The Future of Games and How to Stop It

How to Build a Better Game Company

Only a few years ago, the game industry was controlled by a few publishers creating games according to the strategies learned over the prior decade: funding so-called hit “AAA” games with increasingly large budgets. AAA games are delivered inside an ecosystem with:

• Big up-front platform fees
• Expensive gatekeepers
• Costly manufacturing processes
• Retail-driven distribution through stores such as Gamestop and Walmart

This business model has resulted in a content arms-race where development budgets have soared to $50MM+ per game, with marketing budgets several times that amount.

Meanwhile, the market has changed. The first signs were the runaway successes of free-to-play games such as the offerings from Nexon. Then Zynga came along, and despite the many mistakes it has made, showed the world that there was room for new types of games for new audiences, distributed through newer distribution models. Since then, there have been some huge successes, such as the amazing growth of Supercell and the recent exit of Natural Motion.

An Industry at the Crossroads

Too many game startups are still operating within the model of ten years ago—when even the models of two years ago are already wrong.

The next few years will tell whether a new wave of game businesses will achieve both sustainability and scale—resulting in a better, more diverse and healthier industry. Some startups will be taken up by those with a lot of cash (the AAA game publishers, and the last generation of game companies that had an IPO). However, acquisitions will only produce impressive returns if they focus on building better, stronger companies rather than simply playing in the industry’s farm league (forming traditional studios). We need to see some startups “swing for the fences” and grow large, sustainable ventures on their own.

It’s best for everyone if innovation wins out: best for gamers who will benefit from the widest range of game genres, types and business models—as well as for investors, who need a vital and less hits-driven ecosystem. If game startups are going to succeed, they either need to get big enough to go toe-to-toe with the Electronic Arts of the world—or they need to be so powerful that they could reshape potential acquirers from within.

So what is this future of games that needs to be stopped? It’s the one in which innovation is squelched and game creation reverts to the mean of expensive, hits-driven development. In this model, studios are disposable, outsourced R&D farms. Game companies can do better. This article is about how we might do that.

If you’re a gamer and you’re concerned that it means that the types of games you love won’t be made anymore, you need not fear. The market for AAA games continues to be in the tens of billions of dollars worldwide. The largest success of 2013, Grand Theft Auto 5, has sold over 32 million copies worldwide, generating somewhere between $1 and $2bn of revenue at retail. Even the venerable World of Warcraft, while well off its peak subscription levels, still does over a billion a year in revenue with its 7.8 million subscriptions. Games like this will endure because there’s a big market for them, and big companies that are great at making them. However, the strongest industry will also be a more diverse industry where developers of all kinds can ply their trade.

Technocultural Disruptions

Before thinking about the game industry, it’s helpful to take a step back and look at what’s happening with digital consumer businesses in general: the ubiquity of Web browser access, the widespread adoption of powerful portable devices (the iPad, Android phones and tablets) and increasing access to broadband has set the landscape for demand in the billions of customers. There are now close to 2 billion smartphone users in the world and broadband speed access—that was already available to half a billion people back in 2010—will grow to around a billion in the next few years.

As interesting as the changes to the consumer market are, the more fascinating disruptions are happening inside companies as they strive to find new ways of creating and delivering products.

In the last year, a number of companies have found success building a new generation of really great consumer products in markets that early-stage investors wouldn’t touch a few years back. Examples include:

• Warby Parker, which morphed from being an online eyeglasses retailer into a potent eyewear brand of its own
• Harry’s, which is doing a similar form of vertical integration in the razor business
• Nest, which set out to “reinvent unloved products” like the thermostat, turning them into digital information appliances for the home.

And lest you think this is a US-only trend driven only by the highest-paying, design-sensitive consumer: consider that VANCL, an online fashion retailer that makes and sells its own brand of clothing, attracted the most private capital of any company of this sort in 2013. These companies are having success because they’ve made digital distribution, information technology and Internet integration fundamental to not only their products but also their operations.

There are some common themes with all of these new consumer products companies: an emphasis on design, heavy leverage due to technology across the business, and an ability to reach customers without depending on expensive/slow retail distribution.

What’s Broken in Games

There’s a lot for game companies to learn from the current crop of consumer growth companies, but there are also a lot of problems inherent to the the traditional models for game development:

• The studio development model is broken. From an economic standpoint, studios are really just outsourced R&D for larger publishers. There are some exceptions—but for the most part, a studio exists to rapidly scale up an enormous development effort, ship a product, and then shed off unneeded staff quickly. While this model has succeeded at producing huge games like GTA 5, it is a lousy model for creating sustainable businesses for all but the very largest games. Big studio-developed titles usually don’t benefit from the creation of best practices, the institutional memory, or the perfection of craft that is acquired over the course of time.
• Unrealized profit potential. Games should be thought of as a type of service rather than a product to be thrown over the wall and handed off to marketers. Every game developed in the ship-it-and-forget-it vein has given up an opportunity to have the original developers continue to innovate and deliver value-creating entertainment experiences to the players who loved it over the long term.
• Serialized, expensive development. Because the old model of game development is so expensive and because it takes years to deliver such games to the market, it means that companies have far fewer opportunities to recognize patterns and learn from mistakes and successes. Although there are certainly some exceptions that prove the rule, for the most part the creators of games haven’t had enough opportunity to master a category and then multiply that success over a number of products. The most successful, scaling game companies in the future will eschew serialized, expensive development in favor of models that let them try a lot of things, fail cheaply and deliver games that people actually care about.

Building a Better Game Company

So, what now? Here’s what I think the ideal game company of the future looks like:

• Focus on delivering long-term engagement. Attention=money, so games are going to compete to garner the most attention. The more attention a game earns, the more money the company earns. The games that are going to grow the most are those that deliver content and updates to customers over a long course of time: free to play games, episodic content, content tied to live media, subscriptions, downloadable expansions, advertising, etc. are business models that support this.
• Vertical integration of development, marketing and live operations. If games of the past could be thought of as “entertainment packaged as software,” then the game companies of today and tomorrow are “entertainment packaged as SaaS (software as service).” Games can’t achieve the goal of delivering long-term engagement unless they start acting like almost all successful consumer product companies that have achieved scale—which means being good at delivering and learning from all aspects of the customer life-cycle. Since digital distribution is already trumping traditional brick-and-mortar distribution for almost all new games, it is getting both easier and harder to achieve this type of vertical integration. It is easier in that there are fewer gatekeepers to negotiate with and the overall model can be far more capital efficient. It is harder in that successful vertical integration requires developing skills that most game companies haven’t been good at historically (merchandising, analytics, data science, marketing, distribution, customer service, etc.)
• Category mastery. Game companies are going to be increasingly known for the type of games they make. Franchises are going to be just as important as ever, but most successful game companies are going to first focus on being best at a certain type of game and allowing franchises to develop from them. As companies get great at a category, they’ll manage overall risk by maintaining a portfolio of multiple products in a category. At Disruptor Beam, we’re focusing on a category we call Strategy RPGs, and we’ve done OK so far but there’s a lot we’ve also learned. This learning is critical to building a sustainable company.
• Shift from hit-driven to portfolio-driven. Mastering a category takes time, but it also means placing several small bets and doubling down on successes rather than the one-big-bet of traditional big-budget game development.
• Leverage state-of-the-art information technology at all elements of the customer and development lifecycle: the inside of successful game companies are going to be informed not only by the best game designers—but also social designers, UI designers, analytics experts and will in many ways look like SaaS or information technology companies on the inside.
• Gain unfair advantages in terms of distribution. Bad games can sometimes succeed. However, good games can also fail for one simple reason—they don’t reach enough customers. Companies that have vertical integration and category mastery are still going to need to do the extraordinary to reach the top of the charts. There’s a lot of ways this can happen: partnering with media companies with successful franchises (what we’re doing at Disruptor Beam), unique social interactions, partnering with successful Internet channels with access to tons of customers, clever guerilla tactics, being first-mover in new digital marketing platforms, or by simply delivering high-ARPU products that can afford expensive and talent-intensive paid acquisition efforts.
• Have a smaller headcount. The most successful will have enormous revenue:headcount ratios. Consider Supercell, with a little over a 100 people, generates millions of revenue per day—of course, they got there by trying several times and steadily improving (their first game was on Facebook and had around 100K MAU and low revenue). Driving these sort of results with smaller teams means growing companies in a disciplined way in which both ROI (in the financial sense) and ROF (Return on Fun—the rate at which an investment turns into a lot of fun for your customers) is carefully considered.
• Exist anywhere in the world. Two of the most successful companies, Rovio and Supercell, have already proven that a game company can be anywhere: until recently not many people thought of Helsinki as a startup hotbed—but there you go. However, teams are probably going to consist of more senior folks and will probably continue to cluster near locations that historically have produced a lot of other startups in other industries.

While we’ve recently seen some amazing exits (Supercell selling half the company to Softbank for $1.5bn, or the Natural Motion exit to Zynga) we’ll see a company with the attributes I described above (and certainly a few that I haven’t described and which will surprise all of us) IPO and get to even greater scale in the coming years. I think the best is yet to come. Just as we saw dozens of search companies before Google’s triumph, I think there’s an opportunity for a colossal success in the game business. Not all of these companies will make a game that you care about, but it is an industry that will, overall, produce something for everyone. That’s the future I’d like to see.

Hat tip to Jonathan Zittrain for the inspiring the title of this article. Images are Creative Commons images from Flickr, with attribution to Great Beyond, Jesus Solana and Giulia Forsythe.