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Strategies for superior market performance of games and apps

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Slide deck on platform market analysis and strategic positioning for (serious) games and app developers. Prepared as a master's level guest lecture at the University of Groningen (July-'18).

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Strategies for superior market performance of games and apps

  1. 1. Strategies for Superior Market Performance of Games and Apps Game Development for Language Impaired Populations Joost Rietveld EUR  UCL July 9 & 10, 2018
  2. 2. About me Joost Rietveld (Dutch, thirty-something) Academic experience: BSc/MSc in Business Administration, RuG PhD in Management, Cass Business School Visiting PhD student, NYU Stern Assistant Professor in Strategic Management, RSM Assistant Professor in Strategic Management, UCL (start Sept-’18) Professional experience: Strategic Management, Two Tribes Independent advisor, Strategy Guide Owner/content creator @moes_and_mattie
  3. 3. According to the structure–conduct– performance paradigm, the firm’s basic conditions have a direct, short- term impact on the market structure. The market structure then has a direct influence on the firm's economic conduct, which in turn affects its market performance. Basic conditions Market structure Firm conduct Firm performance Feedback Feedback Feedback Adapted from Porter (1981)
  4. 4. Is there anything new under the Sun? Around 500 years BC Sun Tzu, a Chinese military general, wrote in his now very influential warfare manifesto: “If you know the enemy and know yourself, your victory will not stand in doubt; if you know Heaven and know Earth, you may make your victory complete.” Or: Understand the basic conditions of yourself and the market, know your competitor(s), and act by taking all of this into account and you will be achieve superior performance.
  5. 5. Outline for our time together • Market structure • Understand marketplaces for games and apps • Economics of two-sided platforms • Governance of two-sided platforms • Firm conduct • Factors affecting competition between games and apps • Stylized facts about game and app competition • Take home strategic advice Basic conditions Market structure Firm conduct Firm performance Feedback Feedback Feedback
  6. 6. Two-sided platform markets: Markets in which one or several platforms enable interactions between two or multiple user groups (e.g., ads and readers) and try to get them “on board” by appropriately charging and governing users on each side of the platform
  7. 7. In 2014, Professor Jean Tirole won the Nobel Prize in Economics, in part for his work on two-sided platform markets.
  8. 8. Two-sided platform markets exhibit network externalities: The effect that one user of a good or service has on the value of that product to other users
  9. 9. In two-sided platform markets network externalities apply to both sides of the platform… - Direct: Increasing the number of users on one side of the network, makes it either more or less valuable users on the same side Indirect network (positive, can be negative) - Indirect: Increasing the number of users on one side of the network, makes it either more or less value to users on the other side (should be positive) Direct network effects Indirect network effects
  10. 10. 𝜂1,2 = ( Δ𝑄1 𝑄1 ) ( Δ𝑃2 𝑃2 ) 𝜂2,1 = ( Δ𝑄2 𝑄2 ) ( Δ𝑃1 𝑃1 ) ≠ In two-sided platform markets complementors and end-users have different cross-side elasticities, such that: If 𝜂1,2 < 0 two products are complements to each other If 𝜂1,2 > 0 two products are substitutes to each other If 𝜂1,2 = 0 two products are unrelated to each other The volume of the interactions between the two user groups depends on the price structure of the fees charged by the platform.
  11. 11. 𝜂1,2 = ( Δ𝑄1 𝑄1 ) ( Δ𝑃2 𝑃2 ) 𝜂2,1 = ( Δ𝑄2 𝑄2 ) ( Δ𝑃1 𝑃1 ) ≠ In two-sided platform markets complementors and end-users have different cross-side elasticities, such that: If 𝜂1,2 < 0 two products are complements to each other If 𝜂1,2 > 0 two products are substitutes to each other If 𝜂1,2 = 0 two products are unrelated to each other Identifying the user group with the highest cross-side elasticity—and setting the price structure such that this side is monetized while the other side is subsidized—helps two-sided platforms unlock indirect network externalities.
  12. 12. Software developers are subsidized Consumers are subsidized In two-sided platform markets it is not always end-users who are subsidized
  13. 13. Two-sided platforms are faced with a typical “chicken-and-egg” problem…
  14. 14. "This year is the first time that we are able to cover the cost of the PlayStation 3. We aren't making huge money from hardware, but we aren't bleeding like we used to.“ - Shuhei Yoshida, president of Sony's Worldwide Studios (2010) Sony’s console related operating income, by year Video game console prices (retail, USD) by month: Despite being the most expensive console in the market and a price drop of nearly 75%, Sony only started making a profit on every PlayStation 3 sold in 2010, towards the tail-end of the console’s lifecycle. Sony’s financial results explained: • Cost of sourcing expensive technology components goes down • Learning effects and scale advantages to production and distribution kick in • Sony intentionally keeps price low to grow installed base • Royalties from game devs drive profits
  15. 15. Two-sided platform markets: Markets in which one or several platforms enable interactions between two or multiple user groups (e.g., ads and readers) and try to get them “on board” by appropriately charging and governing users on each side of the platform
  16. 16. Value in two-sided platform markets is co-created. Developers produce complementary goods that increase the overall value of the platform, yet platforms will also strive to capture most of this value.
  17. 17. There are many ways in which platform firms can (and will) affect the overall value creation and capture of a two-sided platform market: 1. Platform openness 2. Selective promotion of complements 3. Competing with complementors 4. Platform absorption (vertical integration) 5. Platform and category exclusivity 6. …
  18. 18. Wholly closed platform architecture Wholly open platform architecture Wholly open complementor architecture Wholly closed complementor architecture Some two-sided platforms are more open to enter and sometimes even modify than others…
  19. 19. Two-sided platforms often selectively promote developers and apps through storefront features, certification (badges), algorithmic recommender systems, and otherwise.
  20. 20. Kiva Field Partners who received the Family and Community Empowerment badge increased their share of female borrowers by up to 6 percentage points per quarter compared to otherwise comparable Field Partners without badge. Family and Community Empowerment badge: “In order to serve families and communities, a Field Partner should be reaching women. In most markets, serving women means offering loans without material guarantee requirements or otherwise reaching out to poorer clients with fewer assets.” Source: Rietveld, Seamans & Meggiorin, 2018
  21. 21. Sources: Jiang, Jerath & Srinivasan, 2011; Zhu & Liu, 2016 Two-sided platforms often directly compete with independent developers through first-party offerings… Two-sided platforms are most likely to compete in those product categories where the platform is in an excellent position to generate profits (e.g., popular products, low costs, abundance of input suppliers), and drive out other sellers.
  22. 22. With the introduction of iOS 12 in 2013, Apple effectively killed over 1,000 flashlight apps by integrating flashlight functionality into its mobile operating system. Two-sided platforms occasionally absorb (or, vertically integrate) functionality offered by independent developers into their platform architecture, effectively rendering those independent offerings obsolete. Vertical integration offers: - Efficiency gains for end-users - Greater value of the overall platform - Quality improvements - Higher profit margins at lower prices
  23. 23. Two-sided platforms often pay to have complements exclusively on their platform (for a limited time), giving them an edge over their competitors. Relatedly, two-sided platforms sometimes grant one complementor (within a certain product category) exclusive access to their platform, essentially giving these complementors monopoly power. Microsoft allegedly paid over $50m to have GTA’s Episodes from Liberty City exclusive on its Xbox platform for a limited period of six months. Microsoft has long given Explorer the exclusive rights of being Window’s sole internet browser until an anti-trust court case ruling deemed this a misuse of Microsoft’s market power.
  24. 24. Two-sided platforms are different • In order to achieve superior market performance, you must not only have a good product, you must also be aware of the market conditions you operate in • Two-sided platform markets are different from traditional markets: • They exhibit direct and indirect network externalities • Platform users have different cross-side elasticities forcing the platform to design a price structure where one side is subsidized and the other is monetized • In order to create and capture value, platforms enact governance strategies: • Some of which are beneficial to complementors (e.g., openness, promotions, exclusivity) • Some of which can be detrimental to complementors (e.g., comp., integration, exclusivity) • These factors influence the extent to which games and apps generate revenues, and when… (cliffhanger for tomorrow’s presentation)
  25. 25. Outline for our time together • Market structure • Understand marketplaces for games and apps • Economics of two-sided platforms • Governance of two-sided platforms • Firm conduct • Factors affecting competition between games and apps • Stylized facts about game and app competition • Take home strategic advice Basic conditions Market structure Firm conduct Firm performance Feedback Feedback Feedback
  26. 26. 2.22 4.15 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 Seventh Generation (IB = 167m) Eighth Generation (IB = 17m) Unitsales(millions) Ubisoft’s Watch Dogs sold nearly twice as many copies in its first month on eight generation platforms than it did on seventh generation platforms, despite the nearly ten times larger user-base on seventh generation platforms.
  27. 27. Goods and services launched on two-sided platforms constitute contingent innovation decisions; a decision to adopt an innovation which can only be made after a prior innovation decision.
  28. 28. Evolutionary dynamics at the platform-level have significant implications on the complements level: 1. Over time, not only will more end-users join a particular platform, also different types of end-users will join • Early platform adopters are the first to adopt new technologies • Early platform adopters have a greater willingness-to-pay for technologies • Early platform adopters are less risk averse • Early platform adopters have a stronger preference for novelty (innovation) • Early platform adopters “dig deep” for new information about technologies • Early adopters are often the first to migrate to a next generation platform Early adopter end-users of two-sided platforms display qualitatively different characteristics from late adopters
  29. 29. PS3 SKU timeline 2006: PlayStation 3 launches with 20/60 gb models no peripheries included in box 2007: 60 gb bundle with two controllers and two games included (Motorstorm & Resistance) 2008: 80 gb bundle with one game (Metal Gear Solid 4) and dual shock controller included 2009: 160/320 gb new ‘PS3 Slim’ hardware bundles with one controller included 2010: 320 gb ‘Move’ bundle with Move hardware, one game (Sports Champion) and one controller included 2012: 500 gb new ‘Super Slim’ hardware model with one controller and 1yr PS+ subscription included Despite constantly lowering the price for PlayStation 3, Sony packed their stock keeping units (SKUs) with increasingly greater functionality. Furthermore, the functionality changed (e.g., type of games, hardware). Both allowed Sony to better serve late adopter consumers who hadn’t yet purchased a PS3.
  30. 30. Evolutionary dynamics at the platform-level have significant implications on the complements level: 1. Over time, not only will more end-users join a particular platform, also different types of end-users will join 2. Over time, more complementors will join a particular platform Unlike traditional industries, entry into two-sided platform markets often is easy and the marginal costs of production are low to non-existing leading to competitive crowding 0 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 0 1 2 3 4 5 6 7 8 9 10 11 Numberoffirms Firmentry Time (years from industry founding) Firm entry Number of firms In a traditional production industry, the number of new entrants first increases and later decreases. Furthermore, owing to scale advantages and consolidation there is significant attrition resulting in an overall decline in the number of firms later in the industry lifecycle. 0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 5500 6000 0 500 1000 1500 2000 2500 3000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Numberofpublishers Publisherentry Publisher entry Number of publishers In a digital platform, such as Valve’s Steam (shown below), the number of new entrants increases over time as facilitation by the platform and indirect network effects make it attractive to enter (late). Furthermore, since there is virtually unlimited shelf space and zero marginal production costs, there is very little attrition leading to an exponential growth in the number of firms later in the platform lifecycle.
  31. 31. Evolutionary dynamics at the platform-level have significant implications on the complements level: 1. Over time, not only will more end-users join a particular platform, also different types of end-users will join 2. Over time, more complementors will join a particular platform 3. As platforms accumulate end-users and complementors, their bargaining position over the platform increases Figure adapted from Johns, 2006; p170. As two-sided platforms grow their user-bases and stock of “killer-apps” over time, they become less reliant on new complementors • Early on, platforms need complementors to solve their “chicken- and-egg” problem, resulting in strong overall support (e.g., subsidies, marketing, selective promotion, contractual terms) • As platforms evolve and the user-bases grow, their overall dependency on complementors goes down • Support for complementors becomes more targeted later in platform lifecycle, mostly benefitting a select group of highly reputable complementors with high quality products
  32. 32. Overview of iOS governance changes: 2009 Allow for in-app purchases 2010 Allow for in-app advertising 2012 Implement matching of consumers and apps through Editor’s Choice, Top Charts, Free App of the Week, and Genius 2013 Enable user reviews for apps 2014 Offer consumers 14 days no-questions asked refunds on app purchases 2015 Search algorithm optimization improving matching of popular apps (e.g., taxi  Uber) 2016 Introduce paid search results
  33. 33. Platform evolution • Two-sided platforms are dynamic entities that evolve over time • We identified three platform-specific evolutionary dynamics: 1. Evolution of user-base composition • Over time, more and more end-users enter the platform • Late adopters, however, have lower WTP, are risk averse, and search less deeply 2. Evolution of complementor competition • New entry increases over time, little attrition (no shake-outs) • Later, complementors often enter with greater ferocity than end-users 3. Evolution of governance mechanisms • Platforms reduce their dependencies on complementors over time • Overall decrease in complementor support, favoring the few over the many
  34. 34. 2.22 4.15 0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 4.50 Seventh Generation (IB = 167m) Eighth Generation (IB = 17m) Unitsales(millions) Ubisoft’s Watch Dogs sold nearly twice as many copies in its first month on eight generation platforms than it did on seventh generation platforms, despite the nearly ten times larger user-base on seventh generation platforms.
  35. 35. Watch Dogs was released towards the very end of the seventh generation gaming consoles (and at the beginning of eighth generation consoles) meaning that: • These platforms had lowered their overall support for game publishers and focused support only on absolute hit games (e.g., GTA V) • These platforms were heavily populated with late adopter consumers, and early adopters had already partly migrated to eighth generation platforms • These platforms were rife with competition as the stock of games had grown substantially while many new games were still coming out at the same time • Watch Dogs was a very innovative game (based on a new intellectual property). Demand for innovation was much higher on eighth generation platforms.
  36. 36. Evolutionary aspect Value creation Distribution of value Value capture Governance Drop in overall governance support leads to a reduction in value creation for complementors Directed governance towards reputable complementors with high quality products leads to a skewed value distribution for complementors Drop in governance, threat of platform entry and absorption, lead to a reduction in value capture for complementors Demand-side shifts Lower WTP, risk aversion, and migration to next platform lead to a reduction in value creation for complementors Risk and novelty aversion drive late adopters to a small group of hits, enhancing the skew in value distribution for complementors Lower WTP and migration to next platform lead to a reduction in value capture for complementors Complementor competition* Increase in available complements leads to an average decrease in value creation for complements Surviving early entrants benefit from economies of scope and learning which enhance the skew in value distribution for complementors Drop in average prices due to increased competition lead to a reduction in value capture for complementors * The extent of complementor competition on value creation, distribution and capture depends on 1) the ratio of end-users to complements –app market potential- and 2) whether there are stock (e.g., iOS App store) or flow (e.g., Kickstarter) effects to complementor participation. Platform evolution affects how complementors create and capture value
  37. 37. Stylized facts about app competition 1. On average, complementors create less value as platforms evolve • The effect is amplified when entry occurs in the same category • The effect is amplified for very innovative complements 2. Increasingly skewed value distribution as platforms evolve • In favor of hit complements by reputable complementors • In favor of incrementally innovative complements 3. The incentives to innovate for complementors go down 4. It becomes harder for complementors to capture value 5. The above are amplified when complementors are subsidy-side
  38. 38. Implications for app and game developers • Look beyond the size of the platform user-base by taking into consideration compositional contingencies and migration • Anticipate the shift from early to late adopters, apply divergent strategies across the platform lifecycle: • Early on: Focus on throwing gravel by launching a wide variety of innovative complements in new categories. Apply a product proliferation strategy • Later on: Focus on throwing rocks by pooling resources towards a limited set of familiar complements that extend earlier efforts • Enter and innovate in relatively under-populated complementor categories in otherwise crowded platforms
  39. 39. Some final thoughts… • Don’t assume… • your app will sell itself—marketing and PR should start during development! • your app faces no competition (comps are out there, your app isn’t perfect)! • all publishers are evil or redundant—they often do offer added value! • you will do Fortnight numbers, these markets are incredibly skewed! • Consumers are fickle and, on average, have low WTP for apps and games. Try spreading your risks by seeking external funding for your efforts (e.g., subsidies, sell to an institutional client) • Freemium is tricky. This model generally lowers consumers’ WTP even more and only works under strict conditions
  40. 40. Thank you! rietveld@rsm.nl /gjrietveld @gjrietveld

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