Whyos

Three obvious truths about frontline downloadable game sales are generally ignored by the existing industry players:

1. Inventory Means Nothing –Limitations on retail availability unnaturally hinders sales of digital product. It may help a lousy retailer, but does nothing for the creator or publisher (even if the retailer is the publisher).
2. The Store Metaphor is Played Out -There are no limits to how you attract and keep customers of digital product except the limits of your imagination.
3. Great Games are Currently Sold on Lame Websites-The elegant implementation of interactive entertainment in games is in stark contrast with the archaic implementation of retail download/commerce sites.

The way that frontline games are currently marketed and sold via digital distribution is driven by inherent publisher conservatism, which forces unnecessary reliance on metaphors from physical retailing. If games were handled as other digital content is today, they would benefit from transparency and a scale that would revolutionize the business, enabling new business and content. The scope of that benefit is difficult to define, but I’ll do my best to describe potential scale. As a side note, what we’re looking at here excludes downloadable casual titles, since they have modest value to consumers or creators, and so easily flow wherever they might garner a few sales, usually via some iteration of Oberon, Big Fish or Reflexive; these aggregators are hungry for SKUs, and merchandize simply. I don’t believe that downloadable casual games as sold today are a healthy model either, but that’s a separate issue.

As it stands now, there are two primary ways to sell a frontline game executable online. In the first, a website/aggregator negotiates for the rights to sell a game. They receive it with or without DRM (adding it, if the latter), and upload the file to their website. Each site needs to negotiate the DRM state of the file, and spend time and money integrating their DRM and ecommerce features.. Then the customer completes a transaction for the game, using the site’s proprietary checkout, and downloads it. Sometimes the title will be exclusive, and often its early availability on a site is paid for, either with an upfront fee (guarantee), or a marketing commitment. This is generally a sloppy and inefficient way to do business, especially as both sides are thinking that they get more from the deal than they give away. The overall scenario of negotiated distribution is unnecessary, and harkens back to a time when inventory was physical and limited, and giving something to one entity meant not giving it to another. Online, the best way to make the whole worth more than the parts is to enable transparency, but that truth is lost on participants in this market. Trymedia, Direct2Drive, etc., fall into this category.

In the second method, a publisher, or meta-aggregator, only sells product from its own site. There is some limited potential to integrate a retailer or affiliate’s basic site functionality with the content provider and pass (or warm-handoff)  the purchase, using purchase codes or re-branded product pages  But it is a kludge, and if more than a couple of games are integrated in the non-standard way it necessitates, the retailer’s site quickly degrades; taking the status and value of a simple affiliate. EA, various MMOs, and a variety of distributors sell in this way, but usage by retailers and aggregators is necessarily ad hoc.

Web 2.0 has by now matured, and is highly relevant to this area.  While “Web 2.0″ is thrown around a lot, its definition is oddly bifurcated: On the one hand it represents the stylistic and technical aspects of interface enabled by Ajax and Flash technologies. On the other, it is more substantively defined as a range of technologies that enable communities of developers to use a variety of feeds and services to create compelling new offerings. Think of Twitter, a simple feed twisted and repurposed any number of ways. Or Google maps, enabling a variety of creative business hacks. It’s this latter definition of 2.0 that really “allows a thousand flowers to blossom,” and also allows both users and investors to cherrypick those with the traction to move forward.

So, there are feeds for micro-blogs (Twitter, etc.), blogs (RSS), maps (Google maps), etc. Some of these are built on standards, some are ubiquitous services provided by a single entity (Google Maps, Amazon S3, EC2 and payment services), but what they have in common is that they enable aggregation and use of content and services by anyone smart enough to conceive and build that next step.

This is where the benefit of a standardized feed for downloading and buying games comes in: It enables both major and grassroots entities to develop functionality and environment for game products, within the context of a Web 2.0 ecosystem. Twitter, has about 3 million active daily users, and fully 57% of them access it through third-party applications and web-apps. Perhaps that usage only represents a modest incremental volume of users, who would be there in any case. Perhaps it’s entirely incremental. It’s impossible to say. The provider benefits either way; the overall audience is probably larger because of third-party gateways to content, but even if not, third-party offerings provide features that make some audience members happier using the content

When we look at how blogs are read, the stats are less visible, but certainly a significant percentage of blogs are read through RSS readers, either standalone ones or web apps. -FeedBurner had about 65.6MM users last year.

Feeds work not only on the macro scale, aggregating software and websites, but also on the micro scale, for individuals in a social networking environment. The Pew Internet & American Life Project (March 2008) estimated that 37% of Internet users are involved in user-generated content creation, but that number rises to nearly 80% for 12-17 year olds. So a huge number of gamers are building their own online presence with just the sort of embedded functionality that a “feed for games” could enable. They are currently broadcasting their video and music preferences to their online communities, driving interest and transactions. Because of the executable-based and fragmented nature of the games business the industry is effectively locked out of this.

Where there has been standardization and transparency, in keeping at least with the zeitgeist of Web 2.0, is in Flash games. Although none of the leading game aggregators implement 2.0, in either definition of the term, particularly well, the embeddability of the technology inherently enables aggregation and flexibility. Also, the standardization and simplicity of the toolset enables a much larger development community. While the old “long tail” concept may never work for games, there has to be a creative outlet both to keep developers and the audience more broadly involved; especially as the high-end of console game development reaches astronomical costs and similar levels of risk aversion. Flash games have successfully taken that position, and as Flash continues to evolve, the potential for a creative and skilled developer base within the medium will only continue to grow.

But, when you look at what is going on in downloadable games, it’s just a stinking mess. Some publishers insist that they must own the customer by owning the download application driving each sale. Others depend on Steam, which has done the best job of selling downloadable games, both because it takes the initiative seriously enough to run it like a real business and because Valve started with the advantage of tying Steam to the release of HL2 and its high-profile downloadable element. But Steam is an ugly hammer of a retail tool, and wins somewhat by default. Trymedia have become the preferred white-label solution for converting boxed product to digital distribution, simply because they’ve bothered to do the publisher deals, but their sales volume is insignificant. On the casual side there are some significant players in download stores (Big Fish, Oberon), who do a good job within their focus, but their value is largely based upon their ability to negotiate distribution, and to create at least some of their own games.

Why is a game available in one place, but not another? Usually either because the publisher will only sell it direct, or because someone has done a deal to place that content on their site. This isn’t a healthy environment, and it will hobble growth of the online game business.

There are two moderately successful marketing approaches for selling downloadable games online. The first is for a media entity to use excess ad inventory to push a large audience to its retail offering. Direct2Drive through IGN, MSN, and Yahoo Games (when it was more active), all took this route; and I suspect that Turner had this in mind when they started Gametap. –After all, if you have unused ad inventory, why not monetize it with sales of product that has no cost to the retailer?

There are two inherent problems with this approach. One is that these guys aren’t retailers, so in the long term, the project ends up being an annoying one to which they’re ill suited. The other is that really, the conversion stats for this sort of project are quite poor, so, unless you’re desperate, the ROI ends up muting the initiative.

The other model is to have a unique technology or content that pulls in an audience. Valve does this by binding Steam to frontline game content and access to their engine. EA does this by including their Download Manager with software and enforcing its use for online distribution of their titles. The problems with this approach are that it’s lazy on the part of publishers, and it really doesn’t create the best solutions, since it’s focused on an unnatural exclusivity.

So, what needs to happen to rationalize this business and bring it into the modern era? It needs a standard feed. I’m not the person to design this, but I know that it must include transaction (revenue split definition and transaction provider selection), shopping cart, game binary, points, ladders, updating, user identity, and token-based DRM. Additional value could come from including marketing assets such as game genre(s), game description, system requirements, and screenshots/video. Some of these elements aren’t strictly transaction-related, but they are basic and standardizable; enabling more elegant integration if opened to the developer base.

What barriers are there to implementing such a model? Well, the data is all pretty simple and if the format is constructed competently, not really an issue. Ownership of the customer, however, must be dealt with. This is an emotional (to the point of irrationality) issue, with developers, publishers and retailers each feeling that the customer relationship is rightfully theirs alone. It must be that both the end vendor and the publisher have access to the customer’s contact info, and that acceptable usage must be standardized. The biggest real barrier to overcome is transaction functionality and technology. For this part, I’d suggest that a mediating role in which a revenue split is enabled, as defined by game providers; splitting each payment between publisher and retailer. The easiest provider to integrate into this role would be PayPal, but it should be standardized enough to allow competition. In the case of larger retailers, they could take that role themselves.

Once this standard is created, what happens? Maybe a couple of dozen damned clever widgets/applications selling games. Maybe the same again with web applications. And websites. Maybe Google builds the best viewer, maybe some kids in NYC or the Czech Republic, or Israel. Not only that, but game functionality is sold for different purposes, and integrated into websites differently. The games business can then expand its profitability and influence.

Why are applications and widgets important? Well, we know from other sorts of feed that there is some preference for these alternatives. We also know specifically in the area of games that xfire and the apps making use of gamertag and other game-specific feeds are highly successful. But, most importantly, a persistent application allows the retailer to maintain an ongoing relationship with the consumer, pinging them when new products or updates are available, driving increased sales. This is why EA likes to own the download application, and a large part of why Steam is the most successful retailer of downloadable games. But without a standardized feed, this success is only limiting of total sales volume. Because Steam will not become a ubiquitous provider, and a single publisher cannot as market as effectively as an aggregated offering.

Within this new ecosystem, clearly there are opportunities for technology entities and startups, but just as importantly, it opens up the opportunity for major retail brands to effectively participate. Currently, their distribution relationships are intermediated by entities with the time and interest to negotiate multiple publisher/developer relationships and integrate functionality. What would set retailers free to use all of their merchandising and customer relationship expertise toward this distribution? Make it a feed and avoid the need to fool around with non-standard content relationships; make it simply a matter of enabling retailers to compete effectively on a fair playing field of performance and brand. The end result will be more games sold, more games produced, with more direct consumer contact for retailers and a wide variety of retail options for consumers.

Game sales have been steadily growing topline, but it remains an inefficient business for bottom line profits. And, in terms of influence, games remain isolated, with technology costs and focii putting the emphasis on major hits. The vision of a feed is of opening up games to enable a broad variety of approaches and models in content models, marketing, sales and consumer relationships, and make this a healthier and more dynamic business.

-Nathan