Strategies for superior market performance of games and apps

Strategies for Superior Market
Performance of Games and Apps
Game Development for Language Impaired Populations
Joost Rietveld EUR  UCL
July 9 & 10, 2018

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

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)

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.

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

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

In 2014, Professor Jean Tirole won the
Nobel Prize in Economics, in part for his
work on two-sided platform markets.

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

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

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.

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.

Software developers are subsidized Consumers are subsidized
In two-sided platform markets it is not always end-users who are subsidized

Two-sided platforms are faced with a typical “chicken-and-egg” problem…

"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

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.

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. …

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…

Two-sided platforms often selectively promote developers and apps through storefront features, certification (badges),
algorithmic recommender systems, and otherwise.

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

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.

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

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.

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)

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.

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.

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

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.

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.

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

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

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

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.

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

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

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

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

Thank you!
rietveld@rsm.nl
/gjrietveld
@gjrietveld

Strategies for superior market performance of games and apps

Recommended

Recommended

More Related Content

What's hot

What's hot (12)

Similar to Strategies for superior market performance of games and apps

Similar to Strategies for superior market performance of games and apps (20)

Recently uploaded

Recently uploaded (20)

Strategies for superior market performance of games and apps