Video games have changed a lot since the early days of home gaming in the late 1970s and early '80s. The graphics improved, the games got more expensive and elaborate and a whole lot more people from every walk of life are playing them.
But for the last three decades or so, the business model did not change very much. The customer bought a game and paid a lot of money for it, not to mention the cost of buying the expensive hardware required to play it. Video game manufacturers operated a different model of sorts: Create great games to get consumers to buy the hardware, then keep cranking out great games that would keep consumers on board and upgrading those devices.
It’s a model that’s being disrupted by new platforms with disruptive business models, Recurly Co-Founder and CEO Dan Burkhart told Karen Webster. Making money in gaming is no longer about selling the games for a high upfront cost, or even buying expensive gear on which to play them. Today, it’s about subscriptions and access to titles and content, he said, a baseline that provides lots of opportunities to grow revenue by monetizing in-game purchases and selling expansion packs or specialized equipment, accessories and even branded clothing.
“Gaming is figuring out the upsell,” Burkhart told Webster, “and utterly changing the entire market.”
Striking a New Strategic Path
The gaming industry, like music or film, is highly “hit-driven,” and for the same reason — a big hit is a big windfall. One can look at Fortnite for the most straightforward example, given the billions of dollars it has generated and “the millions of American parents who have spent the summer trying to tear their kids away from it to get them to go outside for an hour,” Burkhart quipped.
And the ability of some games to attract players and keep them hooked for inordinately large amounts of time is shaping up into an unbelievably lucrative business. It’s the reason firms like Microsoft are paying billions for Minecraft, Burkhart noted, and aggregators are racing to snap up the next big title.
The hits, he told Webster, undeniably explain the explosion of costs and the race for position in the gaming market.
But the hits aren’t just a matter of building games that are more enjoyable or engaging and as fun as Fortnite surely is. The makers of the games must think strategically about their customers and about the psychological process of gaming itself. In short, they have figured out a way to monetize the endorphin rush that comes with winning.
“When I was back at eBay, we said the key to activating a new customer wasn’t just having them participate in an auction, but actually having them win one. Because it makes them feel good in a different way than just buying it does,” Burkhart noted.
At their very base, games are built around that psychological hook — it’s why they have levels, unlockable achievements and experience points. Layering the ability for players to purchase their way into competing better or having a fuller experience is a way to hook a player and keep them playing.
There doesn’t have to be a high cost of entry. Games are increasingly giving away baseline access to play to keep those barriers as close to zero as possible because the structure of the platform makes it a giant context for commerce — albeit of a slightly tenuous kind.
Moreover, Burkhart noted, subscription models are increasingly moving toward bundling titles, because not all games have Fortnite’s seemingly infinite ability to draw interest.
“Particularly where churn is a factor, feeding in new titles extends the half-life of a subscriber’s playing time,” he pointed out. “When you look at some of the models, the ability to put your title on the homepage of the aggregators will become another revenue stream because of access to potential players.”
Changes and Challenges
What is happening in the world of gaming now, Burkart noted, was very much foretold by what occurred in the worlds of music and movies, respectively, with the rise of services like Netflix, Apple Music, Prime Video and Spotify. Less than 20 years ago, customers regularly had extensive collections of CDs and DVDs. There are still holdouts today, but most of them are older — the desire for a physical copy doesn’t make as much sense to millennials, Burkhart noted.
“This speaks to changing patterns of consumption in general,” he said.
Video games had been a holdout because up until very recently, hardware-specific gaming consoles or PC equipment — was a determinative factor. But that is going away fast, noted Burkhart.
“[For example] look at the Google Stadia, which supposedly offers access to 4K gaming resolution with no requirement for high-end computer gear or a gaming console at home,” Burkhart said, noting that if it catches on, the rest of the industry will quickly start following.
There are challenges to be ironed out. Friendly fraud — particularly in the form of enthusiastic children swiping a parent’s card and going on an expensive digital shopping spree — remains endemic in the world of in-app and in-game purchases. It is the vast majority of cases.
But, Burkhart noted, it is also a problem that the sellers — in this case, the gaming platforms — are willing to work with customers to a higher than usual extent. Often, when a chargeback complaint comes in, the gaming company will refund the money rather than wait to be forced through the whole chargeback process. Unlike regular card fraud, where something of value in the physical world has been stolen, the marginal cost of refunding the purchase of a digital magic wand is relatively low.
“They’d rather keep people playing on the platform and making good purchases than fight for the bad ones,” Burkhart noted.
And as more people are joining to play on the platforms, it will be interesting to see what comes next, as the aggregators look to make their gaming platforms stickier for consumers.
“Amazon, Hulu and Netflix all moved from aggregating video content to making their own. Could we see a similar thing in gaming? We don’t know yet,” Burkhart noted.
But it’s worth watching. The business of gaming is less about getting customers to buy a game or an expensive platform so much as it is about enrolling the consumer in a gamified commerce ecosystem and keeping the marketplace a place where people will want to return.