Hello 519 Games, Thank You Disney

Although I normally use this blog to discuss business issues related to social gaming, I wanted to elaborate on my recent career move and thank all the great people at Disney International that I have worked with the past year.

Today is my first day as the CEO of 519 Games (no, our website it not up yet). 519 is a joint venture of two media companies, the EW Scripps Company (http://www.scripps.com/) and Capitol Broadcasting (http://www.cbc-raleigh.com/). We are currently building a fantastic team and will be one of the top five social gaming companies (both social web and social mobile) by the end of 2012. More details will emerge over the next few weeks.

I also wanted to take this opportunity to thank all of my former colleagues with Disney International. The people I met and worked with in Europe, Russia, India and Latin America were some of the most incredible, smartest and nicest individuals that I have ever worked with. I originally was going to call them out specifically, but every time I wrote a draft of this post I remembered somebody else. I realized that no matter how hard I tried, I would forget someone who improved my experience.

From the top of Disney International down, it is an incredible and diverse group. Everybody was approachable, everybody was nice and friendly and everyone worked together. Yet the diverse personalities were what made the last year so great. Although it is difficult to articulate, I met literally hundreds of people who had larger than life personalities, all unique, all creative and all helpful.

It was this great collection of people that helped me learn and grow professionally that I can now move on to the biggest opportunity I have ever had. Again, thank you all.

User Generated Content and Feedback in Social Games

For a space that is considered the cutting edge of innovation, social game companies are missing two of the biggest trends in the entertainment and online spaces. There are no major social games that allow players to create and share content. And despite Facebook’s efforts, there really is no crowd sourcing or popularity measures that help people find social games.

User Generated Content

Rarely a day goes by without seeing a major user generated content initiative, from Super Bowl commercials created by consumers to the explosive growth of Quora, yet this trend has been virtually non-existent in the social gaming space. Ironically, it is easy to find ways that consumers could create content that would elevate these games. Players are often frustrated at the lack of new content once they have been playing a game for months or even weeks. Why not allow the community to create new content that is then used to keep the game fresh. There are great amateur artists who could create new building or even crops for a Cityville. I am sure there are also players who would love to create hidden object scenes for a game like Gardens of Time. Not only would you get fresh content, you would content that he game team has not even thought of. A game with user generated content would take on a life of its own.

User generated content is an even more attractive option to compliment a social game company’s international strategy. What better way to make a game feel more French than allowing French players to create local content. International versions of many social games reflect the biases and stereotypes of foreign countries often found in the Bay Area, be it sticking a “bag-ett” in a French game or making a Kalashnikov the only local content for a Russian version. Instead, allowing local players to customize the game creates a local game for each market, one that almost certainly will be more viral and monetize better.

Popularity

People are increasingly using different measures of popularity to make their choices, in entertainment, dining, purchasing, pretty much all aspects of life. Millions focus on top-reviewed restaurants on Yelp to pick a dining establishment, Amazon.com’s best seller list to find new books, trending Twitter topics to get their news, etc. As Bloomberg Businessweek pointed out in its 15 August issue, while there is no accounting for taste, the data can be helpful and even inspiring. Yet in social games, players cannot easily follow these trends. Seriously, players are not going to go to AppData to see the latest numbers. And Facebook does a terrible job of showing people what gams are hot, though they have tried a few times. The game companies are no better. If you are a fan of a Wooga game, can you easily find out which is their biggest game, not really.

This is another opportunity that takes on increased importance internationally. While foreign consumers often have different tastes, they usually like to use the performance of a product in one place to help them decide if it could be interesting. A movie that has failed in the US is much less likely to get traction in Poland, regardless of the merits of the film.

Overall, user generated content and better measures of popularity are fantastic opportunities for social game companies that can increase revenue and traffic significantly.

Collaboration, part II

I recently finished reading a great book on building a company that leverages collaboration, Collaboration: How Leaders Avoid the Traps, Create Unity, and Reap Big Results by Morten Hansen and wanted to write about a few ideas that are relevant to social game companies (as well as almost every other company).

Disciplined Collaboration

Hansen’s book provided several key concepts. First is the idea of disciplined collaboration. The key take away from this concept is that not all collaboration is good; it must generate results greater than people or teams working individually. Just collaborating for collaboration’s sake (as shown by regular useless meetings, conference calls with many participants who do not add or derive value or travel between locations just to meet but not advance a plan) is as bad as or worse than not collaborating at all. Collaboration should be used to generate value for the company, not as a checkbox. As Hansen points out, good collaborators know when to collaborate, when not to, and are willing and able to execute the selected project.

Analytics can also be applied to deciding when to collaborate. People should launch a collaboration project only if the net value of collaboration is more than the return minus both opportunity costs and collaboration costs. Hansen calls this the net value of collaboration premium. Mathematically, it is written as: Collaboration premium = return on project – opportunity costs (what the person could have done individually) – collaboration cost (travel, conferencing, etc.).

Hiring for Collaboration

Hansen’s book also provides some great principles for leaders to implement collaboration throughout their organization. The first and most important is hiring the right people. As discussed above, effective collaboration is disciplined collaboration, and you must hire the right people for this strategy. No matter how effective, you do not want lone stars. It is impossible to create a culture of collaboration when you allow some contributors to work individually. Even if they do a great job, it undermines the concept of evaluating all opportunities as to whether or not collaboration is beneficial. Moreover, it sends the message to others that collaboration is not necessary for career success.

Conversely, you also do not want to hire “butterflies.” Butterflies are those who flutter from person to person spending all of their time collaborating. This type of employees ends up wasting hours and days of their co-workers time, time that may be better spent on individual projects or other collaborations. When building your team, what you want is neither lone stars nor butterflies, but disciplined collaborators who collaborate effectively when it is needed.

Leading for Collaboration

The book also provides some great guidance for leading collaboratively. It is the leader who sets the tone for the organization. If you do not lead for collaboration, expecting collaboration from your team is wishful thinking. To lead for collaboration, you need to

• Set a unifying mission. If everyone knows their mission, it is much easier for them to see the benefits of collaboration
• Provoke a common value for teamwork. You, and the organization as a whole, should reward disciplined collaboration (and punish lone stars and butterflies). Hansen provides a lot of detail on how to coordinate compensation with collaboration and I will not over-simplify it here. I recommend you read the book to see what techniques you can use to create this value throughout the company
• Speak the language of collaboration. As anyone who has been in a leadership position knows, there is nothing more important to your employees than your actions. If you evangelize collaboration and do it yourself, that will have a stronger effect on your organization than anything else could

Although my blog is focused on the social gaming space, the above lessons and practices are valuable to any company. In social gaming, however, the market evolves so quickly that collaboration is a huge tool for maintaining a competitive advantage.

Non-traditional Uses of Analytics with Social Games

I have lamented several times on this blog that social game company do not use analytics enough outside of monitoring and improving the actual games and monetization. I thought it might be useful if I posted some suggestions on other areas where game companies could apply analytics.

Marketing (non-performance). Social game companies are famous for how well they use analytics to optimize their performance marketing campaigns, i.e. Facebook ads. Despite ad budgets that rival those of FMCG (fast moving consumer goods) companies, however, social game companies have a very unsophisticated approach to traditional marketing (if they are even pursuing these opportunities); a billboard does not a marketing campaign make.

There are many analytic tools available, starting with SAS, which allow companies to optimize their marketing investment. They help direct resources to the appropriate marketing channels and adjust the deployment based on results. These tools also allow for near perfect execution of campaigns by using predictive analysis to put the right offer or messaging to the precise customer at the correct time. They help companies adapt instantly to customer interactions, making adjustments in real time between different marketing platforms. These tools work across television, print, web (banner), outdoors, PR and all marketing tools, allowing social game companies to create marketing campaigns as or more efficient than performance marketing alone. As it is getting more difficult (and costly) to acquire Facebook users with Facebook ads alone, creating an analytics driven marketing program is necessary for social game companies to grow.

Growth opportunities. Analytics are also a fantastic tool for evaluating growth opportunities. With all the data that social game companies already acquire, they can then mine this data to find opportunities others have missed. There are multiple tools that allow game companies to use this data for forecasting profitability of new initiatives. New products, new markets, new platforms, etc can all be evaluated analytically and ROI estimated rather than having strategic direction come from the last person standing after an eight hour Board meeting.

Intra-company. Finally, analytics are a great way to align everyone in a game company with a common interest. By making player data available to everyone, the data can drive all business decisions. If your company tracks, measures and shares results across all channels and business units the data provides the tool to optimize decision making. In addition, providing this data allows for a consistent customer experience (for example, between a Facebook game and a social mobile app) and multichannel marketing with a single view of the customer across all marketing and business functions.

I have not tried to create an exhaustive list of how you can be using analytics to drive growth, but I wanted to touch on some key areas and get people thinking that analytics is not just for improving monetization 5 percent in a month. At its best, it provides a competitive advantage when applied across the organization.

No Winner Yet in the Social Gaming Space

I have been asked on two separate occasions recently whether the social gaming wars were over; if it was impossible for a new entrant to compete. I answered intuitively that it was far from over, there were still many opportunities ranging from social mobile to targeting underserved niches. Unfortunately, I did not have any data to back up my proposition, and as I rely on analytics to drive decisions, that absence troubled me. I also understand that my intuition is not always going to be right, so finding data on this topic became crucial.

In the most recent issue of the MIT Sloan Management Review (Summer 2011), I found the evidence. They reported that 3.8 years is the average length of time before a switch in market share leadership in high-tech markets (that they studied). Out of 19 markets studied, market leadership ranged from 2 to 5.5 years and in 10 of the 19 markets there were multiple switches in market share. In the article, titled ”How Quality Drives the Rise and Fall of High-Tech Products,” the data clearly shows that product quality drives these changes in market leadership. Out of 34 total changes in leadership, 18 percent were driven by changes in quality leadership that year and 50 percent were related to a switch in quality leadership in prior years (another 20 percent was companies who always had superior products gaining leadership). Thus, 88 percent of all changes in market share leadership in high-tech companies was driven by a superior offering from the “underdog.”

The authors of the study also pointed out two key reasons that once-invulnerable companies lose their leadership position. The first is that in high-tech industries new products and technologies constantly flood the market, upsetting the status quo. Secondly, consumers of high-tech products often rely on experts or informed consumers who have reviewed the products. These two factors offset the network effects that come with market leadership.

This research confirmed my (and many others) hunch that the social game ecosystem can still change dramatically. Obviously, there will always be exceptions to the rule, but the data clearly shows it is premature and inaccurate to assume that the social gaming ecosystem cannot change dramatically.

It also points to the need to focus more on product quality than first mover advantage, as the latter does not create the long-term advantage many believed. Most importantly, there is still a lot of profit (and fun) left in the social gaming industry.

Interview with Damian Harburger of Metro Games

Today, I decided to post an interview with Damian Harburger, the CEO of Metro Games. Metro Games is one of the largest, if not largest, Facebook game developers in South America.

Lloyd: Please tell me a little about the history of Metro Games, when you started it and what was your vision? What are the biggest differences between what you originally thought Metro would be doing and how the company has evolved?

Damian: MetroGames was founded in July 2007, with the objective of becoming the largest gaming destination, a spot that was empty at the time: the idea was to create the Facebook or the Youtube of games.

By mid-2008, the company had ten web multiplayer games and its own platform almost ready. But with the great impact Facebook had on the gaming industry, MetroGames started to port its games for that platform. In less than a year the company released six titles, becoming one of the top 10 developers on Facebook, reaching 2MM DAUs.

Throughout 2009 we released 10 games on Facebook, and based on the success Farmville was having, in the last quarter of 2009 we started developing our first resource management game.:Towner. This game was key to learn about this format, which led in the release of our most successful social game so far: Fashion World.

In February 2010 we received an investment from Playdom. Only five months after Playdom’s investment in MetroGames, the team tripled its size from 35 to 110 and we consolidated as one of the most succesful new companies in the social gaming arena.

By the end of 2010, we opened a Mobile games division, with the objective of replicating our success in new platforms like iOS and Andorid.

Lloyd: What do you think is different about being based in Argentina as opposed to California?

Damian: There is actually not much of a difference. Our goal is to entertain people by providing them with high quality fun games. With globalization, location is not really important nowadays. (Just think of Rovio’s Angry Birds, developed in Finland)

Lloyd: What disadvantages do you face being an Argentine company?

Damian: Besides a few hour time difference with the Bay area, I cannot think of any other disadvantage.

Lloyd: What advantages have you found being in Argentina rather than the US?

Damian: Definitely the most important advantage is the possibility of having great innovative professionals at lower costs, if compared with US salaries.

Lloyd: Given your location, have you focused on the local South American market?

Damian: Not really. Most of our users are from the US and Europe. However, we hold a big piece of Latin America’s social gaming market.

Lloyd: What opportunities do you see for social game companies in Argentina and overall South America?

Damian: I see great opportunities for social game companies in South America. The quality of human resources is both abundant and highly skilled, and even though candidates do not bring much specifically related previous experience, with some coaching they are good to go in a really short period of time, and this is clearly compensated by the creativity they show. Like in any other business, finding the right people is key in order to be successful. In addition, the user base has been growing steadily over the past couple of years. This is partially due to the fact that internet access and usage in most of South American countries have expanded considerably and also because people in the region have finally lost their fear of internet transactions. If we add that to the fact that the economy in the region has been explosively growing for the past decade we get a massive and much more mature and profitable market to serve.

Lloyd: I noticed you were the first social game developer on Tuenti, what have your experiences been like on other social networks?

Damian: Our experience with Tuenti has been great so far. We got there first and that gave us some clear advantages over the rest of the developers. Nowadays, Tuenti users relate to our brand in a very positive way and they are always asking us for new games and features, which is great. Besides from Tuenti and Facebook, we have not placed our games on any other social network.

Lloyd: Overall, what type of opportunities do you see off of Facebook?

Damian: iOS and Android are hot and going to be even hotter within the next few years. Those are platforms where a small developer with little or no money, but with a great game, still has a chance to succeed.

Lloyd: Thank you Damian and I hope for your continued success.

Structuring a Game Development Deal

An old friend of mine, Daniel Marks, recently suggested I write a blog entry on different ways publishers and other IP holders could structure deals with game developers. Given this suggestion, I wanted to look at the many ways to create mutually beneficial deals. Before talking about deal structures, I want to stress that I intentionally used the phrase “mutually beneficial” not as a throwaway but as the only way to work with developers. If you create a deal that is not sustainable or simply bad for the developer, you will almost certainly end up with a bad product or no product. The developer may agree because of cash flow issues but once a better deal is available, you will find yourself without a team. Even if you avoid that pitfall, having an unhappy developer is a recipe for creating a game everyone is unhappy with.

First, let’s start with the traditional deal structures, flat fee contract work and a recoupable development fee against future royalties. In the former case, a developer prepares a budget for a project based on their expected hours, their labor and materials cost and a degree of profit. They are then paid the fee over various milestones (i.e. first playable, alpha, beta, launch). If the publisher changes the requirements or scope of the game, the cost is adjusted to reflect the new scope. Once the product is delivered, no further money is owed to the developer. With a recoupable advance, the developer is still compensated for the costs of creating the game (or a portion of these costs) but also receives a share of the revenue the game generates. The recoupable development fee is still paid in milestones as with the flat fee structure. The developer is likely to take a lower development fee because it has long-term potential to make more. Royalties normally range from as low as 5% (when it is a proven IP or concept and little innovation is required of the developer) to 25-35%. A key benefit of the flat fee approach is that the Publisher knows exactly how much the project will cost. For the developer, they are guaranteed a profit they are comfortable with. In the latter approach, the developer is more incentived to create a product that will resonate well with the market. The publisher, however, could be left with a large liability if the game is a hit.

An increasingly popular model for creating games is co-production. In this model the developer will bear some or all of the development costs in exchange for a larger share of the revenue. The exact ration depends on how much of the costs the developer is willing to bear and how valuable the assets provided by the Publisher (or Licensor) are. A base case would be a company provides a very strong IP (for example a major movie), the developer creates a social mobile app at its expense, and the two parties split revenue evenly. This model works particularly well when a Publisher or Licensor has a very strong IP or strong distribution channel. Thus, the developer can estimate the return they would have for financing (or partially financing) the project. I have seen many successful implementations of this model by traditional entertainment companies looking to move into the online or social gaming world, where they don’t want to finance a game but have an IP that works well in the space. Thus, they are able to monetize their IP better than simply licensing it or not having it exploited at all. For the developer, it is an opportunity to get a higher return than just a small profit on a flat fee basis or a relatively small royalty.

There are also variants on all of these models. Although I cannot cover them all, I will throw out some options to get you thinking. In a flat fee model, there can still be incentives for success (defined by the publisher). If the game is finished early, there could be a bonus. If revenue exceeds certain thresholds, bonuses can be paid. In an advanced royalty model, the royalty structure could be tiered so as sales grow the royalty rate decreases (or increases) to limit the publishers exposure or to provide more incentive to the developer to create a hit. Also, a portion rather than the entire development fee might be recoupable, so the developer can start earning royalties sooner. With a co-production model, the revenue share can shift based on performance or based on marketing efforts by the Licensor. As I mentioned, there are thousands of permutations, the important thing is finding a model that gets all parties focused on the same goal.

One other issue in structuring agreements is how to deal with issues specific to social gaming. Currently, very little social game development is out-sourced, largely due to the complexities and demands of running a game once it is live. Milestone payments in getting a game to launch do not deal with the real issue of how to compensate developers to maintain a live game. As the social gaming industry matures, however, I am seeing more and more developers and publishers proposing creative ways to use the external development model to scale their businesses. A couple of models that I feel are most likely to create that mutually beneficial nirvana are committing to a monthly payment and a retainer plus royalty model. With the monthly payment option, the game publisher would determine how many engineers/artists/designers are needed to support the game, then pay a developer a fixed monthly fee to keep this personnel dedicated to the project. In the latter case, the publisher would pay a monthly retainer but also a portion of the games revenue (anything from 1 to 50 percent). The retainer allows the developer to dedicate resources to the project while the royalty incentives them to keep the game strong.

Finally, international rights can be an important tool in structuring a development deal. A developer might retain rights to a game outside of North American in exchange for a lower development fee. The developer could then syndicate those rights to third party or publish it themselves. Many publishers and license holders are focused on specific markets, by picking up rights to markets that they do not value highly, the developer can generate a higher return on the project without any cost to the publisher/licensor.

As I mentioned at the beginning of this post, the most important element of structuring a deal is finding a structure that is mutually beneficial and aligns everyone’s interest. There are many ways to get to this end result, just be creative and be fair.

The Answer to the Talent Shortage

Much has been made of the difficulty in attracting and retaining strong people in the social gaming industry; I have repeatedly heard the northern California region described as in an employment bubble. Despite the increasingly depressing unemployment numbers throughout the US, social game companies in northern California are finding it close to impossible to get good employees (even at outrageous salaries) in the Bay Area.

Rather than swim in an increasingly crowded pool, these companies should be looking abroad to grow. Continue reading “The Answer to the Talent Shortage”