Why Episodic is Broken

Epic Games VP Mark Rein is no stranger to controversy. Outspoken and honest, his statements always make for good headlines - and carry significant weight, given the huge success of the Unreal franchise and the increasing domination of the Unreal Engine in the middleware space.

A the Develop conference in Brighton this week, Rein courted controversy once again in his keynote - most notably with an attack on the emerging business model for episodic gaming, which calls for games to be sold in smaller, discrete chunks, often over digital distribution services.

Despite the enthusiasm within the business for this model, Rein doesn't believe that it works - and he wasn't shy about saying so, in a widely reported segment of his speech which laid out his reasoning for why episodic content is not the future for our industry.

Here we present the full transcript of the segment of Rein's presentation where he discussed episodic content - including his response to contributions from the audience. Is Rein injecting much-needed business logic into an overhyped and unproven idea - or is he really a dinosaur, as one of the audience accused? Read his speech and make up your own mind...

Epic Games VP - Mark Rein

"We see a lot of developers coming to us and saying, "my business model is that I'm going to make a little bit of my game and then I'm going to sell it online through digital distribution, and then I'm going to have the money to make a little bit more, and a little bit more..." I'm like, are you insane!?

"I think there's a lot of talk about this right now, but very little actual success in this area. I honestly think it's a broken business model, and I'm going to lay out a small case for that.

"One of the problems is that you're getting a piece of a game. We've seen a couple of games out there at this $20 price point, so I'm going to use that as an example. You're paying $20 for a third of a game, you're waiting six months between episodes... I mean, that's a long time. When you're watching a TV show, it's not a big deal to wait a week between episodes - because you're not paying for it. It's advertiser supported, someone else is doing that, and you understand that that's how the money works.

"But with a videogame, I find that every time I put a game down for a period of time, I want to try a new game after that. I think that franchise fatigue will set into these episodic games much sooner if they don't shorten the time between episodes.

"The problem is that if you try to shorten the time between those episodes, you're going to get a lot of recycled content. It takes a long time to get a game that looks as good as Gears of War, where each level probably has a couple of man-years of development in it - so it's not feasible to put a level out every other week. It just doesn't work that way, let alone five or six levels every other week. So what you're going to see is a lot of recycled content, walking through the same environment you walked through in the previous episode, shooting the same weapons and the same enemies - and that's a lot different from buying a large scale game, where you're going to get something different.

"You're also competing for customers' attention with blockbuster titles that have huge marketing budgets. It's pretty hard to justify a huge marketing budget on a game you're going to sell for $20.

"So contrast that to a boxed game - it's entirely new content, characters and environments, storylines you probably haven't experienced before. The developers potentially spent years developing it, it has - hopefully - a cohesive start, middle and end, a complete story... And you're only paying maybe two to three times as much.

"The games industry is already doing episodic content. We've had it for years - Madden, Mario, Unreal, Grand Theft Auto, Final Fantasy, Warcraft... These are all games that are sold to you episodically. They do very well, and they make huge amounts of money, because the publishers can justify putting the marketing behind them - and as I said earlier, it's difficult to justify a marketing spend on a game with a potentially small audience.

"Distribution without marketing is worthless. Whenever people come and tell us, "oh, we're going to be on this service, or that service, these guys are going to put our game here, or do this and that..." It doesn't matter! That's not a business model, it's just a distribution methodology. How are they going to market the game? How are people going to find out about it? How are you going to sell a million copies of this title?

"It's the same in retail. How are you going to justify buying ads for a circular, when the wholesale price of your game is $13 or $14? The economics are very upside-down on that. Don't get me wrong - I would love to see games sell for $20 and sell 15 million copies, more like the DVD model, but I just don't think that's going to happen in our lifetime.

"What I'd like to say is - what works for Half-Life, might not work for you. I mean, this is a franchise that sold six to seven million copies, had a huge marketing budget... Everyone knows it, it gets on the cover of every magazine it wants to be on. If there were ten games competing for that space, Half-Life would always win. You won't even come close.

"So therefore, this is not a way to get around publishers; you still need publishers. They're not evil - they provide you with the marketing and the money to let you make a really good game.

"A lot of people will argue and say, "but TV works that way!" Well, TV doesn't really work that way. What happens with television is that you have a first run showing of a TV series, then it could go to DVD, it could go to downloadable, things like iPod; it could go to pay-per-view, it can go to airlines, and then goes into syndication, where it's just reshuffled again a few years later. They have lots of opportunities to make their money back over and over and over again - and their technology doesn't get as stale as game technology does.

"The same with movies - they start in theatres, then they go to pay-per-view, then to DVDs, then iPod... Etcetera, etcetera, etcetera. These guys have the ability to build something that's a little bit smaller - well, movies do have big budgets, but the point is that the market for that kind of episodic content is pretty clear, and they have the opportunity to leverage that much more than you ever can with a game.

"With a game, we go from a console game to a budget console game - but budget console games don't get a lot of marketing, and the margins on them are extremely small. Then of course, there's used and rental - which most developers make dick on. Then for PC there's things like GameTap, and on console there's the potential to sell on places like Xbox Live Marketplace. Again, you're going to be competing with big properties that people really care about, and you're going to find that the financial models of these are not going to make you a lot of money.

"Franchise fatigue means diminishing returns, and that means that the longer you play up your episodes, the fewer you're going to sell. That's just the way it works, and television is the perfect model for that. You start off a new show, and it can start off really high - or start off low and build high in its first season - and what happens? Every show eventually goes off the air. Why? Because the viewership declines. That's the model - that's a diminishing returns model.

"The same thing happens with games that are sold in this economic model. You will probably not sell - again, somebody will prove me wrong on this, but you probably won't sell more of your third than you did of your first episode. There will be fatigue, especially if it goes out over a long time.

"Like I said earlier, don't get me wrong - I would love to see games sold for less money, and I'd really like to know - is anybody trying this? Anybody in the audience? Feel free to argue on this..."

Audience Member:
"Mark, you're out to lunch on this. There's not enough data to really support any of your conclusions, and I think that you're like a dinosaur - looking at the old way that games are made and published and distributed, and trying to fit it into a future potential model. You're wrong."

Mark Rein: "Okay, I take that - I could be completely wrong on this. But I doubt it very much, because the television model is diminishing returns, it's paid for by advertisers, and it's free. HBO costs $12, and you get how many series on HBO? How are you going to make money on this at $20? The marketplace certainly isn't expanding for this kind of content, right? I mean, Microsoft and Sony are going to take a big chunk of this, and you're going to be competing against big, blockbuster games."

Audience Member:
"Maybe the audience of Unreal is not going to purchase this, but the marketplace for games is much bigger than the players of Unreal..."

Mark Rein: "Oh yeah, there's casual games that people buy for four or five bucks, right? You're right - I'm applying this to the majority of us today, who are making our living making console games or PC games. You're right, and I'm prepared to be proven wrong on this, but I'm sure time will tell..."

Audience Member:
"You're comparing this to very traditional games, but it is opening up to a much bigger market in casual gamers. I'm a big fan of SingStar, and this is very much episodic content that they can bring out constantly - and the technology doesn't need to move on that much. People are buying it, all the content is there, and that is very much episodic content - why is this any less of a game, when frankly, I'd probably be playing it more often than something like Unreal?"

Mark Rein: "But SingStar, today - and I know they are doing a model where they'll sell you the songs online, which I think is brilliant - SingStar today is no more episodic than any other sequelised game is. They've taken the game and they've made a bunch of sequels for it - the sequels happen to come with different packs of music.

"I think that's the way we have been doing episodic games, and I think that has proven to be successful - but I don't really see that as the same kind of thing as, "let's take our game and cut it up into small little bits." I think SingStar is just additional content for an existing game, just sold over and over again - the same as mission packs. We've been doing mission packs for years and they've been relatively successful, but there are diminishing returns. People who do mission packs will tell you that they will never sell as many mission packs as they sold of the original game, and eventually they become uneconomical.

"So, SingStar might be the kind of thing that proves me wrong - certainly, we've got an opportunity down the road with Xbox Live Arcade and Sony's new venture, to sell additional content that way. But what steers this, and what brings this topic to the forefront for me, is the number of people who have come to me looking to license technology and betting their business that this is something they're going to be able to do today - that they can sell these games online and make serious money from it. I think that's a very, very scary proposition."

Audience Member:
"I agree with you in the sense that if you're thinking of episode content as taking Unreal or Gears of War, chopping it into three and then parcelling it out over three six month timeframes - yeah, that's not going to work. I think that where your brain is locked is that you can't see that episodic content, online distribution... These are going to represent new opportunities for different kinds of games, different types of play - different audiences that aren't necessarily being addressed by these, you know, 400k units on different platforms through retail... Taking the existing stereotype of what the industry produces and saying, "let's make that episodic," is probably not going to work - but episodic is much more diverse and different than that very narrow definition."

Mark Rein: "I'm talking to an audience of people who develop traditional games - and sure, there might be other avenues, but the problem is going to be the marketing dollars, the marketing spend. Getting people to find out about those games, that's going to be really hard."

Audience Member:
"I see you as a middleware company, and therefore you want to sell to triple-A games - that are going to sell at $50 or $60. So you don't want developers coming to you saying, "we want to build a small game...""

Mark Rein: "Whoa, wait, wait - hang on. Just to let you know, we have a business model that works on a very, very small up-front, and a percentage of revenue share. We have a perfectly good business model for people who want to attack this marketplace, and we've done quite a few deals already for these kinds of things. So this isn't just my own vested interest - I'm just worried that the amount of revenue there is to share will be tiny!"