The Contracts and Royalties panel at the Casual Games conference was easily the most interactive and informative discussion of the show. The moderator had asked the participants – (Greg Mills - AOL Games, Rich Roberts – PlayFirst, David Nixon - Oberon Media, CJ Wolf – iWin, and Margaret Wallace - Skunk Studios) to put together business diagrams explaining how they each believed the margin split should work among the various players in the casual games value chain – developers, publishers, DRM providers and distributors. As one might expect, the content creators thought that distributors should receive about 30% of the revenue, while Greg Mills put the distributor number at 50% or more, much to the displeasure of many in the crowd. The panel then became a little bit of a critique of the distributors, with RealArcade taking the brunt of the abuse as the original creator of this system.
What was not brought up was that this perceived margin share imbalance is simply due to business leverage - there is no law of physics that says distributors should receive only 30%, even if that is common in many physical media businesses. This may not be a popular statement, but the developers/publishers currently need the distributors more than the distributors need them. A similar case exists in the cable world where a distributor like Comcast receives 60%+ of the margin since the content providers absolutely must have carriage on the platform – and this is for a much more mature business than casual games. No one says that content creators must distribute their content through companies such as Shockwave and Yahoo Games – if they’re unhappy with the margins, then publishers should withhold their content. When I brought that up with various developers, they quickly stated that they wouldn’t be able to make enough money without strong distribution, which leads to the obvious margin split we now have which favors the distributors.
So instead of sitting their complaining about it, what should content creators do about this perceived problem?
- Make Great Games – this seems clichéd, but providing a hot game or preferably, set of hot games, will increase your leverage. Merely making clones of Zuma or Feeding Frenzy may have worked last year, but it is going to be increasingly less effective in a more competitive environment.
- Aggregate a Critical Mass of Games – distributors want to work with fewer content providers – Greg Mills made it clear they wanted to limit it to 4-5 providers at AOL. A distributor can’t continue to do contracts with tens of providers – it just doesn’t scale in a larger market. At Listen.com/RealNetworks, we signed over 200 label agreements before we finally made the call to funnel all new labels into a distributor such as IODA or Iris – it’s going to happen in this market.
- Strike Exclusive Deals with Distributors – it may make sense to strike a limited time exclusive (or even longer) with a certain Distributor in return for a better margin splits and additional promotion. It has the risk for alienating the other ones, but I think we’ll see more of it as Distributors look to differentiate their offerings from the competition
- Market and Brand your Games/Company – as was pointed out on the panel, most content providers do a great deal of their own marketing – e.g. MTV doesn’t wait for Cablevision to promote their channel – they drive demand themselves. Almost no developers/publishers currently do a lot of marketing to drive demand and create awareness – that may not have been necessary in less competitive times, but it’s becoming necessary now
- Work with Smaller Distributors, including non-US ones – it’s likely that a content creator can get better terms from smaller distributors, especially if they work with them closely as opposed to shipping them the identical product. This takes more work, especially outside the US, but content creators need to get more creative in how the look at the marketplace
I’m sure there are many additional ways to address this issue. But they all come down the inexorable fact that the casual game business is going to get harder and more complicated for all players, but that those content creators who can deal with the new landscape will actually come out ahead as the business expands, just as always happens in maturing media markets. It will not be business as usual by 2006.