While it is impossible to predict the future — Chaos Theory shows that even very small events can have a huge impact — you can still prepare for likely scenarios. The uncertainty principle, a key tenet of quantum mechanics (as popularized by Stephen Hawking), postulates that perfect predictions are impossible if the universe itself is random. Thus, I do not believe in predictions (outside of State Fairs), but I am a strong advocate of pre-mortems and thought a pre-mortem on 2021 for the game industry would be useful. A pre-mortem is a meeting held before a major decision where all those involved in making the decision imagine themselves six or twelve months after the decision was taken, assume it turned into a debacle, and then explore why it was a disaster. The value is not predicting exactly how 2021 will turn out but preparing for events that could have a major impact.
For 2021, I want to take a similar approach and put my readers in December 2021 looking back at the year and understanding what went wrong. I have put together several ideas to consider for your pre-mortem but as every company has a different risk profile, you should focus on those that could most impact your business.
We underestimated the headwinds created by Covid-19
At the end of 2021, we may look back and regret not seeing the disruption Covid would cause to our industry. With many people unemployed or seeing lower earnings, spending in iGaming and social gaming could deteriorate sharply. If you made investments or acquisitions based on continued growth, you may find yourself in a difficult position.
We overestimated how quickly revenue would revert to pre-Covid levels
There is also a possibility that when 2021 is over, you may regret anticipating that the impact of Covid would be short lived. Instead, the phenomenal growth many social and iGaming companies experienced could continue or even accelerate, as more people see the value of online gaming. Thus, you may have underinvested in growth expecting a weaker market.
We missed the impact of the new consoles on social gaming
Generally, it has been mobile and free-to-play games that have impacted the console gaming space (see THQ and Acclaim) but in a year we may look back and realize that the launch of the PS5 and Xbox Series X/M significantly impacted the mobile and gaming businesses. With the strength of the new console launches, particularly Sony's, there is a possibility that these consoles pull users from other forms of gaming. I have always said you should not look at your direct competitors but consider the entire entertainment space (gaming, streaming media, television, etc.) as potential competitors, so discounting console gaming is something you may regret.
Real Money Gaming happens faster than expected in the US
The last year has seen the move to online accelerate (just ask most brick and mortar retailers) and this acceleration may spread to the US real money gaming industry. While the valuation of several iGaming companies have exploded because of the US opportunity (Draftkings anybody), most companies still assume the majority of the US will not legalize real money gaming in the short term. While the process has been slow, often disruption manifests itself initially slower than expected only to hit an inflection point that surprises people with the speed of the transformation (ask a movie theater owner). Changes in the US market would not only impact real money gaming operators but could change the playing field for social casino companies (for better or for worse).
The European Real Money market shrinks significantly
While the US real money market is the opportunity everyone is looking at, the industry could experience very material changes in the markets that generate virtually all of the current profits. Evolving legislation in many European markets is impacting companies' ability to compete and to maintain profitability. Changes always create challenges and opportunities and that is likely to be the situation in Europe's real money market.
IDFA has a major impact on acquisition ROI
While there has been much hand-wringing and chatter about Apple's planned IDFA change, most companies are operating under the assumption that Apple will not make a change that causes apocalyptic destruction. While that is likely the case, there is the possibility that the change will be as damaging as some warn, making it unprofitable for many game companies to acquire players. You may regret not building up a strategy that reduces your dependency on performance marketing and instead increase your competence in cross-sell and monetization (if players cost more, you need to make more from them). You also may regret what genres you pursued, as some will be more resilient to an IDFA change than others.
M&A market drives non-profitable behavior
In the last year, the M&A market in both social gaming and iGaming has heated up, with 9 and 10 figure deals commonplace. You often see in a strong M&A market that companies focus more on positioning for a sale than profitability, which cascades across the entire industry. If valuations are driven by new user growth (say the US sportsbook market), companies will bid up prices for new players and give incentives to attract customers from competitors (sometimes with a negative ROI). For businesses focused on profitability, you may find that your previously sound approach did not work in 2021.
Your "supply" lines are disrupted
Over the past five or ten years, most game companies have shifted to a model where various functions are outsourced. You may have moved your game design to India or your art to Nebraska or your sound/music to Kuala Lumpur, which has allowed you to harness the best talent in the world and potentially reduce costs. While these changes have increased elements of your resiliency, they also provide new risks. In 2020, Covid made it harder (and in some cases impossible) to travel, Brexit creates questions in how the UK will collaborate with other European countries and new trade wars potentially impact the ability to work across borders. You may find that critical functions turn into bottlenecks that slow or halt your content stream or new products.
Work from home changes the nature of the workforce
Many people have forecast how the workforce will change in a post-Covid world but, as I said earlier, predictions are not my business. Instead, you should be aware of potential shifts that could have a dramatic impact on your business in 2021:
Major tech companies move to a permanent part online model, thus increasing their recruiting reach worldwide. While in the past you may have considered your employees safe if you were in Belarus or Sri Lanka, you may now be competing with the world's best companies to keep these employees.
People might want to return to an office. If you have moved to a pure or primarily WFH situation, you may lose employees who want to be back in an office.
Work from home has a negative impact on your team's mental health.
There are many ways that work from home can evolve and you should anticipate changes in the macro-environment impacting your business.
Something happens that you never saw coming
You also need to realize that risks come in many forms. While you can anticipate some, there will be risks that come out of the blue from complex combinations of typical events or from unprecedented massive events (i.e. Covid). You need to detect these quickly and respond based on the event, rather than trying to fit it into your anticipated risk bucket. This response should be improvisational, rapid, iterative, and humble, since not every action taken will work as intended.
While I can't (and, really, neither can you) predict the future, you need to look at possible outcomes and build up a risk adjusted strategy to optimize your growth. Do not rely on the ones listed above, but look at your business and understand what external factors could have a significant impact next year. Keep in mind, a pre-mortem is meant to look at and avoid potential disasters so while many of the above scenarios are negative, hopefully most (if not all) will never materialize. If they do not, great, it's better to have an insurance policy you never use than needing one you do not have. You also need to be ready to react quickly to unanticipated challenges.
Rather than trying to guess (predict) the future, conduct a pre-mortem, where you put yourself in December 2021 and look back at what went terribly wrong for your business. The exercise will help you identify the biggest risks you face.
Some of the areas you should look at include the impact of Covid, spread of Real Money gaming in the US, challenges to RMG in Europe, the new gaming consoles and how work from home is changing the workplace.
You also need to realize that risks come in many forms and some are impossible to anticipate. You need to detect these quickly and respond with improvisation, speed and an iterative approach, since not every action taken will work as intended.
Author Lloyd MelnickPosted on December 22, 2020 December 13, 2020 Categories General Social Games Business, General Tech Business, International Issues with Social Games, Social CasinoTags Covid19, IDFA, Mergers and Acquisition, pre-mortem, real money online gambling, Work from home1 Comment on 2021 Pre-Mortem: What went wrong in 2021
Consolidate your gains (if you have them)
While many companies and business are struggling to survive the Covid19 pandemic, some businesses and industries have been fortunate to see a boost. Mobile gaming, social casino and iGaming as well as many other online businesses (from Zoom to HouseParty to Netflix) have experienced extraordinary results due to more people being stuck at home and many land-based businesses closed. In particular, social casino companies have experienced about a 20 percent uplift in revenue (even higher in the social poker space), while many online real money casinos and poker companies have seen record revenue (including Stars Group, Evolution Gaming
and Flutter).
If you have been fortunate enough to benefit financially (I think all of us would trade it for a return to normal and an end to the suffering people are experiencing) from the pandemic, now is the time to think about your next steps, in particular, what you need to do to lock in the gains. There are three routes lucky companies can go
Consolidate the gains. Many gaming companies are seeing an unprecedented number of new players and players spending at higher levels. You can take steps that when the world returns to normal you retain these incremental players and help them sustain their new monetization level.
Enjoy it while it lasts. The increase in users and revenue for gaming companies has largely come at little or negative (due to lower marketing expense) incremental expense, thus directly impacting net profit. Companies can use this profit to pay down debt or increase dividends to shareholders (investors, founders, etc.) and other stakeholders (i.e. employees).
Assume it will continue. Some companies might treat the improvement as less of a windfall but more of a new normal internally driven rather than created by the pandemic.
You probably guessed from the title of this post my recommendation is that now is the time to lock in as much of the gains as possible. This pandemic is (hopefully) a once in a lifetime event, companies that can but do not leverage their good fortune will look back in 12-18 months and deeply regret missing the opportunity to move to the next level.
While it could be tempting to pull as much of the incremental profit out of the company, especially in businesses that have struggled, it creates a short-term rush that will leave you in no better position than you were six months ago. Three years from now, five years from now, ten years from now, the utility gained by pulling out the revenue will be forgotten rather than having created a business worth multiple multiples of what it is currently worth.
In the past, I have seen people use extraordinary experiences (the financial crisis, 9/11, etc.,) as an excuse for poor performance while attributing any benefits to the underlying business. Executives may want to take credit for a 20-50 percent uplift, but just as executives at EasyJet and Virgin Australia did not suddenly become stupid overnight, it's important to realize your product did not suddenly become great and will maintain its momentum post-pandemic.
Locking in the gains
While you can argue the gains are temporary, it is a choice rather than an eventuality. As a believer in online gaming, I am confident that with the appropriate actions you can maintain much of your current success. Brett Nowak, founder and CEO of Liquid & Grit and arguably the pre-eminent expert on the social casino space, recently pointed out that mobile and social gaming is probably the best entertainment value in the world. For $5 or $10 a month (or even zero) you can enjoy a game for tens or hundreds of hours. Compare that to the cost of going to a movie or a concert or sporting event or even buying a book and the utility of your spend is tremendous. What the pandemic has done is exposed millions of people to this incredible entertainment value.
The companies that will benefit long-term are the ones that can turn this short-term boost into a long-term behavior change for the new customers. There are two elements you need to focus on. The first is retaining your new customers, keeping them from abandoning your game when casinos open or they are no longer spending 24 hours at home. The second element is keeping your players' monetization at the higher levels. By focusing on these two areas, you can set a new, higher, floor for your product and continue growing.
Retaining your new customers
The best way to retain the influx of players is by reinforcing to them the great entertainment they are getting so they have less desire to return to the cinema or casino. There are multiple actions you can take to retain these players:
Expose them to all that is great. Most entertainment alternatives cannot offer the breadth and depth that a game provides. If the player, however, only sees a small part of your offering, they have no idea what they are missing. Run promotions where you open for a limited time elder-play levels, slot machines that they would not normally have access to or powers and weapons normally available for senior players.
Treat them like they expect to be treated. While online gaming provides a great value, often our customer facing teams are less mature than other industries. I have written many times about the importance of creating a WOW experience for your players but with new customers who are used to WOW experiences at their casino or favorite restaurant, it is even more important. Now is the time to double down on giving a great experience, especially to the players likely to become VIPs, who may be used to red carpet VIP treatment at casinos or in other parts of their lives. Match the experience they would get if they go back to their normal haunts.
Focus on the meta-game. Social games are great at creating an environment that encourages players to come back regularly. Features like progression, daily bonuses, locking mechanics, piggy banks, etc., create incentives and habits for players to return regularly. These features often promote loss aversion in players or make it a matter of prestige to return, so focusing on building a compelling set of retention features will help prevent churn of your new players.
In-game loyalty. Now is the time to improve or add a loyalty system to your game (think airline frequent flyer program). By definition, a good loyalty program increases the loyalty of the customer. Loyalty programs increase the cost the player feels when leaving, making them less likely to churn. Loyalty programs also help form habits that make your game part of their daily activity.
Invest in marketing. Now is the best time to invest in marketing to acquire new players, even though many have cut their marketing budgets. Given the damage some industries have faced, overall advertising has decreased, thus cutting the costs most gaming companies face for new users (supply and demand). Instead of acquiring the same number of players you had planned to but at a lower cost, you can use these savings to invest in additional marketing to grow faster than you had projected.
Hire the best. While your company may come through the pandemic unscathed or better, unfortunately many others are not. This situation provides a unique opportunity to bring in talent that can take you to the next level that normally would never be available. Even if you do not have an immediate need, consider accelerating your people growth now.
Maintain customers' monetization
While retaining players is always a challenge, maintaining monetization is much more straightforward. In addition to keeping the new users who have discovered your offering due to being locked in their homes, you want to give them a reason to keep their spend at current levels. The "secret" is giving people value. If you give your customers great entertainment for every dollar they spend, they will learn that your game is a better investment than alternatives. There are several steps you can take to reinforce this understanding
Don't price gouge. Some companies, especially those that consider the pandemic a short-term opportunity, are tempted to use the current situation to extract as much as possible from players. While it could boost short-term profits, it is likely to leave players less satisfied and thus more likely to revert to other options as the lockdowns ease.
Provide more value. Rather than squeezing players, now is the time to be more generous (you can afford it with the increased revenue). Ensure that they get more hours of gameplay, more exciting virtual goods, etc., from the purchases they make now. This action will reinforce in their mind the great entertainment value your game is compared with other entertainment products.
Conduct great promotions and giveaways. As the pandemic recedes, launch an aggressive calendar of sales promotions as well as giveaways to keep customers engaged at previous levels. Again, be generous as the goal is not to get a short-term boost but to reinforce what a great product you have and then keep these players engaged at current levels for months and years.
Predict VIPs. Most iGaming and social game companies have learned the value of VIPs, as it drives profitability in the space. Many of your new customers who eventually would become VIPs, however, have not had time to achieve the criteria that would qualify them for VIP treatment. Loosen your criteria so that you can capture future VIPs and give them exceptional treatment that they will not want to lose. This treatment is particularly critical in the iGaming and social casino space where they will probably have a host waiting for them at their land based casino when it reopens.
The current Covid19 crisis means it is not business as usual. If your business is one of the few companies actually benefitting, do not make the mistake of missing a once in a lifetime opportunity to go to the next level. Now is the time to do everything you can to retain your new customers and give them a reason to keep monetization at new levels.
While most of the economy is suffering right now, some online companies, particularly in the iGaming and social gaming space, are benefiting. These lucky games need to lock in these gains rather than miss a once in a lifetime opportunity.
To consolidate gains, companies need to minimize churn from this new cohort of players and provide customers a reason to maintain their new monetization levels.
Some of the most effective ways to retain these new customers include exposing them to the full product, introducing a loyalty program, enhancing meta-features and providing great customer service.
Author Lloyd MelnickPosted on May 6, 2020 April 25, 2020 Categories General Social Games Business, General Tech Business, Growth, Social Casino, Social Games MarketingTags Coronavirus, Covid19, iGaming, real money online gambling, social casino1 Comment on Consolidate your gains (if you have them)
Winners and Losers in the entertainment space post-Coronavirus
While it is impossible to predict exactly what businesses in the (broadly defined) entertainment space will benefit from Coronavirus and which are likely to fail, some basic and timeless principles help understand the likely winners and losers. There are two keys for successful entertainment company.
First, an abundance of content is the biggest revenue driver. While quality is obviously important, nobody wants to consume bad content, quantity is also critical. Content is a consumable and once it is consumed people look for more, if it is not available they will find something else. Successful operators constantly deliver new quality content to keep customers engaged.
Second, the subscription model is emerging as the dominant model in the entertainment space (not necessarily a new phenomenon, as Netflix and Amazon Prime have been around for years), growing from its existing stronghold to other parts of media. Additionally, subscriptions driven by Coronavirus are more likely to stay resilient in the aftermath of Covid19 as they will require action to cancel rather than asking people to continue making purchases.
Using this filter of abundant content or a compelling subscription model, it becomes easier to ascertain what companies and products will emerge from the Coronavirus situation in a good position.
There are likely winners that will emerge from the current situation. Those that I consider most prone to benefit include:
TikTok. While TikTok was already experiencing amazing growth, Coronavirus provided the rocket fuel. TikTok is a video sharing network used to create short dance, lip-sync, comedy, and talent videos. Since it relies on user-generated content, its increased traffic driven by Covid19 has led to increased content, creating a network effect that makes it an even more compelling destination for customers.
Houseparty. Houseparty is a social networking service that enables group video chatting through mobile and desktop apps. Since Houseparty relies on users to create content, in this case chats and virtual parties, it enjoys the same benefits as TikTok, increased use has led to increased content. Already a winner as it was acquired last month by Epic Games (Unreal, Fortnite, etc.), Houseparty is poised to grow its first party base and spread into Epic's family of games developed using Unreal.
Netflix. It is hard to say the largest streaming media company can benefit further, but Netflix is likely to see a long-term benefit. With the broadest range of programming including a plethora of original programming, Netflix cemented its value to existing customers while bringing in new subscribers. One only has to hear the words Tiger King to know how Netflix has won.
Amazon Prime. Amazon Prime, Amazon's streaming video service, which also includes free delivery on Amazon purchases, is likely to enjoy the same benefits as Netflix due to its abundance of content. Given its huge library of third-party content coupled with a large amount (though less compelling than Netflix) of original content, very few customers (if any) are likely to have become satiated. New subscribers are apt to continue their subscription while existing customers are less prone to churn as they have experienced the value of their Prime subscriptions.
Steam. Just as video streaming services with abundant content like Netflix and Amazon Prime will benefit, Steam will profit in the video gaming space. Steam describes itself as the ultimate destination for playing, discussing and creating games. Like Netflix and Amazon, it has the largest catalog of quality PC games and its library continues to grow faster than customers can consume the content. This ever-growing library will help it sustain the growth from Covid19.
Coursera. Electronic learning was already a sector in its ascendancy and the increasing number of people looking for options to stay busy while in lockdown or quarantine sped the adoption of this sector. Coursera has the most courses from top learning institutions and given the importance of breadth and depth of content, it is thus likely to be the biggest winner in its space.
Udemy. Udemy is similar to Coursera in that it is an online learning platform. Unlike Coursera, however, Udemy crowd-sources its content, allowing individuals and companies to create content. This crowd-sourcing strategy helps it offers thousands of courses on a huge variety of topics. With quantity of content paramount, Udemy is likely to benefit greatly in the aftermath of Covid19.
Hit Free-2-Play games. Early data has shown that Coronavirus has increased downloads almost across the board for mobile and free-to-play games but the revenue increase is more localized to the top games. This phenomenon reflects that most hit games already have a deep reservoir of content, giving players many options and incentives to spend. This growth is likely to sustain after Covid19 as the more players spend in the game, the more invested they feel and are thus less likely to churn.
While there are multiple winners in the entertainment space, Coronavirus is also likely to highlight the companies with a flawed value proposition.
Quibi Quibi is a new streaming service focused on delivering professionally created content in 10 minute episodes. Founded by Jeffrey Katzenberg and Meg Whitman, it has raised almost $2 billion. Quibi's lack of content spells disaster, despite what you may think of Quibi's business model, execution or ability to raise investment. While Netflix and Amazon Prime have had years to develop original content, Quibi has had less than two years and it shows in a very non-compelling catalog. Due to its model, Quibi also needs to create six episodes (at about 10 minutes each) for every episode of original content a competitor creates (at 60 minutes each) to deliver the same value to the customer. Moreover, as both Netflix and Amazon were able to launch and grow their businesses using third party content to supplement their initial offerings (in the early days it was their initial offering) and give a broad catalog to customers, as Quibi is introducing a new format there is no third party content available. Moreover, while TikTok can generate almost unlimited crowd sourced content, Quibi has shunned this option. This lack of content spells doom for Quibi.
Apple Arcade and Google Stadia. Apple Arcade and Google Stadia are two streaming games services on Apple's iOS and Google's Android
platforms, respectively. While both are subscription services and should thus benefit, content dooms them. Although they both offer a somewhat large number of games, they must compete with the near unlimited number of games on their own app stores. Layering on to this challenge is that most mobile games are free-to-play, you can enjoy the games without ever making a purchase, so they do not have a compelling value proposition for their subscriptions.
Movie theatres. One segment of the entertainment space whose existing challenges were accelerated by Coronavirus are movie theatres. Unlike streaming services like Netflix or Amazon Prime, theatres do not have a plethora of content or offer a subscription service. Thus, they are unlikely to recapture many of the customers they have lost.
edX. edX is an online learning platform similar to Coursera, founded by MIT and Harvard universities. Unlike Coursera, though, edX has a much more limited catalog of courses. Given the importance of content, it is likely to fall behind its more robust rivals.
Mediocre Free-2-Play games. The rich get richer. While the hit games are enjoying a big boost in revenue due to players staying at home, mid-tier games are not seeing a similar uplift. While their downloads have increased, it is not translating into more in-app purchases. In part, this activity is driven by the top games having a very deep pool of content, be it virtual goods, levels, battle passes, etc. Their success allows them to create even more content as content creation is resource intensive. In the aftermath of Covid19, the gap between the haves and the have not games is likely to have increased while customers who sampled games with limited content are probably done with those games.
There is one entertainment offering that I am not willing to call a winner or loser yet, Disney+. There are mixed signal using both the content and subscription screen.
While Wall Street has lauded the initial subscriber numbers for Disney+, I am not convinced it will be a long term success. In only a few months, more than 50 million people subscribed to the service, exceeding even the most optimistic projections. Given these subscriber numbers, it is easy to assume that the service will be a long-term success approaching the value of a Netflix.
The concern, however, should be the depth and breadth of content. Unlike Netflix and Amazon Prime, Disney+'s content is limited to the Disney family (Disney, Star Wars, Marvel, National Geographic and Pixar). While this is very compelling content for many (about 50 million) initially, will it sustain? People consume content and even this large back catalog of offerings will be old to many of the 50 million in a few months or a year. Relying on first party content, will Disney be able to keep a sufficient content flow not only to appeal to new customers but keep from churning a big portion of these 50 million subscribers.
While streaming and digital entertainment has enjoyed a windfall from people staying at home, winners and losers will emerge in the aftermath of Covid19.
The winners will be the companies that have a very deep and broad content offering (either by first party development or crowdsourcing) and leverage effectively the subscription model, while losers are likely to have limitations on their proposition.
Among the likely winners are crowdsourcing champions TikTok and HouseParty as well as streaming services like Netflix, Amazon Prime, Coursera and Steam. Likely losers are Quibi, edX, Apple Arcade and Stadia who either have limited or less compelling content. The jury is still out on whether Disney will have enough content to make Disney+ a long-term winner.
Author Lloyd MelnickPosted on April 29, 2020 April 13, 2020 Categories General Social Games BusinessTags Coronavirus, Covid19, Disney, Quibi, TikTok2 Comments on Winners and Losers in the entertainment space post-Coronavirus