video games

Nintendo doom-mongers beware

August 2011

 Recently, an anonymous publishing exec declared publically that 3DS is “definitely dead” unless Nintendo generates good sales this Christmas. The surprising finality of this proclamation, even allowing for the ‘unless’ parachute clause, is by no means singular. Industry history is littered with flawed prognoses of doom for games platforms, which seem to come thicker and faster in times of change such as these. This month I’ll explore what makes senior industry execs (and journalists) so unafraid to risk their reputations with such bold predictions of outright failure.

Sony’s PS3 launch was widely described as a “failure” in the games press, as seemingly slow hardware sales after launch week triggered overblown, doom-laden declarations from senior industry figures. “The PS3 is a total disaster”, said one of the industry’s most vocal and successful CEOs in 2007, advising Sony that, “they should just cancel it and do a do over”. While Sony would undoubtedly have welcomed higher sales in its first 12 months, it was far from the disaster so many declared and with over c. 53m unit sales since then, the doomsayers now simply look naive.

Many went astray by erroneously extrapolating a short-term trend into a long-term one. Despite this being Sony’s third (TV-based) console launch, the doomsayers ignored Sony’s track record and, more relevantly, the same sluggish starts to all its previous consoles’ lives. Sony pioneered the 10-year console lifecycle with the first PlayStation, then extended it with the second and should accomplish the same longevity with PS3. To achieve this, Sony sensibly views console sales as a marathon during which an explosive early sprint (i.e. through aggressive pricing) is not only commercially inappropriate but would have proved detrimental to performance later in the race (leaving less room for later sales stimulation by price cuts). These are lessons that all of the console manufacturers have begun to take on board.

Besides this commercial myopia, the other explanation for these outbursts derives from publishing execs panicking about their massive investment in new platforms not being sustained by sales in a particular month or quarter and simply seeking someone else to blame for their company’s underperformance (and their over-estimates). This self-interest lies at the heart of many world-ending pronouncements for broader sections of the games industry. Retail gaming and the console business as a whole have been declared dead or facing an imminent fatal demise so many times they should be regulars in George Romero movies. These terminal diagnoses are usually given by those with vested interests in their death: for example, digital distributors or mobile games developers. Console-oriented companies give as good pessimistic hyperbole as they get – take the still common (and frankly risible) claim that social is just a fad.

Although there certainly are examples of complete commercial failure for certain platforms, most have proven extremely resilient. A great example of this was the PSN outage earlier this year which generated the full gamut of reactionary headlines and even poll research which quantified the extent to which Sony would experience an exodus of customers. “55% said the PSN breach would put them off buying future Sony consoles” claimed one article. “Gamers will simply no longer trust Sony” stated another. The truth was that the PSN outage of April and May plus the accompanying consumer and media furore has had absolutely no negative impact on the ongoing sales of PS3 hardware and retail software sales. Hardware sales between April and June were actually higher than the previous year as were software sales which even experienced a noticeable upwards spike in May and June. In the 3 months since it was restored, PSN has seen 3m new registrations and digital sales that are already above pre-outage levels.

In this case, those carrying their ‘The end of the world is nigh’ placards forgot that most PS3 owners have little choice when it comes to high-end gaming (owning no high-spec PC or other consoles), that there is a sizeable core of console owners whose loyalty survives such tests, and that most players are oblivious to, or simply not interested in, such industry travails.

So, is the anonymous publisher correct in his comments about 3DS’s prospects? No format enjoys weak holiday sales, so his ‘parachute’ is banal. This ‘few months to live’ prognosis seems remarkably misguided – as if Nintendo would abandon such a major new format after just 9 months on sale. 3D has its flaws and Nintendo its challenges, but 3DS has several tactical tricks to play before giving up the ghost. Whatever you believe, these panicky views are best taken with a pinch of salt and a longer view.


games monetisation, Publishing, video games

Console microtransactions  

August 2011


One of the most lucrative ways that developers could make money in future – microtransactions on console – represents a truly vast commercial opportunity and one that is well suited to the UK games development industry with its long and strong console games development history. However it is an opportunity that is largely untapped and faces some significant hurdles before it can fulfil its enormous potential. This month I want to explore why it is so promising and what is inhibiting it.


Consoles, using a number of metrics, house the most concentrated and valuable collection of gamers in the industry. Every platform (Wii included) contains a sizeable nucleus of hard-core, typically male, players who spend many hundreds per annum on their hobby. An almost identical demographic is playing MMOGs and other online games. While, globally, they don’t spend as much online as console gamers, they are playing in greater numbers with growth being fuelled by microtransaction games not just in Asia but also in North America, and in particular, Europe. As a result, microtransactions have become the standard for almost all new western MMOGs.


But microtransactions do not need an MMOG to be effective. They often work best within freemium and multiplayer games services but neither are necessary. In the very few instances where they have been employed on console, they have been hugely successful. EA’s FIFA Ultimate Team football trading card/management hybrid has been included with the last three FIFA releases (on XBLA and PSN) and allows in-game currency to be topped up with real money purchases. The game was charged for separately but became free with FIFA 11 and generated revenues of $15m (FIFA09) and $30m (FIFA10) while FIFA11’s free version has dramatically accelerated revenues to $1m – $2.5m/week, during its first 5 months. Given the simplicity and low cost of the game, this strong performance produces remarkable profits for EA.


Another fascinating example of the potential of console microtransactions is Sony’s Home service. Home has become a genuinely lively hub for microtransaction gaming, supporting 100+ developers creating virtual items, spaces and games. Not only are the leading games generating 7 figure gross revenues from microtransactions, but they are doing so from what appears to be a noticeably more diverse audience than is found at retail for PS3. The top 10 best-selling virtual items on Home in the USA in the last six months have included an array of casual games related and female fashion items, although you’d be surprised at how common it is for some core male gamers to enjoy putting on virtual frocks.


So, why are there so few examples of console microtransaction games? The single biggest block is that two of the console manufacturers have been wary of microtransactions and freemium. Both Nintendo and Microsoft outright reject the idea of freemium. One console manufacturer’s most senior execs told us at E3 that their “publisher partners are simply not interested in providing a game for free”. There also remains the view that microtransactions are “interesting but not suitable for our audience”. However these offhand dismissals hide some more profound questions. Console manufacturers clearly fear the destruction of a consumer value proposition rigidly based on prices guided by the console manufacturers and set by the publishers/retailers. This would be replaced by a value proposition based on consumers setting their own discretionary spending limits. In addition, microtransaction games are typically updated frequently, which console manufacturers may struggle to QA in time. Some of the other features of microtransaction games, like analytics, rich customer usage data, viral recruitment and so on, are so far lacking. Let’s not understate this, widely supporting microtransactions would necessitate a fundamental change to the way console manufacturers run their businesses.


But they could also transform their businesses at a time of decline in the retail channel. Sony is comfortably the most progressive, being open to microtransactions, MMOGs and freemium in one corner of its service. Yet it has attracted only limited developer interest. Some developers want to large install bases across multiple platforms but we have seen dozens of microtransaction games on other platforms thrive with relatively tiny user bases.


Nintendo will probably remain a dead-end for microtransactions for the foreseeable future, but Sony is looking more promising. Foremost of these new microtransaction console games is CCP’s Dust 514, which could kick-start more microtransaction PS3 game releases, and open Microsoft’s eyes to their commercial potential, perhaps even changing their mind. In the meantime, EA has demonstrated that microtransaction games do not need MMOG-level investment or design complexity, can be launched on PS3 at least and can attract hard-core and high-paying audiences.


video games

Analysing the games analysts


March 2011

As the retail market continues to slide and new gaming categories burst onto the scene, it’s getting increasingly difficult to find out how big or fast growing the overall market or its components are. At the same time, finding this out is becoming more important for companies wrestling with which horse to back or how to convince VCs and other external investors to fund their growth in these newer markets. This month, I want to turn our spotlight on research providers and explain what to look for, what to avoid, and why market estimates can vary so widely between analysts.


The best example of massive differences in market projections can be found in mobile gaming. Whilst 2010 estimates for mobile gaming varied between researchers by 100% (from around $3bn worldwide to over $6bn), 2013 forecasts were even more divergent, ranging from $4bn to as high as $12bn. There are several reasons why analysts can come up with such different interpretations of the same market. The first (and most cynical) reason is that some can err on the side of bullishness over caution when it comes to market sizing because, put bluntly, this sells more reports. We frequently hear senior execs say they have selected a particular report over another simply because it has the most attractive market size figures for them to use in their investor documents. In practice, market size overestimates benefit nobody except the research company; no investor will invest in a company based on market growth forecasts alone and the better ones will quickly learn what the more realistic figures are during their due diligence process.


The other reason is that it is extremely difficult to estimate the sizes of these new games markets or agree upon common metrics (such as a unit sale) for very different markets. Unlike retail, where publishers agree to share comparable sales data, most new markets have no such solid data sources, despite the fact that, as digitally distributed media, such tracking should be relatively straight forward. The problem is that online publishers, developers and their distribution and payment partners are reluctant to share actual sales data and both their greater control of the network games supply chain and the lack of peer pressure have given them the power to say no. Whilst some markets in which traditional publishers operate, such as premium downloads, may eventually get sales charts and data, this is only a small fraction of the total online market. With around a dozen distinct network games markets (e.g. mobile, MMOGs, social and so on), there is zero prospect of the industry being able to produce a single reliable digital and retail chart. Faced with that dead end, what about separate studies of these market categories?


There are several methods analysts use for sizing markets, none of which are perfect, but all of which rely heavily on researchers using deep knowledge of the market category they are analysing. One way is ground-up, estimating individual companies’ (or games’) sales based on public or confidential acquired data. Another is top-down, using a solid piece of data (e.g. the number of PS3 owners) and work back from that to a market value (e.g. PSN sales), using other data sources for guidance. In both cases, the margin for error is entirely based on the quality of the guiding data and the experience of the researchers. We believe that a mix of both yields the most reliable market figures but it does not stop analysts with only a superficial understanding of gaming producing hopelessly inaccurate market perspectives.


The most suspect and, sadly, common way to size markets is using questionnaire-based consumer surveys. In isolation, this process is almost guaranteed to produce incorrect results because it relies on finding a representative cross-section of consumers (very easy for this to skew or self-select in a particular direction) who answer questions about their exact spending accurately (which few do). Then the results must be grossed up in the correct ratio to reflect the market as a whole. Unfortunately the lack of concrete data has driven some companies to use this type of consumer research to size network games markets without any bottom-up research to act as common sense guidance. When questioned, one such MMOG study’s authors tried to justify hugely overestimated figures by pointing to several companies without realising that these companies’ actual figures were public knowledge and represented a fraction of their estimates.


Needless to say, there are good analysts out there but you will need to exercise scrutiny and scepticism to identify them. You should ask: what is their motivation? Do they have sufficient experience of the games markets they are talking about? Is their research methodology sound and can it be justified? Do their market size figures stack up next to public company data? Does it pass a common sense test? In other words, make sure you do your research before buying into (or from) them.



Development, video games

When clusters implode – why games development clusters survive or fail

October 2010

When big studios like Realtime Worlds suddenly switch their lights off, the industry collectively shudders, blusters about probable cause, crosses itself and gets back to business. Post-mortems range from the uninformed (failure of business model – patently wrong as many similar companies would kill for APB’s ARPPUs), personalised (it’s always Management’s fault) to astute (most AAA MMOGs with console production values fail), pragmatic (quality dampened retail performance killing funding) or unvarnished (APB was heavily over-engineered compared to direct competitors). But why do some clusters collapse where others survive, what’s the long term impact of losing that many staff on Dundee, and what are the prospects for those let go?

At the heart of the industry’s biggest clusters – Seattle, Montreal, Vancouver and San Francisco – are giant studios training talent in the latest development technology and processes. Since most of these powerhouses are publisher-owned or are publishers in their own right, they typically have the scale and resources that most indies lack to attract talent from afar, which in turn attracts other companies. Eventually some staff spin out, either individually or as start-ups, diversifying the cluster. The locale often provides start-ups with seasoned Non-Execs to add strategic clout, reassure investors and eventually, sometimes, broker sales. When acquired, these studios close the virtuous circle by delivering cutting edge creativity and technology back into publisher studios, whose innovation is commonly evolutionary not revolutionary.

Our industry needs the balance and interplay between publishers and independents. They provide services, a talent pool and business opportunities to each other, as well as trigger subtler interactions between creative business people. Many clusters have grown and benefitted from cross-fertilisation from adjacent industries, most notably film in Vancouver, and Silicon Valley in San Francisco. London now has numerous games companies from new media agency-land, making it the UK’s largest cluster by number of studios and headcount.

Large publisher studios in your cluster are the best defence against shocks like Realtime Worlds, whose demise robbed Dundee of over 60% of its full time staff. Many of these newly-available top-flight developers are being scooped up by other studios but the UK overall is still losing headcount. Dundee itself now has under 160 development staff in full time roles in twenty-odd small-to-medium sized companies, which no longer enjoy spill-overs from a well-funded giant studio.

There’s no doubt that the cluster would be in much deeper trouble without Abertay, which provides a degree of safe haven during storms, housing developers and providing funding and staff. Dundee’s local funding environment, while better than most due to local benefactors and the new prototype fund, isn’t quite at the level to trigger multiple new start-ups. Finance is the other key to many clusters’ success. This financing is not universally sourced from public bodies. Canada may pump-prime to attract global publisher studios but the privately funded clusters of Los Angeles, Hamburg and San Francisco arguably create more long-term value by incubating indigenous studios. San Francisco’s games headcount is rocketing as social gaming companies tap a thriving venture capital scene entranced by a booming market, as well recruit from the Valley’s considerable talent pool.

Whether clusters and newly redundant staff bounce back from such redundancy shocks is driven too by timing. During the last collapse in developer numbers in the early-mid 2000s, many staff, with fewer jobs to go around, left the UK or the industry altogether. 3-4 years ago, studios were growing but faced recruitment shortages, so many released staff were absorbed by companies relieved to find experienced people. Since 2008, UK-based studios have tightened their belts, shedding nearly 9% of the UK’s full-time developer headcount.

What about these new routes to markets with lower barriers to entry? Let’s not overstate it: perhaps 10% of UK staff made redundant since 2008 went on to found companies. But, since then we’ve tracked well over one hundred start-up studios in the UK, whose fate correlates strongly with platform choice. iPhone companies have mostly struggled while browser game studios have thrived. The North East lost many start-ups which almost exclusively chose iPhone, but failed to find a market. Start-ups in the South East have tended towards Flash and Facebook, with a greater proportion surviving, so far.

After the RTW recruitment auction, a minority may leave gaming, but in a global industry with a highly mobile workforce, many will use this as the opportunity to work for overseas games companies. Data is hard to gather, but TIGA’s late 2009 survey found that half of studios’ lost jobs went overseas, 72% of them to Canada. Perhaps globalisation, which has killed many UK outsourcing companies’ businesses in recent years, can rescue such staff. Why wouldn’t a newly redundant but experienced developer facing bleak prospects in the UK head to San Francisco where cash-rich social games companies are growing faster than they can find office space for and are crying out for talent? I’m as unhappy with the UK’s decline as anyone but recognise that looking out for number one may mean looking overseas.

What will happen to Dundee? Dundee may be down but it’s not out. Local studios like Proper Games, Tag, Dynamo and Digital Goldfish are still going strong, and with Rockstar down the road, Scotland is still a top games development destination.