Game Developers' New Covenant

During the past few months I've met with colleagues at various conferences and one topic that continually pops up is the current state of game development. On one side is the happy crowd; these are the guys who either work with large studios on large blockbusters (Call of Duty, WoW, etc.) or who run very successful game startups or established free-to-play studios. This group is content with the current state of the industry as they have a built in audience and the capital to do pretty much whatever they want. However, on the other side there are the guys who have become bitter or jaded about the industry because they have either had their companies shut down or downsized due to decreases in investment.

While video game revenue has increased overall in the past few years, with player growth expanding to hundreds of millions of players across multiple platforms, the revenues for retail games (console, boxed product) has actually decreased. With the player base growing it doesn't make sense for that revenue to be decreasing, but many of these consumers are getting their gaming fix for free thanks to new platforms and business models.

In the past it was the norm to develop a game over the course of a couple of years, and it still is for the largest game franchises. However, the average game studio can't survive doing that in this environment. On average, hundreds of new games are released everyday on all platforms (PC, mobile, web, console, etc.) - way up from single digit numbers 10 years ago. We'll always have blockbuster titles such as Battlefield, Call Of Duty and BioShock that have hundreds of millions in developer budget and marketing, and long development cycles, but most of the money in the industry will come from smaller titles. Development will shift toward a service model equivalent to TV sitcoms and low budget/high return of investment movie series like "SAW." 

"Ten years ago our work as game developers stopped as soon as a game went to retail. Now you essentially need to form a marriage with gamers"

Just like with TV production, when the first version of an online game launches (excluding retail/boxed/console games) most of the time it's not even close to being polished to the level expected from a $30-60 retail game. It isn't until you receive initial feedback from users that developers decide a project's fate. Once they have this feedback, it can be used to modify and fine tune the game based on data received from the game's vital stats. While there are a lot of statistics you can use to decide the fate of your game, in the end all that matters are just two metrics: your retention rate and your average revenue per user (ARPU). Retention rate tells you how good a game actually is. If players are leaving a game shortly after joining, then the game sucks. It could be that the design isn't the best and doesn't resonate with players or maybe you're not targeting the game to the right audience. You can't satisfy everybody, but you can find a niche and provide a solid playing experience for those players. In addition, it makes no sense to continue operating a game if the ARPU is low. One way or another you have to make money - after all, we're operating a business. Arguably there are different ways to increase ARPU and some are considered to be more favorable to players than others, but doing this part wrong will affect retention rate.

While it is not the best way to make games, there's a very valid business practice to just survive when your game is not addictive enough and not very well monetized. If the life time value (LTV) of a game's player base is higher than the cost of bringing in new players and supporting live operation teams, you can survive and prosper by just grinding through as many users as you can. It works by acquiring new users through marketing and advertisement, burning through them and then moving to the next batch. We've seen this work with some large retail titles and some large social games on Facebook and other platforms. This is not the ideal strategy if you want to keep your game going for a longer period of time, but it's something that can be considered if you have access to a really large marketing budget or low cost access to a huge audience.

The New Age of Development

Ten years ago our work as game developers stopped as soon as a game went to retail. Now you essentially need to form a marriage with gamers by respecting customers, having customers respect you and by both compromising on things because so much content is created post launch or when beta starts. I'll say this is totally new and sometimes really hard to master. If you're smart and put lots of data mining capabilities into your title, then every day you'll have direct access to the real time data that tells you what your users feel about the game... Not what they say on forums or websites, but what they really think and how they react to any of the changes. Are more players playing per day? Do they stay in a game for longer periods of time? Do they spend more money on in-game transactions, and so on.

"The truth is that our industry has changed. Players are no longer a unified group of 13-20 year-old males. Now is the time to explore new resources, platforms and audiences"

Some of you may ask "so you basically are saying that the only way to survive in the industry is to learn how to make free-to-play games filled with microtransactions and burning through users?" Nope, this is not what I'm saying. Free to play is just a business model that allows users to try a game for free. By doing this you eliminate the entry barrier and make it easier for new players to try your game. It still needs to be a good game for them to actually stay. You can also charge for the game and as a result get a much more dedicated and engaged audience even though it'll be much smaller. Can it work? One of the games I produced, Infestation: Survivor Stories (formerly The WarZ), showed that this is a valid way to go. Even though the game has been and still is a paid game, it has attracted around one million users and maintains a steady user retention rate. We understand that if we'd released it as a free-to-play game, we'd probably have around 3-5 million users, but we'd likely drown in growing issues since we are a small company.

There's no one answer to which business model is better because you must decide what's right for your resources as a team and what works best with your audience. Minecraft became a massive success by being a paid game. World of Warcraft is still ranking as the number one western MMO in terms of gross revenues per year, yet this is a paid game with a mandatory subscription fee. On the other hand, free-to-play games World of Tanks and League of Legends are both rumored to be earning more than $600 million each and every year.

The truth is that our industry has changed. Players are no longer a unified group of 13-20 year-old males. Now is the time to explore new resources, platforms and audiences to create games you want to make while letting players decide if they enjoy those creations.

It's a new development scene where we can create things and deliver them directly to customers. It's a little scary to let players have so much power in deciding our fate as development studios without the promise of an initial monetary investment from players, but we can embrace this and just try to make the best games possible.  

Sergey Titov is CEO of Arktos Entertainment Group, a private company providing investment capital as well as technology platforms for companies in the video games industry. Sergey is a passionate game developer and entrepreneur, combining work on his own titles with investments into independent studios.