SaaS and New Business Models

June 6, 2010 in Bootstrapping as Method, Startup Challenges | No comments

My previous work on gaming came to a standstill several months ago. Many things happened to cause me to abandon my foray into the gaming market.

  1. Project Darkstar was shut down by Oracle. It has since re-emerged as Red Dwarf Server. I hope this project finds great success, but the risk involved was making me uncomfortable. As a one person shop, there were too many uncertainties and too frequent changes to keep up with my limited time.
  2. Observing and learning the Game market – it is very crowded. I knew this when starting, but the competition continues to improve. Games which feed the masses (think Farmville) continue to grow, and nothing I would be creating would likely change that.
  3. Timelines are too long. Making a high quality game, my project plan was extending into the multi-year when taking into account server design, client development, and graphics. Add to that integration into portals, marketing, and so on – it quickly became too much time invested for too little chance of return.

So I made a couple of games, worked on distributing them, and then came up with a new method to start anew the process of value creation. Instead of going B2C for my next project, I am planning on launching a B2B niche product with a much better price structure and target market. Development is already underway, and I’ll be posting here over time once it is nearing completion.

Key Success Metrics

In keeping with my learning in the single-founder startup market, here are my key success criteria I used to judge market opportunities. Expect to see a post on the idea generation process at some point.

  • Idea to Launch planned to 6 months of part time work or less. I want to have everything up and running as fast as possible. My current project has been through design, and is about 50% of the way through initial development, and about 2 months have passed. So far, so good.
  • Product should target a niche where competitors already exist, but fewer than 10. This is to ensure I don’t have to create the market from scratch. In this case, I will be offering a solution at a far lower cost point and with much greater ease of use compared to my competitors. I will be going down the road of cost+ and differentiation (ease of use) compared to my competitors.
  • Product should have a sales price. Previous efforts of mine focused largely on the free or freemium markets (freemium being 90/10 free/paying customers). I still like those business models, but I have found the required volume reduces potential revenues too much for niche products. It also tends to extend the break even time by a significant amount, since you must constantly add infrastructure and scale for non-paying users. In this case, I am looking at a $20-$30 price point, recurring.
  • Keyword competition should not bee too high. In my target niche, very few keywords are very highly competitive, and ample traffic flows to some very low competition keywords.
  • Market has a long tail (Many possible sub-niches) or the market has a ways to grow before becoming mature. In my case, there is not many possible niches, but the market is still in its infancy for non-enterprise customers.

Overall, you’ll be seeing more about my product in the coming months as I prepare to launch. I will also be releasing some tutorials based on my technology choices which took me some time to figure out, based on the lack of documentation for exactly what I am trying to do.

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Why Network Marketing is Evil

April 9, 2010 in Bootstrapping as Method | 2 comments

In the past few years, growth of network marketing has moved around the globe in a variety of product categories.  Also called Multi-Layer Marketing, Pyramid Marketing, and Direct Selling, (although direct selling is a broader term which encompasses business models I will not discuss here), network marketing has touched almost everyone’s life in one form or another. There are many proponents of network marketing, although if you look carefully you will see why network marketing is not a business model but a scam based architecture disguised as a business.

What is Network Marketing?

Unlike direct sellers of the past, who would call potential customers at home or travel door to door, the primary aim of the network marketer is not to sell products, but to add additional distributors (direct sellers) into the company. This is often done using a high level sales pitch detailing how much money the speaker has made, and often includes market-speak to gloss over the risks. Words such as business opportunity, ground breaking, work from home, financial freedom, ground floor, etc. are all used to lure in a potential new mark. When a new person joins, they must pay a nominal fee or “investment” to begin their company, usually also with offers for add on products such as samples or kits. Once recruited, the marketer is then asked to try to bring in family and friends in the same way.

Selling the actual product is generally the secondary goal, and depending on the organization may be emphasized in differing amounts. Although some sales will occur, research has shown that the vast majority of people who buy the products network marketers sell are network marketers themselves.

Given the structure of a network marketing company, it is impossible for network marketing to be a viable business model for the independent marketer. In very rare cases (approximately 10 people per company), the marketer will make significant returns, although this is due to unknowingly scamming network marketers lower on the chain out of time and money.

Why Network Marketing Cannot Work as a Viable Business Model

Business models exist to generate increasing value for the largest number of people. In traditional companies, the business model will generate benefits for all stakeholders – customers are pleased with their purchase, owners and employees receive profits, and investors receive a return. It would make sense then, that a good business model would maximize value for all involved. The question is – Does Network Marketing increase value for everyone? To answer this question in a better way, I broke out the network marketing business model into groups of stakeholders with different value propositions:

  • Customers – people who buy the product, but are not network marketers themselves
  • Network marketers – For my purposes, those with 3 or fewer levels of downstream distributors
  • Top of Pyramid – Those with 4 or more downstream levels

Now, lets take a look at how each of these groups might be affected by the network marketing model:

  • Customers:
    Customers are more likely to have a personal relationship with the seller, but because margins are suggested to be 20-30% for the network marketer, they are paying a hefty premium when compared to the more typical 5-10% in traditional retail. In addition, many products (think Amway Global) are priced higher then the competition at wholesale, and have less value to the consumer.
  • Network Marketers:
    Generally, the marketers themselves must purchase a large number of samples, workshops, materials, kits, and product for their business. This often offsets any income made by a substantial amount. Further, they tend to solicit friends and families to participate in their  ‘opportunities’, which can lead in a decline of quality relationships. This is offset by the small chance that they will attain a large enough downstream that sales and residuals will offset costs.
  • Top of the Pyramid:
    Generally the top marketers in a chain. They may see large sums of money, although almost all of it comes from their downstream payments. The chances of attaining this are very small, given the high turnover of downstream sellers. In a study (related to a court filing) of the tax returns for the top 1% of Amway sellers, the average yearly income was negative $900.

Who Will Answer the Hard Questions?

I have yet to encounter a network marketer who will honestly answer the following questions. If you are currently a network marketer, then please, ask these of yourself and your bosses:

  1. Considering that other successful companies can cover global sales with only a few hundred sales staff, why are thousands of Network Marketers a better choice for this business/product?
  2. What is the actual average retail profit per sale for a marketer with no downstream?
  3. Do you keep detailed accounting logs of profit and loss related to your business? Are you profitable?
  4. What percentage of people who pay the sign up fee actually see a profit?
  5. Why are the incentives for recruiting new talent greater then incentives for direct sales?
  6. If the best salesman in the world joined your company tomorrow, but never recruited a single person into their downstream, who would benefit the most?

Why Network Marketing is Evil

Look, when it comes down to it, most network marketers have the same dreams everyone else has: to be independently wealthy, to have time freedom, and to be productive members of society. Network Marketing pitches play to all of these dreams, and are very effective at luring people in. Add to this the lack of basic business knowledge most people have, and it is a recipe for disaster. Most network marketers do not know basic accounting, and consider all income profit, without regard to money spent. So a few people get very rich while everyone else loses money. Evil.

The DSA (Direct Selling Association) includes so many network marketing companies that it is now a lobby group for them, and have worked to have network marketing exempted from anti-pyramid schemes (Yes, it is a form of pyramid scheme, which has been made legalized through excessive lobbying). Evil.

It encourages people to exploit those closets to them: friends and family. Evil.

The worst part is, most network marketers just feel they don’t work hard enough to make the big bucks, even though the deck is stacked against them.

Don’t take my word for it..

There are many people opposed to Network Marketing and the evil it represents. Please do not involve yourself with network marketing companies. If you need more convincing, read some of these sources:

“In a randomized survey of households in Utah County, Utah, where many MLMs are located, we found four MLM distributors for every one nonparticipating customer.”

What do these companies have to say in their defense? A little reading will find replies such as “They are wrong”, “Sales are strong”, “Work hard and it pays off” or my personal favorite “It is perfectly legal”.

Finally, if you listen to nothing else, please consider the non profit, pyramid scheme alert, and research whatever network marketing company you work with.

Internet Start Up Mistakes and How to Avoid Them

December 13, 2009 in Bootstrapping as Method, Startup Challenges | No comments

I launched my first web business 2 years ago, and just like that the venture flopped. Resurrecting the whole thing was pointless, and I spent a fair amount of time reflecting on what went wrong, what went right, and why it was doomed to failure from the beginning. Since that time, I have met many people in the same boat, or who were heading in that direction. To help prevent others from facing the same situation, I compiled a list of the main mistakes I made and see others making, and some tips on how to avoid them.

1) Not seriously writing a business plan

Many first time entrepreneurs and even some long-term entrepreneurs make this mistake. Everything you read online will suggest writing a business plan, but many people take this step for granted. Perhaps it is hubris that they have skills others do not, and thus are bound for success with their great idea. The problem is that the idea may not be so great, or the execution of the idea may fail. The business plan forces you to consider this carefully and honestly, to assess if it will be a successful venture, and what your chances of success are.

This is an easily avoidable mistake to make. Don’t just commit to writing a business plan, but commit to writing a business plan which is honest, as harsh as it needs to be, and identifies as many risks as possible. The most critical section for new web startups is going to be the financial section and the marketing section. For finance, ask yourself very carefully about the business model, and realize that the vast majority of web businesses do not make money, even for very large sites. Is your model  a good business model? How many users will you need to turn a reasonable profit? What are your costs per user and revenue per user likely to be? How many other businesses have turned a profit using this model, and how long did it take them? Did those businesses have success factors you lack? There are many such questions you should carefully analyze and write down a formal response to, even if no one will see it but the internal team.

Secondly, marketing. The question I like to ask is “is this a <major blog in your niche> worthy story?” Would they write an entire story dedicated to your product, or not? If the answer is no, you may want to seriously consider if your product has a good potential of success. The second piece of the marketing section  is market research, and really understanding the ins and outs of your competition. On the web, every other site is a competitor, not only in your own niche. If someone would rather be on facebook then your page, they will be. And finally, a good knowledge of other similar sites is critical. What are their competitive advantages? Why will you be able to siphon off their users to your own site? Is your site unique enough or superior enough to cause people to change their habits? To avoid failure, be realistic, even if the answers are harsh.

2) The Me Too Syndrome

I constantly talk to web entrepreneurs who fall into this trap. They see a major success (Some bloggers, twitter, and facebook come to mind) and then say ‘if them, why not me?’ They set out to create an also-ran product with nearly all the same features. The problem is, even if you build something which is fundamentally better then the competition, you still have to make users understand that and accept it. This works sometimes, but is the rare exception and not the rule. Generally, if you are entering a competitive space with a successful competitor, go find a new business.

3) The ‘If you build it they will come’ Fallacy

Some people have the assumption that building something means people want to use it, so they will. I actually made this same assumption when I started my first web business a few years back – thinking that there was search volume for my product, it was well designed, and so people would naturally start to use it. In reality, a business has to build out a customer base through word of mouth, advertising, brand building, and public relations. You can’t sit around for Googlers to find you. They may, but they also may not.

To avoid this, always assume that no user will find your site unless you personally direct them to it. This will help you when considering the proper marketing strategy. Building up the business case and the marketing plan in your business plan will help here. Essentially, you will need to help users to find you. Having a great product only keeps users, it doesn’t generate them.

4) The design trap

I like good design. I am not so good at creating it. My strength lies in the more technical and business oriented areas of startups, not in overall product design or graphical design. Although this is one of my weaknesses, I realize that design is a very important piece of product development. The trap is when the design becomes the product, or when the design is never ending. In the first case, a really cool designed product has forgotten about the utility of the product for the consumer. Who wants a really nice looking lump? In the second, a form of scope creep, continuous refinements in the design space can leave a product less polished, or delay delivery far too long leading to high cost.

I see a lot of web startups who tweak and tweak without ever finishing. I would recommend setting the design early on, and then going through several rounds of refinement, but leave a limit up front, and only exceed it in extreme circumstances. Once you are successful, you can always complete a redesign.

5) Product worthiness

Is your product really something other people want a lot of? Really? Is it iPod good? If you can’t honestly answer yes to this question, then what are you really doing? Perhaps just starting a business without a good product. This, along with the also ran products, is one of the main reasons I have seen many new startups fail.

A friend of mine nailed it one day when we were talking about mobile apps. He said he sees a lot of applications on the iPhone which are ok, but not great. The truly great ones come about when an existing user searches for an app she really wants, but can’t find it, so designs her own, and designs it well. This leads naturally into…

6) Filling a gap

As a corollary from the previous section, does your product fill a gap in your customers needs? If it does not, then why would a customer pay for your product? Even if your product is free, if a customer wouldn’t be willing to pay for it, you should evaluate the overall utility the business you are starting really has. Making sure your product fills a customer need is a basic part of product design, and should be considered before any significant capital has been spent, whether in time or money.

Also consider the life space that your business will occupy and how that will affect price points, even for free services. Utility applications and web sites generally have a higher price point, because they can actually improve your users life. Entertainment or social applications are more take or leave, since they are unlikely to materially improve your users life.

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A Short List of Current Reading

December 2, 2009 in Current Reading | No comments

A sampling of some of the interesting reading I have done this week:

The Greatest Deception in the History of Finance – An excellent post on why financial freedom is an illusion, which lead me to an interesting blog where I found…

Man’s (Career) Search for Meaning – A post which mirrors my own philosophies on work, and why I am driven to change the method of my own.

Game-guilds and street gangs both driven by team formation – interesting team formation dynamic

How to pick a co-founder – A good look at picking business partners. I like how he ties everything back to all personal relationships :)

Players (And Designers) Learn Faster With Tight Feedback Loops – A good reminder on learning, but hard to do in practice.

That is all :D

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A Meditation on the Subway

November 30, 2009 in Career Satisfaction, Personal | No comments

This weekend, I found myself alone in a central subway station. I had a lot of time to kill – a couple of hours before I would be leaving the trains. I played around with my phone for a little bit, watched people walk by, and purchased a bottle of water. Then I sat on a bench, pulled my legs into a cross-legged seated position, and began to meditate. It was a challenge at first, what with people coming and going, sitting near me or standing and waiting, screeching trains every few minutes, the nonstop bustle of a major city. Still, I was able to slowly follow my breath into the center of my body, and push away the sights and sounds around me, finding happiness. The time passed, and I was content.

It was later that I realized that this story makes a good metaphor for life. The people and trains that parade through the subway like clockwork mirror the emotions and events in our own lives. If we allow them, they will happily distract us for our entire lives. Only when we are forced to do we stop and look inside… otherwise we are just another blank face in the crowd, waiting for our train to come.

Sometimes it’s hard for me to take time out. I work a lot, and necessarily spend a lot of time moving from one place to another. Finding time to reflect on oneself is always difficult, but among the most rewarding things. When I was young, I would frequent the dark corners of my mind, and see what was hiding there. As I got older, this natural tendency towards thought led me to classic novels, meditation, and a propensity for long, solitary walks in the woods. Unfortunately, the more I see of the world, the harder it is to find time to reflect upon it. I continuously strive to escape the daily grind, which in modern society is a loose requirement for a satisfying life. I always want a unique, individual business to succeed so I can make optimal use of my time and increase my own awareness and happiness, but the workings of getting there leave little time along the way. The casualties of starting something new are many, and sometimes I playfully wonder if I should not just accept the everyday life most Americans enjoy, and jealously guard the petty hours left to me by world.

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Project Darkstar Game Server Risk Benefit Analysis

November 28, 2009 in Bootstrapping as Method, Flash | No comments

I am in the late functional Design stages of an Indy MMO, and the early technical design stages (Secret for the time being), so a couple of weeks ago when I was searching for a very inexpensive, scalable, smart solution to the ’server problem’ all MMO’s face, I found Darkstar and a couple other MMO backend products. Darkstar is an Open Source server platform developed by Sun Labs, specifically created for massively multiplayer game creation. It has a long list of useful features, and allows the development team to build application logic directly on top of it while handling all the low level server tasks which are traditionally the most difficult – concurrent data access, user connection level loading, multi-node scaling, and persistence across server crashes or shutdowns.

I looked carefully at several server platforms by analyzing technical documentation, 3rd party opinions, and in the PDS (Project Darkstar Server) case, actually building out the examples and looking over some of the source code. The result is that I have (tentatively) chosen Darkstar as the technology for my current project, and thought I would post my analysis here for those who may be evaluating MMO creation themselves. Darkstar is currently in pre-release, and this analysis is based on it’s current state and assumes successful a node scaling implementation which is expected within the next 6 months. This is a high level analysis of the Benefits and Risks of choosing Darkstar as the back-end server platform for an MMO (with small teams and Indy projects in mind, and not a lot of extra cash). Left out of this analysis is any direct feature comparison with other products. For more information, I recommend visiting their website and reading the forums, or even trying out some of their code examples yourself.

Benefits of Darkstar as a Server Platform:

  • Darkstar is Open Source – I like open source because it’s possible to contribute back to the community, and support a good thing in software. Open Source products have saved me thousands of dollars over the years in license costs, so I tend to want to support their efforts. This may not apply to all teams reading this, but is a key point for me. Additional benefits of open source are deeper understanding of underlying technology, and the ability to customize and support a product regardless of what entity initialized it. You also have a good chance that many other teams are adding useful features and tools into the code base.
  • Darkstar is Free! This beats every other server solution. Although there are some other free servers out there, none have much in the way of functionality needed for a back-end MMO. For a small game shop, this significantly reduces game production risk. It also avoids one of the success pitfalls, which is needing to scale up server licenses quickly if the traffic is not sustained while hoping revenue will also follow along. PDS offers (or soon will) easy scalability in both directions at no cost.
  • Scalable! Though not quite complete, the vision of PDS scalability is unmatched in other systems today. Both the ease and method of scaling cannot be found in other systems today (at least not at Indy price point). If you want to find out more about how scaling works, I suggest you take a look at this video demonstration of capacity level loading across nodes.
  • Superior Capacity Planning – The fact that the code base is free along with the scalability function of the product gives a unique advantage in deploying or removing capacity. If paired with a cloud based server environment, it is easy to add machines quickly as you scale up, and if demand drops off, to quickly scale back down and save costs. If the game has seasonal fluctuation or sudden peaks, this is a key cost advantage over other systems.
  • Excellent reliability in the data store – Though I have not fully tested it, the basic model avoids a key number of issues found in other server implementations around reliability of data. The primary example is the avoidance of duplication bugs and in memory errors seen in some other MMO’s. The data storage mechanism is unique and robust.
  • The Server base is really tailored to multi-player games. Other server systems are typically geared towards chat, large numbers of rooms (or shards) with few players, or other server side functions, and toss in virtual world building almost as an afterthought. Once you get past a lot of the marketer-speak on many other systems, the technology doesn’t seem to be there to the same extent as PDS. What this means to a development team is that much less time worrying about the server logic and that much more time implementing game logic when using PDS.
  • Server side game programming is easier and faster (and thus more reliable and less expensive) then any other server system I have seen. PDS offers developers the illusion of programming a mono-threaded application while maintaining a highly concurrent state. There is a number of convenient API’s for using the server, and the PDS API is quick and easy to learn. This reduces the potential for programmer error in server side programming for massive environments.
  • PDS implements roughly 80% or more of server side programming not related to game logic. Ideally, a game server would implement 100%, but I don’t think such a thing exists today. The amount PDS has achieved is incredible and blows away other server system I have seen. Since it is still in pre-release, I expect more down the line, and much of it is on their product road map.

Risks of using Darkstar as a Server Platform:

  • No SQL Database back-end. Darkstar chose a design pattern which uses a database and serialized Java classes. It is very easy to code in, but makes viewing your data virtually impossible. Though this design decision is behind many of the benefits listed above, the trade-off makes several critical game components much harder. The repercussions for this are numerous and varied, and are a downside of choosing the PDS. I have listed the main problems this causes below.
    • In order to update an objects’ current state as an admin or GM outside the game rules, custom interfaces must be added as opposed to using direct SQL tools. It is significantly more complicated to write such a tool then to write a web front end to a database.
    • Historical reporting is not a freebie as in other DB systems – Server design must include asynchronous writes to a DW DB, as opposed to using DB to DB datawarehouse methods, which is currently a well defined and solved problem. This is not as big a problem as the first, since it should be relatively easy to implement. Additionally, a large game server would need to implement something like this anyway, to avoid contention on their main database.
    • The server state itself relies upon the data store. If you want to change certain code objects (An initialize method on server startup which creates many objects only on the first server start, and non-serializableable compatible class changes), you must also remove your data or use another method such as merging changes. This makes future server patching much more difficult. It also blurs the line between what is game data and what is game logic. Since there are certain methods and objects which can’t be easily updated without potentially harming player data. It is possible a third party, which has already developed a tool to make this easier, will release something to the community, but it remains an issue for the foreseeable future. The technical details of what this means are complicated, and if you are considering Darkstar, I recommend you read up on these issues on their website to get a fuller understanding of exactly how a code patch might look.
  • Long term platform support is unknown. Currently, the only support is through forums or logging a bug issue. Since there is no formal paid support option, there is no real hope that critical issues will be handled in a reasonable amount of time as in some other open source projects. Having the code helps in this case, but it would be good to be able to get support at some point if needed, especially if the game turns into a breakout hit.
  • Oracle/Sun acquisition. Unfortunately, due to regulatory issues,  it can’t be discussed yet by the Darkstar team or Oracle, but Oracle has a mixed record on Open Source when it does not suit them. The long term viability of a project which is not aligned with Enterprise database software seems low to me. From the outside, I judge the probability of Darkstar being Oracle supported years from now to be moderate to low. That leaves long term support and improvements to the community, if a team picks it up at some later date. Historically for open source, there is not a great track record of this happening, especially with highly specialized open source software. Selecting this server technology means the team will have to take on the risk of self support and improvement for the code base years from now. Another related worry is if the Darkstar team itself leaves, as several other high profile Sun professionals have done in the past few months.
  • Documentation lacking / not regularly updated - Things on the server side are changing fast, and the documentation does not keep quite up. It is still in pre-production release, so this is not a really a fair criticism, but examples, training, and documentation is still sparse for such a complicated system. There is plenty of material for learning the basics and to get you started, but detailed manuals do not yet exist, and support tools are not offered.

One note on the list of risks to those who might look at this for their own projects. The risks can be broken along two specific lines, one is long term supportability of the product, and the other along the lines of how much work will it take to design a game out of the box. This second criticism is valid, but if you compare Darkstar to other solutions on the market, the work entailed to bring you to the same level as PDS currently offers is far greater. In other words, if you are making a buy decision on server software for MMO style games, every server I have come across has a long list of server functionality gaps, but Darkstar only has the ones listed above (which end up being far fewer then other products I have looked at). As for supportability, that is something common to most new open source projects, and not unique to Darkstar. I think the Oracle acquisition adds to the uncertainty significantly compared to when Sun was still independent, but I am hoping to gain clarity in the future, perhaps once the EU clears the deal.

The Final Say

Given the not insignificant downsides, you may wonder why I have chosen Darkstar for my own projects. The real reason is functionality, followed closely by cost. First, a quick note on functionality: it is unmatched. Yes, there is a lot of work required to make sure patching is viable and you can modify and track data. However, both of these issues are currently widely discussed by the Darkstar community, and it seems reasonable to assume they will be tackled in the future. Now, a quick look at costs. See my other post on Indy Game Economics 101 for an in depth view of game revenue vs. cost, but with a server that takes no upfront cost or licensing cost, it is the best value for the money. Support costs may be higher if internal support requirements grow rapidly, however existing projects don’t seem to have this complaint.

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A Blue Screen of Death Marriage Proposal?

November 18, 2009 in Personal | No comments

This past weekend, my dear friend A. decided it was time to propose to his long time girlfriend. Sadly, her father has fallen ill, so she was leaving Monday morning for another state. This pulled forward his plans, and highlighted the lack of a concrete proposal plan, only a few half baked ideas. His favorite idea was to use her interests in a joke to surprise her. She has been playing a lot of Dragon Age lately, and loves computers, so he wanted to incorporate that somehow.

While we were talking about it on Friday afternoon, he was lamenting about his lack of programmer ability to actually pull off something like that, and was telling me his ideal was a fake blue screen of death which would at first annoy her, but upon further reading would actually be a very sweet note with a marriage proposal attached. I hadn’t done any systems programming in some time, but decided I really wanted to help A. achieve his goals.

I got home from work a little after 5, and hacked into the night to get something working. What resulted is an incredibly annoying program that makes you think the PC has crashed after a certain time interval. It actually waits until the user starts Dragon Age before starting a timer, and after a few minutes takes over the PC. It can be difficult to get rid of unless you use the task manager. Of course, I had to make sure her game would be intact, or she might not have been quite as pleased as my friend would like. I took a demo capture to show him how it would work (without checking if the game is running), and posted it here, with some of the personal text blurred out at his request.

Saturday night rolled around, and he waiting until early morning (between 5 and 6 AM) to include it in her startup program folder. On Sunday afternoon when it went off, he was waiting behind her with ring in hand on one knee. The proposal went exactly according to plan, with a perfect WTF!? moment followed by a ‘how sweet’ moment. What girl could say no to a proposal given by one of the most hated PC screen of all time? Not this one!

Congrats A. & S.!!!

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Indy Game Economics 101

November 15, 2009 in Bootstrapping as Method, Flash, Startup Challenges | 1 comment

I recently entered the Indy gaming market, a crowded market if ever there was one. I liken being an Indy game designer / programmer to being a first cut author, except without an entire publishing industry looking for hot talent. Imagine being an author and getting your first book put on Amazon for download, or included in an online store along with millions of other titles, many of which have name brand recognition, thousands or millions of dollars in marketing spend backing them, or a lower price point (free). Your book is new, it touches universal themes, the writing is solid, and the characters alive. Still, it is useless unless people see it and buy it. How is such an author to make enough to feed the family?

Similar to the author I describe, Indy game shops face a steep uphill battle to make a game profitable. In this post, I will walk you through the basic economics of game distribution, price points, revenue models, and the business side of game design. In future articles, I will expound on low or no-cost marketing initiatives, distribution methods, and design for cost and quality.

Revenue Models for Independent Game Shops

There are a variety of revenue models to pick from, all of which can make your game profitable. Each method has different pros and cons, and are generally not mutually exclusive with other methods. If you can reasonably include one of these methods with your game, then include it, even if other revenue streams are already integrated. I like to look at each model from the perspective of the question “How many (unique) users do I need to have before a game is likely to make a million dollars?”

Revenue Model: Advertising

Probably the most widely used today for small independent games, advertising is when you use an ad network of some form and include it in your game. You can run ads during load screens, between levels, at start up, and really any time you want to. The most well known ad network today is Mochi ads, which adds additional benefits to the game design team by distributing the game for you.

Benefits:

  1. Ads are very easy to add and can boost your bottom line.
  2. Ad networks may help distribute your game to many game portals (generally for flash only)

Downsides:

  1. Some users are turned off by ads. If you throw in too many, you may lose customers.
  2. It can be hard to charge for a game up front, and then force users to sit through ads. Some games have been burned by this recently, but it may come to be more accepted by the gaming populace over time.
  3. Ads pay very little.

How does it pay?

Assuming you hope to make some cash from your game, lets see how ads work for payoff. Similar to ad supported web sites, you need a lot of traffic to generate any significant revenue, so your per-ad payout is going to be low. You can find published rates for CPM anywhere from $.05 per 1000 ads shown to roughly $1 per 1000 ads, though in actual experience you are unlikely to see a rate this high for any extended period. Across all games, the general consensus for average rate  is around $0.30 per 1000 impressions. This assumes a decent but not incredible game. This means you will need more then a billion players to break the $1 million mark on your game. That’s a lot of players. I have heard that using Mochi nets a game an average of 1 million plays, so a decent game can generate around a thousand dollars from advertising. One important thing to keep in mind is as the quality and popularity of your game increase, the expected CPM increases, and the value of each player increases accordingly. There are some games which can be supported purely on this model, but generally only the top 10 or 20 games in a year.

Revenue Model: Direct Sales

Direct sales ask a gamer to shell out up front for your game. Some recent successful examples of this method are Machinarium, which retails for $20 a copy. This nets you much higher revenue per player, but it is a lot harder to get a single player.

Benefits:

  1. Higher upfront payout per customer
  2. potential to generate a lot of revenue quickly

Downsides:

  1. Generally requires high quality game play and play length to attract customers.
  2. Distribution channels are more challenging. Options include through your own website, Steam, Amazon, or for some games XBox Live or PlayStation Network.
  3. Requires a more extensive marketing effort to get the word out.
  4. This model can be significantly harmed by piracy, as seen with other indy games with a 90-95% piracy rate.

Common around this strategy is packaging a Demo which is free to play and gives the player a good feel for the game. This means you actually need to sell two products to your customers – first a demo which they play and enjoy, and second the game itself. It is easy to leverage ad networks or other models with the demo to improve distribution and revenue from non-buyers.

How Does it pay?

This kind of sales can pay off very quickly if the game sells even decently. Assuming the $20 price point, you will hit your $1 million mark after only 50,000 game purchases. You can hit it faster if your demo is ad supported and does well. The main challenge with this strategy is in gaining distribution through third party channels, marketing the game, and convincing players to purchase instead of pirate your game.

Revenue Model: Micro Transactions

Micro transactions have been used for some time by game companies, even longer then most people realize. Micro transactions consist of selling pieces of your game to players over time, so their up front cost is lower or even zero. Players can be sold a variety of products including the game itself and expansions (the earliest form), additional game content such as expert levels or new areas, player items, fashion accessories for avatars, or virtually any game feature you can imagine.

Benefits

  1. Players can consume your game with lower up front risk due to lower cost. This increases total players
  2. There is typically a higher ceiling for player expenditure then with direct sales. A direct sale gives a max of $20 of revenue per player, but every time you add a new virtual good to the game, players increase their revenue potential.

Downsides

  1. The game must be designed to support these transactions. If not, they will generally not sell well. This can be difficult, since you must provide value to both non-paying and paying customers without unbalancing the play ascpects too greatly.
  2. Traditionally, it is difficult to successfully sell players items when not in a multi-player environment.
  3. Some players are turned off by the idea of spending any money on in game items. This is known as the ‘penny gap’ where some players refuse to pay for anything no matter the cost.
  4. If you use multiplayer, which is common in this model, ongoing server costs will dampen profits, and a large percentage (80-95%) of players will be non-paying customers.

How Does it Pay?

Studies have shown that paying players in these kinds of games are price insensitive, so you can charge sometimes significant amounts for certain items. Additionally, players which spend one time are also likely to continue to spend over the life of their gameplay, averaging around $30 per paying player. Unfortunately, many of these games have poor purchase rates, hovering between 1 and 5% of players being paying players. Thus, if we assume that you get 4% of players paying $30, it takes around 800,000 players to hit a million dollar revenue. Keep in mind that this is revenue, not profit. Since by nature this model assumes online play, you have additional costs for servers and support, which will detract from your bottom line. It is possible through good game design to change these numbers so a higher percentage of players are paying customers, and they pay more for the content, though that is another discussion entirely.

Revenue Model: Licensing

Licensing can be a rewarding model. You sell your game up front for big bucks directly to a game portal, distributor, or other third party, and make money regardless of how well the game does.

Benefits

  1. Make money regardless of game popularity
  2. It is possible to license to multiple 3rd parties depending on the terms of the agreement.
  3. You may be able to use this model in conjunction with advertising depending on terms of the agreement.

Downsides

  1. You lose some control over your game – publishers may request changes or additional features.
  2. You are unlikely to be able to use certain other revenue models such as in game or up front sales.
  3. Most license agreements are relatively low revenue.

How Does it Pay?

This model pays well if you have fewer views, and poorly if you have many. It is highly unlikely you will hit a million dollars with this model unless you make many high quality games. In general, licensing deals run from $100 to $10,000 at the very high end. This is not a lot when you consider salary costs for team members. The saving grace of this model is when you sell it multiple times and also distribute with an advertising model, or have a game which you don’t believe will make a lot in advertising.

Conclusion

Overall, there are a variety of revenue models to choose from. Most of these models rely heavily on the game design, and vice versa. It is wise to select a revenue model during the early design phase of a game in order to ensure the maximum revenue potential is achieved. Adding features to support one or another model at the end of thr project is likely to degrade overall game playability and under-perform from a revenue perspective.

All but one  of these methods share one thing in common: They don’t do well unless you have a lot of players. Players are mostly willing to pay for good entertainment, though you have to present a clear value model for them to make a decision. Competition is fierce for attention, so making a high quality game is still the best way to make a buck.

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New Direction: Gaming

September 27, 2009 in Career Satisfaction, Flash | No comments

To be perfectly honest, when I started this blog, I already knew that my current direction was towards creating multi-player games with niche appeal for profit. It came to me one day a few months back as I was brainstorming and looking over a few ideas I had for my next venture. The problem I usually came up against was the problem of passion. Most ideas made good business sense, but weren’t very interesting from a lifestyle perspective. I always asked myself: Do I really want to be working on this for the next x months and then supporting it for y years if it is successful? Generally the answer was no, especially when I did a bit of market research.

So I came up with an idea for a game which asks the player to change who they are from the inside out, in a fun way. The game will take a bit of work to create, and is not going to be the first thing I make either. Instead, I have done some research in the intervening time period around the current casual gaming market, and I think there is a lot of opportunity there. So, to get my feet wet I worked on creating a very basic game (like what you might find on a typical flash portal, but not so good as their best ones) to learn a bit about Flash, ActionScript3, and how to build a game using that framework.

I am glad to report that it was not very hard to do.  I certainly learned a lot about what not to do when designing my next game. The game revolves around the idea of being cupid, and trying to match two people together to make a couple. While the player is trying to remember which people on screen were thinking which thoughts, and trying to match them, Dark Cupids are popping up and trying to stop you. The game is pretty simple, but can get pretty challenging as you move up in the levels. I don’t expect it to hold anyone’s attention for more then 15 or 20 minutes, but I do think I will try placing it on a few portals for some additional feedback from gamers.

The other test I want to perform is whether or not using this as a marketing strategy (by placing clickable links in game back to this site) will drive any traffic. Though for such a game as this I expect any result to be small, I will test it out and report back with my results.

I have included the game here for you to try out:

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Small Business Guide to IT Outsourcing

September 3, 2009 in Bootstrapping as Method | No comments

Many small businesses, whether just getting started or established and growing, consider IT outsourcing but do not know where to start. In this article, I will walk you through the benefits and risks to outsourcing various parts of your IT infrastructure, and some common strategies as well as ways to go about implementing those strategies. This is intended to be a jumping off point for discussions around your IT outsourcing strategy.

Please note: I am not affiliated in any way with any company or organization listed in this article.

I Want to Outsource. Now What?

Before going into the pros and cons of outsourcing, it pays to do a little thinking about what exactly you will be handing over to another entity. You should choose a strategy based on your business model, the amount and types of technology your company uses, and your tolerance for giving control to a third party. There are several broad categories of IT support for outsourcing. Roughly in order of ease of successfully outsourcing, from the most difficult to the most simple: Technology strategy, IT project management, technology infrastructure support, application support, and application development.

The smaller the company, the fewer people dedicated to IT and the more you may need to outsource up the chain of command. As you grow, it pays to keep this in mind and decide at what point it makes sense to start bringing different tiers of IT in house. Lets discuss the benefits and challenges of outsourcing each tier of support, and then we’ll go into some analysis of how to go about outsourcing each function.

IT Technology Strategy

In larger companies, this tier of IT support resides in the CIO and CTO positions and perhaps their direct reports on down. This tier consists of high level decision making about the direction of the company in regards to technology. Often, these people will evaluate and decide which technologies to deploy, select hardware, software and other vendors, and ensure the organization can meet customer needs and pay suppliers on time. Strong technology strategy can help your company stay ahead of the technology curve in regards to the competition.

Risks of outsourcing: Good technology strategy is hard to find. Even big companies pay huge sums of money to find experts in the field. Leaving this to an occasional consultant may leave you lagging your competitors.

Benefits of outsourcing: There are a variety of reasons you may be better off outsourcing strategy. Perhaps your IT needs are very limited, or maybe all you need is a static web page which you can update yourself. Possibly you can make do for a while as is. If technology is not a big factor in your business, you can do without a dedicated strategist while you grow. It may also be inevitable to outsource this function if no one in your business is technically competent enough, and you can’t afford someone to fill this role full time.

IT project Management

More a function for mid size and large companies, IT project managers oversee changes to your web presence, lead initiatives to make sure your internal operations are running smoothly, and will occasionally even help the guy down the hall with his email problem. Kind of like jacks-of-all-trades, if you have enough IT need to have a full time IT department, these employees will keep it all running smoothly. They also handle budgets for developers, hardware purchases (e.g. laptops), and support costs. In some cases, the project managers may also be technology strategists, and in extreme cases will even do the deep technical work as well!

Risks of outsourcing: The project managers generally know your business and your technology. Outsourcing can take this knowledge and put it on the outside, which may leave you vulnerable to change. There also may not be a lot of monetary savings over time as the total cost of the contract + expenses + loss of control adds up to about the same as the initial savings of not having full time employees on the books.

Benefits of outsourcing: Outsourcing this is great if your IT needs are limited and you have employees who can manage IT part time, on an as needed basis. It can also allow you to level load your expenses. Doing a big web redesign that takes six months? Hire a project manager on contract to do the whole thing, and then let them move on when the project is done, and your costs fall accordingly.

Technology Infrastructure Support

This tier of IT is where most people begin to think of typical IT jobs. The people running your infrastructure support might be server administrators, database administrators, network engineers, or other highly trained technology guru’s. They are especially needed if you run your own servers from your office or have something that must always be accessible to your employees or customers, like a web ordering system, internal payment system, etc. Finally, they often help architect new systems and applications, providing the expertise for a successful and lasting deployment. They work closely with project managers on a consulting basis, and then implement the technology to make it work. They also provide infrastructure support to multiple systems. If it is critical to fix when an application goes down, these are the people who will fix it.

Risks of outsourcing: You tend to lose control of the technologies used when you outsource this function. If you outsource server support, for instance, the support company may force you to choose an Operating system and setup of their own specialty. If you change vendors later, this may become a problem. Similarly, you lose control of your data. If you have databases with sensitive information like SSN and Credit cards, then you must be very careful about auditing the vendor to ensure adequate protection. Remember, if a vendors’ employee steals that data, it’s your company that gets the bad PR.

Benefits of outsourcing: There can be significant savings from outsourcing this tier of IT. Experts in these fields can often be expensive, and your IT infrastructure may not be large enough to merit 100% of a persons’ attention. Further, for specialized systems, it may take many experts to support it (one for network, one for server, one for database…). Vendors will take advantage of economies of scale and standardization to lower costs significantly. Additionally, it simplifies the management of your systems, allowing you to focus on the customer product (internal or external) while the vendor handles the technical details.

Application Support

Similar to the technology infrastructure support, this tier focuses on supporting technology. Rather then the enabling technologies like server and network, this IT tier directly supports the applications your company uses. Because your customers and employees are often interacting with these systems, this tier of support also has to interact with your customers and employees. This often gives rise to customer complaints when calling an overseas help desk, so choose your support group wisely. These employees often require access to your applications (imagine an email administrator account for instance) and sometimes access to application source code if they will be making changes.

Risks of outsourcing: Data privacy and quality of service are the main concerns. Since vendors must have access to your systems to support it, they can also view potentially sensitive data. Additionally, an outsourced person may feel less loyalty to your company, and may not correct errors as quickly as an employee would. Finally, consider customer service. These folks are usually the face of IT to your customers and employees, so a good mix of personable and technical characteristics is best.

Benefits of outsourcing: A significant cost savings. The less support you need, the more savings you will get since this allows you to level load your needs along with other small businesses. One person might provide support to 10 companies, meaning you can pay 1/10th the cost for the same level of expertise. Additionally, you may see a quality improvement if this allows you to achieve higher quality support. This is especially true if you won’t be relying on this tier for direct customer concerns.

Application Development

The most frequently outsourced IT function and the least risky to your business. This function typically developments technology products to specifications you provide. Today, it is common to hire web designers and application developers for a few months to build a web page, and then end their contracts. Some of these people will also offer application and continued support for an ongoing fee or on an as needed basis.

Risks of outsourcing: As in all outsourcing decisions, if you get a poor quality resource, you may have poor quality delivered back to you. For custom code projects (web pages), you may have a more difficult time finding support, or that support may cost more if you change providers.\

Benefits of outsourcing: The main benefit again is cost reduction. Very few small companies need full time software development teams. Outsourcing this function allows you to get high quality software development when needed, and pay nothing when development is complete. This is especially true for projects that need to be deployed once, and will have only small changes afterwards.

I Know What I Want to Outsource. How Do I Implement It?

After considering which areas of your business you want to outsource, it’s time to decide your outsourcing strategy. Here are a few broad hiring strategies used in the industry:

  • Hiring freelancers
  • Hiring individuals operating small businesses (such as web designers)
  • Hiring consultants
  • Contracting an IT outsourcing firm
  • Hiring employees as contractors

Lets quickly talk about some of the pros and cons of each contract type.

Hiring Freelances: Freelancers are people who may work multiple jobs at a time for multiple clients. They can be individuals or associated with a company. There are a variety of resources where you can find freelancers. Websites like eLance, guru, and prject4hire allow you to post requirements and desired cost range, and freelancers will bid on the projects, allowing you to decide which freelancer to select. These sites also have robust ratings systems where you can see feedback from other customers, or provide your own. They also provide some protection against undelivered work by acting as an independent third party to the transaction. To be sure, you can find excellent work at a very low cost at these sites, however they also tend to be a race to the bottom on the quality and price spectrum. Many of the most talented people will not participate in these bidding wars, so if you are looking for great web site design, a strong architect, or a nuanced technology proposal, you may want to look at other options.

Individuals as Small Business: Many highly talented people will start their own company to attract clients, using their skills as the main sales tactic. They will charge more then a freelancer, however they will also work more closely with you and your business team to ensure your needs are met by their deliveries. They usually have a strong brand to uphold, and will look for your repeat business. Developing a relationship with these businesses is a great way to get top-notch service.

Consultants: Consultants generally don’t deal with technology support or implementation, but will provide you with tactics, strategies, or evaluations of your IT landscape. They can be very expensive for a short time, and leave you with a plan which requires more expenditure to implement, but can be invaluable in your long term planning. Consider IT consulting along the same lines you might consider tax consulting or marketing consulting. It is one more business function with which you may want temporary outside expert help, and can provide a strategic advantage over your competition.

IT Contracting Firms: These firms specialize in IT resourcing. This is a very broad category, since many companies fall here by default. The most common arrangement small businesses have is when they order server space for website hosting from a company like rackspace or gridlayer. These companies offer self managed hosting for a small fee, where all administration must be done by the client, and in some cases hardware purchasing as well. Simply by renting server space from these companies, you implicitly outsource certain functions like network and server vendor selection. They also offer IT services up to and including complete server management for your business, so you can ignore a lot of the administration work. Although this may not always feel like outsourcing, you should consider it as such and treat it with the same consideration you would when evaluating other outsourcing contracts.

The other common kind of IT outsourcing firm provides individual people instead of services. They may contract with your business to provide 2 full time workers on site at your business for 6 months for instance, and provide server support as above from within your company. There are many prominent outsourcing firms that provide this kind of service, and the services they provide range the entire spectrum of IT tiers excepting perhaps strategy.

Employees as Contractors: This has become more popular in the last few years. It is possible to hire a person as a contractor, but have them report directly to your own chain of command. This saves you money on taxes like the social security tax, and employment benefits you offer other employees like healthcare by pushing it to the contracted employee. Many contracted employees have less loyalty to your company though, so be aware that this can be riskier then other forms of outsourcing since there is no external control of the services provided. Additionally, there are various laws and regulations regarding this type of labor agreement, so be sure to research the requirements thoroughly before embarking on this kind of outsourcing strategy. You should note that this is not by any means exclusively used as an IT outsourcing strategy, but is used in all business functions today.

Now that you have an overview of IT outsourcing, your next step is to continue researching. I recommend looking over websites of several service providers who can provide what you need, and put together a comparative matrix with pros and cons. Outsourcing should not be done quickly or without forethought, but can provide a quality and cost boost to your business.

Do you have experience with IT outsourcing? Send me comments or email with your experiences, and I will compile them here in a future post.

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