Making Them Pay
Vindicia's Gene Hoffman on finding new business models, adapting to the digital world - and the games industry's curious traditionalism
In an industry filled with companies whose job is to create menacing alien worlds or soaring fantasy narratives, it's understandably hard to get excited about a company whose job is simply to facilitate the flow of money. Yet that flow of money has never been quite so complex. Consumer relationships have never been quite so multi-faceted and so direct. The chain of transactions linking developers to game players has shortened dramatically, and yet the options for forging that chain have multiplied exponentially. It's not entirely uncommon to hear veterans of the industry, a couple of beers worse for wear, bemoan that for all the fresh opportunity offered by today's market, yesterday's was at least a simpler world.
Gene Hoffman is the closest thing you're ever going to find to a veteran of the brave new world of online content distribution - and, more importantly, how that content gets paid for. In 1998, he co-founded eMusic, an early online music service which pioneered ideas about changing the business model for music to match the online world, rather than shoehorning prices and sales models designed for physical products into a world that had already discovered Napster. Today he's CEO and Chairman of Vindicia, a company that provides payment solutions and in-depth advice on business models to a range of different industries - including some of online gaming's giants.
Hoffman recognises the simplicity of yesterday's business models, but gives no impression that he mourns their passing. "In the past world," he explains, "every business model was some version of a hundred thousand, ten thousand, one thousand, five hundred, two fifty, 49.99... Up front. Then 18 to 24 to 36 months later, you'd hope to get either the same transaction again, or 20 per cent of it. So, big software was sold, in a year I'd get a 20 per cent transaction for the service cost. Small software, I'd sell you an office suite for $500 and get you to do the upgrade for $220 in 18 months. Mario Brothers, it'd be $49.99 - or really, to be honest, $260 to buy the console and the game - but now you've got the console and I'll hit you for another $49.99 for another game later. Those are all the business models."
It's boggled us that it's taken gaming as long as it has to go digital.
"But back when we were looking at the Internet's arrival, we knew that anything that could be disseminated would be," he continues. "Once that happens, how you run the business day to day, and how you go to market, has to change radically. Once piracy is ubiquitous - and once the physical comes out of it - the customer sits there going, okay, digital actually makes this more valuable to me because it's easier to use... But at the same time, though, I could just steal it. No matter what, then, you have this downward pricing pressure."
eMusic was a direct reaction to that environment. Selling albums for $8.99 left the company scrabbling to find any profit margin, trapped between the high cost of acquiring customers who rarely stayed for more than one purchase, and the fee demanded by the rights holder. Hoffman's solution was to throw out the traditional model in favour of offering monthly subscription packages that let customers download a set number of songs, DRM-free.
"Suddenly, wow, 43 per cent of people who'd give me their card - which wasn't everybody but it was quite a few - would stay an average of 14 to 20 months. That's a business model. Now I've got dollars to spend to acquire customers. I'm out there spending $20, $30 a customer, because I'm actually getting, what, $260 from each of them? That's a business model."
Since selling eMusic to Universal in 2001, Hoffman has been applying the same kind of logic to an even wider market. "What I realised was that that dynamic was going to cross software, it was going to cross all media," he says. "Print. Magazines. Television, movies, you name it. Everyone is going to have this problem - including gaming. In fact, it's boggled us that it's taken gaming as long as it has to go digital."
Today, Vindicia works with many of the biggest names in the online games business, from core MMOs like Rift, Star Trek Online and Champions Online (and yes, Blizzard is a client too), through to more casual titles - the likes of MindCandy, BinWeevils and so on. Yet gaming is only about 30 per cent of the company's business - the rest is made up of a diverse mix of dating sites, Software as a Service suppliers, and other online media providers. Describing what exactly the company does is a little tricky, in a sense. Its core product is an extremely robust back-end for payment processing, but it's instantly clear when Hoffman starts talking that understanding business models and the evolution of the market are the real bread and butter of the firm.
The reality is that the most successful products are the ones with no single business model. Even if you say you're a subscription MMO, you actually have a virtual currency and a virtual goods model.
"Everyone else would characterise us as a payment structure," he cheerfully admits, "but in reality what we do is marketing, billing and CRM - and more importantly, business models. What we're really doing is enabling digital services - gaming, entertainment, you name it - to go to market and not necessarily worry about how to execute various business models."
Examples and ideas spring up rapid-fire in Hoffman's responses to every question. "The reality - especially in gaming - is that the most successful products are the ones with no single business model. Even if you say you're a subscription MMO, you actually have a virtual currency and a virtual goods model in operation. Fundamentally, what we're doing is giving the game producer, the marketer and the designer all the tools necessary to get away from the cash register." He rattles through examples - an MMO developer who wants to know how to maximise the revenue boost from the switch to freemium. A publisher who needs to mine through complex B-test data to see if dropping the price of a virtual item will give a sales upswing.
"Being able to run that easily, to pull the data all the way back from the billing - that's important, because it goes beyond the simple yes-no answer. For example, if you offer that customer a lower priced virtual currency item, did that actually extend his purchase life? Even though you may not be getting optimal revenue per, you're leaving maybe a pound on the table, is he doing an additional transaction later that you otherwise weren't getting? It's about being able to do that level of analysis, directly in that our tools make it easy to do that, but also in the sense of having us there to train you about how to ask those sorts of questions."
Hoffman's enthusiasm for business models and revenue structures come loaded with plenty of bugbears about problems in the industry - not least of which is the disdain which many designers and even executives hold for this vital part of the production process. "A lot of game companies came to us and said, hey, we want to do what Zynga does, but we don't really want to integrate that business model directly into our game - we're all about entertaining, not making money! Of course, that had the result that you'd expect. If you're not focused on entertaining people in a way that makes you money, you're not going to get them to do the transaction."
Not all companies feel that way, of course, and plenty are learning to embrace new models like virtual currencies and virtual item stores - even integrating them into the design process rather than asking a firm like Vindicia to bolt them on at a late stage, another issue Hoffman says has arisen several times. Yet for other companies, the willingness to embrace new ideas and business models comes out of desperation, and the results of that can be patchy. Vindicia worked with the ill-fated RealTime Worlds ("we lived through that", as Hoffman puts it) and the present spate of high-budget MMOs switching to freemium is another example which is soon pulled out. On that front, Hoffman spares little ire.
"Look, some of these MMOs are launching and, they're really bad," he says bluntly. "You don't want to say that too loudly to them, but seriously, these guys need to do a lot more content before they launch. So why not price it that way? Why not do a paid beta initially, and tell people, it's pretty damn good and you'll be able to play, but it's not done and we're not going to fill the whole world until three months from now - but sign up today for ten bucks a month and you know what, we'll throw in the actual release and just keep it going when we come out of beta. Or five bucks a month, and move it up - or there's a whole other model, where it's ten bucks a year, and then freemium on top."
Despite this, Hoffman notes that the MMOs transitioning to freemium may actually have maximised their revenue - even if they've done so by stumbling around in the dark until they accidentally tripped over an optimal business model. By taking in a lot of money up front in the form of box sales and subscriptions, then eventually resuscitating the game with steady monthly freemium sales, the transition that's so often accused of being a last act of desperation by the games press could actually turn out to be a legitimate business model in its own right.
If you're not focused on entertaining people in a way that makes you money, you're not going to get them to do the transaction.
"It's an over time business model, right?" he muses. "A lot of people have never really thought about businesses as being one model now and another model later - but of course, this is what movies do. You've got your house opening, then your DVD release, your airplane release, your VOD release, then the movie channels, then it's on CBS, ABC, Sky One, etcetera. From that perspective, seeing the game business head that way - sure, the exact steps are different, but it's not that different in reality."
That kind of flexibility in thinking is crucial at a time when business models have become so diverse - and so rapidly changing. So, too, is a willingness to look beyond the boundaries of videogames to find data and ideas. Hoffmann criticises the games business for being too inwardly focused, with companies simply repeating the same models over and over again as they imitate their competitors and their own previous successes. By contrast, he says, industries like online dating - which is aimed at much the same demographics as core gaming - are much more willing to experiment with new ideas and dispense with pre-conceived notions. Vitally, they're also switched on to direct marketing, an area which videogames firms generally remain weak at exploiting.
"There's this aversion to direct marketing in gaming which just doesn't make much sense to me," he says. "What Zynga did very well was to build a direct marketing platform called Facebook - and by the way, it was Zynga who built Facebook, not this silly Facebook thing that built Zynga! There's an important thing that a lot of people don't catch. One of the things that people beat up on the Zynga guys for is simply not being gamers. They're right, in some senses. These weren't gamers, they were guys who said, I know how viral online marketing works."
If anything, Hoffman feels that the obsession with getting games into a box which can be marketed on Amazon or in GameStop is holding back the industry's ability to innovate in how it engages with its customers. "Those are the last places that SAAS or online TV or dating go to market themselves. They see online marketing channels as real ways to reach people because they don't have those traditional channels to do their marketing... They say, pyschographically, who do I want? I don't see a lot of games companies sitting there, looking at Google and saying, what keyword would somebody search to find me? I don't see people thinking about quickstreams and online promotions and segmenting their online customer acquisition channels - it's more like, how do I get this into a box?"
"I'm not saying give that channel up," he continues, "but innovate! Why GameStop or why Amazon aren't given a percentage of long-term customer value always boggles my mind. That's an easy deal to do. Hey, Amazon, drive me more subscribers and I'll give you five per cent of lifetime. Done. Channel conflict over."
Walled gardens have a tendency to fall apart, and not in a pretty way.
Hoffman laughs and shakes his head at the simplicity of what he sees as the solution. It's typical of a direct and blunt approach that underlies his thinking. It's apparent that he thinks traditional business models often blind people to the obvious solutions to modern business problems. Watching the music industry panic and near collapse over the threat of the internet gives him a belief that even the most impregnable looking giants are truly vulnerable - he sees Sony and Microsoft repeating many of their mistakes, and thinks that even Apple's walled garden can't last. "30 per cent is ridiculous," he says firmly. "Walled gardens have a tendency to fall apart, and not in a pretty way."
His goal, with Vindicia, is to get involved in the life-cycle of products increasingly early. "People usually get involved with me about three months before they think they're going to go live," he says, "which means that they've got some idea of their business model, and that's usually an idea that was perfectly valid in the market six months ago. The right time is more like six to nine months before launch, and actually have us be a part of the business discussion." Payment systems and pricing models still aren't likely to thrill people who dream up starship combat scenarios and magic spells for a living, but if the rest of Vindicia is much like its CEO, that's likely to be a much more lively discussion than you might imagine.
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