"Game dynamics" = the new black

I recall a 1995 conversation with Mike Moritz from Sequoia, a VC on the verge of fame, and a board member of my first startup regarding his recent investment in a new company called “Yahoo.”  In passing, I asked Mike about the company’s revenue model, and, when he answered, remember saying something like… “Advertising?  Are you kidding me?”

Michael Moritz at TechCrunch40That was then, this is now.  A decade later, seeing Mike again at Sequoia, I, jokingly said… “Yahoo, Google… advertising.  I think you had something there.”  Mike said, “Oh, come on, that was obvious.”

Well, in 1995, in software, in Silicon Valley, it was NOT obvious.  And seeing the internet in terms of a new monetization model is what makes me always bring up Mike’s name when I get asked to give an example of how a VC saw something that others didn’t.  Not that there weren’t great media businesses thriving on advertising in 1995 — there were.  It’s just that Silicon Valley at that time was about software.  Writing software, putting it in a box, and selling it for money.  No one connected that having billions of eyeballs on your web page could translate into billions of dollars.

After Yahoo’s (and later, Google’s) phenomenal success, few questioned advertising as a viable money-generating model for new startups.  The formula was simple:  raise a lot of money, market the hell out of whatever web property you laid claim to, and, then, magically, convert that traffic into clicks and advertiser money.  Companies came in, said “ad-driven revenue model: and VCs nodded and wrote big checks.  There were many successes in this business, but many more failures.  What the startup founder often misunderstood is just how huge the traffic numbers had to get to make enough money to pay for even a single engineer, forget about a nice Mountain View office and media executives with perks.

As the disillusionment with pure advertising models grew in the early 2000Ks, new, simple variations on the simple theme of advertiser dollars reared their heads.  ”Social,” “location based,”  ”offer-based” and other models have come been coming and going.  They all still depend on the same basic idea:  lots of people = lots of traffic = lots of advertisers willing to pay for that traffic.  And that gave birth to an industry:  targeting, optimization, clever ad-serving, campaign management, etc.  But, unfortunately for most of the new companies, the pattern tended to repeat itself and innovation had no place in a business that needed to scale at the speed of thought.  Early movers with critical mass eventually eclipsed all the copycats because, fundamentally, it’s hard to build a better mouse trap when you are focused on users and traffic versus building product.  You don’t have time to innovate because that’s not the goal.  The goal is to grab traffic share.

Image representing Zynga as depicted in CrunchBase

So, the new fad is “gaming dynamics” and “in-game goods.”  Early movers:  FourSquare (and lots of clones) and Zynga (with almost every gaming company now trying to monetize by selling things).   The numbers are obvious in case of Zynga, and, presumed though not demonstrated in the case of FourSquare, Loopt, SCVNGR, Gowalla, etc.

Here’s my issue:  in-game goods are no longer new and no longer clever.  Everyone is doing it hoping to get the same knee-jerk reaction from investors who missed the boat five years ago.  It’s the equivalent of talking about advertising in 2002 (vs. 1995) as a revenue model.  It gets old, gets old quickly.  Some investors bite, but that’s because they aren’t playing games and not reading the press.

Another issue is that buying in-game goods get old very quickly.  If you’re Zynga, you’ll keep making money with unimaginative, boring hits like CytiVille.  But, my in-game dollars are no longer free for the taking.  I have spent a lot of personal money on World of Warcraft, Travian, and other in-game platforms.  But, it seems to me that almost every game I now play wants $5 here and $10 there.  My personal dollars and my tolerance for PayPal payments are now stretched to the limit — not because the $5 bothers me, but because there are just too many places to spend it.  Like slot machines on the casino floor, the games are all the same, and all want a few bucks for a chance to win the jackpot and enjoy the ambiance.

Yes, there will be an alternative currency that will be shared between games.  And, most likely, it will be based on FaceBook’s virtual currency (and that’s another reason I am not balking at all at the price Goldman put on the company).  Why?  Because if you’re hoarding cash under a mattress, just as in real life, you would prefer that to be in gold, dollars, or euros (vs. say, Russian Roubles).  And I would prefer the game dollars I buy to be kept by a company with real banks behind it.  I think the in-game goods race is won.  There will be gold mines, but Facebook will be selling the picks to the miners and getting rich in the process.   Others?  How many “lindens” do you still hold, and what’s the exchange rate?

So, what’s my advice to game developers and social media sites looking for revenue models:  make better games and build better services. That’s what will get you the users and, eventually, the dollars.  I have been playing WoW for seven years now not because of its clever social network, its economic overtones, or its ability to connect me with my friends — I’ve been playing WoW because it is simply and awesome game.  And I’ve tried Aion, Eve, Lord of the Rings, and await my Rift invite — still prefer WoW.  Make better games, even simple ones like Angry Birds (which, by the way, makes a lot of money simply by SELLING what they’ve built).  Make services that are useful (like Yelp).

I have loved computer games ever since Star Raiders on my Atari 400.  I will keep playing games, probably, for the rest of my life.  I will pay for games that I find interesting.  But, as with CityVille, I will stop playing after a few hours if I notice that the authors are trying to be a bit too eager to extract cash from my wallet or get me to recruit my friends into their Ponzi scheme.

Build an addictive game, build a useful social service.  The gaming will come naturally and much later. 

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About Kirill Sheynkman

I am the Senior Managing Director of RTP Ventures. I am a three-time founder of software startups including Stanford Technology Group, Plumtree Software and Elastra (an acquisition, an IPO, and a failure): spent most of my life building companies and working with VCs. Now a VC myself. Still not 100% sure I like it.

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