Video Game Venture Capital – VGVC

Manifesto Games founder Greg Costikyan points us to a couple of interesting posts from Meez CEO and angel investor Sean Ryan, on his conclusions drawn from Casual Connect Amsterdam, discussing the pain and opportunity in the casual games space.

Both posts are worth reading for anyone playing in the space. Costikyan summarizes the ‘Pain’ post well in saying the ‘landrush is over’. Rising development costs, a glut of content – much of it free – resulting in falling average selling price, increased power and exercise of that power by what Ryan labels distributors*, and increasing competition from cheap content suppliers, are making the business of developing casual games far more challenging and less lucrative than it was just a couple years ago.

[*Ryan uses the term 'distributor' to refer to both distributors like Oberon, Real, etc, and casual game portals like MSN Games, Yahoo, and BigFish that they often supply. There are important differences between the two, and the power each strata in the business yields depends on how consolidated traffic is between the main sites. Distributors like Oberon have become increasingly powerful in recent years as traffic has diversified across a larger number of niche-specific portals. This is analogous to the shift in power that took place in computer retail in the 90's as sales shifted from thousands of mom and pop shops to a few big-box retailers, with distributors like Ingram Micro and Merisel losing influence, and with it margin, in the process; of course in the casual games case, the shift is in the opposite direction. To Ryan's point though, both are higher levels of the ecosystem holding power over the lowly developer]

While all of this is interesting and true, its not exclusive to casual games.  While Casual Connect was going on, I sat half-way around the world at the DICE summit in Las Vegas, where Mitch Laskey and Keith Boesky were on stage debating whether consolidation would kill innovation. One of the more interesting points in the debate occurred when Laskey (a VC himself, with Benchmark Capital) claimed he had invested in a developer and his co-speaker interrupted “Bullshit!”, asserting that the company “is a platform play” more than a developer.

Similarly, while we don’t know the full details of what some casual game devs that have received recent funding are up to, our bets are that they’ll ALL turn out to be platform plays, game aggregation communities, or casual game aggregators or publishers. About the only example we can think of is GameLayers, and even that is arguably a platform play due to its meta-game type of experience.

A more-than-once discussed topic in DICE cocktail conversations was the contrast between VC’s investing in publishers, platform providers, and technology companies, but not Game IP, while publishers were very much grokking the value of IP and leaving a trail of acquisitions to prove it (Bioware/Pandemic being the poster child in most of these discussions). One theory frequently floated was that the majority of VCs putting money into the games segment were traditionally technology investors, rather than having a more ‘Hollywood’ background. Of course, in the casual games segment, where IP can be immitated as quickly as technology and game mechanics, is this any safer a bet? Uncertain.

In many ways, the landrush may be over in any segment that’s proven profitable. With retail games, the stakes of high development costs mean publishers exercise power. With console downloadable games, its only a matter of time before the platform owners dial up their margins and control over their own channel. With casual games, publishers with fight for virtual shelf space and squeeze out indie developers while distributors and portals will each leverage their strengths.

So with all that considered, should VCs dare put money into casual game devs? 

The answer of course, is Yes.

However, investing in a commoditized space with decreasing ASPs and increasing competition would be a bad idea. The key is whether the investment opportunity is in a company that is building a *differentiated* product or experience.

Ryan points to a couple tactics in his opportunity post, recommending that developers maximize distribution through use of Flash and by seeking additional distribution parterships, as well as developing their own direct-to-consumer web sites. Not that these are bad ideas, but they strike us as fairly limited thinking.

More sound tactics for early stage casual game developers might include limiting distribution in exchange for better terms or favored marketing status (e.g. Everyday Shooter signed exclusively with Sony on PS3 and got put on a marketing pedestal in exchange, vs being just one of many games on Xbox Live Arcade or Nintendo’s service). Another tactic would be to explore alternative business models. Item-based sales is an oft-cited model, but examples like Webkinz and UBFunkeys are even more novel. Finally, rather than looking at Facebook or MySpace as distribution vehicles, treating them as development platforms requiring unique content.

Regardless of the tactic, a developer striking out in a new and bold direction (e.g. the GameLayers reference above) strikes us as a better investment than one setting out to hit its head against the same brick wall as a thousand other players. 

Tags: , Benchmark Capital, Casual Connect, Casual Games, DICE Summit

This entry was posted on Sunday, February 17th, 2008 at 2.47 pm and is filed under macro trends, shows & events. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.