Editor's note: Tadhg Kelly is a game designer with 20 years experience. He is the creator of leading game design blog What Games Are, and consults for many companies on game design and development. You can follow him on Twitter here.
It's no great revelation that financial reports can be arcane and hard to interpret. Everything is balance, trends, pointers and a series of evolving narratives that subtly dance with one another across a crowded floor. There are always new angles to consider, players in the mix and potential directions to be taken. Yet despite all that, meta-trends do emerge, larger tides that lift all ships or founder them. A few years ago social gaming was that meta-trend, and it produced a flurry of activity in investment and acquisition as the potential of getting games in front of hundreds of millions of users for low cost struck a chord with investors and VCs alike.
At other times everything seems in flux, and that seems to be the prevailing mood at the start of 2013. Last year may have seen a considerable degree of mergers and acquisitions (although the number of transactions were down 27 percent, their average size was up 60 percent), but it's not clear what any of them are supposed to mean. This is a theme also being reflected in reports, such as the executive summary of Digi-Capital's latest Global Games Investment Review. This year the company seems to think that games are all a bit up in the air and is strongly advising caution. With a billion dollars less invested in social games (a 94 percent drop!) and Kickstarter only representing around 6 percent of all investment activity, the overriding theme is transition, changing dynamics and, well, chaos.
Anecdotally, this is also being reflected on the development side. Studios are very hedgy about their prospects for 2013 and adopting a wait-and-see stance for every new platform announcement. Everyone wants to know where to spend their development money most effectively, and nobody seems able to tell them. Given how social has stalled, mobile seems packed to the gills, tablet is increasing and cloud gaming went bust it's hard to be confident about where games will go in the next 12 months. As the proverb goes, we seem to be living in interesting times.
Yet I think there are still some beacons to navigate and sharp rocks to avoid. Here are five examples:
1. Facebook Games Are So Very Over
The more I read about Facebook's Graph Search, the more I'm convinced it's a ticking time bomb. Not only does it open the door for all manner of creepy PR disaster stories, it will make muggle users (i.e. those who don't pay attention to the tech press) very uncertain about just how safe they are online. It might look great in demo, but nobody actually needs to search their social graph that often for information. Recruiters, stalkers and daters, on the other hand, will. Not only is it a boondoggle, it's a potential user killer, and it reflects a deep lack of focus in the company. The general problem seems to be that while a scrappy startup attitude propelled Facebook to massive success, Zuckerberg and his team seem to be struggling to define what a mature Facebook looks like. He has his billion users but isn't sure what he's supposed to do with them.
For Facebook games none of this augurs well. Likewise the recent platform change to deliberately hide once-publicly available app usage information behind a cloud of ranks and inferred positions is a deeply suspect move. Not only does it allow for vanity metrics to go unchallenged, it means developers will be considerably less able to conduct market research. And discovery remains a big issue. The App Center has largely failed to shift the needle quantitatively or qualitatively, and so Facebook as a platform languishes and continues to be a game of who can afford to pay the most in customer acquisition.
While I certainly don't expect Facebook to stop serving games, over the last 24 months it has become the new Yahoo Games or Real.com. It's a dead zone and really only of interest to those who want to burn a lot of money to acquire users. With all due respect to Zynga, something is very wrong with a platform when the top games on its charts are still the same old poker, a middling sequel to FarmVille and a bunch of very tired-looking content underneath that. It means it's over.
2. The "Mid-Core" Is Not Next
"Mid-core" is a term that has gained some currency in industry circles in the last 12 months as a kind of halfway house between "hardcore" (Call of Duty/World of Warcraft types) and "casual" (everybody else, but usually with an inferred slant – meaning women). To be mid-core implies that the previously casual player is on the road toward becoming a PC or console gamer, or is developing instincts in that direction, or that a previously hardcore gamer is disengaging. In theory the mid-core is a space that companies like Kabam and KixEye occupy, and Zynga has made moves in the space as well, and it's supposed to be the social market that explodes next. I think not.
While I have no doubt that many ex-console gamers now play games like 10000000 or Spaceteam on their iPads because of greater convenience, there is no mass audience of casual players slowly levelling up to become proper gamers. As far as we know, KixEye's War Commander is a well-performing game in terms of ARPPU but – up until Facebook killed transparency on its reporting this week – has only ever had maybe half a million daily active users. That's a good number for a respectable niche of a market, but nowhere near "explosive."
While I do think that there is a generation-two of social games, mid-core games are not it. Generation-two games need to be much bolder in their vision, frankly, and focus on delivering genuine value through social connection. More than we are currently seeing across the whole spectrum of social gameplay. At some point the basic roleplaying and simplified strategy-raiding games just wear out, and mid-core really is really just an elaboration of those basic principles.
3. Social Gambling Is Overheated
I've been saying this for a while.
Although many analysts expect Zynga to partially become a gambling company in the hope of returning to explosive success, I don't think it's going to work out. Not only is the farming game audience different to the roulette and slots audience, there are already hundreds of providers in that space. It's simply not the kind of virgin market as that which Zynga was able to so successfully inhabit in 2008-2009 by being smarter with the platform levers than everyone else. It's crowded, and in many cases the core idea is already out there and being flogged to death.
Some of the players in this space, from Jackpot Joy to King.com, are intimately familiar with how to deliver socialised gambling products. It varies from country to country, but in the UK television has been awash with companies advertising Slots, Bingo, Poker, Blackjack, live betting and so on for years, and those providers have likely saturated most of the customers that would have been prime targets already. There are also many providers on Facebook offering social slots and the like, and many more who've found that that has become an overly stuffed market.
Other than the fact that it has large user numbers in its network, I don't really see what Zynga brings to social gambling that isn't already there. Zynga's been stuck in a pattern of sequel-ing and trying to hold onto the users that it has for a while, with many pundits predicting that they may even decide to go back to private in the not-too-distant future. How that is supposed to be rescued by yet-another-Bingo title is beyond me, and as Zynga is the bellwether in this market the same question applies to other providers, too.
4. Microconsoles
It is universally expected that Sony and Microsoft will launch new PlayStation and Xbox hardware this year, and the talk around the campfire has it that both will make very large announcements at the Game Developers Conference at the end of March. Nintendo has already launched its next-generation machine too, the Wii U, but it seems as though it's unlikely to be the smash hit that the Wii was (although with Nintendo you never know). The troubling aspect for all three is how they increasingly seem out of step with the much more fluid app-style market that mobile devices have driven, both in terms of hardware iterations and how they sell software. In the seven years since it launched, for example, the Xbox 360 has remained largely the same beast. And yet Apple has managed to launch six iterations of the iPhone and five iterations of the iPad (including the mini).
Furthermore, the number of companies who are able to provide software for these premium machines continues to drop. With THQ effectively being fire sold next week, eyes are looking to the other second-tier publishers like Capcom, Ubisoft, Square Enix and Take Two and asking how long they can expect to play at this level. The question of whether there will be enough games to satisfy all three platforms is becoming very real, as is the question of whether it will effectively become a two-horse race soon. Finally there are the questions of cost, inflated expectations and whether ultimately the console business is on a path to becoming entirely vertical.
There's a sentiment among developers who work outside the walled gardens of the console that these platforms just do not understand what the app and service mentalities have done to games in the last few years, and instead keep trying to deliver premium retail propositions in a world that doesn't care about that so much. Certainly the precipitous drop in retail sales of console games combined with public market valuation of the console sector (again according to Digi-Capital) seems to reflect that sentiment. And yet the only messages coming out of Console Towers are about grand visions, huge technologies, massive Blu-ray discs, roll-up media services and $60 price tags for games. This is why I think 2013 may actually be the year of the microconsole.
Small devices like the Ouya and the Gamestick are threatening to do to the console market what the netbook did to the laptop market. They're focused, open, mostly Android-powered and fundamentally being driven by app thinking rather than hulking retail propositions. They promise to be cheap, nimble, open to develop for and to have free-to-play games. Nobody's close to saying that there's an obvious winner in this space yet, and it feels as though it probably needs a large backer to step in and legitimise it. Samsung perhaps. Or perhaps fulfilling the eternal threat of something to do with the Apple TV will really kick microconsoles into high gear.
However the prospect that a game console might return to its roots as a dumb machine that displays games on your TV, which small studios can write and run games on much as they have on PC, social, mobile and now tablet is incredibly exciting. Whereas Gormenghast-sized beast machines that don't know whether they want to be game, TV, Internet, social, music or movies boxes? The question not being asked is whether anyone really wants that machine at all. Why else do you think Ouya raised $8.9 million out of thin air on Kickstarter?
5. PC Is Alive And Kicking
Speaking of Kickstarter, PC games had 73 percent of the volume of videogame crowdfunding in 2012 and 63 percent of the value. This far outstrips any other platform or type of game (with the possible exception of tabletop games). At the same time much of the enthusiast gaming press and communities are of the opinion that the PC is still the prime game platform going into 2013. Many have concluded that tablets are neat, but not yet ready for serious play. PC gaming action also continues to aggregate around Steam, and whatever Valve may be doing with hardware. And while I maintain that the Windows 8 Store will prove to be disruptive to the PC gaming space given time (60 million licenses sold so far despite its many woes), what's clear is that the gamer is still in love with the mouse and keyboard.
So if they are supposed to all be going post-PC, it doesn't look as though anyone has convinced them as to why yet. Nor does it look like anyone in the near future is going to do so, perhaps not even (for the first time in living memory) console makers. They still love their high-end gaming rigs and their sense that PC is where indie games thrive. They love that quirky sense of openness, and the notion that their machines are where "proper" games live. All of this means that, despite the tech blog narrative saying otherwise, most of the marketing story successes in games are coming out of PC land. MMO playing is still largely happening in PC land. Weird hardware like the Nvidia Shield and the Razer laptops are still appealing most directly to PC land.
And here's the kicker: If the PC does shrink as a market to the point that it really only becomes about Alienware and similar machines specifically tailored for power use, the PC gamer and game developer is perfectly fine with that. They do not care in the least whether there's a PC in every home: For them a gaming PC is still considered a pride purchase, a thing of love rather than a word processor with Internet. And I think they'll still be around next year, and the year after that. And so on.
Overall
In Digi-Capital's executive summary, the advice is about acquisition opportunities, exits or investment opportunities. However, the tone across all sectors is very tentative. Be selective, avoid big moves, think limited or organic. The phrase "Avoid large, value-destroying M&A" pops up again and again. All of which essentially means "hold onto your hat." For outer markets (by which I mean those involved in casual, light, social and so on) this is a sentiment that I find myself agreeing with.
For inner markets, not so much. As a lot of the more peripheral plays rise and fall quickly, the more focused companies at the centre who offer games to those who already have an interest continues to rise. It may be a very complicated time for those who have built businesses largely with eyeballs and revenue in mind first, but it's also a time when Minecraft has crossed $250 million in revenue. The difference is increasingly not between one sector over another, but between passion and novelty, dedicated audience versus idle distraction. Increasingly the latter is looking troubled.
Digi-Capital (www.digi-capital.com) is a digital investment bank focused on games across America, Europe and Asia (China, Japan, South Korea). As well as its investment banking and venture partner work, Digi-Capital publishes its 2012 Global Video Games Investment Review http://www.digi-capital.com/reports.html which analyses games industry dynamics, trends, M&A, investments and public company comaprables by sector (mobile/tablet, social/casual, MMO, console, middleware, advertising) globally
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