[Casual games are vital to the future of the biz - but how does a developer navigate the middlemen-strewn digital distribution future? In this in-depth piece, Lost Garden blogger Daniel Cook presents a manifesto to help casual game devs get loyal customers with great social games.]
A few years ago, casual game development has heralded as a safe haven for the independent, creative forces in the game development community. All the past worries of shelf space limitations, ornery publishers and expensive development budgets no longer applied.
In the new world of high profit margins, limited middlemen and free green lighting for all, innovation would inevitably flourish. And for the most part, once you account for Sturgeon's inevitable law that 90% of everything is crap, this is exactly what happened. More game developers poured into the market and some truly wonderful games were born.
Middlemen, however, were not eliminated. They merely evolved. In the place of brick and mortar stores, portals emerged. Instead of limited shelf space, there was limited access to top ten lists. Instead having your company name sidelined in the spirit of publisher branding, your game is whitewashed with the portal's brand, advertisements and customer retention systems.
In return, the portals offered quick sales on your latest game. Game developers trade their future for a fast sale now and the portals attempt to pick up the long term customer loyalty. Much of this is uncomfortably familiar to the early publisher/developer relationships of years past.
How can casual game developers adapt?
In order to maintain the biggest piece of the pie possible, casual game developers need to evolve their business strategy. This essay covers the following:
The current dominant strategy
There are two pillars to the typical casual game developer's strategy:
Best-in-class casual games
The golden geese at the center of most casual game developers' success are their high-quality casual games. The best groups create a powerful creative team that consistently builds polished, innovative titles that have strong appeal with a wide demographic of players. Historically, such teams have focused on creating complete, packaged games that can be easily ported to a wide variety of platforms.
Once a game is built, it is distributed across hundreds of portals and multiple platforms. Due to their relatively simple interfaces and system requirements, casual games port well to a wide variety of platforms ranging from phones to consoles. Due to their electronic nature, they can be republished to a vast number of portals at little cost. The revenue potential of a single game is multiplied by the number of distribution channels that can be addressed.
Every developer faces some common strategic threats:
All these issues reduce the developer's bargaining power and their profit margin. The slew of high-quality games means that portals can more easily walk away from any one company with extraordinary demands. Brand erosion means that developers are forced to scramble each time a new title comes out to sign deals that help them acquire a good stream of trial downloads.
The good news is that casual games are still a growing market and the inevitable consolidation is only just beginning to appear. Distribution channels are still quite fragmented. The bad news is that every game that a casual game developer releases ends up building up the publishing behemoths that will eventually put the squeeze on profitability. Many smaller developers are already feeling the pinch. The portals have some very sound business dynamics on their side. Where casual game developers are scrapping over each and every sale, the services strategy adopted by most portals takes a longer term approach and looks to capture the lifetime revenue of each customer.
Identifying what needs to be done
Let's begin by stating the obvious. The reason the developers are going to portals in the first place is that they need customers for their games. The reason they keep going back to portals is that they can't keep the customers they initially acquired. This is a root cause that developers can address with careful application of both game design and business strategy.
Running services need not be the exclusive domain of portals. There are limits to the community building that can be accomplished by portals. Most ultimately don't own the games and are not game developers. A far more potent online community can be built if the core game mechanics integrate tightly with the community features. The next generation of highly sticky community sites will be built by game developers, not clearing houses which treat games like commodities.
Benefits of developer-run game services
Online communities are an attractive addition to a casual game company's core competencies because they mitigate most of the dominant business strategy's obvious weaknesses:
Webkinz and Club Penguin are two recent examples that both demonstrate how a multiuser environment combined with competent casual games can build a highly profitable and lasting user base. Such games rival World of Warcraft in the size of their user base, are run by relatively small support teams, and exhibit impressive profitability. The sale of Club Penguin for $350 million demonstrates the financial viability of running a game developer as a service.
Implementing a services strategy
How would a casual game publisher to begin tapping into the services business model? There are two main steps:
Step 1: Build a gaming service around existing brands and products
To make a service sticky, you need a persistent multiplayer meta-game. Existing casual games provide the core activity of the community, but the meta-game gives users reasons to socialize, reasons to replay old games and reasons to play new games.
There are obvious parallels to MMOs, but such designs should not be copied verbatim. It is also worth looking at more casual social spaces such as Habbo Hotel, Club Penguin or Facebook. There are four main steps that are important in the process of building a sticky community:
Other people's portals (OPP) are a great resource that should be leveraged for the good of the game developer's service. They aren't competitors. They are resources to be tapped. Once your service is in place, you can use your traditional packaged casual games, marketed through pure portals, as a customer acquisition tool.
Currently, you can visualize the casual games economy as consisting of game developers, platform owners and customers. Imagine that the two main currencies we are trading in are cash and customer loyalty.
We want to switch this up a bit.
Each game sold through a channel acts as a gateway into the developer-run service. Channels become marketing and new customer acquisition partners, not merely sales partners. Channels still win, because they make money off selling games -- just like they do now. The developer wins by building up a stable population of lifetime customers.
This isn't a new strategy. We've been seeing mainstream developers selling core games such as World of Warcraft with solid success through retail channels. Eve Online recently started using Steam to replicate the same distribution tactic online. Each sale makes the channel owners happy, but ultimately puts the majority of the revenue in the hands of the service owner. The same strategy can be successfully applied to casual games as well.
Philosophically, portals are best-suited to selling packaged games to new customers for a profit. It is a good business, but their piece of the pie should end here. They should not own the lifetime revenue of the customer. This is the developer's to keep, if they so choose.
It is a big switch to go from putting out packaged titles to building a service. Casual game companies may not yet have the cultural DNA to build a robust online gaming world.
The next stage in the evolution of casual games
The future powerhouses of the casual games industry are companies that have the best attributes of both existing developers and portals, tied together by a rich meta-game experience. A community of passionate gamers, heavily invested in the service, helps the company weather the inevitable surge of talented upstart game developers and predatory middlemen.
Other companies are sprouting up that embrace the hybrid portal/casual game developer/MMO from the very start.
If your company is not interested in created a major online community built around casual games, others will happily reap the benefits of doing so.
Still plenty of room
Yet, this is not a winner-take-all market. A mere 100,000 active users can result in a vibrant, profitable community that lasts for a decade or longer. Some survive on far less. People will come for the games, and stay for the community. The business dynamics are far more palatable than the vast numbers needed to make a pure advertising or packaged games business work.
There is room for hundreds, perhaps thousands of such services, occupying a spectrum of interesting niches. Most will fly under the radar, completely unnoticed by mainstream media and generally unaffected by the ups and downs of the marketplace. The market, for at least a decade or so, will become a fragmented place spotted with islands of humanity. Some islands will be bigger and more noticeable than others, but they will not remove the opportunity for the willing entrepreneur to carve out a spot of their own.
There is no reason for casual game developers to play second fiddle to their distribution channels in the same way that many mainstream game developers bow to their retail-oriented publisher masters.
There are some larger themes at work here.
It will take a long time before all game developers wean themselves off the current crop of middlemen. Just as traditional publishers have not disappeared in the face of online portals, neither will portals disappear in the face of developer-run services.
Instead we are left with a mixed ecosystem populated by developer-run services living alongside powerful, well-established middlemen from the previous era.
It is highly likely that existing middlemen will be slow to adapt to the increased negotiation power of a small, but growing portion of the developers. Many will be outright hostile to what they perceive as a threat to their core business. That's okay.
There is absolutely nothing they can do to stop developers creating exciting services. The smarter portals will figure out how to provide additional value to these bright new customers in the form of efficient marketing and distribution offerings, international operating deals, and other activities that add value.
In the long term, this sea change is a good thing. Business models that liberate developers from the yoke of publisher and portal funding releases powerful market forces that drive product innovation.
Bigger profit margins for self sufficient developers mean that they are more likely to single-handedly take on the "crazy" risks that result in new genres and increased markets.
All in all, the introduction of service-based casual games companies once again makes the casual games market an incredibly exciting and dynamic place to build games. The opportunities for brilliant new businesses are boundless.
A definition of disintermediation: http://en.wikipedia.org/wiki/Disintermediation
Appendix A: Specific recommendations for medium to large casual game developers
It makes good strategic sense to make a major investment in services offerings that go beyond dabbling with user accounts and simple achievement systems.
Appendix B: Why lifetime customer value matters
I've briefly mentioned above that lifetime customer value is a useful metric for a business. Here's a little exercise. Note that the numbers are hideously simplified for the sake of illustration.
Strategy A: Cash now, please
You release one game. You give up 50% of its sales to the portal and sell 1000 copies at $20 a pop. You make $10,000. You pay $10,000 to the portal. You get no customer information.
10 games, each selling 1000 copies, will net you $100,000 in revenue.
Strategy B: Customer information, please
You release one game. You give up 70% of its sales to the portal and sell 1000 copies at $20 a pop. You make $6,000 and the portal gets $14,000. However, now you also direct the customers back to your online service. You know their names, their email addresses, how long they've played your game and which activities in the games they seem to have enjoyed.
The next time you release a game, you contact the customer directly through your service. Of those, 10% purchase directly, giving you 100 sales and making you $2000 up front. That 10% might seem high, but you aren't selling to strangers. These are people that know and like your products. You've made them happy before; they play your games every day. It is the difference between asking for money from a random stranger on the street and asking for money from your good friend.
You also use the portal again, and gain another 1000 customers and another $6000. Now you've made a total of $8000 on your second game where you only made $6000 on your first title.
Following this logic, by the 10th game, you'll have revenues of $150,000, with $60,000 coming from the portal sales and $90,000 coming from direct sales. By focusing on a close relationship with your customers instead of the easy money, you've made 50% more.
Lifetime customer value
Early on, you paid the portal $14,000 to acquire 1000 customers. However, for each subsequent game that you released, those customers paid you $2000. Over the course of 10 games, they paid you $20,000. That's a profit of $6000 over your initial acquisition costs. Focusing on lifetime customer value helps you make difficult decisions early on in order to reap superior profitability later.
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