The article provides an overview of challenges, which game developers and investors face on the current gaming market. It also introduces developers to common approaches investors use to pick up and evaluate games.
The gaming industry is first and foremost the industry of creative people and enthusiasts who are fully absorbed by their projects and treat them as a piece of art first, and only second as a commercial project.
Similar to art, very often games that do not comply with market canons and run counter them become hits. However, we should understand that there are few such games, as well as not many great works of art. Most films, songs, books, pictures, and games must adhere to specific rules and laws to be commercially successful.
When I worked as an investment analyst, there were two main words used when discussing projects - RISK and VALUE. Any investment is always a game of these two words. There is a classic rule on the market, which I think, you know: The higher the risk, the higher the potential value of an investment. If we are talking about the game market, every investor knows that the gaming market is high-risk but highly profitable. Why this market is highly profitable, you can answer without me. Gaming media republishes successful stories, and you can learn from such games’ experience at gaming conferences.
The riskiness of the market is not so apparent and does not lay on the surface. I would single out two reasons:
1) Data, which developers try not to talk about with investors e.g. that 95% of mobile games do not reach profitability or that the median number of installs of a game on Steam in 2016 was 6,640 copies, which converts into $25,245 of sales.
2) The complexity of the evaluation. Many investors are afraid to invest in games because they do not know how to find hits. It is a very challenging task, because, as I said above, games are, in the first place, art, and the evaluation of art is subjective. The fast dynamic of the market complicates it even more. In this regard, traditional investors have only one way: a model of serial success. This approach is based on investments in a team, which already had an experience of launching successful projects. "The company, founded by former employees of Supercell / Rovio / Riot (insert a well-known company name) received investments to develop a game" - this is a typical title in the current market. The same applies to attracting investments through Kickstarter and other crowdfunding platforms. I will not judge how successful this approach is regarding creating or searching for hits, however, one thing I can say for sure is that the chances of producing a successful project (not equal to a hit) are higher for such companies than for other developers. Their tail of success can be transformed into players' attention, which helps them to solve one of the most critical problems of the current gaming market – visibility.
The gaming market is becoming more competitive and expensive. Investing in an unsuccessful idea can sink a small studio or create a significant financial gap for a large company. The mantra of the modern global games market is "go big or go home." The gaming industry is becoming more like the movie industry. If you want to make a big game, you will have to spend $80-100+ million for development and another $50-60 million for marketing.
The market is becoming more saturated. According to SteamSpy, 7,672 titles (21 per day) were released on Steam in 2017, which is around 40% of all games published on the platform since 2004. Steam Spy's data suggests 2017 saw the release of 2,427 more games than the preceding year, once again setting a record for games released on Steam.
If your team cannot attract $100 million to the AAA project, it does not mean you need stop making games. You can still attract money for a smaller project if you understand what investors and publishers want and approach the process of creating games more rationally while keeping the elements of creativity and fun.
If you plan to attract investments for the game, you need to think very carefully what game to develop. Investors who specialize in games and most importantly, understand them are scarce. Most will invest, as I already wrote above, in a serial success or in games that are understandable to them and have a clear positioning.
One of the most understandable positionings for an investor is when a title is presented as a clone of a successful game in a different setting or with the combination of other mechanics. If the team does not have a serial success, the very idea of the game can be presented as a serial success. Of course, if there are no numerous clones on the market already. If we consider an experienced publisher as an investor in a game, then in addition to the first option, it can be hooked up by some innovative mechanics. If you make something fresh and unique, a good publisher will notice it (unlikely for a traditional investor). Innovation can very often mean reducing project costs: the project can become viral, which will reduce the cost of attracting users. The risk, of course, is also higher here than for the first option.
Another important aspect to pay attention to is a clear understanding of a platform you are going to, and a target audience. You cannot come to an investor or a publisher and say that you are making a game for all platforms and all people in the world. It will be much better to say that you are doing a niche mobile game, for men over 35, who want to race as in Need for Speed, but with Mad Max-style trucks. Show the investor this vacant niche in the market, the demand and how you will meet it. Do not be afraid of a word “niche." Exploring niches is an excellent way for small teams to make money in a highly competitive market and an advantage of such developers over big companies.
A clear understanding of a target audience is a signal to an investor that you will initially develop and adjust your game for this audience, and also that you will have an understandable business model that is tied to the characteristics of a certain audience, rather than to some average player. Also, a good understanding of a target audience enables the investor to use more familiar approaches to evaluate markets and projects. Much worse for the investor, if you draw beautiful presentations, showing the billions of revenues of the gaming industry and give examples of top games and their metrics.
In this article, I will not go deep into the details of the methodology for evaluating the market for games but talk about two classic approaches that most investors know about and which you can use to present your projects.
The first approach is a Top-down evaluation.
The essence of this approach is in building a classic funnel, which is familiar to game developers. When determining your market, you go from the top to the down: starting from a big market (the entire platform), moving to a genre, hardware requirements, localization (key markets) and ending with the characteristics of your target audience (gender, age, interests). The stages can be different depending on your game.
The second approach is Bottom-up evaluation
This approach is based on the comparison of your product with similar products on the market. You look at the performance of similar games to evaluate your title. I also recommend combining this approach with factors analysis: constructing a matrix with competitive advantages of similar games and calculating multipliers based on this matrix.
In the next article, I will write about the tools and resources that can be used to evaluate the market for your game and provide examples how to evaluate games.
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