O Publisher, Where Art Thou?

The Brain Drain

The strongest and smartest advocates for Facebook among publishers are aggressively pursuing this opportunity as we speak, creating huge value in the space. They just aren’t pursuing it at the behest of the traditional publishers. Companies like Zynga, Playdom and RockYou! are able to woo smart and ambitious individuals by offering some very enticing things including:

• Significant equity (with potential upside!)
• Accountability AND responsibility (imagine that)
• Ability to focus efforts on the external opportunity versus on the internal bureaucracy
• Opportunity to shape an organisation versus be shaped by one

The people that are leaving the traditional game publishers to pursue these new opportunities are precisely the people these publishers would otherwise need to recognise and capitalise on these opportunities. The exodus of even one key person can severely impair an organisation’s ability to act and this continues to happen across our industry.

Organisational Momentum (or lack thereof)

In the amount of time it takes to sign a traditional game development deal (6-9 months), an effective online team can develop and launch 2-3 new games on Facebook. In that same timeframe, FarmVille went from not existing to having more active users than Twitter. In a world with Facebook, publishers take far too long to make decisions and far, far too long to move to action once a decision is made.

Organisational delay is inherent to most large organisations, even the most successful ones, and I’m not solely singling out game publishers for this. In our industry, however, the negative consequences of this delay are exacerbated due the supersonic rate of change on Facebook and other online and mobile platforms. Moving to action typically requires the consent of multiple stakeholders across multiple areas with often competing priorities and incentives. It can take a lot of time and effort to run the approval gauntlet and a positive outcome is far from guaranteed. In many cases, the champions of a new opportunity make a rational individual decision that the personal effort and political capital required to attempt to push something through just isn’t worth it. I am sure this has been the cause of death for many Facebook initiatives over the past year or two.

In addition to the typical organisational delay, Facebook poses an additional challenge in that it is not necessarily clear what internal group should own this platform. Facebook does not fit neatly into the traditional categories our industry has been built on. Is Facebook "casual" gaming, "online" gaming, "social" gaming, "mass market" gaming, "family" gaming or deserving of a new category all-together? By not clearly fitting into an existing organisational structure, delay has only been increased as internal turf battles have played themselves out for the rights to own this new space.

The DDIY (Don’t Do It Yourself) Mentality

Why build when you can buy? EA recently acknowledged the value of Facebook and their own internal shortcomings in this area when they purchased Playfish for $300m plus a $100m earn out. By the end of 2010 you will see more deals like this as publishers scramble to gain a foothold on Facebook and other mobile and online platforms. Under the circumstances, these may be viewed as "good deals" for the publishers, but one has to ask why they have to pay such premiums for capabilities they should have been able to build internally and for a fraction of the expense.

Let’s get back to the Playfish acquisition. I think EA overpaid, but I don’t take the position that this was a bad deal for EA. EA gains instant access to 52 million MAU, Playfish’s rumored $50m annual revenue and a Facebook developer that will be able to bring EA’s gaming brands to millions of players on this platform. EA stands a good chance of getting a decent return on this investment. This return, however, pales in comparison to the return they could have gotten if they had invested a modest amount in Facebook (less than the $21m in funding Playfish secured prior to being acquired) and built their own capabilities. The bottom line is that they, as well as every other publisher, have been unsuccessful creating these capabilities internally and are now forced to pay premiums to acquire these teams. Even then, history would suggest that these publishers stand a good change of destroying the very capabilities they pay top dollar for.

Time to Wrap it Up…

Undoubtedly one can find more reasons to explain why the traditional game publishers are late to the Facebook party and the specifics vary from publisher to publisher. I have no doubt that by the end of this year, every publisher will be bringing its major gaming IPs to Facebook and other online and mobile platforms. They may be able to buy their way into the competition, but their inaction to-date has allowed a new class of competitors to gain a substantial foothold in the gaming industry and they will continue to be a force to be reckoned with. It’ll be fun to see it all play out…but in this race I think the hares are going to make a whole bunch of money before the tortoises catch, or more likely buy them.