Gaming is Not a Hit-Driven Business

Or, at least it does not need to be

One of the most pervasive myths about the game business is that it is a “hit-driven” business. This isn’t to say that there aren’t hit games—there are—just as there are hit websites, hit apps, hit social networks, hit instant messenger programs or hit SaaS platforms. But when someone says something is hit-driven, they usually mean something else:

  • That the success of a hit-driven business is essentially random—and not largely dependent on the talents or the team behind it.
  • To the extent that it isn’t totally random, that awareness of a hit-driven business is largely generated by cultural tastemakers who are hard to influence.
  • That products in hit-driven markets are resistant to iterative enhancements, ongoing innovation or institutional learning that can lead to business improvement over time.

The above chart from IDG Ventures, based on data from 2005 through January 2014, shows the growth in venture-returns in the game market. Prior to this time, it’s true that almost every game business had lesser returns because they took years to build, required substantial capital, and products shipped to shelves with little or no potential for ongoing improvement. Some products still get built this way, and many investors still view the game business through this lens. In the aforementioned article that quantifies venture returns in gaming, Phil Sanderson comments that:

A common misperception is that gaming is only a “hit-driven business,” but many successful game companies have been more than one-hit wonders through developing platforms or categories using innovative technology and in depth knowledge of the rapidly emerging gaming markets.

Here are a few ways the game companies can depart from the hit-driven model:

  • Games as a Service. Shift from a ship-it-and-forget-it model to one that treats games as services—enabling ongoing revenue streams that can be iterated and improved with time.
  • Realize that content alone is not enough. Take advantage of more capital-efficient and faster development, by using the superior development tools, open source, cloud infrastructure, etc. that are available on more recent platforms. This allows companies to exploit discontinuous innovations in game design and business models more rapidly.
  • Democratize product distribution. Use social networks, viral technology, newer digital distribution platforms, etc. to circumvent the traditional publisher->retailer hegemony and build a direct relationship with customers.
  • Community is King. Leverage community and brand as the glue that can provide a life beyond individual titles; socialize more aspects of the game experience.

Companies that build according to the above principles of sustainability (which I’ve written about at greater length in a post directed more at the game development community) can create long-term businesses with the potential for venture returns.

Mitch Lasky, an investor at Benchmark, commented on the difference between these two type of game companies:

…there are really two types of startup companies in the video game business with two very different value propositions: pure content companies where the value and defensibility comes primarily from intellectual properties and the associated cash that flows from hits; and companies where the principle value is not based on IP but on something else, be it platform, or distribution, or audience aggregation.

That’s what we aspire to at Disruptor Beam—by creating a company that is, first and foremost, a community of the fans of the most popular genre worlds. We gain distribution leverage through our partnerships with media companies, and focus on sustainable game designs that emphasize long-term social interactions such as diplomacy and in-game politics.

The game industry is transforming. While some companies are going to create game content the old way—following a model which has been moderately successful for two decades—the most exciting growth (and the venture returns to match it) will come from the new ecosystem of sustainable gaming enterprises in which content is only one facet of their success.