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The Content Problem

The fundamental axiom of economics is 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 valid 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). The new units 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 people (!) Clash Royale team is astronomical.

Furthermore:

The genius of PvP (Player v Player) environments is how they necessitate the emergence of a meta-game. PvP environments resemble game theory models where it has been shown strategies evolve in an evolutionary process. In mathematics, Player vs. Environment (PvE) resembles optimization where strategies are static – one and done. Each balance change reshuffles Equilibrium in PvP environments; 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, films 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 to be “effective,” and the recommendation engine plays a vital role in this. But the last episode of Stranger Things shows that the recommendation engine cannot 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: it needs fewer writers, editors, and CG 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 seven 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 than 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 invest in moving performances to a similar format: year-round production with weekly releases heavily. There’s always another piece of content to consume right around the corner while the back-catalog for a given show continually expands 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 glance at community pages confirms this.

King mitigates content churn using an increasing difficulty curve such that it takes players longer to reach content exhaustion as they progress through levels. Another strategy is also possible, however: branching narratives. Reality TV faces no such option.

Increasingly, Hollywood is shooting movies back-to-back. It’s cheaper to continue production rather than 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 similarly with two production crews but with a singular end product. Game of Thrones also operated with two film crews, but the end product was a single episode. Why not dedicate an hour to each perspective rather than splice the two in a single episode? A multi-perspective production 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 smattering of volume helps the supply-side problem even if a particular creator has a finite number of videos (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, accounting for regular release cadence.

Diminishing returns for linear content are incredibly steep; few users will watch a film or movie more than once. Increasing and prolonging the LTV of a viewer is most elastic with more content: a costly proposition. To compete with games, TV, and movies need far more supplies. If technology and business models can change innovative products rather than be a vehicle for them, now has never been a better time to explore changes in storytelling.

Part IV

Game Companies Are Not Tech Companies Part II: Platform Power (Or Lack Thereof)

October 31, 2020

Part I

Ran Mo retraces the incredible fast follow of the auto-chess genre. Before you could blink an eye, what was a mod in Dota 2 (which itself was a mod) had spun off into three incarnations. The first was from the mod maker, Drodo Studios’ plainly labeled Auto Chess, the second was Valve’s Underlords, and the third was Riot’s Team Fight Tactics. It’s not clear any of them have done “well.” Indeed, none of them are making any real money as there’s little to purchase amongst any of them.

Valve’s Underlords PSU Declines

But if there is a leader, it’s Riot’s Team Fight Tactics (TFT) by content cadence (from a player count perspective, it’s unclear if TFT is doing something meaningful). How do we explain the last entrant now leading the pack? Ran seems to argue for the power of the platform:

“Underneath the hood of League of Legends is a deep set of systems and tools: messaging and voice chat systems, social systems, matchmaking, internal development tools, event systems, cloud-based server infrastructure, post-game data analytics, and so on. These tools enhanced play experiences and supported the continuous release of contents, events, and updates.”

Ran goes further, explaining that “We’re likely entering a new wave of consolidation today, with new moats centering on live-service ecosystems […].”

I could not disagree more. Not simply on Riot’s platform power, but the wider value of game platforms altogether. Game platforms have, and will always be, valueless: there is too much game specificity and velocity for meaningful platform features to scale. “[…] messaging and voice chat systems, social systems, matchmaking, internal development I could not disagree more. Not simply on Riot’s platform power, but the broader value of game platforms altogether. Game platforms have, and will always be, valueless: there is too much game specificity and velocity for meaningful platform features to scale. “[…] messaging and voice chat systems, social systems, matchmaking, internal development tools”? While standard and required for live service, they are not particularly “deep.” If these features form a moat, then it’s the equivalent of a kiddie pool defending Versailles. The ever-growing number of PC game launchers, all of whom do these exact things, suggests as much. The primary value of game “platforms” is discovery and perhaps security.

The deeper platform features of Steam (Marketplace and Workshop) have failed to see widespread adoption. Other platforms haven’t even tried building anything beyond a friends list and chat. None of them can justify a 30% cut, and for many games, “multi-tenancy” or listing on multiple platforms is the clear revenue-maximizing strategy. Of the top 20 Steam games, only 35% non-Valve games use either Marketplace or Workshop. Furthermore, 59% are multi-tenant or are on other PC launchers. Expect this to increase as Steam degrades as the sole game discovery launcher. Activision realized this long ago when they shifted Call of Duty to Blizzard.net and away from Steam. Blizzard titles anchor the launcher with eyeballs but do little feature work. It’s 2020, and Blizzard still region locks many titles, meaning switching from NA to EU servers entails losing all progression for some titles.

Other firms take game platforms to eat at certain parts of the game “supply” chain. In addition to a given piece of technology working for games, these firms hope the tech will scale outside of games as well. This is an executive fetish that rarely, if ever, pans out. Machine Zone (MZ) is the latest failed entrant into “but we’re really a tech company”. Both Cognant, its internal ad-buying platform, and Satori, its cloud platform, went up in flames. MZ ended up selling to AppLovin at 10% of its peak value. The jury’s out if Improbable, the latest “but we’re really a tech company” can dig out of $85M losses. A more considerable hope is Unity, but even then, only 8% of the 716 customers to spend $100,000 or more have been non-gaming firms—games as a technology an executive fetish that rarely, if ever, pans out. Epic’s PR team was out in full force trouting The Mandalorian using Unreal, but indeed this is a mingy share of Epic’s revenue. Games have similar challenges to tech firms, but tech firms rarely have identical challenges to games (all squares are rectangles, but not all rectangles are squares). A common theme of this blog reiterated in this series is that games are a distinct and unique medium. The faster we embrace this, the faster the industry can evolve.

While game companies may never be tech companies, there may be a small place for game technology companies. Unreal and Unity are real and are here to stay – they solve complex and prevalent problems game makers face. If the games industry grows, the total addressable market for game tech solutions grows as well. Is there room for more game technology companies beyond Unreal and Unity? The previously mentioned Improbable seems to think so, but little additional evidence exists.

There’s more to be said for a given game as a platform, but the evidence is scant even then. Publishers haven’t been able to retain the value of extensions within a given title (Auto Chess splitting from DOTA 2) or outside of it (MOBAs splitting from Warcraft III and Heroes of the Storm). The simple ability for players to build content within games hasn’t precisely accelerated either. If anything, modding has become more challenging, not easier since its ascent in the early 90s. Can we think of a single major 2020 release to embrace mods? Much was made of Halo 3’s Forge, but we’ve seen few copycats since its release in 2007. If we consider a corollary to Bill Gates’ definition of a platform, it might go something like this: “A game is a game platform when the playtime of platform content eclipses the main game.” In this view, there hasn’t been a modern game as a platform. A softer version might consider a game as a platform when “the playtime of additional modes eclipses the main game.” Despite a much lower bar, it’s not clear that Fortnite, with its concerts and social spaces, has reached it either.

We’re left with Roblox, a trustworthy game platform. Roblox provides valuable tools that make it easy for developers to create compelling games and provide for discovery. But the jury is out to consider this the future of games, especially with its elder sibling, Manticore, is going nowhere fast.

RPGs vary from CCGs, which vary from FPSes. FPSes might need to solve 64 player servers, while CCGs may need transfer markets and RPGs need deep customization systems. This specificity of these challenges shrinks the total addressable market for the tech solutions game firms have devised. Central platform features haven’t adapted to a particular game design (and the speed at which it changes). As a result, we’ve rarely seen game companies make a successful transition to a tech firm.

Part III

Game Companies Are Not Tech Companies Part I: Every Game Has Networking Effects, They Just Don’t Amount To Much

October 23, 2020

It’s a billionaire bonanza, but from single to multi-digit billionaires.

Ran Mo and Joseph Kim (@jokim1) argue for looking at games from a Silicon Valley perspective. The usual three make an appearance: moats, networking effects, and platforms. Moreover, while I thought it had died out after the launch of Halo 3, there continues to exist an inferiority complex amongst game makers. Games never seem to get the mainstream or broader tech circle legitimacy many think they deserve. Despite operating in the Valley and major tech hubs, game companies do not reach the crazy evaluations of FAANG (ATVI has a market cap of $63B, while Facebook sits at $215B). Furthermore, public intellectuals like Tyler Cowen or Ben Thompson rarely discuss games as a share of their commentary (not the case with Matthew Ball – but maybe he drinks too much kool-aid). Even internally, game firms seem to be chasing subscriptions off the heels of Netflix and Spotify.

The fundamental problem comes from not respecting or understanding games as a distinct How to Build the Amazon of Game Companies mainly describes why game companies will not be Amazon. The fundamental problem comes from not respecting or understanding games as a different and unique medium separate from linear content. In many ways, Kim’s piece wants to make this point but does not go for the kill by the end of the article..

I’m writing a some posts to address and expound on this. In two parts (networking I’m writing a two-sided series to address and expound on this. In two parts (networking effects & platform power), I’ll examine why game companies fall short of traditional tech companies. Then, with another two parts, I’ll address what tech companies have to learn from games (the content problem & MC = MB).

Networking Effects

Networking effects describe the positive externalities from the n+1 user to a service. Every time someone joins Facebook, the benefit increases in value as others can interact with that person. Gyms, for instance, work in the opposite direction: every member who joins a gym occupies a fixed amount of capital and decreases the value to each other member.

Fawning over networking effects comes from the path dependency inherent in the model: more users leads to more users. What does VC not want self-perpetuating growth? However, as Margolis and Liebowitz argued during the Microsoft case:

Although these simple numerical and algebraic examples appear both logically sound and structurally uncontroversial, these examples entail severe restrictions. The logic underlying path dependence is seductive but incomplete. […] Given that the theoretical claim that can be made for path dependency should be understood as only a demonstration of possibility, the case for path dependence becomes an empirical one.

It is not that networking effects are not real, but they are not as powerful as they were first made out to be. After all, networking effects could not save Friendster or Myspace, and as we will see, they mean little for particular games.

At a certain scale, diminishing returns decay positive network effects to zero. The 2nd user who joined Facebook was far more beneficial to the 1st user than the 100th million users who joined. While not directly comparable, Google’s Chief Economist, Hal Varian, makes this point regarding the predictive accuracy of models with additional data.

And we can create a similar arbitrary model for a particular game: diminishing network effect value for the marginal user that inevitably results in an asymptotic total network effect value.

Not all games face the same curve. A game like Hearthstone, with 1v1 play, has far less to gain from an additional user than, say, League of Legends, which has 5v5 and many ranked segments. More users reduce matchmaking times, potential latency, and thickening skill distribution (higher P, you will be matched against similar skills). The fewer segments (modes, ranks, etc.), the less powerful networking effects are, and the quicker the marginal value curve depresses. Cross-play doubled down on this by removing platform segmentation. Nevertheless, even for League, the networking effect power is infinitesimally small at scale; the significant gains are eaten with a relatively low user count.

Games do not have the “sticky” elements of networking effects. Synchronous consumption is another example. In any real-time game, a network effect is delivered when you play with friends. At the same time, something like Instagram Stories is consumed whenever the user pleases. It is not clear that having a friend play the same game I do is beneficial unless we play simultaneously.

Schelling’s Nobel Prize-winning work on tipping is a more apt model for describing many games today. Consider a group of players all playing the same game. These players are partially driven to play this particular game to be “in the know” or a part of the pop-culture conversation. Each of these players has a given threshold for defecting to a new game based on the share of public discussion consumed by the game. Players defect if the game declines as a share of the conversation; they leave as the game goes from 100% of the public conversion to 99%. More will leave at 99% and more still at 98%, continuing a downward spiral into a new equilibrium.

Of course, the inverse is true as well. Some might join a game if its share of public conversation goes from 0% to 1%, and even more would participate if it went from, say, 20% to 30%. A new game release can set off this “tipping” chain reaction in players. Look no further than the migration of Fortnite players into Warzone. The power of tipping is as strong as “public conversation” is as player motivation. Unfortunately for developers, this means instability in the long-run capitalization of viral game hits.

I have avoided addressing two-sided marketplaces as they will more neatly fit into the next part: platform power (or lack thereof).

Part II

Can We Get Players to Tell Us Their LTV?

October 21, 2020

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.

Kantian Ethics for Game Ads and Beyond Is Probably a Good Idea

October 20, 2020

The ASA has banned misleading ads from Playrix’s Gardenscapes. Running the same creative in user acquisition hits diminishing returns fairly quickly as the creative “clears the market” for users attracted to that creative. To broaden appeal, why not simply advertise the game as existing in a entirely different genre? This opens up a whole new segment and drops CPIs significantly. Of course, advertising gameplay that doesn’t exist surely means these users will exhibit extremely poor KPIs. However, there’s a broader implication to these ads and one that harms the entire game industry.

Images of the ads in question — Where’s the garden? And the gems? What about the dog?

The harm is described in Akerlof’s Nobel Prize winning paper on car lemons:

Akerlof’s original example of the purchase of a used car noted that the potential buyer of a used car cannot easily ascertain the true value of the vehicle. Therefore, they may be willing to pay no more than an average price, which they perceive as somewhere between a bargain price and a premium price. Adopting such a stance may at first appear to offer the buyer some degree of financial protection from the risk of buying a lemon. Akerlof pointed out, however, that this stance actually favors the seller, since receiving an average price for a lemon would still be more than the seller could get if the buyer had the knowledge that the car was a lemon. Ironically, the lemons problem creates a disadvantage for the seller of a premium vehicle, since the potential buyer’s asymmetric information, and the resulting fear of getting stuck with a lemon, means that they are not willing to offer a premium price for a vehicle of superior value.

If users start to have an expectation that a given game ad does not truthly describe the game in question then they’ll be less likely to click. This means higher UA costs even if your firm does not engage in these type of ads.

A similar problem is starting to creep up in PvP games. Developers have started to be confronted with the uncomfortable reality that PvP is a zero-sum game: for someone to win, someone else has to lose. And of course, when players cannot progress they churn. Supercell has heavily introduced bots in Clash Royale as a response.

Of course, players cannot identify if they are indeed playing a bot or a real player. This steals one of the compelling aspects, if not the compelling aspect, of PvP away from players: outsmarting another individual. But like the lemon problem above, if this trend continues then players will start to question if they’ve dominated a real opponent even if the particular game doesn’t use bots. Games that use unmarked bots start an industry expectation that diminishes the experience for all.

There’s a good moral rule here to help us and it’s from an 18th century philosopher called Immanuel Kant. Kant advocates for something called the Categorical Imperative. This claims that if we were to universalize a given action and it would result in a “contradiction” then that action is immoral. Consider lying: if everyone were to lie then the world would not function, therefore lying is immoral. Or consider being lazy: if everyone were lazy then nothing would get done. It’s a no-holds-barred approach to consider moral action, but thankfully we’ll use it a much more narrow scope.

If unmarked bots were to be universalized, PvP games would be irrevocably harmed. If misleading ads were to be universalized, then players would stop clicking on them all together. Both of these situations violate the Categorical Imperative and align with outcomes that benefit the entire industry. The Categorical Imperative makes for a simple and rule based approach to consider the “greyer” parts of developer action.

The Collective-Action Problem of F2P Clans Remains Unsolved

October 19, 2020

BOGO's dangerous looking two-person electric scooter coming soon — Google image search never fails

There’s a compelling aspect to achieving group oriented goals: being apart of something larger than yourself. Lots of F2P developers harp on the importance of social features. Yet the social experience in many games is abysmal. Lots of teammates or clanmates don’t seem interested in participating instead preferring to “free-ride”, putting forward little effort but getting the fruits of the team reward. Mancur Olson’s foundational work, The Logic of Collective Action, describes how this problem manifests in the public sphere (sometimes literally in the case of electric scooters). Game designers have a much easier time aligning individual and clan incentives than public officials yet they sometimes miss easy wins. How can we make the clan experience better then it might otherwise be?

In Clash Royale, clans advance a boat against rival clans. Advancing the boat depends on individual clanmates playing games everyday (and winning). The more clanmates play consistently, the more the boat advances and the better the rewards the clan will receive. But for many clanmates playing everyday requires a great of effort, why not let others earn the rewards for you?

Clan Wars 2.0 - The most anticipated Clash Royale update | Blog - RoyaleAPI — How do the boats move without oars? Supercell’s biggest mistake since Rush Wars.

The problem is severe in Battlefield where “PTFO” or “Play the Fucking Objective” is standard nomenclature. Players often won’t engage in activities that benefit the team (capturing flags), instead preferring to pursue their own objectives (generally: shoot players as fast as possible).

A given player faces two potential payoff schedules when considering to allocate effort to the clan. There’s the expected payoff with no effort (the probability that the clan/team will win if the given player did nothing) as well the probability that the clan will win if the player puts forth effort. We can model this as such:

\[\mathit{expected\ payoff\ from\ effort_i} = {P(\mathit{winning} | \mathit{effort_i}) \ *R}\]

where

\[P(\mathit{winning} | \mathit{effort_i})\]

is the probability of winning the clan event given give the effort of a given player or rather the additive probability of this given player participating.

While R is the reward from winning.

Of course if $P(\mathit{winning}| \mathit{effort_i}) = P(\mathit{winning}) $ or the given player cannot sufficiently contribute to the probability of the clan winning then there’s zero incentive for them to put forth effort. Why bother?

This problem exacerbates as team size grows: the efficacy of a given player varies inversely with the number of teammates. This makes intuitive sense: in Battlefield, a player in 2 versus 2 match has a greater impact on the outcome then a player in a 32 versus 32 player match. The incentive to free-ride rises as the number of teammates or clanmates rises. Weakness hides in numbers.

We’ve also ignored the game-theory dynamics of this problem for simplicity, but it’s worth mentioning. If I know my other teammates are not going to put forth effort, why should I? This leads to Nash equilibriums where clans have almost no activity.

How can we overcome the free-rider problem and ensure that all teammates put forth effort? The highest cost-benefit feature is simply better monitoring tools. In many clan or team based games, clan leaders face asymmetric information: they simply can’t identify the players that do not put forth effort. A simple measure of activity (last login) or games played in the last week goes a long way to kicking out free-riders. We might also consider a joint-production function. In Battlefield or Clash Royale each player would receive a score based on their effort or contribution to team advancement, if the team wins they receive a multiplier on this score. Such a system would have two benefits: it would more closely align individual effort with individual outcome (reap what you sow), and it would increase the benefit for high performing clan members to engage in monitoring. For example, a high performing member might have $20 in contributions with a 2x multiplier or $40 for winning compared to a low performing member with $5 in contributions and therefore $10 for winning. In real terms, the high performing member has an even greater incentive to encourage low performers to put forth effort.

There’s a lot to be said for social shaming as well. While it hasn’t been effective for zero effort participants, there’s evidence it might help players on the margin. A push notification demonstrating that your clans needs you or perhaps better yet, a system where your clanmates can send you push notifications is a compelling way to push players into action.

Perhaps the greatest miss I see is not in clan monitoring (kicking out free-riders), but in self-selection to begin with. Clans are generally pareto efficient for players meaning that there’s zero cost and only benefit to joining one. Players then generally look for near max-size clans as they maximize the clan’s probability of winning a reward and thus the players. Reducing search costs by recommending (or restricting) clans based on device language, location, and some measure of progression maturity makes all players better off.

It’s hard for social monetization opportunities to take-off if team based activities suck. We still have a long way to go to fix top of the funnel problems. Afterall, teamwork makes the dreamwork.

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Recent Posts

The Content Problem

Valve’s Underlords PSU Declines

Networking Effects