This was originally posted on Betable's Game Monetization blog.
[In the Innovator's Dilemma, large companies keep improving on what makes them successful, while scrappy companies come up with entirely new ideas. Finding these disruptive ideas means accepting risk and failure. These lessons apply to the game industry.]
The Innovator’s Dilemma
The Innovator’s Dilemma is a oft-referenced book by Professor Clayton Christensen of Harvard Business School that describes a theory about how large, successful firms can fail “by doing everything right”. Christensen describes how a company’s successes and capabilities can actually hamper its ability to adapt to new market conditions and technologies. To explain its theories, the book outlines two major types of technologies: sustaining technologies and disruptive technologies.
Sustaining technologies are used to improve the performance of existing products that have an established role in the market. Large companies are often very good at developing these technologies and use them to overcome challenges. Often times, smaller countries that are not innovative see these technologies as a baseline for a successful business.
Disruptive technologies are often a cheaper, simpler, smaller, or more convenient way of doing things. In their infancy, they frequently leave users worse off than if they had used existing sustaining technologies. However, these disruptive technologies typically address a new market segment or a set of under-served customers.
Large companies overlook disruptive technologies because they do not immediately serve the high-end market that they dominate. Also, large companies have many things that slow down adoption of new technology: set precedents, organization size and structure, and established customers that they are accountable to. Large companies cannot afford the same unpolished, always-in-beta feel that startups can get away with, and they often see no reason to scrap the technology that they built their business around in order to try something new.
Innovating in the Game Industry
Like other industries, the game industry finds itself facing the same dilemma when creating disruptive new technologies. The technologies that entire companies can be born out of are game mechanics, game archetypes, and monetization methods. If you take an example like virtual goods, you can clearly recognize its journey from a disruptive to a sustaining technology.
Sustaining technologies in the game industry often started out as innovative. For example, downloadable content (DLCs) began as a revolutionary alternative to EA’s sell-forty-expansion-packs-to-The-Sims model and the prevalence of fully priced expansions in the PC game industry. As game distribution platforms adjusted and made DLCs more convenient, they ended up taking over both the PC industry as well as new platforms such as iOS, Xbox Live, and Steam.
The poster child of a disruptive technology changing the game industry recently is virtual currency-based social games. Built on the backs of social networks and addictive game mechanics, players drawn into these games were often compelled to invite their friends to complete game objectives. As this technology matured, it encouraged players to post advertisements for the game and provided enticing new convenience items or customizations to drive growth. These games were often targeted for mass appeal, and though they were free for the majority, massive businesses were able to be built around those players who chose to pay.
Once these disruptive technologies have reached critical mass, they are adopted by everyone and become commodities to players. However, the opportunity to leverage the cost savings, untapped markets, or new capabilities of these disruptive technologies to build innovative new businesses has already been claimed by the first entrants. These large companies in-turn live off of the technologies that made them famously successful, and small companies copy them while aspiring to become one of the big players.
Small companies could potentially out-execute or out-innovate using sustaining technologies to beat the large companies at their own game, but why would they? Small companies can potentially win this way, but they will be up against the large companies tremendous advantages in knowledge, scale, and execution of the sustaining technologies that made them successful. To speak gamer-to-gamer for a second, this is like charging the gates of a massive fortress with an army one-tenth the size of your opponents’. This is not the way to win: to win as a small company, you need to tunnel under the castle walls, so to speak.
The Power of Disruptive Technology
Disruptive technology is so powerful because consumers are fickle and demanding: they are loyal to whatever product best serves their needs. Nowhere is this more true than in the game industry. Consumers spend more on games than other entertainment mediums, and they are free to spend their time and money on whatever new game best captivates them. This is even more true now that open distribution platforms and the spread of free-to-play games have put the power firmly in players’ hands. Combine these factors and disruptive technology in the game industry can create empires overnight.
As is the case with Zynga and the other social gaming giants, being one of the first to market with a disruptive technology gives you a huge advantage. Since disruptive technology by definition opens up a new segment of the market, there is an immediate land grab to secure as many of the first-time players as possible. As a rule, it is almost always easier to secure new players rather than poach them from a competitor. Furthermore, players are intrigued by a new mechanic and that makes them more likely to share the game with their friends, forgive hiccups, and come back for more. As your games grow rapidly by claiming all of the low-hanging user acquisition fruit, you quickly get more funds (or in some cases, funding) to ramp up development and marketing. It is no accident that Zynga used their early lead to raise venture funding, and subsequently outspent their competitors by as much as 10-to-1 in marketing to claim over 50% of the social games market.
Solving the Innovator’s Dilemma
In order to solve the Innovator’s Dilemma, you need to be able to identify, develop, and successfully market emerging technologies before others use them to overtake your company. Doing so doesn’t mean abandoning your pursuit of sustaining technologies, but instead balancing your need to grow existing revenue streams with the need to seed new ones. Becoming a company that embraces disruptive technology is challenging, but any game studio – large or small – can do so by changing the way they look at risk and failure. This means overcoming the organizational prejudices that inhabit any company with an established customer base and business model.
You will need to accept market risk: your expert quantitative analysis of the market opportunity will mean nothing, because as Christensen puts it, “markets that do not exist cannot be analyzed”. Instead, you must compare the opportunity presented by the new market versus iterating on your existing market. Often times these opportunities will be more qualitative than quantitative, but by putting the decision in the context of your company’s long-term goals, you can fairly evaluate the potential of a new technology.
You cannot be afraid of failure: you need to fail fast and fail often in order to learn as much as possible about the technology and the market. As Eric Ries hammers home in his acclaimed book, The Lean Startup, with disruptive technology you must optimize for learning. This is because the first company that unlocks the optimal usage for a new technology will be at a huge advantage, and putting resources behind a suboptimal technology just wastes your time.
You must continue to look for and pursue new technologies, even as your most successful experiments bear fruit. Sitting idly on your newly discovered cash cow simply puts you right back at square one, where you relied on sustainable technology for success. Your company should always be hungry for new opportunities to grow, new seeds to plant, and new ideas that throw sand the face of your best business models.
In the end, you determine whether you innovate
Tying together the three solutions to the Innovator’s Dilemma is the ability to listen to new ideas with an open mind. You are in complete control of this internal process, and you must own up to your own prejudices as well. This is exactly why Betable is building the world’s first and only platform that enables real-money gambling and betting in video games. Social game mechanics flew in the face of what many game creators thought was “fun”, yet hundreds of millions of people play these games every day. The truth is, the ideas that challenge the status quo are the ones that end up changing it forever. We believe we’re doing just that, and we look forward to seeing what other innovations are just around the corner in this rapidly changing industry.