[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:
- Strengths and weaknesses of the typical successful casual game developer
- How the addition of developer-run online services can help mitigate the weaknesses of the current downloadable business model
- How a developer's strengths as makers of great games can be turned into a competitive advantage when surviving in an ecosystem filled with larger service-oriented portals
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:
- The rising quality of competing games. The entry barriers for creating casual games are low and dropping every day. Tools such as Flash or XNA ensure that the masses of developers interested in making games have all the resources they need. A substantial number of casual titles, both original and clones, are reaching best-in-class. The secret ingredients of a great internal development environment (small teams, a passion for detail and freedom to experiment) are being replicated in a small but growing portion of the hundreds of developer petri dishes around the globe. As this process inevitably advances, even the most established casual game developers run the risk of losing their position at the top of the heap.
- Brand erosion due to portal business tactics. Portals desperately want to commoditize casual games. It is in their best interest to treat them as disposable, one-size-fits-all content like a movie or an MP3. This allows them to take a mass market strategy where they build efficient machinery that feeds their customers a stream of gaming snacks. Never satiated, the players keep coming back to the portal for more. In order to make themselves the center of gaming goodness in the eyes of their players, portals are incentivized to minimize development team branding and maximize the placement of their own branding and services.
- Portal integration cost. As part of their customer retention tactics, portals are building in more community features such as achievements, gamer scores, persistent IDs and chat. They are using disposable casual games to build a loyal community that they can continue to rely upon for years to come. This places an expensive integration burden on the casual game developers. It also increases the chance that customers will look to the portal for future purchases, not the developer of their favorite game.
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.
- Build a service that keeps the customers you have. In the current model, developers lose their customers the moment they finish with the developer's latest game. One proven solution is to build an ongoing service that keeps those customers around, so there is no need to acquire them again for the next title. Think of what Battle.net did for Diablo, or what the ranking and comment services do for Kongregate. This is the game that portals are playing. Game developers can play it better by building their own services.
- Treat portals as a customer acquisition tool. If you are using portals as a pure revenue source, you are thinking overly short term. Your game demo is ideally built to sell itself. It is a self-contained sales machine that hooks users and encourages them to make a purchase. The only real value of a portal, marketing fluff aside, is to increase the number of people that get to experience your demo. When you start thinking of portals as a customer acquisition tool instead of your primary revenue generation channel, other opportunities emerge.
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:
- Predictable long term revenue stream. Users tend to stick around and they tend to keep spending money within their community. There is less worry about being only as good as your last game. By keeping your community healthy, you can keep the revenue stream steady.
- Pricing power. The ability to control virtual currency and sell items and levels within the game gives the developers far more pricing flexibility than is present in the current "$19.95" download market. This means that you can price in ways that deliver more value to more customers. Overall, this results in higher lifetime revenue from each customer.
- Extend sales of existing titles. Core casual games that serve a larger multiplayer metagame end up being played long past the time that the initial content has been worked through.
- Increased insulation from external market forces. Since the customers using the service have a deep, invested relationship with the developers, they are less likely to be influenced by the activities of other portals or the existence of other games.
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:
- Build a gaming service around existing brands and products
- Co-opt existing distribution channels to promote the game developer's service
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:
- Persistent material goods. The first step is to move beyond ephemeral gameplay and give the player an immediate reason to stick around. The cheapest method is persistent meta-game goods. These can be through a decorated user page, achievements on display, placement on the scoreboards, or outfits that they flaunt.
In order for players to stick with a game, they need to have a sunk investment in time or energy that is readily recognizable as material goods in the game. Persistent material goods provide a common focal point that ties together the time they spend across all the various divergent games. Why are you playing that 5000th game of Match-3 online? Because you want to earn those popular Ruby Earrings.
- Persistent Identity. Once users are hooked on their material investment, the service should allow the user to make an investment in their reputation. Persistent avatars and screen names that can be viewed by others lets users become known in the community.
- Communication systems. You need tools for individual users to find and converse with likeminded people. Lone wolves tend to leave community sites no matter how great the games. However, if you can bind them to a social group, they'll stick around for the conversation. Private messages, chat rooms, forums and blogs are all valid options.
- Social structures. Now that small groups of users are talking, you want to bake the fledgling social network into the structure of service. By adding official groups, teams or "gaming circles" to your service, you ensure that the most efficient manner for users to talk with one another is through your site.
Step 2: Use existing distribution channels to promote the game developer's service
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.
- Game developers make packaged games.
- Portals in various platforms market and sell the packaged games.
- Customers give the portals money and their loyalty.
- A moderate portion of the money is passed on to the developer. Only the biggest brands get any portion of the customer's loyalty.
We want to switch this up a bit.
- The first few steps are the same. Game developers make games and portals market them.
- Users give portals money to purchase the games. However, the games are constructed to hook up to a larger developer-run online service upon purchase. This siphons much of the user loyalty away from the portals and back towards the developers.
- The developer gets a small cut of the initial sales. They receive the vast majority of the customer's loyalty and future sales due to the user's participation in the service.
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.
- Integration of web and game development. In some larger groups, web and game development often exist in two separate silos. The development platforms are different, the skills are different, and the goals have historically been different.
Yet the development of the games and the development of the base web service are intimately intertwined activities. In order for the service to succeed, web and game development needs to be integrated in cross-functional teams. The game development teams need team members that intimately understand web metrics, web usability, flash development and customer support. Support for virtual currencies, achievements, and ties into service wide meta-games are typical features, and you need teams that can handle the cross-discipline requirements.
- Packaged goods mindset. Currently, most casual game developers ship complete, packaged games. Teams are steeped in the premise that they create a complete set of levels and gameplay that is sold to the customer for a one-time fee. When you get into services, this assumption is challenged by the need for incremental updates, virtual goods, seasonal events, and hot fixes.
- Inexperience dealing with community support. There is a rule of thumb that the real development on an MMO doesn't begin until it has gone live. The social anarchy that results from thousands of players interacting with your code requires a completely different form of support than a packaged game. An experienced live support team would need to be grown to handle these situations.
- Not enough people on the team. Many casual titles are put out by one- or two-person shops. They outsource the artwork, the sound and often even much of the marketing and business. Some smaller groups barely have enough human capital to pop out a game or two a year, never mind manage a service. As a result, most successful casual services will be built by medium-sized groups who can devote a developer (or five) to building and maintaining the service.
- Lack of business experience running a profitable service. Running a successful service means mastering the business side of micropayments, price setting, seasonal promotions, and virtual currency issues. Making that switch from monetizing each game to monetizing the service can be painful. A common mistake is to treat the service as a free add-on in the hope of selling more packaged goods. The result is a developer who finds that their service investments just don't pay off.
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.
- Start from scratch: BuildCafé.com and Flowplay.com both have the stated mission of building a social community around casual games, complete with avatars, virtual currency and virtual item sales.
- Partner: Service operators such as Outspark are building up considerable expertise managing MMOs brought over from Asia. These are the new middlemen of the industry, though they have a much tighter relationship with the developer than current portals.
- Add a service to your existing titles. Middleware companies like MetaPlace or Aria are making the cost of starting your own service smaller than ever. I suspect we'll see a half dozen more announcements over the coming year.
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.
- Direct relationships with customers. Business models are emerging that let game developers have profitable, direct, long term relationship with their customers.
- Disintermediation. The traditional middlemen are no longer critical to the developer's survival. Maintaining brands and customer relationships can be handled directly by the developers. Managing an expensive portfolio of disposable content is mitigated by the use of community specific game systems.
- Delivery of long term value. The value driving these models is primarily based on socially rich communities, meaningful brands and highly reusable content. Disposable content, in the form of game mechanics that you play for a short period of time and then toss aside, make less sense from a financial perspective.
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.
- Purchase or hire a small MMO team as the core of a cross functional team of web, game devs and MMO experts. A partnership is possible; though the greatest benefits will come from bring the knowledge in-house.
- Build an online game molded after titles like Puzzle Pirates. Use existing flagship games as the core mechanics. Be sure to include persistent material goods, persistent player identities, robust communication systems, and game supported social structures.
- Start transitioning the web team over to a team capable of supporting a live game. This means hiring more community support personnel and game masters.
- Create portal versions of popular games that lead players back to your online game. Turn portals into a marketing channel for your community.
- Start tracking customer lifetime value and building game systems to increase this metric, either by increasing retention or creating offerings that let passionate players spend more.
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.