Thursday, January 29, 2009

Whither Open

PocketGamer reported today that Apple will create a "premium" area of the iPhone app store for games priced at $19.99, and will restrict distribution to a "number of large publishers, rather than the thousands of smaller developers currently selling their titles on the main App Store." The move is reportedly to help combat the race to the bottom that I wrote about last summer. To me, it suggests recognition by Apple that there is some benefit to a managed platform.

This is something that the console manufacturers learned after the tidal wave of bad content killed the market in the '80's, resulting in the famous "ET in a landfill" period of the video game business. Nintendo brought the market back with tight gatekeeping of 3rd party publishers and the quality of the content they distributed. Since then, the symbiosis of platform management and marketing combined with publisher quality and standardized economics, produced an order of magnitude greater business opportunity than the more "open" PC gaming platform.

There is an article of faith in the venture community that open eco-systems create more valuable companies, and the example of the internet certainly gives credit to that viewpoint. But, as I've said before, the App Store itself is the "killer app" for iPhone -- the 15,000 apps available on the App Store primarily benefit Apple, rather than any single publisher or developer. It is extremely difficult to build sufficient market share to create enterprise value for a company when there are 20 free, me-too products in every competitive category.

14 comments:

Jussi Laakkonen said...

You are quite right on Nintendo's "Seal of Quality" lifting the video game business out of the hole it dig itself on Atari 2600. Also agreed that the AppStore's primary beneficiary is Apple itself. Finally, also agreed on the situation of PC single player games (blogged about it here http://tinyurl.com/c2vrfb).

Now, to contest some of the conclusions drawn:

1. The closed console game space is not nearly as lucrative as it sounds.

The latest console transition has accelerated the development costs (AAA titles running at $15-25 million) meaning that titles need to sell titles need to sell at least million-two million copies to just break even (previously a 400-500k selling game would typically break even), created incredible barriers to entry, and highly polarized the market (TOP3 take in the majority of the sales, where it used be more evenly spread across the TOP10).

The formula of increased costs, tougher competition for meaningful sales, and curtailed innovation has made very difficult for even the biggest players in the market like EA.

At the same time Sony is billions in the red for PS3 and Microsoft's multi-billion investment into Xbox and Xbox 360 is finally after 8+ years starting to make quarterly profits.

The only one swimming in cash is Nintendo, who went for the blue ocean market. Third parties on Nintendo's platform don't do nearly as well. Where as on e.g. Xbox 360 over 95% of SW sales come from third parties, for Nintendo's platforms roughly 50% of sales is Nintendo's own games.

2. Biggest moneymakers are on PC
The persistent, online game experiences on PC are the biggest moneymakers (save for Wii). World of Warcraft did over a billion in sales in year 2007, of which over 50% was pure profit.

Although best selling games like Call of Duty 4 can break 10M sold units (at say average unit price of $40), the revenue received by the publisher after cost of goods and console license fees is roughly half of that. From that you'll need to subtract all operating costs, marketing etc, so it doesn't scale nearly as profitably as online titles do.

3. The console space can't innovate
The closed model of the console space actively discourages innovation true the combination of high barriers of entry and platform holder's policies and the risk avoidance of third party publishers (caused by market polarization and increased dev costs).

The new innovations (apart for Wii) have been on PC: MMOs, free to play casual MMOs, virtual hangouts like Habbo and Stardoll, the social games of late.

From my perspective which is the one of an entrepreneur, there is nothing better than the PC online, social games markets. It beats iPhone 10 to 1 because
- you keep all of the money you make (zero Apple tax)
- viral growth on SocNets (not on iPhone)
- varied payment methods from direct payment to CPA/lead-gen (only direct payment on AppStore)
- virtual goods monetization (not really possible (yet) on iPhone)
- 170+ million users on Facebook + roughly the same on OpenSocial-enabled SocNets vs. 12-15M iPhones sold
- freedom to create nearly whatever you want vs. Apple's somewhat arbitrary policies

The big thing iPhone has going for it are customers who have been trained to pay for content, and that finally "mobile doesn't suck anymore".

bizpunk said...

Jussi -- I kind of agree with you, but I was making a different point.

I don't like the console business at all. The escalating costs of creating console titles has driven a lot of the profit out of the business. But during the late '90's and through the last transition, when costs were under control and the closed platform protected the large publishers, it was a terrific business -- far better than the open PC business.

It's tough to use WoW as an example -- it's such an outlier. It's like using Google as an example of a typical internet business. Outside Asia, what's the #2 or #3 or #4 online game doing in revenue? Probably less than $100MM in annual revenues (around what a 2MM unit console title would do). And MMO's ain't so cheap to make and maintain, either. :-)

Also, I'd argue strongly that the SocNets are not really "open" -- there's a distinct possibility that Facebook and MySpace get aggressive enforcing content and business model restrictions in the future, force you to use their billing platforms, and take a toll on revenues, just like Apple. If you are relying on them 100% for customer acquisition, you are potentially vulnerable.

Jussi Laakkonen said...

Mitch, I don't think we that far apart - we are just applying different lenses to same data.

WoW is definitely an outlier, as exemplified by MMOGCharts:
http://tinyurl.com/32haj8

A lot of the other MMOs outside of Asia hover around 200-300k subscribers, which would put their revenues roughly 30M$-40M$ per year.

The high bets needed to make MMOs are driving that market introduce the same problems the console space faces.

According to NPD (http://tinyurl.com/ax45xl) roughly 10 titles sold ~2M copies last year in the USA. If you double that for worldwide, we have 20 console titles crossing the 2M mark in one given year. The odds of achieving a standout success in that space are not good.

I agree that the PS1 and PS2 eras were definitely golden times for third party publishers.

I would be the last one to advocate start building a MMO company this late into that game. However, building a casual MMO company (looking at the western successes of Bigpoint, GameForge and Nexon's expansion to USA) is definitely a viable option. The ROI there is more lucrative and there is more chance to iterate and get things right.

Interestingly, Zynga's Yoville virtual world on SocNets has more active US-based users than WoW. Reportedly Zynga was doing $50M in sales last year, and the investment was definitely smaller than what is needed for any decent MMO.

Oh, I don't have any illusion of SocNets being truly open. It's just that they are more open (currently) than any other meaningful platform.

Using anybody else's platform or distribution channel always comes with gotchas. The more closed it gets the more gotchas. I'd argue you dealt with one of the most closed and "gotcha-ridden" ecosystems at Jamdat from what I understand of the dominance the US wireless carriers had and still have over mobile game publishers.

Jussi Laakkonen said...

Amazing how fast the landscape can change. Since my original comment, iPhone 3.0 and Facebook Connect for iPhone have been announced. So now we have
- limited viral distribution (FB Connect)
- virtual goods (3.0)

And much more. I gotta hand it to Apple, they are really knocking this one out of the park.

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acheter levitra said...

I don't like the console business at all. The escalating costs of creating console titles has driven a lot of the profit out of the business. But during the late '90's and through the last transition, when costs were under control and the closed platform protected the large publishers, it was a terrific business - far better than the open PC business.

acheter kamagra said...

Aussi, je dirais vivement que le SocNets ne sont pas vraiment «ouverte» - il ya une possibilité que Facebook et MySpace être agressif contenu et l'application de restrictions du modèle d'affaires à l'avenir, vous obligent à utiliser leurs plates-formes de facturation, et de prendre un péage sur les recettes, tout comme Apple. Si vous comptez sur eux à pour l'acquisition de clients, vous êtes potentiellement vulnérables.

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The formula of increased costs, tougher competition for meaningful sales, and curtailed innovation has made very difficult for even the biggest players in the market like EA.

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