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Virtual Goods and Real Money Trade: Paving the paths March 13, 2008

Posted by jeremyliew in business models, digital goods, facebook, friendster, games, games 2.0, gaming, myspace, social networks, virtual goods.
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As I read the coverage about the real money trade in MMOs panel at GDC, I was reminded of danah boyd’s thoughts on why MySpace took off and Friendster did not, which notes in part:

Friendster killed off anyone who didn’t conform to their standards, most notably Fakesters and those with more creative non-photorealistic profiles. When MySpace users didn’t conform, they were supported and recognized for their contributions to evolving the system.

A good analogy to both situations is what to do when faced with a nice green lawn on a college campus. Some students will always cut across the grass, leaving worn paths. There are three solutions to this problem:

(i) Erect a fence around the lawn and put up some “keep off the grass” signs. This keeps the grass green and pristine, exactly as the landscape architect imagined it, but forces unhappy students to go the long way around to their classes.

(ii) Do nothing, let students cut across the grass and tramp mud into classrooms.

(iii) Pave the paths. Students take the shortest paths, no mud in classrooms, and the rest of the lawn stays green.

Friendster put up “keep off the grass” signs. Myspace paved the paths.

Now if you ask students as to what should be done about the muddy paths, they’ll probably suggest option number one. But its those same students that created the paths in the first place! It is more important to watch what users do than what they say. Facebook is facing a similar dilemma with its apps right now.

Games companies have the same issue with virtual goods. The abundance of real money trading markets for virtual goods tell us what users want to do (despite their vociferous claims to the contrary). If game developers don’t pave these paths, they risk muddy classrooms or unhappy students.

Notes from the Casual MMO panel at SXSW March 11, 2008

Posted by jeremyliew in mmorpg, virtual worlds.
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I just wrapped up moderating a panel at SXSW on casual MMOs. Liveblogged notes from Virtual World News are here. Venturebeat also has a writeup here.

An excellent excel model of viral growth March 10, 2008

Posted by jeremyliew in business models, churn, models, retention, social media, viral, viral marketing.
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Last week Andrew Chen wrote an excellent post about the growth and potential decay of viral apps. Rather than just focusing on the elements of viral growth, Andrew also took into account the declining likelihood of an accepted invitation as you saturate a population, and the impact of churn. He provided a useful model to social media founders who are trying to estimate their growth, and what can go wrong when a viral app “jumps the shark”:

shark fin

He notes:

* Early on, the growth of the curve is carried by the invitations
* However, over time the invitations start to slow down as you hit network saturation
* The retention coefficient affects your system by creating a “lagging indicator” on your acquisition – if you have good retention, even as your invites slow down, you won’t feel it as much
* If your retention sucks, then look out: The new invites can’t sustain the growth, and you end up with a rather dire “shark fin.”

I think this is a very useful model, but that it doesn’t quite predict what we typically see in real life. Rather than dropping to zero, failed viral apps typically hover at a steady level much lower than their peak. Since Andrew made the model available under “copyleft”, I made a small edit to his model. Rather than treating churn as a constant percentage of users in each time period, I treated it on a cohort level, with a higher churn rate in the early periods and lower churn as time goes on. This is similar to the churn profiles seen for subscriptions businesses such as AOL’s ISP business. (I was at AOL from 2002-2005 as SVP of Corporate Development, and then as GM of Netscape.) This model better matches active user graphs that we typically see for failed viral apps.

churn by cohort

If you’re interested, the model is available for download here. Viral growth assumptions are in the yellow cells on the “viral acquisition” tab and churn assumptions and output are on the “user retention” tab.

Saving us from the games industry March 7, 2008

Posted by jeremyliew in business models, distribution, games, games 2.0, gaming.
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This is a guest post from John Szeder. John has been kicking around the gaming industry for a ten years now and is a frequent speaker at GDC and other gaming conferences. In his words:

John Szeder is an enthusiastic digital content creator and evangelist. He is presently working on a project in stealth mode, but ran two of his own companies successfully and profitably for most of the past eight years. He was a founding staff member at Digital Chocolate and early employee at Research In Motion. He holds a Bachelor of Mathematics degree from the University of Waterloo.

__________________________________________

I have been attending GDC for 10 years now and every year I am happy to say that I learn something new. I don’t think that everyone gets the same benefit from the tradeshow, and I have a little story to tell you about the importance of learning the lessons of history.

I recall back in 2000 when I first started doing mobile development sitting with a room of bright developers who said “Hey let’s go into the mobile marketplace! The mobile platform will save us from the games industry!” We all downloaded the various SDKs, bought some phones. We called Qualcomm, JAMDAT, and Verizon. Some of us started direct distribution of our own content, some of us did projects with publishers. I made a game in roughly four hours that paid over $100k in royalties over 3 years. These were good times.

In 2003, the bloom was coming off the rose. A lot of companies were making games and the carriers were getting overwhelmed. Fewer titles were getting placed. 10 new handsets, all rife with bugs, started coming out every month, and suddenly what started off as nice little cottage marketplace was full of people in business casual going “Here is our co-marketing agreement”.

So a group of developers at that point saw that there was opportunity to make downloadable games. I was not one of them but I heard a business pitch where someone was going “Hey let’s go make downloadable casual games! The casual games marketplace will save us from the games industry!” We won’t describe what happened next, it bears some remarkable similarities to what happened in mobile.

A short few years and 20 match-3 clones later, those same people gathered at the bar (bringing us to 2005) and realized that adding a set of smashing pumps to a match 3 engine and calling it “be-shoe-eled” was not going to buy clean diapers and beer anymore, but one of them had great news. “Hey I just got off the phone with Microsoft, and I can put my game on XBLA Marketplace!
Microsoft’s XBLA platform is going to save us from the games industry!”

It was a nice idea. They started off paying more than half the royalties to developers. Then it went to an even royalty split. And from what I hear, now the developer gets less than half, pretty much the same as in every channel.
It is sad to see people’s misguided monopolist instincts hard at work.
The same could probably be said for the Wii, but I didn’t bother getting one to put in my closet to gather dust after showing Tennis to my wife and her mother, I only buy hardware that I can play games on that I enjoy and Italian plumber games are *so* 1987.

The final nail in the coffin for me came when two of the people I respect for their artistic talent and creativity both said to me this
year: “John, I have an idea. Let’s go pitch this project to Sony. Their new PSN marketplace will be awesome

[wait for it]

AND IT WILL SAVE US FROM THE GAMES INDUSTRY”. You need to drop your voice a few octaves and say that last part aloud to someone near you in slow motion, because that’s what happened to me. I dropped into slowtime as though I was in the matrix and people were shooting at me. The echoes of developer’s ideas from the past several years hit a strange resonance and harmonic that was almost physical, even though half the conversations happened at the Fairmont Hotel in San Jose and the other half were in the W lobby in San Francisco.

I have some shocking news for you.

Nobody will save you from the games industry.

You will need to do it yourself.

You need to stop signing bad deals. Retain control of your IP. Seek alternative financing for your game development dreams. Find channels where you can participate in distribution (and revenues) and move up the food chain. Most importantly, understand that the people who you think will save you from the games industry are the very ones you need saving from.

Interesting nuggests from Social Games Panel March 5, 2008

Posted by jeremyliew in advertising, asynchronous gaming, business models, social games, social gaming, social media.
8 comments

Yesterday I moderated a panel on social games at Graphing Social Patterns. The panelists were Mark Pincus (CEO of Zynga), Shervin Pishevar (CEO of Social Game Network), Michael Lazerow (CEO of Buddy Media) and John Hwang (CEO ofTrip Monger, whose primary app is Speed Racing). It was a wide ranging discussion.

First we discussed what differentiates a social game from other sorts of games, and in particular multiplayer games. The general consensus is that a game is social if the social context of the relationship between a player creates or enhances the gameplay. For example, if emotions like guilt, pride, reciprocity, gratitude or vengeance get evoked in the gameplay because of the combination of gameplay and player relationship, a game is social. These emotions of course greatly increase the level of engagement in a game. Scrabulous’ turn based game play (which can induce guilt for keeping a friend waiting for your move) and Warbook’s revenge attacks were both presented as examples.

We then discussed some of the specific game mechanics that have worked well for social games to keep high levels of engagement. These included asynchronous play and many of Amy Jo Kim’s game mechanics. Mark talked about the importance of dedicating resources to constantly tweaking and improving a game to keep engagement levels up since the environment changed so frequently. John Hwang talked about the need to focus on the “hits” in a hit driven business, rather than trying to make every game a hit.

The conversation turned to monetization. We noted that despite the early stage of the four companies, all of them were profitable. John Hwang said that an individual developer with a good game can make a great living off the ad networks. Mike Lazerow thought that “advergames” or sponsored custom games were going to become the standard ad unit for games. His company (Buddy Media) is trying to avoid the hit driven nature of the games business by building game skeletons that he can reskin for new sponsors. They have had great success, garnering a base of 24 blue chip brand advertisers so far, with each campaign averaging over $100k. Shervin said that SGN had been successful with both direct sales and with rich media ad networks, especially VideoEgg. Mark was most excited about the digital goods opportunities for Zynga. He noted that they had just launched their first game with digital goods baked into the game design, Ghost Racer, and with a base of just 30k daily active users, they were already seeing a run rate of over $20k/month in digital goods revenue. Shervin noted that while Warbook doesn’t have an explicit virtual goods model, Warbook gold had been showing up on Ebay and one player had made over $1,000 selling Warbook gold.

We next talked about how social games can grow. Viral growth has obviously been the key driver of growth up to this point for all the panelists. Shervin noted that they had seen a strong positive correlation between App Rating and rate of viral growth – high quality games spread faster. Mark talked about the importance of supporting a game with advertising, especially at launch. He said that many of the Zynga games had bought their early distribution so that they had a bigger base from which they could grow virally. However, as Facebook has clamped down on some of the viral channels, the panelists talked about other growth channels. SGN, Zynga and Buddy Media have all made acquisitions to help with their growth. SGN and Zynga both talked about the importance of having cross promotional and viral channels beyond the control of Facebook. They are interested in creating networks whereby apps can cross promote each other directly in canvas pages, and hence are not subject to changes that Facebook may make in the future. Both companies mentioned their respective game promotion networks as possible solutions to this problem.

If I missed elements of the discussion, readers please feel free to add them in comments. I wasn’t able to take notes since I was moderating, so this is relying on my imperfect memory! The video of the panel is also available here (scroll down a ways). UPDATE: Unfortunately the video seems to have been taken down.

Speaking at Graphing Social Patterns March 4, 2008

Posted by jeremyliew in social games, social gaming, social media.
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I’m moderating a panel on social games on Tuesday March 4th at 11:30am at the Graphing Social Patterns conference. If you’re at the conference, come on over. We’ve got the CEOs of some of the companies that have produced some of the top games on Facebook, including Zynga, Social Game Network, Buddy Media and Trip Monger (Speed Racing). It should be great!

Faux Facebook fatigue March 3, 2008

Posted by jeremyliew in apps, communications, facebook, social networks.
6 comments

Michael Parekh points to the Youtube video below and calls it further evidence of Facebook fatigue.

I disagree. I’m not a diehard Facebook fanboy, but I’ve done enough consumer internet product management to know that you can’t ask users what they think, you have to watch what they do.

There is certainly a growing chorus from the digerati about how Facebook apps are for toddlers, and this is echoed in the video embedded above. Interestingly though, Compete’s stats suggest that app usage is holding steady.

FB apps penetration

The feed, one of Facebook’s core innovations, had similar problems when it first launched. Early on, Facebook users condemned the feed. Today they can’t live without it.

Many of the lightweight Facebook apps live fleeting lives; they grow quickly and fade away just as quickly. That much is true. But their viral growth speaks to them meeting a core need for users of social networks, lightweight communications across increasingly expanded friendship networks:

These lightweight communications are native to social networks. Whether they be exchanging pokes on Facebook or pasting a glittering “thanks for the add” .jpg into a Myspace comment, “content free” communications abound. The meta message is clear though “I’m thinking of you”, and that is often enough of a ping to keep the connection open. Many of the Facebook and Bebo apps fulfill exactly this lightweight communication function, including Hug Me, Zombies and Scrabulous.

The digerati, with their Outlook address books and social network friends lists in the 1000s, bloated by people they met at conferences several years ago, are edge use cases. Their experience is atypical. Normal users of social networks use Facebook apps in the same way that middle America forwards emails to one another. A healthy percentage of the emails that I get from my mother in laws are these forwarded emails (whether remarkable pictures, funny videos, or uplifting stories) and they’ve all been forwarded many times before they get to her. Facebook apps are just another instance of this lightweight communication behavior that we’ve seen online for many years.

More recently we’ve seen more of the app developers turn their attention to increasing engagement and building richer experiences for app users beyond the lightweight communication. But even the lightweight apps are fulfilling a need for users.

Scrabulous on the front page of the New York Times March 2, 2008

Posted by jeremyliew in IP, litigation, social games, social gaming.
3 comments

The NY Times has a color piece of Scrabulous below the fold on the front page of their physical paper today. I admit, I like to read my Sunday NY Times in physical format – call me a luddite!

The Aggarwallas have really done a great job of building a true social game, but it is not looking like they will be able to reap all the benefits of their work due to their IP infringement.

Harold Zeitz, senior vice president for games at RealNetworks, said Friday that he was working closely with the Agarwalla brothers to bring the official Scrabble game to Facebook users.

Hasbro, meanwhile, said in a statement that Electronic Arts was planning to release an online version of Scrabble this spring. And Mattel, which signed a deal with RealNetworks last July, says that settling with the Agarwallas would set a bad precedent.

Last year Andrew Bridges did a guest post on the Lightspeed blog about how big companies use litigation as a strategy against startups that is highly relevant to the Scrabulous situation.

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