Saturday, April 24, 2010

Blizzard, secondary markets and the gaming industry

Phew... after two months of work, I can take a step back and go back to blogging.

Who won the "Pirate bay" trial?

The simplistic answer is obvious: though currently in appeal (scheduled to open September of this year) the site's operators were convicted on April 17th, 2009 in accessory to crime against copyright law, and were sentenced to a year in jail and over $3.5M for fines and other damages. I would call this a pretty decisive decision.

So the publishers win, right? I don't think so.

The trial itself is a cornerstone in the fight against piracy, but focusing on that misses the point. Don't get me wrong, I'm not pro any illegal activity, however some illegal activities stem from a need that's not met by what the industry has to offer; something people are willing to pay for. It's not that people didn't want to pay for music and movies - they just didn't want to pay for them in the way they were bundled by the publishers. And from this perspective, the publishers lost. They lost their old business model to the vast end-user-driven movement that spun piracy: iTunes (paying for single songs), Netflix (subscription based streaming), Spotify (free music discovery) and Hulu (ad based streaming) are examples to models that evolved since publishers had to change. Who won the pirate bay trial? Irrelevant in the long term. The important thing is that users get more of what they want.

The same rule applies to secondary markets in online games.

I spoke to a few publishers over the last few months, and especially at GDC. I asked a simple question - why don't you support p2p trade and secondary markets? The answers varied, but most of them responded just like a music publisher in the pre-iTunes era: it just doesn't fit their business model.

Most games provide their players with progression - along skill levels, story lines, levels, goods. When stripping them off fancy mechanics, in essence Farmville and WoW are similar in the sense that you have "stuff" you accumulate (be those points, ranks or cows) and you have a series of actions you can do you get them. In some of the cases, you also go through an internal narrative that adds another layer of "stuff" to achieve, this time story progression. Players get rewarded by the game, and invest in challenges that the game provides them with - and so gameplay, long hours of engagement and investment of time and money against game-initiated calls for action are what drive profitability. Secondary markets undermine this dynamic - players are supposed to buy content, currency and items from the publisher only, and buying them from other players ruins gameplay and works against the game's planning.

Sounds familiar, doesn't it?

The way I see it secondary markets represent something the player community needs and wants, and a necessary change to the way games are played. Allowing players to create value themselves and trade it with other players will only increase engagement with the game, not decrease it - provided that there is really an option for open ended play. Of course it creates additional challenges - farming, scams, fraud in p2p trade - but most of those are current issues for most online games and worlds, and instead of seeing its value churned by piracy and chasing down pirates, the gaming industry needs to make a decision to take this activity into the games. With the digitization of commerce, there's no reason why actual entrepreneurs cannot work in the virtual space as much as they would in the real world, and virtual worlds can be direct beneficiaries from sophisticated ecosystems. You only need to look at the numbers from Blizzard's latest launch of the "pets" on WoW to understand that reselling, and later turning these now-commodities into high value collectibles, is just around the corner - and gaming companies cannot allow themselves to not participate in one way or another.

It does seem, however, that gaming companies have identified this need and are working to accommodate it in future publications. Going back to the opening of this post, this is another place where "piracy" showed the industry where it needs to go; choosing to fight such a clear message from users doesn't really make sense. I, for one, am looking forward to in-game, open marketplaces booming.


Anonymous said...

A classical example is the couple who made excess of $1M in selling virtual real-estate on 2ndlife.

Jon said...

Good text. Too few has made the connection between distributors and their responsibility to create business models that make money out of the content from the creators. It's their role. When the customers show what they want distribution wise, and develop the technology for free, they choose sue the customers and use the creators as cause, biting both hands that feed them. Bad idea. Think "outside the box"!

Aileen said...

Hi Ohad, thanks for this post. I agree that the MMO secondary market is pretty much in exactly the same spot as music downloading was a decade ago - user-driven need, publishers/record labels resisting change. (Coincidentally i've been drawing this same parallel for the longest time now.)

The question then is: who will become the itunes of mmos?

I'd have to disagree with one minor point though - that it "ruins gameplay". I'm assuming that users want the best gameplay possible. If it did ruin gameplay (for majority of gamers) this user-driven market would not be as big, or possibly even bigger, than the primary market today.

Bottom-line, this phenomena has been around for decades and is not about to disappear. Resisting it is not only futile but costly, and at the end of the day, the people who stand to lose the most are the publishers.

Disclaimer: I'm the founder of First Meta Exchange, a publisher-supported virtual goods exchange.