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The Business of Social Games and Casino

How to succeed in the mobile game space by Lloyd Melnick

Tag: competition

Beware of equating sector performance with that of a dominant company

Beware of equating sector performance with that of a dominant company

One cognitive bias that is often overlooked is equating the performance of an industry or sector with that of its dominant player. When one company represents 60, 70, 80+ percent of a market, its fortunes will drive the growth (or decline) rate of the industry. This growth, however, may be due to mistakes or issues with the dominant company rather than the underlying market and potential of the space. This bias, what I refer to as Dominant Player Bias, risks abstaining from good business opportunities and misallocating resources, missing Blue Oceans and accepting sub-optimal performance. The chart below shows how one company’s poor performance can imply the entire sector is contracting, though the problems are due to the dominant company rather than reduced interest:

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There are many examples where the fortunes of the dominant company are equated with the fortunes of the industry. Facebook has nearly 70 percent of the social media market and if people lose interest in Facebook, it drives a decline in social media usage. Roughly, a 20 percent drop by Facebook, would drive down overall social media numbers about percent 15 percent (I am not using real numbers for the purpose of this example). Thus, investors may invest less in social media or other companies may accept declining usage because they feel the industry is contracting significantly. The actual cause though may be Facebook’s customers’ dissatisfaction with privacy or advertising policies. Dominant player bias has caused these investors and competitors to equate Facebook’s performance with the social media landscape.

There are several actual examples of dominant player bias (the Facebook one above is for illustrative purposes only). When Zynga’s performance dropped significantly after its IPO in 2011, many heralded the end of social gaming. The success (and valuation) of companies like King.com, Epic, Supercell, etc., show that the underlying market remained healthy and Zynga was performing due to internal issues (shift to mobile, reliance on the Facebook feed, etc.).

Underestimating the market

The first problem caused by Dominant Player Bias is that it prompts companies to underestimate, and thus under-invest, in a market. To use the Facebook example, if Facebook is facing difficulties but people misinterpret its problems for shrinking demand for social media, they are underestimating the market and thus missing potential opportunities. These opportunities include:

  • The dominant player under-investing and seeking to diversify. If they do not realize that internal decisions have led to falling performance, they may seek to diversify or even exist a market with high potential because they believe the potential market is smaller than it actually is
  • Competitors may shy away from trying to build a business in the market because they feel it is not worth the investment. This bias can result in under-investment in new product development, marketing or other avenues that companies could challenge the dominant player. In this case, dominant player bias is actually compounding the problem because if the market is shrinking due to poor performance by the dominant player, it is actually a great opportunity for someone else to come in and try to break its hold on the market.
  • Investors are less likely to fund companies with ideas that can disrupt the market if they perceive the sector is not attractive. Investors might underestimate the potential of an opportunity if they think the market is shrinking, though the market may only be shrinking because of poor decisions by the dominant player.

While dominant player bias can be either positive or negative, it is not a significant problem when it exaggerates the market potential. If a great company is continually expanding the market, then the great company’s performance is a good proxy for the overall opportunity.

You may miss a Blue Ocean

Another issue generated by Dominant Player Bias is that it might blind companies or investors to Blue Ocean opportunities. I have written several times about Blue Ocean strategy, rather than competing directly find an adjacent market space where there is no competition, and how Blue Oceans over time generate a higher return than competing in red oceans. If you succumb to Dominant Player Bias, however, you may never find the Blue Ocean because you falsely decide it is not worth looking for. This problem is particularly salient in industries with a dominant player, because their dominance may have prevented them from appealing to anyone except their existing customers (who they feel represent the entire market).

A great example of Dominant Player Bias and how a Blue Ocean strategy proved it wrong is the circus industry. Years ago, Ringling Brothers dominated the market. However, they let their product get stale and did not react well to changing tastes. Most observers at the time, 1984, believed that the overall circus market was dying and not worthy of investment. The founders of Cirque de Soleil, however, saw past this bias and realized it was the Ringling Brothers offering, not the circus market, that was causing the decline and launched a reimagined product. Now Cirque de Soleil is orders of magnitude larger than Ringling Brothers ever was because the Cirque founders were not convinced the circus market was dying due to Ringling’s poor performance.

A convenient excuse

Whether you are the major company or one of the small players, dominant player bias can mask under-performance, and thus opportunities to improve your company. Rather than looking inwardly, either intentionally or unintentionally, poorly performing dominant companies will blame the market for poor results. This bias will lead to several problems:

  • Resources are under-allocated to the market where they have a dominant position. As mentioned earlier, dominant companies normally enjoy higher profit margins. Rather than trying to grow these businesses further (and thus increase a high margin business), internal investment is diverted to other efforts that have a lower ROI because the market potential of the core market is underestimated.
  • There is unnecessary diversification or divestment. If the company believes the market it dominates is declining due to existential issues, it may diversify or close its business in the sector while it could enjoy a higher return if it resolved the internal problems leading to declining results.
  • The dominant player misses opportunities to expand the market because they misinterpret declining results for a smaller market.
  • Allowing poorly performing leaders to remain in critical positions. Rather than realizing deficiencies in leaders, poor results are blamed on overall conditions. This mistake keeps weak leaders in place rather than in competitive markets where the strongest leaders rise to the top and help improve the company’s fortunes.

Concentration is often the cause of an industry’s decline

While most companies dream of dominating their market, the type of concentration that creates Dominant Player Bias also can negatively impact the dominant player. By not facing competition, the company is not forced to innovate or grow the market. Instead, it enjoys monopoly rents, and thus a high profit margin, but is not focused on creating additional value. Without a focus on improvement, these companies usually reach a peak where they consider their huge market share the ceiling.

They do not provide anything to people who might not like their product but would enjoy something somewhat different. They also suffer from the innovator’s dilemma, they are satisfying existing who they know very well but because of their focus on their customers they do not create offerings that appeal outside the existing market. Over time, because others experience Dominant Player Bias, nobody brings new products to market, and the perception that the market is saturated leads to the reality that there are no new customers. Additionally, when a company enjoys a dominant position, the cost to them of acquiring new customers is very high relative to the value (almost everyone knows the dominant player, the low- and mid-hanging fruit has already been picked, etc.) so resources are focused on increasing profitability, generally by cutting costs. Since there is no effective competition, in the short term the company sees higher profits but eventually people are driven to alternatives (there are always alternatives, just potentially not direct alternatives), which creates a declining market (though the market shrinking is not driven by a smaller addressable market but by the dominant player reducing the total net value it is providing). This decreasing market both negatively impacts the dominant player over the long-term and prompts other companies to avoid entering the space.

The antidote for dominant player bias

To counter Dominant Player Bias everyone (the dominant player, competitors, potential market entrants, investors, etc.) should focus on the underlying market dynamics and the value to the customer rather than the short or mid term trends in the market. Going back to the Zynga example, looking in the mirror it is clear how other companies avoided Dominant Player Bias. If rather than looking at Zynga’s troubles and extrapolating it to the social gaming market, you looked at the value they were giving game players with a product that appealed to an untapped market (non-core gamers) and a business model (free-to-play) that made it easy for consumer to test and enjoy products, you would have seen that there was still a tremendous opportunity. That is exactly what happened at King and Supercell and Scopely, who avoided Dominant Player Bias and built billion dollar companies. By focusing on how much value you can deliver, it is much easier to scope the market rather than relying on how much one company has already delivered.

Key takeways

  1. Dominant Player Bias is when you mistakenly think a sector is contracting because the dominant firm is performing poorly, while the underlying cause is mistakes by the dominant firm.
  2. Dominant Player Bias impacts both the dominant company and competitors (and potential competitors), as it prompts them to underinvest in the sector and not seek new, Blue Ocean, ways to expand the market.
  3. To combat Dominant Player Bias, you should look at the underlying value to customers and potential customers, rather than the performance of one company.

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Author Lloyd MelnickPosted on January 28, 2020January 29, 2020Categories Analytics, General Social Games Business, General Tech BusinessTags blue ocean, competition, Dominant Player BiasLeave a comment on Beware of equating sector performance with that of a dominant company

What Real Money Gaming companies should learn from the problems faced by EA and Activision Blizzard

What Real Money Gaming companies should learn from the problems faced by EA and Activision Blizzard

In January, I wrote a post on why Electronic Arts and Activision Blizzard’s stock had plummeted and what other game companies could learn from their challenges. While the lessons are relevant to social gaming companies, in many ways they are more germane to Real Money gaming companies, many of whom have also struggled to maintain their share prices.

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Look at the competition holistically

The first problem I identified with EA and Activision was that they focused solely on each other and other console game manufacturers when considering the competition and generating competitive responses. As Netflix stated in its shareholder letter in January, “we compete with (and lose to) Fortnite more than HBO,….When YouTube went down globally for a few minutes in October, our viewing and signups spiked for that time…There are thousands of competitors in this highly fragmented market vying to entertain consumers and low barriers to entry for those with great experiences.”

Real Money Gaming companies do not seem to have gotten the memo, they still focus primarily on each other. Most Real Money online casinos measure their competitiveness by how many games they have versus other online casinos. Sportsbets list their breadth of betting options and in-play bets versus other sports betting apps.

When the US market began to open last year, most Real Money operators looked at each other when developing their American strategy. They copied the partnerships other operators were entering into. They built similar go-to-market strategies. They took their European apps and “adapted” them for the US market.

The sole focus was outdoing their direct competitors. They did not look at how Americans consumed entertainment, how it was different than in their core markets and then build a strategy to compete with these other forms of entertainment.

The US is an example of how the Real Money operators fail to look holistically at the entertainment ecosystem and simply focus on each other. It is why margins continue to decrease and why fewer and fewer new customers enter the ecosystem. It also leaves them very vulnerable to other forms of entertainment appealing to their customers.

Franchises are not forever

The second lesson that Activision Blizzard and Electronic Arts learned the hard way is that franchises are not forever. Many of the biggest Real Money operators still rely on their existing franchise and have not built a sufficiently robust business to deal with downturns in the franchise. You can broadly define a franchise, as I would consider William Hill’s retail locations the same as Farmville, a formerly ubiquitous product that declines over time.

The Real Money space is dominated by one product companies, which leaves them particularly vulnerable to franchise erosion. Many of the operators (both large and small) rely on an individual product for success (often the product and company name are synonymous), and when that product decreases, they are in a very vulnerable position.

You need a pipeline of new products

Consistent with the above point, not only do many Real Money operators rely on one product, they do not have a green light process or plan to bring new apps to market. Often, their product development is focused on improving and optimizing their core offering. If the macro-market for that offering decreases, they do not have alternatives available to compensate.

As I wrote last month, companies need a robust green light process to identify market opportunities, particularly prospects to appeal to non-customers of the industry. Creating skins of existing products do not achieve this result; they simply provide a marketing tool and potentially nudge your product positioning. Yet very few Real Money operators launch entirely new products that have a different feature set and market appeal than their existing products.

These opportunities exist if Real Money operators will look outside of their current offering. There is no reason a Real Money sportsbook cannot offer a standalone eSports app or a Crypto sports betting solution or hypercasual sports betting games. A Real Money casino can look beyond its integrated casino to create a Live Dealer app or an app that has progression or social features. The key is for companies to assess the market opportunity, their strengths and weaknesses and create a product pipeline that will help them grow.

New products and new markets are the key to success

As the above analysis shows, Real Money gaming companies suffer the same issues as video gaming companies and firms in many industries. They lose the forest for the trees, focusing on their direct competitors and existing customers, rather than how the industry and world is evolving. These blinders leave them vulnerable as people’s preferences evolve and miss an opportunity to grow exponentially.

Key takeaways

  1. Real money operators need to avoid making the same mistakes that Electronic Arts and Activision Blizzard committed if they want their stock to be resilient.
  2. Real Money gaming companies should not simply focus on each other but realize they are competing with all entertainment companies and build products that expand their market.
  3. Real Money operators normally rely on one offering and do not have a robust product pipeline to deal with declines in their core product.

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Author Lloyd MelnickPosted on April 9, 2019March 20, 2019Categories General Social Games BusinessTags Activision, competition, Electronic Arts, Green Light, green light process, real money online gamblingLeave a comment on What Real Money Gaming companies should learn from the problems faced by EA and Activision Blizzard

Why Activision and EA have dropped over 40 percent

Why Activision and EA have dropped over 40 percent

Both Electronic Arts and Activision have plummeted more than 40 percent from their 2018 heights and the underlying causes provide important lessons for other game companies. An article in Barrons, Electronic Arts and Activision Are Struggling to Survive a Fortnite World, highlights the key causes.
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Look at the competition holistically

Many companies are focused on the competition but they fail to define the competition properly. While your direct competition can have the biggest short term impact by increasing marketing or adding a new feature, your entire business can be disrupted by a company that you did not realize is a competitor.

Netflix views Hulu and Amazon Prime as their primary competitors, and then the broadcast and cable networks. It was, however, Fortnite from Epic that had the biggest impact on Netflix last quarter as consumers shifted their entertainment focus from television to the massively popular game. The failure of Netflix to anticipate this competition from a non-traditional competitor has left them unable to respond promptly, adding more scripted content does not negate the appeal of a game like Fortnite.

As the article shows, it was not just Netflix who misread the competition, as it was a key driver for EA and Activision’s decline. These companies were focused on each other (as well as the other console games coming to market) and did not anticipate a free to play gaming changing the ecosystem so dramatically.

Outside of gaming, we have seen this phenomenon repeatedly, from the classic horse buggy companies that went bankrupt as they did not realize the impact of automobiles to the decline of retailers who were slow to respond to online shopping. Blockbuster focused on Hollywood Video and mom and pop video stores before realizing that Netflix was the real threat, realizing too late. In the 1990s, GM and Ford and Chrysler were so focused on competing with each other they all faced bankruptcy when Asian manufacturers gutted their market with a new breed of high mileage vehicles. Dell and Compaq were so fixated on providing better PCs at a more competitive price that they are now afterthoughts to Apple and Samsung.

The game and iGaming space is littered with similar examples. The THQs and Acclaims did not consider free to play a competitor until it was too late. Many land-based sportsbooks did not consider online a threat until they saw their businesses disintegrate. When Sega was looking at building the next Dreamcast, they focused on Nintendo and Sony, not Microsoft.

The lesson is the true threat to your business is not the competitors you recognize as competitors, but companies who provide an offering that your customers can use to replace yours, even if it is a very different product. By not realizing who your potential competitors are, you will not be positioned to retain your customers when they shift.

Franchises are not forever

The article points out how underperforming franchises have also negatively impacted Activision and EA. Destiny was one of Activision’s cornerstone franchises and as soon as Destiny 2 showed the franchise was in decline, the stock fell 12 percent.

Destiny is not the only example of a declining franchise pulling down its stock. When Zynga went public in 2011, Farmville and Zynga Poker helped drive a share price to over $12. As both “franchises” slipped, Zynga has struggled to remain relevant, with a share price about 65 percent lower than at its peak.

These examples show that franchises do not continue indefinitely on their own. You need to work at maintaining and growing them by keeping up with current customer needs, as well as anticipating shifts in the market place.

It also shows a growth strategy focused on acquiring franchises runs the risk of overpaying and failing. Almost by definition, you are buying at a peak because it is only a franchise when it is doing very well (then it is defined is a declining product). If the acquirer cannot grow the franchise, their large investment (and franchises do not come cheap) can crumble.

You need a pipeline of new products

The third lesson from the fall of EA and Activision is the need for a robust product pipeline. Given the risks of franchises declining, you need to have new products ready to replace them. As an analyst wrote in the Barron’s article, “the main issue [for Activision Blizzard] is an underperforming pipeline of games.” In EA’s case, the poor performance of its Battlefield franchise has left it with little to drive growth. Both EA and Activision have built their business by refreshing franchises, so when those fail, they have nothing to fall back on.

While the need for a pipeline of new products (for any industry) seems obvious, it requires a commitment, and not just money. This commitment often feels unnecessary when franchises are driving growth and revenue. Even if a company is willing to invest in new products, if they do not have a commitment from on top, it will still fail as their best people (marketing, tech, design, etc.) will be working on the existing franchise products. In a competitive industry (and every industry these days), your B team is not going to beat other companies who are focused on winning with new products.

What Activision and EA teach us

Rather than feeling sorry for Activision Blizzard and Electronic Arts (they are still valued at over $25+ billion each), you can learn from them to avoid the dramatic declines they have faced recently. Most importantly, when looking at the ecosystem and your customers, realize that customers are not simply deciding between you and your closest competitor, they are looking at the best use of their time. For a game company, that means not worrying about competing games (primarily), but Netflix, music, movies and other form of entertainment. You may create a better product than your competitor to find there is a much smaller market for both of you.

As you are anticipating your customers’ needs, you also need to anticipate they will be different, so you cannot rely on today’s franchises. You need a stream of new products that anticipate their new expectations.

Key takeaways

  • Activision and Electronic Arts shares have fallen more than 40 percent in the past twelve months, driven by a combination of misjudging the competition, relying on franchises and having a weak product pipeline.
  • When surveying and reacting to the competition, you must look beyond the direct competition and understand who else could take your customers.
  • While franchises are important revenue sources, you need to nurture them and have alternatives as they eventually will degrade.

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Author Lloyd MelnickPosted on January 19, 2019January 19, 2019Categories General Social Games BusinessTags Activision, competition, Electronic Arts, franchises, Green Light, new product development1 Comment on Why Activision and EA have dropped over 40 percent

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

Dealing with risk

Key takeaways

  • We operate in a very volatile environment worldwide, with many external risks (Brexit, Trump’s victory, Russia’s invasion of Ukraine) difficult to predict but very impactful.
  • To succeed, you not only should look at direct risks but overall risks to the value chain that will cascade to your company.
  • The key is to understand and plan for risks that will impact competitors, your supply chain (anything from raw materials to cloud capacity),distribution channels and customers. Good companies will be ready to not only deal with but also capitalize on external changes that they do not control.

Dealing with risk

Businesses always have had to deal with external risk (as opposed to business risk, ie. a competitor bringing out a better product) but it seems that these risks are magnified in the current environment where we are seeing seismic and often unexpected changes in government, economic policies, etc. Were automakers who moved operations to Mexico prepared for a Trump victory, were banks who set up international headquarters in London thinking about Brexit, were call centers that built their infrastructure in Manila ready for Duterte? The same goes for legislation and regulatory, were companies that based their operations in Ireland expecting the Google ruling or were trucking companies ready for the cap on greenhouse emissions?

Many companies take the position that they cannot control or predict these risks so they just need to conduct business as usual and deal with situations when they occur. That attitude, however, can leave you company with few or no options and thus unable to recover from the external shock.

Fortunately, risk is not new and over the years the companies that have best sustained success have developed ways of dealing with risk. I came across an article from 2009 in the McKinsey Quarterly, Risk: Seeing Around The Corners by Eric Lamarre and Martin Pergler, that shows best practices in identifying (and thus preparing for) potential risks.

Risk is not only direct risk

Most companies do have some system in place to identify risk, though I have seen some whose systems is bury your head in the sand, but even with systems in place they often only look at direct risk. For example, they may be worried about the risk of being banned from China so the government can help a local company, but they are not looking at the risk that a drought in China could bankrupt all their local distributors.

Lamarre and Pergler point to the situation in Canada in 2007 when the Canadian dollar appreciated 30 percent versus the US dollar. The Canadian manufacturers did understand the impact of the currency change on how competitive they were in the US. Most Canadian companies, however, did not see how it would impact Canadian consumers (75% of whom live within 100 miles of the US). Thus, not only did their US sales crater but so did the bulk of their Canadian sales. They actually had hedged to minimize the impact on US sales, but they were unprepared (and many did not have the resources) to protect themselves from the squeeze on revenue in Canada.

The best way to assess and manage risk is to look at all levels of the value chain. Once you understand these risk areas, you can see how they cascade to the core competitiveness of your business and what steps you need to take to mitigate the risk. The key areas of the value chain to analyze are competition, supply chain, distribution and customers.

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Risk related to competition

While most companies constantly monitor their competitors’ product offerings, the greatest risks are often less obvious. External factors might change a company’s cost position versus its competitors or substitute products. Companies are particularly vulnerable to this type of risk cascade when their currency exposures, supply bases, or cost structures differ from those of their rivals. Sometimes good and sometimes bad but all differences in business models create the potential for a competitive risk exposure.

For example, look at two fast food hamburger chains. The fast food business is largely price/value dependent. If one year a drought drives up the price of livestock feed, which then drives up the price of beef by 50 percent, it could have a huge impact on a company that sells millions of hamburgers. It should not fundamentally change the business because all chains face the same situation. However, if your competitor regularly hedges the price of beef by buying futures, then they can potentially keep prices constant even if beef prices spike while you might have to increase substantially your price. Thus a previously stable economic situation could quickly change to one where you can no longer compete. If some players hedge and others do not, cattle price increases force the nonhedgers to take a significant hit in margins or market share while the hedgers make windfall profits.

Companies must often extend the competitive analysis to substitute products or services, since a change in the market environment can make them either more or less attractive. In the hamburger example, high cattle prices indirectly heighten the appeal of salads, which would drive down demand for burgers.

The goal is not to mimic your competitors to eliminate these but think about the risks you implicitly assume when your strategy departs from theirs.

Supply chains

Supply chain risk often cascades to your business. If you are a technology company and cloud storage costs double overnight (maybe due to new regulations), all the software as a service companies that were giving you services would be forced to increase their prices. While you may have created contingencies yourself to manage your cloud storage costs, you probably would not have anticipated the cost increases of all SAAS suppliers. If some of your competitors managed these services internally, they may not have to shift their prices or service significantly. Thus, it is not only the direct impact of the change in costs but also the indirect impact.

Distribution channels

Indirect risks can also lurk in distribution channels: typical cascading effects may include an inability to reach end customers, changed distribution costs, or even radically redefined business models. Facebook is a great example of this risk in two ways. When it first embraced gaming, it provided some companies at that time (i.e. Zynga, Playdom and Playfish) a way to reach hundreds of millions of people at very little cost. Thus traditional game companies like THQ and Acclaim saw their share of users wallets decrease or have their players pulled away to the Farmvilles and Social Cities of the time. So even though FB did not directly impact THQ and Acclaim, it effectively bankrupted them.

Then, when Facebook changed its model in 2011 so companies had to pay it 30 percent of revenue, the impact both direct and indirect had a huge competitive impact. Overnight, profitability for FB dependent game companies fell 30 percent, forcing companies to change their cost structure, migrate to other channels or cease to exist. Companies that were not dependent on Facebook, primarily other online MMO companies, had a significant advantage. While social game companies may have been aware of the risk of Facebook credits, they generally did not understand how it would benefit certain competitors.

Customer response

The most difficult risk to anticipate are the responses from customers, because those responses may be so diverse and so many factors are involved. One typical cascading effect is a shift in buying patterns, with consumers using another distribution channel. As Lamarre and Pergler write, “another is changed demand levels, such as the impact of higher fuel prices on the auto market: as the price of gasoline increased in recent years, there was a clear shift from large sport utility vehicles to compact cars, with hybrids rapidly becoming serious contenders. Consider too how the current recession has shrunk the available customer pool in many product categories: demand for durable goods plummeted among consumers holding subprime mortgages as their access to credit shrank, and demand for certain luxury goods fell as even financially stable consumers turned away from conspicuous consumption.”

How you should look at risk

The key to anticipating risk and managing your exposure is to assess the full risk cascade. Exploring how that risk propagates through the value chain (competitors, supply chain, distribution and customer response) can help you think through what might change fundamentally when some element in the business environment does.

To manage the risk cascade properly, there are several steps:

  1. Look at the direct risks and how they will impact your business.
  2. Take those same direct risks and see who they will impact your competitors, they the supply chain, then distribution and then your customers. For each of these, determine how that impact will effect your business.
  3. For each of the four elements of the value chain, look at their direct risks. Then look at how that risk will impact the other three elements on the value chain. From there, determine how it will impact your business on the value chain.For example, identify the risks to your customers. Maybe the value of their local currency will decrease due to changing political affiliations. With a weaker currency, they will have inflation and more of their wallet will go to core products. They will thus have less disposable income. For you, it may mean you are at a disadvantage to local suppliers (whose costs are in the local currency) or that these people will just be spending less on your product category. Thus, if you are well prepared, you may have a lower cost product available or be able to shift your marketing to territories where users are less impacted.
  4. Build contingency plans not only for the direct and obvious risks, but other risks that can indirectly have a significant impact on your business.

Managing risk is a central ingredient to your success

In these volatile times, it is important to anticipate and have contingencies for external events that can significantly impact your business. Simply saying who could expect a certain election result or a natural disaster and thus our company is bankrupt is not an excuse except possibly in your next job interview. Good companies will be ready to not only deal with but also capitalize on external changes that they do not control.

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Author Lloyd MelnickPosted on November 23, 2016November 12, 2016Categories General Social Games Business, General Tech Business, International Issues with Social Games, UncategorizedTags competition, customer, distribution, hedging, risk, supply chainLeave a comment on Dealing with risk

How to hook your competitor’s customers

I have written frequently about the importance of knowing your competitors (competitive intelligence) and I also love Nir Eyal’s Hooked model to build products that retain; I just came across a slideshow by Nir that brings both of these concepts together. Nir’s presentation, “4 Ways to Win Your Competitor’s Customer Habits” (presentation below), shows the four ways companies build better hooks than their competitors.

As a quick recap, the Hook Model describes an experience designed to connect the user’s problem to a solution frequently enough to form a habit. Eyal defines habits as behaviors done with little or no conscious thought. The convergence of access, data, and speed is making the world a more habit-forming place.Businesses that create customer habits gain a significant competitive advantage. It has four phases: trigger, action, variable reward, and investment.

Eyal identified four ways to win customer habits. If your product becomes the one the customer is hooked on, then you will enjoy their continued business.

Slide1

Faster HOOKS

The first technique is faster hooks. The faster the user passes through the model, the greater the product’s or game’s habit forming potential. Nir Eyal uses the example of Netflix, which won over people’s viewing habits from Blockbuster by delivering movies what were waiting for users rather than forcing them to get in a car, pick the movie, pay and drive home.

To achieve faster HOOKS, first understand the must-have reason people are using your product or game. Next, lay out the steps the customer must take to get the job done. Finally, once the series of tasks from intention to outcome is understood, simply start removing steps until you reach the simplest possible process. Continue reading “How to hook your competitor’s customers”

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Author Lloyd MelnickPosted on May 14, 2015January 4, 2016Categories General Social Games Business, General Tech Business, GrowthTags competition, habit forming, Hooked, HOOKS, Nir EyalLeave a comment on How to hook your competitor’s customers

The importance of competitive intelligence

In most businesses, the need to know what your competitors are doing is a given. In the social gaming space, however, competitive intelligence (CI) is either an afterthought or not even considered critical. That thinking at best leads to a sub-optimal product and at worst facilitates losing your market to another product.

Why Competitive Intelligence is important

Good competitive intelligence is invaluable to all companies, including those in the mobile and casino gaming spaces.

  1. CI shows you the minimum quality level acceptable for your game. In the mobile space, most users will try multiple applications and then settle on one, a winner take all environment, though in casino they may play two or three. Thus, your potential customers are also playing your competitors’ products and deciding which one to invest their time in the future. If your game is clearly inferior, weaker graphics, slower tech, etc., you have lost.
  2. Your competitors are not stupid and you should learn from them. Internally, they are looking at the same opportunities and problems you are trying to tackle. By understanding features and initiatives they are taking to improve, they can inspire you on ways to manage the situation. Not that you want to copy everything they are doing, but understand how they are approach problems and if you have a different approach make sure your solution is better before deploying it.
  3. You can learn from their mistakes. It is great to make mistakes because it means you are trying unique initiatives; it is not great to repeat mistakes as that has no value. What is even better is if somebody else makes the mistake to learn from them without having the cost.
  4. You ensure you are value competitive. A car company would not never release a new model without understanding how its price and features compare with other cars. It would base the price on the competitive feature set, including branding, and then price their car so it is a reasonable option for consumers. Very few people will purchase an auto when they can get a comparable one for half the price.In the game space, companies mistakenly believe users are price inelastic. Many players, particularly those likely to monetize, understand what they are spending money for and how much they will get for it. The value is often in play time (e.g., I will spend $20 in a bingo app to play an extra hour). If the player feels your game is much more expensive than comparable games, they are less likely to spend in your app and will shift their spending to competitors (and you will see lower revenue from higher prices).

Continue reading “The importance of competitive intelligence”

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Author Lloyd MelnickPosted on April 16, 2015January 4, 2016Categories Analytics, General Social Games Business, Lloyd's favorite postsTags business intelligence, competition, competitive intelligence3 Comments on The importance of competitive intelligence

It is about creating a monopoly, not winning

thiel_6_4_frontIn Peter Thiel’s hot book, Zero to One: Notes on Startups, or How to Build the Future, he makes many interesting observations (some I agree with, some I do not) but one in particular is particularly valuable. Thiel asserts that great companies are not great because they beat their competition, they are great because they do not have competition. Although he does not quote Blue Ocean Strategy, it is very consistent with their thesis and data that shows that companies that create new markets have much higher economic returns than those who come up with new strategies to defeat their competition.

Basic economics

Thiel’s point about the benefits of creating what he refers to as a monopoly, what I call a blue ocean opportunity, resonated with me as he use basic economics to prove the point. At its core, classical economics shows competition will drive out excess profits. That is why although Exxon makes a lot of money, they do not make a higher return on investment than another oil company. Whatever you are doing, somebody else will copy.

Thiel points out that, “Americans mythologize competition and credit it with saving us from socialist bread lines. Actually, capitalism and competition are opposites. Capitalism is premised on the accumulation of capital, but under perfect competition all profits get competed away. The lesson for entrepreneurs is clear: if you want to create and capture lasting value, don’t build an undifferentiated commodity business.“ Instead he advocates building a virtual monopoly, a company so good at what it does that no other firm can offer a close substitute. Continue reading “It is about creating a monopoly, not winning”

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Author Lloyd MelnickPosted on February 5, 2015March 19, 2015Categories General Social Games Business, General Tech Business, Growth, Lloyd's favorite postsTags blue ocean strategy, brand, competition, Excess Profits, Monopolies, Peter Thiel, Playing to Win, proprietary technology, Zero to One3 Comments on It is about creating a monopoly, not winning

Don’t underestimate the competition

One mistake I frequently see is when tech or game companies underestimate the competition, particularly when responding to a competitor’s product or game. Coupled with the need to be 9X better to get someone to switch to your product, this failure leads to many businesses nose-diving.

Maybe I should have considered the competition

Thinking your competitor is dumb

The most basic mistake is acting as if you are smarter than your competitor. Although most readers of this blog are quite intelligent (hence, why you are reading this blog ☺), so are leaders of your competitors. You are not going to create a more successful product or better game simply because you are smarter than other companies in the space. They also have great teams who are looking at the market. You need to find true competitive advantages. You are not going to win just because your mother told you that you were smart. Continue reading “Don’t underestimate the competition”

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Author Lloyd MelnickPosted on October 2, 2014October 14, 2014Categories General Social Games Business, General Tech BusinessTags 9x better, competition, competitive response1 Comment on Don’t underestimate the competition

Partnerships, focus and competition

When I recently updated my OpenTable app, I noticed they incorporated a partnership with Uber in which you can request a car when looking at an upcoming reservation and the car would already know your destination. This partnership between Uber and OpenTable is a great example of strategic thinking by both companies. I wanted to comment on it as I think all companies can learn some key lessons from the initiative.

Uber and OpenTable logos

Continue reading “Partnerships, focus and competition”

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Author Lloyd MelnickPosted on August 21, 2014October 14, 2014Categories General Social Games Business, GrowthTags competition, focus, OpenTable, partnerships, Uber3 Comments on Partnerships, focus and competition

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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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