How Gaming’s Upstarts Stay Ahead in a Changing Market

Regardless of the latest Halo hype, an army of entrepreneurs is looking to dominate the video-game industry. Some leading startups share their tips for surviving any high-tech market reinvention.

Shipping this week, Microsoft’s Halo: Grab Xbox 360 and Sony’s motion-sensing PlayStation Move will be the talk of the $20.2 billion gaming industry. Both mark the beginning of the all-important holiday retail season, however the excitement belies the churn in a business being transformed by scrappy new technologies, platforms and entrepreneurs.

"We’re exceptional most change in the shortest period of time that the gaming business has ever seen," says Trip Hawkins, founder of publishing juggernaut Electronic Arts. "Things won’t be the same again."

Credit an ideal storm of socioeconomic factors from tightened household spending to changing play habits and the growth of cellular devices. The iPhone Store and other alternative distribution channels are allowing a large number of independents to slash costs, test out innovative concepts and do an end-run around traditional publishing models. Subsequently, a field weaned on blockbuster products and brick-and-mortar distribution is watching its once-captive audience fragment across devices and platforms.

But a sector awash in opportunity can be suffocating under a tidal wave of competition and oversaturation. Days gone by 2 yrs haven’t just accelerated the field’s typical boom and bust cycle, they’ve also turn into a textbook study in market disruption, with average prices plummeting, product visibility shrinking and standard retail lifecycles dwindling over the board. Interestingly, industry employment is growing roughly 9 percent annually since 2005, attracting a lot more than $2.9 billion in wages, while layoffs continue steadily to rock Activision, THQ and other established, large-scale players.

Credit the rise of gaming entrepreneurs. While giving high-flying corporate execs migraines, this environment can be birthing the best explosion in entrepreneurialism since gaming’s garage days. The lessons to be learned could apply across a variety of industries suffering from changing technologies, that’s, nearly every industry.

"Big-budget production models are failing and barriers to entry are less than ever," says Wanda Meloni of M2 Research, an Encinitas, Calif.-based general market trends firm focusing on digital entertainment. "The opportunities haven’t been better for small independents."

Still, the business enterprise is hardly fun and games. This is a consider the top trends, how they’re transforming the field and what must be done to survive within an industry whose future is suddenly in play.

Social Games: Marketing something as a Service An astounding 200 million social networking users now play casual games like FarmVille and Pet Society monthly, which draw audiences numbering in the tens of millions. It’s a sobering wake-up call when compared to previous benchmark for breakout industry success, online fantasy universe Wow, which boasts 11.5 million subscribers. Because of their low system requirements, familiar concepts and overall user-friendliness, these popular titles are single-handedly assisting to grow the gaming market. But despite presenting massive opportunities, challenges for smaller businesses operating in the area are also considerable. Dozens are released daily, brand loyalty is minimal and user turnover is massive. However, it hasn’t stopped San Francisco-based Booyah’s leading Facebook title, Nightclub City, from reaching 8 million active users.

"With free products, what you’re really building are real-time subscription models," says CEO Keith Lee, whose games cost nothing to play, but generate thousands through the sale of virtual goods. "Instead of pricing to create levels, by offering content at tiered pricing structures, you optimize revenue per user by effectively letting people spend what they need." Also imperative with "freemium" goods — free products that upcharge for optional upgrades on the back-end — is designing every user action with monetization at heart right from the start. Don’t overspend on marketing and PR in the digital era either, Lee recommends. Buying product features offering compelling reasons to talk about your creations with friends (e.g. to tackle group problems, compete for high scores or just exchange eye-catching photos) can generate literally 1,000 to 5,000 percent more trials.

In the years ahead, Lee says, it can help to think of worthwhile you offer as something, rather than as something, and recognize the worthiness of establishing long-term relationships with customers. As such, offerings should be supported post-launch with additional content add-ons, community initiatives and aggressive customer acquisition and retention tactics. For Facebook games, this implies experiencing the social network’s capability to simultaneously and rapidly update this program for each user, unlike traditional games, which depend on a short launch and subsequent intermittent patches or upgrades. Because software makers can track who’s simply clicking what and how often, and source real-time fan feedback, it literally pays to hear your visitors, adapting features and pricing as the marketplace dictates. Because of this, companies like Booyah regularly support titles such as for example My Town with new expansions, product enhancements and limited-time sales promotions made to keep new and existing players alike happy and engaged.

Instead of go all-out about the same release, Lee further advocates that high-tech entrepreneurs adopt the very least viable product strategy when managing their portfolios. Ship products with sufficient features to attract a crowd, he says, iterate rapidly, and do not hesitate to abandon offerings that don’t garner an instantaneous response. "You’ll know in the first fourteen days if a product is prosperous," he says. "If not, there is no point in keeping it on life support."

Hawkins’s own San Mateo, Calif., startup, Digital Chocolate, learned the hard way, by discovering the cellular phone games it initially specialized in — like 3-D puzzler Tower Bloxx — didn’t translate well to Facebook. "The trick to success today is to create brands that transcend platforms," he says. "Nevertheless, you also need to play to each distribution channel’s strengths." To attain the social network’s less tech-savvy audience, this meant making original games like Millionaire City and MMA Pro Fighter understandable instantly, intrinsically created for multiplayer, and accessible with an individual click. In-game events of note also needed to be easily shareable via social media, so friends will make others aware that these were seeking aid or competition.

As the business is illustrating with releases like NanoStar Castles and Safari Kingdom, when entering new markets, it’s wiser to spread risk across a variety of smaller products instead of one flagship offering. "To accomplish scalability on any new platform, you must commit to adopting guidelines," Hawkins says. "Regarding new technologies and devices, which means being able and ready to make mistakes… we’re still learning each day." Fail quickly and frequently, he says, until you get the formula down. While a seemingly counterintuitive strategy, it could pay dividends. Digital Chocolate’s games have reeled 9 million monthly players on Facebook in only six months, and today bring in a lot more than its entire mobile business.

Mobile Games: Hard Sell, Then Upsell Traditional PC, Ps3 3 and Xbox 360 games may take 2-3 years and $20 million to $30 million to build. In comparison, apps for Apple and Android handsets could be assembled in weeks for under $20,000, which is why they’ve captured a whole generation of bedroom entrepreneurs’ imaginations. Given sales of 100 million-plus iOS devices (iPhone, iPad, ipod itouch, etc.) though, producing high-quality titles with the capacity of selling in the millions isn’t the problem. With an increase of than 40,000 games available through the App Store alone, and bestseller lists really the only way to attain mass visibility, helping customers discover new software could be a tough task.

"Even Apple does not have the power to create something a hit alone platform," says Chris Ulm, CEO of Carlsbad, Calif.-based Appy Entertainment. Due to this fact, he says, it’s needed for small companies to create multiple products, seize opportunities for exposure and build methods to connect directly with customers. For Appy, it’s about creating a running dialogue with fans, which creates a robust direct marketing channel that may someday manage to self-sustaining any era. Consumer touchpoints include frequent software price drops made to attract more new users, e-mail newsletters that share breaking updates and in-game ads that regularly promote new releases. The strategy is apparently working, with games like FaceFighter! and Zombie Pizza downloaded nearly five million times.

Razor-thin margins are also a problem for app makers, Ulm says, with most successful titles distributed for free or coming in at 99 cents. "We’re training audiences to anticipate more for less," he says. To offset tightening revenues, instead of invest heavily in large-scale projects and big teams, he instead advocates the application of selective outsourcing and building less ambitious products made with incremental gains at heart. By using a core team of seven full-timers, but contracting freelance programming and art tasks out as needed, the business keeps overhead low while steadily building its technology base and refining its production pipeline with each release. "Every app we do furthers our reach with customers, grows our technology in hops and opportunities for what could possibly be profitable joint ventures," he says.

Don Traeger, who built the EA Sports label into interactive entertainment’s premier pro athletics brand before launching his latest venture, Santa Clara, Calif., developer Portable Zoo, agrees. "With games like Karuki, we purposefully released a little product then added levels, changed things and finally finished up with a big, top-notch title," he says. But tinkering with pricing can be crucial, Traeger says. "Whenever we slash costs on our apps, sales don’t just rise while the products are discounted, but also once they return to a high price, and the game’s retail lifespan lasts longer than expected."

Brian Greenstone, founder of Austin, Texas-based Pangea Software, most widely known because of its Macintosh titles ("It’s easier to be considered a big fish in a little pond"), further says that upselling existing customers could be more profitable than attracting new ones. To go units en masse through app stores, he explains, it’s imperative that you appear within a sales chart, that leads to heightened visibility and may cause sales to skyrocket. Which (Top 100 Games, Top 50 Arcade Games, etc.) doesn’t matter, Greenstone says. What does has been downloaded a lot more than 1,000 times in the first 12 hours. Standard measures like ads, pr announcements and YouTube videos aside, Pangea’s most reliable publicity tactic has simply been text announcements within its current games that let existing players know when new releases can be found. "Forget staggered marketing… drop every bomb on your own first sortie," he says, laughing.

Rightsizing one’s company can be crucial, Greenstone, the firm’s sole full-time employee, suggests. "If you are spending more than 90 days and $500 developing an app, it’s too much time and an excessive amount of," he says. "The main element is to crank out around you can." To keep costs low and participants motivated in virtually any business where success is uncertain and funds limited, he recommends contracting out work whenever we can, and offering collaborators profit-sharing plans. It’s a model that’s exercised considerably well for Pangaea, now 2 decades old, whose hit series Nanosaur cost around $200 to create and has since grossed over $1 million.

Digital Games: Slashing Overhead and Selling Direct So much for GameStop and Wal-Mart. While music, movie and television providers have a problem with the digital transition, enterprising the administrators are gleefully exploiting low distribution costs, higher margins and on-demand convenience to circumvent traditional publishing channels. According to advertise analyst The NPD Group, players are responding in record numbers, with sales of digital and retail PC games reaching near-parity in ’09 2009.

Upsides for smaller businesses are plentiful aswell. Online vendors such as for example Steam, Xbox Live Arcade and PlayStation Network don’t just give tiny independents the methods to directly interact with consumers and comfortably sell products for $5 to $20. (At odds with standard $50-$60 retail charges for full-sized games or $20-30 for smaller titles and expansion packs). In addition they eliminate the dependence on manufacturing, warehousing and shipping, and offer channels by which titles can profitably be released to smaller, more loyal fan bases, letting creators strike gold by tapping previously unsustainable niche markets.

Built from the wreckage of overambitious startup Flagship Studios (creators of the much-hyped Hellgate: London), Seattle-based newcomer Runic Games knows that less is actually more. Abandoning plans to focus on a three-year, $10 million-plus massively multiplayer online project, it instead opted release a modest fantasy dungeon hack Torchlight, built-in just 11 months for pennies on the dollar. Sold as a $20 digital download through web stores such as for example Direct2Drive.com and Runic’s own website, the single-player title — with the capacity of holding its with any retail outing — has since sold a lot more than 700,000 copies. Plans for a sequel, due in 2011, and grand-scale online version already are underway. "Simpler is way better," says co-founder Max Schaefer. "It pays to target."

Instead of tick off every box on your own feature wish-list, for teams with limited resources, empowering users to complete the blanks may also be a handy solution, Schaefer says. By supplying a free level editing toolkit that lets fans remake scenes and scenarios within their own image, Runic has were able to extend the game’s reach and longevity at little additional cost. Like a great many other gaming insiders, Schaefer also shows that traditional ways of marketing and pr are minimized in the digital era. "Pricing strategies can be extremely effective marketing tools unto themselves," he says. "Whenever we slash costs on Torchlight by half, we literally see 10,000 percent jumps in sales." Free product trials and demos are also vital, he says, citing conversation rates as high as 40 percent for one hour of two of complimentary play.

Sandlot Games, creators of casual downloadable hits like Tradewinds and Westward, uses similar strategies. But company president Daniel Bernstein also emphasizes the need for scalability and a diversified business plan. At its peak, the firm maintained 25 employees in Bothell, Wash., and 23 in Russia. However the rapid saturation of casual games downloads for desktop PCs and resulting price drops it prompted led it to cut its domestic staff in two, crank up overseas production, and dive headfirst into new markets. "Every industry undergoes boom and bust cycles," Bernstein says. "Way too many businesses fail because they scale themselves from what they think the marketplace should be rather than responding predicated on actual growth."

Having nearly succumbed to its mistakes forced the business to become more inventive also to turn to emerging platforms just like the iPhone, iPad and Facebook. In addition, it led Sandlot to identify the worthiness of licensing its brands and establishing processes for better product lifecycle management. "We’ve not merely successfully leveraged the aid of outsourced partners to market an urgent 650,000 copies of Cake Mania on Nintendo DS, a location we’d little experience in," Bernstein says. "We also learned the need for bundling, discount programs and marketing to current customers." Buying your own website and direct selling channels are also vital for just about any startup, he says, as is creating a core team and putting fixed procedures and processes set up that let you create a lasting knowledge base. However when neither works, he says, "you’ve always surely got to have an idea B prepared to cut to."

Episodic and Downloadable: Finding New Methods to Reach Customers From 3-D online worlds fueled by the purchase of small virtual goods ("microtransactions") to ad-supported, location-based amusements that exploit cell phones’ built-in GPS systems, pioneering new methods to play are emerging each day.

Consider episodic games, value-priced titles serialized into bite-sized regular installments like primetime Television shows. These games initially struggled to remove, but San Francisco-based developer Telltale Games used the cheaper, nimbler production model to resurrect supposedly "dead" classic gaming franchises like Sam & Max and Monkey Island. It is also gone from selling roughly 4,000 copies of its titles in the first month to nearly 50,000, launched its publishing program and nabbed the trunk to the near future and Jurassic Park licenses.

The trick to the seed-funded startup’s success is easy, says CEO Dan Connors. "Get products to advertise as quickly as possible, make mistakes as quickly as possible and be earning cash as soon as you ship, then utilize the income to fund the next production," he says. "Continually be attracting cash, and just be sure to own usage of your own customers too… it’ll offer you leverage in virtually any deal. That way, you can sublicense rights to partners with greater reach to benefit from their superior distribution and marketing, without quitting control of actual products themselves."

Research your options, too, he says. Knowing how big is your audience, the very best channels to attain them and what must be done to market product into these channels is imperative. Regardless of how good your company’s offerings, it will not matter if you cannot ever effectively connect to shoppers, or overspend predicated on false assumptions.

Fredrik Wester, CEO of Stockholm-based publisher Paradox Interactive, agrees wholeheartedly. Initially a little, struggling developer of strategy and wargame titles, the business hit a turning point when it started to look for methods to creatively co-finance the publishing of other game makers’ offerings. Without money in the lender, it had been forced to sublicense titles by individual territory throughout THE UNITED STATES and Europe, using partnering distributors’ payday loans (signed on the effectiveness of software prototypes) to invest in continued development.

But while these efforts sustained company growth for a while, steadily declining retail interest in games for armchair generals threatened to derail it in the center of the last decade. With shelf space dwindling, the business decided in 2006 to launch and digitally sell its titles exclusively through its retail website, prompted by an e-mail from an Argentine fan who couldn’t find its games in local shops. Initially a tragedy, Wester admits ("all we’re able to do the first weekend we launched is charge customers, not let them actually download games"), it eventually proved a sound investment.

Although it took eight months of seeding retail boxes with complementary codes for digital downloads (billed as free game backups in the event shoppers lost their CDs), users eventually came around. So did development partners, who increasingly asked to market their games through owner, resulting in the site’s eventual transformation in to the full-scale online retailer GamersGate.com. Today, a lot more than 2,200 titles are for sale to download, of which the most notable 10 sellers only generate 10 to 15 percent of revenue, underscoring the energy of long tail distribution. But more important, Wester says, in addition, it teaches a simple lesson in market dynamics.

"You will have to find new methods to reach your customer, so when these channels don’t exist, you will need to create them," he says. "Dialogue also offers to work two ways… furthermore to charting your own course, it is additionally vital to let your customers let you know what they need." Hence the firm’s later move, despite owning its online distribution service, to get its games listed on the websites of rival vendors such as for example Steam and Impulse, with the purpose of making its titles more accessible to shoppers. Mission accomplished: Today, the business enjoys premier status in a genre other publishers have all-but abandoned, with new entries in leading franchises like Hearts of Iron and Europa Universalis with the capacity of selling 200,000 copies alone.

However, much like all experts surveyed because of this story, Wester says it simply serves to underscore the brand new reality to do business in virtually any high-tech industry this year 2010. "The old rules of operating teach valuable lessons, but it’s obvious that lots of are quickly becoming outdated," he says. "To survive on today’s playing field when progress comes calling, you have to rapidly — and cost-effectively — work out how they’re best rewritten."

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