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.


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.