Choosing a business model for a game

I just came across this post by Nicholas Lovell in response to Dave’s talk at the GameHorizon conference.  I don’t want to get into debating all of it (obviously I disagree on the “epic fail” bit!!), but item #2 really got me thinking:

My view: different business models require different gameplay. A subscription business needs a very different set of hooks to a microtransaction business or an advertising-funded business. Trying to shoe-horn a business model onto a game not designed for it is very very hard and is likely to cause huge difficulties in the future.

I think this is very much missing the point.  I wouldn’t dispute that “shoe-horning” a business model onto a game not designed for it is hard, but it doesn’t logically follow that you should build your game around a business model.  I’ve no idea what Dave actually said, still less what meaning he intended to convey, but I think there are two key reasons why Dave was right (and this is all just my personal opinion rather than RTW’s).

#1 Basic economics of consumer software

Here are the variables in how much profit you make from software:

  • Development cost
  • Number of users
  • Pricing and payment model – how much each user pays you
  • Operational costs, if your software is a service (online game, website, etc)

It’s a tricky equation because they’re all intertwined (pricing affects the number of users; number of users could affect the price you think you should charge; spending extra development cost could allow you to reduce running costs, increase price or increase users; etc etc).  But, a few simple observations help to clarify:

  • Number of users is incredibly important.  The beauty of consumer software compared to other products is its ability to scale.  It costs you nothing to produce copies of the software, and the number of users has enormous scope for increase: this is the variable with the leverage in the equation, and if you want to be really successful, this is the key.
  • Development cost is less important than you think, because it’s a one-off cost.  I’m not saying it doesn’t matter, but it doesn’t scale.  There’s a limit to what you can do by trying to play with that variable, particularly as any significant reduction is going to hurt quality so much that you fail entirely.
  • Operational costs are far more important, because they do affect your ability to scale.  It would obviously be a mistake to price your software below its running costs unless you had a plan to change that relationship over time.
  • Pricing isn’t something you can tweak to cover your costs.  Correct pricing strategy has nothing to do with your costs; it’s all about value to the consumer. So this factor is critically important, but it’s not a variable in the sense of a number that you can just play with in a spreadsheet to get the profit you want (incidentally, this fact about pricing has nothing to do with software specifically … as you’d expect, Joel Spolsky has a good article and book recommendation here).  In a creative endeavour like an online game, you typically don’t know in advance exactly what the customer’s experience will be like; you don’t know what aspects of your game will be most fun.  So you can’t possibly know what the perceived value will be, and it’s therefore very hard to think up-front about how you charge the consumer.

I would suggest that these four factors imply that your main “business model” concerns early in development should be, in order:

  1. Making a great product that lots of people want to play.  Without this, you stand no chance, whereas with this, you’ll find a way to make money from it.
  2. Operational running costs, as these are the main thing that could prevent a great product from being profitable.

Although I have no idea how Dave and the board approached APB’s business model, I do know for sure that the development team has paid close attention to both of these.

#2 Development (creative and engineering) considerations

Naturally, you may need to build software features to support the business model, but as an engineer, I’d say these features are always likely to be more straightforward (read: lower risk) than the creative/gameplay/fun features.  I would much rather focus on the creative stuff early on the project, when the time is right for heavy iteration and exploration of design space, and then build the business features near the end when you know what you’ve got.  I suspect this is part of what Dave was getting at: he’s a creative person and wants to nail that part of the project above all.  He understands that you can’t just plan a game design up front and implement it from a spec.  You have to iterate, you have to experience what you’re building to guide further decisions.

Finally, whichever route you take, this isn’t a binary decision.  There’s a continuum between the extreme positions of building a game entirely around a business model, and the opposite extreme of building a game with absolutely no thought to the business model.  I would expect either extreme to be a bad idea, and I’d personally interpret Dave’s position as leaning toward one end of the scale, rather than not caring at all about the business model.  The fact that we’ve managed to raise $80m of VC, and the fact that the engineering team have paid close attention to things like bandwidth, suggest that we haven’t been completely blase about the business model during development!

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6 Responses to Choosing a business model for a game

  1. Nicholas says:

    Thanks for the thoughtful response, Luke. But I still think that the fundamental business model needs to be thought about in advance.

    For example, it seems to me that RTW has always assumed that the game would be sold in a box with an upfront payment (unlike games like Runescape from Jagex or Pet Society from Playfish). That’s one clear assumption right there.

    A game which is going to be 100% free-to-play with the sole source of revenue coming from item upgrades is very different from one that will get the lion’s share of its revenue from a boxed copy with an incremental subscription.

    So I wonder if the issue here is that RTW has, in fact, decided on the business model (i.e. boxed sales plus an incremental charge) and the key issue is pricing and how the increments are charged. And when it is more around “tweaking” the business model, rather than an utterly different one, then I can see Dave’s point.

    • lukehalliwell says:

      I think there’s room for agreement in what we’ve each said; as I pointed out, we’ve not completely ignored the business model for APB by any means: our main focus has been on making a great product but that’s not to the exclusion of other concerns.

  2. Boab says:

    You really should factor in marketing cost as a factor for profitability. Dave and Colin have talked about one of they attractions of the MMO market is the potential for large sales and in turn revenue citing WoW as a prime example.

    That mass market penetration doesn’t happen without significant and sustained marketing spend. “Build it and they will come” just doesn’t work any more and hasn’t for a while. You can make a great game only for it to be roundly ignored if you don’t tell people about it.

    I’m also surprised you’re characterising development costs as one shot; for the type of project you’re working on they aren’t. The live team will be key for providing an ongoing content stream.

    > The fact that we’ve managed to raise $80m of VC, and the fact that the engineering team have paid close attention to things like bandwidth, suggest that we haven’t been completely blase about the business model during development!

    The only proof of that is successful product and there is no formula for that yet in the MMO space.

    All the best but you won’t know if you’ve won until at least 6 months after launch

    • lukehalliwell says:

      Great point about spending on marketing, I think it would be fair to add that to the 4 things I listed. I don’t think it would change the gist of my argument though – that building a great product comes first.

      Also correct about development costs. I would split them into two parts: what I’ve called “development cost” above is the once-off cost to reach launch – and then you have ongoing development, which counts as part of operational costs for the purposes of my analysis above, although I didn’t explain that at all, sorry.

      As for the investment, I didn’t say we’d won or that our product is successful. I don’t think that at all – as you say, only time will tell. My point was simply that it would be very hard to convince anyone to invest that much without at least thinking a little about the business model. Anyhow, it’s a parenthetical point – whether you choose to believe that we did or didn’t, doesn’t really matter a whole lot.

  3. nicholaslovell says:

    Exactly, Luke.

    My main point was that a headline that came out of Dave’s talk was “Don’t worry about a business model – just build a great game and the rest will follow.”

    I’m not sure that’s what Dave thinks, and I wanted to make sure that aspiring video game developers didn’t think that the game was everything and the business side was nothing.

    As with all things, a modicum of balance goes a long way.

  4. Anon says:

    “I don’t want to get into debating all of it (obviously I disagree on the “epic fail” bit!!)….”

    Ouch.

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