No menu items!
Home Blog

Easy KPIs for Video Game companies

0

What are KPIs?

KPIs stand for Key Performance Indicators. Basically, they help you select the most relevant sets of data to assess how well your company is doing. We are going to focus on a first, basic approach, and then with the eye set on a specific example for a video game company.

KPI tracking is essential for any business.

What KPIs should we be looking for?

Let’s start with the most basic:
– Revenues
– Costs
– Profit

Seems quite obvious, right? To know how well your company is doing, you see how many revenues you have, this is, how much money comes it, what your costs are, or, money that goes out, and what’s left. Pretty simple.

However, with these metrics we do not have enough information to improve the company. We might now if we are gaining or losing money, but we won’t have a clue where our problems or opportunities are. We need to dig a little bit deeper.

If we were talking about a normal company, we could start going into the different departments and consider cashflow as a KPI, or maybe new customers in a set period of time, what the sales life cycle is, how long it takes us to produce the product, etc.

But we are here to talk about video game companies, so let’s focus on the KPIs for them.

KPIs for Video Game Companies

Defining the KPIs for a video game company will depend a lot on the company, the game and how it is monetized. For example, a company that sells physical copies of a game will focus on very different KPIs than one one that sells digital copies. Both need to look for development costs, marketing costs, product life cycle, etc., but the first one will have to focus a lot on the distribution and manufacturing costs, while the second one will have to focus on which platforms are selling better and the related costs.

Since it would be barely impossible to cover all different scenarios in one posts, let’s focus on one specific scenario:

KPIs for companies selling mobile games with a freemium business model

If you have no idea what I’m talking about, let me quickly explain.

Games with Freemium Business Model

Mobile games are games sold for mobile phones. Between iOS and Android, you cover about 99% of the mobile market.
The Freemium business model is based on giving free access to the game. In other words, you can purchase the game, install it and start playing without having to pay a single cent. However, once you start playing, you are presented with in-game purchases. These can be anything like cosmetic changes, more powerful items, extra lives, reduced waiting times, etc.

With this scenario in mind, let’s see what KPIs would be especially relevant here:

Users: You want to know exactly how many users you have. This means, how many people have downloaded your game and are playing it. But this is not enough by itself. You want to know how many (daily/hourly) active users you have, and compare it with your inactive users. This information will let you know of the ones who downloaded your game, how many are actively playing and when, and how many have the game on their phone, but are not interested enough in playing anymore.
Furthermore, you also want to know as much as possible who your users actually are. All possible segmentations (age, gender, location, other’s game they might play) you have the information for will help for a better analysis. Additionally, any sort of comparison between monthly users, daily users, hours when more users play, etc. can be very valuable to assess marketing campaigns and special promotions.

User Acquisition Cost: The mobile video game market is extremely competitive. It has very low barriers for new players to enter and the players have, literally, millions of alternatives where to chose from. This means that reaching the players is one of the most difficult tasks a mobile game developer has. Which translates in a very high marketing/promotion cost. You need to promote the game to reach the player, get him to register and ideally, you want him to purchase something. On average, it costs about $3 to acquire a user and around $5 to get a registration. The in-app purchase cost jumps up and would be around $100 (Data from 2018). Purchasing users only amount 2,9%, which is another very important KPI to control. Keeping a good track of these costs and merging this information with all other KPIs might allow to find better targeting/marketing strategies.

Revenues: You want to know everything you can about the money that comes into your pockets. You want to know how much revenue you make per month, day and even hour. You want to track variations. When is the time that users purchase the most? What was taking place when they purchased? What triggered that purchase? How much was it? If there are different packages, which ones sell the best, when, and why. All this information is essential and again, comparing it and combining it with other sets of data will help you devise better monetization strategies.
Example: If you see that most of the players who perform in-app purchases do so after reaching level 20 and during night time, and you were targeting mostly level 10 players and during the morning, you can easily refocus your promotion strategy to increase the revenues.

Retention rate: You want to know how many users you gain, but as important, or more, is to know how many still play after X time. X being minutes, hours, days, weeks, etc. You want to study at what point users normally stop playing. And why. Is it at a particular level that users get frustrated? Is it a set amount of time where users get bored? All this information is essential to improve the game and keep your users hooked.

Gaming User Experience: Analyzing the average game session, whether purchases happen during or after longer or shorter sessions, whether attrition of players take place after longer or shorter session, etc. all add up to close up the analysis.

person in blue shirt writing on white paper

As I said before, one particular set of KPIs can help a lot to answer a very specific question, but the best results come when you are capable of bringing everything together. The real key is to interpret all these very different metrics in a way that allow you to find better strategies to improve your growth and profitability.

In short, asking the right questions and gathering the right information, using KPIs to group this information and make it suitable for analysis, is essential for any video game company. And every company will need to ask different questions at different points in time to find the right answers based on facts.

01. News – Fornite’s Epic Games & Microsoft sue Apple & Google

0
Epic Games sues Apple

If you have been following the news lately, you might have heard of Epic Game, the company behind Fornite, is suing Apple and Google for banning their game from their respective App-Stores.

The lawsuit against Apple was issued on the 13th of August in California.

Following this, the 23rd of August, news came that Microsoft joined Epic Games in the court battle and has decided to support Epic Games against Apple.

Let’s quickly analyze the backstory and the strategic meaning behind this news.

Backstory: The App Store

person holding space gray iPhone X

When apple launched their iPhone in 2008, it came with the very famous App Store. This platform serves developers to publish their app there and after it is approved by Apple, it can be purchased by customers. For every copy sold, the developer gets a 70% and Apple cashes in a 30%.

This has been pretty much the standard. Apple, Google and as you can see in our Steam Case Study, Valve applies the same percentage.

Depending on who you are, you can consider the 30% as very reasonable, especially as it takes away a lot of effort in releasing the product to the public, but there’s also a lot of people who consider this 30% too excessive. This current lawsuit is not the first one to come. A few years ago, Spotify also tried to sue Apple.

Furthermore, Apple makes sure his cash cow is well protected and ensures that there are no ways to circumvent the 30%. They analyze the apps and make sure that they get their cut on single-purchase apps, subscription-based apps and in-app purchases. And here is where Epic Games comes in.

What Epic Games did is to include in their App a direct link to their own market place where users could buy from. In other words, it allowed users to buy through the Apple App store, or directly through them, being the second option cheaper, as Epic Games would save on the 30% cut.

Why is this strategically important

We will not go into legal analysis, chances to win, etc. but purely focus on the strategic reasoning behind this move.

Epic Games released Fortnite on the App store in 2017. Since then it has been installed over 133 million times and the revenues generated from it are estimated to be in the range of $1.2bn.With a 30% cut, Apple has made over $360 million.

Fortnite Game | PS4 - PlayStation

This move is very relevant for Epic Games, as it will give him back control over one of his distribution channels. If you remember the business model canvas, one relevant aspect were the Distribution Channels. These can be direct or indirect. Basically with or without intermediaries.

Selling on the App store turns what should be a direct distribution channel into an indirect. A 30% loss in the revenues/profits is a huge loss for any company, especially if the cost does not represent any value. And here is where the problem comes. For big players like Spotify, Epic Games, Microsoft, etc. the App store or Play Store do not add any value. They have the means and resources to build a product and everything around (sales channels, distribution channels, marketing campaigns, customer support. etc.) without the need of anyone else’s support. Therefore, they are not generating any value for the 30% cost they are suffering.

Currently, there is no way around this. Since Apple has full control of their OS and App Store, and so does Google of theirs respectively, if you want to reach the billions of users that use iOS or Android, you have to pay up.

What’s the End-Game

The goal of this suit, and this is why Microsoft joined Epic Games, is not for Fortnite to be even more profitable. The goal is for Apple and Google to lose control of their App Store. To open it up so that costs can vary and access is open. Epic Games and Microsoft claim that these stores are currently a monopoly held by Google and Apple. And there are antitrust laws in place to avoid companies holding monopolies as this restricts the market and affects negatively both consumers and suppliers (who are not the monopoly holders).

white and black dice on white and black dice

If the lawsuit succeeds, Apple and Google will lose billions. But more importantly, it will be a huge revolution in prices, access and options within the apps. Linking to other marketplaces, to other games, stores or publishers will all be open now. It’s effects can be very far-reaching.

01. Case Study Steam and their Steam Machine

0
Strategy Case Study Steam

Valve Corporation & Steam

Case Study Steam

Case Study Steam: Steam is very well known for being the go-to platform for PC gaming. Valve Corporation’s (the company who owns Steam) platform is the most used for purchasing and playing games worldwide. It attracts dozens of millions of users who love playing on their platform. In March 2020, 20,3 million people were playing simultaneously on their platform, and Valve claims to have over 94million active users monthly. Quite a huge accomplishment.

They are also very well known for some of their games. Half Life 1 & 2, Portal, Left 4 Dead, Counter Strike and especially DOTA 2, are some of their franchises that attract casual, hardcore and professional (e-sports) users alike.

Even though Steam is the most used platform to purchase games and Valve Corporation single handedly controls it, they are a private company owned (50%) by Gabe Newell (CEO & Co-Founder). They can be and are very secretive about their numbers. Obtaining accurate and up-to date information on their numbers is extremely hard. Nonetheless, we have done a lot of research and found some figures.

Quick glimpse into their financials

In the chart below, we can see the revenues Steam generated selling games. The information shows the years 2014 to 2017. This article in 2018 tells us that Valve adapted their revenue terms and moved to charge 30%, which seems to be the standard for app platforms (i.e. Google & Apple).

The information in the chart shows how revenue Steam generated from the sales of games and their respective DLCs. This information is very interesting, but it needs to be read carefully. This number is not the cut Valve took, but the whole amount. Therefore, we have to take into account that Valve would become 30% (or more, before the change in their terms). This data does also not take into account the sales of Software, also available at Steam (i.e. Video Editor 15 Plus, RPG Maker or Liquid Rhythm).

Revenues based solely on Steam’s game sales.

This following chart shows us the actual revenue Valve generated in 2005, 2010 and 2014. In other words, this number represents the cut Valve got from their 30%, including Software, and also including any other revenues from the sale of Hardware and other revenue streams, such as events, partnerships, grants, etc.

Valve Corporation’s Revenues

The gap between game sales and revenues can be clearly seen in 2014, the only year where I could find both data. It might seem like there is a huge difference, as it goes from 1,5bnUSD from game sales, down to 730mUSD of total revenues. Yet, if we take the 30% cut as the average (even though for some smaller companies, Valve might take less of a cut for the first X-number of games sold) this means that 450mUSD were the commissions from games and 280mUSD from everything else. Or in other words, game sales represented about 61,6% of Valve’s revenues.

The Data for the most recent year, 2017, shows a large increase in the game sales. The biggest jump was from 2014 to 2015, with an increase of 233%. Yet, from 2014 to 2017, Valve has had a CAGR of 42,06% which is very impressive.

To end this financials section, let just let this sink in. In 2017 Valve generated only from the sale of games 4,3bnUSD. Which means that their revenues were approximately 1,29bnUSD (30%). And this does not take into account all other revenues. Even if we take today’s known employees at Valve (360), this represents a revenue/employee of 3.583.333,33 USD.

Case Study Steam: The Steam Machine

Steam Machine by Alienware, their mayor provider.

The year is 2012. Windows released their Windows 8 in August. There were very harsh critics for this version of Microsoft’s OS. Gabe Newell, Valve’s CEO, was one of the most critical ones. Well known are his remarks:

“I think Windows 8 is a catastrophe for everyone in the PC space. I think we’ll lose some of the top-tier PC/OEMs, who will exit the market. I think margins will be destroyed for a bunch of people.” – Gabe Newell

Nobody really knows if that was the trigger or they actually had it planned before that. In 2012 there were already some rumors of Valve considering developing a console (known back then as the Steambox). But the official announcement came at the end of 2012. In Valve formally announce they were working on developing a console.

The years passed and after some delays, the Steam Machine finally came out in November 2015.

What is the Steam Machine?

The title perhaps could be more accurately portrayed as what “was” the Steam Machine, as it was kind of discontinued in 2017. But let’s first focus on the idea of the Steam Machine.

Valve’s console aimed to be a hybrid between a PC and a Console. It would run on Linux’s Debian 8 and offer the player an efficient and open OS on which to play games with. Steam OS was the brains of the Steam Machine. However this brain required a very specific heart to run. The system specifications for the Steam OS to run on were, and still are, very limiting when compared to PCs that run on Microsoft or Linux. However, when compared to consoles, they allowed for quite some possibilities.

The machine came with the Steam Controller and was manufactured by different vendors (Alienware, iBuyPower, Falcon Northwest, CyberPowerPC, OriginPC, etc. ). Since the requisites on where to run the OS allowed for different Hardware to be used, the prices ranged from 499USD up to a staggering 6.000USD.

Valve was looking for a perfectly balance hybrid between Consoles and PC that allowed the user to freely access an open OS without any restrictions.

The idea behind Valve’s console was to find balance between enabling gaming and Media options. Players should be able to enjoy their games, playing with friends and family as well as enjoying the media options a computer had to offer (browsing & other media services, media sharing, family sharing, etc.).

Furthermore, Steam OS was, and still is, available at Steam for free for anyone who want to create their very own Steam Machine.

The theory looked very promising. End of 2015 the console was officially released and could be purchased by anyone who desired to do so.

No one really knows how many machines were sold, however, by mid 2016 it is estimated that less than 500.000 machines were sold. For the expectation created and Valve’s ambitions, this number is extremely low and clearly showed Valve had failed to enter the console marked.

But if the theory and the product looked so promising…

…What went wrong?

Unlike some other failures, where bugs, bad software, underdelivering or overpromising might be at fault, the truth is that Valve delivered exactly what they said they would. So, why did they sell so few units, eventually letting the Steam Machine die in less than a year?

Valve’s Strategy at fault

Simply put, something in their Strategy was or went wrong. Even though they did have a promising initiative, they failed to implement it the right way. Judging now is very easy, so let’s travel in time back to 2012 and analyze what they probably thought was a good idea, and what they did wrong when they moved forward with it.

2010-2015

This lustrum was a good time for the video game industry. In the graph below, we can see that Console (including handheald) gaming was still the biggest segment, however mobile was gaining more and more traction. PC gaming was big, however if we look at the evolution of the previous years, it was still quite smaller than consoles.

Windows 8 came out in 2012, prompting Valve to consider the consequences of relying on Microsoft’s OS as their sole platform (representing today still more than 95% of their users, as shown in the graph below).

Valve feared that if Microsoft decided they cut cut them off, create a monopoly or affect their business model in a way that profitability would be in jeopardy, they would have no way to fight back. If the performed an analysis fo the industry back then, they probably saw a trend for consoles being very much relevant. In fact, looking at the evolution, they could have easily thought that consoles would dominate the market for many years to come.

Entering this market, being a well known player already, looked certainly as a good decision.

Furthermore, their business model looked very enticing. They did not want to compete with the PC market, but rather create their own market in-between PC and consoles. They wanted to create a hybrid, leveraging their platform and library of games and enter this way the living-room space. This was clearly communicated and the discourse maintained by Valve in the years since they announced the Steam Machine until they released it.

After getting into what perhaps were the thoughts of Valve in 2012, we see it actually makes sense to enter the console market. It was a very competitive market, but it lacked certainly certain Media -related services some console gamers were very much looking for. If the idea and motivation behind this plan were so right, how did it turn out so wrong?

The mistakes

The problem was not with the motivation. The problems were with the Strategic details:

  • Customer Segmentation: Either their estimates on how large the customer segment that they were aiming for were too optimistic or they wrongly established their profiles.
    • You had two options to acquire the steam machine. Either purchasing a pre-made and pre-installed console by one of the vendors or doing it yourself. The latter relied on the customer being very capable to navigate around the installation, which required and still requires a certain technical capabilities. This option had no incentive for Valve, as they would not be selling any Steam Machine, but rather transform a user that already was using Steam on their computer, to do so in their living-room.
    • They were aiming at console players who either wanted gaming on a PC as well, or who were looking to use some media within their systems. The switching cost for a console user is and was extremely high. If (in 2015) someone using the Playstation 4 would had wanted to switch to the Steam Machine, they would have had to buy another console (at least 499 USD), and a complete new library of games.This shows that they targeted a very specific segment of gamers, but that required them to spend a lot of money to do the change into the Steam Machine. They better offered these users a lot in return…
  • Value Proposition: The value proposition was very clear for Valve. A hybrid between PC and a console, that “simplifies” gaming and enables the user to use the console however he wants, thanks to the Linux based Steam OS.
    • Issues: This value proposition was unfortunately not very attractive for their target users. If they were already Steam users, it was cheaper to just buy Valve’s switch, or connect their PC to their living room TV, rather than to buy a new computer/console. The OS was neither fully a computer nor a console. In other words, if you wanted to use it solely as a console, you already had very good alternatives that came with a great game catalogue and an established community. If you wanted to use a PC, you were not going to feel very familiar with a Linux-based system. Furthermore, getting a Steam Machine would not guarantee that you could play all games on Steam. Some required a more powerful Hardware than the basic versions would offer, and even worse, some games required specific Hardware to run.
    • Exclusives: Another big problem with the Steam Machine is that it was just a stand-alone device. There were no incentives to buy it. One of the key selling factors of a console are the games that can be played with it it. If you could simply play any game you could already play on a PC, why would you bother buying a special device? Sony, Microsoft and Nintendo had their franchises with their exclusive titles. Steam came with what they already had. The steam library.
    • Price & performance: The Steam OS did actually run very smoothly on the Steam Machine. However, if you wanted to really get all the juice this machine had to offer, you better prepared your wallet. The 499 USD was the most basic version. However, an average Steam Machine would rather run around the 800 up to 1.200 USD. Basically, same as a decent computer. This price was twice or trice the price of their competitors. With no exclusives, why would anyone buy a Steam Machine instead of any of the other consoles or just a computer.So far, we have seen that the customer segmentation was a very niche one and with very high shifting costs. And their value proposition did not really cover these costs. The last resort would had been for Valve to really to something very different to everybody else.
  • Differentiation: The risks when just building a hybrid model is that, unless you do it very well, you’ll just be “neither or”. Valve wanted to bring the computer to the living-room. Their motivation was an open and accessible OS to play games with to take away the risk of monopole from Microsoft. Unfortunately, they did not offer anything to their niche customer segment worth their switching cost. Neither did they really differentiate themselves from the competition, nor from what they were already doing on PC. The Steam Machine was nothing special. It did not differentiate all too much from a regular PC. Neither did it from a regular console. The few extra media capabilities were not enough to move console users from their valued console into a complete new environment. Furthermore, the trends in the console were already showing more and more media capabilities. When the Steam Machine came out it 2015, PS4 was already out for some years and Microsoft had released Windows 10, which did what Valve wanted to do much better, seamless and with Windows, which meant 95% of the users were already familiar with it.

Altogether, Valve had a nice dream for an open-based OS to bring gamers together. Unfortunately, they were not able to correctly address the needs their target customers had nor differentiate themselves enough from the competition. This led to very few consoles being sold and Valve ultimately discontinuing the production, even though this was never officially announced. They just let vendors put them in the background of their stores until with time, they just faded away.

Conclusion:

Saying the Steam Machine was an utter failure would not be fair for Valve. There were many things that they did right. And even within the failure, they didn’t lose much, thanks to a very well thought of approach to the manufacturing process.

What Valve did right:

  • They identified a need currently not covered in the market. This would have allowed them to create a blue ocean and potentially acquire a totally uncontested market segment.
  • They minimized risks by not manufacturing themselves the machines. Since the vendors were the ones producing the hardware, mounting it and installing the OS, Valve had no operational costs. Their only losses were in the development of the OS and the marketing campaigns.
    • Furthermore, they were able to link their different hardware devices (Steam Controller and Steam Link), so that even if the Steam Machine, they would still be able to sell those separately, which they are still doing today.
  • They delivered what they promised. The few that actually acquired a Steam Machine, got exactly what they expected.

What Valve did wrong:

  • They did not accurately assess whether the market segment they targeted would be large enough for their console to take off.
  • They did not differentiate themselves from their competitors.
  • They did not take into account the Value Proposition. From Valve’s Point of View, they were offering a great deal. A complete new environment with a free OS for anyone to use, either by themselves or purchasing a finished machine from a Vendor. However, they did not take into account all the points discussed above that made this machine a very poor choice.
  • They were not fast enough. Three full years were needed for the Steam Machine to see the light. During these 3 years, the PS4 and Xbox One came out, offering already partly what made Steam Machine “unique”. In 2015, before the Steam Machine came out, Windows 10 already did what they would do, better. In other words, they were outrun by the competition.

Lessons learned

Just having a great idea or a great product is not enough if you are not able to design a good Strategy, covering all the details. And even if the Strategy is perfect, you need to still take into account what your competition is doing. If what you are doing is not truly something completely unique, it is very likely your competition will do it as well. If all you rely your Strategy on is being “the first” (AKA First Mover Advantage), you are exposing yourself for any delays (like in Valve’s case, the controller that forced the delay of the Steam Machine from 2014 to 2015) to dismantle your whole plan.

Strategy made easy for the Video Game Industry

0

What the heck is “Strategy”?

You have 5 minutes to cross a river. If you don’t, you’ll be eaten by a tiger. If you try to simply swim across, you’ll drown. How do you do it? That’s strategy.

If we think about business strategy, crossing the river is your goal, your business growth. The tiger is the competition. If you are not quick enough, the competition will catch up and eventually take you down. The river is the market and your own costs. If you try to just “go with the flow”, you will eventually face stagnation.

In other words, business strategy is a plan. It is how you will get from point A to point B, using whatever means you have available.

Strategy

Let’s go into a little more depth for a minute. Having already established that strategy is nothing but a plan, the details of said plan can be many. And here is where strategy starts becoming interesting as well as complicated.

If we continue using the example above, many would say “To go from A to B” is the plan. However, that’s not really the plan. That is your goal. The plan would be how you would do it. You could say, I’ll get from A to B by cutting down a tree and using it as a bridge. This would be a reasonable strategy indeed.

However, now all the little details start coming into play. Do we actually have the tools to cut down the tree? Will we be able to cut it down, place it, cross it and then push it off, before the tiger gets us? Are we strong enough to move the trunk?

All these things have to be considered before actually building the strategy and here is where a lot of people underestimate the effort, complexity and value of Strategy. The strategy we build has to suit us and our capabilities.

Quickly said, to build a strategy, you need to analyze who you are, where you are at, where you want to be, what tools, capabilities and/or means you have available and how your surroundings can affect (positively or negatively) your efforts to go to your desire point.

What a Strategy is not.

I believe it is equally helpful to continue talking about strategy as it is to talk about what it is not. Let’s go into the business world and forget for a second our wilderness example. Unfortunately I have had to face CEOs saying their “strategy” is to increase sales or a to be more profitable. All these points are very valid business goals, objectives or even results of a strategy, but they are not strategies per se.

The mission and vision of a company is not a strategy either. It might affect the strategy in some ways, but it is not and will never be a valid strategy.

Finally, projects, action plan, new products or services, etc. are also not a strategy, even though they can be an important part of one.

It is really important to stay away from false and wrong meanings of strategy. Claiming to have a strategy in place when we are actually talking about goals or objectives will lead to confused employees, inefficient implementation, higher costs and potentially complete and utter failure to achieve these goals. At best, this will be a (very) expensive mistake, and at worst, this can lead to the company having to close down.

The importance of Strategy

The last paragraph leads us into why strategies are so important. If applied right, this can mean huge advantages but if applied wrong (or not applied), this can mean irreparable damages.

Strategy

Of course, life’s not black and white and neither is Strategy. I’m sure you all can think of small businesses that have been doing fine without a strategy. Surely there are some cases like that. Nonetheless, this is mostly due to these businesses being something very local and for a very specific product (i.e. a village bakery or butcher). This means, that either the “lion” is very far away, or the “river” is very shallow.

There are particular conditions that enable operating that way. But these days are coming to an end. Digitalization and logistics to a scale never seen before (Amazon, Rakuten, etc. using DHL, Fedex, UPS, etc.) are forcing even these small and local businesses to adapt or end up closing. IN other words, the “lion” is coming closer.

Having said that, let’s go into the reasons why having the right strategy is so important.

In the world we live in, we have to work with limited resources such as time, money, products, people, information, etc.

Furthermore, we do not live in a static world. Around us, everything is constantly moving. While we sleep, someone on the other side of the world is working. While we take one day to produce a screw, someone is working to do it in half a day. In other words, no matter if we like it or not, we are in an endless race. This means that even if things are looking pretty good for us right now, if we don’t keep moving, soon we will be behind our competitors.

If we can agree that we live in a constantly moving world, with limited resources, we will also agree that using our resources efficiently is essential. As is to make sure we find ways to stay ahead of our competitors (we can do so for instance with being different, better, holistic, specialized, etc.). Here is where Strategy is essential.

Another key element of Strategy that is often times overlooked, is communication. Once your strategy stands, it will serve as a clear route-map. Everyone in the company will know what needs to be done, why it needs to be done and how it needs to be done. This will not only serve to make sure the big picture is clear, but also everyone is rowing in the same direction.

When building a Strategy, you will analyze what resources you have, how you can use them, what the market is doing, what the customers actually want, how you can differentiate yourself from the competitors and how you can keep growing, whilst still being profitable.

And that is the ultimate goal of Strategy: Profitable Growth.

Actual elements of Strategy

As just explained, when building a Strategy, you look into many different elements. Luckily, we are not the first to do so, so we have some helpful tools at our disposal.

A good way to get started is using the famous Osterwalder Business Model Canvas. This framework will have you ask yourself the most basic questions about yourself (key activites, value proposition, key resources), the market (customer relationships, customer segments and channels), as well as who your allies (Key Partners) are or could be. All these questions talk about value creation. Once you have created value, the other two remaining questions are how you are going to capture it (revenue streams) and what will be your costs (Cost Structure) which you need to take into account.

Strategy - Business Model Canvas
Osterwalder Business Model Canvas

Certainly there’s a lot to digest here. And even though this is generally accepted as the starting point for any start-up, doing this from time to time in seasoned companies can also help.

There are alternative models that try find out even more information. An example is Vives and Svejenova’s, 2014 Business Model Canvas, where they also ask for the motivation or driver, which is a very important question to ask. And while there are different approaches to the Canvas, there are also a huge list of other useful tools to analyze internally or externally, such as:

  • Porter’s 5 Forces Analysis
  • PESTEL Analysis (Political, Economic, Socio-Cultural, Technological, Environmental & Legal)
  • SWOT (Strenghts, Weaknesses, Opportunities & Threats)
  • Sources of Competitive Analysis
  • Ansoff Growth Matrix
  • The Delta Model
  • RATs & CATs
  • Etc.

Today we are just listing a few examples. In another posts, we will explain the different frameworks, how to use them and what information they provide.

All in all, the purpose of these tools is just to provide a guideline to ask and answer the right questions. Ultimately, answering these questions, you will realize what you are lacking, or perhaps, what your key competitive advantage is. In other words, you will be able to improve your weaknesses and exploit your strengths.

“This is all very nice, but I thought we were talking about gaming here…” – Right! Let’s get into why Strategy matters so much in the video game industry.

Strategy & Video games

If you just didn’t jump to this point, by now you will have a good understanding of the very basics of Strategy, the consequences of using it right and wrong and some of the elements that can help you build one.

Why is Strategy so important, especially, in the video games industry?

Strategy in the Video Game industry

The video game industry has grown drastically in the past 20 years. It has surpassed any other entertainment industry, generating more revenue than movies & music combined.

It is a very competitive industry. There are millions of games available, looking to grab the attention of the gamers, which has proven to be not only extremely difficult, but also very expensive.

The market has experienced huge disruptions in the past decades. Development, the product itself and how and where it is played has changed drastically. The costs have also changed considerably and present many different structures, depending on what you want to do. It’s not the same developing a simple game for an App store in a few weeks, than a AAA game with hundreds of developers over the course of 5 or 10 years. And even mobile games are becoming more and more complex, blurring the line with console games even more. And let’s not even get into Marketing, which is now where many companies spend the most money nowadays.

It is also one of the industries that present the most options to monetize the same type of product. You can sell your game one-time, you can offer subscriptions, freemium with in-game purchases, you can offer DLCs, Pre-Purchase, Early access, etc. or combine everything said so far anyway you please.

The above is just the tip of the iceberg. The reach, complexity and speed of the video games market makes it essential to build a strategy. And to do it right. We have seen companies almost go under, and also get back up on their feet. Let’s finish with a great example: Nintendo.

Nintendo was fighting with Sony and Microsoft in the early 2000s. It was a fierce war to see who could get the most users out of very limited pool. Instead of fighting for the same already half-eaten pie, Nintendo decided to open up the market and basically create their own pie (or how it is called in strategy, a blue ocean). Instead of fighting with Sony and Microsoft in the console wars to offer the best graphics and quickest processors, Nintendo opened up the video-game market to the casual gamers. They launched the Wii, attracting kids, elders and everything in-between. This was a brilliant strategical decision.

In other words, what Nintendo did here is they decided to stop investing their limited resources in something which was already being contested by others, and instead focused on doing something else, that would cater to a different audience, for which they would not have to fight for with the other two key players in the market.

This is just one of the thousands of examples we can find in the video game industry. Understanding and answering all the important questions, analyze the answers and build a strategy that will move the company into a favorable position is something many companies have done or should have done.

Steam, Activision-Blizzard, King, Rovio, Epic Games, etc… are all cases of great strategic thinking. It is equally important to analyze the big failures of the industry, too, for which are many, some that still survived (Nintendo or Microsoft) and some that went under (THQ or Pandemic Studios) or were forced to be acquired by others in unfavorable positions.

In future articles we will cover strategic analysis of companies and their choices, news and trends of the industry and really anything related vide game viewed from a strategic perspective.

Until next time!