Analysis: 'Coopetition' - Digital Distribution's Enemy?

[How are exclusive titles affecting PC casual game portals? In an article that has wider digital distribution implications, Reflexive Entertainment's director of marketing Russell Carroll (Wik, Ricochet) delves into the "coopetition" between online gaming portals - and how developers can get caught in the middle.] The casual games industry got its beginnings online with downloadable PC games. That birth was recent enough to rightly refer to the industry as "in its infancy." With infancy comes both growing up and growing pains, and currently, the industry is experiencing the later. Competition In the downloadable PC space, each of the casual game portals fights for customer eyes as it attempts to sell ever more copies of Diner Dash and Bejeweled. There are literally hundreds of websites selling casual games to online customers, but as is the case in any industry, there are a few locations that dominate most of the sales. Much like Target and Wal-Mart, the largest portals fight over similar customers who are likely to pick one retailer and spend most of their time shopping there. There is nothing amiss in any of this. It's simply capitalism and business as applied to the casual games industry. That is, it's all normal, until you add the next factor. Cooperation Unlike other industries, most of the players in the PC casual space are both creators and distributors. They make games in addition to distributing games through their own portals. As a game developer, it is financially advantageous to distribute games not only through your own portal, but also through your competitor's portal. Coopetition This leads to a very tenuous balance in the PC industry, where the portals work both competitively and cooperatively with other portals in something I call coopetition. As you might guess, there are flare-ups in this relationship that depending on your point of view are good or bad for the casual game business on the PC. In fact, one of those flare-ups has occurred over the last few weeks, which has me very interested, and so as a wartime reporter who happens to be entrenched in the action, I thought I'd share a little bit of the news from the front lines. First Shots Last October, I wrote an article discussing the differences between the portals and some of combative interactions between them. I want to revisit just one part of that article here, and that is the first maneuvers made by the portals in their coopetition battle. I noted in that article that there was a large difference in game catalogues between the largest game portals. This came about as some of the portals felt that selling games created by their competitors was negatively impacting them. In what was the first major offensive in the battle between portals, the major game catalog holders both pulled their game catalogues from each other and stopped distributing their own games on their competitor's portals. The effect of this is portals that have increasingly unique catalogues. Personally I feel this division of game catalogues is negative for the industry - I can't imagine having to go to Target to get EA games and to Wal-Mart to get Activision games, but if you consider the situation to be more like Pepsi and Coke, then it is conceivable that it may be helping the industry. Covert Action Whatever concerns I've had about exclusive game catalogues, certainly the portals have seen value in having games that are exclusive. Over the last 18 months the major portals have worked feverishly to have exclusive games. These games were exclusive for a period, typically two to four weeks, after which they were made available to the other portals. As a higher and higher number of games became exclusives, the portals started noting that once they received a game that had been exclusive elsewhere, the sales weren't what was expected. To quote iWin, the sales were "spent." In response to losing sales, a rumor of portals refusing to carry games that have been exclusive elsewhere has been circling the industry, and one company, iWin, has officially substantiated the rumor. On iWin's developer relations contact page, it states that, beginning August 1, 2008: "[iWin] will no longer be accepting games for distribution on iWin.com that are offered exclusively on another website other than the publisher's own site." While iWin is the first to announce this policy of not accepting any game that was previously exclusive on another portal, it is not the only portal considering or implementing this, or similar, but less drastic policies that treat games that have been exclusive elsewhere as second-rate hand-me-downs. iWin, in its thoughtful response as to why it is taking this approach (a must-read for anyone in or interested in the PC casual games industry!) compares the situation to movies, noting, "When Disney launches a blockbuster movie like Chronicles of Narnia, they don’t give Loew’s or United Artist an exclusive." The response further mentions that 70-80% of a movie's revenue comes in the first few weeks. Though the comparison between movies and casual games isn't a perfect one, certainly if the casual game's industry follows a similar trend of a high spike of sales during the first few weeks, then missing out on those first few weeks would be extremely negative. However, will refusing games that have been exclusive elsewhere solve the issue? What's the likely impact on the casual games industry in the PC space? New Combatants One of the most intriguing pieces of this new battle is how it brings the developers into the fray. Developers must choose between having exclusivity on one portal, potentially limiting their distribution, or fully distributing on all portals, and missing out on the rewards that exclusivity can bring. There are certainly arguments that can be made as to which is the financially better approach, and certainly there is no clear path that is always financially more viable, but regardless of what path is chosen, developers are choosing a path that aligns them with one portal's approach or another's. Developers are being unwittingly recruited into the battle and are at the forefront of the current skirmish, and as it true of all battles, those on the front lines are the most likely to be injured by the fighting. Speculation So what is the end result of this latest move? Until it has all played out we can only guess, but it turns out that guessing about the future of the games industry is a lot of fun, so let's have at it. There are few industries that can support competing products that are very similar. In the PC downloadable Casual Games industry, the game catalogues between the largest portals still have a lot of overlap, but due to exclusives over the last year and a half, the titles in each portal's catalogue have become much more unique (even if the products remain VERY similar). I expect that catalogues will continue to differentiate, and I think that is a bad thing for the industry. The separation of catalogues makes it more difficult for new brands to grow strong (notably that may mean older brands are strengthened in the current climate). Like iWin, I think creating a climate that makes it harder for new brands to grow will ultimately keep the PC space more niche. When something is only available at Wal-Mart or at Target it hurts sales of that item overall unless it already has a strong established brand. Certainly the decreased availability of a new product does not help it in creating awareness and brand strength. On the flip-side, exclusives, if continued, I believe are very beneficial to the individual portals. The fact that portals with an exclusive can command such a large portion of a game's sales works out tremendously to their advantage and can be used to build a base on which they can create more sales with each new exclusive. The additional earnings allow the portal to grow faster than its rivals. While the growth of the largest portals may or may not help the developer, clearly the additional money gained from exclusives will directly help the portal and put it in a better situation than its competitors. And The Band Played On The casual games industry, like all other industries, exists to make money. It just so happens to be making money off of casual games, and so we tend to think that the competition is more friendly. While certainly it's a friendly industry, the latest offensive in the battle has drawn more battle lines and has conscripted developers into the fray, making the tenuous balance a bit more tenuous and a bit less balanced. The end results are uncertain as the battle rages on and competition heats up, but the change in how portals treat exclusive games is a major one that will greatly affect the landscape for the foreseeable future.