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How to succeed in the mobile game space by Lloyd Melnick

Month: December 2016

Why Super Mario Run was destined to fail: Lifetime Value Part 24

I am surprised that people are surprised about the lack of success for Super Mario Run from Nintendo. While I do not claim that I can predict the future, and this time of year I scoff at everyone’s predictions because if the so-called experts actually could foresee develops they would be much wealthier than they are, in January 2012 I laid out the reasons traditional gaming companies were unlikely to succeed in the free to play space . The reasons I stated nearly five years ago were also the headwinds that doomed Super Mario Run.

super-mario-run

Different businesses

As I wrote then, the biggest challenge traditional game companies face when moving to a free-to-play model (at the time it was more Facebook than mobile) is that they are different businesses. Old school game companies, be it Nintendo or EA to Take2, are skilled at creating a great product that someone buys, enjoys and finishes. Free-to-play companies are creating a service (hence the now relatively old term software as a service), something that customers use over time and becomes part of their life (like Netflix or Amazon Prime).

Building and running a service requires a different skill set than building a great game. The former needs

  • Analysts to look at customer behavior and suggest changes to continually improve the product
  • Product managers to create new features and elements that keep existing players engaged and ensure strong elder gameplay for the most committed players
  • User acquisition specialists who not only can bring in new players but can reactivate the most valuable players
  • CRM experts who can communicate with existing players both inside and outside of the product through multiple channels to increase their engagement and loyalty.

Conversely, traditional game companies succeed with a very different skill set

  • Great game designers who can create a fantastic experience, though usually of a limited nature
  • Marketing gurus who can get people to purchase a product
  • Distribution experts who can ensure the product is placed prominently in front of potential customers.

I have no privileged information in how Nintendo structured its Super Mario Run team but based on the product and how they are managing it, I would bet the focused more on the skills needed by traditional game companies than those creating a free-to-play game service experience. The game clearly has great designers and their promotion by Apple shows they still know how to manage channels.

They do not understand free-to-play LTV

What they are lacking is an understanding of free-to-play economics, primarily how to optimize player lifetime value. I have written way too many times about customer lifetime value (even wrote a book on it) but it is still a concept that traditional game companies like Nintendo fail to grasp. In summary, lifetime value is the monetary value to your company of a new player and it is a function of monetization (how much they spend), retention (how long they remain a customer) and virality (how many other customers they bring in).

In the traditional game space, this equation is quite easy. For Nintendo, LTV is largely how much a payer pays for a DS and Wii game. It does increase by downloadable content (DLC), whether they buy additional Nintendo products and if they encourage friends to buy but it is largely driven by that retail purchase of a game.

This experience is evident in how Nintendo approached Super Mario Run. The product is built so that the free element is a teaser to get a $10 purchase. It is not built to create a long-term relationship between players and the game, where they return (and often spend) daily for months or years (no exaggeration, take a look at Mobile Strike or Clash of Clans or most of the games on the top grossing charts). They are still focused on the discrete purchase, selling the razor and not the blades.

This approached doomed Super Mario Run (and by the doomed, I meant compared to expectations and potential, as it will still generate millions), even if they were seeing more traction getting the initial $10 purchase. In the world of free-to-play, $10 is largely an irrelevant transaction. Supercell was acquired by Tencent for $8.6 billion because players are spending hundreds or thousands of dollars in the game. By focusing on the first ten dollars, Nintendo missed where the bulk of free to play revenue comes from and largely capped what most players would have to spend. Thus, a player who Nintendo could have built a relationship with that would generate $20,000 is now spending $10 and moving back to a Supercell or King or Zynga game.

Core game companies will continue to flail in the free-to-play business

I said it almost five years ago and it has largely held true, traditional game companies won’t succeed in free to play. Since I wrote that article a handful of game companies have seen some free-to-play success (most notable Hearthstone) or acquired respectable free-to-play businesses but most have either failed or gone bankrupt. We still have not seen EA turn their core games (FIFA, Madden, Battlefield) into free-to-play franchises. There is nothing from Microsoft or Sony on any mobile chart. Take2, not a player in the mobile space. You get the point. It’s no longer a question of when the core game companies will successfully move into free to play (and mobile) but when they will just give up (and investors will stop expecting it) and focus on what they understand.

Key takeaways

  1. The failure of Super Mario Run by Nintendo was very predictable, as traditional game companies face many structural issues in creating free to play mobile apps.
  2. The biggest hurdle is their team structure, as they are built to create a product and not run a successful service.
  3. Core game companies also do not truly understand free to play economics, that customer lifetime value is driven by long-term retention and monetization and not a discrete purchase.

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Author Lloyd MelnickPosted on December 24, 2016Categories General Social Games Business, Lloyd's favorite posts, LTV, Mobile Platforms, Social Games MarketingTags customer lifetime value, free to play, lifetime value, LTV, mobile, nintendo, Super Mario Run10 Comments on Why Super Mario Run was destined to fail: Lifetime Value Part 24

The most important company in the game industry

The most important company in the game industry

Key takeaways

  1. The most significant company in the video and computer game space is one that people do not frequently think of Tencent, which has a market value of $229 billion (more than the market value of Apple, Google, Microsoft, Sony and EA combined).
  2. Tencent’s game properties include the biggest PC game (League of Legends), the strongest mobile franchise (Clash, as in Clash of Clans and Clash Royale) and the most important console game company (Epic, maker of Unreal and Gears of War).
  3. Tencent is also a very progressive company, allowing is investments the autonomy to make decisions and grow.

The most important company in the game industry

I was doing some research last week, when I was surprised at a company with a $200+ billion market value (market capitalization). The company was Tencent, with a market cap $229 billion. For comparison Microsoft has a market value is $479 billion. Apple is at $614 billion. It is definitely more than Sony, who only has a $37 billion market. Want to try EA, forget it, only $24 billion.

While you can argue that Tencent is not a game company (and the bulk of its income does come from other operations), looking closely it becomes apparent that they also dominate in the (western) game space. Among their assets in the game space:

  • Clash of Clans and Clash Royale from Supercell. Tencent acquired Supercell this Spring.
  • Unreal and Gears of War developer Epic Games. Tencent is the largest shareholder in Epic, probably the most important developer in the console game space. Unreal is the engine (a suite of game development tools) used to create many of the most popular games in the world, from Dragon Quest and Final Fantasy to Moto Racer to Street Fighter to Assassins Creed to Brothers in Arms to…. Not only is it the most successful game development engine, Epic’s first party titles include Unreal (big surprise), Gears of War and Infinity Blade.
  • League of Legends creator Riot Games. Tencent controls the largest PC game in the world, League of Legends.
  • 8 Ball Pool and Agar.io developer Miniclip is another Tencent company. Miniclip always sems to have multiple games in the top-10 mobile charts and has tens of millions of daily players.
  • Kim Kardashian Hollywood developer Glu Mobile. Tencent is a minority investor in the most prolific mobile developer that uses big name IP, such as Kim Kardashian, Nicki Minaj and Gordon Ramsey.
  • QuizUp from Plain Vanilla is another part of the Tencent empire, as Tencent is one of Plain Vanilla’s largest investors.
  • Skylanders, World of Warcraft, Destiny and Call of Duty owner Activision/Blizzard is also part of the Tencent empire. Tencent owns 25 percent of Activision/Blizzard.
  • And there is more. Tencent is also one of the largest shareholders in PocketGems, Dots, Robot Entertainment and I am sure some I have missed.

slide1

When you look at the properties that Tencent controls (Clash of Clans, League of Legends, etc), it is clearly the most important company in our space.

The other interesting element of Tencent

In my conversations with people at some of the companies above (and this data is totally anecdotal), Tencent is a very interesting parent. People often group it with Japanese and Korean companies, which are often very challenging to work at. My friends who have worked for Japanese companies complain about how western employees and executives had virtually no autonomy to make decisions (they were all made at the Japan level) and even then decision making was excruciatingly slow.

From what I have heard, Tencent, and Chinese companies in general, are pretty much the opposite and often more progressive than western companies. Tencent has left the companies above very autonomous and business has barely changed on the day-to-day level. Tencent, however, has helped these companies grow by expanding into the Asia. Most surprisingly, in the incredibly cynical game space, I have not heard anyone say anything bad about working for Tencent.

Chinese multinationals are often much more progressive than other Asian and often western competitors. In 2013, I wrote about how Haier (a Chinese white goods manufacturer) eliminated all of its middle management, a concept here that companies (other than Zappos) are just starting to look at. I have never worked at a Chinese company and have actually interacted very little with them, but between Tencent, Haier and Alibaba (the world’s most successful retailer), Chinese companies show many progressives traits that lead to success in the game industry.

The game industry’s most important player

When you combine Tencent’s market valuation with its network of the most important game properties, it is clear that they are the most important game company in the world. Over time, Tencent’s performance will be more parallel to that of the game. When Tencent does well, the game industry does well. When the game industry does well, Tencent will do well.

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Author Lloyd MelnickPosted on December 14, 2016December 14, 2016Categories General Social Games BusinessTags Activision, clash of clans, clash royale, epic games, Glu Mobile, Kim Kardashian, league of legends, miniclip, Pocket Gems, quiz-up, riot games, supercell, Tencent1 Comment on The most important company in the game industry

Maybe your competitors are not that smart after all

Maybe your competitors are not that smart after all

Key takeaways

  • While it is important not to underestimate your competitors, you also should not consider them perfect.
  • Industry leaders often maintain their position due to certain core factors and their other initiatives can be flawed, do not assume everything they do is right.
  • Simply because a competitor decided to pass on an apparent opportunity does not mean they made the correct decision, they may have misjudged the opportunity and left an opening for you.

Maybe your competitors are not that smart after all

I have repeatedly said and written to not underestimate your competition (most recently here), but experience has shown me that you also should not overestimate them.

Success does not equal omniscience

One mistake we often make is to think industry leaders are perfect. Several years ago I worked for a top-5 social game company (okay it was Playdom as most of you have access to LinkedIn). We were very envious of the leading game company at that time, Zynga. Everything they seemed to do, from new products to new features to marketing, worked. Almost always when we identified an initiative at Zynga it inspired a similar initiative. In fact, when I wanted to pursue something, I found it was best to wait for Zynga to try it and I could then easily get internal support (conversely, if Zynga was not doing it, it was usually a non-starter).

Fast forward a few years and Zynga acquired Spooky Cool Labs, where I was Chief Growth Officer. Although the bloom was off the rose at that point, I did have a chance to speak with some Zynga veterans who were there when I was at Playdom. What I learned was that many of the initiatives that “inspired” us were considered disappointments at Zynga. There were several key drivers for their success but not everything worked well, or even worked at all. Sometimes the success factors overshadowed the failures and other times they did not even initially realize the initiatives were net-negatives.

While I have had the fortune to work at both the hunter and the hunted, I have also seen many companies over-estimate the market leaders in various industries. Most automakers copied GM until they saw that GM was on the verge of bankruptcy. Foreign airlines copied US ones’ yield management pricing until the US airlines needed government aid. The list is almost endless of industry leaders leading the competition off a cliff.

Don’t assume they know more

A recent experience highlighted another mistake of over-estimating the competition. A few weeks ago we launched a new feature in one of our products. The offering was not unique; it was largely common sense for any social casino. We actually knew that our two largest competitors had considered the feature and it would have been quite easy for them to implement.

Although our feature was not a huge effort, we delayed it and spent a great deal of time looking at possible downside because our competitors had not tried it earlier. We believed they clearly knew the market and obviously wanted to optimize revenue. Finally, we decided that we might as well try it, it seemed like to good an opportunity to pass on.

When we launched the feature, we saw a 21 percent increase in revenue (through an AB test). The uplift has settled in the 10-15 percent category but given the limited effort we consider it one of our greatest successes of the year.

We still do not understand why our competitors have never launched a comparable feature (even after talking to a person who worked on a comparable feature at one that was never launched). More importantly, we now know we should not place too much credence in a competitor’s decision not to try something (feature, new product, etc). We are still conscious if a competitor scales back something they have launched as that decision is probably based on the traction that they have witnessed but we are also conscious that they are no more omniscient than we are.

Moving forward

While it is never good to underestimate your competitors – they have many smart people trying hard to succeed – you also should not assume they are perfect. Even the most successful are probably doing some things wrong, and their success may cover up the mistakes. And while they have also looked at the market and talked to customer, they do not always come to the right conclusions on the best way to move forward. It’s why competition always leads to better products and companies. Look at the competition, but also make decisions on all the information you have available.

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Author Lloyd MelnickPosted on December 7, 2016December 5, 2016Categories General Social Games Business, General Tech BusinessTags competition, features, playdom, product management, zynga1 Comment on Maybe your competitors are not that smart after all

Get my book on LTV

The definitive book on customer lifetime value, Understanding the Predictable, is now available in both print and Kindle formats on Amazon.

Understanding the Predictable delves into the world of Customer Lifetime Value (LTV), a metric that shows how much each customer is worth to your business. By understanding this metric, you can predict how changes to your product will impact the value of each customer. You will also learn how to apply this simple yet powerful method of predictive analytics to optimize your marketing and user acquisition.

For more information, click here

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Lloyd Melnick

This is Lloyd Melnick’s personal blog.  All views and opinions expressed on this website are mine alone and do not represent those of people, institutions or organizations that I may or may not be associated with in professional or personal capacity.

I am a serial builder of businesses (senior leadership on three exits worth over $700 million), successful in big (Disney, Stars Group/PokerStars, Zynga) and small companies (Merscom, Spooky Cool Labs) with over 20 years experience in the gaming and casino space.  Currently, I am on the Board of Directors of Murka and GM of VGW’s Chumba Casino

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