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Launching new businesses from the ashes of failure August 31, 2009

Posted by jeremyliew in bankrucpcy, Ecommerce, Entrepreneur, turnaround.
2 comments

One of the great stories of Silicon Valley is how Josh Hannah and Jack Herrick bought eHow’s assets at a distressed price after the company went out of business, turned it around with a very low cost model and sold it to Demand Media two years later for a big profit. As Wikipedia notes:

eHow.com was founded in March 1999. The company raised close to $30 million... , hired 200 professional writers, and … employed a 25-person engineering team. By 2001, eHow had created thousands of articles. The professional writing, combined with a TV and radio advertising campaign, briefly made eHow one of the Internet’s top 10 news and information sites. Despite the popularity, eHow was not profitable and was forced to declare bankrupcy when funding ran out.

In 2001, IdeaExchange.com bought eHow out of bankruptcy with the hope of charging eHow’s readers to access how-to instructions. eHow remained unprofitable and in early 2004, IdeaExchange sold eHow to Jack Herrick and Josh Hannah.

Says Josh:

“When I told people what I was doing, they thought I was crazy. Conventional wisdom said content was dead, and there was no way to make money on it. We had a different view. In my experience, the foundation of a great business depends on having a different idea from conventional wisdom and pursuing it in spite of a skeptical market.” says Josh.

Josh and his partner restructured eHow by outsourcing content creation to the community and employing then-new advertising and search engine optimization techniques. In six weeks, they had earned enough from advertising to pay off the cost of the purchase. They increased revenue and traffic 30-fold before selling the company to Demand Media in 2006 for a 400X return.

The NY Times has an interesting article in this Sunday’s magazine which notes that much the same may be happening with Linen’s and Things:

In this instance, control of the Linens ’n Things brand, meaning its trademarks and the like, and its Web site, were acquired for a reported $1 million by a joint venture between Gordon Brothers Brands and Hilco Consumer Capital, divisions of firms with long histories in the bankruptcy business. This entity helped run the Linens ’n Things liquidation, spending four or five months immersed in its unwinding operations in the process. “We learned a lot about the brand and the consumer,” Carlyle Coutinho, vice president of Hilco Consumer Capital, says. “We knew we’d have a very strong e-mail list and a very strong customer base that was very loyal.”Time will tell how loyal shoppers turn out to be to what the Gordon Brothers-Hilco crew concocted: a Web-only version of Linens ’n Things. But a database of five million e-mail addresses isn’t a bad thing for a “new” business to have at its disposal, and certainly not something an online retailer starting from scratch would be likely to have. Nor would a start-up have a nationally recognized name the day it opened…

The proposition of this distinctly Great Recession model is snapping up a valuable asset on the cheap and using the low-labor tools of Web commerce — outsourcing, electronic ordering, etc. — to simulate a version of the original business.The new version of lnt.com that celebrated its “grand reopening” a few months ago may not strike the typical shopper as anything radical. The interesting stuff is in what’s behind the site, or maybe even what isn’t. For instance, the actual operation of lnt.com has been jobbed out to a third party: a San Diego firm called TorreyCommerce that bills itself as “a leading provider of outsourced e-commerce to the home-furnishings industry.”…

Linens ’n Things itself now has few direct employees, or even a full-time chief executive. And while the comeback announcement included a mention of plans to “reinvigorate” the brand, the marketing efforts so far revolve around Internet search ads and promotions sent to the e-mail list.

As companies both big and small go out of business during this great recession, I wonder which of them may yet be reborn by smart, thrifty, scrappy entrepreneurs who know how to keep costs low and, more importantly, variable. Anyone leveraging someone else’s invested capital out of a bankruptcy like this – please email me!

$2.5bn market size estimated for virtual goods in the US by 2013 August 30, 2009

Posted by jeremyliew in virtual goods.
3 comments

Last month Piper Jaffray published a research report titled “Pay to Play: Paid Internet Services”, which included their analysis of the paid social networking, virtual goods, online dating, domain registration and paid online content (primarily video and music) industries. Included was the following market size estimates for virtual goods in the US and for the rest of the world (encompassing games, virtual gifts on social networks, and potential virtual goods on portals such as Yahoo.)

virt goods rev estimates

Web based free to play game nuggets from GDC Europe August 21, 2009

Posted by jeremyliew in game design, games, social games, viral.
1 comment so far

Worlds in Motion has coverage of comments from senior figures from Zynga, Playdom and Gameforege speaking at GDC Europe about the free to play game market:

Gameforge co founder Kerstig noted:

Gameforge was formed in 2003 by Kersting and his partner Alexander Roesner as a developer of free-to-play browser and client-based MMOGs and has since released 15 MMOG titles in over 50 different languages. Their games have attracted over 85 million players worldwide and have nearly one million users playing at any one time…

“The challenge for publishers is to make it as easy as possible to get their games to gamers” says Kersting. Online distribution is a much better choice for both developers and users for numerous reasons – the cost of distribution “is close to zero”, access to media is easier and “the customer wants to get what he is looking for as easy and fast as possible”, according to Kersting….

He says gamers buy virtual items “for faster game progres, to enhance their gaming experience” and due to “vanity” — “so that they can say ‘I have the biggest house, garden etc.”

De Loayza from Zynga gives some tips on social game design:

The exec explained that the San Francisco-headquartered Zynga now has 15-20 million active daily users, which compares favorably to existing websites like EA’s Pogo.com, which gets a similar amount of visitors — but every month, not every day….

The Zynga exec noted that simplicity is the key to success for many social games. In fact, he said: “Make it less game, more social,” and it’s important to “focus on traffic as much or more as gameplay.” He cited a successful title like Kickmania, where the gameplay is a simple as ‘kicking’ a friend on a network, with leaderboards and other things layered on top. He also noted that often, the more straightforward mechanic is the better.

There are some particularly good viral-related game mechanics, says De Loayza, with gift giving being a particularly good way to alert other users and get them to join your game. He cited PopCap’s Bejeweled Blitz as a notably interesting example of competition as a viral mechanic, where users can team up to compete and win prizes.

In addition, crew mechanics on more standard ‘spreadsheet games’ like Mafia Wars, where adding friends to the game gets you to level up, can be a major growth factor. As for notifications, which are the way social network games communicate with your users, “use them as much as possible,” says De Loayza. He did acknowledge in the Q&A that what could be considered as ‘spamming’ does happen in the space, even as Zynga tries to keep their notifications useful.

How about the biggest mistakes you can make in the social network game space? De Loayza cited licenses, commenting: “I am not convinced that licenses necessarily work in this space… people just don’t seem to be that interested in it,” as well as linking to a destination site outside the social network, which “breaks the viral loop.”

Meretzhy from Playdom also had some tips on building virality and monetization:

He explained that the key issue of virality, or how to get your game to reach the widest possible audience, can be achieved using several popular mechanics. Game requests, active “wall-posts” and passive notifications are the favored methods where players are prodded to beat each other’s scores, join each other’s mobs or exchange gifts.

However, Meretzky pointed out that it’s not as easy as simply applying these mechanics: “Virality is made more complex by nearly everything falling outside of the terms of service,” making it necessary for a user to be in constant contact with the social networks.

Recently other methods have emerged to further the viral nature of social games.Farmville, Zynga’s hugely popular new Facebook game, uses a combined gifted invite method in its “lost cow” mechanic. When a cow wanders on to your virtual farm you aren’t allowed to keep it yourself, but can send it to a friend to get them started. This type of invite has a much higher acceptance rate than the standard message invite.

Another new mechanic brought in by Big Fish Games in their social game Restaurant Empire is the “be my employee” system, where you can task your friends with jobs in your restaurant. This system has two ways of hooking players: either your friends want to return the favor by employing you, or they want to seek revenge if you have given them a demeaning task. How do they get this revenge? By employing you in their restaurant to perform the same (or even a worse) job…

Meretzky was quick to point out though that, “monetization follows engagement.” In order for the player to start spending money in the game they must be very engaged and invested in it.

Meretzky detailed some of the way to get players to re-engage with a game, including login rewards, collecting stores of money that will not increase over a set amount, harvesting, and notifications of friends beating your high score.

He said of the high score mechanism that when you see a friend has passed you on a leader board, “the natural inclination is to jump right in and pass them right back”, clearly a very strong re-engagement technique.

Game designers, what do you need to do to get your players to pay you? August 18, 2009

Posted by jeremyliew in flash, game design, games.
1 comment so far

Dan Cook follows up his great post on how freemium beats advertising as a business model for flash games with a second great post on how you can get your players to pay you. After discussing the historical reasons that most flash games today are such lightweight affairs, he recommends the following checklist to see if you’re building enough value in your games to get users to pay you:

Quick value checklist

  • Are you ignoring bad metrics like portal ratings?
  • Are you measuring the holy triumvirate of value: fun, retention, money?
  • Are you collecting real customer data?
  • Does your game score 4 out of 5 on the fun scale?
  • Do players return after a week?
  • Is your game design amendable to high retention play?
  • Are you iterating on your game and improving your game as measured by internal metrics?  Have you figured out the big levers that affect player experience?
  • Do you know when you are done? Do you know when you’ve reached the point where your game has proven value to your players?
  • Are you willing to bail on the game if it doesn’t show signs of improvement?

Dan recommends measuring key drivers of value such as how much fun players have at various time points (by random survey), how often players return, and how much money you make from each player (on average). He then recommends making various game design changes, or a “kill the game decision” based on these metrics.

I strongly support the idea of using metrics to fine tune game play with real live players, in much the same way that web 2.0 used metrics to fine tune user behavior. This is best practice for many social games today – Siqi and David from Serious Business and Lil Green Patch gave a talk at the Social Gaming Summit about just this topic. I think another important metric is engagement (e.g. average time spent playing the game, including multiple sessions). I believe engagement is correlated with monetization – the deeper a player is engaged with a game, the more likely they will be willing to pay. I think that this may be a better measure than retention (although I’m open to debate on this point). In many free to play games, the bulk of the money is spent in the first spike of game play, so whether they continue to return or not may not be as important as how well you hook them in the first few days that they play the game, and how addicted you can get them.

This of course leads to questions of how you can build long term engagement, which Dan also has some suggestions for:

  • Narrative, story, and cut scenes exhibit “rapid burnout”.  In other words, player see them one or twice and then are bored when they see them again.  Games that rely on such content have generally low retention metrics.  You can mitigate this by releasing new narrative content on a regular basic to keep the product ‘fresh’, but this has a high cumulative cost.
  • Linear levels or solvable puzzles also exhibit rapid burnout.  Game systems that can be completed or conquered are usually one shot activities.  You can layer additional challenges within each level, but often only expert players will be motivated to come back for a second play through.
  • Some handcrafted content like text or static images can be refreshed cheaply: The type of handcrafted content you include makes a huge difference on the slope of your increasing costs.  New text-based questions in a trivia game are relatively cheap compared to creating new God of War levels.  An hour of text-based content is likely several orders of magnitude cheaper to build.
  • Social content is low burnout: People will keep interacting with their friends for years.  Mechanics that can tap into this often have very high retention rates.  Anything that allows players to chat, share and form social identities in a community is pure gold.
  • Grinding results in burnout, but it slows the process. Techniques like leveling or purchasing upgrades can dramatically increase the length of the game for very little development and design costs.  Think of grinding as method of stretching, but not adding to your content.  Grinding techniques only delay the inevitable.  They can result in lower fun scores as people feel obligated to play, but aren’t enjoying the process of playing.  Since you want people to fall in love, such a reaction can be counter productive to your goals.
  • User generated content systems are low burnout: User generated content is ultimately a social system that encourages users to create consumable puzzles.  The puzzles themselves may be short lived, but the community of creators can thrive for decades. This solves the problem of the linearly increasing cost of more handcrafted content by apply large numbers of people working for free.
  • Algorithmic content has low burnout, but is hard to create and balance: Evergreen mechanics like Bejeweled or random map generation in Nethack keep people playing for hours.  However, they are tricky to invent and balance.

    • An example of a high retention game is one like Puzzle Pirates that has social (avatar, chat, guilds), grinding (levels) and evergreen algorithmic content (puzzles).  There is some light narrative in the form of periodic events and very little in the form of conquerable level design.  Most games have a mix of all these various types of content and successful services almost always put a portion of their reoccurring revenue towards a steady trickle of low marginal cost handcrafted content.  However, a high retention game designs tend to emphasize content with less burnout.

This would lead you to believe that (i) sandbox games (ii) user generated puzzle games and (iii) multi player games are well suited to driving long term player engagement without forcing costs to scale linearly. I’m inclined to agree.

What browser based games (flash and non flash) do readers think exhibit these qualities?

Government could make monetization even harder for online ad networks and publishers August 13, 2009

Posted by jeremyliew in ad networks.
2 comments

In the last few years, behavioral targeting has gone from being an interesting experiment to core to the success of many ad networks. Many networks are using data collected from one site to improve the targeting of advertising on other sites. But in the past two months, both the FTC and some members of the House have discussed limiting the ability for online advertisers to do behavioral targeting.

Businessweek notes about the new FTC Chairman:

Leibowitz wants to terminate—or at least rein in—… delivering ads to individuals based on the Web pages they visit and searches they carry out. Appointed by President Barack Obama in February to run the country’s top consumer watchdog, Leibowitz has made so-called behavioral targeting a top priority.

Leibowitz is not content with advertising industry self regulation:

… Leibowitz hints that he’s growing impatient with marketers’ efforts. “It’s not clear that they’re moving far enough or fast enough, even though they’re making some progress,” Leibowitz says. He supports the controversial approach of making more of the targeted ads on the Internet “opt-in”—meaning they would require consent from Web users before collecting data—and is in talks with members of Congress intent on drafting legislation for online ads.

The member of Congress that he is talking to are members of the House of Representatives’ Subcommittee on Communications, Technology, and the Internet, who are also keen to limit behavioral targeting. Businessweek again:

Representative Rick Boucher (D-Va.), who chairs the House subcommittee on communications, technology, and the Internet, has stated publicly since February that he plans to draft legislation on targeting practices this year. He says sites should maintain plain-language privacy policies, visitors should be able to opt out of data collection, and any third-party companies working with publishers must obtain permission from Web users before acquiring or using their information.

This position has bi-partisan support. Notes Paid Content:

His counterpart on the committee, Rep. Joe Barton (DR-Texas), also said he appreciated the relevance of targeted ads, but he was dismayed at how much information is collected about him on the web without his knowledge. Barton: “I hit the delete button every week and erase the cookies on my computer. I’m always amazed at how much information is taken from me. I think I have the right to know what information websites are gathering about me and what they’re doing with it. And poll after poll shows that the public agrees with me.”

The current FTC guidelines on behavioral advertising call for  the principle of  “Transparency and Control”:

Every website where data is collected for behavioral advertising should provide a clear,
concise, consumer-friendly, and prominent statement that (1) data about consumers’ activities
online is being collected at the site for use in providing advertising about products and services
tailored to individual consumers’ interests, and (2) consumers can choose whether or not to have
their information collected for such purpose. The website should also provide consumers with a
clear, easy-to-use, and accessible method for exercising this option. Where the data collection
occurs outside the traditional website context, companies should develop alternative methods
of disclosure and consumer choice that meet the standards described above (i.e., clear,
prominent, easy-to-use, etc.)

This princple is reasonable. But as noted in italics in the quotes above, what Boucher and Leibowitz are talking about is to move beyond this principle and essentially establish an opt in process for third party cookies (which would include the cookies for all ad networks).

This is an impossible position. For a start, ad networks typically don’t have  space on a publisher page to even ask for an opt in. But in any event, opt in use of cookies will mean that very few users will allow themselves to be behaviorally targeted because defaults are almost always dominant.

Taking away the ability to do behavioral targeting and retargeting would reduce overall industry eCPMs. This would impact both publishers and ad networks by reducing their revenue. It would make it harder for advertisers to target their customers, resulting in overall higher customer acquisition costs. And it may even lead to more advertising in general as publishers try to make up for lower eCPMs with more ad units, which will have an impact on user experience.

Companies who rely on contextual targeting and content adjacency to sell their advertising have little to worry about as they do not use much third party data today. Examples include well know brands (e.g. NYTimes.com) and sites with endemic advertisers (e.g. WedMB). The big portals (e.g. Yahoo) and  search engines (e.g. Google)  who see a high enough proportion of all web users to be able to use first party data for targeting will also have little to worry about.  TBut many ad networks, and the publishers who rely on ad networks for a substantial proportion of their revenue, should be closely watching the positions of both the FTC and the Subcommittee on Communications, Technology, and the Internet.

What is the difference between a good product and a good company? August 12, 2009

Posted by jeremyliew in startups, Venture Capital.
11 comments

Insightful tweet from Charles Hudson:

Good products create value. Good biz models capture value. Good companies have both

If a company has a good product but does not have a good business model it is usually because  it has not been able to figure out a way to benefit from the value that they create themselves. There are a number of common reasons for this:

1. They don’t create enough value for each user. If the value created for each user is small, it is hard to capture much of that value because of transaction costs.

2.  It is hard to identify who will get value from the product or convince them of the value.  Even if a lot of value is being created for each user, costs of sales may end up being too high.

3. Many other products create the same value. Competition and substitution limit the amount of value that you can capture from a user to a “market price” which can be lowered by too many alternatives. This is obviously much worse if they create MORE value than your product does.

4. Users expect the value for free.  Sometimes this expectation come about because of industry norms (e.g. online content) and other times this expectation is created by early decisions that the company makes.

It is rarer to find a company with a good business model that doesn’t create value. One notable class of such companies are focused on arbitraging new marketing channels, often with a lead gen or direct response back end. These companies often feel more like “projects” than companies in that there is a natural end of life for them when the arbitrage opportunity closes. These can be terrific projects for individual entrepreneurs, but because they don’t create enterprise value in the long term, are not necessarily good investments for venture capitalists.

I prefer to invest in companies that are both creating value and capturing some of that value for themselves.

Do readers have any other thoughts on ways to create value without capturing it, or capturing value without creating it?

$200 off Engage – Virtual Goods, Games and Social Media conference August 10, 2009

Posted by jeremyliew in conferences, games, games 2.0, social media, virtual goods, virtual worlds.
1 comment so far

I’m speaking on the VC panel at Engage Expo next month, Sept 23-24 in San Jose. I’m on at 1pm on Wed Sept 23.

The agenda is shaping up well – I’m looking forward to the social media and virtual goods tracks especially. This conference used to be called Virtual Worlds Expo, and I think the intersection of virtual worlds and social media is particularly interesting. Zynga’s Yeoville is the best example of a port of a virtual world to a social network, but arguably games like Restaurant City, Rockyou Pets, Farmtown and Farmville are all examples of asynchronous virtual worlds with a strong single player component overlay.

If you’re thinking about attending, use the discount code SPEAPERVIP SPEAKERVIP to save $200, and if you’re sure you’re going register before Aug 14th to get the early registration rate.

Casual real time strategy games August 6, 2009

Posted by jeremyliew in game design, game mechanics, games.
3 comments

Gamasutra has a nice writeup of the game design behind Corpse Craft, a causal RTS (real time strategy) game on Whirled:

In a traditional RTS, resource gathering is largely automated (players send designated resource gathering units out to harvest materials and bring them back to base, and they do it until either they’re killed or the game is won), and it’s the combat that has to be managed. Conkling decided to invert this model in order to eliminate the need for unit micromanagement. In Corpse Craft, resource gathering is micromanaged through the match-3 game, and new units that are created behave autonomously based on a very simple set of rules.

In other words, players spend resources to create undead creatures but don’t actually control them. There’s no base to manage, and no map to explore; all of the action takes place on a single non-scrolling screen.

According to Conkling, traditional RTS games typically keep combat interesting with a simple unit ecosystem, and battles are most exciting when they’re epic and unpredictable. Corpse Craft maintains that feel through a basic rock, paper, scissors relationship between units, where each unit has an obvious strength and a weakness that can be mitigated by sending the unit onto the battlefield along with other units that offset that weakness.

“Each unit behaves predictably, which is important because they’re not under player control, but when you throw lots of units together into a battle, there are interesting and unpredictable things going on due to the huge variety of interactions between those units,” Conkling said. “Battles are emergent in the sense that there are a few basic rules that drive the combat units, and from that you get chaos, unpredictability and interesting gameplay.”

Web based casual RTS games are a very interesting genre to me because they offer so many opportunities for virtual goods based monetization. We’ve seen several MMOGs make the leap from hardcore client based games to more casual web based games and retain their ability to monetize through virtual goods, and I think RTS is the next category to make that leap. That’s why we invested in Casual Collective last year, which has developed a number of such casual RTS games including Desktop Tower Defence, Flash Element Tower Defence, The Space Game, Minions and Desktop Armarda.

Casual Connect panel on designing, balancing and managing a virtual economy August 3, 2009

Posted by jeremyliew in economics, game design, game mechanics, games, mmorpg.
2 comments

Freetoplay.biz has raw notes taken from the session on Designing, Balancing and Managing a Virtual Economy. Some good quotes include:

On inflation:

Gaia

  • did not manage economy when they started
  • want ppl to earn quickly for initial wow experience
  • down the line, someone who has been playing for months and months get really rich – what is left for them to buy?
  • need to manage these disparities correctly from the beginning
  • company has one full time economist balancing it

3 Rings

  • don’t screw up
  • mudflation – overinflation of currency is easy to introduce if you are not being rigorous about sources of attention currency
  • need to have some level of instrumentation… need to pay attention and be set to react when something goes awry
  • it is a discipline that is tough to master

On creating one time currency sinks to battle inflation:

3 Rings

  • incredible opp to take fantastic amounts of wealth and turn it into a one-time exclusive item
  • when we shut down alpha server we challenged people to throw Pieces of 8 into a hole… winning group got their name on top of a list

Gaia

  • we wanted to redo our amazon-like stores within the site, so we created a fiction inside Gaia that stores were getting shut down because of recession… asked users to help donate to help build higher quality stores… we created a concept of leaderboards… where largest donating teams got their names in lights… they felt as though they were getting status within the site

On pricing and maximizing ARPU:

Nexon

  • you want your players to spend all the money they have so they need to get another payment card, etc
  • you should offer your players lots of diff ways to spend their money
  • players are not buying 1 item at a time… they are batching… buying $10 of virtual currency at a time… so you need lots of options for purchase so people don’t have money just sitting there

2 Fish

  • i love pricing… counterintuitive in some places
  • barrier pricing… i.e. everybody wants one of the cooler cars
  • initial thought is that cars should be expensive
  • but really they should be cheaper as they are a barrier item
  • once they have a new car they can spend more on customizing it
  • think about what kind of behaviours you want and price to encourage that

Nexon

  • we actually do sell cars for $10
  • we sold 120,000 cars for $10 apiece
  • agrees re: barrier
  • but barrier for ppl in game is not 10c, but $10 for initial payment… so you need enough items to justify that
  • if you have 100 ppl playing game, what % are going to pay and how much
  • what items can you create to get to a $15 ARPU

Gaia

  • we do exactly that re: modeling an ARPU
  • interplay between getting ARPU up vs getting percent of people who pay up
  • clearly they should be complementary
  • but fascinating thing is that we are not really clear on which one matters more, we go with what is easy
  • getting dollars per player up is always easier
  • people who want to pay are willing to pay a lot of money
  • relatively easy to find small % of ppl who pay and pay
  • more interesting thing is how to get a higher percent of ppl to pay
  • that has more ramifications on long term business health
  • barrier is getting the money into the game via cc or payment card

On dual currencies and managing fraud and chargebacks:

Gaia

  • we need to be clear… if you can get your money out, then it is a big issue
  • SL has a currency where you can invest your time and get it out in real dollars
  • as soon as you do that, you can run into regulation issues, but more primarily, people will try to game the sytem… bots, farming, etc
  • if you are going to go down that path, plan on having half your dev team working on managing exploits for the next few years
  • you have then become the best target for money laundering
  • we chose not to do that… greatly simplifies life… branding decision as well – is your site a place where you can spend time and earn money? a career? or is it a fun experience where you put in your money but don’t expect to get it out

Gaia

  • ways to avoid hitting the 1% chargeback
  • not allowing you to purchase on day 1
  • maxing the amount ppl can spend in a month
  • making sure ppl can’t pull money out

3 Rings

  • we hit chargeback problems … we hadn’t switched on address verification… turned it on and problem went away
  • WoW has big chargeback isseus as people farm on stolen CCs