Thursday, January 14, 2010

Packaged Goods

I got a lot of feedback about my EA post. Since this blog is normally read by around 50 people, I welcome the new visitors. But because many people are here for the first time with no context, I think it's important that I try to distinguish the forest from the trees. My 50 regular readers know what I mean by "transition to digital" but a lot of the first-time readers don't.

EA has in the past three years invested in a bunch of interesting original IP and has vastly improved product quality. They have many compelling packaged goods games in the pipeline. From a consumer's perspective, there's a lot to be said for that, and many of the comments I have gotten have been centered around EA's turn-around from the hard core gamer's perspective. They have created a ton of goodwill with core gamers.
My point was not about whether Dead Space was a good game or not. It is. But it's largely irrelevant, a bit like winning a hand at a blackjack table in Vegas. The odds are stacked against you long-term. And this is my view of the packaged goods business. We can argue about how long it's going to take, but at some point in the not-too-distant future, the packaged goods games business is going the way of music CDs and books. You may still be buying games for $50 and downloading them (although I kind of doubt that will be the winning model). But one way or another, the games BUSINESS is going to transform into an e-commerce business.
This has many important implications. In an e-commerce world, the mechanics of distribution are completely different. It's about clicks, and visits, and trial (free-to-play) and conversions, and customer acquisition costs. This is a totally different way of thinking about distribution. The old packaged goods mentality of sell-in, inventory management, and crescendo marketing is totally useless in this new arena.
In addition, I think it's highly likely that we see a contemporaneous disruption created by the rise of games-as-a-service. World of Warcraft has shown that you can create an enormous business around a game that was released 5 years ago and then refreshed, updated, and run as a service in the interim. The amazing Zynga has shown the combined power of virtual goods in the games-as-service environment, and the benefit of a blue ocean distribution channel on Facebook.
The digital revolution has struck most media businesses as a form of what I would call "un-bundling." In the music business, this has taken the form of the rise of the internet-distributed MP3 song over the store-bought CD (originally, and mostly illegally on Napster, more recently and legitimately on iTunes). In TV, it was the DVR and cable channel expansion that killed the bundle known as network primetime.
There has been a lot of speculation about what form "un-bundling" will take in the games business. My own perspective is that the internet and digital distribution will create an un-bundling of time in the games business. Right now, the big publishers charge $60 for 40-80 hours of game play. I pay this price whether I play the game for an hour or whether I play it for hundreds of hours. I think that the rise of virtual goods and free-to-play models are leading indicators of this shift to un-bundle game time. So are the rise of casual, social and even mobile gaming. They are ways to capture gamer interest, and willingness to pay, in a manner other than the traditional $60 for 40 hours.
It is my opinion that media companies facing these sorts of market disruptions do better by embracing them early and taking their medicine, even if that means taking the axe to some of your existing businesses and processes. A great example of this is the Chinese game publisher Shanda, who recently changed their business model, took a year of pain and diminished stock price to get there, and then came back stronger than before. It takes a lot of courage to do this, because it's unpopular with your team, unpopular with your investors, and even, short-term, unpopular with your customers.
The US packaged goods companies have collected some important assets that position them on this road to the future. Blizzard, and Playfish, and Pogo, and JAMDAT are all examples. But in my opinion true leadership in the games business is going to mean betting the farm on these models and abandoning the CD-ROM as anything other than an alternative to downloading. Nobody had done that yet. Either it will happen, or a company like Zynga will leverage it's highly-advantaged distribution position into the core games market. The fanboys are going to recoil in horror from that statement, but it may be a lot easier for Zynga to buy up independent core games with e-commerce models (like Global Agenda, for example), than it will be for the major packaged goods publishers to switch to e-commerce models.

52 comments:

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Ken D. said...

New reader here, thanks for explaining "transition to digital." Been a fan ever since reading "EA's Miss." It's not often that I have the chance to learn about what goes on behind the scene of major business decisions. Thanks.

Jami! said...

(Misplaced apostrophe in "its," last paragraph.)

Interesting perspective, well articulated. I don't really buy that the 7-14 hour high-production value story-driven game is going to vanish (or get vivisected into chapters ala Fable 2 or Telltale's offerings); I'll be surprised if, as a model, it doesn't make a fairly untarnished transition to digital distribution. But the earnings, in an overall environment that is seeing more "gamers" and "gaming" than ever, do suggest that EA might be holding onto a constant-sized piece of a growing pie.

Any rate, I'm subscribed to your posts. ;-)

Sergio Achinelli said...

Hi there, another new reader. I agree with Jami, what will happen with games like MW2 or GoW? Do you think they will transform into something else, more manegeable perhaps in an online environment (sold in episodes...), or will packaged goods be limited to these rare masterpieces?

AK said...

I was introduced to your blog via-Joystiq's posting regarding your EA Miss post. Just want to thank you for elaborating so thoroughly on your train of thought. Cheers.

heartlessgamer said...

I'm impressed the entire post didn't mention Steam. I love Steam, but so many discussions of this type are propped up only by Steam sales figures. Good post.

Zsombor said...

Well yes, EA's latest stunts seem much more benefical from a gamer perspective, but I think EA was a bit easygoing with the money they had, and it cost them an awful lot.

Zsombor said...

I'm a new reader BTW, hello Mitch, your articles are very interesting, I always wanted to know more about these things

Zsombor said...

Also Mitch: what do you think about the recent news about companies forcing their employees to work 14-16 hours a day? (the team of Max Payne 3 for example)

Anonymous said...

EAT SHIT AND DIE MITCH!

-EA

Tim said...

Great post Mitch, subscribed to the blog.

Shawn @ Entroporium said...

While it's true that users will migrate quickly to digitally distributed games, it will be a long time before the established game players can get out of the packaged goods business because of the co-dependency with/by major retailers. A big part of ATVI's recent success is its tight expensive relationship with WMT (or, more tangibly, ever wondered why the Moms in the WMT tv ads are always playing Guitar Hero?)

Anonymous said...

New reader here. The EA post were very good reads. Where do you see Nintendo in this "transition to digital"?

David said...

OH SNAP - feel the burn, Mitch:

http://www.gamasutra.com/view/news/26977/EA_Chides_Lasky_Benchmark_Over_Bankrupt_Red_5.php

Anonymous said...

Very well said, Mitch! This sure is going digital, we are though still in fragmented market where every channel has a specific format. Thinking of the day when everything will be done in something like HTML5 on all platforms. Need to say goodbye to all the SDKs - Apple, microssoft, google's

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