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The Digital ‘Tipping Point’

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On · In Business Strategy, Video Games

During its earnings call earlier this week, Electronic Arts (EA) CEO John Riccitiello declared the company had reached “the end of an era.” By that, he meant an era dominated by packaged games for consoles and gaming-dedicated handhelds. While the decline in packaged game revenue is no surprise given that current-gen systems are in their seventh year, Riccitiello suggested the industry is settling into a new normal defined by growing digital and mobile opportunities.

EA is well-positioned to capitalize on these trends. It’s grown digital revenue at a steady pace, averaging annual growth of 40%. The publisher is currently tied for first in digital revenue among western gaming companies, due mainly to the success of Battlefield 3 Premium. Its Origin digital distribution service is producing solid numbers as well: 30 million registered users and 4.4 million buyers with average sales of about $64. What’s more, about 13 million are accessing Origin on their mobile devices.

This shift toward mobile games will only accelerate as more consumers adopt 4G LTE services, and EA ramps up simultaneous multi-platform releases of its core titles. The fact that Origin now has 70 independent developers pumping out content for the portal can’t hurt, either.

EA’s public outlook signals a video game market in rapid transition. Packaged and social games are losing steam, while digital and mobile options take up the slack. The question is: Will the latter produce revenues fast enough to make up for losses in more established product niches? The uncertainty around the answer has compelled EA (and many other AAA title publishers) to adopt a conservative title development strategy, emphasizing its most popular franchises. This is a natural, but hopefully, temporary reaction to the current market volatility.

What makes gaming so exciting is the ever-present potential for an original idea to break through the standard industry fodder. It’s an industry built on the next big thing. Let’s hope powerhouse publishers like EA haven’t entirely lost their appetite for discovering it.

The Promise & Perils of Ouya

By
On · In Marketing Opportunities, New Product Development, Video Games

By now you’re probably aware of last week’s Kickstarter success story, Ouya, the Android-based gaming console. The project racked up the biggest first day ever on the crowdfunding site and a few days into meeting its fundraising goal of $950,000 became only one of eight projects to top a million dollars. At the time of this writing, the project has cleared just over $5 million, with 22 days left to solicit backers. As even the chronically jaded Darth Vader might say, “Impressive. Most impressive.”

Why all the love? Ouya represents everything indie gamers and developers have been pining for since, well, the advent of open-source gaming. It has two main virtues:

It’s relatively inexpensive, a.k.a., cheap. The console promises to be a boon for gamers weary of shelling out several hundred dollars for hardware and accessories, paying $60 a pop for premium titles and getting nickel-and-dimed for online multiplayer action. Ouya is expected to retail for only $99 and many of its titles are likely to be free-to-play (F2P) or at least have a significant F2P component. This could mean F2P gaming in the living room on a grand scale.

It’s developer-friendly. The potential consumer benefits of an open source console are clear: more titles and more unique titles. The relative ease of programming for the Ouya should guarantee a continuous flow of new games and encourage developers to take design risks that would be financially impossible in titles intended for one of the big three consoles. Ouya represents a chance to shift the public spotlight from fancy graphics toward ideas.

Good ideas, though, are only a necessary, not a sufficient condition for success. If a good idea alone was enough, we’d be carrying Apple Newtons instead of iPhones. Solid execution is crucial. Here are the three most important questions the brains behind Ouya have to answer to realize indie gamers’ dreams:

1. Which games will drive console sales at launch? The usual Android shovelware and ports of franchise entries like Angry Birds won’t cut it. The living room experience is fundamentally different than the mobile experience. Consumers turn on their TVs for immersive entertainment. Which titles will offer the equivalent of a AAA cable program or blockbuster movie? Without a winning library of games at launch, the console might as well be a cleverly-designed cardboard box.

2. What’s the distribution strategy? A console based solely on downloadable content doesn’t offer much to brick-and-mortar retailers in the way of ancillary sales. Why would Walmart bother with a $99 product (presumably, with a small profit margin) when it doesn’t have the chance to sell games for it? Absent a strong retail presence then, how does Ouya compete effectively? Even Amazon doesn’t rely entirely on its website to hawk the Kindle. Its retail partnerships have been essential in raising awareness and facilitating impulse buys of the device.

3. What are the compelling social components? Part of what distinguishes console from mobile play is the ease of playing with others. It’s not clear to what extent Ouya will allow for either in-person or online multiplayer action. But the social aspect shouldn’t be underestimated, especially when the console is likely to appeal primarily to hardcore indie gamers, a natural affinity group.

Basically, the makers of Ouya need to figure out how they’re going to convince consumers the console does more than blow up Doodle Jump to TV-sized dimensions. How effectively they do that will determine the course of this crush-worthy experiment.

Touch-and-Go with Potential Xbox Controller

By
On · In Connected Home, Convergence, New Product Development, Video Games

A recent Microsoft patent filing suggests individualizing Xbox 360 (or, more likely, Xbox 720) game settings could be as easy as grabbing a controller. According to Engadget, the patent describes a controller with sensors that detect your identity. Based on your unique hand pressure pattern, the controller delivers content according to your personal preferences. This feature would be especially handy for gaming sessions at a friend’s house. Just bring your touch-sensitive controller along and ta-da, your friend’s console knows your setting preferences as well as your own.

If, as rumor suggests, the next-gen version of the Xbox is more akin to a home server, it’s easy to imagine Microsoft extending this functionality to other kinds of personalized content, potentially, through facial recognition via Kinect. How cool would it be if your Xbox 720 recognized you on coming home from work and automatically configured your environment to your needs, say, adjusting your lights and temperature? Unfortunately, the unit can’t be expected to help settle family disputes about who gets to control the thermostat.

NBCU’s Gamification Play: Synergy by Any Other Name

By
On · In Marketing Opportunities, Video Games

The new buzzword, gamification, is beginning to look suspiciously like an old one—synergy.

Earlier this week, Comcast’s subsidiary NBCUniversal announced the creation of UGN (Universal Game Network), a new casual gaming platform that will bring together its most popular online, mobile and social network gaming offerings.

The company is putting special emphasis on the latter, with an eye toward leveraging gamer data on Facebook and other, similar sites. “Social gaming is a fast-growing category that attracts a highly engaged and targeted audience,” Linda Yaccarino, president, Cable Entertainment and Digital Sales for NBCUniversal, said in a statement. “UGN provides NBCUniversal with a unique platform to connect with these consumers and offer our clients a distinct ad solution that taps into the 300 million social gamers active on Facebook and beyond.”

UGN aggregates NBCU’s gaming efforts around a single platform for the first time. Consumers can play games and accrue reward points, consume content, and challenge friends via Facebook.

What does this mean for companies making packaged games for home consoles and/or gaming-dedicated handhelds? Social gaming tends to grow the audience for games of all kinds, so the advent of UGN means more opportunities for packaged game companies to sell their wares. Casual gamers in this category don’t seriously erode the pool of console gamers; in fact, the success of Wii from Nintendo proves just the opposite.

The real deal here is that UGN extends NBCU’s content and advertising reach to critical targets watching less TV and/or multitasking while watching.

There is, of course, another benefit for NBCU—more consumer data. Per the NBCU press release, “The UGN platform also enables NBCU to track fan engagement, target content to specific audiences and create future experiences based on popularity and demand. Long term, advertisers will be able to take advantage of the integrated big data analytical capabilities of the system to maximize the reach and efficiencies of their buys.”

In other words, NBCU will be able to combine what they already know about TV viewers with data from UGN, Facebook, and a variety of other sources the company accesses.

So synergy, er, gamification is fun for you and me, and another way for NBCU and Comcast to ring their registers. Game on!

The Perils of Crowdfunding Video Games

By
On · In New Product Development, Video Games

Earlier this month, President Obama signed a bill that allows the general public to invest in startup companies over the Internet via crowdfunding services like Kickstarter. Prior to this law, early investments in private companies were restricted to qualified institutions (namely, investment banks) and wealthy individuals. The Jumpstart Our Business Startups (JOBS) Act permits average citizens to invest in—and profit from—startups in the same manner as traditional investors. (To be sure, U.S. securities law does provide for investments from so-called “non-qualified investors,” however, the process for offering these opportunities is fraught with legal complexity and considerable expense.)

Although Kickstarter characterizes contributions to the projects it hosts as patronage rather than investment capital (and reportedly doesn’t intend to change its model), passage of the JOBS Act has brought increased attention to the crowdfunding phenomenon. So it was with great interest that I read a recent report in GamesIndustry International which broke down the costs associated with funding one particular Kickstarter project, the indie game Star Command from Warballoon. The article shows that crowdfunding doesn’t obviate the need for solid upfront budgeting.

Warballoon sought $20,000 on Kickstarter for its iOS and Android title and netted roughly $36,000. Sounds like a rousing success, right? Well, not so fast. Here’s how that amount got whittled down in short order to $11,000 for actual game development:

$2,000     pledges failed to materialize

$3,000     fees to Kickstarter and Amazon’s portion of PayPal transactions

$10,000   prizes or rewards for contributors—posters, t-shirts and shipping

$6,000     game music

$1,000     poster design

$1,000     iPads for testing

$3,000     PAX East conference

$4,000     legal fees for incorporation and related documents

$2,000     taxes (contributions must be declared as income)

$4,000     incidentals and daily expenses

There are a couple of collapsed line items worth highlighting. One is that Warballoon “lost” $17,000 out of the gate to a combination of pledge reversals, transaction fees, prize fulfillment and taxes. Startups looking to get in on the crowdsourcing action should budget carefully to ensure they set a fundraising target that accounts for these expenses. If Warballoon had raised only its original goal of $20,000 then around 75% of the total would’ve been exhausted before the team got to product development (assuming proportionately fewer pledge reversals and a slightly lower tax bill).

The line items associated with game development—music, iPads for testing, and incidentals—come to $11,000 or about 32% of the $34,000 in pledges that were actually collected. I don’t know how that figure compares to other, similar Kickstarter projects. But if I were a patron, I’d expect a higher percentage of the monies to go toward direct project costs. The legal fees associated with incorporation and such should properly be considered startup costs. Incorporation filings and associated operating agreements are a basic cost of doing business. I’d be highly reluctant to contribute to a company that hadn’t already taken this step.

Fundraising platforms like Kickstarter are wonderful avenues for startups with a marketable or otherwise appealing idea. Recently, Double Fine made international news by raising over $1 million in a single day for a new multiplatform adventure title. The company ended up with nearly $3.5 million against an initial goal of only $800,000. That’s powerful evidence for the viability of the crowdfunding model. Just don’t let the excitement around a new project blind you to the necessity of diligent advance budgeting.

Mass Effect 3 & the Centrality of Storytelling

By
On · In New Product Development, Video Games

Even if you’re not an active gamer, you may have heard something about the controversial ending to the blockbuster console and PC game Mass Effect 3.  It’s been covered on a wide variety of gadget and game-related websites, including Gadget Review, Kotaku, GameFront and GameSpot. The issue should be of interest even to non-gamers because it points out the centrality of solid storytelling in a medium popularly recognized primarily for whiz-bang technical achievements.

To summarize: Mass Effect 3 is the capstone of a sci-fi action trilogy in which you play Commander Shepard, a war-torn veteran tasked with defending Earth from a seemingly unstoppable alien invasion. It sold 890,000 copies in North America in its first 24 hours in release and about 2.4 million worldwide in its first week, making it the most successful packaged game launch of 2012 so far. The title was also met with heaps of critical praise. The game’s publisher, Electronic Arts, cites over 30 perfect scores and an average critics’ rating of 95 out of 100.

So why the controversy? Angry fans’ criticisms generally revolve around the ending. They claim the ending violates previously established lore, leaves a number of important questions unanswered and perhaps most damning of all for a game which emphasizes player choice, renders in-game decisions moot. A March 5th community poll about the ending on the Bioware Social Network elicited an overwhelmingly negative response. Of the nearly 60,000 poll respondents, about 90% voted “The Ending Sucks,” while only 2% considered the ending “Fine As It Is.” One fan was incensed enough to file a false advertising claim with the Federal Trade Commission.

Regardless of the validity of these criticisms, the clear takeaway for companies developing video games or other forms of interactive entertainment is this: story matters. Interactive options alone, no matter how innovative, aren’t sufficient to meet consumers’ expectations. Consumers look to interactive entertainment to immerse themselves in the storytelling environment and to enhance the emotional stakes. That’s why Mass Effect 3’s ending has generated such passionate responses. Users care about what happens. (Which is an unambiguous compliment to Bioware and Electronic Arts; if users didn’t care, the issue here would be much different.) And because users care, it’s incumbent on the creative forces to concentrate on traditional storytelling fundamentals, finding ways to meet players’ expectations and still throw in a (logical) surprise or two. No technical feat can substitute for an emotionally satisfying story.

Game Developers Conference Report: The Many Varieties of Free

By
On · In Market Research, Video Games

Last week’s Game Developers Conference (GDC) saw a number of headline-grabbing announcements, most notably, the introduction of Valve’s home console the Steam Box, the return of EA’s Sim City and the departure of Peter Molyneux from Microsoft Studios Europe. If you were to read only these above-the-fold stories, however, you might well miss the tectonic industry changes suggested by the composition of the expo hall. On that level, the big story was the ongoing rush toward mobile games of the iOS and Android variety; more specifically, the many faces of the freemium game.

The term ‘freemium’ is deceptively simple. Most games that fall into this category aren’t entirely free. In many, if not most, cases, the free component represents a fairly limited gaming experience. A complete experience is possible only by making a purchase, hence, the proliferation of payment platform companies at the GDC. Juniper Research recently forecast sales of in-game items will surge from $2.1 billion in 2011 to $4.8 billion in 2016, driven by a sharp increase in smartphone adoption and growing user comfort with the freemium revenue model.

Going from booth-to-booth at the GDC, I cataloged the various strains of the freemium concept. The result? This handy taxonomy of freemium revenue models:

Pay-to-Supplement Model

This category consists of generally straightforward fee structures, e.g., you pay for access to specific content. Here’s where you’ll find the usual suspects: new maps, novel or expanded capabilities, virtual items or real estate, and the like. Users can purchase items using either virtual currency, earned based on time spent playing and/or various achievements, or alternately, real cash money.

South Korea’s largest developer/publisher, Webzen, launched S.U.N. (Soul of the Ultimate Nation) in 2006 using a freemium model that relies on micropayments—in-game purchases of virtual goods. The franchise continues to grow, giving credence to the notion that this payment model typically produces slow revenue growth but lends greater longevity than standard pay-to-play models.

Pay-to-Experience Model

As opposed to purchasing discrete items, the options in this category revolve around buying qualitatively different experiences. The most popular options here include tiered subscriptions (DC Universe Online) and pay-to-play events or tournaments (Madden NFL).

 Pay-to-Own Model

This category is probably best represented by PlayOn Arcade where you can play games for 1 cent per minute until you’ve paid full price for them, at which point, you own them. The fee structure is designed to minimize buyer’s remorse by giving you a chance to trial games for a relatively low cost rather than forcing you to pay full price upfront.

Merchandise-subsidized Model

The cross-sell goes digital: real-world merchandise with special codes allow you to unlock virtual items, enhance a character’s powers or otherwise alter a game’s dynamics. Prominent examples include the Magic: The Gathering collectible card game. Some decks come with code cards for access to special items in the online version of the game or in packaged titles like Duels of the Planeswalkers.

Advertising-subsidized Model

This category of free-to-play includes in-game advertising and TrialPay. The former is a well-established revenue model; it’s the equivalent of product placement in TV programs and movies. In this case, though, the in-game spots are increasingly dynamic, allowing publishers to update their ads on a pre-set schedule and/or tailor ads to specific demographics.

TrialPay is a service that allows you to pay for games by trying or buying from an advertiser. Essentially, you pay for a product or service in lieu of the game. Game developers reportedly earn more per user than the average casual game—$50 on up.

The mobile game advertising network, Nexage, had a strong presence at the GDC. The company offers a fully integrated real-time bidding and mediation exchange designed to match ads to the most appropriate audiences. It emphasizes a number of unique opportunities afforded by mobile game advertising, including the use of rich media and location-based offers.

No doubt more variations of the freemium revenue model will emerge as the gaming industry continues to evolve from packaged to digital goods.