Microsoft’s Nook investment is huge for the social game industry

Microsoft’s $300 million initial investment in Barnes & Noble’s Nook unit is arguably the biggest news to hit the social game industry this year. Just last week, I was saying to some colleagues that there have not been any major developments in our sector recently. That changed yesterday. Over the next five years, Microsoft has committed to a total investment of $605 million in Barnes & Noble’s Nook, making it a bigger deal than Disney’s acquisition of Playdom in 2010.

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Lessons from Moneyball for the social game industry

I finally watched Moneyball on DVD and it reminded me how applicable it was to the social game industry. I read the book when it was first published and immediately felt it was applicable to my company, Merscom, as a way for us to gain a competitive advantage despite not having raised as much VC as our competitors. We even asked all new hires to read it. Despite my affinity for Moneyball, I could not bring myself to see the movie as I assumed it would not do justice to the underlying concepts.

After seeing the movie, I realized even more that the lessons from Moneyball were directly applicable to the game industry. The scene where scouts sit around in a room and evaluating free agents was almost a carbon copy of many greenlight meetings I have sat through. In those meetings, arrogant game executives and creatives “pontificate” and yell until they decide what games to spend millions developing and marketing. They always argue that there many years of experience and intuition will lead to hits, and they generally end up with multiple failures for every hit.

One of my first takeaways from the movie was how important it is to overcome the old way of thinking in the game industry despite institutional resistance. The old timers are going to want to do things their way and are going to look down on making decisions via analytics. To succeed, you are going to need to push analytic solutions and potentially replace people who cannot accept this new way of doing things.

Another takeaway came from the Art Howe example, where Beane could not get Howe to make line-up decisions based on analytics so he ended up trading his starting first baseman (Carlos Pena) to force Howe to play the guy with a higher on-base percentage (Scott Hatteberg). The lesson here is that if you cannot get your organization to embrace analytics immediately, you may need to make other moves to prompt your team to take the right path.

A final lesson came from the epilogue, where the Boston Red Sox followed the A’s path in embracing analytics and ended up winning the World Series, while the A’s have largely floundered. Although not covered in the film, what largely happened in baseball is that as many team’s embraced analytics, then the A’s advantage over competitors evaporated. In the social game space, obviously most companies use analytics to improve a game’s performance, largely focusing on monetization, engagement and virality. I have argued in other blog posts how important it is to use analytics in all parts of your business, not just game development. I think the experiences in baseball show even more that the only way to sustain a competitive advantage through analytics is to expand their use into ways your competitors do not.

Recruiting, NCAAs and Building a Great Social Game Company

The championship game last night got me thinking about the similarities between building a title team and a great social game company. Although there seem to be a million books on how you can use lessons from sports in the business world, one topic that seems quite neglected is recruiting. Since I did not really care who won last night (thanks Lehigh), I took the opportunity to put together a few lessons we can learn from college recruiting to make our game companies stronger.

Do not underestimate the impact one person can have

One person can be the difference between success and failure, and that person does not necessarily have to be the high profile rock star. A good example from sports (going from the NCAA to the NBA) is Jeremy Lin (you knew I would get a Linsanity mention into this post). He turned the Knicks from a team that probably would not have made the playoffs into a team that had potential to do very interesting things (until he subsequently got injured). Just as a point guard can turn a basketball team around, a great BI analyst or Producer can have a huge impact on a social game company. They can be the difference between a game failing and a game being a runaway success (and for the impact one successful game has, please see Omgpop). Lesson: The lesson here is that you should treat all open positions (spots on your roster) as a potential game changer, make the effort to select great people for all positions and then do everything possible to bring them into the organization.

Recruiting can make up for many shortcomings

As Roy Williams has shown repeatedly, having great talent can make up for a lot of other weaknesses. Even if a coach is not great in creating a game plan or building a strong system, if they can bring in top talent they will at least usually be in the mix for a championship. Lesson: Even if it turns out there are holes in your business plan or executive team, bringing in great people can still lead to a success.

Avoid transfers, be honest

One of the things that most disrupts a team is having many players transfer to other schools. Losing players causes issues with team cohesiveness, planning and creating gameplans (as they leverage your talent) and cause coaches to spend large amounts of time to replace players rather than finding other pieces to the puzzle. Usually, players transfer because what they expected from the program (for example, starting or playing time) was not the reality. Other times, the style of play the coach implemented was not how the player wanted to develop their skills. Lesson: Be very open with candidates about what their role will be and what the environment is overall, so that when people start their expectations equal the reality. Also, measure and track how many new hires you lose in the first six months as a metric for how well you are setting expectations.

You are always recruiting

Although there are official recruiting periods, the great coaches are recruiting 365 days/year, 7 days/week, 24 hours/day. Recruiting is not limited to the official visits (the interviews) but should be looked at holistically. The top coaches have radio shows (Coach K is Sirius), they might coach the Olympic team, they may even appear on Letterman. All of this activity makes them top of mind when they or their assistants have the formal meeting (interview). Lesson: Do not limit your recruiting to interviewing candidates, a lot of a social game company’s executive time should be devoted to activity that will make your company more attractive to potential candidates and put you over the finish line if the interview goes well.

Everyone is recruiting

Coach K, Roy Williams, John Calipari are not the only touch points for recruits. All the coaches, current players, alumni are all involved in the recruiting process. It is not coincidence that Grant Hill and Jay Williams are back for big Duke games, they are big parts of the recruiting process and the reason the rich keep getting richer. Lesson: Everyone in your organization and tied to your organization should be part of your recruiting process. It is not an HR function or the responsibility of the hiring manager, a great social game company will engage all its people to help find and attract the best talent. And it is not only in the organization, but investors, Board members and other stakeholders need to be encouraged to be actively involved in recruitment.

You are always selling

Although the top basketball programs only have a limited number of scholarships available, they do not know who will end up committing, who may get injured and who might transfer. They are thus actively recruiting a large number of potential players until they have filled all of their slots and not rejecting players until they have to (unless they are not interested). Lesson: Until the final decision has been made on a candidate, you and your team should always be trying to convince him to join your company. The candidate should leave every interview excited about the opportunity.

Know the competition

Coaches are not recruiting in a vacuum. They will understand what other programs a player is considering and highlight the advantages of their program. Lesson: It is important to determine what other options your candidate is considering and explain to them the benefits you offer.

Now go out and WIN

Millennials Aren’t All Bad

Although I try to be metrics driven in all aspects of running fiveonenine games, I recently caught myself taking for fact some commonly held beliefs about millennials (people under 30) as employees. A recent article in Strategy + Business (Five Millennial Myths article)dispels the five key myths about millennials. Given the need for social game companies to hire the best talent (really the need for any good company, but this blog is not intended to save the world), having preconceptions about job candidates could severely negatively impact your business. In addition, companies often devote resources to engaging millennial workers, while they may not need engaging.

Myth: Millennials do not want to be told what to do

The basis for this belief is that millennials have always been told by their parents that everything they did was great, so they are difficult to manage. The reality is that the idea that millennials will not listen to authority is wrong. According to the article’s author’s (Jennifer Deal) research, millennials presently working are more willing to defer to authority than either Baby Boomers or Gen Xers.

Myth: Millennials lack organizational loyalty

Here, the perception is that those under 30 are not committed to their employer and will switch jobs for a small salary raise. The research shows that this perception is also incorrect, as millennials have the same level of organizational commitment as boomers and Gen Xers. The author believes that this misperception is largely caused by the fact that young people of every generation change jobs more frequently than older workers.

Myth: Millennials are not interested in their work

The idea behind this stereotype is that their lack of commitment to an organization is also shown by their lack of interest in their job. Deal’s research clearly refutes this belief, as millennials are just as intrinsically motivated as boomers and Gen Xers. The research did show that people lower in an organization are slightly less motivated by the content of their jobs than people at higher levels. Given millennials are under 30, they are often lower in the organization and thus those display less interest in their jobs.

Myth: Millennials are motivated by perks and high pay

This belief is that millennials are only interested in material rewards and organizations could never satisfy their desires. The research, however, shows no correlation between age and whether the person is motivated by salary and perks.

Myth: Millennials want more work-life balance

According to this conviction, millennials want to spend lots of time outside the office, whereas Baby Boomers and Gen Xers are workaholics. Guess what, this belief is somewhat true. Millennials are interested in work-life balance, but not much more than Gen Xers. The author believes that even this difference is caused by the different stages of life the people are at, rather than a shift among generations.

My takeaway

My biggest takeaway from this article is that hiring and HR needs to be as analytics driven as the rest of your company. When we start to use perceptions and anecdotes to make decisions rather than data, we often make bad decisions. If those decisions lead to creating a weaker team than you had to or wasting resources trying to “satisfy” already happy employees, it could seriously hamper your company’s ability to thrive.

What Zynga’s acquisition of Omgpop Means

I blogged several times about how Zynga’s IPO would affect the social game industry and now we have the first data point, Zynga’s $180 million (and potentially more) acquisition of DrawSomething’s developer, Omgpop.

Zynga has some cash

Although I am restating the obvious, Zynga is sitting on a ton of cash (they added with the offering $1 billion to ample cash reservoir). As most people have learned anecdotally, when you have a lot of cash in your wallet (or purse), you are more likely to spend it. Although Zynga was not exactly averse to acquisitions prior to its IPO, they are now willing and able to spend big bucks when they see a great opportunity. Given how much cash they still hold, Omgpop is likely not Zynga’s last major acquisition, providing a clear exit path to companies with something valuable.

Users are more valuable than talent

My second takeaway from the acquisition is that what is now valuable to Zynga, and thus also to the other major players, is users, not talent or competencies. What Zynga is spending almost $200 million on is Draw Something’s 10.8 million DAU (and the company’s reported 20 million DAU). Zynga can quite easily create a similar game for much less money so it is not the technology; while the size of the deal and the related size of the Omgpop team shows it is not a talent acquisition.

In previous posts I had mentioned how Zynga’s multiples would set a benchmark for how other social games are valued, unfortunately, you cannot draw a straight line valuation of your company based on this sale. The analogy I like to use is the Super Bowl. Ads during the Super Bowl selling at a much higher CPM than other TV ads because advertisers do not have any other opportunities to reach as many people at once. In this situation, Omgpop sold for more per DAU than a smaller company would because there are not many other opportunities to pick up as many DAU at one time.

UA is indeed the biggest issue facing social game companies

The biggest issue social game companies face, both on Facebook and mobile platforms, is user acquisition, which is why Zynga was willing to pay so much for Omgpop. If it was the good old days, Zynga could just use performance marketing (ads on a CPI or CPA basis) to acquire 10-20 million users and it would probably cost them a lot less than $200 million. For a large social game company, this deal shows how hard it is to get incremental users. Unless you have $200 million to spend, social game companies will need to approach marketing smartly and adopt robust marketing strategies to survive and thrive.

Perseverance often works

What seems overlooked in the Omgpop story is that the company is about six years old and has launched about 35 games (NY Times article about Omgpop’s struggles). In fact, the NY Times reported the company would of run out of money by this May if Draw Something was not a huge success. Omgpop is clearly not a one hit wonder, but a company that has persevered and not given up. It actually reminds me of another hugely successful mobile game developer, Rovia. Like Omgpop, Rovio launched over 30 games in a three year period before breaking through with Angry Birds. And I have to mention my previous company Merscom, which we founded in 1993, dealt with some tough times but eventually sold to Playdom in 2010. These examples show that you should not expect a home run on your first swing and not give up when things are harder than you expected.

The industry does not start and end in the Valley

When you are in the San Francisco area, there is an unspoken (well it is sometimes spoken) attitude that social gaming begins and ends there. They do not take companies from outside the region very seriously. Omgpop, however, was a New York company whose core team was not SF boys. If my math is right, three (Omgpop, Doubledown and Playfish) of the four largest acquisitions in the social space came from outside the Bay Area (with Playdom being the exception, not the rule).

Parting thoughts

My key takeaways from the acquisition of Omgpop by Zynga are

M&A is not dead in the social game space
Large acquirers are not interested in talent acquisitions but are looking at ways to continue growing
User acquisition is becoming the central issue in the social space and will drive M&A. The companies with strong marketing will thrive
The best companies are not necessarily great in the first 90 days
The best companies are not necessarily in northern California

Thoughts from GDC

This is probably my twelfth or thirteenth GDC, so there is going to be little that surprises me anymore. That said, the shift to social over the last two years has been interesting and sharper than I expected. This year, there are some other interesting developments that I wanted to share.

There is great development talent in Col0mbia

Colombia seems like the next force in game development. For almost twenty years, I have been working with international game development teams either for contract work or licensing products and have found great talent in eastern Europe, the former Soviet Union, Brazil, etc. At GDC this year I was amazed that some of the best development teams are coming from Colombia, a territory that previously was not even on my radar. I met with multiple Colombian companies and they showed a great combination of technical competence, design flair and an understanding of the current market for social and mobile games. It is exciting to see this talent enter our space. Takeaway: Look at Colombia for development and art resources.

There will be a big consolidation and shakeout in the user acquisition space

I was amazed at how many different companies are playing in the mobile user acquisition space. There are ad networks, seller mediation levels, buyer mediation levels, agencies, traffic holders looking to monetize their users, social gaming networks, etc. It is also amusing that every single meeting begins with we will give you better users for lower CPI. I guess I was lucky not to schedule any meetings with companies offering bad users for more money. Comparing all these layers to the advertising industry in more mature industries it is clear there will need to be consolidation and a shake out. I expect to see vertical integration, where a few vendors offer complete services to ad buyers and to publishers monetizing their inventory and those companies that do not end up with one of these vertical roll-ups cannot survive. Takeaway: Be careful who you partner with as they may not be around when you most need them.

Overall, more companies need exits than will get them

There are a lot of social game companies, as well as ancillary support companies, that have received one or two rounds of financing but have little opportunity to raise another round. Many of these companies raised money two or three years ago and their investors are now more focused on an exit than injecting more growth capital. I came across a lot of companies “raising” a round and only one that just completed its raise. Takeaway: There is going to be an increasing emphasis on profitability, as companies will actually need to make more money than they spend to survive.

HTML5 is gaining traction

I was surprised at how many developers were pitching projects or development capabilities using HTML5. I am still not sold on it for immediate use, nobody was able to show me a great game developed in HTML5, but given all the development resources being thrown at HTML5 it is only a matter of time. It reminds me of the adage, which I believe was from Bill Gates, that people underestimate how long it will take for a technology to be adopted but also do not realize how wide spread that adaption will be once it happens. Takeaway: Carefully evaluate HTML5 opportunities for your development and be ready to leverage this platform when it is right for your games.

The publishing model is gaining traction in social

I blogged about it a few weeks ago (my post on the publishing model in the social space) and saw this week that the emergence of the publishing model in the social and mobile space is speeding up. A year ago, 6Waves on the social web side and Chillingo on the mobile side were really the only options available and most developers wanted to self-publish. At GDC this year, the ratio was probably reversed, with more than half the developers looking for a publishing partner (probably also tied to the lack of financing available). Takeaway: The social space is evolving to a model much like the traditional game space.

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15	16	17	18	19	20	21
22	23	24	25	26	27	28

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Do not underestimate the impact one person can have

Recruiting can make up for many shortcomings

Avoid transfers, be honest

You are always recruiting

Everyone is recruiting

You are always selling

Know the competition

Now go out and WIN

Share this:

Myth: Millennials do not want to be told what to do

Myth: Millennials lack organizational loyalty

Myth: Millennials are not interested in their work

Myth: Millennials are motivated by perks and high pay

Myth: Millennials want more work-life balance

My takeaway

Share this:

Zynga has some cash

Users are more valuable than talent

UA is indeed the biggest issue facing social game companies

Perseverance often works

The industry does not start and end in the Valley

Parting thoughts

Share this:

There is great development talent in Col0mbia

There will be a big consolidation and shakeout in the user acquisition space

Overall, more companies need exits than will get them

HTML5 is gaining traction

The publishing model is gaining traction in social

Share this: