Category Archives: Business

Google Adwords?

by | Business
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The guys over at Stack Overflow are saying that they tried Google Adwords, and it was horrible for generating ad-revenue for them. In a recent podcast (Episode 64, 15:00), they say that they had nearly one million pageviews per day*, but Google Adwords were generating 38 cents of revenue per month. That’s astonishingly bad. They said that they hand-picked some advertisers themselves, and their ad-revenue went up 50x — which would still only be about $19 / month. I’ve sometimes wondered if ads on websites actually generated any profit for websites, or if they were just a method to pay for a fraction of the monthly costs. Sounds like the latter. Even at $19 / month, there’s no way that Stack Overflow is paying for it’s own bandwidth and server costs.

* According to Alexa.com, which tracks website traffic, Stackoverflow ranked as the 639th most visited website in the United States, which is certainly respectable.

World of Goo, Pay What You Want

by | Business, Game Development, Games
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2d Boy recently had a 1-year anniversary sale on their game “World of Goo”. The game normally sells for $20, but now you can pay whatever you want for the game (minimum of 1 cent). They also asked people why they paid what they did, and released statistics on how much people paid.

The Results:

57,000 people downloaded the game over the past week. The average price paid was $2.03. In total, that adds up to $115,710. Because PayPal takes 30 cents + 2.9% of each payment, they ended up paying 13% of that ($15,000) in transaction fees, leaving them with $100,000, or $1.75 per buyer.

Here’s their bar-chart of the money paid and number of people at each price (click for a larger image):

Full Survey Results are here.

I have to admit that I’d thought about trying the “pay what you want” model for future games. It’s hard to interpret these results, though.

The Bad:
People paid very little – developers saw a scant $1.75 per sale.

There are some reasons that this should be taken with a grain of salt, though. I can think of quite of few reasons why this payment was low. First, the game has been out of a year. This means that everyone who would’ve paid $20 for it probably already bought it. Maybe 2dBoy is picking up the people who were willing to pay for it, but weren’t willing to pay $20. Also, in the questionnaire, asking why people paid what they did, 11.6% said they already owned it on a different platform, so they were just giving 2dBoy a few dollars for the opportunity to have it on another platform.

Of the 12% who actually answered the survey, when asked “How much do you think this game should cost normally?”, 85% said this game should normally cost $10 or more. But, only 12% of survey responders actually paid $10 or more. And only 5% of buyers paid $10 or more. Based on the sales numbers, 23,335 people (41%) paid 99 cents or less, and less than a third paid $2 or more. This is one of my fears of the pay-what-you-want model; that people will admit that a game is worth X dollars, but a large majority will pay much less than that if they have the opportunity to pay you less.

The Good:
They got a lot of sales, which added up to $100,000. That is, $100,000 on top of their previous income.

For comparison, 2dBoy says that the game actually cost about $116,000 to produce. Although, $116,000 is their “minimum living expenses” cost. They said that it took two people two years to produce the game, and $96,000 covered their living expenses – which translates to $24,000 per person per year; which is not a decent living.

I’d like to be able to try to generalize these numbers, but there’s a lot of difficulty in doing that.

First of all, World of Goo is a very popular game. So, trying to vindicate the pay-what-you-want model based on “they already earned $100,000 and only spent $116,000” doesn’t work very well. Afterall, World of Goo is probably in the top 99th percentile of games produced. So, if they made $400,000 on a $116,000 investment (ie. a good profit), it would also mean that 95% of the games on the market would be showing losses in the same situation.

Second, the pay-what-you-want model generates free publicity. Since World of Goo is essentially a first-tier game, it benefits disproportionately from free publicity. A second or third tier game might get a lot less free publicity, and then they’d get less benefit. To put it another way, let’s say that pay-what you want causes people to pay you less money, but increases the number of buyers. The numbers for some fictional games might look like this:

Using normal sales model:

GameX (Popular) 1000 buyers / month $10 revenue per sale = $10,000 revenue per month
GameY (Obscure) 50 buyers / month $10 revenue per sale = $500 revenue per month

Switching to a pay-what-you-want sales model, GameX (which is popular) gets lots of free publicity on gaming websites and blogs, GameY (which is obscure) gets a handful of mentions but remains obscure:

GameX (Popular) 8000 buyers / month $2 revenue per sale = $16,000 revenue per month
GameY (Obscure) 80 buyers / month $2 revenue per sale = $160 revenue per month

In the case above, GameY didn’t gain much in publicity, but it saw a sharp drop in the amount paid for their game. It would be a losing strategy in that case.

I also have to wonder about how pay-what-you-want model will change over time. Right now, it’s relatively novel, but if everyone did it, would the publicity decline — and, therefore, cause a decline in the profitability? In the survey, almost 1 our of 4 people said that they like the pay-what-you-want model and want to support it. But, if it becomes popular, will people stop supporting it because it is “established”? And what percentage of them paid higher amounts of money? Theoretically, the “we want to support pay-what-you-want” people could account for 100% of the people who paid $5 or more, and they could disappear as the model becomes more popular.

Wikipedia: Hollywood Accounting

by | Bad Corp, Business
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Wow. This is sleazy.

Wikipedia: Hollywood Accounting

In accountancy, Hollywood accounting is the practice of distributing the money earned by a large project to corporate entities which, though legally distinct from the one responsible for the project itself, are actually owned by the same people. This substantially reduces the profit of the project proper, sometimes eliminating it altogether. The effect of this practice is to reduce the amount which the corporation must pay in royalties or other profit-sharing agreements.
…
Due to Hollywood accounting, it has been estimated that only about 5% of movies officially show a net profit, and the “losers” include such blockbuster films as Rain Man, Forrest Gump, Who Framed Roger Rabbit, and Batman, which all took in huge amounts in box office and video sales.

Because of this, net points are sometimes referred to as “monkey points,” a term attributed to Eddie Murphy, who is said to have also stated that only a fool would accept net points in his or her contract.
…

Examples

Winston Groom’s price for the screenplay rights to his novel Forrest Gump included a share of the profits; however, due to Hollywood accounting, the film’s commercial success was converted into a net loss, and Groom received nothing. That being so, he has refused to sell the screenplay rights to the novel’s sequel, stating that he “cannot in good conscience allow money to be wasted on a failure”.

Stan Lee filed and won a lawsuit after the producers of the movie Spider-Man did not give him a portion of the gross revenue.

The estate of Jim Garrison sued Warner Bros. for their share of the profits from the movie JFK, which was based on Garrison’s book On the Trail of the Assassins.

Art Buchwald received a settlement after his lawsuit Buchwald v. Paramount over Paramount’s use of Hollywood accounting. The court found Paramount’s actions “unconscionable,” noting that it was impossible to believe that a movie (1988’s Eddie Murphy comedy Coming to America) which grossed US$350 million failed to make a profit, especially since the actual production costs were less than a tenth of that. Paramount settled for an undisclosed sum, rather than have its accounting methods closely scrutinized.

Joystiq: What’s In A Name

by | Business, Society
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Joystiq has been running a few articles about how companies got their name. The story behind Stardock:

“I was in college and started the company to help pay for school until I could get a real job. I needed to get a computer and got a hold of a wholesale distributor to get the parts to build it. When I called, they asked me what the name of the company was and in panic, I looked around and was reading a book by Raymond E. Feist and the chapter was called ‘Stardock’ so that’s what I said the company’s name was. It stuck and has been since.”

Wow, he came up with a name on the spur of the moment.

The story Randy Pitchford tells about Gearbox (of Half-Life fame) is a little more harder to believe. It involves a high-stakes late night poker game in New Orleans with Gabe Newell. And, if that tall-tale didn’t trip your BS detector, it appears that Valve and Gearbox are now confirming that the story is a fabrication. I wonder if Pitchford was just seeing how far he could string Joystiq along with that unlikely story.

These stories remind me of a recent episode of This American Life, called “Origin Stories”. In the beginning of the episode, they discuss corporate creation myths. Google even has a myth about starting in a garage:

The Apple and Hewlett-Packard garages have now become such a part of Silicon Valley myth, that it’s made other tech companies want stories like it. Google, for example, they did not start in a garage. The founders began working on their search engine in 1996, when they were at Stanford. They didn’t move into a garage until 1998. They already had investors, and they were just in the garage for five months. But in 2006, Google bought the garage as a company landmark.

It’s like no one wants to hear the story of the rich, well-connected guys who meetup at the Marriott conference room to hatch a business plan. You know, there’s no romance in that.

Dan Heath has written about these origin stories in Fast Company magazine. He says one way to measure just how appealing these stories are, is to count all the ones that get quotes widely, even though they aren’t remotely true.

For instance, when eBay began, a story circulated that it’s founder created the company so that his fiance could buy and collect Pez dispensers more easily. Not true.

One of the creators of YouTube used to claim that the idea for the business came after a dinner party in 2005 when two of the company’s masterminds, Chad Hurley and Steve Chen, shot some video and tried to post it online, and found out just how hard that was back then…. Steve Chen later admitted in Time magazine that the dinner party [story] was embellished to provide a better founding myth.

Of course, there’s plenty of other myths created about historical figures, as well. For example, Christopher Columbus didn’t have some crazy idea that the earth was round back in 1492 – everyone knew that the earth was round. In fact, a Greek mathematician had made a pretty good estimate of the size of the earth back in the third century BC. And George Washington didn’t cut down a cherry tree.

Why I don’t like “1000 True Fans”

by | Business
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A while back, Kevin Kelly (co-founder of Wired Magazine) wrote the article “1000 True Fans”, where he lays out his idea for earning a living by creating stuff (music, books, software, etc). It had provoked a lot of discussion on the internet (searching for “1000 true fans” yields 16,000 google hits). Most people seem to really like the idea, but some of us don’t. I actually find his idea to be overly simplistic, although it does have a certain appeal to make it popular.

In a nutshell, his idea is this:
Step 1. Get 1,000 true fans who love your work so much, they buy everything you create.
Step 2. Create $100 worth of merchandise each year.
Step 3. Earn a fabulous living of $100,000 / year.

Most people look at this and think, “1,000 true fans? That seems attainable. $100 of merchandise per year? Sure, I could do that.” So, what’s the problem?

* First of all, it’s next to impossible to create $100 worth of merchandise per year of real creative output. I suppose someone could create T-shirts and coffee-mugs, too, but that really doesn’t count because (A) it’s unreasonable to expect to have 1,000 “true fans” who are going to buy every T-shirt and coffee-mug you create, and (B) the fact of the matter is that artists earn next to nothing on sales of T-shirts and coffee-mugs. So, we’ll ignore the T-shirts and coffee mugs for the rest of the discussion and concentrate on the real productive output: books, software, music. It’s next to impossible to create $100 worth of this per year. In my case, if you average out the number of years I’ve worked on my software and compare it to the sales price of my software, you’d wind up with a an average sales-value of around $5 per year. I can’t think of any bands that put-out $100 worth of music and videos per year. And no authors are putting out $100 worth of books per year.

* The “1,000 True Fans” idea is confused about whether you’re supposed to bring-in $100 of profit per fan, or merely $100 worth of sales per fan:

Let’s peg that per diem each True Fan spends at $100 per year. If you have 1,000 fans that sums up to $100,000 per year, which minus some modest expenses, is a living for most folks.

Kelly seems to get these two things confused, because he says that each fan spends $100 on merchandise per year. The problem with this is that a sales price of $100 does not mean $100 worth of profit for you (the creator). In the case of, say, T-shirts and Mugs, selling $100 worth of merchandise might mean $10 of profit. I had read recently on an authors website that royalties on book sales are 8%. So, $100 of book sales equals $8 profit for the author. This means $100,000 in sales equals $10,000 and $8,000 in profit – neither are a living. In other cases, where profit is 50% of the sales price, then the creator is earning $50,000 / year – which is a living wage. Fortunately, in the case of music and software, the packaging cost is small compared to the sales price. But, it’s worth highlighting the fact that creators will not be earning close to $100,000 / year, which is what Kelly seems to hint. To really figure out what a creator is earning under this system, you have to figure out the profit per fan, not the revenue per fan.

* Getting 1,000 “True Fans” is hard. I can’t say that I’m a “true fan” of anything, and I suspect that most people aren’t either. Kelly suggests that if you can add 1 true fan per day, you’d have 1,000 true fans in three years. But, I think you’d have to be extremely talented to be adding 1 rabid fan per day. If you were talented and worked hard, maybe you could get 1 new regular fan per day, but not a “true fan” who loves everything you do so much that they’ll buy everything you create. I suspect the number of fans an artist has would scale exponentially because of word of mouth and media exposure. This means you have to be talented enough that you are getting the word-of-mouth and media exposure. Of course, now we’re back in the realm of normal promotion, rather than “true fans”.

If Kelly really was right about getting 1 rabid fan per day, then (based on the exponential growth of word-of-mouth and media) I think it’s clear that you’re on your way to being massively famous. I think most people know that being massively famous isn’t a realistic goal for most creators.

I think a much more realistic thing to do is just concentrate on getting fans, rather than “true fans”. These regular or “fair weather” fans are going to outnumber true fans because most people aren’t going to be true fans of anything, and even if they are, it probably won’t be you. As I said, I’m not a “true fan” of anyone, yet I have hundreds of CDs and hundreds of books. I suspect that even “true fans” have music/book collections where more than 90% of their purchases are for things having nothing to do with their true-fandom. This suggests that more than 90% of an artist’s sales are going to be to people who are not “true fans”, and every artist will have at least 10 fans for every “true fan” (and that ratio is probably generous). Fair-weather fans are going to be easier to get and more numerous.

In fact, if we look at the Nine Inch Nails release “The Slip” we find that they sold a high-end package for $300. They limited the sales to 3,000 copies. We don’t know exactly how many they would’ve sold if they didn’t limit it to 3,000 copies, but if a mega-famous group like NIN has only 3,000 “true fans” willing to buy the $300 set, what hope does the typical creator have of getting 1,000 true fans? Based on my guesstimates in this article, less than 1% of the people who got “The Slip” bought the $300 or $75 package. This suggests that the regular fans outnumber true fans by at least 100:1.

My suspicion is that if someone actually set-out to get 1000 true fans, that about the time they get 1,000 fans, they’d only have about 10-50 true fans. And, if they ever reached 1,000 true fans, they’d have another 30,000 to 100,000 regular fans. In both cases, the majority of the creator’s income would come from the regular fans, not true fans. When you look at it this way, it’s really about getting fans, not true fans.

* The “true fan” idea only works if you’re one (or maybe two) people working together. If you have a larger group, your number of true fans has to increase by the same factor. (Admittedly, Kelly does bring up this fact in the article, but it’s worth reiterating.)

One good thing I can say about Kelly’s idea is this: if you concentrate on getting the mythical 1,000 “true fans” you probably won’t attain it, but maybe the process of trying to get those “true fans” will push creators to do the level of work worthy of getting a “true fan”, which will draw-in the fairweather fans — and that’s a good thing. I think there are some aphorisms that are false, but they point people in the right direction. For example, “the customer is always right”. It’s absurd to say that every customer is always right. A minority of customers will be irrational. However, it’s a good aphorism because it leads businesses to be more customer-focused and it’s better to err on the side of giving the customer too much credit. Businesses will do better in the long run if they act that way.

In that sense, the “1,000 true fans” idea might be a good goal, but the reality of it is sketchy.

While a lot of people have been positive about Kelly’s “1,000 true fans” idea, here’s a few creators who express the same skepticism as I do:
John Scalzi (book author) critiques Kevin Kelly’s idea.
Robert Rich (musician) talks about the sisyphean task of building 1,000 true fans.

iPhone Development

by | Business, Game Development, Games
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I’ve been asked a few times about whether or not I’ll create iPhone applications. I haven’t looked into it much, prefer desktop/laptop development, and generally feel that the iPhone “gold rush” is over anyway. I think there was a time, a few years ago, when you could get a big benefit by being the first one there. But, everyone noticed the opportunity, and now there’s lots of competition. From what I can tell, there are a few success stories, and the vast majority of iPhone apps languish in obscurity.

Here’s two contrasting articles. The first one is written from the user’s perspective. You’d get the impression that iPhone development is a gold-mine. But, of course, he only mentions the most popular applications:

Last month, I became an obsessive air-traffic controller. The culprit: a terrific game for the iPhone called Flight Control. The premise is simple: You’re faced with a crush of planes, and it’s your job to guide each one to its respective runway…. According to Firemint, the game’s publisher, the 99-cent app has been purchased more than 700,000 times since March; at its peak, it was being downloaded 20,000 times a day.
…
Last fall, [Ethan Nicholas] spent weeks—some of it while cradling his 1-year-old son—writing a tank-war game called iShoot. The game, which sold for $2.99, hit the App Store in October, and in January, it shot up to the top spot—selling hundreds of thousands of copies and earning Nicholas enough to let him quit his job and take up iPhone development full-time.
Source: Slate

The second article is about iPhone development from a software-developer’s perspective. It isn’t the gold-mine you’d think it is. There are 40,298 applications for the iPhone. The author does some estimates to figure out the average profitability of an iPhone application (about $1,881). At that amount, you’d better be cranking out a decent application every month to earn a bare-minimum living ($22k/year). Of course, there’s a lot of variability in this: some huge successes and lots of applications that earn next to nothing. So maybe “average” isn’t the best way to look at this. Afterall, if you have 70 applications that earn $1 million each, 2,000 applications that earn $1000, and 38,228 applications that earn $100 each, you’d end up with his same numbers. It would look more like a lottery under these numbers – almost everyone would end up poor, and a handful of people would get rich. These same numbers would also produce a bunch of “success stories” – 70 of them – that the media could write about, as if the iPhone was a sure-way to quit your day-job and earn a great living.

From what I hear, the top-selling applications tend to get a boost by getting onto Apple’s Top 10 list, and (to a lesser extent) the Top 50 list. Again, this suggests that there are some big winners, and a lot of losers.

Update, June 9, 2009: It’s nice to get a little confirmation of my view. In a recent blog post, iPhone developer Rick Strom says:

First, so you know where I stand among the 60,000 or 600,000 (I’ve heard both numbers) registered iPhone developers: I have nearly 20 apps in the app store as of this writing.

Four of those apps are on the charts:

* Zen Jar #34 Social Networking (paid)
* Zen Jar Lite #54 Social Networking (free)
* Spirit Board #36 Board Games (free)
* Spirit Board Pro #95 Board Games (paid)
…
With two apps on the [Top 100] paid charts, one would assume I’m rolling in dough. After all, this is a gold rush, right?

The reality is much more startling. In order to place #34 on the social networking charts, you need 30-35 downloads a day. At the standard app store pricing of .99, and after Apple takes its cut, that means your app needs to bring in a little over $20 a day to chart at that position. And social networking is a popular category.

Perhaps you’d expect the game charts to do better. Board games isn’t a wildly popular category, but it still might surprise you that it takes about 6-8 downloads a day to chart. That means if you are making around $4 a day you’ll be in the top 100.

So what does this all mean? Well keep in mind there are over 36,000 apps in the app store. If the apps on the category charts are doing those sorts of numbers, what do you think the rest of them are doing?

Nothing. Absolutely nothing. The aren’t selling at all.
…
I post these numbers so people can understand what is really involved here. The app store isn’t a sane marketplace at all, any more than the lottery is. When you submit an app, you are buying a ticket. Maybe you will be one of the few who makes a couple hundred grand in a hurry, but most likely you will be just another shlub tossing your blood, sweat and tears into the void where it will be ignored.

Gabe Newell (Valve) and the Game Industry

by | Business, Games
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A few news articles have been coming out of the DICE Summit. In an article titled, “The Very Different Gaming World Gabe Newell Wants”, Newell had some thoughts on “how he thinks the video game industry should work”.

-Pricing that’s always in flux: Are you ready for the price of a game to go up and down regularly? “One of the things that annoys me is the inefficiency in pricing we have in our industry,” Newell said. He doesn’t like how rigidly prices are set in stores and how slowly those prices are changed… Valve has hired an experimental psychologist to concoct new sales promotions, one possible idea being to reward every 25th purchaser of “Left 4 Dead” with a free game on Steam. Newell joked that this person is “turning us to the dark side of B.F. Skinner.”

Hm. I’m not sure that I’d categorize this under “how the gaming industry should work”. I think what Valve is doing with the price fluxuations is this: attract attention. By having sales, they have an excuse to get into the gaming news. They also give people a reason to keep checking their website (any sales yet)? If you can keep people coming back to your website, odds are better that they’ll buy something – maybe even buying/trying a different product from Steam. As far as I can tell, it’s worked pretty well. I saw gaming websites talking about Valve’s “Left 4 Dead” sale. For example, Joystiq posted this article: “This weekend: Left 4 Dead 50% off on Steam”. Price fluxuations = excuse for gaming websites to talk about you = free advertising.

-Frequent content updates: Newell said “Team Fortress 2″ has received 63 updates from Valve in the last 14 months. That is the future, he told the developers in the audience: “You’re going to be touching [your customers] not every three years but every three weeks — and hopefully even more often than that.

Wait – this if how the gaming industry is supposed to work? If you do the math, there, you’ll see that 63 updates in 14 months is more than one update per week. One of my irritations with Team Fortress 2 was that they were always updating it. Want to play a quick game before you go to bed? Oops! You have to download a patch before you play. Hope you don’t mind a 20 minute download first. One of the other problems that happens with PC games is that the ability to patch games after release means developers feel less bad about releasing a “not quite complete” games, knowing that they can patch it after the fact. One guess here is that Gabe wants to make sure people are tied into the Valve service (since patches are only available through your account) – which means you bought your game (and didn’t pirate it). Frequent updates means pirates are running old versions, and if you want the latest fixes, you’d better buy it. It certainly keeps the uploading-pirates and downloading-pirates busy. I’m doubtful that it improves anything for gamers, but if it helps Valve shake-off some pirates and get some more sales, then gamers are helped indirectly.

-Video game companies acting as “entertainment companies”: Newell said he is “obsessing” over gamers’ expectations for “what kind of entertainment company they want us to be.” They are fans of properties, not forms of entertainment, fans, to use his example, of Harry Potter, as opposed to just Potter books or just Potter movies. As a result, he said he is moving away from thinking of Valve as a video game company. One example is the introduction of “Team Fortress 2″ video shorts made by Valve. The next will be that same team’s “TF2″ comics.

Selling merch – aka: opening up another revenue stream for the company. Not a new idea, but not a bad idea, either.

-No DRM should be offered that can be thought of as DRM: Newell believes that digital rights management software that is presented as copy-protection gives a game a stink. It leaves customers unsure about how flexibly they can access their games. So they turn to pirates who offer games with fewer strings, he suggested. “There is evidence anecdotally that DRM is increasing piracy rather than decreasing piracy.” Valve’s solution: battle the pirates by providing better services than the pirates do. The effectiveness of pirates, he said, is to get content to people who want it more swiftly and easily than the companies who make the content do. An outfit like Valve, however, can get provide even better service, even by doing something as intrusive as data-mining their customers’ computers — as long as they are transparent about it and can prove to the customer that taking such measures will make the customers’ games better.

Well, this isn’t really news coming from Valve. I’m always amused when people rail against DRM, but then suggest following in Valve’s footsteps (oblivious to the fact that Steam is DRM). What this says to me is that there is a right way and a wrong way to do DRM – which is different than view promoted by groups like DefectiveByDesign: that all DRM is bad – inherently wrong, wrong in principle. Ideally, gamers should be able to use their games (and music and movies) without ever running into restrictions during normal use. At the same time, Steam is there to stop people from uploading/downloading games to filesharing sites. Gabe Newell is frequently misunderstood when talking about DRM. You often have to parse his words very carefully to understand exactly what he means. For example, Joystiq paraphrases him as saying “Gabe Newell wants to shake up the way the industry works by … getting away from DRM as copy-protection”. That sentence sounds like Newell is opposed to DRM. He’s not. The original article quotes him as saying: “Newell believes that digital rights management software that is presented as copy-protection gives a game a stink.” Newell is suggesting digital rights management that isn’t presented as copy-protection – it’s presented as a system to automatically download patches, etc. In an article less then six months old, Doug Lombardi (of Valve) was quoted as saying:

Lombardi, and others I spoke to off the record, say that at least for digitally downloaded PC games, DRM and copy protection is here to stay. For Valve the biggest push is to lock down those “zero day” pirates. Day zero is the time between when a game goes gold and when it is available for purchase… The key to making a good authentication system, Lombardi says, is to not stand in the way of customers enjoying what they bought.

By keeping their DRM strings invisible, many gamers seem unaware of the fact that Steam is DRM. I see examples like this all the time:

Valve seems to have managed to simultaneously use DRM and get lots of people to praise them for not using DRM. And, of course, if people break their DRM – well, Valve can fall-back on the fact that only legitimate buyers get the weekly updates mentioned earlier.

-Concept art for everyone: Newell wants creators and customers to be in more direct communication with each other before and after the release of a game. One such method is to show concept art early, which builds buzz. The concept art, Newell said, “is a more effective tool [for building buzz] than most of the advertising around your product.”

This idea isn’t even remotely new.

It won’t be better graphics that determines a winner in the next console generation (which, of course, it never has been: see the N64, Xbox and PS3). It’ll be the extent to which a console allows game creators “to have this relationship with your customers.” The “this” is everything bullet-pointed above.

True. You want customers coming back to your website over and over. I’m sure the Valve-customer relationship will establish their website as great place to advertise their next game, increase brand recognition, open up more possibilities for selling old stuff / merch, becoming more than just a faceless corporation, etc, etc. The other day, I was thinking about how the games industry is different than a lot of other industries. I don’t really remember what companies made which games, and which games were made by which companies. It’s just not that important because titles are so variable. I’m never in a position where I say, “Oh, Valve made X. I like that game. Here’s another game by Valve. I’ll probably like this one, too.” But, when I’m talking about a musician or an author, I think it’s a different situation – I might buy an album from a musician if I like their other stuff, even if I haven’t heard a single song from that album. And people have a pretty good idea what a book will be like if it’s written by Stephen King. But, we just don’t follow game companies like that. Maybe games are more variable in their execution. What this ultimately means for game companies is that they have to convince customers of the merits of each and every game (rather than relying on an “established reputation”). The relationship Gabe is talking about plays an important role in selling the merits of the next game.

In the end, I don’t think Gabe Newell has much new to say, and it certainly isn’t a “very different gaming world” (as the title of the article suggests). One thing that did occur to me while reading this, though, is that the gaming industry is picking up the same strategies that politicians have used on the campaign trail: repeat yourself constantly. Repeat, repeat, repeat – drill in your ideas over and over because different people are listening each time. It seems like the game companies maintain a set of talking points – stuff they can repeat to game journalists for a story. (I remember Brad Wardell of Stardock doing the same thing.) I hope I never have to play that role. I get really bored of repeating myself.

Pirate Bay Goes To Court

by | Business, Copyright, Piracy
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Well, it’s about time, Sweden. The enemies of software development are finally in court. According to articles I’ve seen, the movie, music and software industries are claiming that they made millions of dollars on ads. I don’t know if that’s true or not, but it doesn’t much matter to me whether they got rich (just like it doesn’t matter to me whether or not someone made money when they slashed the tires of my car – they’re still guilty of causing harm). I suppose that’s the justification for the fines, though – the Pirate Bay faces $13 million in fines and up to 2 years in jail.

What’s disturbing, however, is the fact that some popular websites have become “no go” areas for anyone arguing that copyright should be respected. Both Digg and Slashdot are strongholds of the pro-piracy / we-ignore-copyright crowd. Here’s two popular comments and one unpopular comment that recently appeared on Digg. Note the vote-up/vote-down counts. Over three hundred people voted these comments up, while 10 voted them down — that’s a 97% vote-up.

For artists, creators, and software developers, it’s a frightening sight.

Games Industry Recession?

by | Business, Games
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I have to say that I’m a bit confused. I’ve heard that the games industry is relatively recession-proof. I’ve also heard that game sales were actually up in 2008 compared to 2007. Yet, I keep seeing these kinds of stories in the news:

Sega laying off 560 staff, closing 110 amusement facilities
NCsoft downsizes UK operation, laying off 55 staffers
Midway files for Chapter 11
Square Enix lowers revenue forecast for fiscal year
Activision Blizzard loses $72m in Q4 ’08; outlook misses ’09 expectations

I haven’t quite figured out how both could be true at the same time. Is there some other segment of the games industry (like casual games or Nintendo) that are doing really well, but other parts are getting hit hard? Haven’t quite figured it out yet.

NIN and Business Experiments

by | Business, Music
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I’m always kind of curious about the results when companies try different business strategies. Nine Inch Nails released their last two of their albums for free. Well, free if you wanted them for free. Anyone can download The Slip off of their website for free. You can get the first nine songs of Ghosts I-IV for free. If you want the other 27 songs, you can get them a few different ways: free, $5, $10, $75, or $300 – depending on which package you want. (The packages at $10+ contain various physical media, including DVDs, Blue-Ray with surround sound, etc.)

When they first did this, I wasn’t quite sure about his motivation, but I can imagine a whole bunch of possible motivations – to drive up concert sales, as charity to the fans, faith that fans would pay, etc.

I’ve seen a number of people use the NIN experiments as evidence that giving away music “works for musicians”. In many cases, this is part of a “piracy doesn’t hurt anyone” or “this shows that creative commons works” kind of an argument. For example, RollingStone says: “it proves — along with Radiohead’s chart-topping success of the physical release of In Rainbows — that music fans are willing to support artists even if their music is offered up at no cost.” And Ars Technica: “Nine Inch Nails’ Ghosts I-IV topped Amazon’s digital download charts in 2008, despite being offered to fans free of charge. Creative Commons touts the project as a new model for music… The next time someone tries to convince you that releasing music under CC will cannibalize digital sales, remember that Ghosts I-IV broke that rule, and point them here.”

I’m less certain about the success of these experiments. Here’s the results: NIN Ghosts I-IV was the number one downloaded album on Amazon’s 2008 charts, and brought in $1.6 million in revenue within the first week of sales. Sounds good. But, let’s break down those numbers.

They sold Ghosts I-IV in a few different formats. First, you can download the first 9 tracks for free off their website. All 36 songs are available for free on filesharing networks. Even though it was released it under Creative Commons for free, Trent Reznor didn’t make it too obvious and doesn’t provide a link to download all 36 songs. It appears that most people didn’t know that the full album was available for free. And even if they did know it was free, they wouldn’t know how or where to get it anyway. It’s also available in $5, $10, $75, and $300 Ultra-Deluxe packages. We know that there were 2500 copies sold of the $300 packages. (It pays to have rabid fans.) But we have to guess on the rest. We also know that there were “781,917 transactions“. Obviously, “781,917 transactions” includes people who downloaded the 9 free songs (if it only included actual sales, then 781,917 transactions would be a lot more than $1.6 million).

Here’s what I think is a reasonable guess of sales for the first week:

$300 package x 2,500 copies sold = $750,000
$75 package x 5,000 copies sold (just a guess) = $375,000
$10 package x 10,000 copies sold (just a guess) = $100,000
$5 package x 78,884 copies sold (just a guess) = $394,420
Free download x 685,533 people (88% of the transactions)
——————————–
Total Transactions = 781,917 (the number given to us from this article)
Total Revenue = $1,619,420 (the number given to us from this article)

Now, under these numbers, about 12% or 96,000 people bought something. (If no one bought the $75 or $10 packages, then $5 sales would be at 174,000 copies.) About 700,000 people downloaded the free 9-song version, and who knows how many people downloaded all 36 songs via peer-to-peer networks.

I think one lesson that can be learned is that tiered pricing a big benefit to bands with rabid fans. Most bands couldn’t get away with a $300 package, but (based on my guesses) NIN made 70% of their money from the $300 and $75 packages.

But, I was also surprised by the low number of purchases. Fewer than 100,000 people bought something. Okay, so this is only the first week of sales, but in 2005 (less than a month after their fifth album was released) NIN claimed to have over 20 million albums sold worldwide, which means an average of 4 to 5 million copies sold per album. Additionally, with 800,000 downloads, it means that 7 out of 8 people downloaded the free version and didn’t buy anything. Of course, this makes me question Ars Technica’s conclusion that “[Creative Commons won’t] cannibalize digital sales”.

As far as being the number one downloaded album on Amazon in 2008 (which is based on the entire year, not just the first week’s sales), it looks like NIN routed all their $5 sales through Amazon.com as mp3 downloads. Since Amazon doesn’t have strong mp3 sales in general and all of the $5 sales went though Amazon, and the fact that competing music was split between physical media and downloads as well as being available at a variety of stores, then maybe it’s not surprising that they placed so high in Amazon’s best-selling mp3 list. Digital music downloads are still dwarfed by physical-music sales, making up only 10-20% of total music sales. Given these facts, “#1 downloaded album on Amazon in 2008” is a little less impressive than it sounds.

So, was Reznor’s experiment a success? Does this vindicate Creative Commons as a viable and reasonable alternative to selling music? I’m doubtful. It seems like Reznor has mixed feelings. In an interview done last year (before releasing Ghosts I-IV) Reznor talked about his collaboration with Saul Williams. They put an album together and released it as both free download and as a $5 purchase:

Reznor produced and helped bankroll the album, which debuted November 1. All the more reason why he was stunned when fewer than one in five people who downloaded the music were willing to pony up $5, roughly the cost of a McDonald’s Quarter Pounder.
…
Reznor ended the hoopla last week when he reported on his blog that 154,449 people had downloaded NiggyTardust and 28,322 of them paid the $5 as of January 2. In the blog, Reznor suggested that he was “disheartened” by the results.
…
[Y]ou have a lot of reasons why you [don’t want to buy music from the record labels]. So I thought if you take all those away and here’s the record in as great a quality as you could ever want, it’s available now and it’s offered for an insulting low price, which I consider $5 to be, I thought that it would appeal to more people than it did. That’s where my sense of disappointment is in general, that the idea was wrong in my head and for once I’ve given people too much credit.

Saul and I went at this thing with the right intentions. We wanted to put out the music that we believe in. We want to do it as unencumbered and as un-revenue-ad-generated and un-corporate-affiliated as possible. We wanted it without a string attached, without the hassle
…
I’m not saying it was a failure or a success. I think it was both. But it wasn’t 90 percent of the people that showed up paid us what we asked for. Nor did I ever think it would be. I’m not sure what I did expect.

But I’ve found it entertaining reading different people’s perspective on the Web, what they’ve thought of what I’ve said. There’s been a wave of people that said, ‘Oh, that’s depressing. Only 18 percent chose to pay for it.’ Another whole wave of people feel just the opposite. I don’t really know.
CNet News: Trent Reznor: Why won’t people pay $5?

Now, looking at the downloads versus purchases of Ghosts I-IV, we can say that only about 12-13% of the people paid $5 or more for the 36-track album (as opposed to downloading the free 9-tracks from the NIN site). Additionally, a lot of people got the music via peer-to-peer, which means a lot less than 12-13% of people who got the album paid for it. On the positive side, the expensive $300 and $75 packages helped offset the large majority who paid nothing, and selling directly to fans let them skip the record-label middleman – letting them reap more revenue per sale. Although, it would be a false dichotomy to say that NIN only had two choices: the record labels or free/creative commons. A third alternative would be to simply sell the album from their website (without putting it under creative commons, and without putting it on bit-torrent).

It’s true that he did “allow” it to be shared, and that he uploaded it to bit-torrent himself – which seems to suggest that he believes that “giving it away for free” doesn’t hurt sales. On the other hand, NIN didn’t make it easy or obvious to download the entire 36-track album from their website. This made it difficult for anyone without bit-torrent to get it for free. My take on this behavior is that Trent Reznor doesn’t try to stop filesharing because it’s going to happen, but he also doesn’t want to make it easy for non-bit-torrent / non-pirates to download his music for free. I can understand the logic of this. Afterall, the music would be leaked to bit-torrent regardless of NIN’s stance on the issue. And people who torrent wouldn’t be swayed by Reznor’s appeal to not pirate his music, anyway. Since he has zero control over piracy, he might as well try to make some friends and get free publicity by taking a controversial stand.

It would be nice if we could generalize his experience to other bands / companies. But, there’s obviously a number of complications in trying to do that.

I suppose some of the lessons or non-lessons might be:

– Sell physical products with tiered pricing. This way, your biggest fans can pay you $75 or $300. Unfortunately, this only works for bands with a strong following; most bands aren’t going to get very far selling $300 packages. But, there might be other tiered pricing that works – like $10 / $20 / $30.

– Publicity stunts like releasing music under creative commons or making it available on torrents might get you some media attention. Unfortunately, this only works with bands that can already garner news media attention. No one cares if the local band has gone creative-commons.

– Selling directly to fans lets musicians get a bigger cut of each sale. But, this strategy involves forgoing the record-label’s publicity machine. NIN already has enough fame that “more publicity” has limited value.

– Even if you eliminate all the “barriers” that most people cite for pirating music (including: DRM, don’t want to pay the evil record labels, the musicians don’t make money from music sales, lowering prices down to a ridiculously low $5 for 36 songs), most people still aren’t going to pay you if you give them a free option. The percent who pay will probably vary depending on how much people like the music, but if NIN is getting fewer than 1 in 8 to pay anything (and numbers are a lot lower if you include torrents), I think things look rather dismal. On the other hand, we have no idea how many of those “free download” people even liked the album or would’ve bought it.

– Even Trent Reznor seems to agree that making it easy / convenient for non-pirates to download your music for free probably hurts sales. On the other hand, releasing it for free on bit-torrent probably doesn’t hurt you much because it’s going to be there regardless of what you do, and people using bit-torrent are going to pirate music anyway.