Games as services, games monetisation, Mobile games

The promiscuous hardcore gamer: Does new survey data showing social is killing casual add up?

October 2011

As the ways that games are made, distributed and monetised transform some parts of the industry, change may finally have reached the bastion of the retail industry, the console gamer. New data on gamers’ playing and purchasing behaviour claims that many console gamers are spending time and money on social games. Is this data credible and what does it mean for console games studios, their route to market and platform choices?

The data from Kabam and ISG’s recent survey appears pretty stark. 82% of US ‘hardcore’ social gamers surveyed said they are console/handheld gamers with 360 the most popular platform closely followed by Wii. Of these, 78% said their spending on console was static or in decline and 88% said their console gaming time would stay flat or diminish, as a direct result of social gaming. In contrast, nearly 60% of the ‘hardcore’ sample said their spending on freemium social games would increase and nearly half expected to play more on social.

Two other recent surveys reinforce the findings. The (largely hard-core) gamers’ community Raptr measured top games’ share of playing time for its 10m players and found that the 4th largest franchise, after Call of Duty, World of Warcraft and Halo, was Zynga’s ~Ville titles, more than all the remaining core games franchises combined. Another survey, by RockYou and Interpret, found that 50% of 2,000 social gamers polled own consoles. While 2/3 of these companies have considerable vested interest in showing to investors how they are stealing market share from consoles, and some of the data needs a pinch of salt, one cannot avoid the emerging picture of changing consumer behaviour across multiple platforms.

 

Some of Kabam/ISG’s survey’s conclusions are a little too black and white. Despite August’s sizeable 34% fall in US software sales year on year, it’s becoming apparent that Nintendo in particular and sales in certain genres like music have taken much of the hit. Retail sales data for 360 and PS3, while not immune to falling sales and prices, appears considerably more buoyant and, while it would be a minor miracle if 2011 retail games sales hit 2010 levels, it seems highly unlikely that social is killing console, as some have interpreted, because it’s clearly not a zero sum game. In this peak sales season, it’s quite possible hardcore gamers’ expenditure on both retail and social gaming could grow at the same time. Some publishers are even trying to target them twice with the same franchise e.g. Dragon Age 2/Dragon Age Legends.

 

The hardcore social gamers profiled in Kabam/ISG’s survey are mid-core gamers on other platforms, or perhaps hardcore on Wii. Their demographics are not those of classic hardcore console gamers because they’re too female and Wii is too prominent. But these surveys do provide detailed evidence of a new promiscuity in many console gamers’ behaviour. Platform-usage stats in the ISG/Kabam data reveal a mid-core console gamer playing heavily on PC (79%), Wii (55%), 360 (54%), Smartphone (42%), PS3 (39%), handheld (36%) and tablet (15%) in the last 12 months. This demographic has started to use Facebook as a serious games platform, playing for many hours at a time and spending hundreds of dollars. Freemium content such as power-ups, extra resources and time-savers are popular and expenditure is on the rise.

 

Although some hardcore social games companies are spending millions per month on Facebook advertising, many are not, and overall players are clearly responding to new marketing techniques. Multiple hours on social networks every day exposes these mid-core players to marketing from social games companies sent to them by their own friends. These messages intrinsically link the social value of their friends with the value of free items redeemed on response. It’s the difference between a publisher’s marketer telling you ‘Go out and buy this game because it’s great’ and a friend saying ‘Play this game with me now for free and get this cool stuff’. They might look like a wall of spam, but friends’ recommendations within the context of specific games can be intrinsically valuable and highly effective marketing vehicles.

 

With social maligned, muzzled or at the very least misunderstood by the console platforms, none have mounted a clear defence against this changing customer behaviour. Nintendo in particular, its plate already brimming with market fears, appears to have grounds to be worried by the promiscuity of its players. Perhaps it’s time for Nintendo to reconsider its ‘anti-social’ position and grasp the opportunity?

 

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Games as services, games monetisation, Mobile games, Uncategorized

Hardcore social: Kabam

June 2011

This month, I’m returning to our series of profiles of games companies achieving great commercial success with innovative and rule-breaking business strategies. This time US social network games company Kabam comes under the spotlight, a studio that has grown phenomenally fast by  targeting what many have considered a non-existent and non-viable audience: hard-core Facebook gamers.

A few months back we analysed opportunities in hard-core social network games development, arguing this was a sizeable but under-served market. Kabam recognised this potential as early as 2009, taking a significantly risky but highly prescient gamble to move away from nurturing mass-market sports communities online and into niche browser-based strategy games. A quick peak at their changing user base suggests disaster. Before the 2009 launch of its first strategy title, Kingdoms of Camelot, Kabam (then called Watercooler) had 25 employees and its sports communities peaked at 26 million monthly active users. 15 months later and with the sports communities now largely gone, it has a quarter of the number of monthly users (7.2m MAU). Such a decline would be the kiss of death for many social games companies but Kabam now has 16 times the number of employees (over 400 and still growing).

What makes Kabam special is that this remarkable headcount growth has been underpinned by equally strong revenue growth, with the company remaining profitable throughout this hiring spree. Like most top social network games companies, Kabam wisely took advantage of the VC interest in all things social to raise around $40m in three rounds giving it a war chest to acquire and invest in new teams and games. These funding rounds graphically demonstrate the benefits of its strategic volte-face. Its valuation rose from$20m in October 2009 to reportedly a few hundred million dollars just 13 months later.

So how has Kabam achieved such a meteoric rise? Put simply, it has deliberately gone after an unfashionable audience largely ignored by other social network games companies, creating games specifically for them and nurturing a community around them. Where the average age of social network gamers overall is early-mid 40s and a comfortable majority are female, 70% of Kabam’s user base are male and aged 18-35. This demographic plays more (Kabam’s average session lengths are a multiple of Zynga’s) and, most importantly of all, pays more (Kabam boasts that its monetisation is market leading). Kabam has borrowed the best of multiple worlds: the heavily localised browser-based gameplay appeal of off-Facebook games like Travian; the viral propagation features of Facebook games like FarmVille; the commercial benefits of the aggressive freemium microtransaction business models used by companies such as Aeria Games.

The result is a portfolio of games offering deep, collaborative and competitive gameplay based on common hard-core strategy themes (fantasy, ancient Rome) whose communities are richly cultivated through regular content updates and special events. The games generate revenue through microtransactions which are used to buy largely gameplay-enhancing and frustration-reducing items and services. Premium cosmetic items are comparatively limited and Kabam makes use of lucky dip sinks (e.g. randomised item purchases), an increasingly common, if blatantly commercial, technique used by games companies to inject gambling elements into their game. Unlike most Facebook games developers, Kabam caters extensively to international users and most of its recent new users have come from outside the USA.

Interestingly, despite the success of its formula, Kabam sees its future increasingly lying outside of Facebook: on other social networks, mobile devices, its standalone portal and eventually console. Kabam’s new IP plans therefore now revolve around developing multiple SKUs and the resulting business model (and audience) diversification will clearly present it with a new set of risks.

Kabam’s success to date teaches us multiple lessons although two stand out for me. Firstly, developers should not be afraid to take a dramatic new strategic direction if the new direction has sound commercial footing. Secondly, a contrarian point of view is not necessarily an incorrect point of view; if you think there is an untapped market out there, why not go for it and prove everyone wrong? Kabam certainly did.

 

 

 

Games as services, games monetisation

Smurfgate – bad practice for virtual goods?

May 2011

When Madison, an 8 year old from Rockville, Maryland, purchased nearly £1,000 of Smurf-themed virtual currency in one month on an iPhone game without her mother’s permission, the mother loudly complained, galvanising Apple, legislators and the Federal Trade Commission. Whose responsibility was ‘Smurfgate’, what are the commercial implications and could this initiate a fractious new argument about the ethics of microtransaction games for kids?

 

Smurfs’ Village is Capcom’s Farmville clone on iPhone, with classic sim gameplay and virtual currency bundles ranging up to $99.99. Apparently Madison’s mother downloaded the free game, logged in, handed the phone to her daughter who quietly bought wagon-loads of smurfberries, the game’s virtual currency. This was possible because until recently Apple allowed unlimited in-app purchasing without additional password confirmation for 15 minutes after log-in. Why Apple allowed this is somewhat baffling, as was its long delay in enforcing a password prompt for all in-app purchasing post log-in, an inevitable, potentially costly step could reduce revenue by raising friction in many freemium iOS games.

 

Capcom inadvertently fell into a commercial tank trap well known to more seasoned developers of younger-skewed virtual worlds and MMOGs – bill shock triggered by uncontrolled microtransaction-based purchasing by children. Comparatively few online games targeting under-13s use uncapped microtransactions because operators fear potential parental backlash and credit card chargebacks. These developers often try to reassure parents by promoting features like safe environments, moderation, restricted player communication, compliance with legislation and mildly educational content. Commercial model is important; games should appear good value, thus predictable subscriptions work and uncapped microtransactions are problematic. Microtransactions can work if they are subscription-based (effectively monthly allowances of virtual currency), or allow monthly spending limits, both increasingly popular in tween/teen online games. Capcom uses no caps and only posted warnings that virtual currency costs real money following complaints. It’s debatable whether parents would notice or younger players understand. With the top 9 in-app purchases averaging $22.99, some (whether children or adults) spend significantly in Capcom’s successful, commercially aggressive game.

 

If Madison’s mother ignored the premium virtual currency and Apple’s complex controls regulating in-app spending, she may have been reassured by Apple’s 4+ rating, mistakenly so because neither PEGI, ESRB nor Apple assess whether business models are appropriate for children. The ratings bodies struggle to certify these products at all. Like most publishers of mobile and online games, Capcom doesn’t promote an ESRB or PEGI rating for Smurf’s Village. Even Disney’s Club Penguin, one of the safer kids’ virtual worlds, has no PEGI Online rating. With tens of thousands of online games released every year, PEGI and ESRB are like King Canute trying to hold back the sea and it’s unlikely the contentious area of microtransactions for young children will ever be certified.

 

Many will argue the parent bears most responsibility. She may brand Apple’s inadequate spending controls and Capcom’s absent labelling as accidents waiting to happen, and will feel vindicated after receiving a refund but she clearly shirked her responsibility for regulating her child’s purchasing and understanding what she allowed Madison to play. That didn’t stop a congressman successfully asking the Federal Trade Commission to investigate in-app purchasing, whose early feedback probably triggered Apple’s pre-emptive policy switch. If slightly extended, this investigation could open a real can of worms by examining children’s use of a much larger platform, Facebook. Here, officially everyone is over the age of 13, but (say comScore) nearly 4m US Facebook accounts are underage. As social networks usage rises and some games providers blur age limits, massive abuse of minimum ages by children in games risks becoming a headline issue. Again.

 

Hard commercial reality would have eventually forced Apple to do what Capcom, legislators and ratings would or could not. Chargebacks demanded by parents of kids splurging on Smurfberries prompt credit card providers to reclaim funds from the payment collector Apple. Such chargebacks could damage Apple’s vendor status and may inevitably force more changes on content partners.

 

All parties must share some responsibility for rousing the legislators and the ‘scandal’ may have burnt itself out but this could become an opening salvo in a wider campaign to limit kids’ gaming online. If worse examples arise, we may find ourselves in uncomfortable territory discussing new boundaries for child protection.

 

 

Games as services, Gamification

Why the Gamification market will never be scaled

May 2011

If you ever need an example of how deeply games are influencing our culture, look no further than gamification, which has rapidly spread into multiple, highly disparate industries. Each week new counter-intuitive examples of game elements crop up. Gamification is being used to persuade us to watch more television, drink more coffee, brush our teeth more frequently, join the army, even educate our kids more effectively.

 

Of all the new words coined by our industry, surely the clumsiest and least appropriate is gamification, which doesn’t describe the actual practice. Gamification is patently not about turning something non-games related into an entire game – that’s the domain of Serious Games (and, as I’ll argue, its fatal flaw). Gamification cherry-picks discrete elements of games – gameplay mechanisms, community-building principles, marketing methods, analytics – and applies them outside of games.

 

This vibrant new sub-sector of games would not exist without the genius, method and discipline of games designers, who have defined the market to date and dominated the industry’s airwaves with debates about extrinsic and intrinsic rewards, the evils and impending doom of pointsification (snap), and the proper / improper use of games design. This noisy debate could be as much about ownership as it is solid game design principles, the natural consequence of gamification slipping from the control of designers (who are essential for gamification to be compelling) and into the hands of the marketers (who are arguably essential for gamification to spread far and wide). The marketers are best characterised by gamification companies like Bunchball and Bigdoor, around a score of whom have sold white label gamification layers to blue chip giants like FMCG and food manufacturers, TV and mobile networks.

 

While the marketers can be accused of short-termism, rinsing and repeating off-the-shelf gamification based on points, rewards and leaderboards, they have introduced other disciplines essential for the growth and commercial success of gamification. They have taken tips from casual games communities, which have evolved highly sophisticated marketing methodology and incubated huge games communities targeting specific demographics. They have lifted pages from the social network games handbook, utilising social graph marketing, iterative development and virtual goods exploitation. The best embed in their systems the analytics that underpin many online games to ensure they deliver stuff audiences actually use.

 

This magpie-like approach is one reason why gamification is not simply the latest incarnation of the Serious Games industry, which typically builds whole games (engines, art, physics, the whole shooting match) for non-entertainment purposes. Apart from risking extracting all the fun, serious games can fail when whole games are built from completely inappropriate subject matter. No worse example is the UK Department of Transport’s ill-judged £2.7m bet on a fully-loaded fantasy MMORPG designed to encourage – pause for comic effect – crossing the road safely. You can guess the car crash that happened.

 

The other crucial difference is that gamification can scale when, arguably, Serious Games cannot. Serious Games have been about to boom for decades but, excluding some military applications, have mostly not progressed from academic case studies with thousands of users to large scale projects. The ‘whole game’ approach with roots in boxed product development may be to blame. When pitching whole, substantial games on single subjects to non-games finance sources like governments, serious games companies are effectively asking deeply risk-averse organisations to bet on potentially short-term hits as if they were risk-aware games publishers. With apparently few willing to repeatedly fund such punts, this has resulted in a low-value market. Gamification has reached much larger numbers of players and companies faster and with more tangible results. Tell broadcasters that gamification has increased viewing figures by 40%, e-commerce websites that it has reduced friction in the acquisition funnel by 90% or driven up user registrations on community sites by millions for fairly modest expenditure, and clients have proven more likely to open their wallets.

 

But beware analysts telling you that gamification is worth $XXXm because they are simply guesses based on little actual data but rather the hyped-up sales projections of the aforementioned marketers. See our recent tweets on the subject but no-one will ever scale this market accurately because it is impossible to track so many different industries trying gamification.

 

Nevertheless, gamification has demonstrated that it can scale, and generate substantial value. As it rolls onto every device, perhaps the mother load of all gamification projects is just around the corner – education. To date government has failed to take advantage of our children’s favourite entertainment mechanism for teaching, but the gamification of an entire school’s syllabus has taken place in New York, funded by the state, with fascinating results. Games designers, who are fundamentally tutors as well as entertainers, could really take gaming to the heart of our culture.

 

Development, Games as services, games monetisation, Uncategorized

Science friction – how friction could be killing your game

December 2010

How many steps does it take for an average customer to choose, buy and consume a retail game? 5? 10? 15? With so many opportunities to be put off or distracted by other games, entertainment or activities, it’s a tough job steering players towards purchase. This month, I’m going to graze the surface of a vast new discipline for self-publishing games companies: managing friction. Friction means anything that gets between your game’s promotion and its purchase and enjoyment by your customers. Over decades, retail marketers have honed their skills at smoothing this inherently high friction path towards the till. Managing friction is a very different science for network businesses, and one which today defines some of the industry’s most successful companies.

Selling games direct to players over networks clearly reduces some kinds of friction but certainly does not eliminate them all. In fact, our sensitivity to friction is amplified online. Whether it’s a download delay, a registration process, a poorly-crafted marketing message or a credit card form, friction can dramatically reduce your sales. Friction = lost customers and thus revenues. Many online gaming companies invest significantly in processes to guide players from initial interest to spending money as smoothly as possible. Optimising that funnel is a highly granular, iterative and data-heavy process aimed at converting players to the next stage of their engagement with a game.

Friction has long been an environmental hazard for online marketers – the venerable click-through rate is just one friction metric. Every budding online marketer soon discovers you need to test which “call to action” works best. Social games companies reduce friction by testing phrasing, landing pages and all graphical aspects of their marketing, homing in from multiple variations to those that work best. Each call to action is optimised for different kinds of target customer and marketing channel. Trial and error will reveal what works for AdWords may fail as copy for an affiliate promotion, for example. Analytics underpin this discipline, allowing practitioners to dice marketing, customers and on-site activity into segments which are then analysed for return on investment. Each of the many channels and campaigns will perform at different levels depending on the target audience and one major driver behind the success of social networks is that they can dramatically reduce the friction of shopping from a catalogue of multiple products by getting players to recruit friends. However, finding staff skilled at the continual process of evaluating the data is challenging.

The friction generated by people’s stunning impatience online requires a range of technical solutions. Amazon reportedly discovered that a 100 microsecond increase in load time decreased sales by 1%. Google is said to have found that a half second delay in loading a page resulted in a 20% fall in traffic. With load speed fundamentally affecting sales of all online products, most online games companies dealing with high traffic volumes have turned to the cloud to decrease response time. Streaming games services are built on technology designed to reduce the friction of low bandwidths and slow game downloads. Flash’s 95%+ (i.e. low friction) installed base is today driving a significant proportion of online gaming whereas games dependent on plug-ins can force 99% of web users to download and install clients over multiple clicks which most will fail to complete. Plug-in and other download-based online games clearly can work but they do so only for the most motivated players, often the hard-core minority who will tolerate the higher friction.

The bad news is that your work is not finished once someone arrives on your site and accesses your game. In fact, your work’s only just started. We’ve seen data from companies that have won or purchased massive traffic only to lose almost all of it before people even start playing. Some are basic errors in design. How many people clicking on a ‘Play Now’ button are actually forced to endure multiple screens and forms before getting to the Fun? Canny operators manage this by delaying the necessary points of highest friction. Although SOE’s Free Realms requires a client download, new players can immediately start creating and customising their characters in browser, initiating but subsequently hiding the download process. Thus the friction of the installation process is delayed until players are incentivised to continue only after they have made something of value to them in the game. Each individual game will have points of high and low friction. Identifying and subsequently fixing them will require solid analytics to monitor most interactions between player and game for the entire customer lifetime, as well as design flexibility to provide solutions.

There are many other types of friction, some of them more deadly but others that are, counter-intuitively, beneficial; but here we can only scratch the surface of the data and knowledge we have accumulated on this huge subject. The bottom line is that minimising friction means increasing revenues for many types of game service, and companies that successfully manage friction are being snapped up. One good example is Playdom, whose expertise in the many ways to reduce friction was a driver behind its acquisition by Disney. Another is ngmoco, whose development methodology using analytics to guide continuous game improvements has resulted in one of the highest valuation multiples of recent years. However, failing to manage friction can kill network games businesses just as easily as failing to get customers in the first place.

Games as services, games monetisation, Mobile games, Publishing

Chinese hordes – China buys into Western games companies

August 2010

This year China is likely to become the 3rd largest games producer in the world. A burst of acquisitions of US games companies by Chinese games companies earlier this year signifies the growing confidence and financial strength of the Chinese games industry and may herald a new phase in the globalisation of the industry. This month I’ll analyse what China’s meteoric rise into the top tier of global games territories means for the Western market.

First, Shanda Games spent $80m acquiring Mochi Media in January 2010, then came The9’s $20m acquisition of a majority position in Red 5 Studios in March and most recently Perfect World took a majority stake in Runic Games in May for $8.4m. They represent the first three transactions in the Western games market by a sector that barely existed five years ago. Mimicking recent global economic trends, Chinese gaming and Chinese games companies have prospered in the last few years whilst North America and Europe have suffered declining retail sales and their largest indigenous publishers have struggled to avoid falling revenues and losses. China’s success has been achieved without material sales outside of Asia. This minimal global influence is clearly not going to last and these recent US transactions highlight one potential route into the Western market.

The Chinese online games market is expected to grow around 30% this year to reach $4.6bn and whilst the rate of growth may slow down, it still has considerable room for long-term expansion. China already houses the largest internet user base in the world (c. 400m) but this still represents less than a third of the population (vs. c. 75-85% for most Western countries). It has an increasingly tech literate, wealthy and middle class populace benefiting from a buoyant economy and rampant entrepreneurialism. Both the number but also the monthly and lifetime value of Chinese gamers is far from peaking.

From this fertile primordial games market have arisen hundreds of indigenous games ventures, around a dozen of which will generate over $100m in sales this year. The largest – online and mobile giant Tencent’s games business – recorded $300m in sales during its most recent quarter (overtaking THQ, Take 2 and Ubisoft). The next two, Netease and Shanda Games, are expected to reach $800m and $700m turnovers respectively in 2010. More impressive is the fact that almost all of these companies are not only profitable but massively so. 50%+ net profit margins are not unheard of. In addition to throwing off sizeable amounts of cash, many of these businesses have sought to bolster their balance sheets with IPOs and additional fund raising. Giant Interactive, a mid-tier publisher with just $200m in expected sales in 2010 currently has some $700m in liquid assets (more than the combined cash reserves of THQ, Take 2 and Ubisoft) whilst the top 7 have some $5.2bn to spend in aggregate. The $108.4m spent so far would appear therefore a drop in the ocean. There is clearly the capability but is there the appetite to make more purchases in the west?

The answer, for me, is a conditional yes. The West represents a huge, mature market whose player base is considerably more valuable than those found in China. However, unless there is a radical change in direction, Chinese companies are only going to be interested in network games businesses in the West; buying a traditional games developer or publisher would result in unwelcome earnings dilution, lumber them with business practices, technologies and infrastructure that are both alien and largely irrelevant to them. All three acquisitions this year were of network games ventures that complement the Chinese companies’ businesses. The Chinese companies will primarily seek to apply their capital and business know-how to Western-developed network games although we also expect more Chinese publishers to follow Korean publishers’ leads and establish North American and European operations to exploit their existing Chinese-developed IP.

I don’t believe Western expansion will be an investment priority for several years given the rate at which the Chinese and pan-Asian markets are growing. The Chinese hordes are amassing but there will be no invasion just yet. However, I expect to see sporadic additional acquisitions being made in the West as the Chinese flex their financial muscles, and use opportunistic acquisitions and investments to “learn” the Western market and build a foundation for future operations. In the longer term, the question of whether China will become significant to investors in the Western games market is, in my mind, more a case of when rather than if.