Saturday, September 29, 2012

Recapping: Recognition of Genius

Sometimes I even amaze myself. I was looking back at an old post - less narcissistic than googling myself but more than tweeting and thinking someone cares - and found this genius vision of the future. If I did this a few hundred years ago I would have been revered for magical powers - or killed as a witch.
This post was written about three and a half years ago but shows an uncanny, crystal clear vision of the digital and mobile game world - or another statement of the obvious. You be the judge.
Once we get to the other side, we will realize the USD 59.95 price point, and even the USD 49.95 were not carved in stone by the finger of the almighty. They are an industry created construct, which continues to drive us to make USD 20 million “Fields of Dreams.” In this insidious cycle, the consumer demands a certain amount of gameplay for their dollar and we supply it. Perhaps in this new world we will be able to build games of all sizes at various price points. Without inventory we can shift prices up and down and all around until we determine the proper price for each type of game. Really, Gabe Newell says its ok. We can take risks again. New mechanics and gameplay can be released in smaller versions or even to limited large scale beta groups to see if we are on the right track before putting in the second USD 15 to 17 million. We can even capture the long tail currently exploited by Gamestop in their bargain bin. I don’t know if I’ve seen the future or if the revolution will even happen in time to rescue the industry as we know it. I do know we can’t be so ignorant as to believe we are immune to the reconfiguration of the markets for every other form of media. If we don’t choose to be proactive in the change, it will be done for us and we won’t be happy.

Thursday, September 13, 2012

Definite Answer to What is Wrong with Zynga: Obvious Edition

I pride myself on my “brilliant grasp of the obvious.”  But sometimes concepts bathed in divine light before my eyes are hidden to the entire world leaving me sitting like the solitary school-boy laughing to himself in a corner while the world doesn’t know why.    My gift tells me Zynga is in a good place.

For those of you who feel I put too many words to my thoughts on this blog, this time I will get to the point before I digress.  Even though you cannot swing a dead cat without hitting a Zynga naysayer, show me one person in the business who would not give their left nut – women included – to be in Zynga’s position today.   Lots of these well intentioned but sadly misguided folks are offering advice and statements about what should be done, and I will certainly start listening,  as soon as one of them shows me the 2 plus billion dollar company (Zynga’s current “depressed” value) with 60 million people a day checking in that they built.    They can all provide input from high towers about directional changes and missed opportunities revealed by hindsight, but it is just not useful.  My old boss at Eidos, Charles Cornwall was an investment banker who said making games, like any other form of entertainment, is about distribution and access to capital.   He then accessed both and grew a company from nothing to the second largest publisher in the world and a billion dollar market cap in a little over 2 years. The fundamentals of the business have not changed and Zynga has more of both than any other company in the business and perhaps, than any game company in history. 

No one is going to say Zynga has not hit a dry patch relative to the massive growth it enjoyed early on, but remember when Activision, the largest game publisher in the world, went through a prepackaged bankruptcy and emerged with less money and a lower valuation than Zynga has today?   Historically, publishers gained access to fixed distribution channels through relationships with third parties who owned them.  These could be retailers and at one point, middle men like GTI.   The publisher owned the content and the relationship with the retailer, but the connection to the consumer was only as strong as the retailer’s tie to its customer.  We hardly ever found out who purchased the product.    Zynga knows who buys it and they touch more of them.

Let’s put Zynga’s audience in perspective relative to other media.  In two and a half days the company is visited by the number of people who saw this year’s number one movie, The Avengers, globally, during it’s entire box office run.  Wait, before you point out these people paid for the film and do not pay for Zynga games, compare it to the multi billion-dollar television market.   The final episode of MASH, the most watched television show in US history had 50 million viewers.  The average daily viewership of all four US television networks combined ranges between only 40 and 50 million per night.  This is a powerful distribution channel for games and in a world of on demand movies and time shifting of media and disappearing print media making it impossible to know which media to buy, it is a powerful channel in the media world as well.   Zynga’s customer acquisition numbers to grow this audience are well reported, but now that it is there, the cost to reach this number of people is very low.  All the company has to do is make a hit.   This gets us to the money part of the truism.

One of the first examples I use to show the differences between the film production and video games is the different meanings attributed to the word “development.”   I explain how in film, the word means working on a concept to see if the studio can come up with a shooting script and cast.   During this time one person is working and no commitments are made to production.  Games, I explain, are the polar opposite.  “Development” means we are making something.   A team of people is working and a product will be completed and released.   While this paints a clear picture for the uninitiated, it is not an entirely accurate description of the business when I worked at a publisher and it is not an accurate reflection of Zynga.  The hyper accurate analysis of the term reveals they are exactly the same process.
We knew how much product we could push into a channel and sell through regardless of what was in the box.  In the short term, if we did not exceed the number, we knew our “development” of new IP was covered.  In the long term, if we abused the consumer by putting shit in the box, we lost our brand and therefore, our channel.   If the product sales exceeded expectations, we made sequels.  If not, we moved on to the next new IP.    The market for console is much different now, but not for Zynga.    By virtue of its audience size and infrastructure, Zynga is able to build out concepts, test them, determine revenue potential and tune, move forward or kill all before it incurs major expense.   Publishers like Acclaim and Midway are gone because they ran out of money to develop products.  With 1.4 billion dollars in the bank, they can do a lot of building, testing and tuning.   Only a meticulously executed strategic focus on hit avoidance could cause the company to burn through its pile of cash and build something worth while.

I do not know Zynga’s specific plans, and while this bothers a lot of folks actively writing about the subject, I am not bothered.  If you were trying to find success in a highly competitive market, would you telegraph your next move?   However, the company announced it will be looking more toward the core market (code words for increasing the percentage of whales), looking at mobile and preparing for a potential change in legislation which could make gambling legal.  I understand why gamers attack.  The industry hates to see anyone succeed and if a company breaks out and starts minting money a chorus forms to sing about why the winner is “not really a game” or “missing the point” or just a bunch of assholes.   Unless of course you are EA and then you are either management who is angry about the number of employees who moved over to Zynga or one of the remaining employees who is upset to be standing on the sideline while all the other kids got picked.  I can even understand why the mainstream is on the attack.  I mean, the only thing more popular than building heroes and putting them on giant pedestals is tearing them down.  It is kind of the American thing to do.   All those people who missed out on the opportunity to make money while the company was private, can hold themselves out as the smart ones who never got in.   But c’mon on folks.   If Zynga does well, we all do well.   If Zynga does poorly, the financial world hates games again and we return to the tiny incestuous world we are trying to escape.  Let’s give the company some breathing room and watch the folks who built the company to where it is put it back on a growth path. 

Thursday, September 6, 2012

Is Amazon Appling Apple?: New Kindle Fire Edition

This is the exact post I put up in January of this year.   I could say nothing has to do with my being lazy, but I would be lying.  I am proud the post Jeff Bezos' announcements today made the post almost as relevant today as it was the day I wrote it, and perhaps I am showing off, but it has really been a long time since I wrote a new post and this is a good way to get started again.  

By now I am sure Walter Isaacson's report of Steve Jobs feelings about Android is news to no one. At one point during the interviews leading up to the greatest retelling of the monomyth since Luke Skywalker, Jobs said:

I will spend my last dying breath if I need to, and I will spend every penny of Apple's $40bn in the bank, to right this wrong," . . . . I'm going to destroy Android, because it's a stolen product. I'm willing to go thermonuclear war on this.

The timing of that last breath relative to the life of Android is also news to no one. What I have not seen is the realization that Google may have stolen the frame, but Amazon stole the art. And while the media continues to report on the Amazon vs. Apple battle for the bedtime and reclining market, the real battle is Amazon vs. Google. The success of Amazon’s Android running Kindle Fire and focus on the Apple battle masks Amazon’s role as the new standard bearer in Steve Jobs’ war against Google which may well have cause Google to be hoist with its own petard.

Apple never hid its focus on what products can do, rather than providing tech specs. In fact, from the day he returned to Apple, Jobs talked about it to anyone who would listen. The message was clear in the first iMac commercial telling people they were two steps away from getting on the Internet,

At the same time, Dell, the world's largest computer maker, Dell, was running a commercial showing an astronaut floating in space. Twelve years later, Palm still didn’t get it when they launched an iPhone competitor by showing people dancing in a field,

and Motorola was no better with their iPhone killer introduction looking more like a teaser for a Michael Bay film than a phone.

Jobs vision for Apple was not at all curious, but it was certainly curious that no other technology company copied him - until now - and Amazon copied it all.
Apple did a ton of things right to make the iPad work, but the most important was ensuring the quality of the user experience by building and guarding its own ecosystem. Unlike Google, Apple makes sure there was only one type of hardware, running one flavor OS. Then it built a wall around its beautiful garden.

Ensuring the user experience is so important, Apple takes great steps to protect its garden from the detritus left by foreign bodies. It entered into license agreements for distribution of broad swaths of content and committed to review and approve every single piece of software introduced into the garden and even acquired an ad service to make sure the commercials inside the products accepted into the garden would be up to Apple standards. The result, is the single largest homogenous technology base in the industry. Oh yeah - one more thing – Apple has everyone's credit card number.

Amazon was hitting its stride at the time Steve Jobs returned to Apple, and Jeff Bezos also knew success depends on customer service. The company started to provide customer service when it was easy. It only had to deliver the right product on time, and have a customer support phone number. Just like Apple’s simply providing a computer that worked, Bezos simply gave customers what they ordered. At the time, both concepts were revolutionary. Like Steve Jobs, Jeff Bezos did not stop after the easy parts. Just as Jobs famously made sure the parts of the products on the inside are as beautiful as the outside, Bezos invested vast amounts into building unseen technology to magically enhance the user experience – even in ways the consumer never noticed. By doing so, he built a massive user base into a massive company. Oh yeah- one more thing- Amazon has everyone’s credit card number.

Lots of tablets launched last year, but Amazon and Apple were the only ones to launch tablets with clear paths to doing things – and they are the only successful players in the market. It is also no coincidence both tablets are neutered relative to most of the others on the market. Techies think everyone wants to customize and program their shiny little noisemakers, but Apple was the first to identify that just like in video games, the perception of freedom is much more important than freedom itself. Steve Wozniak said it best when I asked him whether he thought the iPhone was a modern version of the Newton (little known bit of trivia – Jonathon Ive designed the Newton 110) and he said
No, the Newton learned you, you learn the iPhone.

Any game designer will tell you that giving a player too much freedom will make them bored. Players must be led in a way they do not know they are being led. That is why Amazon and Apple would make great game designers. While the two companies pursued the same consumer, in the same manner, they attacked the market from completely different directions.

At its very core- no pun intended, - Apple is a hardware company and Amazon is a retailer. This is important because their decisions will be made to maximize revenue in their core businesses.
Some may say Apple is more than hardware, but the company, like Sony used to do and Nike does with shoes, makes its money on selling hardware at higher margins than any other computer company. Jobs always said the software hardware relationship was critical to making the best products, but, for the most part, the software, is not sold on its own and most software businesses within Apple are small relative to hardware sales. In laying the groundwork to launch media devices Apple successfully commoditized music, television, film and game content and gave it to the consumer, so the company could make its profits on the hardware. Jobs compared the company to BMW and if you look at the product lives and update cycles, they are not dissimilar. “I am going to sell you the greatest thing the world has ever seen, and then I am going to show you why it is inferior to my new greatest thing the world has ever seen.”

Amazon is a software company and it is slowly but surely turning its retail products into software. Unlike Apple, hardware only exists to facilitate the software transactions. The company built more software than any other retailer on the planet, but like Apple they don’t sell it. All of the coding goes into an invisible infrastructure with a public appearance that is charitably described as "dated" – but in the case of Amazon this is its strength, not a weakness. With many, if not most of the same content relationships as Apple, the company sells streams as well as downloads. However, Amazon makes its money on the content sales. The company looked to its first hardware device years ago as a lost leader to enable increased engagement with consumers, and higher margins on content sales. In determining what people want in a device, Apple found people did not always need the power of a computer. So it looked at computers, pared them down to the most common uses, put them on a tablet and sold them at a great margin. Amazon realized people did not need all of the expensive stuff built into an iPad, so it pared its tablet down to the most common uses, and priced it slightly below cost. In doing so, Amazon commoditized the tablet. Amazon did not steal the concept of selling digital media into their own hardware, and the first Kindle actually launched well before the iPad. But it did steal, the concept of content over hardware. Every other company was trying to make a better table than Apple, and some did. Amazon was the first to realize they could launch a worse tablet, so long as consumers were able to easily do the things they like most. Choices are limited, but they are limited to what people want. They want this stuff so much, they bought a million Kindle Fires a week. This story plays out like John Woo directed it. Apple is underpricing Amazon on the content, while Amazon is underpricing Apple on the hardware – unless you look just out of frame at the bigger gun Amazon is pointing at Google.

If you are reading these words, you just spent a whole bunch of time reading gaseous belch about why content and access to content are more important than hardware in the tablet world but nothing about Amazon fighting Google. This is where it all comes together. The consumer only cares about content and the providers and creators of content care about getting paid for content. Payment depends on the size of the installed based and the ability to settle a transaction. Because there is no single source of content and Google is still asking nicely for people to put their credit card data into a Google Wallet, no one really gets paid for selling content on Android. The only money made, even on apps like Angry Birds, is through advertising – and for obvious reasons, Google is just fine with that. But before a content provider decides to release an application for free and support it long enough to grow a base large enough to generate significant revenue, it has to run on Android. Therein lies the rub.

Unlike Apple with its single OS and device, Android has a variety of flavors and devices and they are not all the same. Deployment on Android reminds many of the bad old days of PC development because applications must be tested across many platforms and configurations. Kindle Fire to the rescue. By building the Kindle Fire on a customized layer of Android version 2.3, (Gingerbread) and then selling it to 14 million people, Amazon created the second largest homogenous base of users in the tablet world and by far the largest homogenous base of Android users and the only one with a built in payment method. This should be a big win for Google. Just like IBM carried Microsoft's OS to the world like a virulent, pestilent disease, the Kindle Fire is spreading Android over iOS and finally making it worthwhile for developers to invest time in apps. Right? Not really. Amazon is giving consumers a better reason to shun the higher functioning, newer, pricier Google Android devices in favor of the neutered, smaller tablet running a two generation old OS. All in all, this turns into a big plus for Apple. Apple will continue to make BMW's and Amazon will make Chevy's. The market needs both. A Chevy does what a BMW does - gets you from home to work and back again with the occasional trip to see a movie - and for its real world uses, performance is identical. But people buy BMWs for a few added bells and whistles and all those things they will never do with the car, but can. And of course the prestige associated with telling the world you paid more for your car than a comparable Chevy.

I could argue Amazon is killing Android, but it is not. Google is killing Android. Even though Google is touting the virtues of Android 4.0 (Ice Cream Sandwich), it continues down the same path as earlier versions. Specifically, it will not run on all prior hardware devices, it is will not be universally deployed, and it will be operating on a number disparate hardware platforms. No matter how much Google says it is the same, the hardware will cause variation in performance that impacts the applications. The decision for content providers looking at developing for a disparate base with no payment method vs developing for a large homogenous Kindle Fire base with a built in payment method and promotional channel is very easy.

Begging the question, without the quality applications, can Google grow 4.0 as quickly or successfully as Amazon grows the Kindle Fire? With Kindle serving as a gateway drug to iPad's and slowing Google's march, I have to think Steve Jobs is smiling somewhere.