Tag: pre-mortem

While it is impossible to predict the future — Chaos Theory shows that even very small events can have a huge impact — you can still prepare for likely scenarios. The uncertainty principle, a key tenet of quantum mechanics (as popularized by Stephen Hawking), postulates that perfect predictions are impossible if the universe itself is random. Thus, I do not believe in predictions (outside of State Fairs), but I am a strong advocate of pre-mortems and thought a pre-mortem on 2021 for the game industry would be useful. A pre-mortem is a meeting held before a major decision where all those involved in making the decision imagine themselves six or twelve months after the decision was taken, assume it turned into a debacle, and then explore why it was a disaster. The value is not predicting exactly how 2021 will turn out but preparing for events that could have a major impact.

For 2021, I want to take a similar approach and put my readers in December 2021 looking back at the year and understanding what went wrong. I have put together several ideas to consider for your pre-mortem but as every company has a different risk profile, you should focus on those that could most impact your business.

We underestimated the headwinds created by Covid-19

At the end of 2021, we may look back and regret not seeing the disruption Covid would cause to our industry. With many people unemployed or seeing lower earnings, spending in iGaming and social gaming could deteriorate sharply. If you made investments or acquisitions based on continued growth, you may find yourself in a difficult position.

We overestimated how quickly revenue would revert to pre-Covid levels

There is also a possibility that when 2021 is over, you may regret anticipating that the impact of Covid would be short lived. Instead, the phenomenal growth many social and iGaming companies experienced could continue or even accelerate, as more people see the value of online gaming. Thus, you may have underinvested in growth expecting a weaker market.

We missed the impact of the new consoles on social gaming

Generally, it has been mobile and free-to-play games that have impacted the console gaming space (see THQ and Acclaim) but in a year we may look back and realize that the launch of the PS5 and Xbox Series X/M significantly impacted the mobile and gaming businesses. With the strength of the new console launches, particularly Sony’s, there is a possibility that these consoles pull users from other forms of gaming. I have always said you should not look at your direct competitors but consider the entire entertainment space (gaming, streaming media, television, etc.) as potential competitors, so discounting console gaming is something you may regret.

Real Money Gaming happens faster than expected in the US

The last year has seen the move to online accelerate (just ask most brick and mortar retailers) and this acceleration may spread to the US real money gaming industry. While the valuation of several iGaming companies have exploded because of the US opportunity (Draftkings anybody), most companies still assume the majority of the US will not legalize real money gaming in the short term. While the process has been slow, often disruption manifests itself initially slower than expected only to hit an inflection point that surprises people with the speed of the transformation (ask a movie theater owner). Changes in the US market would not only impact real money gaming operators but could change the playing field for social casino companies (for better or for worse).

The European Real Money market shrinks significantly

While the US real money market is the opportunity everyone is looking at, the industry could experience very material changes in the markets that generate virtually all of the current profits. Evolving legislation in many European markets is impacting companies’ ability to compete and to maintain profitability. Changes always create challenges and opportunities and that is likely to be the situation in Europe’s real money market.

IDFA has a major impact on acquisition ROI

While there has been much hand-wringing and chatter about Apple’s planned IDFA change, most companies are operating under the assumption that Apple will not make a change that causes apocalyptic destruction. While that is likely the case, there is the possibility that the change will be as damaging as some warn, making it unprofitable for many game companies to acquire players. You may regret not building up a strategy that reduces your dependency on performance marketing and instead increase your competence in cross-sell and monetization (if players cost more, you need to make more from them). You also may regret what genres you pursued, as some will be more resilient to an IDFA change than others.

M&A market drives non-profitable behavior

In the last year, the M&A market in both social gaming and iGaming has heated up, with 9 and 10 figure deals commonplace. You often see in a strong M&A market that companies focus more on positioning for a sale than profitability, which cascades across the entire industry. If valuations are driven by new user growth (say the US sportsbook market), companies will bid up prices for new players and give incentives to attract customers from competitors (sometimes with a negative ROI). For businesses focused on profitability, you may find that your previously sound approach did not work in 2021.

Your “supply” lines are disrupted

Over the past five or ten years, most game companies have shifted to a model where various functions are outsourced. You may have moved your game design to India or your art to Nebraska or your sound/music to Kuala Lumpur, which has allowed you to harness the best talent in the world and potentially reduce costs. While these changes have increased elements of your resiliency, they also provide new risks. In 2020, Covid made it harder (and in some cases impossible) to travel, Brexit creates questions in how the UK will collaborate with other European countries and new trade wars potentially impact the ability to work across borders. You may find that critical functions turn into bottlenecks that slow or halt your content stream or new products.

Work from home changes the nature of the workforce

Many people have forecast how the workforce will change in a post-Covid world but, as I said earlier, predictions are not my business. Instead, you should be aware of potential shifts that could have a dramatic impact on your business in 2021:

• Major tech companies move to a permanent part online model, thus increasing their recruiting reach worldwide. While in the past you may have considered your employees safe if you were in Belarus or Sri Lanka, you may now be competing with the world’s best companies to keep these employees.
• People might want to return to an office. If you have moved to a pure or primarily WFH situation, you may lose employees who want to be back in an office.
• Work from home has a negative impact on your team’s mental health.

There are many ways that work from home can evolve and you should anticipate changes in the macro-environment impacting your business.

Something happens that you never saw coming

You also need to realize that risks come in many forms. While you can anticipate some, there will be risks that come out of the blue from complex combinations of typical events or from unprecedented massive events (i.e. Covid). You need to detect these quickly and respond based on the event, rather than trying to fit it into your anticipated risk bucket. This response should be improvisational, rapid, iterative, and humble, since not every action taken will work as intended.

What to do

While I can’t (and, really, neither can you) predict the future, you need to look at possible outcomes and build up a risk adjusted strategy to optimize your growth. Do not rely on the ones listed above, but look at your business and understand what external factors could have a significant impact next year. Keep in mind, a pre-mortem is meant to look at and avoid potential disasters so while many of the above scenarios are negative, hopefully most (if not all) will never materialize. If they do not, great, it’s better to have an insurance policy you never use than needing one you do not have. You also need to be ready to react quickly to unanticipated challenges.

Key takeaways

1. Rather than trying to guess (predict) the future, conduct a pre-mortem, where you put yourself in December 2021 and look back at what went terribly wrong for your business. The exercise will help you identify the biggest risks you face.
2. Some of the areas you should look at include the impact of Covid, spread of Real Money gaming in the US, challenges to RMG in Europe, the new gaming consoles and how work from home is changing the workplace.
3. You also need to realize that risks come in many forms and some are impossible to anticipate. You need to detect these quickly and respond with improvisation, speed and an iterative approach, since not every action taken will work as intended.