“People are willing to pay for magic.”

That’s what my friend Brian replied when I told him that no one in Microsoft’s target audience would purchase an Xbox plus Kinect for a minimum price of $300 when they either A) own a Wii already, or, B) can purchase a Wii (with MotionPlus, Wii Sports and Wii Sports Resort) for just $200. Brian, as I frequently must admit, is a perceptive fellow.

People are indeed very willing to pay for magic. They have lined up around the block to pay $500 minimum for a slice of magical iGoodness from Apple. They lined up to watch Avatar in 3D (multiple times.) And they — that is, we — will continue to line up for the products and services that dazzle us, recession or no.

So, if you want to know who “won” E3, perhaps one way to figure that out is to apply a magic test to the products that were unveiled there.

Sony’s Move

By essentially copying the Wiimote’s nunchuck, Sony forfeited one of the few ways it might have differentiated the Move from the Wiimote w/ MotionPlus. Furthermore, the Move games I played exhibited noticeable lag, despite frequent assertions from booth attendees that the Move is lag-free. Lastly, there was nothing in the Move 1st party content portfolio that particularly stood out for me (Ubisoft’s Child of Eden was thoroughly intriguing… but also multi-platform.)

Verdict: magic tricks lose their luster after we’ve seen them too many times. This trick is getting old.

Microsoft’s Kinect

I’ve been waiting a long time for someone to make camera-based games that actually work. And there’s no question that controlling your media center with your voice and a wave of the hand is a magical experience, in theory. (How many people spend a small fortune on a universal remote? Now imagine that, minus the remote, plus a system that recognizes you on sight, and you’re starting to appreciate the possibilities.) Interestingly, pre-orders have made Kinect the #1 best-seller in the video game category on Amazon.com for the past six days; a clear signal that many people have bought into the initial hype. And finally, I will personally attest to having witnessed many people (usually women) positively cooing with pleasure while watching Kinect demos at E3. (Mostly Ubisoft’s fitness offering and Harmonix’s delightful Dance Central.)

That might or might not be enough. Nobody wants a universal remote that doesn’t work when you’re sitting. Being a Jedi loses some of its appeal when you’re paralyzed from the waist down. Noticeable lag isn’t a deal-breaker, but it certainly reduces the total potential number of magical experiences. And it’s still unclear how a party game works when anyone who walks into the party room can accidentally break the experience.

Verdict: very possibly magical… as long as you’re not sitting down, not in a crowded room, and not hardcore.

Nintendo’s 3DS

You turn it on and play games in 3D. No glasses. No excuses. It just works. Today, you get Kid Icarus dodging lasers in 3D. Tomorrow, it’s a safe bet you’ll get Mario hopping into your face.

Now that’s unadulterated magic.

The Magic Test, in summary

If you’ve seen it before, it’s probably not magic. If it doesn’t work the way you feel that it should (or doesn’t work in “normal circumstances”) then it’s probably not magic. But if it’s novel, fun, and just works, then you just might have magic on your hands. This test can be applied to game development, not just hardware development.

Don’t take my word for it. Just think about any performance given by the world’s greatest magician.

No, not Houdini. Steve Jobs, of course!

I’ve been casually tracking the daily active user numbers for the top 40 Facebook game developers for the past six weeks. Why the top 40? Because that’s the quantity displayed by Appdata.com on the first of 200 pages. Why daily active users? Because monthly active user numbers are widely considered to be an unreliable statistic for Facebook games, whereas DAU is, if not perfect, at least more directionally accurate.

I was mostly curious to learn how “hit makers” are faring on Facebook. (The 40th developer on the list has just 200k daily active users, so it’s safe to assume that all the heavy hitters are represented in the top 40 list.) Facebook’s total population has supposedly been growing by leaps and bounds over the past several months — it jumped from 350m “active” to 400m in the three months leading up to February 2010) so theoretically daily active users for the top 40 game developers should be growing as well, if for no other reason than there are more potential customers on the platform. However, it turns out the DAU count is down slightly since March.

How about Zynga, the king of Facebook?

How about EA+Playfish, Crowdstar & Playdom (2nd, 3rd and 4th place behind Zynga, respectively)?

All flat-to-slightly-negative, with the exception of EA+Playfish which experienced a small increase in DAU over the same time period. Coincidentally, Gamasutra and Inside Social Games jumped on this story on Friday (two days ago), identifying the falling active user numbers and blaming the drop entirely on “recent changes in the way Facebook manages notifications.” You should be skeptical about that assertion. While changes to FB notifications may well be having a significant impact, the larger issue is simply that Facebook has clearly entered the inevitable misery phase, which I predicted just a few months ago.

The Facebook game development scene has become crowded. Facebook’s platform managers are making decisions that are unpopular with many of their developers and looking to monetize developer activity more aggressively. And the average “hit game” has yet to shift from the “early glory” stereotype to the Facebook game of the future (whatever that might be.) To use a historical example, Facebook is like the MMO market when it was all about Everquest — just waiting for a World of Warcraft to show people what a truly successful social game actually looks like. Of course, Facebook’s WoW won’t look anything like WoW itself, and may not even have a higher development budget than the games launching on Facebook today. It will definitely have a better retention rate, better monetization, and better (less spam-like) viral functionality.

Remember all those VCs and pundits saying it’s too late to become a top dog on Facebook? The guys currently choking the halls of one-too-many social gaming summits? To heck with those guys. The next several months (and perhaps longer) are going to be very ugly for the Facebook game development community. Lots of small developers are going to lose money. We may even see a big Facebook developer collapse under the ungainly weight that they have packed on while attempting to bloat their revenues pre-acquisition/pre-IPO. But this phase will end, and when it does, Facebook’s “triumphant return” is going to make XBLA’s triumphant return look like peanuts by comparison. The only question is: who will ride that wave and who will drown before it arrives?

PS. If anyone has access to the complete DAU data for Facebook — i.e. all 200 pages of it — I’d be curious to know if there’s any meaningful evidence of Long Tail activity over the past several months. If there’s anywhere the Long Tail should be manifesting itself, it’s Facebook IMO.

PPS. If you’d like to download the data I used for those charts, please feel free to grab it here. It took a while to get the data in useable form so I’ll be glad if someone else finds use for it. :-)

Update: interesting to note that on May 7th, around the same time as Gamasutra’s article, Techcrunch revealed that Zynga and Facebook are currently in the midst of a very ugly war and Wired published an article labeling Facebook “rogue” and advocating for a new social standard. Last Friday was truly a nasty start to Facebook’s inevitable misery phase.

For a couple weeks now, I’ve been getting calls from friends in the industry bemoaning their lack of inclusion in the upcoming Summer of Arcade promotion on XBLA. The tone of the calls has varied, but they’ve all shared one thing in common — frustration with Microsoft. As I’ve thought about it, I’ve come to the following conclusion: Summer of Arcade will have to change or, at very least, cease to be Microsoft’s ultimate promotion for the XBLA service.

First, a bit of history. Summer of Arcade was the brilliant brainchild of my good friend, Jeremy Wacksman. It was born of the realization that Microsoft desperately needed something that would draw positive attention to XBLA and make consumers, developers and the press take it seriously (bear in mind, this was during XBLA’s “inevitable misery” phase, when no one had anything good to say about the platform.) SoA served that purpose beautifully; it kicked off XBLA’s “triumphant return” and changed the tone of public conversation from “XBLA is full of crap” to “XBLA is the only place you can find games like Castle Crashers and Braid.” It also established the $15 price point on XBLA — an important and under-appreciated feat.

Dealing with rejection

Summer of Arcade still gives consumers and the press something positive to focus on. Unfortunately, SoA seems to be turning into a net negative for the developer/publisher community. Today, many companies will target a summer release in hopes of making it into SoA and may even choose to hold a finished game in their pockets for several months for that purpose. A couple months before SoA is scheduled to begin, ~five lucky development teams find out their games have been blessed; significantly more discover that they’ve been rejected.

You might be thinking, “oh well, that’s how the cookie crumbles; not everyone can get lucky.” Unfortunately, this isn’t simply a question of “getting lucky” or not. Rejected developers and publishers — aka the majority — find themselves faced with a difficult decision: rush to release their game before SoA or wait to release after SoA. If they release before SoA, it may compromise the game’s quality and/or pit the game against many other high quality games that were rejected and released early (it also truncates the time that a company has to execute marketing activities). If they release after SoA, they’re pitting their game against the SoA titles and/or the retail holiday titles… a scary proposition. Some developers might also lack the financial flexibility to delay launch for very long. Either way, this feels like a lose/lose situation to developers and publishers, and it makes many of them angry. The fact that Microsoft only distributes one game per week during SoA only exacerbates the situation because it contributes to an overabundance of competition before and after.

So what can Microsoft do to change things?

So what does this mean for Summer of Arcade? I can imagine four likely scenarios. The first scenario is that Summer of Arcade simply goes away, but I doubt that will happen. The second scenario is that Microsoft stops limiting which games can be released during Summer of Arcade, but only promotes “the chosen ones.” Unfortunately, this may confuse consumers, and it will still offend many developers and publishers who hoped to be “chosen” and now find themselves competing against overwhelming PR firepower, so it isn’t a great solution.

The third scenario is that Summer of Arcade becomes a pay-to-play event. In other words, if you pass Microsoft’s quality filter (an important caveat), your entry into SoA will depend entirely on whether you’re willing to pay for a slot (in direct payment or, more likely, in greater revenue share to Microsoft). Much like a 30 second ad slot during the Super Bowl, the SoA “slots” would be priced high enough that demand for them would be relatively measured (as opposed to today, where demand is insatiable.) And to those who complain, Microsoft would point out that much like physical retailers, Xbox LIVE has a right to sell some of its “shelf space” and to arrange special promotions for the purpose of attracting customers. In the retail world, one name for this is MDF, or Market Development Funds, and game publishers are very accustomed to MDF arrangements with the biggest retailers. (Before anyone gets too excited, I should note that not once in all my time working for Microsoft did I ever hear anyone discuss or even speculate about the possibility of selling SoA slots. This is my own imagination running wild here, and nothing more.)

The fourth and final scenario is simply: Microsoft introduces more “top-tier” promotions that developers and publishers care as much about as Summer of Arcade. There have already been attempts by Microsoft to do this, but I would argue that none of these new events have resonated with the community quite like SoA did when it first launched. It’s hard to know why, but perhaps the reason is that these new promotions have not been sufficiently differentiated from SoA. Bottom line: *if* Microsoft can somehow create a few more promotions as compelling as SoA, the net result should be greater total sales for the platform and fewer developers/publishers obsessed with getting into SoA.

I really don’t know which of these scenarios will play out. But no matter which, I’m confident that given the increasingly negative feelings developers and publishers have about Summer of Arcade, it’s only a matter of time before the promotion changes in some sort of significant way or at very least is rendered “less important” by the introduction of other, more meaningful promotions. So perhaps the real question underlying this post is: what kind of platform (and what kind of retailer) does Microsoft want XBLA to be? We’ll soon find out.

PS. A special thanks to Kim Pallister for his help with this post.

Lots of people are talking about the iPhone announcements today. Most relevant to game developers: Apple is putting viral invites, matchmaking, achievements, and leaderboards into the OS; adding the ability to gift apps; introducing a slick in-app ad network called iAds; and (finally!) limited multi-tasking if you possess a 3GS or better. This is an impressive list of features, and as a consumer, I’m pretty excited about it.

As a developer, it doesn’t change my feelings about the platform much. It has been evolving into an ecosystem in which F2P is the most viable business model (as exemplified by Ngmoco) and it will continue to evolve in that direction. In fact, the introduction of iAds will likely accelerate the trend as developers race to compete with one another for a share of ad revenue. When Steve Jobs says of iAds: “This is us helping our developers make money so they can survive and keep the prices of their apps reasonable,” he really means “this will help maintain downward price pressure in the app store, which I love because cheap apps help sell iPhones!” (Btw, was anyone else struck by Jobs’ use of the word “survive?” I think that’s the closest he’ll ever come to admitting that life for developers is rough in the world o’Apple.) And if you’re still not convinced that F2P is the future of Applesville, let me remind you of now-common revelations that anywhere from 60% to 90% of app downloads are pirated.

Console Killer?

Piracy is just one reason why I balk when people call Apple’s products “console killers.” The truth is that the iPhone+Touch+iPad triumvirate defies simple categorization and collectively represents a new kind of market for games. It isn’t being positioned to destroy the console market, though it’s clearly having some impact on the portable console space in particular. (Gotta say, I love the title of that article –> “iPhone Is Eating Sony PSP and Nintendo DS’ Lunch.” I guess Nintendo’s 70% of the market doesn’t qualify as a full meal anymore..?)

Successful game consoles have historically limited piracy in Western markets to a great degree. Successful game consoles have historically supported (if not required!) high game prices. Successful game consoles have sharply restricted who can develop content for them and who cannot. Successful game consoles have, as a result, made experiences like GTA 4 and Call of Duty MW2 possible, and there is a non-trivial segment of the population that still wants to buy those games. And perhaps a non-trivial segment of the population will still want to buy the games that will be available on the successor to the Nintendo DS, even if those games cost $30… as long as they are sufficiently differentiated. But Apple doesn’t care about any of this, because Apple doesn’t need to own the “high end” game space or become a “traditional console!” Apple is perfectly happy catering to the mass market consumer (and/or the pirate) who is buying its high-margin devices, watching its iAds, and generating microtransaction revenue via in-app purchases.

What about quantity?

This is partially why I am not impressed when people point out that there are only 2,500 Nintendo DS games as compared to 50,000 iPhone+Touch games. With a few notable exceptions (such as GTA Chinatown Wars and CoD: WoW: Zombies), there is limited overlap between “premium” DS experiences and “premium” iPhone+Touch experiences, and that overlap may shrink if publishers begin to fear that the iPhone cannibalizes too much revenue from other, more profitable platforms. (Also: today, the iPhone+Touch has a big advantage over the DS: no retailer margin! I have to believe that this advantage will be reduced or eliminated when Nintendo releases its next major portable console.)

No… the iPhone+Touch+iPad is a beast all its own. Not a console killer, but something equally impressive. A weird hybrid of some of the best and worst aspects of open and closed platforms, with a touch of crappy retailing thrown in to boot (sorry Apple, but the new gifting feature doesn’t make up for how poorly apps are merchandized.) It’s a place where indies looking to make a buck might find their fortune in the F2P space or with a (rare) 99 cent mega-hit. It’s a place where larger companies might profit from cross-platform F2P games and/or opportunistic use of known IP. It is, to be clear, a remarkable place that anyone serious about the games business has to keep abreast of… but it’s not the be-all and end-all of gaming. And it probably won’t be anytime soon.

PS. Comments on Adobe vs. Apple reserved for a future post. For now, I’ll just say that I’m still pretty excited about the F2P opportunities in the Flash games market.

I was recently interviewed by Matt Martin of GamesIndustry.biz on the subject of publishers making the transition to Facebook. Since my correspondence with Matt was via email, I thought I’d take advantage and share the full transcript, for those of you who are interested in this topic:

Question: Is Facebook a viable format for traditional videogame publishers? Are there opportunities for someone like EA or Take 2 to make a significant profit? Or is Facebook as a platform over for those big publishers that haven’t already established themselves on the service?

Facebook is definitely a viable platform for traditional publishers. The short-term problem, as I’ve noted in the past, is that traditional publishers simply aren’t geared towards making the kinds of games that succeed on Facebook. In general, their game designers are trained (and prefer) to make games that are fun above all else, where a Facebook game designer needs to be as concerned with designing a free-to-play game that is capable of generating real revenue. And in general, their designers are also accustomed to thinking of player acquisition as “marketing’s problem,” whereas viral player acquisition is clearly a core design challenge on Facebook. But I don’t want to make it sound like design is the only challenge; traditional publishers don’t have much experience marketing these kinds of games, in this kind of channel, to this broad an audience. They’re set up to manage the relationship with Microsoft, Sony and Nintendo, to push discs into retail stores, and to blow a wad of cash on TV and magazine advertising. Obviously this is a generalization, but you get my point.

But as I mentioned earlier, that’s all a short-term problem. There’s no inherent reason why traditional publishers can’t build (or buy) fresh studios to focus on this opportunity. They’ve done it before; mobile games are a good example. The traditional publishers will end up wasting quite a lot of money in the process — you can be certain of that — but some of them will ultimately succeed at entering the market.

Question: Would big game franchises such as The Sims or Civilization translate to Facebook gaming, or should publishers try new projects and IP?

Regardless of the platform, it always pays to have a healthy portfolio approach. There’s no reason *not* to try bringing established franchises to Facebook; you simply need to be wary of being too literal in the translation. Put another way: as long as The Sims on Facebook is different enough from The Sims on PC+console, EA has an opportunity to broaden the already huge audience for the Sims and make some extra cash in the process. On the other hand, if the two experiences are excessively similar, EA might find that it has inadvertently trained its consumers to expect all Sims content for free (assuming the Facebook version is F2P, which is likely but not a given). At any rate, I doubt they’ll make that mistake.

All that said, the early life of a platform is generally a great time to launch original IP, and publishers should clearly take advantage of the opportunity to the greatest extent possible. But who in their right mind would say no to a Facebook version of Civilization? :-)

Question: What gaming opportunities are still available on Facebook, and how long do you expect until the platform suffers from a glut of games?

Currently, I think the number of gaming opportunities on Facebook dramatically outnumber the genres that one might call saturated. With a few notable exceptions, many of the most popular games on Facebook seem to be cut from the same cloth. They have simple art, they are oftentimes “social” in only the loosest of ways, and they’re generally simple puzzle games or RPGs. Many quickly devolve into unabashed time sinks. There’s clearly tremendous demand for these experiences so please don’t think I’m denigrating them, but there’s also room for many other experiences as well.

I should add that to my knowledge, there’s been little exploration of potentially lucrative niche audiences on Facebook. This is a platform with hundreds of millions of users — surely there must be some online audiences in the millions (or tens of millions) that would be unreachable in the console space but are reachable on Facebook! What do those audiences want? Religiously-themed games? Something else? Ironically, one might call “games that appeal particularly to hardcore gamers” an under-explored niche on Facebook!

When I look at Facebook, I see a games platform that has been thoroughly enjoying the “early glory” phase of maturity. Not too long ago, there was guarded optimism about the potential of Facebook to host profitable games, but few good examples of such games. Less than a blink of an eye later, Facebook has become the apple of our industry’s eye.

While most publishers are laying employees off by the hundreds, Facebook-centric publishers are hiring like mad. Savvy conference organizers are rushing to capitalize on audience demand for business venues to discuss social gaming. The inevitable stories of unbelievable growth have, quite predictably, become common-place. Facebook’s platform managers have finally started embracing our industry and contributing to the hype around their platform. And finally, a remarkable number of developers (and even large publishers) have begun to re-orient themselves towards the development of social games.

Facebook’s “inevitable misery”

All of these are classic signs that Facebook gaming’s “early glory” phase is in full swing. You may therefore conclude, with 99% certainty, that Facebook as a games platform is likely within a single year’s reach of the “inevitable misery” phase of its lifecycle. Probably much less than a year, in fact. As I’ve argued before, this does not necessarily mean that savvy developers should begin to look elsewhere — it simply means that there will soon be a large quantity of blood in Facebook’s waters. The victims of that impending blood-bath are listed here, in no particular order:

• Developers who fail to realize that the quality bar for content is rising rapidly.
• Developers who believe that “viral game design” is all that matters. Hardly! User retention will prove increasingly crucial (and difficult!) as the options available to consumers explode in quantity. Furthermore, effective marketing and/or cross-promotion will increasingly distinguish those games that reach critical mass — the point before which “virality” is meaningless — from those games that do not reach critical mass and therefore fail.
• Developers who run afoul of Facebook’s platform managers. Make no mistake: Facebook may be an “open platform” but they can and will pull the rug out from under developers… not because they are nasty people, but because they genuinely believe their actions serve the greater good and/or the customer (they may also be looking to pad their own pocketbook.) Facebook might choose to dramatically change the mechanics upon which a developer has unfortunately bet all their eggs. Or perhaps Facebook might begin to proactively promote content, ala Xbox LIVE or the iPhone App store, in which case a developer could find their competitors’ games featured at the expense of their own! (Better be sure you’re supporting Facebook Credits if you want to stay off the black list…)

Early signs of trouble?

Very early signs of the “inevitable misery” phase are already evident. Not long ago, I was hearing that the conversion rate from free users to paying users on Facebook was somewhere around 3%. However, Zynga recently revealed that as of now, 1% to 2% is probably more accurate. Falling conversion rates are one of the harbingers of “inevitable misery,” though I must re-emphasize that neither falling conversion rates nor the inevitable misery phase itself are inherently “bad.” A low conversion rate is fine when your game attracts 70m players! The inevitable misery phase features a great many losers, but it sets the stage for some big winners as well.

When it arrives, what will Facebook’s “inevitable misery” phase look like?

Facebook gaming’s “inevitable misery” phase is going to look a lot like every other successful platform’s inevitable misery phase. Industry news will turn mostly sour for a period of time. Many developers will lose their shirts as games that formerly would have succeeded no longer do so. But there is one major difference between Facebook and other platforms that came before it: never before has a platform been so friendly to cross-promotion and viral growth. These twin forces will likely guarantee that today’s big social gaming companies (i.e., Zynga, Playdom, EA Playfish, etc) should continue to thrive despite any mistakes they might make. In other words, we are less likely to see a Sierra Online-esq fall from grace.

Between having truck-loads of venture capital to advertise new games with, and having millions of existing players that they can point towards new games, these social gaming juggernauts should have an easier time surviving the inevitable misery phase. They may be hiring new employees way too quickly (which unnecessarily increases their burn rate and makes them less efficient), and they may currently be cranking out derivative, shallow games, but as long as they manage to publish at least a few compelling titles as well, they should be OK. (Those “compelling titles” may be clones of competing games, but hopefully a rising quality bar and greater consumer awareness will make cloning harder in the future. I wouldn’t hold my breath, but we can hope!)

And what should you do if you’re not a Zynga, Playdom or Playfish? Well, aside from referring to the advice I gave in my previous article, I’ll add this: unlike so many other games platforms, Facebook is actually large, open, and accessible enough to support many games that target niche audiences — and Zynga is less likely to clone your game if you’ve targeted a niche. (They’re probably looking for games that have the potential to attract 100m players, not 1m or 5m players.) I’m not suggesting that indie developers abandon the mass market — not at all — but niche strategies are worth considering as competition on Facebook continues to intensify.

In my experience, one of the problems that most seems to bedevil game developers is the problem of timing; specifically, understanding when is the “right time” to begin developing for a specific platform. To understand why this is such a challenge for developers, you need to understand how a games platform tends to evolve.

Here’s the typical scenario: A platform — for example, XBLA, or the iPhone app store, or Facebook — comes into existence. Most people regard the platform suspiciously, for a variety of reasons. It’s an unproven market, for starters. The platform owner’s commitment to growing the platform may be unclear. The pros and cons of working with the platform owner in this context are unknown. There are lots of other platforms to choose from. Etc. Most developers take all this into account and decide to pass on the platform for the time being.

Then the platform begins to take off. The inevitable articles in respected publications such as Gamasutra and Edge appear; developer ABC claims to have made a million bucks; game XYZ has sold half a million units; average conversion rates are through the roof; etc.

Lies, damned lies, and statistics

The platform’s owner is probably out there cheering more loudly than anyone. They publish statistics which are 100% true, but which may or may not actually convey a complete picture of what’s actually happening on the platform. (For example, I’ve noticed that Playstation Home presentations are full of great-sounding statistics which tell you almost nothing about your chances of actually generating a profit on that platform, or even your chances of indirectly generating profit via secondary effects — like the buzz that platform helps generate for your IP.) But please don’t take this as Sony-bashing, because as far as I know most platform owners are guilty of this.

Even if the platform’s stats really do paint an accurate, unexaggerated picture of what is happening on the platform, those stats likely reflect a past that has no bearing on the future competitive nature of the platform. Remember the early days of XBLA on the 360? Remember 20% average conversion rates? All that positivity was totally legitimate, but it reflected an ecosystem that was benefiting from an extreme mismatch between consumer demand (which was high) and content supply (which was low — back then one game a week was considered a very large amount of content for XBLA, and even the retail ecosystem was still pretty short on content.)

And that’s where the first big wave of developers get themselves in trouble. They rush to develop games for this wonderful new platform, not realizing (or simply disregarding the fact) that everyone else is doing the same thing. Content supply explodes, because even on a closed platform internal and external pressures push platform managers to lean towards distributing more content rather than less. After all, it’s hard to predict hits, so why turn away something that has a chance of positively surprising you? There’s also the tricky politics of rejecting content from your long-time partners, which can be a painful thing for any platform owner.

Equilibrium’s a bitch

While content supply is exploding, consumer demand also increases, but not nearly enough to keep pace with the content explosion. Consequently, the supply/demand imbalance quickly corrects itself, and in some cases even over-corrects. Worst of all, many developers (some new entrants to the platform, but also some veterans) fail to realize that greater competition means a higher bar for success, and as a result they fail to increase the quality of their games and/or their marketing efforts and ultimately get lost in the crowd. The easy money is gone, and while some developers continue to succeed, a large number fall flat on their faces. Many do not recover. Sierra Online’s stunning fall from top XBLA publisher to total irrelevance is a good (and sad) example of this.

As the pain spreads, the general buzz about the platform begins to sour. Reports of games flopping appear everywhere. Developers complain loudly that the platform is being mismanaged, that there’s too much content, that pricing pressure is too great, and any other number of complaints. (Piracy? Cloning? Favoritism? 1st/3rd party politics? You name it!) Some developers get scared away. Some stay engaged but never figure out how to compete effectively. Does this sound familiar? It should, because it happened to XBLA and it’s happening on the iPhone even as we speak.

But if (and here’s a big if) the platform’s economics are fundamentally sound and if the platform isn’t being too badly mismanaged, some developers ultimately will find a way to raise the bar and stand out from the crowd. They create remarkable games; they market themselves effectively; they adopt more profitable business models where possible; they establish a good relationship with a key publisher or the platform owner itself. These developers benefit from the fact that while the platform has become dramatically more competitive, it has also continued to grow and attract new consumers who still want to download games! (Even if, as if often the case, the new consumers download fewer games on average.) Basically, the ecosystem has inevitably evolved into a hit-driven ecosystem, and while that sucks for most developers, it’s a truly wonderful thing for the few companies that actually manage to crank out hits!

Hope springs eternal

And now something funny happens: the new hits inspire new confidence in the platform. Bigger players, who may not have taken the platform seriously in the early days, or who experimented with it and failed, begin to show their faces — perhaps even in force. EA’s recent releases on XBLA (Battlefield, Madden, etc) are a great example of this. Some truly enormous hits (examples: Trials HD, Battlefield 1943) are launched to great fanfare. The buzz cycle turns positive again!

So, can you guess what happens next?

Nobody knows how long it will take, but eventually the cycle will turn negative. Too much higher-quality content. Too much content with higher marketing budgets. Games that “should” have succeeded start to fail, for any number of reasons. And the wheel keeps turning.

Of course, there may be aberrational moments which disrupt the cycle. For example: a big price drop in the price of a console which causes many new consumers to flood into the market. Or a big change in a console’s dashboard (i.e. NXE) which improves merchandising or introduces features that drive consumers to certain content. But the wheel never stops turning entirely… until the platform dies, that is.

Enough storytelling… what’s the punchline?

So if you’re a developer, what can you actually do about all this? One answer: try to time the cycle; start investing when everyone else is cutting back! Unfortunately, timing a market has never been easy — if it was, we’d all be stock market millionaires wouldn’t we? And remember the “big if” I mentioned earlier: only fundamentally sound platforms ultimately recover from down cycles. Others languish or fail altogether. (Can you imagine the pain that developers who doubled down on Wiiware must be feeling right now? Who knows how long it will take Nintendo to truly fix that platform’s many problems?)

So if timing the market is tough, how about trying to earn the “easy money” by focusing on new platforms that haven’t yet become very competitive? Unfortunately, that’s also quite difficult, because you just don’t know which platforms will ultimately succeed. Just ask all the Android developers who were sure they’d be rolling in cash by now.

The truth of the matter is there’s simply no magic answer — just lots of little rules to keep in mind. Focus on platforms that demonstrate reasonably high upside for hit games, even if the competition is rough. Avoid platforms with terrible merchandising and apathetic management (or worse, management that is actively hostile to third parties.) Develop a good relationship with the platform owner. Market the heck out of your game for months (if not years) before it is released. Keep your costs reasonable. Develop something that stands out and delights people. No matter how competitive a market gets, there is always room for a Braid. Or a Crayon Physics. Or a Flight Control. These were not expensive games to develop.

And above all else, be ready to try, try again. Predicting hits is hard. Developing hits is even harder (especially when it comes to original IP!) Odds are, you’re going to fail. But whatever doesn’t kill you makes you stronger, right?

Film Victoria was kind enough to publicly share the video of my keynote at the Digital Distribution Summit in Melbourne. You can find it here.

Quick summary: I focus mainly on what it takes to successfully pitch your XBLA/PSN/Wiiware/Steam game to a publisher or platform-holder. If you haven’t already endured too many talks on this subject, I think you’ll enjoy the video. I’ve gotten an unusually large amount of good feedback about it!

Oh, and in case you’re wondering, when I ask “are you all right?” in the first few minutes of the talk, it’s because some poor guy fell on his face at the back of the auditorium. I, ummm, probably should have let someone else — someone NOT delivering a keynote at the time — ask after him.  :-}

If you are developing an original IP for XBLA or PSN, or hope to develop one someday, this post is for you.

Given the sales estimates being reported by Gamasutra (see these helpful examples), given what I’ve heard from individual developers as of late, and given the relative strength of established IP on the platform to date, I estimate that in general, no more than nine truly original IP-based games will succeed in any given year on XBLA. This is obviously a rough guesstimate at best; there is certainly the possibility that you will see more (or less) hit original-IP based titles in any given year. But even if I’m off by a few, you’ll see shortly that it doesn’t matter for the purposes of this post.

Now assume that approximately four (or more) of those original IPs will be successful partially because they are high quality, but partially because they are king-made by Microsoft. They might be included in the annual Summer of Arcade promotion. They might support a new 360/LIVE platform feature and be showered with tremendous dashboard and press exposure. They might be internally developed by Microsoft Game Studios. And the list goes on… (I would have included winning the Dream Build Play competition, but it seems like Microsoft is now keeping the winners in the Indie Games Channel.)

Now assume your original IP is not king-made. Darn!

You’ve got approximately five chances left to turn a serious profit on your XBLA game. You’ve worked endless hours and paid yourself peanuts, all in the name of making a great game. You’ve taken the time to create a decent demo experience. Still, it feels like you’re forgetting something… but what could it be? Frustrated, you decide to take a night off and have some fun at PAX. But when you walk through the main entrance, it hits you:

Twisted Pixel, showing off The Maw, Splosion Man, and their upcoming title, Comic Jumper	Slick Entertainment, showing off upcoming title, Scrap Metal
Ankama Games, giving private demos of upcoming title, Islands of Wakfu	Klei, showing off the upcoming title, Shank

You spent so much time developing your baby that you forgot to get out there and talk about it… but the competition didn’t! There were at least six different XBLA development shops parked right by the main entrance! Handing out toys. Showcasing their games. Kissing hands and shaking babies. (Or is it the reverse? You’re so distraught that you can’t remember!) And for many, this isn’t their first conference. The Behemoth… what conference do they not go to? And Twisted Pixel… those wacky guys never cease to charm the public with their adorable Maw plushies.

You play a few demos and grudgingly admit that these guys are making pretty decent games, too. A pit forms in your stomach as you realize that you might be screwed. But hey, that won’t happen. Marketing is bullshit, right? Quality always wins, Right?

Right.

I’ve been meaning to post a followup to my Develop keynote on digital distribution, and was reminded to do so by Raph, who lately has been speaking his mind about the realities of the Long Tail (good stuff — worth a read.) Raph also highlighted a report that Zynga is spending millions of dollars advertising its games and wisely predicted that new digital ecosystems will eventually be “much more hit-driven” as marketing and development budgets escalate. Raph’s right, as he frequently is, but I have one minor correction to make: the new digital ecosystems already are remarkably hit-driven! Put more bluntly: the people who thought the Long Tail would promise the end of hit-driven market dynamics were completely wrong (both about the nature of digital distribution and about the companies that digital distribution benefits.)

With rare exception (see my comments on niche markets at the end of this article) the Long Tail primarily benefits platform holders and the creators of hit content, not the broader creative community. Of course, I’m talking about financial benefit here; one could easily argue that the social benefits of digital distribution touch a far greater number of creators and consumers, and the social benefits are what make digital distribution truly wonderful. But that’s a story for another blog post.

It turns out that the hits get *bigger*

As many prominent journalists, analysts and scholars have recently argued, it turns out that hits are no less important in the new Long Tail world. Lee Gomes noted in the Wall Street Journal that in 2006, Amazon.com still derived 75% of its book sales from just 2.7% of its titles. True, 2.7% of 3.7 million books is nearly 100 thousand books — a great deal more than the total offered by any brick and mortar store — but that doesn’t change the financial situation for the authors of the other 3.6 million! Gomes also noted that, wherever he looked, hits remained vitally important to a given ecosystem (or in his words, “iTunes looks like Billboard, not some paradise of niches.”) And research by Anita Elberse, a professor at Harvard Business School, has shown that in some “Long Tail markets,” success has begun to concentrate in progressively fewer best-selling titles, and worse, that independent artists have actually lost share to major labels. And via Raph, another recent research study with similar findings: of the 13m songs for sale online last year, 10m never found a single buyer, and 80% of all revenue was generated by less than half of one percent (.004) of all songs.

The phenomenon studied by Gomes and Elberse appear to be repeating themselves in digital game ecosystems. While few verifiable public sources of information exist for the sales of iPhone, Steam, Wiiware, PSN, or Xbox LIVE Arcade games, it is widely believed that all of these ecosystems have become more competitive and more hit-driven over time. Where once any game had a reasonably good chance of reaching a sizeable audience, thousand of games (most especially on the iPhone) now go entirely unnoticed. This was the inevitable and unsurprising result of the initial supply/demand imbalance that characterized each of these digital ecosystems upon their births. Millions of consumers, eager to download content on their exciting new game consoles or phones, poured through initially-limited game catalogues and purchased everything in sight. Dramatic sales were trumpeted by indies, by the press, and by the platform holders themselves, spurring huge increases in content supply which inevitably pulled each ecosystem back towards the more familiar hit-driven model. However, these ecosystems also display (to varying extents) the hallmarks of the Long Tail; some hit and niche titles continue to generate a significant amount of revenue despite having been launched two to three years ago. That’s an extremely rare feat in the land of retail games!

At Casual Connect, Kongregate provided some of the best evidence I’ve heard to date supporting my assertions on this front. Kongregate hosts 16,000 Flash games, and approximately 1,000 more are added monthly. The top 1% of games on Kongregate account for a whopping 50% of total user playtime. I guarantee you that the console ecosytem — long derided for its hit-driven nature — does not look quite that top-heavy.

I’ll say it again: in digital, the hits get bigger!

Is this the platform holders’ faults?

No, it isn’t. You can certainly blame the platform holders for not doing everything they can to maximize the benefits of the Long Tail. Take, for example, the fact that until recently you couldn’t rate content on Wiiware, PSN, or Xbox LIVE (and you still can’t for Wiiware or PSN.) Or how about the fact that on all digital platforms, including the iPhone, you still can’t filter the title catalogue by the subset of games that your friends have rated highly? And why is it that none of these ecosystems currently possess a recommendation engine of the sort that has proven so useful and wildly successful for Amazon.com? The consequence of these missing features, unsurprisingly, is an increasing tendency for consumers to steer towards titles they recognize, which means games based on well-known IP and/or games that have received substantial promotion by the press and user communities. For example, most of the recent, publicly-heralded hits on Xbox LIVE Arcade, such as Battlefield 1943, Braid, Castle Crashers, and Street Fighter 2 HD Remix, are all games that were either promoted years in advance of their public release, or were (like Street Fighter and Battlefield) based on truly venerable IP.

But again, it would be unfair to blame the platform holders for the ultimate evolution of their digital ecosystems into hit-driven businesses. As noted earlier, even Amazon.com, with all its supremely-refined tools and merchandizing mechanisms, has not managed to avoid the realities of a hit-driven business. More importantly, research has indicated that — given fundamental characteristics of human decision-making and interaction — it simply may not be possible to avoid hit-driven market dynamics in a digital ecosystem. Professors Duncan Watts, Matthew Salganikand and Peter Dodds recently demonstrated that, in a digital music ecosystem devoid of traditional marketing signals and recognizable IP (but possessing a public rating system), not only did “the hits get bigger,” but popularity was essentially random. A song’s popularity depended entirely on the first few users who happened to notice, rate and download it; a song that was #1 within one test ecosystem was bottom of the barrel in another.

So how does one profit in the digital world?

I could write a book on this, but I’ll resist the temptation. Here’s the boiled-down list of things you should keep first and foremost in mind:

1. Ally yourself with the platform managers as best you can, when you can. They often play the role of kingmaker, and they can king-make you, or they can king-make your closest competitor…
2. Do not forget the importance of marketing, PR, and community management! In the cluttered digital world, finding a way to somehow grab people’s attention is more crucial than ever before. How many indies grow to 20, 40, even 60 people before bothering to hire a marketing/PR person, or a community manager? Far too many. What good is a great game if nobody knows about it? And remember what I said earlier: it’s no coincidence that most of the recently-successful original IPs launched on XBLA are games that had years of buzz and/or big fan communities going for them.
3. Identify and target lucrative, reachable niche audiences. The “lucrative/reachable” part is key. Facebook is a large and open enough platform to potentially support the development of games that appeal to a very small percentage of the online population (assuming that group has a high willingness to spend, and assuming you make real effort to reach them via targetted marketing activities.) XBLA, PSN, and Wiiware, on the other hand, are currently far too small to support games that appeal to anything less than a significant percentage of the total ecosystem population. And in general, simply hoping that “the magic of the Long Tail” will cause a niche to spontaneously form around your products is a very bad plan.
4. When possible, build viral mechanics into your games. With the right design, you can dramatically decrease the amount of marketing spend required to make your game successful (You essentially just need to give it a swift kick-start and let the viral gameplay do the rest for you.)
5. Get creative with revenue-generating strategies. Danc has written an excellent article on this subject (in the context of making Flash games more profitable.) Worth a read.

OK, time to take a breather. More on this subject soon!