GamesBeat

The pace of disruption in the transition from physical to digital gaming (part two)

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We’ve seen several rounds of disruption come and go in the video game business. Not every great idea has taken hold and changed the industry as we know it. OnLive, the promising cloud-gaming startup that raised $200 million and then cratered, was a prime example of a company that tried to disrupt the traditional game retail business and rushed too fast. Startups and traditional game companies have to not only understand disruption, but also how fast to execute it. That was the topic of discussion at the keynote panel I recently moderated at the Login conference in San Francisco. We had five leaders of the modern gaming business talk about the pace of change in gaming, and the perspectives they offered were enlightening. Here’s part two of our edited story on the pace of change from physical to digital gaming. For part one, check out this link.

Chris Early (pictured second from right), the head of digital games at Ubisoft, said, “Content is really what inspires players to go somewhere. That’s probably why it’s been a little bit hard for the industry, with this long console cycle. We’re aided every time there’s a platform or hardware change. Then, people have new platforms with new capabilities. Content creators are able to do more than they were able to do before. But some of those same popular game mechanics continue on. Poker, regardless of the platform, continues to be a popular game.

Chris Petrovic (pictured far right), the head of GameStop Digital Ventures, said he found it ironic that mobile was considered the next big thing.

“For those of us who have been around, we were in mobile gaming in the late ’90s, when it was dealing with carriers and JAR files and G2 and all that kind of stuff,” he said. “To me, it’s an iteration. It’s not a revolution. Tetris on a smartphone versus a future phone is a step function — better, but not mind-jarring. It’s still the same content. We’re just reinventing it. The Big Fish Games and WildTangents of the world that pioneered casual gaming and hidden objects are still thriving with what’s perceived to be an outdated model. That content is showing up in new places now. For the most part, it’s iteration. It’s adapting to where consumers are.

Kevin Chou (fourth from left), the chief executive of social gaming firm Kabam, said, “I agree that there’s a lot of gaming content that gets remixed and applied to new platforms. But I have to think there’s three major changes that are happening right now. There’s a business model change, there are multiple platform iterations and changes, and there’s a distribution change.”

He added, “With business models, as you look at mobile game sales charts today, most of the games now are free-to-play games. Every once in a while, for a couple of weeks at a time, a paid game will come on there. But primarily, we’re moving from paid-up-front games to free-to-play games that have a much longer shelf life. The second thing that’s changing is platforms. We’re talking about mobile now. We’re talking about Facebook and so forth. The third is that even though we’re talking about mobile again, the distribution models are changing. It used to be you’d go to carriers. The carriers would buy the preloads, and they’d get it into their media-center stores. Today, you’re talking about Apple and Google controlling the distribution much more than the carriers are. The carriers are almost cut out of the picture in game distribution.”

Chou said, “These three changes that are happening are a challenging environment for companies. How do I figure out how to deal with these things that are happening in different parts of the business? At the same time, though, they offer a lot of opportunities for companies that solve these problems.”

Petrovic said that user fragmentation will slow down the rate of change, new adoption, and disruption.

“When you see a large, centralized group of consumers, you can make an investment,” he said. “If you think back to a few years ago, there was a variety of streaming services online. They made some big bets, and they helped consolidate the market somewhat. Not so much through acquisition, but through attention. That’s what we saw happen on Facebook. Consolidation of users brought them enough users to get a lot of people to invest there. If we don’t see consolidation of users, it makes it very hard to invest.”

How do you know when to step on the gas during a big market change? Ubisoft’s Early said his company has always been active on new platforms.

“We bet big on Wii,” he said. “We bet big on Kinect. Most of the time, it pays off. Once in a while, you get poked in the eye, but most of the time, it works. Wii U is coming out. There are 23 titles, and we’re more than 25 percent of that title count by launch. Part of what pushes us to continue to do that is the focus we have on how we encourage our studios. Part of their business is working on how to evolve and how to build something new. Sometimes we end up investing in a platform that doesn’t have a concentration of users, and that project loses money. But the learning we have from that doesn’t go away.”

He added, “You can look back at some of the social things we did two years ago in San Francisco with Ubisoft that didn’t pan out, but the learning we have from that now is applying to Ghost Recon Online and the other free-to-play games. It’s even trending into the console space. We’re doing a free-to-play game on both consoles this January with Spartacus. That’s how we do it internally. We make sure we waste as little knowledge as possible.”

Petrovic at GameStop said that OnLive is the perfect case study for moving too fast.

“They were anointed, back when I read an article in 2009, as one of the Four Horsemen of disruption,” he said. “It was Facebook, OnLive, Zynga, and I forget the fourth one. They’re probably not around, either. The point, at least for me and I think for the industry, is that it wasn’t a question of technology. To operate at that scale, you need a lot of money to build up and to acquire customers. Building technology and having customer-facing businesses — those are two very expensive propositions that I think a lot of people underestimate. Also, it’s about knowing consumer demand. In that case, just because it’s technologically possible doesn’t mean it’s a good idea.”

Karl Mehta (pictured second from left), the founder of PlaySpan, which was acquired by Visa, said, “You have to have the culture and the ability to do small experimentation. That’s the only winning formula. Everything is changing. The distribution is changing, the consumers, the market, the platforms. Everything is changing. It’s hard to predict where you’re going to make money. If you can run four or five experiments and test it out, and then you know that one out of the four is the winner, then you go after it. OnLive never did this kind of small experiment. From day one, it acted as if it were the 800-pound gorilla. That’s one example of how it’s easy to step too hard on the gas as well as the brakes.”

Mehta believes the big companies like Nintendo and Electronic Arts should cannibalize their cash flow and invest in the new markets.

“They’re always trying to defend that existing business,” said Mehta. “Any new trend comes in, a new business comes in, and the first thing they’re thinking about is, ‘Okay, how am I going to defend my billion-dollar revenue that’s already paying the bills?’ Seventy percent of their energy gets spent there. Innovating on this new business side doesn’t get 100 percent dedication and focus. That’s why people [are] in this room and in the Silicon Valley area. We can make money because we can do a startup, be 100 percent focused on this new business, and we can always win against the large companies.”

Petrovic added, “Where Karl hits the nail on the head is the classic innovator’s dilemma. It’s a business where the case studies and the histories have yet to be written. We’re not immune from the challenges that Karl mentioned. If you look at all our revenue in the space, where there’s a transition from physical media to digital or an expansion from physical to digital… You have an analog business that’s bringing in dollars. You have a digital business that’s growing, but it’s only bringing in dimes. Getting that perfect intersection of growth in dimes against decline in dollars is, unfortunately, impossible to predict or plan for.”

As for the future, Petrovic said, “Our prediction is that the next generation is going to see a lot more diversification of business models between smartphones and tablets. Tablet is going to be the place where developers and publishers won’t be afraid to charge money up front and also in apps: The ‘paymium’ model, as I call it — somewhere between premium and freemium. You have a customer who’s already said, ‘I spent $500 on an unsubsidized device, and I want high-def content. I’m not afraid to pay for it.'”

He also said, “We believe that the continuing rise of accessories and controllers, like the one we’re selling in our stores, will create a more console-like experience for tablet gamers. We see a lot of leveraging of Android and other open-source systems to create the next-generation, over-the-top or side-loaded device. Even [with] the Android tablets that we sell, people are buying HDMI cables to plug them into their 55-inch TV screen because they want the larger form factor.”

Kabam’s Chou said, “I think the next generation is a lot of mobile and social. But what we’re going to see is those elements trending across all game types. Not just because of a hardware platform, but because they’re elements that are in the games. Across all the games, we’re going to see more social elements. We already see this at the console level, where they’ve got Facebook integration or integration with their own service. Social works. People like it. It’s a human trait — back to the point earlier. The concept of mobile [is] that you’re going to be able to interact with your content in a variety of places and not only on your couch. That’s part of the next generation.”

Chou added, “Now, I’m not saying ‘next generation’ in terms of hardware. I’m talking about the next evolution of content that we play with. We’re going to be able to play with it from a lot of places. Part of that might be on a console like Xbox or PlayStation. Part of it might be on your mobile phone. Business model is a key part of that. We see that happening on social networks. It’s happening on mobile. The big three console manufacturers are starting to dip their toes into it. Sony already has some free-to-play games. Microsoft is doing their first experiments this year. They’ve been slower than other places. But those are trends you’re going to see across all the next generation of content.”

Anil Dharni (pictured third from right), the senior vice president of studio operations at Gree International (the international division of Japan’s Gree mobile social networking company), said, “One thing I want to add to this, again, with my experience on both Facebook and mobile. … Mobile is really interesting, and it’s quite different from the other social platforms, specifically Facebook. You have games that are nothing but HTML 5. They’re webpages, basically. You have 2D isometric, nearly 3D-like experiences like some of the games that Funzio and Gree built. You have 3D games like CSR. You can see all of these succeed. So it’s not that you need console quality. The mobile space is littered with the bodies of developers who tried Unity and Unreal and have not succeeded. It’s an amazingly level field.”

He added, “It boils down to one simple answer, which we’ve thought about a lot. When you’re evaluating a platform, you need to answer the question, ‘Is it a pull platform, or is it a push platform?’ By that I mean, on Facebook, people don’t necessarily play games. You need to push them to play games. On mobile, people are checking the App Store every day. That’s why you see. … On Android, for example, it’s not that intrinsic. People are still adapting to Android as gamers versus iOS, where it’s so straightforward. We see better KPIs on iOS versus Android.”

Speaking about mobile gaming issues, Dharni said, “My take on that is, every platform has issues. For example, iOS is a pain. You have to submit an upgrade, you wait for two weeks, and then you see the next results. I’m pretty sure Kabam is the same way. We’re pretty used to running on a daily basis in order to push code out every single day. We want to get the results that very same day. But we can’t do that, necessarily. We have to figure out a way to build the entire architecture so we can push stuff out on the server that doesn’t impact the client. Whereas on Android, you actually can move at that pace. So yeah, that’s one technical architecture problem. We are so used to offering games as a service, but that’s challenging. Also, [look] at discoverability. It’s a problem everywhere.”

Asked if and when the games industry will go completely digital, Ubisoft’s Early said, “Absolutely. Every single product, within a relatively short time, will be available digitally. But I don’t think that means that the retail experience goes away. You’ll have a continuing set of choices as a consumer. Obviously, for some platforms, you can only get things digitally. At the console level, I think you’ll be able to get everything digitally, but will you go there? There are a lot of impediments to that. There are physical limitations when you think about the American market. There are areas that don’t have adequate bandwidth to think about spending several days downloading the newest game. Yes, there’s precaching and all those other things for dedicated players, or there’s a half-hour trip down to the store. There are all kinds of reasons that I don’t think we’ll ever go all the way to one or the other.”

Petrovic responded, “In my mind, it’s kind of a red herring, this question of ‘when are console games going to be completely downloadable?’ In theory, they will be. In practice, not so much, for a lot of the reasons you mentioned — whether it’s looming bandwidth caps or the speed of bandwidth or the value proposition of not being able to trade that in once you’re done with it. All those things go into it. These boxes are becoming media centers. We’re not just delivering games anymore. The more you load on to those boxes, the less you can tax it with downloading all those gigabytes of games that you eventually have to erase. That’s a pretty expensive thing to erase.”


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