Friday, December 23, 2005

What is the critical mass necessary to create a major world culture in an online game?

So World of Warcraft has reached five million accounts. Good for them. You have a population that is substantially larger than the size of the Netherlands during the Dutch Golden Age. Now there was a culture that gave us some great fruit paintings. (And wonderful droppe!)

Will online games one day give us a meaningful world culture?

This got me musing about how major cultures of the world formed and what it would mean for an online world to act as a seed for a new major world culture. It is a very idle thought exercise.

Thought #1: Creating a great culture just requires the right recipe
Culture is not magical or divinely created. Put enough people in an isolated environment for a long enough period of time and strong, highly unique social norms will develop. It is a natural human dynamic evident in any group of any size. Give me an island, a bumper crop of people and enough time and we can grow you a unique culture that has a more outrageous accent than either France or Alabama.

Thought #2: Critical mass matters
Any size group can create a culture. It happens in companies, in families, you name it. But to create a culture that sustains itself over generations and influences others without itself being corrupted requires a certain amount of mass. Population is one measure of mass. Money is another.

If you look back through the years, most major cultures seem to really hit their stride with with populations ranging from five to thirty million. These are numbers that are arrived at in a very rough manner. I looked up the population of countries with strong cultures in the 1700’s and assumed that at the very least, this is what you needed to sustain a major culture that generates its own unique language, rituals, identity and history. Games are starting to reach substantial population levels. Five million is a good start.

With their ties into gold farming and other real world economic activities, online games are beginning to build a strong economic foundation that can anchor deeper social behaviors. We are seeing thousands of people dedicating their lives to performing the rituals in the game for economic reasons. At the very least this creates a classic split between population classes.

How do you greet a gold farmer? What words do you use? What is their social class? Do you look down upon them? Do you hate them? Are you justified? Such rich human biases driven by economic realities are fertile soil for the creation of lasting cultural flavors.

Thought #3: Cultures diverge from their source
All cultures borrow liberally from the cultures that found them. It is only through economic, social, or geographical isolation will cultures begin to diverge into their own unique cultural identify.

Online games will initially be highly derivative places. Early America colonial culture was highly derivative of European culture. Early online games ape the social mores of Western geek fantasy culture or Eastern pop heroic culture.

Game worlds are isolated electronically, but their users can always log off and go home. Is there enough isolation of users in an online world to create a strong divergence from the original source culture? I wonder.

Thought #4: Time is critical
Put a few million European criminals on an island and come back twenty years later and you’ll still have a few million European criminals. Come back in a generation or two and you have a unique culture that is influenced by its past, but is defined by the cultural environment of its present. There seems to be a strong generational element to the renewal of cultural memory.

Online games are short lived commercial entities. It is difficult to imagine any sort of generational maturation process occurring within the population of modern online worlds. Online games at this point in our history blip in and out of existence just long enough for excited child-like cultures to be born and then snuffed out.

But what happens when several generations grow up playing online games? What happens when a single world with a critical population lasts not just years, but decades?

Thought #5: When is a gaming culture meaningful?
When a large group of online users is willing to die in order to maintain their world and way of life, then the online world will be meaningful.

This is perhaps harsh, but is a critical point.

Culture exists because the community declares its existence. They gather up all the quirky little habits and behaviors that surround them, label them, and set them high upon pillars of unassailable values and ideals. “This is my culture and I value it” the members of the community declare to the foreigners at their gates. “I am willing to defend it.”

It isn’t about a few unstable individuals who do something violent. It is about normal, rational men and women who choose a path despite the consequences because they deeply believe in its inherent value.

Until then these worlds we builds are just a hobby. Idle play by idle children. There may be rants, raves and passion, but until an online world becomes a preferred way of life, they have no more meaning than a cheap Sunday play attended by crowds of crowing foppish dilettantes.

Closing thoughts
If I were to create a score card of the key categories that are necessary to create a great culture and then rank modern online gaming, we still have such a long ways to go.
  • Population - B+: The population numbers are looking good.
  • Economic leverage - C+: There’s promise, but it isn’t there yet. I expect this to catch up quickly in the next couple of decades.
  • Divergence Time – D: This is a big problem. Online worlds still don’t last very long. This leads to a series of ephemeral toy cultures. Perhaps the days of the Roman Empire are long lost and our Golden Ages can be measures in seasons instead of centuries.
  • Core values – E: The basic human values of friendship and companionship are in place, but no online world has managed to give players something bigger than themselves to believe in. Until this evolution occurs, online game worlds will remain a pleasant adornment that rests lightly on the real world we all must inhabit.
Did I mention that these were very idle thoughts? :-)

Take care

Completely meaningless references

Sunday, December 11, 2005

Convergence: A great word to hate

We are entering the mythical land of game consoles as convergence devices. The Xbox 360 can play music, movies and games. So can the PS3. So can the PSP and it even has a web browser. Nintendo might toss in a bit of DVD playback into the Revolution for a chuckle or two. The dream of big media conglomerates and technologists seems to finally be coming to fruition. Just imagine: a single box that does everything. What could be better?

Yet most attempts at forcing convergence of disparate devices fails. A few geeks buy into the hype, but consumers tend to ignore mutants like PSX and other technological monstrosities.

What drives the big console manufacturers to create convergence devices if they have such poor historical track records? Technological hubris is of course always a player, but there are certainly deeper issues worth exploring.

Mind you, convergence is a messy marketing term that is going to need a bit of structure in order to discuss in a meaningful fashion. Let’s look at the two key strategies that are often described as ‘convergence’ and pick them apart to see why they are attractive to those shiny boys in sharp suits.
  • Convergence as a product design strategy
  • Convergence as a platform strategy.

Why convergence as a product design strategy sucks
I’m not a fan of convergence devices that promise to do everything. They tend to under perform in the market due to a variety of factors. There a several great articles wandering about the net covering this topic in more detail, but here are the four basic reason the sink these brilliant technological marvels.

Issue #1: Confusing benefit statement
Instead of a single clear benefit statement, consumers are bombarded with a dozen half-baked benefit statements. You need to be able to sum up your entire value proposition in a short sentence.

Look at the PSP’s promise to the customer “Experience entertainment without boundaries.” That, my fine lady friends, is vague and meaningless marketing speak that fails to describe any sort of concrete benefit. Check out the value statements of some successful non-convergence products:
  • iPod: 5000 songs in your pocket.
  • Google: Find anything on the web easily and quickly.
  • Nintendogs: Own a cute dog (even if you can’t own a real one)
  • Gmail: Friendly webmail that never forces you to delete your messages.
  • Tivo: TV without the crap. (Admittedly, Tivo’s biggest problem is that they aren’t allowed to promote this as a value proposition without irritating the advertisers)

Issue #2: Compromised solution that competes poorly against single purpose solutions:
Look at the classic VCR TV. You end up with a crappy TV and a crappy VCR glued together by a weakened user interface. Many consumers would rather buy a quality TV that gives them those warm post-purchase fuzzies. The quality of the individual buying experience matters.

The complexity that attends convergence is typically the kiss of death. A poll the Consumer Electronics Association found 87% said ease of use is the most important feature for users when they are purchasing new technologies.

Issue #3: Higher cost of entry
A multi-function device forces you to buy a bundle. What if a VCR TV costs $300 and you only have $200? By increasing the entry point, you limit your audience. Often consumers will buy the cheaper single component and then save up to get the secondary or tertiary elements of the bundle.

Issue #4: Single point of failure
When one piece fails, the whole thing fails. The perceived risk of system failure is much higher for multi-function devices. This is quoted as a typical issue, but it sounds a bit academic relative to how consumers typically purchase.

The failed logic of convergence focused product design
The traditional product design logic of a company focused on convergence is deeply flawed.
  • Both product A and Product B are valuable to consumers.
  • If we combine product A and Product B into a combined Product C, we will end up with a product that is twice as valuable to consumers.
  • Other companies aren’t selling converged devices so our super product will have a unique competitive advantage that will help us dominate the market.
Customer value however is not an additive property in consumer products. For all the reasons listed above, a converged product will often have dramatically less value than its individual parts.

A company strategy based on convergence is often that of the lazy corporate strategist who attempts to avoid the radical cultural shifts required by real innovation by playing a childish game of mixing and matching existing product lines.

Product successes are not based on convergence
I can only assume the myth of convergence as a product strategy came about when someone saw the occasional success of a convergence device and mistakenly assumed that the chimeric nature of the device was indeed the source of the product’s sales mojo. Let’s look at a couple convergence devices and dissect the real reason why they were successful.

The classic one is the “clock radio” combo. Though this is certainly a ‘convergence device’, the ultimate driver of adoption was a simple, easily articulated use case: “Wake up to music.” Customer benefit drives adoption.

I find camera phones to be another interesting example of customer benefit being the real driver of adoption, not convergence. At first glance the combination of cameras and phones seems to validate the logic of convergence. Cameras are successful and cell phones are successful. And what do you know; camera phones are successful as well!

Yet something curious occurs here. The marketing people at phone companies are running around frantically trying to come up with ‘convergence’ products and services that take advantage of this obvious ‘camera-cell phone synergy’. This task ends up being really quite difficult. Why? Because the benefit of having a camera phone has very little to do with synergy.

The reality is that the benefit of a camera phone is really quite simple: “Always having a camera with you helps you take better pictures.” Any professional photographer will tell you that the real trick to taking great photos is having a camera with you when the right moment occurs. By stashing a camera in an item that is on your body 99% of the time, you increase the value of the camera.

By this argument, if the technologists had managed to figure out how to pack a camera into a standard keychain (and people were constantly encouraged to upgrade their keychains), the “camera keychain” would have been nearly as successful. The customer value is what matters. The fact that the value takes place in a convergence device is mostly random happenstance.

What I’m harping on here is that most ‘convergence devices’ are in reality just a combination of technologies that happen to tap into a concisely defined customer need. Rarely does someone use a radio-alarm clock as a main clock. Nor do they use it as their main method of listening to music. Instead, they use it for a narrow, highly specialized purpose that has a very strong value proposition.

So focusing on “convergence” in consumer products is a silly, meaningless product innovation strategy. What you should be focusing on is serving a customer need. Sometimes that involves slapping two mature technologies together, but more often it involves traditional product design techniques that attempt to solve unrealized customer requirements.

As a game designer, the obvious lesson is that you shouldn’t expect to create a RTS-FPS-RPG that is an overwhelming success in the market place. But we have bigger fish to fry today. If convergence is a poor product design strategy why do console manufacturers insist on designing consoles that promote convergence?

The other face of convergence: Platform creation
The other face of convergence is when a company attempts to create a technology platform that serves as the foundation of a wide array of successful products.

The logic here is straight forward.

  • Create a technology base that allows product companies to make innovative products.
  • Product companies will focus on filling the needs of real customers with great, easy to use products.
  • Customers will buy the well design products and in the process the platform will come along for the ride.
  • Ultimately, network effects will start to make their effects felt and it becomes silly for anyone to develop products without the help of the underlying platform.
You provide technology so that someone can create a Grand Theft Auto and then when everyone wants GTA, you happen to sell them a large number of PS/2s in the process.

Platforms are about potential, not about results
Platform creation is often mislabeled as convergence by the ignorant press and the marketing lackeys that goad them onward.

It is in the platform provider’s interest to claim that they do everything under the sun. They have no idea what the killer application will be for the platform, but the last thing they wish to do is define the platform too rigorously and turn off potential developers.

We are entering into a turbulent time in media. The traditional console game industry is stumbling and future growth is coming from poorly defined markets like cell phones, online games and casual games. Pundits are describing an all digital future where media is downloaded on demand. Digital music and movies are driving the creation of radical peer to peer distribution system outside of the control of traditional channel owners.

In short, if you are a large company such as Sony or Microsoft, you can’t afford a narrow focus. If you focus on a few carefully chosen product benefits and fail to pick correctly, you’ve put the entire platform at risk. What happens if you don’t include great movie playback features and in the next few years someone comes out with an amazingly popular movie distribution system that doesn’t run on your platform? Billions of dollars of potential revenue are lost.

When platform strategy meets product design reality
This thinking puts Sony and Microsoft in an interesting position. They release products that hedge their bets and promise to do everything. All the standard convergence flaws apply.

  • The new consoles have confusing benefit statements. Is the PS3 a game playing device? Sony isn’t saying.
  • Convoluted UI’s. The classic consumer devices of the world have two or three buttons that a grandmother could use. To really tap into a PSPs capabilities, you need to be an uber geek. Downloading a special program to download movies onto your PSP using you PC is not a strong value proposition. Where is my ‘download music’ button?
  • The new consoles are overly expensive. Do you really need Blue-ray or HD capabilities? Most people don’t, but you end up paying for those technologies now because they need to be part of the bundled ubiquitous platform capabilities.
From a product design stand point, all this is very silly. From a platform design standpoint it is essential. When some of those extra features are used by a killer product that plays on the platform, the platform can explode into the market. Your risk is greatly reduced because by building a platform, you have hundreds of smart companies trying to create a killer product for you. You don’t need to rely on your own (often questionable) product design capabilities.

Sony makes a bet that a GTA will come along and use the streaming capabilities of their DVD player to create a must have game experience. Microsoft makes the bet that a Halo will come along and use the Xbox Live capabilities to create a must have experiance. They don’t know what the ultimate hit product will be, but they pack enough attractive goodies into their offering that someone, somewhere will build a success using their platform.

Do platform companies innovate?
There is a big difference between the culture of a product company and a platform company. At the most basic level, the DNA of how they think, react and value products and innovation diverge.

Innovation is almost always about creating a small set of easy to use functionality that serves an underserved customer need. The initial results are unpolished and compare badly to established products. However, because they have little competition in their niche, they thrive and grow at a rate far better than the main industry.

Platform companies are horrible at creating new products that target customer needs. They are always looking for someone else to make the hard customer-centric decisions for them. Trimming features is agonizingly difficult since there is always the little voice in the back of their head saying “But this could be useful in the future.” The result is bloated product offerings that do everything for everybody.

The closest a platform company comes to innovating is when they spot a product category that is critical to the adoption of their platform. Superior resources will be spent in order to own that product category and ensure that its predominant home is the company’s platform.

For Microsoft’s original Xbox this product category was the FPS genre. They invested heavily in making Halo the predominant FPS title on any platform. Halo was certainly a good game, but the combined marketing and hype that Microsoft lavished up on it was critical to its ultimate success and recognition as a major brand. They spent this money because they realized that owning the product category would strongly drive the adoption of the overall Xbox platform.

Since they own the dominant brand in this product category, it is doubtful that they’ll lose it to another platform. Nintendo made this mistake with Final Fantasy. Instead of creating their own RPG offering that dominated the RPG genre, they relied on Square. Ultimately the relationship faltered and Square took Final Fantasy over to the Playstation. The N64 platform suffered a major blow. A product category leader moved to a different platform and took their customer base with them. The lesson for a platform company is the importance of owning your product category leaders.

As we’ll see, this mistake was not an isolated incident, but instead was a classic result of Nintendo’s product focused philosophy.

Why do product companies remain small?
Product companies are great at innovating, but often poor at building up platform-style network effects.

Nintendo is quite happy to make hard choices and try to understand customer needs. Last generation, they made the choice that online services didn’t bring enough value to their customers. This generation they are rolling out a service that has only a few features (what, no match making?!), but serves the true needs of their customer base far better than any current solution. The claim of twice the percentage of gamers playing Mario Kart compared to Xbox Live is a strong one.

Again, we see the philosophy of choosing simple products that serve clear needs and leap into the market with impressive success.

The downside is that product design is a heavily centralized activity. If you look at three very different product innovation companies, Nintendo, Apple and 3M, the vast bulk of their innovative products are designed internally. The culture and processes required to make great customer-focused product decision are highly refined and quite delicate. The fundamental activity of cutting the junk and keeping the good stuff can be easily sidelined by ever a few doubter or hedgers. You literally need to build your entire company around the product design process.

This product design process is not easily transferable to external firms. You can’t easily imbue a 3rd party developer with the design processes that Miyamoto and crew have built up over the past decades. You can’t easily replicate Steve Jobs’ eye for design. In fact, there is limited strategy focus in most companies. The more you are a product company, the less energy is put into being a platform company and vice versa.

Instead of hundreds of developers innovating on your platform, you have one. That one company is generally a highly profitable powerhouse, but its output often will rarely compare to the shear bulk of people putting out content for a broader platform. The result is that massive platform momentum is hard to generate

A tricky balancing problem
All of this creates a complex set of difficult-to-balance requirements.

  • A new console must be marketed to consumers with a clear value proposition at time when there is very little value and lots of potential.
  • If you increase the potential of your device, you make it more expensive by bloating it with extra features.
  • If you increase the out of the box value of the device, you limit the breadth of the platform’s capabilities and tend to focus on first party innovation at the expense of 3rd party development.
A snapshot of the console manufacturers
Using some of these thoughts we can come up with a snapshot of each of the console manufacturers.

  • Microsoft is a pure platform company that dabbles in product design only as a method of ensuring the dominance of their platform. Innovation is secondary to creating a rich and full featured platform. This ties heavily into the culture and history of the company.
  • Sony historically has been a strong consumer product design company. In the past 10 years, they’ve caught the platform bug and are still figuring out how to deal with it. The success of Playstation literally saved a company that was hemorrhaging money from a stalled electronics business. The shock to Sony’s DNA is that it succeeded as a platform offering, not a product offering. With the Playstation 3, they are embracing the platform strategy fully. The question is whether or not they have the skills and the internal culture to pull it off. They certainly have the brand.
  • Nintendo is a strong product company that dabbles in platform development to the degree necessary to make their products succeed in the marketplace. It is quite likely that their individual products will be surprisingly successful in the next round, yet overall market penetration will still be dragged down by a basic lack of platform momentum.
And so end my meandering thoughts on the topic of convergence. The important takeaways:
  • A product design strategy relies on a focused product targeted at a strong user need.
  • A platform strategy relies on creating a broad and flexible foundation that accelerates the development of successful products. Where products are about fulfillment of needs, platforms are always about potential.
  • The cultural DNA required to pursue each strategy is very different. Product design involves making hard choices for the customer. Platform design involves throwing in the kitchen sink for the developer.
  • Product design requires a strong centralized system of decision making. This creates amazing successes, but limits the scalability of the platform.
  • A platform focus creates a business model that scales impressively based off the contribution of numerous 3rd party developers. The real trick is getting it off the ground in the first place since the initial value proposition is mere fluff without products to back it up.
So when you heard Microsoft and Sony marketoids blathering on about super technology and cool things you can do with the convergence of all media, you are right to dismiss it as hot air. They are simply filling time until a developer creates a great product that uses their platform.

At that point, their tune will change. Suddenly the message will be all about the newly minted product successes. It is the same pattern that occurred with GTA, Halo and Final Fantasy. They will then use the success of the golden child to drive further adoption of their platform. In turn, their platform success will encourage more developers to take risks and build great new products. Over time, if enough killer products come out, the platform will snowball and gain momentum.

Nintendo, on the other hand, will come out of the gate with a concisely defined product offering that a target audience will love. The most successful teams will be internal Nintendo development teams and closely held 2nd parties who are well indoctrinated in the process of creating unique solutions around specialized hardware and software.

There are certainly many unknowns. Nintendo could realize their product design bias and beef up their 3rd party support structure to counter the weakness inherent in their cultural predisposition. Sony could rediscover its product design background and launch with strong games tailored to the strengths of their target platform, thus avoiding the early lull that hits most platform focused products.

We can’t predict the future, but at least we’ll have a reasonable vocabulary to discussing what happens.

Take care


Sunday, December 4, 2005

Idly gathered game industry statistics of doom

While I’ve been settling into the comfy moist goodness that is Seattle, I thought I’d jot down a few of my research notes. A blog is a remarkably nice method of recording information for later. It is searchable, automatically indexed by posting time, and has the surprising habit of collecting comments from people who are much better informed than the original poster.

Without further ado let’s look at today’s game industry numbers

American console adoption flatlined since the 80’s
“So this chart is pure number of units sold. It doesn't take into account duplicate ownership, and doesn't take into account population growth. You overlay those two facts to get a percent population with a console in the household, and that's what it looks like. 8 Bit years, 31% of households had a gaming system. This year, where is going to end up? Somewhere between 31-32%. The growth we have seen has been driven by population growth, and by duplicate ownership.”

Reggie Fils-Aime, Chief Marketing Officer of Nintendo

This was a stunning tidbit to me since it has been a matter of public knowledge that game revenues have been growing steadily for many years. The always forthcoming ESA claims that US revenues increased from $3.7 billion in 1996 to $7.3 billion in 2004.

The most basic conclusion is that we, as an industry, have become increasingly sophisticated at squeezing more money out of our current customers. However, we have done quite poorly at expanding beyond of a relatively fixed core audience.

Half as many (arcade?) gamers as in 80’s
“In 1982, he tells us, there were 44 million gamers. Today, there are 18 million.”

Kotaku on Nolan Bushnell, Founder of Atari

I can only assume that Mr. Bushnell is referring to arcade gamers in the US since the number of console gamers alone is dramatically larger than 18 million. Add in casual gamers and the numbers grow even larger.

Weak 2005
“Much of the problems have occurred in the last few months. After a strong first half of the year (up 9% over last year), sales growth has stalled over the last four months, declining by 17% year-over-year. Year-to-date sales are down 2.1% through October.”

"Our most recent forecast predicted U.S. console and PC software sales growth of 6% for 2005, and we now acknowledge that our forecast is too high in light of the weaker than expected October and likely weak November sell-through data. On balance, we now expect sales for 2005 to be flat to slightly positive."-

We are at the end of a console generation and slow sales are to be expected. The Xbox 360 is kick starting the next console transition early, but supplies are still quite limited. These numbers really aren’t that surprising. Except to see the inevitable mergers, closings and buyouts that accompany the mini-shake down when old consoles die and new ones are born.

Longer term declines over the last console generation
“In 2003, the global market combining hardware and software sales fell 10 percent year-on-year to 1.1 trillion yen (10 billion dollars), according to Tokyo-based Computer Entertainment Suppliers' Association.

That represents a 27-percent drop from 2001 when the market stood at 1.5 trillion yen and Tokai's Kawamata said Sony and Nintendo aim to reboot the sluggish game market with brand-new hardware.”

When an entire market drops by a third during what was predicted to be a growth cycle, there are interesting dynamics at work. A 27% drop in global sales despite mild growth in the US is quite likely driven by the shocking contraction of the Japanese gaming market.

I’m trying to track down links to document the actual numbers behind the Japanese market collapse. I know I’ve run across them, but foolish I forgot to bookmark them. If you run across such information, drop me a note.

In a mature multi-billion dollar market you expect a bit of slow down in revenue growth as you reach maturity. However, that isn’t what is happening here. Instead we are seeing dramatic fluctuations that belie an industry built upon an unstable and poorly diversified value proposition.

Success rates of new games
“A new report on the risks involved in game publishing and development has been released suggesting that, in the next generation, as few as 80 games a year will turn a profit.”

There are around 1000 titles released each year in Japan

Just for reference, there are roughly 500 to 600 retail titles released each year by the top 20 game publishers. There are hundreds of smaller titles that don’t quite make it on the radar and are much harder to track.

This is roughly 16% of all titles that hit profitability. Now, I’ve heard some people claim this is a decent percentage. However, for a new product launch this is pretty darned miserable. Robert Cooper’s research found that typical success rates of various product categories are as follows:
  • Highly innovative: 78%
  • Moderately innovative: 51%
  • Low innovative: 68%
Even low innovation brand extensions are kicking the butt of your typical game. Now, the number of highly profitable games is even less. If Halo accounts for 20% of the industry profit during last year’s Christmas season, there really isn’t that much to go around for everyone else.

Profit equals return on investment. If profits are low for a product category, then investments in new products will also often be low. Low profitability threatens the entire industry and makes it far less likely for there to be support for artistic innovation.

The culprits for low profitability are slightly more nuanced than the “increasing technology costs” that everyone is so quick to blame. Rational companies only invest in technology when there is competition forcing their hand.

We have hundreds of teams pursuing a mere half dozen highly saturated product categories (aka game genres) in which there are only one or two market leaders possible. It doesn’t help that most current genres are mature and their population is fixed or contracting. Also that ‘rationality’ of game industry management is questionable. Poor management practices, a lack of mature product design processes and a fixation on technology for the sake of technology also contribute.

End of data dump
All in all, the latest numbers provide a delightful snapshot of our dysfunctional yet lovable industry. The next two years are certainly going to be quite the rollercoaster ride for a lot of folks. Longer term, great difficulties are certainly lurking on the horizon. Many have been sitting under our noses for years.

(I recommend business model modifications and adoption of improved product design methodologies. :-)

Take care