Psychochild's Blog

A developer's musings on game development and writing.

18 August, 2015

In business, it’s all about the growth
Filed under: — Psychochild @ 5:46 AM

Blaugust, day 18

Today, I’ll write about one of the topics I’m most interested in: business. Specifically, how business impacts the development of games. I could sum it up in one word, “Growth”, but where is the fun in that?

Profitability is not enough

A simplistic view of business is that you want to bring in more money than you spend. While this is true, this is not what gets the business press and investors excited. What they want to see is that you are growing, that is, making more money in proportion to the amount of money you spend.

When talking to investors, it’s important to talk about the “hockey stick”, where your growth may start slow and steady at the bottom of the stick, and then at some point you see explosive growth (visualized as the handle of the hockey stick).

Why? Because this type of growth will generate bigger returns. A company with rapid growth can create more value with money, and this attracts more interest from investors or companies looking to acquire the company. So while EA might be profitable, they aren’t going to attract a lot of interest because their growth is pretty modest these days. An investment in EA will generate modest returns, but if you invest that same money in a small company that shows amazing grow, you’ll see a much more significant return on investment.

So, growth rules everything. Once you understand this basic truth, a lot of things start to make sense.

The growth of free-to-play

Why did free-to-play take off everywhere? Because of growth. As I recall, when DDO when free-to-play they increased their revenue by five fold in a short period of time. In hindsight we can see that this growth wasn’t sustainable, but it did generate a lot of interest as this was unique in MMOs. Most MMOs either grow big and bleed subscribers over time, or slowly build up to a plateau of users. A game that showed five-fold growth bucked the trend.

Outside of MMOs, we see that free-to-play fueled a lot of crazy growth. For example, social network games were praised as the second coming because they were eating our lunch. But, some years later the luster has dulled on social media games, even though there are still some very profitable companies making social media games, because there is another field with high growth: mobile gaming. But, history tends to run in cycles….

Are MOBAs the future?

The excitement over MOBAs in the last few years has been electric. Fueled by the culture of streamers who play MOBAs, these games have been hailed as yet another thing to displace MMORPGs. But, looking at the numbers this excitement seems curious: an estimated 400 million MMO players compared to an estimated 140 million MOBA players. What’s the difference? Growth.

MOBAs got their commercial start in about 2008. In a few short years, there were millions of players, and that type of growth seemed amazing. One game in particular, League of Legends (LoL) grew amazingly fast and dominated the field. Even now LoL controls an estimated 2/3rds of the market.

And, just like MMOs, we see companies try to come and claim a piece of that. But, there have already been some high profile failures, notable Turbine’s Infinite Crisis DC comics themed game. This has lead to people talking about a saturation of the market. And saturation means one thing….

A lack of growth.

When the growth stops

Riot Games, the maker of LoL, is certainly not in dire financial straits. They’ve sitting on a lot of money and still generating pretty good profits. A majority stake in the company was acquired by one of the larger Chinese internet companies, Tencent, for many hundreds of millions of dollars. So, a saturation of the market doesn’t mean that companies suddenly don’t make money.

What happens in practical terms is that all the buzz from the media and money from investors wanes. You won’t find breathless articles celebrating the new business celebrities, or investors willing to fork over money to related startups quite so readily. Larger companies look to acquire smaller companies, trying to capitalize on even the merest appearance of growth; we saw a feeding frenzy of smaller companies snapping up larger companies toward the end of the social network game craze.

And, a big pile of money covers a lot of sins. Despite having a huge hit game, Riot games has not been able to create a grand followup to their flagship game. Some of the largest social media companies are still around, floundering and trying to figure out how to recapture that old growth they used to have, even in more trendy new fields. Even though attention has moved on, they still exist, still generate revenues, but without the excitement and fanfare they used to generate.

What this means to you

Basically, if you’re an MMO fan, you have to realize two things. First, MMOs are hardly dead. Sure, they might go through phases where new business models are introduced, or new markets become dominant, but they’re still around. Creating an MMO is likely to turn a good profit. I expect Camelot Unchained will be a success by almost any measure.

But, the other thing to keep in mind is that it will be harder to create an MMO using traditional business means. Even if Camelot Unchained is amazingly profitable, investors are likely to see a better return on investment from some “hotter” market. Therefore, investors are a lot less likely to want to write checks for an MMO company. On the other hand, this is why crowdfunding has become so important.

Any suggestions for tomorrow’s topic?

If you have a suggestion on what I should write about tomorrow, post it in the comments. Or, send me an email at psychochild@gmail.com. I’ll find something to write about even without suggestions, but a suggestion would be more fun!







5 Comments »

  1. Following up on the importance of crowdfunding…

    It seems that crowdfunding and Early Access are becoming the new normal. Players are jumping into the process earlier and earlier in the development cycle and my fear is that, while it is good to see some indie games getting made that might not have otherwise, the process is pushing a game’s “peak” to before it even launches.

    Are we at risk of seeing the growth cycle skewed to the point where we burn out the interest in games before they are even complete? Can this be changed/fixed with different marketing methods for Early Access, or is the current method of marketing right alongside launched titles the best way to go for the money needed?

    Comment by Tanek — 18 August, 2015 @ 8:04 AM

  2. Given your experience (and a book), I’m not surprised to see the business dynamics of online games laid out so clearly.

    My reaction is stuck right now around the macro-level danger of chasing short-term profit spikes that clearly are not sustainable, so I’ll just let it go at that.

    Suggestion for a future post: analytics. :) What’s the smart position to take on how to apply analytics data versus trusting an experienced designer? If Elder Designers are making the big-picture design decisions, does A/B testing driven by analytics in social games remove opportunities for junior designers to learn and practice the craft?

    Comment by Bart Stewart — 18 August, 2015 @ 9:09 AM

  3. The growth mania has ebbed and flowed over the years. My first Silicon Valley IPO came at a time when you had to have growth, profitability, and multiple product lines in order to get investor interest. And then two years later Netscape went public with no real source of income, no viable business plan, just huge growth and domination of the browser market. They were next door to us on Middlefield Road in Mountain View and were adding staff and buildings at a crazy rate in the hope that if they threw enough resources at things, something would pan out and make money. Growth isn’t everything.

    Of late the emphasis on growth has remained, but margins are now the indicator that Wall Street obsesses about. And, of course, one of the things that depresses margins is spending on R&D. What used to be a failing company trick to buy a couple quarters of relief, acquire somebody making some money, has now become the norm for almost everybody. Even Apple, long uninterested in things they didn’t make themselves, has started down that path.

    But wait, we were talking about video games, right?

    You see this same behavior at EA, which has a long history of acquiring studios for the immediate boost and then later destroying them in order to maintain margins.

    Basically, if you go public, you risk putting your company in the hands of people who do not care about product or long term planning and profitability. Your board of directors represent stockholders, and in the end they only want dividends or an ever increasing stock price. This runs right up against most start ups, which generally have but a single successful product. Even Google really only had advertising as a successful product. Everything else has either been minor in comparison or come through an acquisition. What do you do when your one product goes into decline? (Aside from getting acquired by CA so they can milk your remaining customers for maintenance fees for as long as possible.)

    Hrmm, sorry, this wasn’t really on topic, was it? Just my morning mental meanderings.

    Comment by Wilhelm Arcturus — 18 August, 2015 @ 9:26 AM

  4. Is there really a definition of MMOs which (a) give you 400 million MMO players, and (b) does not actually include MOBAs as “MMOs”?

    Comment by carson63000 — 19 August, 2015 @ 5:43 AM

  5. Yes, because MMOs are much more popular in Asia than MOBAs. The market is larger than North America and Europe. Now to be fair, it’s hard for a North American or European developer to break into Asia these days. And like many other types of games different markets can feed ideas to each other.

    Comment by Psychochild — 19 August, 2015 @ 6:42 AM

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