Game Industry Legends: Trip Hawkins

I've been an entrepreneur for about 40 years, and the only good way to be an entrepreneur is when your hair is on fire with passion for an idea that you really believe in. At this point I can't really rule it out and say I'm never going to do it again, but obviously the right way to approach it is to wait until you feel something that you have conviction about. While that process is going on I'm also cognizant that I have a tremendous wealth of experience and scar tissue and I've seen it all. It's probably about time in my life that I focus more on sharing my wisdom with other people, and doing more to mentor the next generation.

I think because of the scope of my career, and all the different things that I've seen, and all the platforms, and technology evolution, I've got a relatively unique perspective. My strength has always been pattern recognition skills that I can use to look into the future and have a sense of how things are going to evolve. I'll often get the timing wrong, in that intellectually it seems to me that something should be happening on Tuesday and it might actually be a few years off. I think I'm getting a little bit better as I get older at recognizing which ideas are too far ahead of their time.

Indeed, it is a period of very high change, and that's one of the areas where the passion of young entrepreneurs who have their finger on the pulse of the behavior of their own generation and how they're adopting and using new technologies is important. I just look forward to being a supporting element in complementing the passion that those kinds of entrepreneurs have.

I'll say something that's kind of fundamental about Facebook as a platform. Back in 2009, and even the early parts of 2010, the platform kept the plates spinning at the same speed. The amount of game communication that went into the social channels was 20 times greater than it is now. That's not just me making up a number; Facebook themselves actually said that they had cut game spam by 95 percent, which means they cut it by a factor of 20. And it's true. If you think about what that means, it's that the viral audience size is going to shrink, because a lot of people that would have found out about it before won't, and the other thing that's going to happen is that people who actually played it are less likely to return to play again, and that's going to be a function of the fact that they're not being reminded as often in their social channels. This was a tremendous change in the performance of all games on Facebook.

What that basically means is that only the best games that monetize exceptionally well can survive and recoup marketing investment. Really, I feel that there aren't that many games in the whole industry that qualify. It's been a struggle for everybody; I mean everybody's traffic is down, even Zynga's, but obviously Zynga has a lot of strengths and advantages going for them, but it's even had its effect on them. A change in viral is going to reduce your MAU, and a change in the return rate is going to reduce your DAU; if you reduce the DAU you're going to reduce revenue. And then if you take 30 percent off the top of that, you're going to completely reduce the revenue. Those are changes that Facebook game companies had to absorb.

I'm not really trying to pick on Facebook here; we went on to Facebook when Apple had no capacity for microtransactions. So for a while Facebook was the hottest, best platform, and then Apple got more mellow towards virtual goods and virtual currency, they launched their microtransaction system, and then meanwhile Facebook made their changes. If you look at a company like Funzio, you'll notice that they launched one game on Facebook that was a reasonably hard-core, imperative game that monetized reasonably well, and they did not release any more Facebook games after that. They just ran over to the iPhone, and their timing was perfect. They had a good game in Crime City with good monetization, so they could market. Then they focused on making a good iPhone version, then they brought it to Android. Just having one good game that had those characteristics made that company. Then you look at every single company with a game that did not have that kind of a monetization rate - it's a little like the tide went out and exposed a lot of rocks.

So it's not really unique to Digital Chocolate, except that Digital Chocolate invested more heavily on Facebook than many other companies did. The other thing was that we had a tradition of success using tools to extend our platform reach. It turned out to be difficult for us using operation staff with those tools to take a big-screen Facebook game and make it a great iPhone game. Obviously the style of play is somewhat different between a mobile device and a Facebook member session. Last year when guys like Funzio had their revenue take off on Apple, we were lagging behind. I do think Digital Chocolate's going to do a much better job; it already is doing a better job on the mobile side this year, but it's just late. I can't really say a lot more about Digital Chocolate. I didn't think that's what you wanted to talk about.

I think the console business is going to continue to shrink. It'd be like looking at the aircraft industry in 1920 or 1930 and saying, "What's going to be the ratio between privately-owned aircraft and passenger commercial aircraft?" Obviously in the first couple of decades of flying it was all personally owned aircraft, and you couldn't be in a plane unless you knew how to fly one. It's a little bit like the hard-core console gamers. The same thing with cars; the first couple of decades with cars you had to know how to crank the thing on the front end, know how to drive a stick-shift and do your own repairs. You just get to a certain point with technologies where the mass-market wants things to be much more turnkey and convenient.

Even the hard-core gamer now, many of them prefer the social value of playing casual games that are on social platforms. They also prefer the convenience of cloud-based games where they don't have to be locked into one machine where they did the download or the install. They prefer short sessions. That's where Zynga's customer base has come from. I think Zynga probably has 1 million of their 250 million customers that generate most of the revenue, and those are the customers that have migrated over, that used to play Grand Theft Auto for $100 in their basement, and now they're spending $1000 in Mafia Wars and Zynga Poker.

And that migration is going to continue, I think there's going to be a pretty healthy supply of these migrating gamers, and I've started to refer to them as dolphins, because they're basically behaving like whales except they're doing it in casual/social games. If you think about the difference between a dolphin and a whale, a dolphin is sleek and agile and very social and playful, and those are all characteristics of these kind of gamers.

That's really key, because in all of these games a very high percentage of players will always only play for free, and in really high-volume games there will be a little bit of ad revenue, but the most important core skill that the industry has to improve is how to get gaming time to go deeper into integration with a virtual goods economy, and how to use good principles of merchandising and promotion in that economy, and get customers excited about spending more money.

I honestly believe that the customers that spend a lot of money on virtual goods are very satisfied customers, because they're basically king of the world. There are consumers today who will go out and spend more money to upgrade their car to a luxury model that will cost an extra $20,000 and they may still feel like a loser even with the hot car. Somebody who's even spending as little as a thousand dollars in a game is going to get an incredible dominant feeling about how well they're doing in that game. Socially, people want to drive luxury cars, and they want to have other status elements to improve their social opportunities.

Here's what's different. In the old days, to get your product discovered you had to get it into Walmart and get it in the front of the store and that required distribution leverage, which you get from financial leverage, and scale, and brands. You could have a mediocre game, but if it got in the front of Walmart with a brand name on it, it was going to sell. It would be too late for the customer to get their money back once they find out it was mediocre, and the industry cranked out a lot of mediocre branded games.

If you look at it now, this is a free-to-play model. If you look at how YouTube grew, YouTube didn't have any brands, and it was crummy video because they kept it in the browser. But the convenience of the browser, not needing to install a video player, not needing to freak anybody out about doing an install that might be spyware, the convenience of just distributing links through MySpace, Facebook, instant messaging and tweets was key. As consumers now, we click on YouTube links all the time without even thinking about it and we're satisfied with the video quality.

So to me that's an example of this trend line, where consumption of game activity is going to move in that YouTube direction. Just like with movies, you will occasionally actually go out to an actual movie theater and get that full-screen experience. But by and large, we are now consuming the vast majority of our video minutes in our offices or on our mobile devices or in our homes. We're not doing it in a movie theater where the fidelity and the quality and the immersion are so much better. When you look at the fact that these things are free-to-play, and they're easy to distribute, then basically everybody's going to have a shot at trying everything, and the cream is going to have to rise to the top.

The definition of cream is going to typically be the products that are good at engaging customers, and have a healthy virtual goods economy that motivates players to spend money. If you only have one or the other of those two things, it's like a table with only one leg - it's not going to stand up. I think the industry's gotten much better at the first one, the engagement question, what it takes to get people through a tutorial, what it takes to get them to return, what it takes to get them motivated to play because they're having fun and they're making progress.

There are more games doing that, but there are still very few of them that have compelling economies that really motivate a lot of spending. They're still in the minority there. It's as if the industry needs an institute on how to develop the science of virtual goods economies. I actually think that well over half of the success stories out there were really just good choices about a game theme that helped them back into that success, or a certain amount of serendipity. I don't know that there are that many people and that many examples that are really great scientific designs that are virtual goods economies.

That's a fair statement. Your typical game designer, they know how to make something that looks good and animates well, and for well over 20 years now having better 3D graphics was the mantra and everybody focused on that, and your project leaders had to be really good at understanding that. The thing about a 3D engine and a game scene using a 3D engine is that anybody can look at it and instantly tell if it's good or bad. You can tell what the framerate is, you can tell the quality of the models and the texture maps and the lighting and the shading, you can quickly figure out if the user interface and the controls are good, and you can quickly figure out if the collision detection is any good.

Not so with a virtual goods economy. Most game designers have never really spent much time thinking about it. There's not really a keen understanding yet of how you integrate conventional game design with thinking about virtual goods economies. Those two are going to have to get really integrated together to make really successful games.

There's a lot of opportunity to make it more like fantasy sports on the Internet. There's an enormous audience that has endless entertainment value looking at baseball stats and football stats and trying to figure out if this guy's going to help them a little bit on this stat but hurt them on that stat; a lot of players represent archetypes that are very similar. They have subtle differences and fans want to argue about which one's superior until the cows come home. To me that's a successful example where there's plenty of minutiae available that in fact heightens the emotional interest and the commitment that consumers have to virtual goods. The flaw in fantasy sports is that they're not selling the virtual goods.

It's evidence that you can get an enormous audience of tens of millions of fans that play every year, year in, year out, and get them caught up in virtual goods which are really statistically based, and that obviously shows that it's possible to do it in a fictional brand using the same elements.

That's right. I talked about that migration - probably a lot of hardcore gamers grew up on Madden Football. Today they may still play Madden, but now a certain amount of their time has shifted over to fantasy football leagues on the Internet. They're the hardcore guys, the ones who started the league and then invited a bunch of friends in that are casual players that didn't play Madden, or maybe they played it more briefly when they were much younger, but they're football fans and they want to join the fantasy league because of the social context. Those kind of casual players aren't really all that caught up in how they're going to perform, they don't mind losing, and they don't mind their hardcore friend winning more often because he puts much more time into it. That kind of game design can work really well; you have your casual players and your dolphins and whales that are spending a lot of money, and everybody ends up happy.

That's the thing that the industry categorically must improve. It's real simple. The cost of discovery, acquiring new customers, has gone up across the board. If you went back to 2009, discovery on Facebook was basically free. When the App Store first launched, before it got cluttered with a million apps, it was easy to have a good application get discovered. The same thing applies to Android, and the same thing applies to the browser.

But nowadays all of these platforms are so cluttered with all this stuff that you've got to have the stuff you're trying to drive traffic to with marketing be healthy enough in terms of monetization that it can recoup the marketing. And that just totally changes the hurdle of what these games need to accomplish from a game design standpoint on the monetization side. You can't just think about 'Oh, the game is fun, great' or 'Oh, the game retains' - that's not sufficient.

That's right. Honestly, an area of costs that is a real challenge for the industry is server overhead. A lot of game companies are fairly small, they're not going to be able to run their own cloud service, they're going to need to go to a third party, and those costs turn out to be shockingly high. It's a matter of discipline and skill to try and design games that are more efficient at it, but if you have a game that has a lot of free players or you have a game that has a low monetization rate those costs can really eat you up. That's a significant change to the business model.

No question, it would be tablets. I think tablets are the perfect storm, because you've got a big screen, and you don't have to worry about battery life, because you're going to probably be using it in places where you're close to a wall outlet. You've got a bigger form factor, so things like heat dissipation are less of a concern. You're in a position where you can put more performance in a tablet. You can run a full browser and really have full access to the World Wide Web, because you can run all of the de facto standards including Flash, if you want, and then you've essentially got a replacement for the laptop, the replacement for the handheld game machines, and a bigger, beefier big brother to smartphones.

I think you're going to see a lot of consumers, like they do on the PC right now, where they're using all their social channels on a tablet, they're doing their email, their social networking, their instant messaging, etc., and then they're also using a browser, and then it just supports the model of the browser being a very convenient way to try new things. If you have a tablet, you can go to a higher performance level with anything you like by downloading and installing a native app that squeezes more performance out of that tablet. It just feels like the tablets in the next four or five years, you're going to get to a billion tablets, it's going to be the fastest-growing device in history, and it's being used by every segment of the population. You already have not just gamers using it, but of course men who are not gamers use it, and women use it, and kids use it, and everybody likes tablets and everybody has started to consume content and spend money. So that just looks like it's going to be an enormous, enormous market.