iPad games are a big opportunity June 28, 2012Posted by jeremyliew in games, games 2.0, gaming, ipad, tablet.
I posted recently about discovery being the challenge in gaming. This is very true of mobile gaming where the level of noise is very high.
I think that iPads, and tablets broadly, present a current opportunity for game developers. According to Pew Internet Life, one in three Americans owns a tablet or ereader as of January 2012. Many publishers acknowledge that tablets are going to be very important gaming platforms. John Ricatello, CEO of EA, recently said that iPad is EAs fastest growing platform. Says the International Business Times,
Reuters reported Gonzague de Vallois, senior vice president of publishing at Gameloft, saying: “The iPad is the fourth step in the gaming evolution. The first being the microcomputer, the second being the game console and the third being smartphones.”
Even Microsoft, with it’s new Smartglass product, acknowledges that the iPhone and iPad will be important gaming platforms.
Yet today, there are far fewer games built specifically for iPads. Discovery is substantially easier for iPad than iPhone as it is less crowded. And even most “HD” iPad games are simply upresed version of the iPhone game. Yet tablet gaming has the opportunity to be quite different to phone gaming:
- Longer session times
- More screen real estate for display
- Multi-touch and other more complicated gestures more feasible
- Opportunity for co-op and competitive play with another person sharing the same device
If the tablet is fundamentally an entertainment device that lives in the living room (versus the phone being a utility device that lives in the pocket and is frequently used out of the home), then you would expect different use cases to emerge, and different games to address those use cases. There is a window where better products can lead to better discoverability. I expect this window to close over the next 18-24 months.
Who do you think is doing the best job of optimizing the tablet gaming experience?
Discovery is the problem in gaming June 11, 2012Posted by jeremyliew in games, games 2.0, gaming.
In 2009 I wrote a guest post at Industry Gamers about why social gaming is so attractive to investors, where I talked about the three key elements oin gaming: Development, Distribution and Discovery. Basically, I compared circa 2009 social games to AAA games and said that they were cheaper to develop (a few months and a few hundred thousand dollars), distribution was virtually ubiquitous (since they could be played in browser versus bought in a store and played on a console or high end PC) and discovery was free through viral growth instead of driven through heavy marketing campaigns. I concluded that this dynamic, which allowed a startup to take multiple “shots on goal” with a venture capital investment, was what had brought renewed investor interest to gaming, an industry that had largely been financed by publishing deals.
Much has changed since 2009, and browser (including social) and mobile games are the two hottest areas in gaming right now. But I think the framework of Development, Distribution and Discovery is still a useful lens to view the industry
Development costs have gone up since 2009, as has production quality and game quality. Many of the circa 2009 social games were more focused on growth than retention, and in many cases more focused on “satisfaction” than fun. This has changed dramatically. Game design has improved, as has design and art. This has caused development costs and timelines to increase, but generally but less than an order of magnitude. Good mobile and web games can still be built for a budget in the low single digit millions range and below, and in under a year.
Distribution continues to be easy, but it is no longer free. In 2009, there were no facebook credits and 360M people used Facebook. The iPhone app store had been around for a year or so, but there were less than 10m iphones in use. Today, there are 1bn smartphones (including Android), 900M people use Facebook every month, and in all cases you pay a toll to the platform. But gaming companies do not compete on distribution, it is a level playing field.
The outcome of easy development and distribution has been a massive explosion in the number of games available. For both mobile and Facebook, games are the most popular category of apps. In a world as crowded and noisy as this, Discovery has become the bottleneck.
In 2009, viral growth through invitations and notification were the way that Facebook games could get discovered. As these channels became better policed, discovery moved to the feed. Today, even the feed is no longer a reliable driver of discovery.
For mobile, charting is the primary mode of discovery, and this led to widespread app store manipulation.
Today, game quality is an ante, but discovery is the differentiator. We see a few strategies work repeatably for at scale discovery in the current environment:
- Cross promotion to an existing base. Game publishers with a lot of Facebook or mobile install bases are able to make their user base aware of new releases in a free and scaleable way. Zynga has repeatedly made use of this approach to launch its new games at real scale.
- Sequels. Publishers with a hugely successful hit game can often milk the IP with subsequent releases. Rovio has done this repeatedly with Angry Birds. With the game market being so noisy and confusing, most players will give a sequel a shot if they enjoyed the first game.
- Borrowing IP from another media. Much like a sequel, gamers will respond to a brand they recognize. This can be IP from another gaming platform (Bejeweled Blitz, Zynga Poker, Sonic the Hedgehog, Sims Social) of another medium (Hollywood Squares)
- Paid acquisition. Smartphone and Facebook both have relatively efficient markets for paid installs at this point. If a game monetizes better than others, it can pay more for a new player than others can, and it can find its audience through paid channels. This requires excellent monetization. Kixeye, a Lightspeed portfolio company, has followed this approach with great success.
- Get featured by the platform. This is hard to do. Infinity Blade benefited from a lot of promotion from Apple, in large part because it changed peoples perceptions about what was possible for an iPhone game. This drove a lot of users for the game, despite its relatively high pricepoint. Getting featured by the platform is hard to plan for, and can take a combination distinctiveness, something in your game that also promotes the platform, business development expertise, and someone simply taking a shine to your game.
Many of these are not useful strategies to startups since they are only available to larger companies who have already seen success. But we still see new games break through, get discovered, and race up the charts. This can always happen to great games at any time. But it relies on luck, and luck is not a strategy.
What is your strategy for discovery?
The ’05/’06 vintage of web 2.0 startups took advantage of much lower development costs and faster iteration cycles to build compelling products and sizeable user bases without thinking too much about monetization right away. For companies like Youtube and Facebook, this approach worked incredibly well and led to very fast value creation, often in advance of revenue growth.
One of the hallmarks of some of the current generation of “hot companies” is an early focus on business model and revenue generation. This is a cross genre phenomona, including social gaming companies like Zynga, Playfish and Playdom (a Lightspeed portfolio company), flash sales companies like Gilt, Ruelala and HauteLook, local deals sites like Groupon and Living Social, and subscription businesses like LifeLock or Zoosk. All of these companies have seen revenues grow into the millions per month within 12-18 months of launch, which is a pace that has not been seen from previous generations of internet startups.
The success of Zynga, Playfish and Playdom has been well documented. Zynga is doing 10s of millions in monthly revenue, and Playfish and Playdom in the single digit millions per month, all within 24ish months of launch.
In the Flash Sales category, last July Business Insider said of Gilt:
Yesterday, we reported the impressive success of Gilt Groupe, a two-year old ecommerce company that expects to generate about $150 million in revenue this year…
First, growing from $0 to $150 million in revenue in two years is pretty fracking impressive, no matter how you look at it. That’s way faster than Amazon grew in its first two years, for example. (Yes, the Internet is much bigger now).
The fact that Gilt’s US business is reportedly cash-flow positive is also very impressive. It’s one thing to generate a lot of revenue. It’s another to generate a lot of revenue with enough margin to put the company in the black, which Gilt has reportedly done in the U.S.
Part of the company’s cash-flow generation is the magic of the online sales cash cycle: When you sell online, you often collect cash for your product sales long before you have to pay the vendor you bought the products from. Amazon benefitted heavily from this dynamic in its early days, and was cash-flow positive long before it started to generate net income. But part of the cash-flow success is also the power of the business model.
Gilt thinks it can get to $500 million in revenue next year, which seems plausible. The company is expanding both horizontally into other product categories (it started with fashion, and is now moving into kids, travel, etc.) and other geographies (it already has 20 employees in Japan).
The Economist reported in September that RueLaLa wasn’t far behind:
Ben Fischman, the boss of Rue La La, which started in 2008 and expects to have revenues this year of around $130m, thinks the “theatrical environment” of his site keeps customers hooked. He says retailers became complacent during the boom years and failed to make the most of new technology.
Groupon is on a similar growth path. Since they put the number of sales and price of each day’s groupon on their website, it is relatively simple to estimate their revenue by adding the implied daily revenue across each of their cities. They went from around $100K in revenue in January 2009 to around $10M in revenue in January 2010 – a 100X increase in just twelve months.
Atul Bagga, Internet Equity Analyst at ThinkEquity, recently published a report based on an interview with the CEO of Zoosk where he notes:
Zoosk is a multi-channel global online dating service with presence on major social networks, online, mobile Web, iPhone application, and desktop client with 50 million registered users/14 million monthly unique users, a $2.5 million monthly revenue run-rate (as of October 2009) and a 20% month/month revenue growth. The company expects its revenue to be more than $200 million by 2011.
Of course, not all the current “hot” companies have taken this approach. Some, like Twitter or FourSquare, have seen enormous growth in usage that has outpaced their revenue growth.
But the categories I outlined earlier are all taking advantage of one of Lightspeeds consumer internet predictions for 2010, that direct direct response advertising is getting more efficient. A bad time to sell ads is a good time to buy ads. All these companies are taking advantage of relatively low customer acquisition costs.
If you understand your customer lifetime value, and you can acquired customers for 20-30% of the lifetime value, you are going to make money. Understanding lifetime value is hard for media companies, but it’s easier for gaming companies, ecommerce companies and subscription businesses. They have predictable customer behavior cohorts that can be extrapolated from a few months of data from a representative sample. Running an aggressive positive arbitrage while online media is cheap has allowed all of these companies to grow revenue very fast once they get the micro-economics right.
I get really excited about these types of companies. If you’ve got microeconomics that work like this, email me!
Asia is significantly ahead of the US in the development of the free to play MMOG market. If China’s market is an indication, the future certainly looks bright. Says GamesIndustry.biz:
China’s online games market will exceed USD 5.5 billion by 2012, according to Pearl Research, which estimated that the market grew more than 63 per cent to USD 2.8 billion in 2008.
The study, entitled “Games Market in China”, reported that six online game operators, including Tencent, Changyou, The9, Netease, Shanda and Giant each brought in more than USD 200 million in revenue last year.
Peak concurrent user rates are phenomonal, especially when you consider that free to play MMO publishers in the west consider a game successful if they get more than 50k PCUs:
China’s most popular online games were named, with Netease’s Fantasy Westward Journey leading the pack at 1.8 million peak concurrent users, followed by Giant’s Zhengtu Online at 1.5 million.
Tencent’s Dungeon and Fighter hit 1.2 million concurrent users, while Blizzard’s World of Warcraft, operated in the region by The9, came in at 1 million users.
But a rising tide does not raise all boats. 70% of Chinese Gaming companies are operating at a loss according to iResearch Consulting Group:
There are about 200 online games in the Chinese market presently, said insiders. But only several developers can make a profit on their games, such as NetEase.com, Inc. (NASDAQ: NTES), Shanda Interactive Entertainment Ltd. (NASDAQ: SNDA) and The9 Ltd. (NASDAQ: NCTY).
Such estimates may stun those people who believe that the business generates huge profits. But from analysts’ points of view, the huge profits, if existing, have been killed by costs on human resources, hardware, promotion and after-services firstly.
T2 Entertainment Co., Ltd., a Chinese online game operator, invested about CNY 30 million in the South Korean game Freestyle before the open beta testing in China, including over USD 1 million on the operating rights and CNY 20 million on promotion.
Besides, the R&D of an ordinary three-dimension online game often costs CNY 10 million, insiders said, adding that of ten online games, only one is profitable.
Because of the hit driven nature of gaming, if the cost of a “shot on goal” is high (as the examples above suggest) then most launched games will not be profitable. Also each game is a “project” with an end-of-life, rather than having ongoing enterprise value. Some hits have the ability to build sequels, but in many cases a company that created a hit game in the past doesn’t have a guarantee that their next game will be a hit.
As a result, some of the nominally successful online games companies are not that highly valued. Shanda, NetEase, Changyou and Giant are all valued at over a billion dollars. However The9, noted above, currently has negative enterprise value. (See Avista Partner’s video game industry April Briefing – page 6 for online games.) This means that The9 is valued by the market at less than the amount of net cash that they have. (The9 recently lost it’s World of Warcraft license in China to NetEase. WoW represents 75% of The9’s revenue and they have not had a true hit of their own outside of WoW.)
The9 is an extreme case, but in general the median multiple for the online gaming category is just 7.0x 2008 EBITDA. Even for the four online gaming companies with more than a billion dollars in market cap noted above, 2008 EBITDA multiples average just 10x. Given the high growth rate of this industry, that is a surprisingly low multiple. As an online MMOG typically has a 4-6 year life, there isn’t much credit being given for companies being able to launch new hit games.
These relatively low multiple are being driven by three factors:
1) High cost to launch a new game
2) Low number of new games launched each year
3) Low probability of each game being a “hit”
In order to unlock the much higher multiples that a market growing as fast as online gaming should allow, companies will need to figure out a way to address one or more of these factors. I think a few of the free to play “social gaming” companies that are starting to figure out how to do this
Best practices in MMOG metrics April 30, 2009Posted by jeremyliew in games, games 2.0, gaming, metrics.
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I missed Daniel Jame’s presentation at GDC last month, but he has a great blogpost and slideshow about how to use data dashboards to run an online game. Go read it, and pay attention to the sample reports in the appendix.
Crowdsourcing missions for MMOGs April 21, 2009Posted by jeremyliew in game design, games, games 2.0, gaming, mmorpg, user generated content.
Really interesting post at Kotaku about City of Heroes experience with crowdsourcing story arcs.
In a letter to the community posted on the official City of Heroes website, Matt “Positron” Miller revealed that within the first 24 hours of the new updates’ existence, players in both hero and villain factions had created more than 3800 story arcs, each consisting of five missions a piece – more content than the development team had created during the game’s entire existence.
Players have been busy trying out missions and critiquing them in the forums as well. Out of the more that 20,000 arcs now available in game, 2,860 of them have been rated 5-stars by players, with only 582 rated at 1-star. Popular themes include the 5th Column, featured in 794 arcs; the super-heroic Statesman, starring in 134; and time travel, which is the subject of 112 arcs.
As an indication of volume, this is more story arcs that have been created by the game developers in five years!
One popular element was creating custom opponents notes the City of Heroes blog
70% of the arcs that are published use Custom Enemy groups. These are enemies created using our fantastic costume editor, coupled with a large sampling of the powersets that the game already uses. These unique enemies have proven to be extremely popular and sparked new life into the game. Players absolutely love fighting custom enemies for the simple fact that they no longer know what to expect. One of the biggest problems with MMOs is you eventually learn what all the critters you are fighting do, and the game can get pretty rote. Developers make new critters, but there can be months before you get new ones. Now players have the opportunity to be constantly making new enemies with new, interesting capabilities that can challenge and vex themselves and their friends, any time they want.:
I don’t play City Of Heroes, so I don’t know how directly applicable this idea is to web based social games. However, any of the social games currently available have very similar structures (e.g. the “wars” genre) which can get old over time. Perhaps this approach of crowdsourcing missions might add some interesting eldergame elements to these games.