Why Virtual Currency Exists

A recent Twitter thread highlighted a popular Gamer™ belief:

Even within gaming studios, I encounter a similar sentiment. Proponents of this position claim “firms use virtual currency pricing as a behavioral trick!” With virtual currency, there’s a disconnect between the real-world price and the virtual currency (VC) price. While true, there’s no intentional trickery going on. Instead, the reasons for VC are quite straightforward:

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Battle Pass Who? We’ve Got Direct Stores

One revelation of the Apple v. Epic case is that 67% of revenue is from the Item Shop.

I couldn’t directly source the claim from a primary source (the specific page). If someone can link to the page number, please do so in the comments.
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More on the Economics of Battle Pass: Resting Prices, Forecasted Level and Complete Pass

WoW made blue bar = good a heuristic by way of XP boosts

The previous model of battle pass (BP) focused on average daily monetization cap (ADMC) as the key lever in driving more monetization from BP. Special attention was paid to the role of tiers and we’ll continue to do so here.

One of the more interesting shortcomings of BP is the inner temporal nature of the pass. The pass is available not on demand but at fixed time intervals. If a player joins in the middle of a twelve week season they face radically different pass economics then someone who started at the beginning of the season.

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The Environmental Economics Approach to Liveops Content Management

I’m sure Candy Crush will put Hotelling over the line for a posthumous Nobel Prize.

In 1931, American economist Harold Hotelling published the seminal paper The Economics of Exhaustible Resources. Harold described a problem many firms face: how much of a non-renewable resource should they sell at any given time? This problem is more obvious when thinking about managing an oil supply, but just as relevant when considering how to manage match-3 levels.

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Ultimate Team, Fantasy Sports and the Sorare Thesis

“Something to aspire too”

Professional sports give us something to aspire too. Players are celebrated as heroes and children grow up wanting to become them. It’s no secret that the internet, and games in particular, have found even more ways to engross us in the world of sports. But the terms of that engrossment are not incidental, they’re crucial. NBA TopShot lets users “own” iconic moments. FIFA Ultimate Team (UT) has players collect star footballers. Fantasy sports gives betters big stakes based on outcomes. These platforms offer us an opportunity to insert ourselves closer to the action. French start-up Sorare fuses these aspects in a way we haven’t seen before; it’s the greatest challenger to UT and fantasy sports in years (sorry PES).

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The Economics of Battle Pass are Broken. Let’s Fix It.

To be fair “dippin dots” hangs around

Monetization’s modern paradigm is defined by a direct store and battle pass (BP). After years (and ongoing) criticism of loot boxes, Fortnite re-wrote the rulebook in a way that seems to make both developers and players happy. However, it’s important to consider that at sufficient scale any monetization scheme looks like a winner. It’s unclear if Fortnite is a winner because of the pass or despite it. For instance, the collapse of Clash Royale’s monetization can be partly traced to the introduction of its own pass.

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Game Companies Are Not Tech Companies Part III: The Content Problem

Part I
Part II

The only Content Problem worth saving. Do it, Reed!

So maybe game companies aren’t tech companies. But as much as game companies seem to borrow from tech firms, there’s more to be said for the opposite. If Netflix, a subscription service with over 10,000 movies and TV shows, has its biggest competitor in a single game, Fortnite, then perhaps there’s more for tech to learn from games. And how games deal with The Content Problem is its defining characteristic. Of all forms of entertainment, games present the most compelling answer to the problem.

The Content Problem

The fundamental axiom of economics is that there are unlimited needs and wants and only limited means to fulfill them. The parallel for entertainment might consider that core content demand nearly always outstrips supply. For example, large swaths of Game of Thrones and Harry Potter fans are underserved by a couple of books, movies, and TV seasons. Executives try to fill the void with licensing: Harry Potter backpacks, Game of Thrones beer, etc. But filling the core content demands are impossible: it takes far more than 1 hour to produce 1 hour of Game of Thrones, while the same is not true for games.

Consider the following:

The content consumed in a game like Overwatch or Clash Royale is the pursuit of strategy equilibrium and/or mastery of mechanics. A new unit in Clash Royale changes how players organize their decks, even if they don’t use the unit directly (they must counter it). This can provide hundreds of new hours of content to consume relative to the near 1 man-week of labor to produce the new unit. Therefore, the marginal content output of a given member of the 16 person (!) Clash Royale team is astronomical.

Furthermore:

The genius of PvP (Player v Player) environments is how they necessitate the emergence of a meta-game. In mathematics, Player vs Environment (PvE) resembles the field of optimization where strategies are static – one and done. PvP environments, however, resemble game theory models where it has been shown strategies evolve in an evolutionary process. This means equilibrium in PvP environments is constantly reshuffled with each balance change; the search for dominant strategies in an ever shifting equilibrium is the game itself.

The marginal product of labor for a given game developer completely outclasses a given producer on a movie or TV show by virtue of the medium, not the individual. Unlike games where assets are infinitely replicable, movies and TV face fixed constraints: Emilia Clarke or David Benioff can only be in a single place at a given time. They must also eat, sleep, socialize (sigh). Meanwhile, Captain Price faces no such constraints. There’s no more Game of Thrones to consume after the last episode cuts to black while there’s always another hour of Fortnite to play. How can Netflix and others adapt to the reality of these mediums?

The most straightforward strategy is a content arms race. Netflix continues to spend over $17B a year on original content while scooping up oodles of back catalog content. Of course, viewers must be interested in this content for it to be “effective” and the recommendation engine plays a strong role in this. But the the last episode of Stranger Things is just that, the reco engine cannot find fill the void while operating on the same indifference curve. The “more bodies” strategy to solving the content problem is expensive to execute and as we’ll see in part 4, struggles to achieve Marginal Cost = Marginal Benefit.

Reality TV is a response: less writers, editors, and CG needed to produce a given hour of content. Shows like The Amazing Race, Big Brother and Survivor can do 20+ seasons of 22+ episodes while Game of Thrones struggles with 7 seasons of 10 episodes despite having so many more crew members. Netflix’s speed of investment here is breathtaking. But the addressable audience is more limited in scope then traditional dramas. Netflix needs a bolder evolution to combat games: TV-as-a-service.

The forgotten genre of soap opera TV provides a near perfect blueprint. For those unfamiliar, soap operas are near year-round weekly serialized television shows. The unrelenting pace has resulted in popular series like General Hospital having 14,000+ episodes over 57 years. Netflix needs to heavily invest in moving shows to a similar formats: year-round production with weekly releases. There’s always another piece of content to consume right around the corner while the back-catalog for a given show is continually expanding for newcomers. In many ways, this mirrors match-3 level production. The number one reason why players churn from match-3 is a lack of new levels and a quick glance at community pages confirms this.

Sugar Rush or something, right?

King mitigates this increasing difficulty for example. This increases the time to completion but could also result in churn. Reality TV faces no such option. Another strategy is also possible however: branching narratives.

Increasingly, Hollywood is shooting movies back-to-back. It’s cheaper to continue production rather then stop and go. Why not do something similar to produce more content? In this case, shoot multiple perspectives in a given series simultaneously. Lord of the Rings production operated in a similar way with two production crews, but with a singular end product. Game of Thrones also operated in this way from a production standpoint, but again the end product was single episode. Why not dedicate an hour to each perspective? This easily multiplies a 10 episode season to 30 while holding down cost. Netflix can’t solve The Content Problem, but it can mitigate it.

Interestingly, Youtube has solved most of this problem via a two-sided marketplace. The sheer smattering of volume helps the supply-side problem even if a particular creator has a finite number of video (remember, you can still play a given game for an unlimited amount of time without “running out” of content). Youtube has encouraged users to subscribe to many different creators so regular release cadence is also accounted for as well.

Diminishing returns for linear content are extremely steep, few users will watch a film or movie more than once. Deepening the LTV of a viewer primarily come through more linear content: an extremely expensive proposition. To compete with games, TV and movies need far more supply. If technology and business models can really change creative product rather than be a vehicle for it, now has never been a better time to explore changes in storytelling.

Part IV

Can We Get Players to Tell Us Their LTV?

Nook is all too familiar is compounding growth.

Eric Suffert acutely describes the dangers of extending payback windows. At every t+1 the accuracy of LTV declines while the variance in cohort profitability increases. LTV, however, is not an exogenous variable and clever design can incentivize players into revealing their long-run time horizons within a game.

Consider the design of a many subscriptions: you can pay a lower annual fee or a higher month-to-month fee. If you’re uncertain about the subscription, then the month-to-month is more economical while if you have more certainty then the annual fee makes more sense. The choice is a huge predictor of retention: annual users are far more likely to retain then month-to-month users. The mere inclusion of this annual/month-to-month choice gives users the opportunity self-segment into more predictable cohorts. Why can’t we use the same mechanics in game design to create more predictable LTVs?

Consider two possible goods for purchase via gems in Clash of Clans: a builder or gold. The builder increases the long-run growth rate of gold while the gold itself is a temporary boost in short-run capital stock. In layman’s terms: spending 100 gems on a builder might net you 200 gold today and 1,000 gold by D30 while spending 100 gems directly on gold may only yield 700 Gold today and 0 gold by D30. The builder is an annuity that pays dividends every period, the longer a player’s time horizon the more valuable the annuity.

Players who expect to have a long time horizon in a given title have an enormous incentive to purchase “investment” goods or goods that pay dividends overtime (battle passes similar to some degree). Not doing so results in a increasing opportunity cost penalty every period due to lost compounding growth.

F2P has experimented with direct daily annuities of hard currency. They offer players a discount over the standard IAP packs but must pay upfront to receive a daily allowance. Instead of a 30-day pass, why not ramp to a quarterly or bi-annual pass? Doing so would make LTVs more predictable early in given player’s lifecycle.