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Tuesday, February 16, 2010

The Online Gaming Ecosystem

The online gaming space is evolving quickly. The speed and sophistication of this evolution is being fueled by an emerging ecosystem that rewards companies and games that take full advantage of it and punishes those that do not. The success of this ecosystem is manifest in the large and ever growing player numbers associated with online games.

The online gaming ecosystem is no different from its biological equivalents. It contains a hierarchical food chain, participants and intertwined environments. It fosters complex interactions between feeders, food sources and climates. Success in the ecosystem requires recognition of the rules of the ecosystem and adaptation to the ever changing nature of the ecosystem. There are winners (survivors) and losers (extinction) in the game ecosystem. Those that do not take full advantage of the system cease to exist or become marginalized. Those that do take take advantage dominate and consume ever more resources within the ecosystem.

There are a number elements contained and interacting in the ecosystem.

Players - Players are consumers of the game experience and act as monetizing (fuel) agents.

Games - Games are the honey that keeps players engaged and inclined to invite other players to participate.

Game Platform - Game platforms are micro environments within the larger ecosystem that attract large numbers of players to locations within the ecosystem.

Social Media - Social media is the communication mechanism that players use to communicate amongst themselves. It is also a communication mechanism facilitating communication between game providers and players.

Social Networks - Social networks and social media are closely allied. Social networks act as connection, invitation and retention tools for players, game platforms and individual games.

Free Play- Free Play has traditionally been used by game providers to entice and expose players to games. In the emerging ecosystem free play is primarily used as a tool to acquire and retain players.

Virtual Currency/Virtual Goods (Micro -Transaction) - Virtual Currency has become a means to fueling (monetize) and funding the ecosystem with relatively small micro-transactions.

Macro-Transaction (Gambling) - Macro Transactions are traditionally associated with gambling. These transactions are relatively high stake transactions.

E-mail - E-mail is old school but still a vital way to stay in contact with the game community, maintain a relationship with players, up-sell players and acquire new players.

Affiliate Programs - Another old style marketing tool that has survived and acts as a means of creating alliances between companies for the purpose of attracting players to a game experience.

Referrals - To a large degree referrals have been replaced by social networks. They survive (barely) because in a few cases financial incentives do garner players.

Ad Networks - These environments foster both monetization and promotion of games. The Ad monetization us usually found in the free play zone.

Working Capital - Working capital is also a fuel to grow large game networks. The sheer size of successful gaming communities requires sophisticated game platforms to hold the players. Working capital is required to build and maintain the gaming infrastructure. This is especially important in the early growth phase of the game platform.

Regulations - This is the voodoo (threat) of the gaming world. Regulations are frequently ambiguous, subject to interpretation, ever changing and unclear putting into question if a game is or is not legal. Despite the sometime confused and questionable effects of regulation they need to be respected because the consequences of ignoring them could be devastating to an online game business.

The game ecosystem has become an important force because it is changing the rules on how to grow online gaming communities. More importantly the "business" of online games is becoming "big" business. It is no longer the domain of relatively obscure and self contained MMOG economies. Games have gone mainstream and are attracting serious player numbers and revenues.

Social networks and social media are two parts of the ecosystem that have radically changed the gaming landscape. However, these are not the only elements that have changed the ecosystem. The definition of a game has expanded resulting in greater number of games and game styles to play. The virtual currency/goods purchase and exchange trade has created a new monetization mechanism. Its low transaction cost lowers the barrier for players to engage in gaming financial transactions.

Acquisition/Retention Changes - The ecosystem has changed the way players are acquired and retained. In the old days Ads, affiliate programs, email and referrals where the primary means of acquiring players. Retention was the domain of the game experience. The slide below illustrates how games are now embedded within social media and social networks. Acquiring and retaining players requires a player to pass through the social networks and social media rings of the ecosystem. Without these outer rings of support game communities would not be growing at the same rate.

The illustration below shows how the ecosystem also helps to move players laterally in both the acquisition and retention directions. The free play component becomes very important in the ecosystem. Free play is a great entry point for players and also contributes to the higher retention rate. Easy and free is a comfortable place to hang out, play games and socialize with your friends. It also acts as a good transition stage to micro-transactions. This transaction state is one of the reasons the new online game offerings are generating so much revenue.

The next illustration shows the monetization ladder that has developed within the ecosystem. The revenue per player is relatively low for free players. However, if you effectively move players up the ladder from micro transaction to macro transactions you will experience maximum revenue realization from your player pool. The key is not to view players as only free players, micro-transactions or macro-transactions. Any player can and will become part of each group. In the new ecosystem they are encouraged to do so for the purpose of retention. Why completely loss a player from the system just because on a given day they are not interested in transacting at the high or lower levels?

The slide also illustrated that despite the relatively low number of macro-transactions in the system their overall revenue contribution is high. This makes perfect sense if you have had any experience operating a gambling model.

The complexity of the ecosystem is what makes it work effectively. It provides a number of options and states for players. It does not have a single goal of only getting the maximum amount of revenue per player or have the most players in the game. It supports all of these goals. Certainly game operators can have offerings that do not include all of the elements of the ecosystem and be successful. However The game businesses that combine and manage all of the elements in a coordinate manner will be the big winners.

The emerging online gaming ecosystem does present challenges for traditional macro-transaction game operators that have done so well monetizing players with relatively small gaming communities. Regulation makes it difficult for them to access and retain players through social networks. However, social mediums such as Twitter and Youtube are still open to them if they position themselves correctly. Also, some existing large social gaming properties have demonstrated clever way to move players acquired in social networks over to macro-transaction models (this is a topic for a future blog). The risk for macro-transaction operators if they do not participate in the ecosystem is marginalization outside the system and within their own communities.

In conclusion, the games have begun so to speak. A relatively complex gaming ecosystem is emerging and evolving giving rise to very large gaming communities with significant revenues. There is still plenty of room for evolution and experimentation. However, as the larger social networks such as Facebook begin to dominate the social network space and social game sites like Tencent create large inventories of games and players it will become harder survive in the ecosystem. On the positive side the evolving concept of a game and the likely emergence of new social networking models will change the ecosystem equilibrium and offer opportunities for lessor known and new social gaming operators.

Asian iGaming Conference Macau 2010 - I will be making a presentation on the Online Gaming Ecosystem on February 23rd. If you would like to view the presentation it cane be accessed at:

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