Establishing a Perimeter

Well, that is definitely a problem area, it's not unique to the game industry. There's a school of thought... a great book was written called the Innovator's Dilemma. I'll sort of paraphrase or summarise it.

The things that you do to succeed today are the things that prevent you from succeeding tomorrow. Because the environment, the context, the rules of the game today, become so optimised - in everything you do, the policies you have, the people you hire and train, the tools that you have - are so optimised for today that when there's a disruption in the marketplace, or some technology innovation occurs and things start to shift, you're so optimised to today's rules that you don't even see or fathom how you can make the jump to the new rules.

So this is exactly what's happened to many of the companies which are optimised to delivering games as products. Re-orienting their entire business, abandoning, in some cases, billions of dollars of revenue, to switch to a different source, way of advertising or reaching consumers... It's such a massive shift that it's going to be hard to make.

Surprisingly, I would say that it's been EA that's been the most aggressive in terms of exploring online casual, social, mobile. The purchase of Playfish, some of the experiments that they have done with free-to-play models in Korea. Are they going to make the shift intact and successfully? It's hard to say. If I was going to look at the handful of the big dinosaurs, let's call them, EA really seems to be the one that's experimenting, and dabbling, that realises that this shift is occurring.

Otherwise, when you talk to Activision, or the others, it's more like "we knew all along it was coming, we've made a companion Facebook game to help promote our big release, but we're still in the business of putting a AAA blockbuster game in a box and selling it for hundreds of millions of dollars."

I think Bobby Kotick has gone on record as saying "hey man, you can't tell me that Call of Duty is a dying business model." So that's the innovator's dilemma - they're so optimised and attuned to collecting these billions of dollars on that set of rules that for them to make the jump is very difficult. Even if, within the company, certain people, who are all very smart and talented, identify these issues - steering the big ship and changing the direction is a very difficult thing to do when you have so much time and resource behind doing things a certain way.

Actually, what happens in most industries when this sort of disruption occurs is that the new big companies end up being start-ups, that aren't encumbered by the rules and resources and paradigms from previous models. That's why you see ngmoco succeeding, that's why you see Zynga succeeding. They weren't product companies that shifted to service, these are companies that started off seeing the new way. Again, that's not unique to the game industry. You can go through business history and that's generally the way that business industries operate.

Well, part of the challenge is often that there is so much noise in terms of the new things that are coming up, that a successful business on the current paradigm only gets that noise. Are we going to gamble this billion dollar business on social or mobile, or accessible interfaces, guitars, styluses, Wiimotes, cameras? What's the thing we're going to shift to?

So what they do is say, "well, let's continue collecting the billion dollars, we'll see what shakes out." Because they don't make that jump, because of all that uncertainty, the start-ups say, screw that, let's take this opportunity.

Some of them fail, some of them go nowhere, but some of them do well. There's always competition, evolution, trial and error. At some point, one of the things that sticks is up at that billion dollar mark.

It's hard to say. I think that a lot of the major players are trying to keep their business intact by controlling the retail channel. How many billions of dollars have been generated by mastering the pipeline from product going out to the Walmarts of the world and reaching the consumer. Managing that channel. That's really where the packaged goods, games as products model comes from.

Again it speaks to the question of being so optimised to succeeding under those rules. It's less about, "hey man, don't innovate", it's more about, "how do I keep that business going?" It's more the natural consequence of the economics of that model that limits your ability to innovate. To succeed in that model you have to generate blockbusters. To generate blockbusters you have to have $50-$100 million in development, one to four times that in marketing...

These are massive bets that these companies are taking. So rather than giving the money to you, with your crazy idea, it's about saying, "Call of Duty did good, let's make the next one". That's why you get risk aversion, not because they're sitting there saying, "we need to lock down innovation, or else". It's more that there's just no room to innovate within the economic factors in play. It's more of a natural consequence.