I bought those not just so I can play by myself, but so I can play with my friends," he says.

Longevity is also key: "We're not trying to build a grindfest, we're trying to build a game that grows and evolves with you," Cheng explains.

Marketing Evolution

Responding to question about how Klei's marketing capacity has changed over time, Cheng deadpanned, "There is now marketing."

He elaborated by recalling the company's early days of "guerrilla marketing," which relied heavily on gaming blogs -- but the big break came with a mention by Penny Arcade, which caused a massive spike in the company's traffic: "It was really nothing, nothing, nothing, then bam!, then two days later it was back down again. It was quite funny. I have a screenshot somewhere."

Cheng also tried buying Google ads, "but that was a big flop."

Now, Nexon handles media relations, which takes some of the burden off of Klei's shoulders. As it turns out, Nexon North America is headed up by former Relic CEO Alex Garden. "I've worked with publishers before, and this is the most pleasant experience I've had," Cheng says.

Can You Make It More Casual?

When building Eets, Klei's small team had no specific market in mind, particularly because it was originally made for fun rather than for profit.
But when they brought it to casual game portals, they were asked, "Well, can you make it more casual?"

Unfortunately, that kind of indiscriminate targeting of the casual audience didn't serve the game well. "Our initial experience was too hard for the casual market, and way too easy for the type of people who actually wanted to play our game," Cheng says.

He elaborated on the fallacy of free-to-play equaling casual gameplay, calling out Guitar Hero as a great example of a game that isn't explicitly targeted at casual audiences but remains challenging for the hardcore.

"Free-to-play isn't about making games more casual," he says. "It's about letting players play at the pace they want to play. We don't go, 'Let's dumb this down to make it easier for other people.' It's, 'How do we make this in a way that hardcore players can play the way they want to play, and in a way that other people can play how they want to play?'"