The Game Industry

Greg Costikyan CEO, Manifesto Games 10/21/08

• 30+ years in the game industry(ies) • 30+ commercially published titles • Adventure Gaming Hall of Fame, 5 Origins Awards, Maverick Award • Manifesto Games • Play This Thing!

Me

Huge Growth

But the Business Model is Broken

“Moore’s Wall” and the Decline of the 3 rd Party Developer • Spiralling hardware capabilities = competitive pressure to take advantage of them = spiralling budgets • What Raph Koster calls “Moore’s Wall” • $15m now minimum buy-in for AAA title – 15 years ago: $200,000

Moore’s Wall (con’t)

• Art assets the main cost driver • A Doom level took one man-day to build; a Doom III level takes 2+ man weeks.

• You have no choice: audience expectations, marketing demands • Narrowness of retail channel: <200 SKUs, 2 week on-sale window

Basic Problem

• Sales increase linearly • Development costs increase exponentially • Console model is broken

Average game loses more and more money

$1,000,000 $500,000 $0 $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 1985 1990 1995 2000 2003 Profit/Loss

Conventional Business Model

x15% = $3.75

to developer $8 retail cut $7 platform royalty $25 to publisher $40 retail price

Why Developers are Screwed

• $3.75/game dev needs ~4m unit sales to recoup advance (very rare) • Publisher breaks even at ~800k unit sales (assuming another $5m on marketing) • Once upon a time, a hit game made the dev lot of money.

– Vanishingly small chance today

Result: The End of the Independent Developer • Staying independent = unprofitable treadmill – Have to land next development deal or die – No upside • Selling out only logical path – Assured access to dev funding – Only way for founders to cash out

Market Implications

• Field more and more hit-driven – Few hits have to carry 90+% of games that lose money – At any time, 80+% of sales generated by top 10 games

Implications for Publishers

• Consolidation • “All Games Should Be Like Sports Games” • Licensed crap + franchise extentions • Everything has to be AAA • Gameplay innovation is too risky!

Innovation is Driven by Discovering New Genres c. 2000BC: Track game with blocking (Royal Game of Ur > Backgammon) c. 800AD: Game of Replacement Capture (Shaturanga > Chess, Shogi) c. 1200AD: Game of Leaping Capture (Alquerque > Checkers) 1756: Thematic track game (A Journey Through Europe > Candyland)

New Game Styles (con’t)

• c. 1850: Trivia Game (Grandmama’s Game of Useful Knowledge > Trivial Pursuit) • 1856: Word Interpolation Game (Komikal Konversation Kards > Mad Libs) • c. 1890: Fishing Game (Fish Pond > Operation) • 1910: Military Miniatures (Little Wars > Warhammer) • 1953: Board Wargame (Tactics)

New Game Styles (70s)

• 1972: Adventure Game (Colossal Cave) • 1973: RPG (Dungeons & Dragons) • 1974: Vehicle Sim (Atari Tank) • 1977: LARP (Dragohir) • 1978: MUD • 1979: Flight Sim (Sub-Logic Flight Simulator)

New Game Styles (80s)

• 1981: Platformer (Donkey Kong) • 1981: Computer RPG (Ultima 1) • 1984: Graphic Adventure (King’s Quest) • 1985: Dynamic Puzzle (Tetris)

New Game Styles (90s)

• 1991: First MMOG (AOL Neverwinter Nights) • 1992: RTS (Dune II) • 1993: FPS (Doom) • 1994 TCG (Magic: The Gathering) • 1996: Rhythm Game (Parappa the Rapper)

New Game Styles (00s)

• 2001: Collectible Miniatures Game (Hero Clix) • 2003: Big Urban Games (BUG > ConQwest) • 2004: Alternative Reality Game (The Beast) ....NONE OUT OF OUR INDUSTRY SINCE 1996

Scratchware Manifesto

“An industry that was once the most innovative and exciting artistic field on the planet has become a morass of drudgery and imitation.” --Scratchware Manifesto, 2000

GDC Rant

“You can go work for the machine, work mandatory eighty hour weeks in a massive sweatshop publisher-owned studio with hundreds of other drones, laboring to build the new, compelling photorealistic driving game-- with the same basic gameplay as

Pole Position

- Or you can defy the machine.” -- Game Developers Rant, GDC, 2005

So Find Another Way

• “The Internet Changes Everything” • Major impact on industries from music to telephony • We sell bits. Why put them in a box when the net is designed to transmit bits?

• But so far the impact on the game industry is marginal.

1993

“All told, 15m shareware copies of

Doom

were downloaded across the world... Doom was a watershed event... Because it changed the way videogames circulate and reproduce.” -- JC Herz,

Joystick Nation

Doom was an Aberration

• It

didn’t

change the way games are distributed, because – CD-ROMs came along, apps bloated by an order of magnitude – Internet users were stuck with dialup – Hours-long downloads for apps of any size.

– The shareware model ruled for about 6 minutes.

Web 1.0 (circa 2000)

• Free Internet play bolted on to RTS and FPS games • MMOs adopt hybrid model (retail distribution of apps, but play solely online, with subscription) • Ad-supported play of classic card & board games attract tens of millions of monthly uniques (unprofitably)

Web 2.0 (today)

• • We’re back in 1993, in terms of app size/bandwidth ratio • A success like id’s is again feasible • The market is about to be disrupted

Cui bono?

– Consumers: greater choice, lower costs – (Some) creators: instant fame, but hard to make a buck

Casual Game Market

• $0 to $700m (US domestic only) between 2000 and 2007 • 60 min demo, $20 purchase price • Portal distribution • $250-500k budgets • Middle-aged women

Match 3 Games

Hidden Object Games

Mystery Case Files

Time Management Games

Diner Dash

Casual Game Economics 2003

2008 80% 60% to portal = $12 $16 $4 $8 to developer $20 retail price $250k budget = ~32k unit sales for breakeven $500k 125k

Not a Panacea

• But a sign post showing the potential.

• It’s possible to create whole new game markets on the Net.

• But as usual, the game industry has learned the wrong lessons:

Casual Games: Lesson 1

Everyone, even a demographic like middle-aged women who historically are NOT major purchasers of games Middle-aged women will buy games on the Internet if they’re designed to appeal to them.

cater to their interests

Casual Games: Lesson 2

at the right level of difficulty Online, games need to be dirt simple to appeal to the casual game market intended audience

Casual Games: Lesson 3

A $20 price point with a 60 minute limited demo is a great way to monetize online gameplay lousy ...only 1.2% of downloaders convert to purchase...

Casual Games: Lesson 5

are one way You need deals with portals to achieve a large enough audience to generate enough sales for profitability transactions

Casual Games: Lesson 6

The success of Xbox Live Arcade shows that casual games work on consoles too!

hardcore What, you call Geometry Wars a Casual game? Crap. It’s a shmup, A genre for geeks if ever there was one.

“Free” MMOs

• The logic of the conventional MMO market: – 8-figure budgets – Monthly subscriptions – Multi-year development times – Enormous technical complexity

“Free” MMOs

• The logic of light-weight MMOs: – 6 or 7 figure budgets (initially) – Free to play, upsell with status items (clothing, leaderboards, furniture, etc.) – Far shorter development times – Modest technical complexity – 10-20% of your audience will pay

Runescape

Runescape

• Browser-playable, traditional fantasy MMO • 9m active players – Of which 1m pay $5/month for premium services – Plus advertising revenue • Player acquisition largely by word of mouth

Club Penguin

Club Penguin

• Flash minigames aimed at kids held together with a virtual world metaphor • Free to play – $6/month premium membership for status items

Club Penguin (con’t)

• Key distribution arrangement with Miniclips – #1 free game site on the Internet, >40m monthly uniques – Receives 50% of lifetime revenue from users who join CP via Miniclips • Sold to Disney for

$350m

– Screw console gaming

Webkinz

Webkinz

• Plush toys with codes that allow you to “adopt” the critter as a Tamagotchi-like pet in an online virtual world • Clearly inspired by Neopets • Free to play online • $45m in retail sales (06)

Social Networking Games

• Games built on APIs provided by social networks – Facebook, MySpace today – OpenSocial tomorrow • The

average

Facebook game has >2.5m installed users – Multiplayer ones see 11% of them active each day

Mobsters

Social Networking Games

• Social networks

designed

for virality – Minimal marketing/distribution costs • Turn-based, web pages – Straightforward (and cheap) web development • “Free,” Micropayments + “Cost per action” advertising • Zynga rumored to make $1m+

per day

($36m in venture capital)

Social Networking Games

• Many seeing tens of millions of daily page views • Already seeing VC interest: – Conduit Labs ($5.5m Series A) – Zynga ($36m in two rounds, latest against a $100m+ valuation)

Micropayments

• Common in “free” MMOs, of course • A way to monetize gameplay short of the $20 purchase • High proportion of casual gameplayers run up against the 60 minute limit

Double Trump

Micropayments

• DoubleTrump – 60 minutes free, pay 1 cent/minute thereafter – After 2000 minutes, you own the game outright – Playonarcade.com as tech demo

Wild Tangent

Micropayments

• Wild Tangent – “Token” model – 1 token allows unlimited play until you quit from the application – 25 cents/token – Or watch ads to get tokens – Advertisers can “sponsor” play of games – Credit toward purchase

Micropayments

• These are models built for casual games – But expect to see “free” web games start to use micropayments – E.g., first 12 levels free, another 12 for $3 – Some of this already on Kongregate & Miniclips

Ad-Supported Web Games

• Contract development for sites like Nickelodeon, Adult Swim – Not just crap any more – some of the Adult Swim stuff is actually good • Rev share with portals like Miniclips, Addictinggames.com, Kongregate.com

– Kongregate VC-funded startup to encourage this

Kongregate

Ad-supported Web Games

• Problem is that per-user revenues are small – Hit games can get millions of plays – But figure a few cents per play – Possible to support a small team, but not a path to riches – Does micropayment upsell change the picture?

Second-Tier Genres...

• Conventional retail channel not friendly to games that have no chance of selling 1m units • Yet there are genres that have passionate fans but not enough – Computer wargames – Graphic adventures – 4X – Etc.

...Migrate Online

• Now sold primarily as online downloads – Often with a retail SKU – but the bulk of sales online • Matrix Games – Computer wargames • Stardock – 4X (Galactic Civilizations), RTS (Sins of a Solar Empire, currently #4 on the NPD PC Games best-sellers list)

Gary Grigsby’s World at War

Galactic Civilizations II

Secondary Genres (con’t)

• Can sell in excess of 100,000 units – Galactic Civilizations – Gary Grigsby’s World at War • Retailer disintermediation – Real (if modest) profitability • Opportunity for aggregation – Slitherine’s “Play History”

Serious Games

• Yes, there can be serious money here • Forterra – Spin-off from There.com

– Virtual worlds as training environments for military, medical, transportation customers – Second Life may get the press, but

this

where to look for actual success is

Serious Games

• Peacemaker – Began as a student project at Carnegie Mellon – Modest VC investment, grants from non profits – Major press attention – 100,000 copies distributed in Israel & Palestine by the Peres Center for Peace

Peacemaker

Re-Mission

• Funded by Hope Lab, a medical non profit • Rather high budget FPS (shoot the cancer) • Clinically shown that players are better about taking their meds

Re-Mission

Serious Games

• Increasing amounts of money available from government, non-profits • Most developers in the space have no clue • Clear opportunity for those who focus on it • Mostly contract work – little to no upside...

– But psychic rewards, surely

“Indie Games”

• Ill-defined, but usually means casual game-like business model, but not casual games – Some indie developers have supported themselves for years at a modest level (ApeZone, Spiderweb, Chronic Logic)

Increasing Attention

• Both print and online media increasingly willing to cover indie games • High-volume sites like Fileplanet feature indie game demos • Playfirst deal for Dave Gilbert graphic adventures.

Emerging Distribution Channels

• Steam first really successful distribution channels (can generate sales of tens of thousands) • Gleemax/WOTC • Penny Arcade/Greenhouse

Indie Games (con’t)

• Still a small market by comparison to, say, casual games • But why should middle-aged women have all the fun?

• Critical factor: establishing the “indie is good” meme in the minds of gamers • Relentless PR critical – The lesson of Uplink

Indie Games (con’t)

• IGF • Possibility of upsell to XBLA, Nintendo Virtual Console, etc.

• “Blue ocean” – don’t try to compete with big budget titles • Bandwidth problem • Some “casual” channels open (e.g., Oberon) – But sucky margins

Braid

Defcon

The Shivah

Immortal Defense

Audiosurf

Ten Years from Now...

• The retail channel will be minor • Console titles will be sold via download – The hardware manufacturers will be the key gatekeepers • PC gaming, broadly defined, will see an enormous resurgence, all online • There will be vast diversity in successful game styles

Ten Years from Now...

• There will still be multi-million unit hits...

• But a huge “midlist” of games that sell far fewer numbers,

profitably,

will exist • Application sale will be only one of many successful business models • Conventional wisdom will have reversed – major publishers are dinosaurs

The Independent Developer Shall Rise Again • The future’s so bright you gotta wear shades

Link