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Which games will go the way of Pinball machines? November 27, 2009

Posted by jeremyliew in economics, game design, game mechanics.

It is interesting to note that while MMOGs, time management games and real time strategy games have made the jump to social games, First person shooters have not. Why not?  I find the current generation of FPS very hard to pick up, and that may be part of the problem.

The Cheaptalk blog has an interesting post on an economists view about why pinball peaked and died out. He blames it on the transferability of skill from one pinball machine to another, combined with adaptive technology. This caused the market for pinball machines to bifurcate to experts and newbies, with most effort going towards building games for experts.

Pinball attracted a different crowd than video games like Defender (my new pal designed Defender and Stargate too,) and this is the fundamental theorem of pinball economics.  Pinball skill is transferrable.  If you can pass, stall, nudge, and aim on one machine you can do it on any machine.  This is both a blessing and a curse for pinball developers.  The blessing is that pinball players were a captive market. The curse was that to keep the pinball players interested the games had to get more and more intricate and challenging.

Pinball developers struggled with this problem as pinball was slowly losing to video games.  Video games competed by adding levels of play with increasing difficulty.  Any new player could quickly get chops on a new game because the low levels were easy.  This ensured that new players were drawn in easily, but still they were continually challenged because the higher levels got harder and harder.  By contrast, the physical nature of pinball, its main attraction to hardcore players, meant that there was no way to have it both ways.

Eventually, to keep the pinballers playing, the games became so advanced that entry-level players faced an impossible barrier.  High-schoolers in 1986 were either dropouts or professionals in 1992 and without inflow of new players that year essentially marked the end of pinball.

What game genres have similar characteristics? First Person Shooters come to mind. This challenge is magnified in a mutliplayer environment – it’s not fun to get fragged within seconds of starting a game. It’s the same experience that a new paintball player gets if they wander onto an average paintball course today – most players are now experts.

I highly recommend reading the article if you’re involved in the games and social games industry. I suspect that there is a risk that the competition for players in some popular social games genres may take us in a similar direction if we are not careful.

What other genres of games do readers think may be at risk in the same way?

Simplicity is always a disruptive innovation September 10, 2009

Posted by jeremyliew in economics, games, startups.

Clayton Christensen introduced the concept of disruptive innovation in his book The Innovator’s Dilemma. Summarizes Wikipedia:

Disruptive technology and disruptive innovation are terms used in business and technology literature to describe innovations that improve a product or service in ways that the market does not expect, typically by being lower priced or designed for a different set of consumers.

Disruptive innovations can be broadly classified into low-end and new-market disruptive innovations. A new-market disruptive innovation is often aimed at non-consumption (i.e., consumers who would not have used the products already on the market), whereas a lower-end disruptive innovation is aimed at mainstream customers for whom price is more important than quality.

Disruptive technologies are particularly threatening to the leaders of an existing market, because they are competition coming from an unexpected direction. A disruptive technology can come to dominate an existing market by either filling a role in a new market that the older technology could not fill (as cheaper, lower capacity but smaller-sized flash memory is doing for personal data storage in the 2000s) or by successively moving up-market through performance improvements until finally displacing the market incumbents (as digital photography has largely replaced film photography).

I was recently talking to Trip Hawkins, CEO of Digital Chocolate, and he made the claim that simplicity and ease of use aimed at non-consumption is always a disruptive innovation that threatens incumbents. I think he is right. Some examples include the Flip, which disrupted consumer video cameras, and blogging which disrupted content management systems. Trip was talking about the rise of social and iphone gaming as the equivalent disruptive innovation that was causing non gamers to play games. Definitely something that incumbents need to watch.

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.

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

On inflation:


  • 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


  • 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:


  • 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


  • 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


  • 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:


  • 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


  • 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

Consumer confidence is at an all time low – factor this into your 2009 planning. October 29, 2008

Posted by jeremyliew in business models, Consumer internet, economics, start-up, startup, startups.

The Consumer Confidence Index (CCI) measures how optimistic consumers are about the state of the economy. Specifically, it measures how consumers are feeling about:

1. Current business conditions.
2. Business conditions for the next six months.
3. Current employment conditions.
4. Employment conditions for the next six months.
5. Total family income for the next six months.

Notes Investopedia:

In the most simplistic terms, when [CCI] is trending up, consumers spend money, indicating a healthy economy. When confidence is trending down, consumers are saving more than they are spending, indicating the economy is in trouble. The idea is that the more confident people feel about the stability of their incomes, the more likely they are to make purchases.

The Conference Board, which measures the CCI, announced yesterday that:

The Conference Board Consumer Confidence Index™, which had improved moderately in September, fell to an all-time low in October. The Index now stands at 38.0 (1985=100), down from 61.4 in September…

Says Lynn Franco, Director of The Conference Board Consumer Research Center: “The impact of the financial crisis over the last several weeks has clearly taken a toll on consumers’ confidence. The decline in the Index (-23.4 points) is the third largest in the history of the series, and the lowest reading on record. In assessing current conditions, consumers rated the labor market and business conditions much less favorably, suggesting that the fourth quarter is off to a weaker start than the third quarter. Looking ahead, consumers are extremely pessimistic, and a significantly larger proportion than last month foresees business and labor market conditions worsening. Their earnings outlook, as well as inflation outlook, is also more pessimistic, and this news does not bode well for retailers who are already bracing for what is shaping up to be a very challenging holiday season.”

As a point of comparison, the CCIs most recent peak was at 112 in July 2007. It is down by two thirds since then. The last CCI trough was at 61 in March of 2003, down from a peak of 144 in May 2000. This time around consumer are far more concerned than they were in even the depths of the last economic slowdown. Historical CCI stats are available here.

All consumer facing companies, whether ad based or commerce based, should bear these numbers in mind when planning for Q4 2008 and for 2009.

More on designing in-game economies May 15, 2008

Posted by jeremyliew in economics, game design, game mechanics, games, games 2.0, gaming, social games, social gaming.
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Gamasutra summarizes a panel discussion at ION today about designing games with gold farmers in mind. I recently noted some of the challenges of dealing with in game inflation when designing games. This panel deals with some other game design challenges when you have a virtual economy:

On the topic of the need to plan an economy before the community develops its own, Big Fish Games’ Toby Ragaini pointed to Asheron’s Call as an example: “In Asheron’s Call, they made money weigh something, so rich people couldn’t carry their money around. So players came up with their own exchange for a small, lightweight item (shards). Everyone traded based on these items.”

Habbo Hotel developer Sulake Corporation’s CTO Osma Ahvenlampi noted, “In Habbo, at first they made the currency non-tradable, but players were trading everything else. They finally decided it would make it easier for everyone concerned and made bags of gold etc. When that happened, it reduced eBay transactions because it was easier and more trusted by players to do it internally.”

Many social games developers are taking an iterative approach to their game design. In general this is a great approach. It allows developers to quickly react to what your players like about their game. However, virtual economy design is one aspect that deserves a substantial amount of design work up front. Neglecting it can create a situation where success begets failure because the economy gets out of control and ruins the “fun” for your best players.

Dealing with in-game inflation May 7, 2008

Posted by jeremyliew in business models, economics, game design, game mechanics, games, games 2.0, gaming, mmorpg, virtual goods.

Siqi Chen, CEO of Serious Business (publisher of the Friends for Sale game), pointed me to an excellent white paper on the money supply impacts on an online economy recently.

It notes that in most games, players control the rate at which new cash is introduced into the economy. To avoid hyper-inflation, it recommends four steps:

Consumables are important in creating new Cash – If large amounts of new cash can be created without consumables, then there is no economic brake on cash creation.

Players set the prices of Consumable – This is the other side of the coin, since only player set prices can legitimately respond to changes in the money supply. Attempting to do this programmatically in such a diverse economy as a typical MMO is to invite failure. National governments have not been able to do this.

Fixed drains need to be in place – This provides a mechanism to remove a Crafter who is economically irrational from the business game, as well as to provide equilibrium in prices and money supply. Thus a regular fixed cash fee for doing business is required, and set by the game.

Variable Drains via percentage commission of the sale need to be in place – This provides a damper that mitigates wild swings in the money supply. Fictionally Sales commissions provide this damper. The percentage is set by the game, on Facility Type basis.

People building social games should read the whole thing.

Managing Virtual Economies March 28, 2008

Posted by jeremyliew in economics, game design, game mechanics, mmorpg, virtual goods, virtual worlds.
1 comment so far

Scientific American has an overview of how some MMOGs manage their economies (found via Massively).

The article discusses the approaches of EVE Online, Entropia Universe and Second Life in trying to keep their virtual economies balanced. Getting the balance of crafting, economics and other such features right can drive behavior like specialization/division of labor, guilding etc, as Eyjólfur Guðmundsson, EVE Online’s economist, notes:

The new player who isn’t able to succeed roams around space trying to make ISK[s]. He tries to be a player-versus-player pilot and loses in battle. He needs help to succeed in the community. Players themselves have found ways to deal with this by creating corporations and alliances. It’s not just economics, but also socioeconomics in general.

For new game designers, keeping virtual economies in check is a non obvious but extremely important element of game design. While most designers spend a lot of time thinking about how to add money into a system and how to price virtual goods, some do not spend enough time thinking about how to balance these two elements. If you allow users to transfer virtual currency between each other, trade in virtual items will emerge. If the economies are unbalanced, you run the risk of side effects such as inflation in pricing of virtual goods or too many “high power” items in the wild. Both of these can make it hard for a new player to join the game after it has been ongoing for a while as they are either too poor or too weak to be able to do anything fun. While these things can be managed after they become problems, it is better to have spent some time thinking through the issues before launch.

The invisible hand of economics will make free to play the dominant gaming business model February 12, 2008

Posted by jeremyliew in business models, economics, games, games 2.0, gaming, mmorpg, subscription, virtual goods.

The latest charts of MMOG market share by business model show the free-to-play (F2P in green) model to be roughly neck and neck with the subscription (P2P in yellow) model, with buy to play (B2P in blue) making up just a small fraction of the total:

MMOGs by business model

However, I think that we’ll see the free-to-play model (monetizing through virtual goods and advertising) increasingly take share over the next few years and eventually become dominant.

In the last 18 months we’ve seen many more free-to-play MMOGs being launched in the West, joining pioneers like Runescape. K2 Network, IGG, Acclaim, Aeria and others have all come to market with westernized versions of asian MMOGs, and all are employing a free to play model. Other companies like Sparkplay and Conduit Labs are building their own free to play MMOGs for the western market. But this flood of MMOGs is not the cause of the increasing dominance of the free to play model, but rather the symptom of the underlying economics of the business.

Marginal cost pricing is the principle that the market will, over time, cause goods to be sold at their marginal cost of production. MMOGs, like all other software businesses, have effectively a zero marginal cost of production. This is particularly true when distribution is also online. As a result, you would expect that over time, prices will tend towards zero, i.e. a free to play model.

MMOGs are not special in this respect. We have seen a number of categories of consumer online/software products start out being able to charge a subscription, but eventually move to a free model. In online personals for example, the big story of the last few years has been the inexorable rise of plentyoffish.com, a free online personals site that is now one of the top online dating sites (with no marketing):

online dating sites

Anti spyware software used to be a premium service, and now it too is mostly free. Anti-virus software is the same story. And parental controls software. Now all are available for free.

In each case, it took a few years for the move from premium service to free, but in each case the marginal cost pricing principle eventually took hold. It is hard to hold the line against the invisible hand of the market.

MMOG publishers and developers should be factoring in a free to play environment into their business models.

Virtual worlds, real economics September 11, 2007

Posted by jeremyliew in economics, gaming, mmorpg, virtual worlds.

A couple of weeks ago I wrote about how virtual worlds can generate very real emotions. Alex Tabarrok’s blog Marginal Revolution, notes a post from EVE’s (the space based MMORPG) economist that shows that virtual worlds can also generate real economic phenomena. In particular:

EVE consists of more than 5000 solar systems in 64 regions. The solar systems are connected in a complex web allowing for goods to be moved from one end in the Universe to another. Pilots have to be careful because in low sec and zero-zero security zones there is always the danger of being attacked by gangs of pirates looking for easy prey….

EVE is so large it is difficult for anyone to grasp what is going on in all the regions at any given time. Yet the markets seem to be very efficient at distributing information resulting in symmetric prices throughout Empire space (and even further). This is clearly visible in figure 11 which shows the price for zydrine [one of the more valuable minerals that is used for manufacturing in game] in three different Empire regions.


As one of the comments notes:

The main way to analyze a video game economy is in terms of the one truly scarce resource: player time and effort. In Eve, in order for a player to perform arbitrage, he has to physically move the good from one place to another – thus players will only do so if the profits are worth the time spent moving the goods around. Zydrine is a relatively dense good, in terms of value per volume; a small ship can haul thousands of units of zydrine, so a 200 isk/unit price difference between regions can be exploited for millions of isk in one trip. Another mineral, Tritanium, is only worth on the order of 3-4 isk per unit; its price can be a lot more volatile, especially in uncivilized regions where a large cargo ship can be attacked and destroyed.

Does anyone know of other studies done on the virtual economies in other MMOGs, casual online worlds, or social networks with virtual goods?

Can the music industry learn from the cellphone industry? September 8, 2007

Posted by jeremyliew in business models, economics.
1 comment so far

Techdirt, referencing Bob Lefsetz, draws an interesting parallel between the music and cellphone business models.

He [Lefsetz] also highlights how the idiotic focus on getting more per song, just as everything else about music and technology gets cheaper, is hurting the record labels much more than it helps them. He compares the situation to how expensive it was to use mobile phones a dozen years ago. People were scared to use mobile phones because the charges were ridiculously high. You only used it in special circumstances. Today, however, the rates are much, much lower and that’s massively grown the market for mobile services. Do you think the mobile operators would prefer to go back to $1/minute charges? Yet, why does the recording industry insist on $1/song charges when the infrastructure can support an entirely different model. Instead, make the music cheap and easily accessible.

As a general rule, in a competitive market, prices drop towards marginal cost. But if demand is elastic, then industry revenues and profits can still benefit from this.

Lefsetz makes the point with far more capital letters, exclamation points and indignation in his original post.