The casual games industry has experienced tremendous growth and change over the last five years. The analysts’ growth assessments and projections indicate an industry ripe with opportunities: over $700 million in online revenues in 2005 with a projected $1.56 billion by 2008. Clearly there are vast opportunities for developers, publishers and distributors as the marketplace continues to expand. But while the economic opportunity has grown, so has the number of competitors and the competitive challenges—challenges which grow more onerous as each day passes.
When we started Big Fish Games five years ago, we started as a small studio focused on low-budget games, and we took our games to every distributor that would carry them. After crafting a few hit games, we had the momentum and cash flow to continue driving our business forward. In the following five years, we also established Big Fish Games as a world-leading distribution site—a move that enabled our business to ride out slow periods and removed our reliance on the revenue produced by hit releases from our own studios.
The Challenges of a Maturing Market
Back in 2002, the casual games industry was blessed with a low barrier to entry for both studios and distribution sites. While low budget games that cost under $10,000 to produce can still generate a reasonable return, there is an increasing tide of largely undifferentiated content. In contrast to 2002, the typical hit game can now cost several hundred thousand dollars to produce, and the chances of creating a hit break-away title are getting smaller and smaller. In the past year, analysts state the industry grew roughly 30%, yet the number of titles submitted to us for distribution has more than doubled. Thus, the higher financial cost of casual game development today is exacerbated by increased competition. There are more competitors than ever vying for the mindshare of casual gamers—and those gamers are not keeping pace.
To make matters worse for game developers, the days in which a studio could generate meaningful, supplemental revenue from its own website have all but vanished. There are more well-established major game portals than ever before—each with a strong base of repeat customers and recognized, trusted brands—all vying for the same group of consumers. The large number of casual game distributors includes almost all of the biggest names on the Internet along with a variety of well-funded, scrappy startups. The big distributors spend millions on advertising and marketing to drive customers to download and buy games at their sites and millions more to retain those customers over time. For game studios to survive, they need to consistently produce hit games—but as stated earlier, this has become less than predictable and a very high risk proposition.
None of this means that there is no room for a new studio to enter and succeed, or for existing studios to continue to grow. However, the formula for success has changed dramatically since Big Fish Games entered the market five years ago.
Mitigating the Risk
The challenge for an ambitious studio is to lower the volatility of revenue inherent with game development. One way developers mitigate this risk is with “work-for-hire” arrangements. While these subcontractor relationships provide a certain level of stability, they do not leave room for innovation and they limit the upside potential enjoyed by a truly independent studio.
Another way for a development studio to pay the bills is to monetize the traffic that may flow to its website when consumers seek out its popular titles through search engines. However, attempting to establish an ongoing relationship and meaningful lifetime financial return from these consumers means competing directly with the entrenched, well-funded portals. Given the size, focus, experience and financial power of these portals, a studio pursuing this path may find this option undesirable once it discovers the level of investment required—not to mention the inherent distraction that results when you divert your attention from innovative game development in order to focus on marketing instead.
An easier and less distracting approach to monetizing online traffic is to turn the studio’s website into an affiliate of a larger distributor. This option enables the studio to offer a broad range of games merchandised through an external content feed. The problem with affiliate programs, however, is that the economic returns from such solutions have not historically lived up to the promise because of the affiliate’s inability to retain customers. Although things often look rosy in the first few months with a small but growing revenue stream, eventually revenue flat-lines, and the optimistic early projections of growth fall short. First-time visitors to the site roughly equal to the number of customers leaving each day and never returning, resulting in what is sometimes referred to as the “acquisition equals churn” phenomenon.
Creating a Mutually Beneficial Affiliate Program
The problem with traditional affiliate programs that neither the affiliate nor the distribution portal takes full ownership of the customer relationship—because neither party has the ability to do so. Whereas it is in the interest of the affiliate to keep customers on its own site, it is not equipped to fend off the established portal’s efforts to pull customers away. The two parties end up fighting over rather than cultivating the customer relationship—and as a result, their business relationship is based on one-time transactions. So even though the affiliate may have accomplished its goal of giving its customers a reason to return to its site often, the net effect of the program may be to drive traffic (eventually) to the portal—without (and here’s the kicker) necessarily increasing the popularity of the affiliates own games.
One solution to this problem is to make the portal and the affiliate true partners—to create a scenario in which both parties profit when a shared customer makes additional purchases. One way to achieve this is to align the long-term interests of the affiliate and the distributor so that they quit competing for the same customer and rather work together to maximize (and share) customer lifetime value. In Big Fish Games’ Principal Network Partner (PNP) program, for example, the affiliate site focuses on building its brand and attracting customers organically while Big Fish Games works to retain and up-sell those customers. Whatever revenue each customer generates is shared by both the affiliate and Big Fish, regardless of where the transaction takes place.
Both the affiliate and the portal must make a leap of faith for such a relationship to work since they must: a) trust each other to fill their assigned roles effectively; and b) give up a portion of the revenue they do not currently have to share. The underlying assumption, however, is that as a consequence the lifetime value of the average customer will increase—to the mutual benefit of both partners. And for the affiliate, that value could be substantial. It might mean, for example, that instead of getting 40% of a single game purchase from one customer it might get 25% of everything that customer purchases for the next several years. The benefit for the portal, of course, is that the affiliate will continue to feed it a steady supply of such customers on a daily basis.
Implications for the Industry
The initial feedback on this new kind of affiliate program is very encouraging. Early efforts of current participants have universally resulted in expanding customer bases and growing revenue streams. As those trends continue, the promise of the affiliate concept will finally be fulfilled: Game-specific revenue will truly become a non-factor in keeping independent studios afloat. They will be able to take on riskier projects, build more elaborate games, and live the dream of building what they want to build without worrying about how they are going to keep the lights on at the office.
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Paul Thelen, Big Fish Games Founder and CEO, has an MBA from Stanford University and a Bachelor of Science in Electrical Engineering from the University of Washington. Prior to founding Big Fish Games in 2002, Paul worked at RealNetworks as Director of Consumer Marketing, where he wrote the business plan for RealArcade, an online game distribution service. Paul's latest venture, Big Fish Games, has become a top casual game site worldwide and is a leading publisher and developer of content. Big Fish Games’ rapidly growing customer base downloads over 500,000 games per day. Paul can be reached at paul.thelen@bigfishgames.com.
