A veteran’s view on marketing games

I have written on here before about the divide in our society between those who understand games and those that don´t. Those that do are mainly the young and gamers from the Spectrum and Amiga generations up to around 40ish years of age. Those that don´t are for the most part the few young people who have missed out and older people. But it is these older people who wield most of the power and influence in our society.

The power of the old manifests itself in the stupid, misinformed things that politicians like Hillary Clinton and Gordon Brown say about games. It also manifests itself in some totally crass reporting in the news media. The Daily Mail and Fox News deserving special mention for uninformed coverage. This ignorance from politicians and journalists mainly serves to lose them all credibility with most people under 40.

Then there are businessmen. As games become more and more all pervasive they impact on commercial decisions in more and more businesses. And when the decision makers in those businesses don´t understand what they are doing they can harm their business out of ignorance.

This is what seems to have happened with Scrabble. The game is sold in 121 countries in 29 different language versions. One hundred million sets have been sold worldwide, and sets are found in one out of every three American homes. And an unofficial online version called Scrabulous appeared on Facebook which became immensely popular with people playing against opponents from around the world.

So what we had was a great opportunity for the owners of the board game. They could have worked with Scrabulous to leverage the brand into a whole new generation. The marketing and commercial upsides were potentially massive. But instead Hasbro went to court using copyright law and had the Scrabulous application removed from Facebook. This was shooting themselves in the foot.

The rights for Scrabble are owned by Hasbro in the United States and Canada and by Mattel elsewhere. This split ownership means that both companies have been damaged by the actions of one. It also means that they seem unable to come up with an official Facebook global game, which is patently ridiculous.

Mattel have made a version but it is only available outside North America and has been much criticised on Facebook for its quality. It only has about 2,000 registered users compared with the 600,000 for Scrabulous.

So now the Scrabble brand is damaged, as are Mattel and Hasbro. Millions of internet savvy people will have been offended by these actions and that offence will be reflected in their actions. A great opportunity has been converted into a disaster, all because the people making the decisions just didn´t understand what they were doing.

• I am a great fan of Steve Wozniak so it was great too see this interview in The Telegraph where he talks very sensibly about Apple, the iPhone, tech share valuations and much else. Gems of wisdom from a silicon valley superstar.
• Nintendo DSi has region locking, presumably to act as a form of DRM and so reduce piracy. Obviously it will also reduce choice, but this is the sort of damage that pirates bring upon themselves.
• No Sony conference at Tokyo Game Show and Nintendo not even attending, thus leaving the door open for Microsoft to gain a big competitive advantage. Expect the remarkable performance of the Xbox 360 in Japan (a fivefold increase in sales) to get even better.
• Sony not dropping the price of the Playstation PS3 this Christmas. They can’t afford to because they still make a big loss on every machine they make. All they can do is pass on the increased sizes of hard disks and come up with good value bundles by taking a hit on the software. All the industry analysts said that 2008 would be the year of the PS3. It is turning out to be the year of the Xbox 360.
• BioShock PS3 graphics problems. Like most multi-platform games they are struggling to make the PS3 version look as good as the Xbox 360 version. The elegant architecture and powerful GPU of the PS3 360 beats Cell nearly every time.
• Hardware retail price war on consoles in the UK. Excellent news for consumers and for the game industry. We are now at the price point on the Xbox 360 where most console sales happen, Microsoft are backing this with massive and clever TV advertising. Are we headed for a Microsoft Christmas?
• Analyst Michael Pachter “absolutely convinced” Wii HD is under development. He has obviously been reading about the Super Wii on this blog! Seriously, Nintendo would be very remiss not to have such a machine already developed. It is just a matter of when, not if that they release it.
• Nintendo share price halves. Obviously the analysts don’t expect the extraordinary earning power to continue. There are three things here. Firstly the power of the Japanese Yen. Secondly the worldwide global downturn. And thirdly the continuing suspicion that the Wii is a bubble waiting to burst.

I’m off for a week of cave diving. If I can find time and a connected computer I will try and write articles. Otherwise there may be gaps.

As an essential part of keeping in touch with the realities of the industry I frequently go and have a look round specialist video game stores. And there are always a number of significant trends to keep an eye on in this fast moving industry, such as the demise of PC and PSP games. However the biggest trend over the last couple of years has been the amount of space and emphasis given to secondhand games. They have gone from being just one small rack to being nearly half the store. And I bet they are making more profit for the store owners than the new games.

So what is happening here? Basically any business needs a USP and game stores once had this as they were the only place to buy games. Gradually this has eroded away, firstly with online retailers like Amazon and then with supermarkets, both of whom can beat the specialist on price.

Initially the specialists were cushioned from this price competition. Firstly because the specialist has a bigger range of stock, secondly because he has more knowledge and thirdly because of people’s buying habits. But now video games have become a commodity and those advantages have evaporated. In fact the supermarkets and mail order companies have the better business model now because they can buy in bulk and thus cheaper, they have far lower overheads as a percentage of sales and they can and do use games as loss leaders to generate traffic. It has reached the point where an independent specialist game retailer can buy his stock more cheaply at the local supermarket than he can from his trade distributor.

So specialist retailers needed a new business model that gave them a USP. And secondhand is it. With secondhand they are in an area where online and supermarkets would have difficulty following because of the very large number of buying transactions the retailer has to make. Secondhand runs at a far higher price mark up, which is very nice when new games are selling on price alone and so have decreasing mark ups.

This is very nice for the consumer. When a game first comes out he can go and buy it cheaply at the supermarket or online for mail order delivery. Or he can wait a couple of weeks and buy it even cheaper from his local video game store.

Now, of course, there is the precedent that you can also buy books, CDs and DVDs secondhand. But the scale of this is relatively low and happens on eBay, in flea markets and in back street shops. With games secondhand is big business on the high street. And there is a reason for this. Quite simply games are a lot more expensive to buy than music albums, DVD films or books. This is because they cost more to make for the number of customers. So there is a vastly higher cost per customer in the game industry than in the other main entertainment media.

The big losers in this massive growth in the secondhand market are the video game publishers. A specialist retailer can now sell the same game several times and make a profit on it every time. The publisher, who took the risk and made a massive investment, only gets a profit on the first sale. So from a publisher’s perspective secondhand games have exactly the same effect as piracy. Multiple customers get to play the game but in return the publisher only gets the profit back from one sale. And the customer who buys a secondhand game is making zero contribution to the cost of it being made.

Of course this in intellectually wrong as well as morally wrong. When you buy a game you are not buying the plastic and cardboard, you are buying the right to personally enjoy the IP embedded on it. But most customers don’t see it that way.

But the publishers are going to have the last laugh here. High street game retailers may be making record profits now but they are inevitably doomed. The whole business is in mid transition from delivering content on cardboard and plastic to delivering it online. And online needs no retailers. And there is no secondhand online.

Currently the gold standard for home broadband connections in much of the world is ADSL. This uses existing copper wires and allows a maximum download speed somewhere in the range of 8 to 12 Mbit/s. This is a massive advance on the 56K standard that preceded it and has allowed for widespread downloading of digital entertainment content.

The owners of this digital content have been very slow on the uptake when it comes to exploiting what ADSL can do. This has left the way open for stealing on a grand scale. The biggest glut of theft in the history of mankind as music, film, TV and game content is illicitly transferred around the globe. This has reached the point where many millions of users now expect their digital entertainment content to be free. They just steal at will from the internet and make no contribution to the costs of creating the content. For instance it is quite normal for people to have many thousands of music tracks on their iPods without ever having bought a single one of them.

Of course ADSL downloads are not instant. Downloading a music MP3 track does not take very long. A film or a game is a different matter. However the fact that stolen IP is free has provided a massive incentive for people to be prepared to wait whilst what they are stealing downloads.

But now this is all about to change. The world is rolling out the new home internet standard and it is 100 Mbit/s using optical fibres. This is a lot more than ten times faster because it won’t suffer the speed degradation of ADSL. So it will be possible to watch streaming HD movies whilst still doing other things over the connection. A big jump in capabilities. And so we will experience a big jump in online theft unless the owners of IP finally wake up to what is happening in the world and change their business models.

Whilst the users of downloaded IP are morally wrong because they are thieves, the blame for this happening also lies with the owners of the IP for not protecting it. The music industry, for instance, has totally lost the plot. The game industry is more complex so has come up with a number of working strategies such as using consoles which act as anti piracy dongles and by having games on servers with the player’s computer acting as a client. It will be interesting to see how the industry stands up to the piracy onslaught that 100 Mbit/s will bring.

It is far better to look at 100Mbit/s as an opportunity. A chance to finally get rid of the archaic practice of distributing games physically on plastic and cardboard. A chance to remove the cost of expensive high street shops from the industry. A chance to create server based browser games that are just as graphically accomplished as machine resident games, but far more complex in their interaction. A chance to make money from a wide range of business models.

If you want to know what our 100Mbit/s future is going to look like just go to South Korea, they already have it.

Since it has come to power in 1997 the British Labour government has done a lot of stupid things. Selling our gold reserves off cheaply, massively increasing the tax burden, spending a lot more than they earned, the Private Finance Initiative (PFI), tax credits, mismanaging the national health service, an illegal war in Iraq and Scottish and Welsh devolution for starters. But history may well judge their misunderstanding of the games industry to be their biggest blunder.

For us all to have a living the country must generate wealth. Traditionally this came from manufacturing in Britain. But Labour governments gave organised labour excessive powers which they abused to destroy the manufacturing base. The unions are probably the worst thing to ever happen to Britain and everyone here would now be a lot better off had they not been allowed to run amok. Manufacturing still works in other rich countries like Germany, Japan and Korea, it can be done.

So instead of trying to get manufacturing working the government emphasis was put on financial services to be the engine of our economy. This had a number of very unfortunate side effects, such as distributing wealth very unevenly to a small number of people and to one region of Britain, the area around London. It also made us very vulnerable as we are seeing now with at least 100,000 city jobs to go in the immediate future with the potential for many more to follow.

After the dot com boom and bust the government gave up on technology and information based industries, which was especially crass as these are our future. And no area of technology is more key than gaming.

Uniformed people have very unfortunate perceptions of what video gaming is. Many see it as adolescent boys zapping aliens in their bedroom, or if they are up to date as overweight housewives wobbling precariously on balance boards. What they don’t realise is that gaming has three core, fundamental advantages that will make it one of the world’s biggest industries. These are interactivity, connectivity and non linearity.

Gaming will inevitably grow to be the biggest entertainment media, bigger than film and television combined. But this will pale into insignificance compared with its other roles. For a start gaming will take over education. Completely. We are already seeing troops trained on combat simulators, people going to Baghdad playing MMORPGs to learn how the place works, people enhancing their mental agility with Brain Age, emergency service interactive training and so on. It is creeping on us subtly without anyone noticing, but education is starting to undergo a revolution.

And gaming will enter so many other areas such as management, law enforcement, national defence and so on. The technologies are so all pervasive that gaming will insidiously find itself everywhere. Already most homes have some video gaming device and most people walk round with one in their pocket, which is a massive change in just a few short years.

Some governments understand gaming and its importance to our future. Non more so than the Canadians who are throwing billions of dollars at it. They have now overtaken Britain as the number three development nation in the world behind America and Japan. And the way they are going they may well end up as number one. France, too, has seen the light, but unfortunately after the horse had bolted. They still have two of the world’s big global publishers, Ubisoft and Vivendi.

Yet Britain could easily have been number one. As a nation we have world class tradition in both technology and the creative arts. This is the land of Shakespeare, Turner, Agatha Christie, Damien Hirst and JK Rowling. This is the land of the jet engine, radar, penicillin, liquid crystals and the world wide web. We have the ideal skill base for gaming embedded in our genes and in our culture. And we have Clive Sinclair. His ZX Spectrum computer ensured that a whole generation of schoolboys was computer literate with many thousands of them learning to code right down at native machine level.

And what has happened to this massive British gaming talent? It has to a large extent gone. Emigrating to other more enlightened countries where their skills are in more demand and are better rewarded. There has been a massive brain drain so that most game development teams around the world now have a least one Brit. They are in Tokyo, Shanghai, Paris, Los Angeles and Quebec. They are everywhere. Very many of the people I have worked with are now scattered around the globe.

It isn’t all doom and gloom. British companies like Rock Star, Travellers Tales, Rare and Jagex are amongst the very, very best game developers in the world. They show what British talent can do when it is allowed to. We could and should have many dozens more like them.

Currently the British government is not just not helping the game industry, they are positively harming it. They are giving voice to misguided people like Keith Vaz and his self publicity scheme to attack gaming. They are getting Tanya Byron to investigate a problem when no problem exists. And they are thinking of using the BBFC to stifle the industry. Their stupidity knows no bounds.

What is needed is a Game Council, modelled on the already successful Film Council and Music Council. And this council should be tasked to encourage the game industry in every way they can. And they should be funded. Not with millions of pounds, but with many billions of pounds. There is no way a government could spend money better for our future wealth. And it is nothing compared with what they are currently throwing at the financial sector.

Ever since the 1980s gaming has been afflicted with piracy that prevents the creators of content getting properly and fairly rewarded for their labours. Our answer as an industry has been digital rights management (DRM), of which the game console is the most extreme (and effective) example. Most industry income currently comes from retail sales but a number of other business models are in place including subscriptions, in game advertising and product placement and micropayments for in game items and game features.

The music industry has been afflicted far worse by theft. Firstly because a music track is very small so is quickly and easily transferred and secondly because DRM is difficult to enforce to music across the whole internet. So a whole generation have grown up getting their music for free (stealing). Apple found an answer to getting some money from their MP3 customer base with the simple tactic of making their service incredibly slick. So people were prepared to pay for the service when they could get the same music elsewhere on the internet for free. Microsoft, with Zune, sought to emulate what Apple had done.

Now Nokia have come from left field with an elegant new way of making money from users of downloaded music. They have created a music store with 2,000,000 tracks that is free to use. You can download as much music as you want for a year. The cost of the Comes With Music service for the first year is built into the purchase price of the 5310 XpressMusic phone (already the world’s best selling MP3 phone). Subsequent year’s subscriptions will have to be paid for. But people will. Not because they will see it as paying for music, instead they will see it as paying for a service.

You can see quite clearly here that this is a business model that can be applied to gaming. Payment of a subscription which covers all your gaming requirements. Instead of buying individual games. This is a formula that John Riccitiello has alluded to in the past. Just now we don’t need it for consoles but it would be really sweet for the pirate riddled mess that is PC gaming. Maybe as an evolution of Steam, or possibly as a totally new service. And as broadband bandwidths increase it would be perfect for server based gaming.