In addition to distribution, though, publishers also provide funding.
What's the solution to that part, from your perspective?
MM: That's a great question, and in fact, my business partner [and Riot Games CEO] Brandon [Beck] spoke at GDC Austin exactly on that topic -- alternative sources of raising capital as a developer. As part of going direct to consumers and owning a larger portion of the value chain, the economic equation can be vastly different than the traditional publisher developer model.
Yes, publishers generally fund development, but the developers get a terrible end of the deal. Developers really create all the value. Publishing is arguably a commodity where they say, "Hey, I can market this game or do operations or customer service," yet the splits from a revenue perspective don't necessarily match that.
A lot of the developers that have created hit franchises but that don't own the IP, they don't necessarily do really well. That's something that helps drive developers to want to find additional ways of seeking funding and additional models that capture a larger percentage of the value chain. If the only value publishers are adding to online games is funding, it's probably not worth giving up the lion's share of everything -- whether it's tech, tools, or IP -- and having them recoup all their costs and take that massive percentage of net or of gross. In good scenarios, it's just not worth it.
SC: Speaking as a designer, having been on sort of both sides of the fence -- working in a development house that's funded by the publisher and working in this [independent] environment -- I have to admit I really prefer doing my design work in this environment.
I've seen far too many times, for better or for worse, the publisher exert pressure on the developer affecting both iteration and innovation when it comes to design. Here, because we have our own bankroll basically, we're able to execute what we feel is best for the product ourselves. If we're successful, that's great. If we fail, then it's our fault.
MM: Just to comment on that, that's not to say we aren't data-driven or that we aren't trying to understand the end user or that we don't have sort of business minds or that we don't think from the publishing perspective. We absolutely do. In fact, we probably have better and more detailed metrics than most publishers. The difference, though, is that we're able to kind of marry both the perspective of the end user -- because we directly speak to them -- and are building the game with the business perspective of driving economic value as well.
One of the things I think we do really well at Riot is to understand what the customer's needs and wants are, what our development perspective should be. And that's not just from a feature perspective, but also from a monetization and content perspective. If you're delivering tremendous value, there are ways to monetize. And that's really what we're trying to do.
Are you guys looking to get onto external distribution networks, like Steam or others?
MM: Potentially, we're talking to them about that. We have a pretty focused customer acquisition strategy initially, because there are a lot of users who have played DOTA in particular who have been asking for this type of product. There are a lot of things we can do to go acquire those customers on a much lower cost basis than we could through more traditional means, which is part of why it made sense for us to go direct to consumer.
But this is not necessarily a mass-market game right out the gate. As we add more game modes, we believe that it will be. At that point, we want it to go a lot broader. So our strategy tends to focus on initially tailoring the game and the marketing efforts on converting the core, building the audience, and then expanding beyond that.
If you envision the market as kind of a donut, the inner circle is the core DOTA user, and the adjacent market is the WoW PVP arena guys, etcetera. Then there are the mid-core gamers, who are guys who like playing Counterstrike or various other session-based games, who are competitive and would probably like this game, too. Or RTS gamers. Then finally there's the broader online gamer as the farthest, outermost circle, which we think we can reach in the future.
The PC is an interesting market in that respect - it's so massive, but it's much more fractured than the consoles. I assume that by the outermost circle you're referring to casual users of things like PopCap games or even Facebook games. How do you attract them to a game like this?
MM: To us, it's all about crafting content that's going to retain people. We look at the audience as different market segments that have different interests, wants, and needs. We believe there are ways to educate people, to grow them into the competitive PVP experience.
But there are also a whole bunch of users who are just never going to be interested in that type of game. The casual 35-year-old demo that loves PopCap Games -- PopCap is amazing, by the way -- or the Zynga [social gaming] audience, that's a very different play style. That being said, one of the cool things about the free-to-play model is that it does lower the barrier to entry. You can reach a much broader audience. And Facebook can become an effective means of acquiring customers. But we would approach that by being very focused initially on particular keywords or particular age demographics that that we think our gameplay matches.
As we add additional game modes, we would then brand them differently to target other user groups that we think would match the customer segment that we'd be looking at more effectively. It all comes down to kind of a cost-per-customer-acquisition and what the lifetime value of the user is.
There's a whole system of metrics that we've devised and that many other companies have as well - [Yohoho! Puzzle Pirates and Bang! Howdy developer] Three Rings and so on -- that look at it from a pure dollars and cents perspective. If the cost of acquiring the customer is less than the lifetime value of the user, that's a very scalable business model, and you can go acquire users all day long.