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:
http://bit.ly/AsianiGamingPres

Should An Online Game Operator License Or Build Games?

Online game operators frequently have to make a decision to license or to build games. To a certain degree this decision is similar to a buy versus build decision for any software product or service. However, there are some unique characteristics associated with operating online games that make the decision to license versus build more challenging for an online game operator.

Should All Games Look And Play The Same? - Each game development team will have its own way of developing games that impact the look, feel and mechanics of a game. If an operator plans on licensing games from a number of different vendors it is important to understand what the players tolerance is for differences in game interfaces and mechanics. If the operator develops their own games this becomes less of issue because the operator can control and influence the game experience.

Do The Games Have To Be Integrated Into Social Networking And Social Media Properties? - Social mediums such as Facebook, Twitter, Bebo, MySpace and Hi5 are becoming platforms for game delivery. It is no longer adequate to solely have a web site as a landing page and entry point into a game experience. An operator has to have a presence on social media platforms to reach optimal market share. This places a demand on game suppliers and operators to provide games in social media environments and on web sites.

Thin(web 2.0) Versus Thick Game Clients - It used to be conventional wisdom that an operator had to have a downloadable game client to provide a player with the visual and game play mechanics sophisticated enough to address the demands of players. With the proliferation of Web 2.0, advanced graphic develop tools and full featured web browsers the gap between thick and thin game clients is closing making it possible to provide the same graphic and mechanical experience through a browser. The need to support both thick and thin client game clients needs to be taken into consideration when deciding on the platform of chose. Social Networks are especially sensitive to the need to support thin clients and make it difficult to integrate thick clients into their environments.

Game Platform - Games require a platform to operate on. A platform provides payment processing, reporting, interfaces(api's) to internal and external programs, security, data storage, ad serving, age/location/identity, server side processing, community and social networking features.

When an operator licenses or builds a game system the platform is a much larger and more sophisticated then an the individual games that run on the platform. When an operator "buys into" or builds their own games they are committing to a game platform. Supporting a range of games requires a sophisticated and flexible platform to deliver a wide array of game content.

Development Team - Online games are developed by teams of developers, engineers, project manager and product managers. The teams use certain program languages, API standards, databases, architecture and messaging systems.

Building games is non-trivial and requires a sophisticated technical and managerial staff. Despite the expense and sophistication of a development team, having a development provides an operator with the flexibility to build games and a platform that meets the immediate and ever changing needs of the organization. It also allows the operator to be less dependent on outside resources.

IT Infrastructure/Cloud Computing -Game platforms run on hardware that has to be hosted somewhere. The hosting requires a staff to manage the operation regardless of the hosting environment. Cloud computing has become a new option for game operators obviating the need for hardware purchases. However, the move to cloud computing is not necessarily a good fit for game platform hosting. If a game platform has extreme CPU utilization spikes, rapid increase in storage, inter server communication, database architecture issues and API calls to systems outside the cloud it could rule out the cloud. The important point is to recognize that hosting is a large part of game platform operation that either the vendor or the operator will have to tackle and manage.

Time To Market -Operators are frequently under pressure to get a platform and or games up and running quickly. The pressure to accomplish this goal can have a significant impact an operator's decision to license versus build. There is no single path that will optimally get an operator to market faster. However, there are long term implications to either decision that should be taken into consideration in concert with the decision to get to marker quickly. In some cases the short term goal of getting to market quickly could have negative long term consequences for the organization.

Market Differentiation - It is difficult to differentiate a game property if you are licensing games. There is certainly a way to mix and match games or provide different incentives and promotions to set an operator apart. However, in the end the games you are licencing are the same games that are available to other licensees.

Flexibility And Control - There is an operational and philosophical question that an operator needs to answer before embarking on the license versus build decision. How much control and flexibility do you need to have over your game product offering? This decision is not made out of context without consideration of the other items I have mentioned. However, a decision to license versus build has long term implications in respect to the operators ability to react and move quickly to changing market conditions.

Conclusion - The decision to license versus build games is a complex decision requiring an operator to consider many factors and to avoid the temptation to react to a short term objective that may have long term consequences. Once an operator commits to a certain course it is difficult to change. The decision should be well-thought out evaluating the pros and cons of the decision and the impact on the long term health and welfare of the business.

Virtual Currency And Gambling

Several of my blogs have addressed the emergence of virtual currency as rival currencies to traditional denominations such as the dollar, yen, euro, etc. The recent reaction by the Chinese government to restrict the inter trade of gaming virtual currency because of its ability to usurp the value of their currency created a stir in the online payment and gaming arena.

I received several responses to my comments on the Chinese government move implying the Chinese government was attempting to stop the proliferation of "gambling" by restricting virtual currency trade. Further investigation of the government's announcement did not reveal any relationship between online gambling and the legislation.

However, the debate made me think more deeply about the way online gaming companies are using virtual currency in their businesses.

Casual gaming, MMOGRPG and online video gaming businesses have evolved from granting virtual currency for game play to allowing players to purchase virtual currency. Virtual currency purchases are used to gain access to different levels of games and to purchase virtual items.

So how does this evolution of virtual currency exchange relate to gambling? There are many definitions of gambling and each jurisdiction has its own notion of gambling. However, a good rule of thumb used by the US government defines gambling as a combination of consideration, chance and prize.

If a gaming activity requires consideration/payment to engage in the gaming activity and there is an element of chance associated with a particular outcome and the outcome has monetary value then the activity is considered gambling.

So let's dissect this in the context of the recent evolution of gaming virtual currency. If I can purchase virtual currency using traditional currency (consideration) to play a game of chance that can lead to a prize of more virtual currency then is this not gambling???

To make thing even more interesting if the prize won is a virtual item which in turn can be sold for traditional currency inside the game or outside the game on e-Bay does this make it even more obvious that we have now entered the realm of true online gambling. If the virtual currency won can be traded outside the game universe for other currencies or traditional currencies is this not considered a prize in the traditional sense?

Subscription models such as World of War Craft also fall into this category. The subscription fee is paid in a traditional currency. The fee provides access to a game where play leads to the granting of prizes in the form of virtual goods which in turn can be sold on e-Bay for real cash.

My point here is that it appears the casual online gaming companies are implicitly or explicitly crossing over into the traditional world of gambling. This is creating an interesting challenge for gaming companies, regulators and consumers.

I suspect we will hear a lot more about this in the near future. Many of the online game companies are now generating "significant" revenue form the sale of virtual currency. In many cases this is becoming their primary source of revenue. When one of these companies attempts to go public or is engaged in a purchase by a public company will this bring this issue to the forefront and be challenged???

The Emergence Of A Universal Virtual Currency

Call me crazy but is this already well on its way to being realized!!! Perhaps I am a bit off the chart. However, my experience in the online game area makes me believe that this is certainly within the realm of possibility.

So what is virtual currency? It is a currency that is used exclusively to buy and sell products and services over the internet. In the gaming world "points" are frequently used to obtain access to game play and to win prices. In some cases the points are obtained by purchasing them with traditional currency. Essentially, a traditional currency is exchanged for the virtual currency. This exchange establishes a value and exchange rate for the virtual currency.

Virtual currency is also being used to purchase virtual goods in the video game and MMOG world. There are sites that cater specifically to this kind of transaction. A price of say $20 is placed on a single virtual item. A deposit is made in a traditional currency into an account. This account is used to purchase virtual items. These virtual items can then be sold and exhanged for virtual or traditional currencies.

There are trading sites where the virtual currency value of a real or virtual good can fluctuate based on its trade value and market price.

There are sites that allow you to exchange your virtual points for real items such as a Starbucks, Costco, Crate and Barrel coupon.

Today the value of virtual currency is set by the trading within each site. Each site has its own exchange rate. Essentially, each site is acting as its own country with its own virtual currency. I do not know of sites allowing people to exchange virtual currencies between sites. However, I suspect that this is not far off. It is certianly something my game site is going to do.

All of this activity begs the question: Is it possible to create a currency that acts as a virtual common denominator currency? How would the currency be managed and who would manage it? How would it relate to traditional currencies? Are we already organically on our way to this state?

Optimizing Pay for Play Conversion

In a recent blog I discussed the benefits of using Free Play as a tool to avoid the dreaded credit card fall off problem and to create a retention pool that allowed fatigued Pay for Play players to continue with a game property in the Free Play pool. Another option is to offer a lower risk Pay for Play product that bridges the gap between a Free Play and a Pay for Play offering. Certainly providing a Free Play and Pay for Play product combination is powerful and preferential to a pure Pay for Play offering. However, the step from Free Play to Pay for Play can be too steep for some players. To minimize the risk and perceived player trepidation associated with a Pay for Play offering a lower entry fee option should be considered. This could be in the form of a mirco-transaction for a single game, table, tournament, etc. Or it could be a flat fee payed for a fixed game access period.

A possible critique of this strategy focuses on the lower revenue per customer for Free Play or Micro/Subscription transactions. Certainly this is true but it leaves out the fact that the pool of players interested in playing for free and for a lower committed monetary amount is higher. The illustration below attempts to show that these pool size differentials can be dramatic leading to a nice revenue stream from the two lower risks options. This approach should also take into account the higher conversion rate to Pay for Play and the retention value of these other models. If you combine all of these factors into the cost of acquisition you will find that this triad approach results in a superior return of marketing budget invested.

The other advantage of this combined revenue model approach lies in the conversion overlap of the three transaction models. The illustration below shows that the overlap of the micro/subscription model with Pay to Play players is higher then the overlap of Free Players and Pay for Play players. This makes sense because people that have never transacted or frequently Play for Free have a higher likelihood of staying put as opposed to players that have monetarily transacted in some fashion. This phenomena suggests that offering an intermediary transaction is very important to monetize players in a Pay for Play model. In fact the Play for Free model is growing exponentially and virally through the proliferation of social networks. These social networked players are playing and inviting their friends to play in extraordinarily high numbers. However, a bridge to get these players over to a higher yielding Pay for Play model is required to take full advantage of these ever growing pool of players.

An operator can partner with other operators that offer complementary game proposition. Each of them could focus on a market segment and exchange players. However, this should be a temporary solution unless legal constraints necessitate branding and operator distinctions. Branding is important and brand switching can be confusing for a player. A player would most likely want to stick with one brand and stay within one property.

In conclusion, the online gaming world is evolving quickly with the concept of a game is changing with the total numbers of players increasing rapidly. Many of these players are playing for free, casually and enjoying it. The size and comfort level of this Free Play pool is significant and should be used to build player confidence and retention in a Pay for Play site. The transition from Free Play to Pay for Play can be made more effective if an intermediary, lower risk/reward offering is made available to players. It is preferential that this combination of different experiences and transaction models be provided under a single brand umbrella.