I just returned from Casual Connect Amsterdam 2008, part of the periodic casual game conference show series put on by the Casual Games Association. Although it is a long trip from San Francisco, this was a really interesting show since 2008 will be a time of change in casual games, and we're finally seeing the drivers, which are creating both Pain & Opportunity for developers. This post is about the PAIN and I'll follow up about the Opportunity. It may seem to be pro-developer, anti-distributor post, but it's really just about what naturally happens in early stage media sectors as they mature. Small players get squeezed, and must adapt or go away, as I blogged about here in one of my first posts almost 3 years ago.
On the surface, casual games are on fire. There are numerous articles in main stream publications focused on the sector, the success of the Nintendo DS and Wii are primarily due to casual games, and advertising interest is growing, and most of the top 10 in mobile games are seen to be casual, not hard-core, games. It's now becoming common knowledge that everyone plays games, not just young men, and gaming is truly becoming an equal partner to the traditional media sectors of movies, music and television.
So why the PAIN comment? Its somewhat related to the good news above - now that we're looking at a $2B+ growing global business, we're seeing the issues below, which prompted a great veteran developer to say this week "the gravy train is over".
- Rising development costs - as generally happens in growing media sectors, the costs of each successive game keep going up as developers try to increase the level in graphics, gameplay, sound and overall game depth, plus reflect their own increasing costs. The distributors hasten this process by using "fit and finish" to help determine if they're going to carry a game or not, as does increased competition, but ego also plays a role. It's routine now for developers to tell me their game costs $250K+, and an increasing number are costing more than $500K - that compares to $50K-$100K as recent as 1-2 years ago, and that all comes out of the profit line. A comparable example is in movie sequels, where the rule of thumb is that the sequel costs twice as much and usually does less in revenue.
- Slowing growth in downloadable games - after speaking with almost every developer and distributors, it's clear that downloadable "try before you buy" revenue growth is slowing significantly as conversion rates of download-to-pay drop, and as the increasing supply of somewhat undifferentiated games lets most users enjoy a ton of gameplay if they spend just one hour on each game. I do not believe for one moment that downloadable games are going away any faster than banner ads are (whose death keeps being prematurely foretold), but it seems clear that free ad-supported games, flash games, subscription games, and micro-transaction games are allow growing faster, albeit from a smaller base.
- Increased distribution power - although there has been very little actual consolidation among the top casual game distributors (Real, Big Fish, AOL, Yahoo, MSN, Wild Tangent), the increasing supply of games, often undifferentiated, means that they can squeeze developers on lower margins, lower prices, and other less favorable terms. In addition, at least the first 2 big portals increasingly publish their own games, making less room in the promotional process for 3rd party games. At the end of the day, there is no break out game that is a MUST HAVE for any portal and since they are all big businesses, they can squeeze harder, just as always happens at this part of the market life cycle. The other BIG issue with distribution power is that it limits innovation in the sector since they can't/won't support any cool community or transaction element beyond traditional single player downloadable games since they want to maintain their common user experience, as well as a walled garden - this makes it hard until they all roll out compelling community/ad/transactional solutions, which will, of course, all be different from each other. Some of this will improve as we see new distribution solutions appear, like we now offer at Meez Games, but I'll discuss it in more detail next post.
- Decreasing game prices - related to the over supply of content, lower conversion rates and increasing power of distributors, it's no secret that the effective price of a game has dropped to around $12 from the suggested $20 retail price, and that's due to discounting, inclusion in subscription packages, and other ways to effectively discount the prices of the game to the consumer. All that comes out of the developer side unless you see a similar or greater increase in units sold (price elasticity), but no one seems to think that is actually happening - what we're seeing is top games spending less time in the top 10, selling fewer units, and generating less revenue, but that may still suit the distributor since they sell the eyeballs, push more people into subscription packages, etc.
- Flood of cheap suppliers - if the last 2 years were about the entry of Eastern European and Russian developers, this conference was about the rise of Indian dev shops, many promising lower and prices, not just to develop 3rd party IP, but also to distribute their own games, which adds to the glut. Plus there is a tendency of these new entrants to "clone" popular games, which helps to undercut the category, as we have seen in time-management games or what we'll see this year in hidden object games.
The end result is a set of extreme challenges for the developers in casual games, as well as some moderate challenges for the distributors since the new growth opportunities all require a higher level of investment than their current models do, but we'll talk about that it in the next post since its the fun part of 2008.