The Wall Street Journal reported that more than 90 percent of app toys fail around the same time Activision announced that Skylanders’ sales exceeded $500 million. Among the failed app toys were Barbie Dolls and Hot Wheels cars with special conductors to control games on a tablet from Hasbro, Disney’s Cars AppMates, and a version of the Game of Life from Hasbro in which players spin a wheel on an iPad rather than a physical wheel. Yet, Activision’s physical virtual goods continue to sell incredibly well, driving Activision’s profitability. This interesting juxtaposition of news shows the value of using the equivalent of in-app purchases rather than the business models designed around retailing, distribution and manufacturing processes from the last century.
What is wrong with App Toys?
The biggest problem with app toys is that the toy makers are simply trying to move the same product to a new platform. The toy companies do not understand what creates compelling experiences on tablets (or consoles or phones, for that matter). Instead, they are replicating the same experience people have with the physical goods in the virtual world, which is not what consumers are looking for. They are competing with (thousands of) native games and products that are created to meet customers’ needs. It becomes obvious why the app toys cannot compete. Continue reading “Why app toys fail and Skylanders soar”
Activision’s earnings announcement yesterday shows how attractive successfully conquering the physical virtual goods market is. On November 27, I blogged that Activision would be the big winner Q4 2012 on the strength of the Skylanders franchise and its reliance on a new business model, selling physical versions of virtual goods. I elaborated on that post earlier this month, commenting that the emergence of the Physical Virtual Goods monetization model was one of the most exciting developments in the gaming space in years .
Today, Activision’s stock rose 14 percent because earnings tripled from the fourth quarter last year (in a period in which overall video games sales slumped). Net income increased 257.58 percent to $354 million in the quarter versus a net gain of $99 million in the year-earlier quarter. Revenue rose 25.66 percent to $1.77 billion from the year-earlier quarter (unfortunately, some of that is due to my family).
This report affirms my belief that physical virtual goods are an incredible opportunity. While I do not advocate trying to copy exactly what Activision has done (I believe in blue oceans, not fast following), there are many elements in this space (e.g., product type, demographic) that represent incredible opportunities for game companies.
As an update to my post yesterday on Physical Virtual Goods as exemplified by Skylanders, Activision just announced that Skylanders generated over $500 million in retail sales in the US and generated more revenue than the holiday box office for kids’ films.
The use of virtual goods in a physical form is one of the most interesting (and profitable) monetization techniques that I have seen. By “physical virtual goods” (my term), I mean taking a virtual good that is normally sold through an in-app purchase and making it into a physical retail item that is used to unlock the virtual good inside the game (with no functionality for the physical product).
The Skylanders example
Activision’s Skylanders are the perfect example of this monetization strategy. Activison has two video games, Skylanders Giants and Skylanders Spyro’s Adventure, that sell at retail, just as you would purchase Call of Duty or Super Mario Bros. However, instead of selling downloadable content or offering upgrades through in-app purchases (depending on the platform), players must purchase Skylanders characters at retail, place them on a game-specific portal (a device that plugs into the game console) or enter a code that comes with the character (again, depending on the platform) to unlock the character in the game. Continue reading “Physical virtual goods”
Although this is by no means a prediction based on any scientific data, I am already seeing big trends this holiday gift season that will impact game companies significantly. By talking to my children and their friends, visiting major retailers and getting virtually every online retailers newsletter, it is becoming clear there will be some big winners and losers this holiday season that also show how the industry will continue to evolve.
Nintendo and Microsoft look like the losers
I expect two companies that I respect greatly, Microsoft and Nintendo, to have poor Q4 product introductions. Unlike the iPad and some of the Android tablets, nobody is advertising or discussing the Surface. Although Microsoft has set up stands at malls and is leveraging retailers that normally sell PCs, most consumers who are in the market for a tablet are deciding between the iPad or the Kindle Fire (at least the people I spoke with). Retailers are drawing traffic by selling cut-price Android tablets (normally under $100),showing that they believe consumers will go out of their way to buy such a tablet (say what you want about traditional retailers, but they still understand their customers very well). Worse for Microsoft, the Surface is not even on people’s radar; outside of Microsoft ads I have not heard it mentioned once. Continue reading “Two losers and one winner this holiday season”