Making Them Pay

Making Them Pay

In an industry filled with companies whose job is to create menacing alien worlds or soaring fantasy narratives, it's understandably hard to get excited about a company whose job is simply to facilitate the flow of money. Yet that flow of money has never been quite so complex. Consumer relationships have never been quite so multi-faceted and so direct. The chain of transactions linking developers to game players has shortened dramatically, and yet the options for forging that chain have multiplied exponentially. It's not entirely uncommon to hear veterans of the industry, a couple of beers worse for wear, bemoan that for all the fresh opportunity offered by today's market, yesterday's was at least a simpler world.

Gene Hoffman is the closest thing you're ever going to find to a veteran of the brave new world of online content distribution - and, more importantly, how that content gets paid for. In 1998, he co-founded eMusic, an early online music service which pioneered ideas about changing the business model for music to match the online world, rather than shoehorning prices and sales models designed for physical products into a world that had already discovered Napster. Today he's CEO and Chairman of Vindicia, a company that provides payment solutions and in-depth advice on business models to a range of different industries - including some of online gaming's giants.

Hoffman recognises the simplicity of yesterday's business models, but gives no impression that he mourns their passing. "In the past world," he explains, "every business model was some version of a hundred thousand, ten thousand, one thousand, five hundred, two fifty, 49.99... Up front. Then 18 to 24 to 36 months later, you'd hope to get either the same transaction again, or 20 per cent of it. So, big software was sold, in a year I'd get a 20 per cent transaction for the service cost. Small software, I'd sell you an office suite for $500 and get you to do the upgrade for $220 in 18 months. Mario Brothers, it'd be $49.99 - or really, to be honest, $260 to buy the console and the game - but now you've got the console and I'll hit you for another $49.99 for another game later. Those are all the business models."

"But back when we were looking at the Internet's arrival, we knew that anything that could be disseminated would be," he continues. "Once that happens, how you run the business day to day, and how you go to market, has to change radically. Once piracy is ubiquitous - and once the physical comes out of it - the customer sits there going, okay, digital actually makes this more valuable to me because it's easier to use... But at the same time, though, I could just steal it. No matter what, then, you have this downward pricing pressure."

eMusic was a direct reaction to that environment. Selling albums for $8.99 left the company scrabbling to find any profit margin, trapped between the high cost of acquiring customers who rarely stayed for more than one purchase, and the fee demanded by the rights holder. Hoffman's solution was to throw out the traditional model in favour of offering monthly subscription packages that let customers download a set number of songs, DRM-free.

"Suddenly, wow, 43 per cent of people who'd give me their card - which wasn't everybody but it was quite a few - would stay an average of 14 to 20 months. That's a business model. Now I've got dollars to spend to acquire customers. I'm out there spending $20, $30 a customer, because I'm actually getting, what, $260 from each of them? That's a business model."

Since selling eMusic to Universal in 2001, Hoffman has been applying the same kind of logic to an even wider market. "What I realised was that that dynamic was going to cross software, it was going to cross all media," he says. "Print. Magazines. Television, movies, you name it. Everyone is going to have this problem - including gaming. In fact, it's boggled us that it's taken gaming as long as it has to go digital."

Today, Vindicia works with many of the biggest names in the online games business, from core MMOs like Rift, Star Trek Online and Champions Online (and yes, Blizzard is a client too), through to more casual titles - the likes of MindCandy, BinWeevils and so on. Yet gaming is only about 30 per cent of the company's business - the rest is made up of a diverse mix of dating sites, Software as a Service suppliers, and other online media providers. Describing what exactly the company does is a little tricky, in a sense. Its core product is an extremely robust back-end for payment processing, but it's instantly clear when Hoffman starts talking that understanding business models and the evolution of the market are the real bread and butter of the firm.

The reality is that the most successful products are the ones with no single business model. Even if you say you're a subscription MMO, you actually have a virtual currency and a virtual goods model.

"Everyone else would characterise us as a payment structure," he cheerfully admits, "but in reality what we do is marketing, billing and CRM - and more importantly, business models. What we're really doing is enabling digital services - gaming, entertainment, you name it - to go to market and not necessarily worry about how to execute various business models."

Examples and ideas spring up rapid-fire in Hoffman's responses to every question. "The reality - especially in gaming - is that the most successful products are the ones with no single business model. Even if you say you're a subscription MMO, you actually have a virtual currency and a virtual goods model in operation. Fundamentally, what we're doing is giving the game producer, the marketer and the designer all the tools necessary to get away from the cash register." He rattles through examples - an MMO developer who wants to know how to maximise the revenue boost from the switch to freemium. A publisher who needs to mine through complex B-test data to see if dropping the price of a virtual item will give a sales upswing.

"Being able to run that easily, to pull the data all the way back from the billing - that's important, because it goes beyond the simple yes-no answer. For example, if you offer that customer a lower priced virtual currency item, did that actually extend his purchase life? Even though you may not be getting optimal revenue per, you're leaving maybe a pound on the table, is he doing an additional transaction later that you otherwise weren't getting? It's about being able to do that level of analysis, directly in that our tools make it easy to do that, but also in the sense of having us there to train you about how to ask those sorts of questions."

In the case of handheld consoles, there's also an unanswered question over the Nintendo 3DS. I've always maintained that the 3DS does not have the potential to match the eventual market success achieved by the DS, and I still think that's the case. Earlier this year, however, it looked like the console might be an outright flop - with plenty of commentators ready to pile on and declare the console still-born. Now it's selling bucketloads in Japan thanks to Monster Hunter, and doing remarkably well overseas too, suggesting that the strong Christmas Nintendo needed for the console has become a reality.

Does that mean we're all wrong about iOS reshaping the face of this market? No - but it's new data, and it's important to assimilate and understand it rather than dismissing it as a blip or claiming that Nintendo's "fanboys" are somehow distorting the market in an unrealistic way. In a market where conventional wisdom says that smartphones are the only game in town, millions of consumers have bought 3DS consoles. There's a transition happening, but perhaps it's not the transition we thought - perhaps it's slower, or less complete, or simply more complex than the simple narrative of "everyone drops dedicated consoles and buys an iPhone".

I suspect that similar complexity will emerge as we start to get an understanding of what happens around the forthcoming launches of Vita and The Old Republic. Vita is a powerful multifunction device that isn't a phone - unlike the 3DS, it can be seen in some ways as a stab at the iPod Touch market, for example, and perhaps even nibbling around the fringes of what the iPad does for some of its consumers. Will it work? It won't sink the iPad, of course, but it'll be interesting to see what it can do in the market, and will give us a deeper picture of a market that's not only in transition, but also in the throes of rapid growth.

The Old Republic, meanwhile, is a game that conventional wisdom consigns to the bin of history - an expensive MMORPG with a front-loaded cost structure and premium monthly subscription, adrift in a world of free-to-play business models. It's easy to declare it the last of the would-be WoW-killers. Yet the sheer power of the brand recognition and of EA's marketing machine, not to mention the credibility with the core market afforded by Bioware's involvement, make it something special - and the excitement over freemium doesn't change the fact that over 10 million people are still paying for WoW every month, so it's obviously not a dead business model, even if it's an old one.

Because the games business so often runs on the basis of making good guesses about what's going to happen 18, 24 or 36 months down the line, it has become very full of people who may not actually be great educated guessers, but are extremely good at giving the impression of being utterly confident and informed in their predictions. This makes videogames an industry where conventional wisdom tends to become accepted fact long before it has any right to be anything other than challenged theory. That makes data - proper, quantifiable data coming from the only place that matters, the marketplace itself - incredibly valuable and important.

That data, however, takes a while to arrive. Hence the irony; 2011 will be remembered as a pivotal year for the games industry. Until we see the figures start to pile up in 2012, though, we'll have real no idea in which direction we're pivoting.