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I love Philadelphia, although I certainly did not always feel this way. It’s important to me, for a number of reasons, to discuss how I perceive the current state of the city, but I do feel that I should first describe my own personal history, which I hope will inform the latter discussion. This first posting is intended to set the stage for two further pieces; one on the current state of this city and another to describe what we are working to do at Philadelphia Game Lab.

Where I Come From…

I was born here and lived in other cities before returning, and probably would have left a decade ago if not for family. When I was small, I lived in an Irish area that’s now posh, by the Schuylkill, where I played between trains in the railyard, near the slaughterhouse (which makes me sound even older than I am), my family left there as a wave of idealists moving to Germantown, not with the idea of gentrifying, but being in a diverse place, then on to England, where my father taught savage Europeans the value of direct marketing. Much of my life has been a combination of the cold-eyed use of quantitative data he inspired, and my own interest in collaborating with brilliant people in creative and technical initiatives.

I began my professional life as an artist, working in film, and funded myself as a grip in films and music videos in Philadelphia and NYC. I was then attended the American Film Institute in Los Angeles as one of the youngest people accepted into the program. While there, I worked with some amazing people, including Wally Pfister, with whom I collaborated on enough projects to know that he was a better cameraman than I was by a vast margin. Under the impression that I must be an inadequate cameraman, I decided that I would rather work with people like Wally, as a director and producer. It turns out that he’s simply the best cameraman in the world, so I may actually have been the second best, but the margin of difference could still be more than my ego could take. I was lucky to have worked with him on a number of projects after that in those roles, including a couple where we came to Philadelphia to film in locations here. I had always liked messing about with film chemistry, and the then dominant black box post production technologies, but in the early 1990s, I was increasingly involved with desktop postproduction. I did the first PAL edit on Avid in the US, and I remember having to look at tape to see eyeline in closeups (so poor was the digitized quality), so it was clearly a very crude beginning.

In 1994, I was back in Philadelphia, and talked a bunch of talented and creative friends into taking three months to build an interactive broadband narrative for the web, called Root. -And, yes, we knew that only a few dozen people at universities would even be able to view it, it just seemed like something that needed doing. Three of the 20 people involved in the project actually knew what a web browser was. One of the three, Chris Neitzert, led the technology implementation, I had met him at a party where we almost came to blows over film trivia, and he was then working at a parking lot. -He went on to be a “scientist” at Razorfish, and all sorts of other great stuff. When we were done, we set everyone in a room and people were blown away by their own work. I doubt we could have done it without the presence in Philadelphia of Nate Gasser at Libertynet, who was kicking ass in ways that most people couldn’t see or understand. By 1997, I was fully engaged in interactive work only, and the smaller team that had carried on after Root had cycled through doing some very cool artsy stuff with NYC entities of the time, as well as some commercial clients. At that point, though, it was clear that clients were where the money was, and no one but me was interested in that path.

Around that time, I met Brad Aronson, who is the only advertising person I’ve ever met who fully lives up to the promises he makes of data usage and personal integrity. -He’s also brilliant in his insights. We had a beer and discussed data in marketing, and I offered to build him a database solution that would work better than his spreadsheets. -Without fee, because I thought what was he was doing incredible, and I just wanted to be part of enhancing it. Instead, somehow, he hired me as chief technologist, and I joined him for a great year. He later sold his company to another firm, which was sold to Microsoft. After a year at ifrontier, a friend asked me to help build a new interactive division for Devon Direct, and since I’m clearly a bit obsessed with marketing data, and direct marketing entities live there, I left ifrontier to be executive producer at Devon Digital. At ifrontier and Devon, I had been involved in deep integrations of marketing into websites, including negotiations for fees. In 1999, I too, had tired of commercial client relationships, and negotiating cheap big ad placements was becoming a bit too much like shooting fish in a barrel. I realized that we in advertising were the primary revenue source for some apparently very large sites, and were not paying them nearly enough to sustain them. Worse, the content was not at all compelling, and I couldn’t see why anyone would find value in it. Fortunately, while at ifrontier, we had had a couple of clients in the game industry, and that was increasingly interesting to me; in large part because I think it’s a lot more fun to build stuff that people actually love, than to try to slip off passable content to marketers. I was looking forward to the upcoming launch of Playstation 2 in the following year, and realized that it was an important time to get out of advertising and into games.

I should mention that around this time I co-founded Philadelphia Area New Media association. Others, especially Ian Cross, were more involved in the conception, but I appreciated what he was thinking, and was one of three official co-founders. There was then a point of high-bubble, when folks felt the group should be more than just a bunch of folks having beer, and that it should grow up and charge fees. As part of that, it was integrated into the Eastern Tech Council, and I quit the organization. I felt that Panma’s primary value was actually in just folks having beer and talking; my leaving the organization, combined with new focus on games, meant that I effectively left contact with the local tech community.

I began to look around, and realized that I would have to enter games through marketing, and with Brad Aronson’s recommendation (as he was EB’s agency of record at the time), I began in marketing in Electronics Boutique’s new online division. Fortunately for me, in addition to Brad representing EB in online, the company had a terrible agency doing offline advertising. When I arrived, EB had already committed to a $10 million broadcast campaign for their new website. Now, in overall terms that wasn’t a vast sum, but I pointed out at the time that it would be completely wasted. The company felt it couldn’t back out gracefully, and I was the new guy, so I agreed to do anything I could to help. One thing I did was to get Spike Jonze to agree to direct the spots for a pittance, but the agency then offended him somehow so that he backed out. This story is significant primarily in that it’s how I went from marketing to business development. After the campaign ran, and EB looked at data, it became clear that the broadcast campaign had been worthless. We had a followup call with the agency, going through the deck that they had provided to pitch the campaign. I noticed, mid-call, that there was a page of the presentation that spec-ed a very high projected conversion rate of viewers to sales. On that number was an asterisk, with a note at the bottom that said “data from DMA” -the Direct Marketing Association. I pointed out that their expected conversions were for direct mail, not broadcast. Combined with this event, I suggested that a game industry entity with as much brand value and physical footprint should be getting a lot of value from strategic relationships and not worry so much about conventional marketing. There’s nothing that pleases a retailer as much as telling them not to spend money, and backing it up with data. I eventually became vice president of business development for the chain as a whole, and was fortunate to work under a CEO (Jeff Griffiths), who could see that the industry was moving away from physical media, and toward new technologies. He gave me wide latitude to push to alternative distribution, and when we were purchased at the end of 2005, I was in the process of negotiating licenses for us to publish games on consoles. During my time there, I also negotiated deals with mobile carriers, all of the big publishers (for weird stuff), launched the first triple-A online offering (with Enron’s backing, but that’s another story), as well as some fun mobile stuff with in-store bluetooth distribution of symbian games from devs who largely went on to success in the iPhone world. I also tried to convince Valve to go to a focus on online distribution a year before they did, but they (correctly) felt the time was not yet right for them.

When Electronics Boutique was purchased, I asked our CIO, Seth Levy, if he would do me the favor of ensuring I was the first person laid off for being unwilling to relocate to Grapevine, Texas. I should also mention that I respected Seth enough that when I first started at EB and  he said “you’re a perfectionist, perfectionists never last in retail; you’ll be gone in six months!” I stayed six years to prove him wrong. However, since my value was entirely in being in a position to negotiate strategic deals, that value was minimized by that facts that I would be leaving soon and that GameStop took much more of a pushback position against changes in the industry.

About a year and a half before I left EB, a couple of guys from an existing tech company (outside of games) came to me to present add-on packs for games. These add-on packs were on discs and added content to existing games. If you’re not familiar with the game industry, pre-ubiquitous-connectivity a lot of publishers would sell such packs for big titles. But these guys had no relationships with publishers and their content didn’t look that great. I told them that it wouldn’t go anywhere. They asked me to wait and said they’d download better stuff into the game from their servers. They downloaded a clown army, and I told them that was their model. I then worked with them through issues over time. When I left EB, I had a list of projects I wanted to get into, and I asked this company (funded by Intel and others) to sell me the technology; they replied that their backers wouldn’t accept this, but would fund a new entity. At this point, the owners had been forced out of New Orleans by Katrina, and it seemed intriguing in a lot of ways to form a new company there at this time. We called the company GameFlood, for obvious reasons and because we hoped to facilitate a flood of content. I commuted to New Orleans for a year, when it was largely me and relief workers on the planes, and worked with asset developers all over the world, to populate what we were building. GameFlood carried on for a few years after that, but my vision had been of direct to consumer in game sales, and the technology wasn’t ideal for that, although the folks at GameFlood did some very neat stuff for small developers. -It may be that Unity’s latest efforts will specifically include much of what we had hoped to do, so I look forward to following that.

After leaving GameFlood, I briefly joined Greg Costikyan’s Manifesto Games project as president. Greg is a brilliant man, both in how he designs games and how he thinks of the nature of games. We had historically been on panels at places like GDC, with me representing digital distribution for evil big retail, and Greg representing indie development, and smart folks generally. I always liked Greg a lot, and was very intrigued by what he was working to do. In the early 2000′s I would always challenge Greg that if he could find me a dozen great indie titles in a year, I would have EB publish them and put them on a dedicated rack, but there were just never enough. -Which I know sounds unbelievable now. He had launched Manifesto in 2005, but was having trouble getting enough traction for next steps. I think he hit the issue that “innovators” most hate to run into, that this was a “visionary” project, especially as the industry passed through a technology change as he was working to get started. When he launched, there were few indie titles, but beginning to be more. However, the form of the existing titles tended to be Windows executables, delivered without the app store integration that we see now, and that adds value and continuity. Hence, he wasn’t able to curate as powerfully as he would have liked, and the games sold didn’t add to his potential for future sales. When I joined, it was to change the model into something with more integration into the store functionality, as well as to add browser-based content. However, I think we were too late in working to make this new iteration, and everyone really had the old version in mind still. I left when, after a few months, an article by Dean Takahashi panned the old model Manifesto, and it seemed that the original concept was too firmly embedded in everyone’s mind for us to effectively move to another approach.

In between all of these roles and sometimes around them, I have consulted for a variety of entities in the game industry. Usually, I take one of two roles. The first is to help companies to explore new opportunities and to model and negotiate industry relationships. -I have done this for retail and publishing concepts, and lately in the crossover to education and health. The second is to look at projects in games that have not succeeded and to help define the issues and possible remedies.

In 2009, I co-founded a company called superfluid with a physicist friend, Brana Vasilic (a really smart and incredibly moral man) and Douglas Rushkoff (a “futurist” and leading thinker in the value of the “sharing economy”). It was my first project in some years outside of the game industry, although the model was heavily inspired by my work with indie game developers and perception of their needs, and the transaction functionality by in-game currency models. We engaged with a lot of great people in building this, and worked through the whole “tech startup” model, including presenting at NYTech Meetup. The core idea was to find a way to facilitate online trust and project management in ways that would allow more volunteer projects to achieve completion; in part by ensuring reciprocity. The best parts of this project were conversations with people who truly believe in new models of collaboration and good, including the Ithaca Hours, time bank and LETS people, as well as economists working in more sophisticated ways toward some of these same goals. In building the site, and looking at usage, we realized that there are many, many people who will generously volunteer their time and resources toward projects they think may be credibly completed, and our system did support that. However, on the user side of the system, we came to recognize a barrier; that the vast majority of Americans have a hard time asking for help or reminding volunteers that promised help is late, and that very few people are of a nature that will allow them the confidence and resilience to manage a project. Hence, our options were to either create a system that would succeed as none had before in effectively helping ordinary folks to manage projects, or to build the system solely to bring together that small part of the population that already builds its own projects successfully. As the latter tends to already have all of the contacts, and favorite software, that it needs, we chose the former path, and were beginning to work to build it, with Karthik Swaminathan who was already involved in other projects. The project was moving slowly, and although it had a bit of glamor, due in large part to both the Rushkoff connection and growing interest in online currencies, I was spending increasing amounts of time in NYC and more time than I cared to in speaking with Austrian school economists.

This brings us to the summer before last, and I’ll diverge a bit to my personal situation at the time. I was married when I lived in LA and stayed married until the mid-2000s. Throughout my time at EB and after, I lived in Germantown and for most of that period was in others cities at least 25% of my time on game industry business. I have three children from that marriage, who are all wonderful humans. I couldn’t choose to leave Philadelphia, but I would say that from 1998 until 2009, I really didn’t live here. The Philadelphia of my childhood was a racist pit of Frank Rizzo, and the Philadelphia of my young adulthood was a place in which no one wanted to stay and almost all businesses formed in the suburbs, to avoid the city. -More on this in Part 2.

So, in 2011 I was in Philadelphia, drawn more and more to NYC by superfluid, but also, at the same time, during the prior year, I had met the woman I later married. She is from Boulder and a new Philadelphia true believer. She mocked me for not knowing anything at all about the city I lived in. -Seriously, I hadn’t been to a restaurant in this city for years, I just figured that was something for me to do in other towns. In any case, I did begin to get out, and I was really enjoying what Philadelphia had become, at the same time that I didn’t actually like how NYC had changed. In addition, I was deciding that I would really like to spend time helping to facilitate the trends I was seeing. People were doing very neat stuff, and smart young people were staying in town, rather than fleeing after graduation. Personally, I think that an element of these changes is widespread, in many other regions as well, with educated people leveraging what they’ve learned from a decade of social media to understand the high value of physical community and infrastructure; including a sort of bounceback from the idea that one can work anywhere, so we may as well be on an island, mountain or Portland, OR.

That was my situation, when Moira Baylsen, from the Arts, Culture and Creative Economy group in city hall invited me to participate in a panel discussion around starting a creative company in Philadelphia. As part of my presentation, I included a couple of slides of games developed by entities in Philadelphia. After the panel, when the floor was opened to attendees, two of the first to speak said, respectively: “People need to know that Philadelphia is a hub for game development!” and “We need to teach investors here that games are a great investment!” While Philadelphia is truly a great place to execute creative technical projects, we have lower per capita professional involvement in games than any other large city in North America and are eclipsed by Baltimore in this area. To the second point, it’s probably never a good idea to try to teach investors what to invest in; both because it’s seldom viable, so won’t get you the highly knowledgable investor you want, and because games are not a great place to splash funds. At the same time, game are great specifically because they are usually not part of the conventional tech startup ecosystem, with its need for venture capital.

The term of art “tech startup” implies very specific things in terms of a defined desirable model, and is highly investor dependent for implementation beyond early stages. Tech Startups require that a concept be initiated that can scale massively in usage and revenue without directly proportional increase in cost of business. To oversimplify the model, two or three guys get together, one a tech and one a business/marketing expert, and develop a plan and usually a minimum viable online product. At this point, or just after, some element of a group in which they are in social contact provides an “angel round” of $75k-$300k, they then move it forward and with the help of these investors to seek subsequent rounds to scale. A hard thing for places like Philadelphia is that historically people have fled the city (to suburbs or far away), so we lack a mature and active tech community with hunger for this sort of investment. In addition, this is one of the most conservative cities in the US. -New Philadelphia may be different, but the reins of government and mature business are in very conservative hands. Service industry jobs and manufacturing, as with games, seldom fit into this tech startup model, and in truth, the model has elements contrary to the region’s most immediate needs in job training and creation.

Games are not like that. A game developer almost invariably makes a game not because its use will change consumer behavior massively, but because it will fit into current or upcoming business opportunities, on platforms with installed bases of scale. Game development is artisanal and iterative: Rovio made games for a decade before its smash hit Angry Birds. If they had been funded at the start, with gross expectations for rapid growth, they could easily have dissolved as a team, long before creating that success. However, small or indie game developers are generally lean teams that live from one modest success to another, while building resources and talent. A developer of more than two individuals, with more than two games released is quite likely to be successful in being self supporting, at the least. Game developers benefit from social contacts, but not the same sort of financially oriented contacts that are meat to tech startups.

As we departed the platform, Chris Wink, who was moderating the panel on Creative Business in Philadelphia, said that he had never seen a friendly audience turn into an angry mob as quickly as when I had replied to the audience feedback on games. That night I decided that I could either never mention the city’s potential in game development again, or I would need to take an active involvement. That night, I wrote an email to about twenty trusted friends in the game industry, primarily asking the simple question: “if there were a dozen teams doing interesting stuff in games in a place in Philadelphia; first, do you think that would be a good idea, and second, would you actively support it?” Since that week, I have been working actively on the concept more than full time, so you can see what the answer was. We’ll have some further announcements over the next few weeks, and in the meantime, I’ll post about what Philadelphia Game Lab has been doing and what it’s doing next, as well as something addressing the current state of the city and opportunities here.

 

 

 

 

 

 

 

 

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Man does not live by bread alone. I have known millionaires starving for lack of the nutriment which alone can sustain all that is human in man, and I know workmen, and many so-called poor men, who revel in luxuries beyond the power of those millionaires to reach. It is the mind that makes the body rich. There is no class so pitiably wretched as that which possesses money and nothing else. Money can only be the useful drudge of things immeasurably higher than itself. Exalted beyond this, as it sometimes is, it remains Caliban still and still plays the beast. My aspirations take a higher flight. Mine be it to have contributed to the enlightenment and the joys of the mind, to the things of the spirit, to all that tends to bring into the lives of the toilers of Pittsburgh sweetness and light. I hold this the noblest possible use of wealth. –Andrew Carnegie

In stark contrast with Carnegie’s division of practice into that which earns money and that which does good, “Impact Investing” is the implementation of a belief that profitable businesses which provide social good enable the possibility of a new sort of investor, one who still demands a return on his investment, but who will accept returns lower than those conventionally expected. There are organizations and conferences supporting this new investor, and a number of individuals self identify as being such. Impact Investing isn’t simply the avoidance of negative impact (which is something that moral investors likely do in any case); rather it demands funds specifically put toward positive impact. Also, while any investor may be willing to take a smaller expected return in some cases, and most Angel investments provide no return, the Impact Investor is specifically about investing for good. Its definition demands that this be an area of both expertise and the implementation of a moral belief.

However, assuming as it does that investment for good is an area of expertise is an inherently flawed concept. While areas such as education, energy-saving technologies, etc., are categories in which possible social good may be achieved by investment, the expertise and interest brought to investing in these areas is of the same nature as other areas of specialization. An investor wants as big a return as they can derive within whatever areas of interest they may have, and while those striving for “impact” may feel that they’re more generous in accepting lesser returns, I’d suggest that rather than indicating that this is a different category of investor, it’s simply an investor whose category is seen as inherently providing lower returns.

A secondary issue with acceptance of the term “impact investing” is that it requires utilization of formulae reflecting equivalency between units of good and dollars. If I say that I will invest in something because I want to earn a profit, but I am willing to accept less profit simply because the business is “good” there must be a calculation of the value of good. How much less am I willing to accept in profits for a morally good investment than I for a morally neutral investment? Once I’ve figured that out, wouldn’t it be better for me to invest only for profit and donate part of my profit for good? Isn’t it more effective to earn as much money for good as one is able?

Money is the most fungible thing in the world, while “good” is the least. All of the efficiencies are on the money-earning side of things. Good is simply not efficient, while it is vital. Of course, business shouldn’t create a negative social or environmental impact, but that’s simply one set of boundaries among others, rather than an area of specialization. To state that one is investing specifically for good, as a central focus, on an ongoing basis, means in effect that one is being sloppy in how one invests, getting less benefit than one could, in order to derive money from a category that would be better suited either by conventionally focused investment (if available) or grant funding.

Of course, much of funding, especially at the highly speculative level of angel investors, is initiated by investors’ degree of personal interest and experience in a category.  Hence, one could say that someone with experience in mission-based businesses would naturally both be interested in investments focused around, and personal involvement in, that same area. But, in action, whatever one’s background happens to be, simply starting from the perspective that you’re going to make as much money as you can, immediately puts you in quite a different universe of opportunities. -One which is driven by profitability well beyond the self-sustaining.

In any case, these days, institutions tend to require that a grantee have an ongoing model that is self-sustaining for any funded initiatives. Hence, modern grants are more like investments, but they’re investments appropriately skewed toward doing good. The strategic difference is that it’s an investment in which all value goes toward ensuring that the initiative is self-sustaining, rather than requiring such a strong growth that it generates extra profitability beyond its own needs.

Consider the massive difference between the requirements of an initiative that must return all investment plus whatever element of profit a specific investor demands for his specific model, versus one that simply takes that money in to enable a self-sustaining business model in the long term. The first cuts out a massive number of valuable projects, and indeed, a project-for-good that generates such surplus revenue may well be demanding more than it needs to of the community it serves.

Would not energy and goodwill be better used toward creating really smart and innovative donor advised funds (and other effective and transparent channels for funding), rather than taking at face value that “impact investing” is a meaningful model?

Does all of this go to imply that new models in funding social impact initiatives are irrelevant? I think it does just the opposite. “Impact Investing” is a concept which cannot let go of arcane definitions of both for-profit and not-for-profit initiatives. In our era, the biggest problem that smaller non-profits face is that they all must retool to focus on transparency and self-sustaining models.

A generation of boardmember/donors is aging out of active participation, leaving directors to wonder why young people aren’t giving as their parents did. Certainly, there’s a major element of the current state of the economy in this equation, but concentration of wealth should also to some extent mean opportunities to solicit funds from a flourishing donor class. But this isn’t happening and a lot of smart people are wondering why. At the same time, kickstarter and other crowdfunding sites are successfully raising funds, on a grand scale, from exactly this generation of “non-donors.” Certainly an element of the crowdfunding success is a premium element, that ends up looking a lot like retail pre-sales. But, overall, the principle drivers to donation in that environment seem to be a clear and viable, sharable (non-selfish) message. Nobody gets out of a kickstarter donation any more than they put in.

Unfortunately, crowdfunding is biased in much that same way as conventional grant-giving entities, very much toward sexy projects and away from general overhead.  A smart non-profit can be confident that crowdfunding is an effective tool both for vetting community support and actually funding a project. But that entity still likely needs operating funds to initially cover keeping the lights on, and the basic and ongoing expenses of being an active organization. This represents the first two years before an effective revenue model can be expected to be generating funds. In a conventional commercial startup, a friends and family round may well be followed by an angel round to support the process. This funding is the highest risk imaginable, and wise folks generally think of it as much more likely to be lost than profitable. The reason they’re willing to invest is that it may possibly bring in massive profits in the long term (or they just want to give their offspring a break).

This is a place where Impact Investing breaks down as a concept, as this element of business creation and funding further exacerbates the problematic math of stating how many dollars each chunk of Good is worth; since, in this stage the big risk/big reward scenario is highlighted. One truly has to believe at this point that big reward is possible if one is to buy in under expectations anything like a conventional early stage investor model. If one cannot, then reference to Impact Investing as a subset here is illusory. This is the gap that either Impact Investing or Grants can fill, and it should most often be grants, because this isn’t a place where we want funders deciding that what will drive their decision is whether a business has the potential to win “big enough” in surplus profitability to justify the risk. Rather, the practical mission-based entrepreneur and his funders should be asking themselves the same two questions: “Is this the good I want to do?” and “Is this business model self-sustaining?” Anything else is off target.

Of course, there are other financial models and vehicles that are neither conventional investments nor grants. The Rochdale Society of Equitable Pioneers in Rochdale, England, organizing cooperative business structures for social impact in 1844, foresaw the hazards of Impact Investing when they forbade it in their original principals, but they did emphasize the value of issuing loans to worthwhile initiatives. This continues to be a powerful tool for business created in support of a mission. Not only for cooperatives, but in a number of scenarios, including micro-lending across the world.

Program Related Investments (PRIs) stretch the model a bit further than simple loans, as they may take the form of a loan, equity investment or simply a guarantee, but have none of the problematic elements of Impact Investing. The reason for this is inherently linked both to the nature of non-profits, as the only entities that may generate PRIs, and to the IRS regulations governing them.  If a PRI arrangement takes equity for its provider, its purpose must be within the mission of the provider and “production of income or appreciation of property” may not be a significant element. Hence, one can see that the IRS, who deal most intimately with mission-based activities and their potential corruption, recognize the inherent risk of allowing the potential for large financial benefit to accrue via investment to those who present themselves at mission-driven.

Not only is a desire for maximum return generally off-mission for the impact oriented startup, it can be directly contrary to desired goals. For example, a conventional startup goes to the marketplace that validates its model by wanting, and being able, to pay for its product. However, if you look at a software tool used in education, it is most likely to be fully monetized by affluent and successful schools. Ironically, though, unlike other early adopter scenarios, this is the most meaningless environment for validation; simply because there is so much support behind any tool used in such an environment that it is almost doomed to success. Software in a high-performing school must succeed; the children are oriented toward success and experienced teachers will inevitably find ways to make a silk purse out of the worst sow’s ear. This truism also gives lie to the now popular concept that there can be competition in k12 education; competition requires the potential for failure, and no one can stomach an unbiased test matrix allowing failure of children. Those of good will and having the latitude to do so will inevitably do the best they can to help children.

Another relevant aspect of this dynamic likewise comes from K12 education; it is a product that everyone needs and for which no one will accept its true price.  One aspect of this is that education is a complicated process, with as many variations in learning as there are kids. Hence, it’s incredibly difficult to assess the system price for teaching an inner city kid growing up in poverty against that of a suburban kid who has ongoing contact with positive aspirations and potential. Maintaining the structure of a large and diverse school district is not simply a multiple of the management costs of a homogeneous suburban school, it is significantly more than that. And adding charters to a school district shouldn’t actually lower that administrative cost, as it de-standardizes school activities, which will then be even greater need of oversight.

That is simply a question of comparison in public perception; even more significant is that when one breaks down how much a private school spends per child in Philadelphia (likely ~$30k in total, given $22k tuitions and additional fundraising), and compare that to about  $6k per kid in a fully subscribed Philadelphia Public School, one sees that public schools are either vastly underfunded, or brilliantly well-run, or both. Unfortunately, for those who see easy solutions in charter schools or vouchers, the answer is always the former and very often the latter.

So…as the well-intentioned impact investor, with a focus on education, how does one look at the opportunities in K12 education? Does one create a product that will scale massively in sales to high-performing schools, with the idea that simply because it enhances student performance it is worth doing (even as we see that that’s not inherently required for sales success in the category), and perhaps even worth taking a bit less profit, in order to do this societal good? That’s just a big mushball of reasoning, though. My suggestion; go the route of Carnegie, Frick, Nobel, and Astor ; sell whatever product you have, to whoever will pay, for as much as you can get, then form a foundation, or simply donate, to whatever you think really needs to get done.  Then make sure that it does get done, too. Because, like the robber barons of the 19th century, you will be a clear-eyed realist who bends reality to your will, and that’s what mission-based enterprise needs, if it’s to overcome the massive and inevitable barriers it faces.

 

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While it seems almost a truism that replication of effective models should be an effective course for supporting successful new initiatives, in the real world, it is a critically flawed strategy. In a sense, the term follows the same intuitive function as “Best Practices,” but while best practices covers much ground; everything from security issues and other practical concerns at its most meaningful to a lagging effort to only ape others’ success at its least; “Replication” dwells only at the duplicative end of things. It need not, of course, as meaningful structural elements  (transportation infrastructure, finance models, etc.) can be effectively replicated to great effect, but this is seldom what this generation of users implies. The current context implies that Replication is an agile approach to seeking out the best available solutions and ensuring that there are more exactly like them.

In a variety of contexts impacting economic development and education, Replication has become a term of art with implications of intent and execution. Inherent in the concept is that a group of unbiased observers is stepping away from the fray to look at all available solutions, assess which ones shine, and then support Replication of such initiatives. It’s a popular idea in commercial approaches to education, where it mitigates strongly in support of commercial charter schools, and also bleeds into some approaches to economic development. Replication is currently most visible in approaches to education, so that’s what we can discuss specifically, but the concepts carry over to other public areas.

It’s important to note how and why the term Replication is used, rather than “Scaling” which is more familiar to the business community. Scaling implies an understanding of all elements that go into allowing broader usage of a product or service. Many entities referencing Replication specifically wish to avoid that implication. Scaling simply means that more people are served, so all aspects and implications of that must be explored and facilitated. Also, a broad variety of models may be employed to reach more users. This is complicated stuff, but it’s what must happen for broad implementation to work.

Replication means taking a chunk of what has been done, and throwing it down in another environment, often with an emphasis on physical plant, and denying the full richness of the requirements in scaling. But you can’t Replicate anything sophisticated without scaling, so it’s an illusory method, except in the most basic situations. So, why would folks want to use it? There is an aspect of intellectual laziness in the Replication philosophy, but it also requires a specific perspective for the originator. If you are Replicating, rather than Scaling, what are you doing? Essentially, you’re trimming several elements from the possible dialog:

  1. Advocacy is irrelevant if what you are seeking is Replicable solutions, so projects exist in a status isolated from all external factors, only referencing internal metrics of success (whether testing scores, rates of violence, or other key metrics). The terrible problem with this is that nothing exists like this in the real world.
  2. Discussion of the value of the specific effort being Replicated is irrelevant beyond that of key metrics.  If it meets the metrics, it should be replicated.
  3. It’s very easy to invisibly pander to political beliefs when setting standards and methods for a Replication strategy. Hence, enabling an unspoken agenda by virtue of fixed parameters defining the Replication process. For example, if a school funding program only puts funds toward reproducing physical infrastructure in new locations, and rejects any program-based support, only entities running chains of new schools will receive such support. Parents building new charter initiatives cannot be supported and neither can public schools. In this way, such efforts may be Trojan horses set among people who truly care about education, intended primarily to end advocacy and public education efforts.

 

Replication is very sensible, if you have never actually created anything or worked with real life problems. Most worthwhile businesses and organizations cannot be Replicated, but they can be Scaled. Hence, stating that Replication is the central model for an initiative severely restricts what can be supported.  There’s a common phrase among startups “It’s all in the execution,” which simply describes the universal truth that a great idea, even when specifically described, is entirely dependent upon execution by those leading it.

There are successful and Replicable business models for charter schools, and there are successful charter schools, but there’s not a significant overlap between them. For example, in Philadelphia, the gold standard for charter schools is one with a Spanish language immersion program and a waiting list a mile long. It was founded by engaged parents and supported by Vince Fumo in its creation.  Anything involving Vince Fumo (who’s now serving time) clearly has an aspect of  “you don’t want to see the sausage being made.” And indeed, it would be pretty hard to dissect how it was made, but it’s incredibly successful. Recently they had a change of principal, and a parent opined to me that they were worried it would all go downhill. I’m pretty sure it all worked out fine, but for anyone with experience with schools, it was an absolutely appropriate question. Even with the single point of variation of one person, the model has the potential to be significantly different.

In contrast, there are a number of “chains” of charter schools, that primarily cater to disadvantaged areas, that have an infinitely replicable model, because it’s one based on profitability and minimal standards, facilitated by the skimming of better performing and more engaged kids from local public schools.  If you were simply to reverse the model, as they have in China, where “problem” children are outsourced to private entities, and public schools can focus on large scale education of a willing audience, you would have a better use of such resources, but that would be a significantly less rich revenue stream for private providers.

In these two examples, a worse model for society is the only one with potential for replication. Of course, the Spanish-language school could scale with more teachers or desks, or the founders could make another, different sort of school, but that wouldn’t be Replication.

Looking at public schools, Science Leadership Academy is an incredibly successful example, but I know that its leader would advocate for better support for all school principals, rather than stamping himself on another school. People who make change are flexible and creative, and approaches that facilitate that are a complete nuisance to pull together. It’s much simpler to stand on the sidelines and be sold on limited solutions that can be franchised. While it’s, of course, fine that some people and organizations choose to do so, it becomes something truly terrible when they draw others, who had been active seeking positive solutions, onto the sidelines with them.

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I haven’t posted here for a while, as I’ve been focused on other business, but thought I’d make a pass now at a comprehensive look at issues I see with bitcoin in light of Jason Calacanis’ recent, strongly positive, statements. I’m not an economist, but I do have a fair amount of experience in implementation of a wide variety of alternative transaction scenarios and business models, in scale, and tend to be on the bleeding edge of these things, so my perspective may have some practical use, whether on not you agree with me:

1. “Bitcoin is a technologically sound project.”

It depends how you interpret this statement. There are two respects in which it is probably not true:

a. Fragility. If Bitcoin is ever illegitimately manipulated, even a little, it likely ends up with no value whatsoever, as there’s nothing behind it. -No full faith of the government, no productive community. The entire value lies in its complete imperviousness to attack and its fixed quantities, which seems irrational to expect. If it is hacked in such a way that a few more bitcoins are produced, faith in the system will perish, as it has no recourse to external cross-checks or substantive value. If it is hacked in a way that a few less bitcoins are available, that will only accelerate the inevitable deflation issues of the system. Something that’s very important to remember is that while with most technologies (even with something like PGP, on a message by message basis) it’s not worthwhile to put a huge amount of effort into hacking a system, and one can safely say “that would take too much effort to be worthwhile;” this is absolutely not the case with large scale currency. Both criminals and governments will find it to be well worth such extensive efforts were scale ever actually achieved. Significantly, if you scan the internet for discussions of PGP hackability, the exception always given is that “you’re absolutely secure unless the NSA decides it’s interested.” -As I describe below, I think they eventually would be interested here.

b. Appropriateness. Bitcoin is an attempt to create a structure of value without human influence. There are a fixed number of units that can ever be generated. It can only be an inflexible and stagnant economy; if you look at the history of those who followed these sorts of strategies (ie: Andrew Jackson ), you’ll see that it leads to something worse than the economic downturn we’re seeing now. Dogmatic belief in the evil of debt or of human intervention leads to very bad things. -The fractional reserve system for increasing available US currency has a lot of detractors at the moment, but it’s part of a clever and dynamic true fiat system.

In deflecting claims that BC value is derived from a synthetic fiat system that actually mirrors a commodity system in functionality, or is even a truly commodity-based system (derived from use of power and cycles in mining coins), there’s a proposition put forward by some BC supporters that the only thing behind BC is the community of users. In saying this, though, they are simply adopting the language of complementary currency (such as LETS and Ithaca Hours), without taking on its structure or character. The reason that these other currencies can truthfully claim to have value from their communities is that they are structured to grow in ways that reflect such active participation: more users means more currency in play, as each individual joining the system is eventually reflected in quantity of currency units. More users of Bitcoin simply means more deflation. Hence, it has an inherently pyramidal structure, with early adopters effectively paying less per unit.

I’d throw in here that I’ve read a few postings by BC supporters that BC isn’t actually subject to deflation as conventional currency is, because it can be split into infinitely smaller pieces. For these folks, I’d just suggest that chopping up bitcoins has nothing to do with deflation:

Moderate inflation means that a unit of my money will probably be worth a little less tomorrow than it is today, which inclines me toward actively investing it in growth. But, why, you may ask, is rampant deflation a bad thing? I’d suggest that it’s bad because it’s anti-dynamic; however I chop up a bitcoin, if I am holding a bitcoin and think it will be worth a lot more tomorrow, I’m unlikely to invest it. Why should I invest it? It grows in my wallet. The wealthy holding onto their money is one of the biggest problems the US faces at this moment; why in God’s name would anyone actively attempt to replicate that situation in an alternative currency? For a currency to help its users it should be moderately inflationary and incredibly liquid. Deflation isn’t just another way of measuring the same growth effect in an economy as inflation; it’s absolutely entirely different, both in what it means and the action it drives.

2. “Bitcoin is unstoppable without end-user prosecution.”

Untrue, it’s very easily stoppable. Bitcoin, in scale, is entirely dependent upon the existence of entities that will allow conversion of Bitcoins to dollars. -There will never be retailers (and by this I mean professional retailers, with something to lose) participating in Bitcoin transactions. What will happen if Bitcoin ever gets scale is that banks, PayPal, Visa, etc., will shut these conversion sites down. Why would they shut it down? The problems with Bitcoin will largely derive from tax reporting issues, and the impossibility of an integrated relationship with the United States’ national taxation authority (IRS). A core element of Bitcoin is that there is no central tracking of transactions (or rules for usage); unfortunately for BC, though, for transactions involving sales of commercial services or physical goods with value of a dollar or more executed via a virtual currency, the IRS specifically requires reporting from the transaction-authorizing entity, via form 1099b. Since there are no controls on usage of Bitcoins, all transactions would need to be considered commercial (commercial will contaminate non-commercial if they’re in the same system), and subject to a $15 per transaction fine, in addition to taxes. There are other alternatives for integrating physical currency (like community currencies) into the overall economy, and bypassing this issue, but I don’t see how they could do it online.

If bitcoins cannot be used with conventional retailers or converted to dollars they will certainly not be liquid enough to scale and compete with dollars. I would suggest that alternative currencies can do incredible things for all sorts of communities, but that believing that a currency can or should compete with dollars is often, and certainly in the case of BC, taking a leap away from the useful and dynamic, and into the bitter and non-viable.

So, you start with this piece (that it will inherently be out of compliance with regulations) and then you add to it that, as with egold, even if you start out with great intentions, these sorts of anti-fiat-currency initiatives aren’t really interesting to citizens outside of a committed core group, you can see that usage will veer toward those for whom the negatives of inconvenience and a lack of liquidity are less important than is secrecy. And while a lot of the best people could fall into this category (Richard Stallman, etc.), there are a lot more of the worst sort of people, with a lot more reasons to participate in the system. And this latter piece is where they will come into most direct conflict with authorities, especially in this era.

Aside from these issues, there’s a structural difference between bitcoin and online credit card transactions that implies additional risk. Credit card transactions are representative of the transfer of money, while Bitcoin is built on the actual transfer of currency through the network. If Bitcoins are lost, it’s the same as cash being lost, but it lacks the tangible benefits of cash. If Bitcoins are lost or stolen (either literally or via non-performance), there is no recourse. Credit card transactions have significant recourse built in to the model, as several entities are responsible for tracking and confirming the transfer, and if one breaks, there are redundancies built into the system.

3. “Bitcoin is the most dangerous open-source project ever created.”

It’s basically toothless. Remember when Assange needed money and there was a cry to raise funds via Bitcoin? The project leader told them not to do it. Why? Because it’s inherently fragile and easily shut down. When you know that you really need cash, that currency needs to be liquid in the way that cash is. This is a structural problem with BC; that it wants to be cash, but it can never be liquid enough to fulfill that function well:

a. Its deflationary aspects and inherent instability in value need not be problems in other contexts, but being reliable enough as a transaction vehicle for external communities is a major issue here.

b. Governments don’t fear Bitcoin as a threat to national currencies. Truly they don’t, there’s no way it could scale to be a threat, either technically, or in desirability (are folks on the street crying out for new currencies to replace the $?) However, hidden transactions convertible to cash will be extremely concerning to them because of fears of terrorism, crime, and tax evasion. -At the very least, they will be inclined to shut down the system for the first reason.

4. “Bitcoin may be the most dangerous technological project since the internet itself.”

Dangerous in the sense that it could blow up and make a hideous mess?

5. “Bitcoin is a political statement by technotarians (technological libertarians).*”

Well, sort of. In a way it’s the modern version of the gold standard that Ron Paul adores. It’s mined and of fixed limited quantities. Hence it appeals to those who see the fractional reserve system as vile and corrupt.

6. “Bitcoins will change the world unless governments ban them with harsh penalties.”

As I mention above, conversion to dollars is an easy choke point, and, in addition, nobody is saying that you can’t track who’s transacting via Bitcoins. Hence, while it could conceptually work for unaffiliated individuals to participate; an entity with anything to lose wouldn’t be likely to participate if any sort of legal rulings went against Bitcoin users and transactions.

 

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Jeremy Wagstaff recently posted a very positive analysis regarding Skype, with which, as a heavy user of Skype for IM, I quite empathize.  However, his take on voice functionality is a tad euro-centric; not to say that he’s wrong, but I think that Skype’s journey back from years of neglect is a harder trek than he posits. The audience isn’t quite aligned as he suggests, and the typical usage isn’t quite right for a widespread integration with social nets. Read More »

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Since Gamestop is having a few issues with sales at this point, it seems like perhaps an appropriate time to look at issues in the game retailing business and the timeline for some upcoming changes. For a number of years, folks have predicted the death of games on physical media, and certainly it does make sense that a button click to purchase is a better distribution model than sending folks to a store to pick up something that could simply be downloaded. There have been a few barriers to the transition: Read More »

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There seems to be quite a bit of interest in the game developers cooperative, and I’ve been having a number of conversations about building such a thing. This being the case, it’s likely worthwhile to get into an overview both of what a cooperative is, and why it’s such a good solution for developer needs at this time. Read More »

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I was asked the other day by an interviewer about the past and future of manifesto games, with which I have been glad to have been involved. As I was telling him, though, that a portal dedicated to indie games is redundant by definition in the current environment, where a thousand flowers are definitely blooming, it occurred to me that what is needed now isn’t a distribution channel, but cooperative representation for marketing and business development. Read More »

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Bijan Sabet followed up a tweet pondering the future of libraries with a post including the feedback he had received. Some of the responses were interesting visions, while  some simply crowed the death of the printed word as the end of libraries. A fair amount of what I’ve been called upon to do since 2001 is evaluation of how physical retail can continue to have value in a world of digital distribution. -I dealt with this specifically as VP of Business at Electronics Boutique, and since then in a consulting role for various initiatives. Amusingly, the redundancy of libraries and of video game retail stores ends up being sort of the same issue at this point in history: Read More »

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It’s been interesting to watch as Microsoft and Sony simply decided to copy Nintendo’s philosophy and execution of a ten-year console cycle, rather than come up with an entirely new strategy. Nintendo was slightly more sophisticated in execution, as they gave their technology an initial release as “GameCube,” then a secondary release of basically the same hardware with the addition of of a groundbreaking controller interface, as Wii, giving an effective 10-year life to the technology. In the current economic environment, it is probably best not to try to push another round of console hardware down user’s throats (especially at the price points they want to remain at), so, in this way MS and Sony are adapting the model, but it’s no great stretch. Microsoft’s Natal or Sony’s unnamed PS3 technology will probably form the Wii part of their respective cycles. Back in 2006, Sony was saying that PS3 would have a 10-year lifecycle, and at E3 this year Microsoft was saying the same thing of 360. Read More »

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I’ve seen this coming for a bit; game trade-in machines in Walmart. I think this could be more significant than plays like Amazon and TRU getting into used titles, and even than Best Buy (as they’re unlikely to be too wholehearted in such initiatives); because what this does is potentially provide visibility into pricing, and availability in a high traffic location that will be competitive with GameStop’s broad footprint. Neither the NCR machines nor the e-play technology that runs on them seem to work all that well, but perhaps NCR, which owns a big chunk of e-play may put some money into getting it all together. I think that the broader concept of trade-ins at Walmart is more interesting and important than the kiosk bit, but the kiosk probably makes it worthwhile for them to indulge in an activity outside of their core interest.

The shortcoming of not being integrated into the Walmart system for credits is likely a short term concession to publisher sensitivities, until Walmart can see if the project is worth the bother; they’re likely also looking at whether they want to get involved in this and/or other sorts of pawn-broker-y activities. The name frustratingly eludes me, but I know there’s a small chain of big boxes down south that focuses on re-selling small consumer electronics and media (games and music, I believe); they also have a cafe involved in the model. I really like that sort of combination, and it seems well suited to these times.

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I like the idea of Apple acquiring EA, and contrary to what 1Up says, EA has suffered enough lately to make that a bit more viable. Apple could really use some high quality content for the iPhone/touch line of devices (which is now effectively competitive with game platforms like the DS), and perhaps upcoming tablets. -I’m sure Apple think it wonderful to be so successful with the App store, but knowing how Apple values user experience, you’ve got to think that they’d be happier setting some content quality benchmarks on their platforms, as that business grows. And EA nurtures their brand in much the same way that Apple does; so bringing that marque in, and living with it would likely be a happy marriage.

EA is actually in a rough position; unlike Activision/Blizzard and others that have been successful in creating/acquiring succesful alternate distribution and models, they are sort of in the process of another re-start of such efforts. Apple would largely get them out of this bind, as they could grow and learn on Apple’s digital distribution platform from a privileged position, while also growing their IP base and sales generally.

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Kotaku, which is usually a sensible and practical bunch of folks, has fallen into a germaphobe mindset in which they proclaim it a scandal that GameStop allows employees to take new games home and return them as new. InsideTech weighs in with the concern that employees may steal single-use activation codes that will hobble the customer’s enjoyment of gameplay. -Well, since many games are already cracked open in order to place cases on the floor, I hardly think the latter matters. Read More »

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…Well, actually, it’s a bit difficult to discern cause from effect here, but either way, not a bad thing, in the long term. Just as the old media bulwarks of the game industry didn’t prosper with the growth of the business they nurtured (with the notable exception of Game Informer), neither are the game publishers. And I think that it was to some extent a symbiotic death spiral. The whole model of $60 games is daft, but the print magazines, and, to almost the same extent, online sites (IGN and Gamespot) always pushed publishers in that direction, as they rated games based upon core-gamer expectations of game depth and play duration that aren’t actually sustainable. -Despite all of the complaining that developers and publishers have done about GameStop’s used game model, and I can see the valid reasons for that, GameStop has done a bit to ameliorate the lameness of the frontline game pricing model on the console side, as digital distribution is doing on the PC side. Read More »

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It was nice to get out to SF and meet with friends at the Game Developers Conference, but there were no really compelling tech stories, in terms of either vision or product, and that’s what I show up for. This may well come largely from the state of the economy and its near term effect on innovation. It seems to me that GDC now serves two primary purposes; training for big conventional PC and console games (for which it really does make sense to have a centralized function like this), and a massive game industry career-fest. Read More »

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Since folks continue to ask questions about OnLive, I thought I’d follow up a bit on my earlier post, and include the information I gathered from discussions with OnLive at their GDC booth.

I liked the guys I spoke with, and they seemed open and forthright about the product, giving me the feeling that OpenLive isn’t bunk so much as the product of good technical people creating something moderately useful. But that product has, for strategic purposes, been positioned by their marketing and biz dev folks as something it truly is not; competitive with existing products or in any significant way market changing. Read More »

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Today, Dean Takahashi wrote up a new game distribution technology, called OnLive, that’s announcing at the Game Developers Conference this evening. He feels that it has the potential to destroy retail, with a new technical model of games executed on the server side, enabling gameplay (video) instantly streamed back to the player. This may be a valid threat to retailers, and it’s a danger I’ve warned retailers about for years. Specifically, I first warned of it because PS3′s cell technology seemed focused on the fast video decompression necessary to this sort of system. But, despite the breathless adoration of Venturebeat, I would point out three things: Read More »

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I’m a bit too harried to post as I prepare to depart for GDC, but will no doubt be prolific next week. -I still have a couple of meeting slots open for later this week, if anyone wants to chat.

-Nathan

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I posted last week about the apparent entry of several retailers into the business of buying-in and selling used videogames, and someone very insightful in this area mentioned that it would be interesting to see whether someone trading in games at Amazon would put their credit back into new game purchases. He’s right, because this could be pivotal to next steps, if these retailers are successful. -GameStop’s argument is that buying-in pre-owned product is part of a healthy cycle driving new games sales, and generalist retailers getting involved in the model does sort of dilute that benefit.
Read More »

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It seems to be getting an awful lot of press today that Toys R Us, Best Buy and Amazon are all buying-in used games for re-sale, and hence endangering GameStop’s revenue from this element, but:

Read More »

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We all know that games sold quite well over the holidays and continue to do so. In addition to the conventional product (weighted toward console titles), we’re seeing good volume for casual and online titles. So everything should be great for developers and publishers…but somehow it’s not.

Read More »

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GigaOM has a piece up today positing the impossibility of a massively-multiplayer game that can “kill” World of Warcraft. Instead, it suggests that smaller MMO titles, with other revenue models, will nibble away at WoW’s market share. It’s certainly true, and has been for some time, that niche competitors have been the primary ongoing competitors to the big guys, first to Everquest, then WoW. And, it’s more true now than ever that alternate payment models, like that of MapleStory, are attractive and drive a significant audience.

Read More »

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I remain a big fan of EA. They have a lot of smart and forward-looking people, but it’s hard to stay as flexible as this industry demands with that large a company, and that has been an ongoing challenge for them. They recently announced Q3 results showing unfortunate results, apparently as a result of three elements: Read More »

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As AdWeek points out, these days it’s hard to justify a relationship with a conventional ad agency based upon its understanding of media and how to drive a successful campaign. And some of the worst efforts these days come from agencies trying to go “creatively outside the box,” without understanding that the box itself no longer exists, while some agency folks simply miss the entire point. Read More »

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Last week, there was a pretty specific analysis of GameStop’s used game business in the WSJ (with the slightly annoying flaw that the writer seems to have conflated “gross” and “net” in the sentence emphasizing high gross margin on used games vs. single digit retail expectations).

I like the Gears of War 2 model that’s mentioned, of including in new games a single-use code for a map pack download with value approximate to the discount the user would get from buying the title new. This should be quite good for the publisher and the retailer. For the publisher, it simply feels fair, as the game that’s bought, played for a week, then sold back to GameStop has a value that’s slightly diminished, in proportion to the lower re-sale price of the used title. -The newer used title is still $5-$10 cheaper, but it’s diminished by $5-$10 worth of content. The publisher/developer still doesn’t make money on the used product sale, but this has to feel better for them than having the exact same title at retail, costing less and providing no revenue to them. Read More »

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