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The Future of F2P: The Force Wars
We live in a very exciting time here in the gaming industry. Big changes are happening that will very much change how we do business, what products we produce, and our relationship with our consumers. I have been chronicling the history of F2P since 2001 when I was the senior writer for www.unknownplayer.com (killed by hackers in 2005). Back then I was writing under an alias after receiving numerous detailed (with my address) death threats following the 9/11 disaster due to the ethnicity of my name. Still I managed to be the fourth most read independent gaming journalist during that time. A passion of mine was recording and predicting the development of F2P business models.
Of course it still is, and this is what this article is all about. I am going to explain how we got here, and where we are going. I believe I can do this because of my high altitude view of our industry over the last 16 years and because of my expertise in the area of F2P business models. That expertise accelerated during the period from 2005 to 2009 when I set out to develop consumer-friendly F2P business models, seeking out the top academic mentors available during those years and creating new language for a field I described as “virtual economics”.
In order to simplify the discussion, and in keeping with the timeliness of a Star Wars theme, I am going to go ahead and create some new language right now. The use of advanced quantitative methods to increase revenues while reducing the value of products for consumers is what I would call Darksiding. The actual technologies involved, when used in this fashion, I will call Dark Side Technologies. The application of advanced quantitative methods to increase revenues while increasing the value of products for consumers is what I call Lightsiding. The involved technologies I will call Light Side Technologies.
The application of advanced technologies to improve revenue generation applies to all industries through the history of industrialization, but the gaming industry has unique properties that are often not understood by new participants, or even perhaps veterans. Thus when these technologies (which are often deployed very successfully with non-gaming products) are applied to games, they can have very different results than they do elsewhere.
The purpose of entertainment products in general is to provide stimulation to consumers. This stimulation has physiological foundations. By stimulating the mind, we can change the physiology of our consumers. When consumers perceive these changes as positive in nature, they buy our products quite readily. When they don't think our products are making their lives better, they stop buying our products unless there is an addictive element involved, which there can be. When both conditions (not liking, but addictive elements are present) they continue to buy our products (in smaller quantities) and complain a lot which typically triggers the involvement of regulators.
This makes the nearest commercial equivalent to the gaming industry the tobacco industry. I went into detail about how the gaming industry was following the tobacco industry play book back in 2014. But a spike in the deployment of Dark Side Tech was something I began to notice in early 2012, and at the time I traced its beginnings to 2010 or earlier. This merging of the financials industry and the interactive media industry in ~2010 created a progressive change in game industry culture that made possible the ascension of Darksider Culture. Darksider culture seeks to generate short term profits by means that include degrading the well being of consumers, and ultimately the relationship with consumers. Darksider culture is not unique to the gaming industry, and if it spreads to become the dominant culture in an industry then the result is almost always a regulatory response.
I currently estimate that 75% of the Western game market has adopted a Darksider culture at the management level, and because of lag time a smaller majority of products are currently being deployed containing Dark Side technologies. As a top game industry economist, I'm not here to make moralistic evaluations about this trend. The purpose of this paper is to explain the trend so that we can better understand it, and predict how it will affect the industry and market in the next few years. Shareholders especially need this information in order to make informed decisions as to where they put their money since the information they are receiving from involved publicly traded companies is becoming increasingly optimistic.
I am going to use Electronic Arts as my case study in this review. I do not want for a moment to suggest that EA is unique or particularly responsible for the trend or effects, because the trend is now pervasive in interactive media. I use EA here because not only has it been the target of unusually vigorous consumer and regulatory backlash, but also because EA is facing a perfect storm of obstacles at the moment with even less options available to them than you might anticipate. Those obstacles, which I will explain in detail, are:
Consumer backlash against Dark Side Technologies (including business models),
Regulatory response, which is in direct proportion to consumer activism,
IP oversight from Disney, which will want to compartmentalize the crisis to avoid it affecting Disney stock and brand values.
Consumer Anti-Dark Side Technology Activism
In other industries, consumers tend to be disconnected from each other. This means that consumer trends change gradually and predictably, generally reflected by their purchase and spending habits. When Volkswagon was caught using Dark Side Technologies in regards to their emission systems on their cars, the problem was serious but consumer reaction was relatively muted. VW owners can't see emissions, they don't have an immediate daily consequence. VW owners don't talk to each other in significant numbers and are not likely to get political about their car ownership. Thus VW could pay a fine, make some changes, and go about business as usual.
Gamers are a very different kind of consumer. Because gamers interact intensely by nature, they form a sort of collective consciousness. In 2013 I described this activity intra-game as Persistent Gaming Collectives (PGC's), and explained how this can work for and against us as game developers. The same dynamics extend well beyond the game space. PGC's can organically form for games before a game even launches. If a PGC detects a threat to the collective that is deemed serious enough, it can radicalize. Once radicalized, it becomes a political movement. Using the Star Wars themed analogies I am building in this article, I would call this political movement The Rebellion.
What this means for EA and the industry as a whole is that this is not a one time event. As a political movement, the participants will continue to cross-educate, mobilize, and organize over time until the threat is considered resolved. A more technical discussion of the effects can be found in my previous Data Implosion paper predicting this consumer reaction and it's affects on the interactive media industry.
Leaders in the Rebellion will become quite sophisticated at identifying the existence of Dark Side Technologies deployed in new games and will put the word out on social media channels, often well before a game even officially launches. These hit squads can be devastating for the prospects of commercial success for those products dependent on these mechanisms. While EA's Star Wars Battlefront 2 was anticipated to out perform the original, its sales so far have been 61% below the numbers sold for SW BF1.
When EA was forced to turn off microtransactions in SW BF2, they told shareholders that “This change is not expected to have a material impact”. It certainly had a virtual and financial impact. In addition to the massive loss in retail sales, EA stock has bled off over $3B in value in two weeks. If there was any chance of a clean recovery from the situation, there might be some chance of a rebound, but that's just not the reality on the ground.
The Rebellion is likely to expand well beyond those users most expected to play a SW BF product. It will continue to organize and improve in sophistication. What will cause it to demobilize? EA would have to rip out the Dark Side Technologies from their products (not limited to SW BF2) and replace them either with a content-complete retail system, or a Light Side Technology based F2P system. The traditional retail system is much lower performing, and that is why it has become obsolete.
The presence of a Darksider Culture makes the second (superior) option impossible. There are quite a lot of developers in these companies that would like to take their companies in different directions, but they currently live in fear in the work place. To “pass” as being a good fit to the current company culture, they have to keep their mouths shut. How do I know this?
Because they tell me.
As the top consumer advocate in the gaming industry since 2001 I actually have a lot of followers in these companies. They share their experiences with me and encourage me to keep writing. Without their support it would be difficult for me to do so. Thus I have become a sort of Glassdoor with legs. Once Darksiders are in position in a company, they move quickly to secure power. They are remarkably efficient at this. Those that resist are purged rapidly from the organization and the rest fall in line nicely. I recently had a director at one of these companies (not EA) tell me that he would love to have me come give a presentation to his company on the Light Side Technologies available to them, and how they might improve company performance. But, he added, “that would be my last day working here”.
The primary two criteria used to evaluate new hires is (1) technical proficiency and (2) cultural fit. I've already discussed how the cultural fit criteria is scientifically shown to reduce diversity and increase workplace conflict. If you have Darksiders in place then any potential Light Side hire will fail the cultural fit criteria. If you hire both at the same time (this has happened to me twice) then a Force War will be initiated.
A Force War is initiated when Light Side and Dark Side employees come into direct competition over company/project culture and direction. The two outlooks are incompatible and, dare I say, archetypical. It is no accident that the ageless competition between the Light and Dark is so successful and enduring in the Star Wars IP. One cannot exist without the other, and both have fought for dominion since the dawn of civilization.
Biologically, Light Side individuals live longer, healthier, and happier due to the effects of oxytocin. Dark Side individuals tend to be more aggressive and move rapidly to neutralize competition. They are natural survivors. Company culture, going back to the writings of Adam Smith in the 1775 Wealth of Nations, operates on the assumption that all people act out of self interest. Dr. William Nash and others, including myself, believe this is a critical flaw in that work, and science is increasingly supporting this alternative view. Still, contemporary business and economic models are based on these archaic notions and thus they favor the Dark Side in a Force War.
The history of game development is also a factor. When I was working with Nexon in 2000 and 2001, and they started experimenting with the first F2P business models, they soon discovered that they could make a lot more money by selling advantage in games (an early Dark Side Technology that is still popular), in that case in their Maplestory product. Their other major product (at least in the West) at the time was Shattered Galaxy, the first MMORTS and a design which many companies have attempted to replicate over the years with poor results due to the complexity of these eSports positive games.
While SG may have had greater long term potential, this is difficult to measure in a short period of time. Maplestory was making much higher revenue with the first pay to win microtransactions and thus it was only rational that Nexon went with that model based on the information they had available to them. Nexon, being an extremely talented and innovative studio during that period, had the ability to determine the fate of studios world-wide for decades to come. Their choice of Dark Side Technologies at a time when there were no competing technologies available put the Dark Side firmly into a dominant position globally.
Thus in both of the situations where I have engaged in a Force War in a company, despite perhaps being better positioned, the Dark Side has prevailed and set the tone of company culture. This doesn't mean the results were better for the company. In one case they were unable to produce any new successful products after I was ejected, relying on just my designs without any way of optimizing those designs. In the other case, the studio was forced to close resulting in 100% layoffs after the sponsor decided that loot boxes in a children's game probably wasn't going to work.
In most studios today, a Force War is not even possible because the company culture has already been decided. If consumer, regulatory, and shareholder pressure gets great enough to push for a realignment of company culture, which seems likely, this will still not have the desired effect. Darksiders are survivors. Any attempt to remove them will result in a large number of false positives, meaning you won't be able to get rid of them unless you pretty much get rid of everyone. The technologies that could be used to sort them out are still new enough that they would be considered pseudoscience in a corporate environment.
The vast majority of employees are non-aligned, and there are still many studios out there that have never had a Force War and thus have neutral non-aligned cultures. The current consumer Rebellion is not going to have any negative affect on them because they will not have been identified by consumers or regulators as threatening. These same studios will actually be favored during this period since they will enjoy reduced competition as Darksider studios are forced to execute large layoffs. Those layoffs will generally begin with creatives as described in my Data Implosion paper, further reducing their ability to generate revenue and triggering a Death Spiral as I describe there.
In 2013 as Western regulatory response was first starting to take shape, the UK Office of Fair Trade (OFT) was on the vanguard. The rest of the EU and global body was willing to let the OFT create and present the initial framework for the first regulatory steps aimed at the online gaming industry. These were presented at the 2013 ICPEN summit in Panama where I was also summoned in order to act as an industry insider adviser.
At the ICPEN summit there were two industry speakers, myself and a VP from Disney. The Disney VP presented slides of their most consumer friendly product and called for industry self-regulation. I presented slides of a worst case product, riddled with more Dark Side Technologies than I had seen in any other product, which was marketed directly at children. It happened to be a Disney product, but I was not told the Disney VP was going to be there until I arrived and had dinner with her.
Seeing the evidence I provided, regulators questioned the Disney VP aggressively and she decided to immediately flee the conference. The product involved was made by Gazillion Entertainment, which was abandoned by Disney just two weeks ago and forced to close with total layoffs. I suspect there was a connection to the regulatory noises that came out of Belgium in response to the EA SW BF2 release. In 2013 regulators were acting in advance of consumer sentiment, to put out small fires before they became big fires. This is what good regulators do. They are not social justice warriors. These are very conservative and pragmatic bureaucrats that take a long time in determining a best course of action when crafting regulation.
What happened a couple weeks ago starting in Belgium and winding its way to France, the UK, and even Hawaii, was a different thing entirely. Here there was already a big fire, that regulators could have prevented by acting earlier (as early as 2013) but did not. This made them look bad. Now they were acting in uncharacteristically bold fashion in reaction to intense consumer demand. Politicians will join the band wagon to court voter passions as you are seeing in Hawaii. Under these conditions the regulators will be under pressure to act faster, and in doing so they will be granted the political power to over react rather than under react as they did previously.
This is a perilous time for companies that have invested heavily in Dark Side Technologies and do not possess the infrastructure to operate effectively in another manner. I believe this is why Gazillion was cut off so abruptly. Now Disney can claim that was just an isolated studio that they acquired during the Marvel acquisition and not reflective of company culture. Yes they may have had the opportunity to do this in 2013, but did not. This does not necessarily prove the existence of a Darksider culture in the wider company, they may have just been operating purely mathematically and seeing the studio as profitable without regard to how. This is still a poor defense but given the economic clout of Disney, it may be enough.
Except that now they have another very large loose end...
Disney's Relationship With EA
Regulators have long memories, and will access all previous regulatory work before moving forward with new rules. So they know how the 2013 ICPEN summit went down. These sorts of summits happen only once every few years, and everything was recorded on video. So Disney calling for self regulation at that conference is going to ricochet back to them. Now Disney is engaging in self-regulation after the fact. They can't just shut off EA like they did with Gazillion, but they can shut off all the microtransactions in SW BF2 with just one phone call, and they did.
Still, the gaming arm of the Star Wars franchise was supposed to be something that would boost the SW IP. Instead, they are taking huge brand damage which we can't be certain of in numerical terms but it certainly will be expensive. It doesn't help that articles about EU regulators calling for loot boxes to be illegal have Star Wars videos attached to them, just weeks before the launch of their new movie. EU citizens are already nervous about the power of large USA corporations that hold near monopoly power in their territories. They have a history of going after these companies aggressively when they engage in behavior that is perceived as not in the interest of consumers, and regulators will also be considering the recently announced proposed Disney acquisition of 21st Century Fox assets in Europe.
There are still additional Star Wars games under development at EA. These projects will come under additional scrutiny as well as existing games under the SW IP. If the situation continues to deteriorate, and it looks like it could, then Disney may move towards a “soft dump”. Pulling the plug completely would involve shutting down all existing SW BF games just like Disney did with Marvel Heroes a couple weeks ago. They did it there, they could do it here. Clearly the Disney bean counters and lawyers are already at work trying to decide if that would make the problem worse and increase their legal exposure. Shutting down a big game like that seems a radical move, but they did it with their Marvel game so it's possible. The relationship with Gazillion was problematic because of how the 2013 ICPEN summit went down, but Marvel Heroes was popular with consumers, it was not taking the heat that SW BF2 is now.
EA can't just clean house and go back to a consumer neutral culture. It is solidly Dark Side at this point, and more importantly it has been publicly identified as such by both consumers and regulators. No amount of PR is going to remedy that situation at this point. Calling in a Cleaner was actually attempted, much to my surprise, but the culture nipped that idea in the bud and this option is now off the table.
So while the 61% drop in sales, the multi-billion dollar loss in stock value, the anti-EA Rebellion, and international regulators making EA their new regulatory poster child are all serious problems for EA, the relationship with Disney is their most immediately pressing problem. How it will play out is difficult for me to predict. Disney protects their brand value aggressively, but not proactively. They are poor at preventing fires but good at putting them out. As I've pointed out, the fires at EA are beyond the ability of EA to quench. They are also beyond the ability of Disney to quench. Thus some sort of partition is almost certainly going to be executed, but given the size of the Disney-EA relationship, it can't be done unilaterally and instantly like it was done with Gazillion.
My best guess as to how it's going to go down is the two will enter into relationship counseling, and once that goes nowhere Disney will file for divorce. A messy divorce. Disney will see that as a likely result and be working on the divorce papers even during the counseling phase. Said divorce won't result in total and immediate closure as with Gazillion, as EA is a big company with a diversified portfolio that is not all connected to Disney. Still, any such divorce or “soft dump” is going to result in a labor pool reduction well in excess of 10%, and that's even before regulators get a piece of EA. Given the almost 10% drop in EA stock value already, it seems likely that shareholders will not be waiting for any of these options to actually materialize.
As I pointed out in my recent Data Implosion paper, the entire industry is heading for a large correction. Corrections tend to be incremental until there is a market shock and then they can happen quickly. Well the market shock just happened and the correction is under way. The correction will not be isolated to just EA, even if the market shock was sourced there. EA is an industry leader so it seems appropriate that they are leading the move towards an industry best practices and market correction.
My advice to studios world-wide would be that if you haven't already had (and lost) a Force War, then don't. Play this conservatively and stay clear of any activities that might get you targeted by Rebellion forces and regulators until this dies down. Let your competitors take this bullet, that means more market share and less competition for you. It also means lower user acquisition costs are coming up in the near future. That's especially good news for Force-neutral studios in the mobile space who are mostly struggling under obsolete retail business models, even if there aren't many of you left. Big winners could be Nintendo and Niantic if they play this right and continue to keep it clean.