Monday, February 1, 2010

Playfish's Smart Move in the Facebook Gold Rush

This is a good piece on why Playfish sold itself to EA.

New markets (for game makers or anyone else), the successful ones anyway, tend to turn into gold rushes. Someone takes a chance, stakes a claim, hits gold, and then in come the hordes of followers that heard about the guy that got rich with only a mule, a pan, and the clothes on his back.

In recent years we saw a casual games gold rush, a console downloadable (lead by XBLA) gold rush, an iPhone gold rush, and now it's "Wagons, Ho!" for the Facebook gold rush.

With each of them, the market achieves an equilibrium over time as competition increases faster than consumer spending does, and eventually you get to the same place as the rest of the games industry: A hit driven business in which a minority are profitable, a very small minority are extremely profitable, and the majority go bust trying to get to the top end of the curve.

What *differs* though, in how these markets evolve, is the tactics taken as the marketplace crowds. The strategies available are the same across all of these, but which is the right one, tactically, varies by platform.

They are:
  1. Lowball on price: The PC casual download biz eventually went this way, and many are trying this tactic on the iPhone, but I believe it's a fools game, and some of the others below will turn out to be the real winners for that platform.
  2. Out-Innovate: This one is easy. Go invent an awesome game mechanic/biz model/etc, that no one else has thought of, and that everyone loves and finds addictive. Oh, and make it hard to imitate. Easier said than done. The problem with this one is that there's no clear path.
  3. Spend your way out of the clouds: Spend on development, spend on marketing, etc. Build a better looking title, get pretty screenshots, and then go pound the pavement to get more ink/photons than the other guy. (We saw many XBLA titles go this way as budgets went from $100k to $1M)
  4. Out-Brand: This is another flavor of spending your way out of the clouds. Specifically, license IP/Brands, from games or elsewhere, can help your title stand out in a crowded space. This works especially well with a less scrutinous audience (doesn't necessarily mean hardcore, could mean just more price or time sensitive).
The interesting thing about the Playfish acquisition is that they pretty clearly are claiming that #4 is going to be the strategy of choice for Facebook, and I have to believe they are right.

Dropping price doesn't work because the FB games are mostly free/freemium. Innovation is risky everywhere (better to be 'fast follower'), and increasing the game budget... well that will happen, but it's not clear where it ends, or if FB games are ready for Unreal engine license.
So that leaves out-branding, and as the article points out, the EA acquisition gives Playfish the financial resources with which they can go do this, plus a great set of connections at EA with their own IP and licenses from other EA partners.

[note, of course you'll see ALL the above strategies employed in each of these markets, but there will be majority gravitation toward one or two at any given time]


Patrick said...

Hey, I'm working for a smaller company targeting a market that isn't yet so saturated, invested in by the capital branch of the company you work for, so that makes us brothers-in-law or something. Their strategy right now is perhaps #5 which is to target the under-saturated markets in BRI, but later we're going to throw down the guantlet with the big boys and the strategy will be a combination of improved pricing and innovation.

Basically, nobody seems to know shit about economic optimization or market efficiency and the pricing patterns of both items and their virtual currency exchange rates seems to be mostly guesswork, we've yet to see any robust models for optimizing spend. Second, and this is true of most of the industry regardless of platform of biz model, most game designs suck, probably in correlation to the number of companies that go bust. As the cash-for-time trade is still approaching pinnacle saturation being a fast-follower with incremental design improvements is probably a better idea, for example the first batch of SimCity-type games all suffer from horrible design flaws and the best of the breed has less than 2000 MAU and similarly suffers from an obvious and debilitating design flaw (referring to TinyTown's avatar).

If you took the werewithal of someone like Cactus, who comes up with a new genre everytime he sneezes, combined it with the modeling skills of a hedge fund quant, and gave it the polished edge of a McMillen, you'd have the capacity to take on Goliath and make outsized profits. You've got Steve Meretsky and Brian Reynolds working in this space, I know they've got two of the three, but it really takes all three. More indie stuff that targets a "mere" couple million people but has a 5-10% conversion rate is where we're going in the medium term, after the first leg of the bloodbath.

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