At the Social Gaming Summit recently, on the panel about Monetization and Business Models, David Perry mentioned that there were 29 business models for games that he was familiar with. I asked him to do a guest post listing them all and he agreed.

David Perry is a 27 year industry veteran whose games have sold over a billion dollars at retail. He’s the Chief Creative Officer of Acclaim Games, Inc. and prior to that was the founder of Shiny Entertainment, Inc. which was purchased by Atari. For more information, please visit: www.dperry.com

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Potential Video Game Monetization Methods.

These models come from 25 years of watching people experiment with game monetization.

Note: The good news is there’s lots of choices and many of the models can be combined.

List © 2008 David Perry. www.dperry.com

1. Retail (bricks & mortar), selling boxed product at places like EBGames, Gamestop or Virgin Megastore. This also includes mom & pop stores, hardcore specialist gamer shops, and online retailers like Amazon.com that ship the product to your door. The gap in this market is “same day” physical delivery of games too big to download or 1st party titles (basically combining online & bricks and mortar in one solution.) The future of this space is pre-paid cards as the consoles will (in the future) go online only, distributing everything directly to the consumer, so retail (to make it worth selling the hardware) will need a cut of the software sales. Hence prepaid cards. The Gamestop tactic of re-selling USED games (to avoid paying for new product) will finally be over. To drive users to retail, the making of special “enhanced” versions just for their retail chain is a common practice.

2. Digital Distribution (direct download, direct to consumer), like the Steam service from Valve Software, the PlayStation Store or Xbox Live Arcade from Microsoft. This also technically includes “unlocking” access to a game already on a service, like the faux install process on Facebook (however the player would have to pay to do this unlock.)

3. In-Game Advertising (either obvious billboards or branded items in the game world, or subtle product placement (certain clothing, sunglasses or vehicles like Gaia Online), or built into story elements (like the hero’s girlfriend works for a Neutrogena). Companies like IGA, Massive, Game Jacket, Mochi Media, Google, VideoEgg etc.

4. Around-Game Advertising (basically making money from banner & skyscraper adverts that circle the gameplay window), this is common on flash game aggregator sites, they use services like Google, Commission Junction, personal affiliate deals etc. The revenue comes from CPM (cost per thousand views), CPC (cost per click), CPA (cost per acquisition of a player), CPP (cost for a “real” player who really plays for a certain time, or to a certain level.)

5. Pay Finder’s Fee from First Dollar. This allows you to pay much higher finders fees with no risk. Like offering (as the finder’s fee), the first $25 that comes in from any player they find. You balance the fee to a sensible percentage of the average income you get from players. We [Acclaim] get around $70 per paying player, so this seems reasonable.

6. Advertgames (the whole experience is an advert), common on movie websites, can also be big like America’s Army or the Burger King games on Xbox 360. I did one of the first of these called “Cool Spot” for 7-UP. The advertiser helps fund the game and depending on the deal, that determines who earns cash out of the revenue. Your reputation will impact this equation.

7. “Try Before you Buy” / Trialware / Shareware / Demoware / Timedware (this is letting you play crippled, shortened, or restricted time versions of a game for free, while trying to up-sell the full version.) This is a real balancing act as too much in the demo can kill any hope of future sales. Xbox Live has been experimenting with this concept, they seem to have hit the sweet spot by giving one playable level and then giving a big reveal (like there’s a giant boss monster around the corner) then they say “Buy the full version to continue!”. That’s basically the ‘cliff-hanger’ trick, and just like TV it works.

8. Episodic Entertainment (borrowing from the TV model), you either buy the episodes in a serial fashion as they become available, you can pay for all episodes unlocked for a period of time, or they are sold as expansion packs.

9. Skill-Based Progressive Jackpots (where players buy a ticket to enter into a tournament) this generates a progressive jackpot and winner who reaches a certain (winner) status wins the jackpot. You keep a percentage of the jackpots. The game must be skill based.

10. Velvet Rope or Member’s Club (where the user pays for VIP access), they get special privileges and access to special areas on your site or in your game. They sometimes get special access to new product before anyone else etc. (Basically the more interesting perks you give, the more likely people will want it.)

11. Subscription Model (like World of Warcraft or Conan) paid monthly, usually by credit card or automatic debit payment. It’s sometimes coupled with a retail purchase to get the install files / manual. Commonly players set up the credit card payments and don’t stop them, as they want to keep the game ‘available’ or keep their characters alive that they’ve worked so hard to create. (It’s pretty great to get a subscription from people that don’t even play, so expect more people to design games were they will clearly KILL your characters if you stop paying. Not good for players, but it’s on the list as it’s a monetization method.)

12. Micro-Transactions (small, impulse driven up selling), for vanity, saving time, better communications, leveling up faster etc. These are generally paid for using virtual points (earned in the game) or the points being bought by the player for real money. A new trend is using Friends to buy these items, where the item just costs you inviting a friend to the game, or an amazing item costs you inviting ALL your friends to the game. Another trend is to sell consumable items like actually selling the bullets you fire, or buying gas for the car you race, however this really grays the “free to play” line.

13. Sponsored Games / Donationware (serious games, games for good, charity games), these are the games that are somehow helping society, so could be paid for by a philanthropist, or by a charity or non-profit, or by player donations. www.Onebiggame.org is an example.

14. Pay per play / Pay as you go / Pay for Time (like the old arcade machine or pinball system), you only pay for what you need, for a pre-set number of lives, or as long as you can last. Also used in Internet Cafes and game parlors. This model could be used for game time online as well.

15. Player to Player trading of Virtual Items (letting them trade land, property, characters, items, also by auctions). You keep a cut of all the money exchanged. You also keep the transactions safe for the player (they don’t have to go to the gold farmers or risk the black market for characters.) Some games let the players cash this money out of the game, so it can become a full time job, but is also a major fraud generator (they use fake credit cards, buy things, trade things, sell for cash, cash out).

16. Foreign distribution deals (like the movie industry), where you need funding, so you pre-sell your foreign distribution rights in advance, then use that money to fund the project in the countries you care about the most. www.gameinvestors.com will be helping people do this.

17. Sell Access to your Players (like lead generation, special offers etc.), this is where you monetize your user database by inserting special offers, or personal profile questions into the registration loop. Like when you register, you’re asked if you would fill out a profile in return for virtual points. This is then paid for by an external agency who collects the data live. (Value is equal to how exclusive the data is, how detailed (revealing), and how fresh.) The agency would generally give you the questions and the capture code.

18. Freeware (get lots of users), it’s not a plan to make money, but then again, if you make something that’s very compelling you can expect offers to acquire your software, company or technology.

19. Loss Leader (focus on your real goal), meaning you sell the game far too cheap. There’s clearly TOO much value for money, (like the PS3 Hardware strategy). You use the passionate following to your free game to help sell something else, like a Toy, TV or movie deal, and that’s where the real money is that you were focused on.

20. Peripheral Enticement (the game cannot function without a piece of equipment), so it’s really a way to make you money on the hardware. (Gym equipment is a good example, like the virtual bike or rowing games, you tease them with the software into a very expensive purchase.)

21. Player to Player Wagering (they place wagers before they go head to head), the winner keeps the pot and you keep a percentage of every pot. The games they play MUST be skill based games. Gambling virtual items is another technique, where they buy/earn/trade virtual items, then bet them on maybe a 1-on-1 basketball game, the winner keeps the items. (You made your money selling the items to them in the first place.)

22. User Generated Content (letting users make endless new content), they can sell it to each other, or sell access to it, or get people to pay for time spent playing it, for points they can turn into cash (like IMVU), and you keep a cut of all sales.

23. Pay for Storage Space (on a server) to save progress, stats, game data etc. As an example, this can be used for Karaoke games where you pay to store your library of songs. (Or at least you think you do, even though you are technically just making virtual storage space for your songs.)

24. Pay for Private Game Server (where your friends come to play), like renting multi-player servers, or giving your friends a maximum quality experience. This is more for the hardcore First Person Shooter multi-player crowd.

25. Rental (stores like Blockbuster, or online like Gamefly), the old rental paradigm meant trying to design the game so it couldn’t be played through within one rental period. These days with the Netflix / Gamefly Model, it doesn’t matter anymore.

26. Licensing Access (like signing a deal with a chain of cyber cafes to unlock your game for their users.) Or using your game as a part of a TV show. Or letting a corporation use your brand in their advertising such as McDonald’s Line Rider commercial

27. Selling Branded Items from your site (using a service like Cafepress) - You need to work hard on your identity to make this interesting for people to wear. For example, Gamer Vixens http://www.cafepress.com/gamervixens/

28. Pre-Sell the Game to the Players. This model lets your fans actually fund the development of the title. For example, they pre-pay $5 in advance for a $50 game. (They also get to see it get developed and get to provide feedback.) When the game is launched, they get it for free (as they already paid the $5 advance.) Clearly you have to either have a reputation or a very hot idea to generate enough interest in advance, but once you get on a roll, this can work.

29. Buy Something, get the game for Free - This is the Trialpay model, where the player buys something they want (like a subscription to Gamefly), then Gamefly gives Trialpay a nice fat fee. From that fee, you get paid, and Trialpay gets paid. So by signing up to Gamefly, they get their service and they also get your game (technically) for free.

I’m sure there are plenty more models you’ve seen over the years, if you think of some I’ve missed, please email me at: dp@dperry.com

This is going to hurt.

A lot.

Washingtonpost article on the problems faced by investors when 0 exits happen.

No return on capital, means no returns to LPs.  No more money to recycle back into new funds, or cash available for capital calls.

This can also mean the herd will get culled quickly.

I’m not sure how many of the vintage 1999-2000 funds are still around, or how those partners are doing at this time.  I’m going to guess that many of them will not have a fund II.  Folks who are trying to set up a fund I right now are going to have problems.  When even good deals don’t get done, bad deals will disappear.

In these times of tough red ink, it may become easy to know which companies to invest in. 

Just wait.

The companies that are still kicking after 18 months will probably be around for 18 more.

It’s draconian, but for anyone sitting on cash at this point, there may be little incentive to cut a check today.  Given the high risk/reward of VC, the marginal cost of having cash sitting in the bank, isn’t that bad.

An former boss used to joke that during the bust years, the BEST thing to have done was go to the beach.

As a money manager, during that time, if you just took the 50 mil, put it into T Bills, and came back, you’d have had better performance that most everyone, and been in the top quartile of managers, just because you sat on cash.

But our job is not to sit on cash.  We’re supposed to go out there and find opportunities to make money.  But just because we find them, doesn’t mean we’ll be in a hurry to spend.  Not until it makes sense.

This is not going to be a fun time for anyone in the industry, from entrepreneur to investor.

Time to pick up your tools and build again.

为什么VC被踢出IPO了呢

The Q2 goose egg for VC-backed IPOs has every pundit and prognosticator coming out of the woodwork to weigh in on what’s “really” going on.

The NVCA polled VCs and found investors attributing the whiff to a variety of short-term shocks such as the credit crunch and Sarbanes-Oxley.

But the story of an increasingly anemic IPO market goes back more than a decade. In 1992, a VC might expect as much as 65% of his or her exits to be via IPO. That number fell steadily to 10% by 2005 and has continued to fall since.

The VC industry is laboring under a set of outdated assumptions, a structure optimized for conditions no longer applicable and an unwillingness or inability to embrace the tectonic change it is undergoing. The hand wringing about various short term shocks (such as skittish investors) that sunk the second quarter’s IPOs misses any serious discussion of the long-term systemic shifts that many VCs have failed to act on.
I offer five forces that underly the observable change in modern venture capital:

• The technology industry has matured to the extent that startups are viewed as outsourced R&D by big companies.
• The consolidation of technology verticals via either winner-take-all competition or multi-billion dollar acquisitions has decreased the number of would-be customers and acquirers for focused technology offerings.
• The over-availability of growth capital promotes competition among startups for scarce resources such as technical employees and early-adopter customers and raises development costs accordingly.
• Attractive investments may be increasingly found through creative deal sourcing and structuring rather than sexy technologies, big markets or “hot” entrepreneurs. Similarly for successful exits.
• Successful firms have formalized their succession planning to preserve their virtuous cycle, making specialization an increasingly attractive strategy for first time funds.

What else goes on this list?

天使投资系列文章

The really interesting story these days about tech exits is not the small number of really big acquisitions, it’s the big number of smaller acquisitions. For the typical entrepreneur and angel investor, these smaller transactions are an excellent way to make several million dollar capital gains and should be part of every company’s exit strategy.

I’ve written before on why this is a great time to plan an early exit. The tech M&A market is hot. Big companies know they are better at acquiring than developing new ideas in house. And big companies have lots of cash.

The financial media, and most bloggers, write about the really big startup exits like Club Penguin, YouTube, Skype and MySpace.  Those are certainly exciting exits and great startup stories.

But for the other 99.99% of entrepreneurs and investors, the really exciting news is the large number of tech startups being bought for under $30 million. Many of these exit transactions are so small they aren’t even press released. In my own portfolios, where I have been generating some solid early exits, recent transactions have been in the $15 to 30 million range.

Several smart VC bloggers have also been writing about this trend over the past few years. I tried to find some quantitative data to illustrate what’s going on in early tech acquisitions, but I wasn’t successful. (I found one database that looked promising but didn’t feel like parting with several thousand bucks to back up this post. I also figured that many of the smaller transactions wouldn’t be included anyway.)

The best reference I found was an article by Om Malik titled “The New Road to Riches” which was in Business 2.0 a couple of years ago.  He reports that the Mergerstat database, which includes about 5,000 tech acquisitions per year, showed an average selling price of $12 million.

I spent some time on Google searching for recent acquisitions of tech companies and quickly pasted this list together. Most of these are pretty big successes that millions of us use every day.  They are also great startups that all sold for $30 million or less.

• Google bought Adscape for $23 million (now Adsense)
• Google bought Blogger for $20 million (rumored)
• Google bought Picasa for $ 5million
• Yahoo bought Oddpost for $20 million (rumored)
• Ask Jeeves bought LiveJournal for $25 million
• Yahoo bought Flickr for $30 million (rumored)
• AOL bought Weblogs Inc for $25 million (rumored)
• Yahoo bought del.icio.us for $30 – 35 million (rumored)
• Google bought Writely for $10 million
• Google bought MeasureMap for less than $5 million
• Yahoo bought WebJay for around $1 million (rumored)
• Yahoo bought Jumpcut for $15 million (rumored)

Why is this happening now?

One of my friends in a Fortune 500 company explained it to me this way (paraphrased): We know we aren’t good at new ideas or startups. We basically suck at building business from zero to $20 million in value. But we think of ourselves as really good at growing values from $20 million to $200 million or more. It’s a different skill set than starting things. If we see an acquisition priced at $100 million, then our view is that it’s already out of our sweet spot for adding value. But at $20 million, it’s really easy for me to get it approved.

How should this affect the exit strategies for entrepreneurs and angel investors?

It seems pretty clear that the optimum strategy for tech startups today is to design the company, and its corporate DNA, so everyone is aligned around the idea of an exit transaction in the under $30 million range. The good news is that these exits can often be completed in just a few years from startup. They also have a much higher probability of success than swinging for the fences and hoping for a big NASDAQ IPO.

This exit strategy is nicely summarized in “The New Homerun” by Tom Stein in Mergers & Acquisitions magazine, May 2008. He said: “Startups must be content with hitting singles or doubles, that is, a buyout of $50 million.”

As an angel investor that works well for me. What do you think?

Before I went on holiday I asked Are serial entrepreneurs any better than first time entrepreneurs? and got an avalanche of comments which raised some further points of interest that I have been meaning to share with you for the past week or so (or should I say re-share - and as ever a big thank you for your participation, it is a big part of what makes blogging worthwhile).

In the comments there was an extensive discussion about the difference that experience makes and some questions about the quality of data on the topic. I have condensed it into three areas here.

Firstly - musing on when experience is helpful it has become clearer that the value of experience depends on the pace of the revolution that you seek to participate in. This is a point made by James Penman in the comments to the original post, and encapsulated brilliantly by Clay Shirky in the following quote:

Those of us with considerable real-world experience are often at an
advantage relative to young people, who are comparative novices in the
way the world works. The mistakes that novices make come from lack of
experience. They overestimate mere fads, seeing revolution everywhere,
and they make this kind of mistake a thousand times before they learn
better. But in times of revolution, the experienced among us make the
opposite mistake. When a real once-in-a-lifetime change comes along,
we are at risk or regarding it as a fad.

Additionally, as VC-turned-entrepreneur Bill Kilmer said in his comment, experience is also valuable in every day business:

Every day, there are a thousand sub-routines in our business that we
execute the right way simply because we’ve done it before and we how it
should be done. Each is a potential stumbling block for a new
entrepreneur who hasn’t been down that road before and learned from
their previous good or bad decisions.

If the vision is right it is generally possible to fix execution errors, but if you have the vision wrong that is pretty hard to come back from. As a result I would expect, as per Clay Shirky’s comment, that experience is less helpful in genuinely new areas, and that serial entrepreneurs would be at less of an advantage.

Secondly - there were a bunch of comments around the theme that first time entrepreneurs often don’t understand what they are letting themselves in for and as a result shoot for over-ambitious goals and perhaps sign themselves up for a world of stress they might otherwise have chosen to avoid. By this argument experienced entrepreneurs will often either avoid doing another startup altogether, target a lower but more achievable exit (say in the $50-100m range), or adopt a portfolio approach by working with more than one company so that they don’t have all their eggs in one basket.

The logic of this is undeniable, but it is not great news for me as a VC. We are seeking to work with people who want to build world beating companies, and that usually means that their goals will look over-ambitious in the early days. Some experienced entrepreneurs go down this route - particularly ones that made a good amount of money from their first startup and want to become seriously rich from the second one - Brent Hoberman and the founders of Skype spring to mind here in Europe - but I think as a result of this factor first time entrepreneurs will continue to often be the first to come to us with compelling business plans in new hot areas.

Finally - there were a number of well made comments about the problems with the FT research that I quoted in the original article. Matthew Banks was kind enough to dig out some more work on the topic that points to a similar, if not identical conclusion. This can be found in a paper published by the National Bureau of Economic Research titled “Skill vs. Luck in Entrepreneurship and Venture Capital: Evidence from Serial Entrepreneurs”. According to the summary on Sanjay Parekh’s blog the research showed that previously successful entrepreneurs are marginally more successful than first time entrepreneurs (30.6% success rate compared with 20.9%) and that previously unsuccessful entrepreneurs have a very similar chance of success to first timers (22.1% versus 20.9%). The original paper costs $5 to download - so I didn’t, paywalls are too annoying.