How to Manage a Post Launch Crisis

Let’s say you publish a new update that bundles together several improvements. You hit the deploy button and monitor zendesk for feedback. It slowly starts to trickle in… but its not exactly what you were hoping for.

“I DON’T LIKE THE NEW UPDATE!” someone says. “How do I revert to the previous version” someone else writes. Hmm. Could this be a vocal minority? It’s possible that the loudest customers are also the most critical of your product. But more negative feedback accumulates. It starts to manifest in the App Store. A few users even take to twitter to announce their dislike. Company executives see this and send you terse emails late at night asking you what is happening.

These situations happen more often than most product manager’s expect.

So what do you do? Do you consider it a mistake and roll it back? Do you iterate on the feature to address user feedback? Or do you stay true to your vision despite what customers are saying?

Having gone through this myself a couple times, i’d like to share a few solutions that i’ve found helpful, which i’ve packaged into an easy to remember acronym … DISWACC.

Channel the Power of DISWACC

Define the problem. The first step is to succinctly define the problem. What exactly about this update did users dislike. Did you take away a favorite feature in the spirit of simplification? Is it a confusing interface? Was there an incorrect assumption in your value hypothesis? You can gather this information by collating from all sources (eg. social, zendesk, App Store reviews) and looking for intent patterns. Another technique is to incorporate in your product a surveying tool, such as an app prompt. App prompts ask users to rate their experience on a scale of 1-5. Ratings of 3 or below ask a user to fill out a feedback form for richer explanations about his or her experience.

Next, identify who is affected. Use customer data to drill down into the profiles of those who are complaining. Again, look for patterns. Are these complaints coming from a small number of new accounts? Then investigate if you attracted a cohort of users from a new marketing initiative. This could have been unrelated to your product launch. Are these complaints originating from a new accounts with no other reviews attached? It could be a smear campaign initiated by a competitor. This is rare and pretty unethical, but it’s been known to happen in competitive industries. Unpacking these details should reveal whether issues are troll or legitimate complaint. I’ve conducted similar analysis in the past which revealed that many complainants did not align with our core mission. This prompted discussion which led to the decision that it was ok to to lose certain types of customers. We didn’t want to spread our focus thin building a product for everyone, which would have ended up mediocre. We preferred to build something for a smaller group of people that was amazing.

Understand the severity of the issue. If a nontrivial number of customers have been affected, then what is the severity of the issue? Identify if it caused a drop in metrics such as retention or engagement with a core feature. It’s important to learn if the quantitative story supports the qualitative story. A cohort analysis tends to be more beneficial in this step. Worst case: metrics decrease in line with the qualitative feedback. This may prompt a reconsideration on the benefits of this release. More likely case: metrics improve despite qualitative feedback. It may just be a matter of allowing more time pass so users can acclimate to changes.

With the analysis done, you’ll soon need to make a decision. In this step it is important to widen your decision set. Avoid defaulting to extremes, such rolling back the version or blindly sticking to your conviction. It helps to have a wide lens as you brainstorm alternative solutions. Is it possible to come up with a solution that gives you the best of both worlds? In the past, I’ve launched a recommendation feature that appeared to have a flat metrics impact. But further analysis revealed more nuanced findings. There was a pronounced lift in one group, and a sharp decline in another group. This caused the topline impact to look flat because it was averaged across groups. We figured out a way to personalize the experience. One segment was shown the old recommendation, while the other segment was shown the new recommendation. This led to both improved user experience as well as metrics impact.

Attain distance. If personalization is not an option then get some distance. Think about what would be the best decision 10 months or even 10 years from now. Is there an option that would be best for the user over the long term?

Compare alternatives. A best practice within gaming product management is to run expected outcome models for all new features. If you have an existing growth model for your product, plug these tradeoffs into your model as inputs. Run scenarios for what would happen, so you can predict if each option will harm the business. Temporary pain can be forgivable. But permanent pain, especially if you’re a startup, may not be a viable option.

Core priorities. Last but not least, clarify core priorities. Every company seeks to fulfill some higher mission. If none of the above works, then you should consider the decision that best services this mission. It’s a good idea to run this rationale by other executives to make sure you’re actually channeling the mission. You’ll get confirmation from people who have more experience than you, which should help build confidence in the decision. They can also provide support when further bad press or negative reviews occur.

One Last Thing

Sitting in the hot seat is tough, but all product managers eventually face this if they’re shipping new features at high velocity. One final bit of advice is to always look out for your team. Harsh words in a public forum sap morale. As you rally the troops to work on new features, it’s important to frame this experience as a learning milestone. One that is being internalized for future roadmap planning.

Player Motivations in Gaming

One of the best resources I’ve come across on the subject of consumer insights in gaming is this book – Glued to Games. A lot of the discussion points listed below are inspired from the ideas in this book, so I highly recommend checking it out.

As I discussed in my previous blogpost – arguing for more consumer insights in game development – something I’ve been thinking about is how to increase my chances of reaching market success in a more scalable and repeatable way. Anyone who’s ever worked on new products in a crowded field will tell you that a magic formula just doesn’t exist. For example if I were to take a successful game in the market. Then take the source code, design spec, economy model etc and use these to make a similar game 2. More often then not, game 2 will not win. It then turns into a guessing game as to why something worked the first time and stopped working when repeated.

The most compelling rationale I’ve heard on this problem is that while most people are looking to reach specific business outcomes, customer motivations to reach said outcomes can differ widely over time. Customer motivations are what drive engagement and spend behavior, so that’s where the power of consumer insights come in because understanding customer motivations is where consumer insights is most effective as a tool.

Glued to Games introduces a framework for understanding player motivations in a Maslow hierarchy of needs format. In this post I’ll introduce the main ones:

Competence

Feeling competent encapsulates the moment to moment feedback on feeling effective. If players don’t experience competence, then they usually won’t even bother to give the game a second try. Competence is usually achieved by:

  1. Giving the player clear goals
  2. Receiving meaningful informational feedback on our actions that allows us to learn and improve
  3. Pursuing challenges that stretch our abilities but that we believe we can overcome (optimal challenges)

Old school games like Pong and Space Invaders did this really well

A sub-section of competence is control mastery, also known as, “learning curve”. Control mastery from a consumer insights perspective measures whether players feel effective, or successful when using the game’s controls.  A game cannot win with only intuitive controls, but games very rarely overcome low scores in control mastery.

Efficacy. This measures whether players feel skilled, or unskilled, when playing the game.  Players report low efficacy when the AI is too difficult, when they don’t understand the rules, or other factors that make them feel ineffective. Again this ties into the concept of giving players optimal challenges. This could come in the form of increasing complexity of songs in Guitar Heroes, the strength of your opponent in an RPG, or even the complexity of a map in a puzzle game.

Meaningful growth measures the degree to which players feel they are growing, becoming more effective, or becoming more powerful as they play the game. This tends to expose the problem found in copycat games because growth ultimately has to be meaningful and needs satisfying for players. It becomes very apparent in a quantitative assessment with a large group of users whether something is not meaningful because you get low scores in this area since users have already seen or done it before, ultimately finding your game progression less needs satisfying.

On receiving informational feedback, the three more prominent sources are feedback tend to be:

  • Granular competence feedback describes the one to one relationship with a player’s individual actions, such as the effect of colorful lights and sound when hitting a correct note. Or even blood and enemy reactions when hit.
  • Sustained competence feedback. This could be hitting an unbroken string of multiple notes correctly. Celebrating an “in the zone” moment.
  • Cumulative competence feedback. Permanent player growth that doesn’t disappear with an off button. With a casual game like Kim Kardashian, it could be fan accumulation and celebrity progression. With an RPG, it could be new weapons or skills.

Autonomy

Autonomy is not simply just freedom or independence. It is volition. A player wants to self-endorse the path that he/she has chosen. It is the opposite of feeling controlled. What-if scenarios tend to be very big drivers of this behavior. For example…what if I invested in a church instead of farm. What if I placed my archer here instead of there…  This type of strategic thinking is ultimately what drives players to return to your game.

A sub-driver of autonomy is giving players a sense of Identity. Customizing your character along numerous dimensions, such as appearance, abilities, ethics.

Goal interest. Measures the player’s interest in the games’ overall goals. For SimCity, it could be the general goal of building a great city.  Or a heroic narrative to inspire personal agency in a player’s actions.

Meaningful choice. Measures how well the game presents choices that matter, or have meaningful impact on outcomes achieved. The key here is that choice needs to be meaningful for autonomy satisfaction. This is something that I’ve made the mistake of myself in the past by confusing meaningful choice with cognitive overload. For example: when I present a player with several weapons, am I just annoying players because they need to put together a spreadsheet to figure out what the best option is? Am I not really presenting multiple paths to victory? Games like The Sims or Minecraft do this best because there are no predefined scripting of player activities.

Lastly high autonomy scoring games also will high levels of goal anticipation. Players tend to stick around in your game longer if you can improve the messaging of future gameplay opportunities

Relatedness

High relatedness scores can massively extend engagement because games worlds are proven as places where people can meet, hang out, and share experiences. Mobile games, possibly due to form factor and shorter session times, tend to have a lighter focus on relatedness.

A key tenant of stronger relatedness scores is acknowledgement. This could be from other players or even NPCs. Relatedness also describes an affinity with characters or narrative

A sub-driver of this need is support, which describes that others not only understand us but facilitate satisfaction of our autonomy and competence needs. In mobile we’ve seen this in the form of giving lives (Candy Crush) or troop donations (Clash of Clans).

Lastly the impact we have on other players. This could be as simple as a shared joke or as complex as a deep emotional connection. Tools such as social chat or sharing replays of strategy help facilitate this sense of impact. Constructive competition (as opposed to destructive eg. ganking or unfair ambushing) also works to deepen the social bonds within a game.

 

An Argument for More Consumer Insights in Game Development

A major problem that I have using traditional analysis and hypothesis driven experimentation is that far too often this approach is backwards looking, and doesn’t provide the necessary agility to pivot in fast moving industries like mobile gaming. This is particularly a problem for the management of live products, when you have short term urgency to service a set of existing users.

A Common Scenario

For example if I introduce a new feature that I expect to lift veteran user return rates, it may take 4+ months to perform the necessary due diligence, brainstorm, design, develop, then QA this feature. However, realistically, even though we’ve put our best minds to work on this feature, there is never a 100% chance of success. Failure happens for a bunch of reasons, such as: incorrect hypotheses on the motivation of our users, misinformation from feedback received, executive mismanagement, or even just a mishap in our own execution.

Consecutive failures have compounding consequences. It may take several more months to iterate again on this feature. Meanwhile…time passes… the product ages without a clear improvement. The user base shrinks. Its only a matter of time before there aren’t sufficient users and profits coming from the game to justify continued investment.

How do you avoid this? Here is a quick summary of strategies I’ve seen employed by different teams on various products.

Solution Matrix

Long-term Feedback Short-term Feedback
Objective A/B testing in different geos Consumer insights
Subjective Telemetry analysis Product owner making decisions

As I mentioned, traditional telemetry analysis has several shortcomings in that it’s too slow and is in my experience more of a lagging indicator, since data only shows the end result of users dis-engaging from the product without a concrete answer of “why” they are leaving. We can hypothesize reasons for “why” and try to fix the leak, but all too often there are bad hypotheses mixed in with the good, and you can never tell the bad answers from the good ones until after you’ve spent a bunch of time deploying fixes and have failed to reverse trends.

A/B testing provides much more targeted feedback but it requires a ton of resources and a lot of runway to adequately test variations for a sufficient period of time. You also potentially run into a lot of trouble with existing customers if this is a mature product, since customers generally don’t like being experimented on. Eg amazon’s pricing tests. It’s particularly dangerous with large scale consumer products since the internet is an open information environment and customers, regardless of geographic base, will share information in forums or in the news.

Using product owners. This is not particularly a scalable strategy, but something I’ve seen work in practice is leveraging a gifted product visionary to shepherd feature improvements, and just straight up ignore data and consumer feedback to make fast decisions based on gut feel. This may be slightly more prevalent in interactive media due to the creative nature of the industry. These individuals usually have what we call product sense or a natural intuition (based on personal experience, luck, good timing or whatnot) of what users want, and can comfortably call out that something sucks and needs to be fixed. But not everyone possesses this level of authority, which is why I’ve mostly just seen founder/CEO types able to pull this off. It’s certainly not easy if you are a product manager joining a new team and have no pre-existing credibility. I am not a huge fan of this because ultimately there is a ton of subjectivity in this approach, and all it takes is one monumental failure before your ass is out the door.

The fourth solution, which I’d like to explore further, is using consumer insights as an additional tool to bridge the gap between hypothesis driven design and telemetry analysis to drive faster feedback loops. Even though its qualitative, this can still serve as a useful cross reference point to correct course in case we are meandering down the wrong path. The holy grail here, of course, is to identify a process that allows us to increase our probability of market success in a scalable and repeatable way.

In the ideal use case, the team would first identify KPI targets that the product needs to hit. Then we brainstorm a list of improvements for how to move numbers in a sufficient manner. We do some funnel analysis using comps or out of deep discussion on how to prioritize these features, and start production. Consumer insights comes in then as the bridge once production has started but before the feature is released into a live environment. This enables us to start collecting qualitative data and justify if we are moving in the right direction or not.

In the next post I’ll talk more about how consumer insights can be leveraged in new product development.

Giving Restaurant Story 2 Some Food for Thought

I’ve been on a recent binge playing casual restaurant games, so today I thought I would lay down a few thoughts on one of them in particular – Restaurant Story 2 by developer Storm8.

Restaurant Story 2 is the latest (world wide launch Dec 2014) simulation game that challenges you to run and build your own restaurant, and is a sequel to the original Restaurant Story game (first launched on mobile in Oct 2010).

A quick glance at appannie data shows that RS2 has been hovering around the top 200 grossing in the US. Based on this and with some general knowledge of App Store rankings, I’m guesstimating that the game probably makes around $20-30k per day. Certainly not chump change, but lets discuss what could be done to improve this even further.

Restaurant Story 2 rankings

 

Target Audience

Casual simulation games primarily appeal people in their late twenties to early thirties, and skew >60% female. Similar games in this genre are Kim Kardashian: Hollywood, Sims Freeplay, and Cooking Fever. When building a casual simulation game, the biggest drivers of fun that service this demographic are usually:

  1. Sense of meaningful progression
  2. Ability to showcase player creativity
  3. Social play

I’m going to spend the bulk of this writeup decomposing progression since I consider it the most important of the three design goals. Additionally, I’ll be decomposing progression for three segments of players: new users, non payers, and late game elder players.

New User Progression

The most important objective in new user progression design is to teach the new user how to play, while introducing him/her to the core fun of the game. If I wanted to sum up the core loop of RS2, it would be

“In this game, I exchange coins for ingredients, to make food and earn more coins. This helps me upgrade my restaurant and unlock more complex recipes.”

Something that strikes me as lacking in this early game experience is that the player isn’t introduced to any long term goals. For example the core loop description in Kim Kardashian might be summarized as

“In this game, I use energy to perform game actions, complete quests, and level up. This helps me unlock new locations and cities. This ultimately lets me become an A-list celebrity.”

But what is the long term aspiration for RS2? Is it to maximize my restaurant value? Complete a storyline? Providing players with a final goal can serve as a compelling reason to return to a game in subsequent days and improve first week retention numbers.

One thing I think the game has done really well is its excellent production quality. A great art style combined with a logical crafting system, plus the general fun of running a restaurant make this game a really enjoyable experience! But my second gripe with this game is an unreliability with the UX controls. For example, in the early game, when I’m still figuring out what recipes I want to make, XP drops from prior meals keep getting in the way of access to my stove. The coin and XP drops in the early game are very tiny increments (only 1-2 in value), which make collecting not really important nor particularly enjoyable. And it impedes my access to cooking, which is core to the fun of the game.

Another example is when I unlock access to new tables and chairs as I progress through the game. Getting players to redecorate in any type of builder game is a huge friction point (but can be very rewarding if players actually do it because it is key to showcasing creativity), so there is a whole slew of best practices on how to make redecorating as frictionless as possible. Unfortunately in RS2, the controls to move tables and chairs don’t work consistently, which left me frustrated since I had dropped my furniture in random spots at first and I wanted to get back and re-organize for a more optimal layout, but couldn’t because my tables and chairs just wouldn’t move.

My third new user gripe is that RS2 heavily relies on a quest system to teach players about in-game functionality. My personal preference as a consumer is that quests be used to further the narrative of the experience, and not be used so heavily as a conduit for teaching. In my experience, a lot of popups (which can work in the short term) usually indicate a lack of confidence in the intuitiveness of the user flow. I think streamlining these quests, making them as minimal as possible (such as removal of the quests for cooking mastery, since mastery is largely irrelevant at this early stage of the game) and incorporating more narrative to make learning seem less tedious would be a boon for improving the new user funnel.

Non-payer Progression

Non-payers are a super important part of your audience since they can generate awareness of your game through word of mouth, and it also creates network effects by fostering a more robust social ecosystem. Like most simulation games, RS2 leverages appointment timers to drive daily engagement for the non payer and payer ecosystem. When I think of timers, I usually mentally bucket them into short, medium, and long timer categories.

  • Short timers: typically used to extend session length. In RS2, the short timers are those used to collect ingredients.
  • Medium timers: typically used to drive multiple sessions per day. In RS2, the medium timers are when players make food.
  • Long timers: this is mainly used for daily engagement, and is built in the game through the upgrade system and the unlocking of more complex recipes.

The game follows a pretty standard playbook with their short timer design, but with respect to their medium timer design, I think it was a miss not to add the countdown directly on the stove so it becomes obvious to players when they need to return. Particularly since players are only working with 4-5 stoves at any given time, this would not have introduced interface clutter. Not making it blatantly obvious in a session how much time is remaining is probably shortchanging sessions per day, which will ultimately impact longer term D14 – D30 retention figures.

It also feels that RS2 is a bit aggressive driving player spend with the initial limitations on pantry storage space. It would be a useful exercise to benchmark this progression versus other best-in-class games, such as Hay Day, on when it feels more natural to start restricting players on storage. This is also something that could be A/B tested using various difficulty curves to find an optimal point of retention vs spender conversion. Furthermore, for such an important concept to the gameplay, such as storage space, it took me a while to understand that the pantry could be upgraded. Making this structure larger and more obvious to players could be an easy way to reduce some player dropoff when players first hit this gate.

Lastly, one feature that is noticeably absent from this game is the use of NPCs. A common problem in these types of games is that players will often just invest in the wrong resources, and the storage space limitation makes this a punitive experience. Players will then need to either delete the item from storage, wasting items they had invested in, or sink the excess into a random crafting job they may not need, slowing progress and frustrating players. A workaround for this situation is the introduction of NPCs that stop by and offer to buy your excess items, usually at a lower price than through crafting job. But what this allows players to do is offload their excess inventory and purchase items they actually need, while still earning grind currency and getting a sense of progression from the game. NPCs would fit very naturally into the restaurant storyline because real life restaurants actually have people coming by and ordering takeout all the time! Other shop owners could also stop by and make procedurally generated requests based on a players existing inventory.

Late Game Progression

I have fewer opinions on late game progression since I’m not that far into the game yet. But in most simulation games, I would expect social (either cooperative or competitive) to play a large role in elder gameplay. Right now the only social feature I can identify is connecting to Facebook so friends can help you auto-complete dishes.

This type of transactional activity certainly qualifies as social, but it fits better with a puzzle type game like candy crush because impulse and extending session timers are what drive purchase behavior in that genre. Simulation games are more about customization and resource management, which creates more diverse opportunities to leverage social. I would have liked to see other social layers, such as competitive leaderboards or a cooperative trading system as a new area of innovation.

Since casual audiences don’t usually care much for competition, trading in particular could have been a very interesting opportunity. Most trading features reinforce the engagement loop because it allows for resource exchange between players at various stages of progression. For example in Hay Day newer users are encouraged to stay in the game to get coins to unlock more buildings. However elder players will have an abundance of coins and what they need are buildable resources for more storage space. Newer users will typically have an abundance of of these resources given they are still crafting lower tier resources with shorter timers, and buildable resources usually come in the form of random drops from doing core game actions like harvesting. Providing players a forum for this type of exchange can help new players earn coins quicker, and an outlet for elder players to expand their production capacities, making the game more enjoyable and sticky for all player types. This then creates opportunity for newer features to be layered on top, such as new content for restaurant customization or even guild contests.

Should You Get a Job in Video Games?

Video gaming may seem like a great industry to work in, after all, market trends seem positive. From 2009 – 2012, the U.S. video game industry increased in size by more than 9% – four times the growth rate of the U.S. economy during the same period. Gaming related acquisitions have driven the 2014 M&A landscape. Stats also indicate that the average gamer is now 31 years old and 48% female, meaning audiences are diversifying, and buying/playing games becoming more widely accepted.

However fast industry growth can be misleading. For example, industries with fast growth and low barriers to entry tend to draw in new competitors. Fast growth also generally puts suppliers in powerful position, which can decrease an industry’s overall profitability.

So the question remains: is video games an attractive industry to work in?

In this post I’ll try to answer this question by using the porters 5 forces framework. This framework draws on concepts from industrial organization economics to derive five forces that evaluate the competitive intensity and therefore “attractiveness” of a market. Attractiveness in this context refers to an industry’s potential for profits.

porters-five-forces

The five forces are categorized as follows – three forces from vertical competition: threat of substitute products/services, threat of established rivals, threat of new entrants, and two forces from horizontal competition: bargaining power of suppliers and bargaining power of customers.

Threat of substitutes

Substitute products refer to any other product that performs a similar function. For example, email as substitute for letter mail. These alternate products can limit profit potential by placing a ceiling on prices. Early warnings signs usually include:

  • An attractive price to performance trade off. Eg video rental compared to online rental services like youtube.
  • Low buyer switching cost

In my opinion, video game substitutes include a diverse range of recreational activities such as watching movies, playing outside, etc. However the industry has continued to proliferate despite these substitutes because of differences in performance. Gaming is interactive and continues to provide a unique, differentiated experience. Threat of substitutes – low.

Threat of established rivals

High rivalry limits profitability of an industry through price discounting, new products, advertising campaigns etc. This is typically dependent on two factors: (1) intensity of competition, and (2) basis of competition.

Intensity of rivalry is high when:

  • Competitors are numerous or roughly equal in size and power.
  • Industry growth is slow because slow growth encourages fights for market share.

Basis of competition:

  • Price competition is bad since it reduces profitability for entire industry. Other dimensions of competition, such as features, support, delivery time, brand image are better for an industry.

At first glance, intensity of rivalry within video games may seem high due to the numerous game developers in the industry.  Market research firms estimate the current number of game developers to be in the range of 90,000 (including small indie teams). But rivalry is dependent on game genre. For example a first person shooter developer doesn’t really compete for the same audience as an educational puzzle developer.

When we look at basis of competition, the good news is that price does not appear to be a huge factor. Segmenting by platform – console game prices appear to have reached parity across developers. Furthermore PC/mobile games have already raced to the bottom by embracing freemium, so price is not a distinguishing characteristic at all.

The video games industry has a ton of genre specific rivals but qualitatively it appears that rivals compete primarily on features, quality, and brand. Therefore threat of this force essentially boils down to the genre you’re competing if. Depending on if you’re developing a game in a crowded space, I’d say the threat of established rivals can be either high or low.

Threat of new entrants

New entrants puts a cap on profit potential of an industry. When threat is high, incumbents must lower prices or increase investment to deter new competitors. The threat of entrants generally depends on two factors: (1) entry barriers and (2) the reaction from incumbents.

Main contributors to barriers to entry:

  1. Supply side economies of scale. Firms that produce bigger volumes realize lower costs per unit because they can spread fixed costs over more units. This is the old game publisher model, when the business revolved around producing consumer-packaged goods. Large game publishers such as Activision and EA could force new entrants to either seek large-scale investment or accept a cost disadvantage.
  2. Demand side benefits of scale. Buyers show higher willingness to pay for a company’s product as a company increases its customer base, with the classic example being a telephone company.
  3. Customer switching costs. The higher the switching cost, the harder it will be for new entrant to gain customers. Vendor management system and infrastructure companies generally have high switching costs.
  4. Capital requirements. Financial resources required to compete at parity. Use to build credit, stock inventory, fund initial losses.
  5. Advantages independent of size. Eg. Proprietary technology, access to raw materials, brand identities, cumulative experience.
  6. Access to distribution channels.
  7. Restrictive government policy. This can heighten entry barriers through regulation or make entry easier through subsidies.

Expected retaliation:

If reaction is vigorous and protracted enough, the profit potential of participating in the industry can be less interesting. Newcomers should fear retaliation if:

  1. Incumbents have previously responded vigorously to new entrants
  2. Incumbents possess substantial resources to fight back, including excess cash or clout with partners
  3. Incumbents can cut prices to retain market share
  4. Industry growth is slow, so new entrants can only enter by taking market share from incumbents.

First looking at barriers to entry: supply side economies of scale don’t really exist anymore in the age of digital distribution. The capital requirements for indie game development are generally very low. And new services like Steam and the AppStore level the distribution playing field, lowering barriers of entry.

However demand side barriers of entry potentially exist if the genre provides a social experience, such as an MMO, MOBA, or even social casual game. Gamers can also exhibit high switching cost if they’ve invested substantial time and money in an existing game. Incumbents can increase barriers to entry by allowing things such as backwards compatibility or endowing existing customers with free items to incentivize downloading their latest product. Other advantages such as brand identity and experience also matter a lot, since talent (perceived or technical) is a huge driver of success in creative fields.

With respect to retaliation: large game publishers have historically been welcoming of Indies and the mod community. After all it’s impossible to compete on price when games are free to play. However it can get ugly on the marketing side, with huge spikes in CPI bids, particularly during the holiday season and for core genres.

My current read is that the threat of new entrants is high, mainly because barriers to entry are still low and the bigger developers have not mastered the use of social, increased switching cost, brands, talent etc to increase barriers to entry. Retaliation barriers can also be overcome, again, by competing in less competitive game genres.

Power of suppliers

Suppliers can capture more value for themselves by charging higher prices. Within gaming I consider suppliers to include the platforms such as Sony, Microsoft, Steam, Apple, Google. Also included are game service providers, such as: Twitch, Unity, SWRVE, Playhaven etc. Supplier power is characterized by a few traits.

  • Supplier industry is more concentrated then industry it sells to. Eg. Microsoft’s monopoly on operating systems vs fragmentation of PC assemblers.
  • If supplier does not depend heavily on the industry for its revenues.
  • Industry participants face high switching costs, eg learning a new programming system.
  • Suppliers offer differentiated products
  • Lack of substitutes in supplier group
  • Supplier can forward integrate into the industry

Of the suppliers I listed, the platform providers certainly check the boxes of most of the above listed traits. Fortunately each platform does not posses a complete monopoly and competition provides some measure of safety for game developers. The exception to this is Steam, which is estimated to account for ~70% of PC game distribution. Fortunately for now, Valve is heavily reliant on the gaming industry for revenues and may not exploit its monopoly. Regardless, the PC space needs more distribution platforms; alarm bells should sound if Valve ever diversifies into alternate revenue streams. A warning history lesson was when Facebook rose to prominence as a gaming platform several years earlier, and policy changes crippled gaming companies built on social. Facebook’s early dependence on Zynga for revenue didn’t stop policy changes as Facebook diversified its business into more traditional advertising.

Other game service providers have less power as they operate in fairly crowded environments, with the exception of Twitch. The market for live streaming games is also likely ripe with opportunity for a competitor.

I believe that power of suppliers is low for now, as the likelihood of abuse is unlikely due to the forces of competition within non-PC suppliers.

Power of buyers

Customers can capture value by forcing down prices, demanding better quality or service, playing participants against each other, at the expense of the industry profitability. This is characterized by a few traits:

  • Few buyers
  • Industry products are undifferentiated and buyers can find an equivalent product
  • Buyers have low switching cost in changing vendors
  • Buyers can integrate backwards and produce product themselves
  • Product represents significant fraction of buyer’s budget
  • Buyer is strapped for cash
  • Buyer’s care less about quality

Fortunately for the gaming industry, the buyer population is increasing and buyers are less price sensitive when they spend on entertainment goods. However increased competition from existing rivals and new entrants means products need to be further differentiated through quality, IP licensing, and feature development. Power of buyers can also be low or high depending on the genre of the game.

Final thoughts

Force Final Vote
Threat of substitutes Low
Threat of established rivals Depends on genre
Threat of new entrants High
Power of suppliers Low
Power of buyers Depends on genre

With this framework in mind, gaming can be an attractive industry to work in, as long as you join the right player. My advice is to consider an established incumbent who can leverage core competencies (existing user base, cumulative experience, brands etc) to increase market share in a crowded genre, a nimble startup able to exploit untapped genres, or a supplier with monopolistic market advantages.