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.

New York under zero: some thoughts on the Engage! Expo

"If there are any Mattel engineers in the audience, the astronaut Barby's space suit is not crash proof" (loose paraphrasing on Will Wright's keynote)

Yep, the keynote was entertaining and Engage brought a lot of vendors to snowy New York's Javits center. The two day event, though a bit low on developers, had a few interesting sessions and some interesting chances to share opinions. So what did I pick up from these two full days?

Payments and mobile

This Engage was heavy on payments companies, and by payments I mean mostly - if not exclusively - mobile payments focusing on SMS billing through carriers (obviously Paypal was there - a few of my colleagues and me - and additional sponsors). While the value of mobile payments for a streamlined, high conversion purchasing experience is clear (on the verge of overstated), the abundance of these companies over such a small space only served to emphasize how not-that-different these companies are from one another. Better coverage, low fraud and a promise for lower fees in 2011 were the value propositions.

Now, while I think mobile payments are clearly an avenue the industry must pursue, it was clear to me that until operators make a big leap of faith to embrace mobile payments, this field will not move much unless the companies themselves move to a Zong+ like, account based system that allows users to add a financial instrument and for the mobile payments company to charge it directly. And, as you are soon to find out, account based systems are a whole new world of pain - while with direct billing you charge a prepaid or underwritten balance an operator is liable for, accounts are a much more complicated structure. Plainly put, you start writing big fat checks directly to fraudsters' pockets. Looking at chargebacks in hindsight, as at least two of the participants suggested, just doesn't cut it. So mobile payments are looking for the next big breakthrough, and if fees don't drop soon (and they probably won't), I'm expecting some M&A work as competition heats up.

Offers and tasks

I'm a long time advocate of offers. Yes, offers have their "dark side", when misused, however they have a huge potential for creating incremental volume - something I personally love. When at the conference I heard that Offerpal are integrating tasks from Amazon's Mechanical Turk, and have been hearing assertions that competitors are going to follow suit (also heard it on stage from IMVU.com's CEO). Why is this good? I think that using social gaming to crowdsource simple but human intensive tasks is good for user education - do something good instead of just signing up for Netflix (nothing bad about Netflix, though); plus, it's good for the potential work providers - ideally, research institutes, advanced OCR services and others. In short, tasks are the new "green". Two caveats in this optimistic view, though: the first is that there is a serious chance of shortage of tasks, at least until this market picks up; the second is that abusing this model is still doable, maybe even easier than standard offers - if I were a fraudster, I'd immediately outsource my CAPTCHA operation to Amazon. Oops! Better read previous posts and do some risk analytics, guys, or you'll find you're breeding an ecosystem of thieves.

Zero cost of goods

I had this feeling in the past, but the conference reassured me: the "zero cost of goods produced" concept is both a blessing and a curse. Why a blessing? Because developers, bathing in the sensational bliss of high margins, were keen on trying new things - new business models, new payment options (30% take for mobile payments? come on) and various experiments in user interaction (offers, vanity items and many other really cool stuff). Why a curse? Because the notion has outgrown its proper boundaries, actually harming some of the developers. Assuming that if you just auto-refund your zero-cost virtual good, the problem of chargebacks goes away is a mistake, and not checking operational costs related to this "zero cost" work will make your bottom line look pretty bad eventually. Additionally, zero cost of goods got many developers focused on solely growing their user base and ARPU - both important but, as a few speakers noted, shifted attention from a few other very important stuff. Like fraud, like going international, but also like pricing - when the third pretty senior person suggested to developers that going all-in on a freemium model just isn't a good idea, I started to understand that the problem transcends risk management and controls; it's starting to detach companies from sound business judgment. So this is probably time to reconsider - it's all a part of growing up as an industry.

P.S. One last thing

I was delighted to meet a few young and talented entrepreneurs working exactly on the things I find exciting - namely p2p trade and new, great ways to engage users. It's fun to see how ideas evolve, and I'm looking forward to hearing more about them and others like them. Well done, guys!

Why you should love (and fear) mobile payments [part 1]

A month and a half ago I discussed the mobile payments opportunity in India, a country where the mobile phone is often the consumer's sole financial entity (no banks, credit cards or anything else but cash). Boku's press release is a good opportunity to take a closer look at the US mobile payments market (see a previous post), and tell you why I think that it has great potential, but should also look out for a few obvious challenges.

You're all busy people, so I'll save you the time reading through my first paragraph and give you the bottom line: mobile payments are here, are growing, and have the potential to kill all other payment services. BUT it won't happen the way you'd imagine, and there are many pitfalls along the way, yet there are many chances for success.

Phew! Now that I got this off my chest, I can start explaining.

Where is my mind? Way out, in the water

(As I'm writing this, EA has announced it has bought PlayFish. All the more reason for a call to the industry to stop panicking and start taking responsibility for its own faith with big fish coming to play. But read on...)

One of the many highly useful skills I learned in Officers' course was artillery aiming. There was a lot more fun stuff I could imagine doing in any given afternoon, but there's definitely nothing like it. And when you just don't have an option (and believe me, in officers' course you don't have an option), you just give it your best shot. Pun intended.


So there I was, trying to get 155 mm cannon to hit a barrel. I don't know if you know how these things go, but artillery aiming is some simple arithmetic and a lot of art. You aim the cannon one way, then course correct the other, then again - in shrinking intervals, until you hit the target (or 50m away from it, which is considered good enough). It must have taken me 5 or 6 attempts to hit the goddamn thing - the gun crew was not a group of happy campers, nor was I. But all in all, it was a good drill, and I passed the test, and got my rank of deputy lieutenant, and mom was happy.

Offer walls and marketplaces: the real alternative to "scamville"

Let me just say one thing up front: well done, Mr. Arrington! From the first clash with Offerpal (former, it seems) CEO Anu Shukla, through this post and others, there's been quite a stir around offer walls and the big question of the legitimacy of their offers (some news sites in Israel literally copied the post's words. But that's another type of scam). Beyond the provocation, there are a few actual issues here, that I think are left out since "scamville" and CEOs being replaced are much more sexy.

Here's the thing: if the social gaming industry is a viable industry (which I think it is) it should, at one point, start to mature as one. Maturing doesn't mean moving slower or becoming less appealing to users, on the contrary, there's still huge potential and a momentum so strong can't just be stopped by a few posts. But what it does mean is that you start getting attention for your mishaps and you need to start addressing this attention in a tone that is way, WAY milder and more responsible than just saying "this is sh*t and bullshi*t" (look here for some current thoughts of industry leaders and how I'd respond to them).