Go-to strategy for Jump
Let’s start with the premise that company X wants to become the Netflix of video games. Basically one small subscription payment per month and you can play all you want.
I’m going to try to make the case of why should we be more aggressive in how we buy content from video game studios. Today company X is thinking about giving a $5k-$10k retainer and then go 50/50 with the revenue generated on a subscription base of $12 per month per subscription.
Now, there are 3 important key points that we need to think and analyze:
3-LTV, CAC & revenue share model
To explain aggregation I’m going to borrow from Ben Thompson that did a great analysis of how this is playing for Netflix and others companies.
“The value chain for any given consumer market is divided into three parts: suppliers, distributors, and consumers/users. The best way to make outsize profits in any of these markets is to either gain a horizontal monopoly in one of the three parts or to integrate two of the parts such that you have a competitive advantage in delivering a vertical solution. In the pre-Internet era the latter depended on controlling distribution.”
What this mean in an era of the internet making distribution almost free and content accessible to everyone, everywhere and anytime? That the vertical integration of content and distribution helps you control the relationship with the end user (customer) and commoditized the supplier (in our case the video game studio). Not only that, that under an aggregation of all users you can serve different customers with different content without needing to do customization. You no longer depend on 1 hit game to make all the money, since you could have several games coming up as the new hits.
This images explain how Netflix is doing the aggregation and taking away the distributors:
So what will happen with the consoles? We can assume that the consoles will become just the hardware door, but the distribution will be own by who is integrated from the customer to the content. Think about AppleTV or Roku, basically used to distribute Netflix, Hulu or HBO but the hardware itself create no real loyalty or interest to the customer. There is a point to make that consoles create part of the game experience, since the graphics and processing power is distributed on the hardware. Now, if would say that Unity is the one fighting that battle, to make software that will eat the hardware in the consoles.
Once we have an aggregation strategy in mind, then we can think about the content. Whoever owns the content will own the attention and relationship with the customer. They are people that will still buy video games that have a personal connection to them or that they have been playing for many years (Call of Duty, FIFA, Battlefield, League of Legends, etc). As we move forward to the next generations of gamers (those born and raised with a console in their house) we can assume that they will be looking for new games to play and to discover.
The issue of the game industry as we know, is that one hit is hard to get, and that the big hit pay for the bills. As company X aggregates all video game studios, there is no need to find that hit but we can diversify and let the gamer define and found which will be the next big game. What happens if there are many places where you can get the same game, or many different platforms where you can get only one game: well, then the user will move to the one that has the most content that fits their needs, and as more people move to one platform then it create a network effect. This is why it is so vital to own the relationship with the content creators to a point where they only distribute through X. More content will attract more users, and more users, will make the content better by the data you collect, which makes a better content selection, creating a higher hit rate.
If we look at the content acquisition on the streaming industry we see a pattern:
If you think about any of this companies: Hulu, Amazon or Netflix none had a big hit until they had enough users and enough content that they economy of scale brought the network effect.
3-LTV, CAC & revenue share model
The whole content acquisition and how much to pay for it basically depends on a numbers game. How much to pay per game or how much to pay the studio, how this payment comes through, how much it cost for the game studio and how much revenue will you come out of that game.
Here it’s where it get complicated. Most game studios developed games without a total certainty that the game will actually pay off. Even with all the market research, marketing and promoting most games goes down as not profitable.
So the important is to know how much is the Life Time Value of a Customer (paying $12 per month on a total of $144 a year) and compare to the Customer Acquisition Cost of that customer. For what is means streaming on a subscription model I would add the cost of the content as part of the cost of acquiring a customer.
The assumption here would be that any customer will sign up for at least one year ($144). If we assume we would have 5,000 paying customers in the first year, that would bring a revenue of $ 720,000.
So what could be the cost of it. If we pay 50 game studios $10,000 for 3 game (150 games) for a period of 24 months licensing then we would have an upfront cost of $500,000.
Here is where the revenue share model comes in. If we assume a revenue share model based on percentages % (like 50/50) then we will have to put a price to each game, or each studio to know how will the percentage actually be related to the customer that pays $12 a month. One gamer may play all the 150 games, in that case how do we pay the studio? Per game? Per user? If we go in a variable model both in the way we pay per usage (game or user) and also in the percentage of it (50% of what) then we put ourselves in a very difficult place to be able to estimate statistically upfront how much could be the cost of one specific game or one specific user.
So let’s get the following model. Upfront payment to the studio for the exclusivity of 3 games for 12–24 months plus a payment per individual paying user that plays that game:
If a game is played between:
0–1000 users then you get $10 a year per user $0 — $10,000
1000– 5000 users then you get $15 a year per user $15,015 — $75,000
5000–10000 users then you get $20 a year per user $100k — $200k
Now, one of the main issues for game developers is the uncertainty of the future payment, which is also correlated with the possible revenue for company X.
Right now we have more open questions than answer :)
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Powerlaw distribution of returns