Black Markets exist on the Internet for in-game currency, time in the form of leveling services and pre-made characters, and items. The buying and selling of these goods and services is expressly banned by nearly every major MMO studio TOS, and while they seek to halt this illicit activity, it continues to be a growing problem within the industry.
The problems that game worlds face with the introduction of an outside market influence, such as real world currency, are many. Primarily at play, is the basic integrity of the organic in-world economy. Virtual economies are constantly evolving and changing under the press of the distribution and prevalence of game goods. Because virtual worlds do not have finite resource allocations as exist in real world economics, they face unique challenges and their integrity hangs upon a delicate balance. Altering this balance with an exterior factor, not accounted for in the design and development of the economy, can have drastic and dangerous impacts on that system.
Take a farmable game resource such as Iron Ore, for example. In a real world economy, there is only so much ore that exists. The prevalence of that ore is further limited by the processes and expense of mining it, and the distribution channels available to the miners. Now take that same resource under the scope of a virtual economy. The ore veins are spawn timed, with an infinite potential allocation of ore, limited only by the human hours available to harvest it.
In an encapsulated virtual economy, lets assume the player market settles on a 1G per 10 Iron Ore. Gold is earned at a specific time per Gold formula, with some players having more and some less, but the same basic exposure and availability to that currency. Now introduce real currency into the mix. 5% of the population purchase Gold, and are willing to pay 1.5G per stack of 10 Iron Ore, to insure that they get all that they need. Markets shift, and the in game currency is devalued.
Gold Farmers respond to demand, and since in game currency is a basically limitless resource, game economies become burdened with excess currency when farmers introduce the resource into the pool. More Gold in circulation means rising costs, without a compensating rise in 'currency-per-hour' availability for those not purchasing this external resource. Inflation that only effects goods, without effecting income.
There are countless other reasons why RMTs are a bad trend for the game industry, but the bottom line continues to be that they are a violation of the Terms of Service. Some argue that certain policies are overbearing or unnecessary, but when we agree to join a game world of our choosing, we agree also, to abide by the rules of that game's maker, despite how we personally feel about them. Those that bot, hack or cheat in other fashions are no more culpable than those that commit account fraud or participate in RMT activities.
This post began at this Nerfbat discussion thread.
Showing posts with label Finance. Show all posts
Showing posts with label Finance. Show all posts
Monday, January 29, 2007
Friday, January 26, 2007
Design on a Dime: The MMO-IT
Before the geek squad starts picturing the IT department of an MMO studio, please read my first Design on a Dime post, in which I lay out an MMO financing concept based upon the investment model of an REIT. Thus, MMO-IT stands for Massively Multiplayer Online - Investment Trust.
Lets assume for a moment that I know something about finance and a little about the online game space, and I decide to build this investor pool. For the math whizzes in my audience who needed a calculator during yesterdays lesson, the total investment dollars at play in my proposed model is $10,000,000. (1000 investors at $10,000 each) This is a very conservative assumption when considering the scope that most speculative investors want to work in, and I personally would contribute $10K to a plan like this, were it set into motion.
So I have my first investor, me... Easy sell, but the next 999 are going to need more than faith and my good looks to convince them. So here is the financial pitch:
I have no idea what an MMO costs from concept to gold, but I am going to assume that $2,000,000 would be sufficient to launch a decent MMO. If I am way off, feel free to lambaste me in the comments section, and I'll gladly adjust my assumptions. I am also going to assume, that any fully-funded design studio can go gold, regardless of the quality of their product, and with creative marketing, can sell 25,000 units in the initial launch, before closing down due to lack of subscription interest. This will be the metric assumption I use for a failed project.
Lets assume a 20% success rate for fully funded design studios, and 250,000 units sold as our standard for 'success' with a 200,000 subscription pull through.
When looking for quality MMO design options, I shop my $10MM to five studios, in order to diversify and spread my risk. My failed investments generate gross revenue of $1,250,000, netting me a $750,000 investment loss, while my successful title launches with a net profit of $10,500,000, and an annual gross revenue of $3,000,000 assuming no additional units are sold.
If we assume the development cycle lasted four years on all projects, then after our first full year live, our MMO-IT will have grossed $17,800,000 and netted $7,800,000 in that same time frame. So how did we do with our $10,000? Each investor now has $17,800 after just 5 years, which is an annualized return of 16%. Not too bad.
Our success story was a relatively small game, and our failures were very, very bad sales numbers and we still turn a decent profit, with fairly low risk. If we have no pull through, we move 125,000 units from 5 different titles and gross $6,250,000 with a four year development cycle. In that scenario, our investors only lose $3,775 each. That's a very palatable loss given the potential gain with just one mildly successful title. Throw in a World of Warcraft or an EQII into our success pool, or manage a 40% pull through and we are talking serious returns on our investments with a very short time horizon.
Lets assume for a moment that I know something about finance and a little about the online game space, and I decide to build this investor pool. For the math whizzes in my audience who needed a calculator during yesterdays lesson, the total investment dollars at play in my proposed model is $10,000,000. (1000 investors at $10,000 each) This is a very conservative assumption when considering the scope that most speculative investors want to work in, and I personally would contribute $10K to a plan like this, were it set into motion.
So I have my first investor, me... Easy sell, but the next 999 are going to need more than faith and my good looks to convince them. So here is the financial pitch:
I have no idea what an MMO costs from concept to gold, but I am going to assume that $2,000,000 would be sufficient to launch a decent MMO. If I am way off, feel free to lambaste me in the comments section, and I'll gladly adjust my assumptions. I am also going to assume, that any fully-funded design studio can go gold, regardless of the quality of their product, and with creative marketing, can sell 25,000 units in the initial launch, before closing down due to lack of subscription interest. This will be the metric assumption I use for a failed project.
Lets assume a 20% success rate for fully funded design studios, and 250,000 units sold as our standard for 'success' with a 200,000 subscription pull through.
When looking for quality MMO design options, I shop my $10MM to five studios, in order to diversify and spread my risk. My failed investments generate gross revenue of $1,250,000, netting me a $750,000 investment loss, while my successful title launches with a net profit of $10,500,000, and an annual gross revenue of $3,000,000 assuming no additional units are sold.
If we assume the development cycle lasted four years on all projects, then after our first full year live, our MMO-IT will have grossed $17,800,000 and netted $7,800,000 in that same time frame. So how did we do with our $10,000? Each investor now has $17,800 after just 5 years, which is an annualized return of 16%. Not too bad.
Our success story was a relatively small game, and our failures were very, very bad sales numbers and we still turn a decent profit, with fairly low risk. If we have no pull through, we move 125,000 units from 5 different titles and gross $6,250,000 with a four year development cycle. In that scenario, our investors only lose $3,775 each. That's a very palatable loss given the potential gain with just one mildly successful title. Throw in a World of Warcraft or an EQII into our success pool, or manage a 40% pull through and we are talking serious returns on our investments with a very short time horizon.
Thursday, January 25, 2007
Design on a Dime
A successful game launch requires two very important elements to be successful. The developers need a good design concept, and the financial resources to make their vision a reality. Design concepts are like assholes, we all have one, and when push comes to shove, the vast majority just result in is a steaming pile of shit.
I believe that the best design concepts die on the vine, conceived in an indy studio or a yet unknown developer's notepad, and forever lack the second necessity to really revolutionize this industry. Money... Since money, and how to get it, is something that I am intimately familiar with, allow me to elaborate on the problems with this industry and how to solve them.
Game development, particularly in the MMO space, has become an inbred industry. Designers, developers and producers work in much the same arena, in a relatively small industry dominated by a few very big gorillas. So when an indy studio, with a genre shattering concept runs out of cash, they all turn to the same basic set of options to proceed. Cancel the project, or call the gorilla. Equally poor choices in my opinion, and here is why...
MMOs, from a monetary standpoint, are a speculative growth industry. Much like commodities, they have an absolutely mind boggling P/E potential, while also having a very high speculative risk factor. Venture capital firms, small private equity firms and many wealthy investors spend billions every year finding avenues to dump money on these very same metric opportunities. So why not in the MMO market as well? Because no one is asking them.
The game industry, if it is to be truly revolutionary, needs freedom to develop concepts without oversight from a interested investor. The gorilla is a very interested investor, and despite the press release indicating that all creative input will remain with the boutique studio, you can assume that is 90% PR bullshit... it is spin.
So how do we bridge this divide and find these Sugar Daddies, just waiting to throw us boatloads of cash with no strings? Well, designers need to employ money men, with enough industry knowledge to make the concepts palatable to the investor, while also knowing what the investor wants and needs. Development firms need to employ financial industry salesmen to pitch their product to disinterested investor groups, much like REIT managers do.
REITs are a good comparison example. I have $10,000 and I want to make a lot of money. My broker suggests Real Estate is an area with phenomenal growth potential, but what can I buy for 10 grand? And truth be told, I don't know dick about Real Estate, nor do I want to manage it. So he takes my money to an REIT, pools it with 1000 other people's $10,000 and he buys a bunch of properties. Some lose money, others win big, and at the end of the day, all I care about is watching my $10,000 become $11,000. I don't need to know how, I don't care if the buildings are painted white or blue, or if one building lost $100,000 and went under.
So how do we apply all this pseudo-intellectual bullshit into a usable concept? Well, you start by having a design idea. Get your idea mapped out well, and rudimentary designs and features in place. Then find your salesmen to pitch your potential to investors and gather the assets to make your vision a reality. At the end of the day, mediocrity in the industry would return enough to satisfy your investors, and with the freedom to design in your own way, you just might transcend mediocrity and make something revolutionary.
I believe that the best design concepts die on the vine, conceived in an indy studio or a yet unknown developer's notepad, and forever lack the second necessity to really revolutionize this industry. Money... Since money, and how to get it, is something that I am intimately familiar with, allow me to elaborate on the problems with this industry and how to solve them.
Game development, particularly in the MMO space, has become an inbred industry. Designers, developers and producers work in much the same arena, in a relatively small industry dominated by a few very big gorillas. So when an indy studio, with a genre shattering concept runs out of cash, they all turn to the same basic set of options to proceed. Cancel the project, or call the gorilla. Equally poor choices in my opinion, and here is why...
MMOs, from a monetary standpoint, are a speculative growth industry. Much like commodities, they have an absolutely mind boggling P/E potential, while also having a very high speculative risk factor. Venture capital firms, small private equity firms and many wealthy investors spend billions every year finding avenues to dump money on these very same metric opportunities. So why not in the MMO market as well? Because no one is asking them.
The game industry, if it is to be truly revolutionary, needs freedom to develop concepts without oversight from a interested investor. The gorilla is a very interested investor, and despite the press release indicating that all creative input will remain with the boutique studio, you can assume that is 90% PR bullshit... it is spin.
So how do we bridge this divide and find these Sugar Daddies, just waiting to throw us boatloads of cash with no strings? Well, designers need to employ money men, with enough industry knowledge to make the concepts palatable to the investor, while also knowing what the investor wants and needs. Development firms need to employ financial industry salesmen to pitch their product to disinterested investor groups, much like REIT managers do.
REITs are a good comparison example. I have $10,000 and I want to make a lot of money. My broker suggests Real Estate is an area with phenomenal growth potential, but what can I buy for 10 grand? And truth be told, I don't know dick about Real Estate, nor do I want to manage it. So he takes my money to an REIT, pools it with 1000 other people's $10,000 and he buys a bunch of properties. Some lose money, others win big, and at the end of the day, all I care about is watching my $10,000 become $11,000. I don't need to know how, I don't care if the buildings are painted white or blue, or if one building lost $100,000 and went under.
So how do we apply all this pseudo-intellectual bullshit into a usable concept? Well, you start by having a design idea. Get your idea mapped out well, and rudimentary designs and features in place. Then find your salesmen to pitch your potential to investors and gather the assets to make your vision a reality. At the end of the day, mediocrity in the industry would return enough to satisfy your investors, and with the freedom to design in your own way, you just might transcend mediocrity and make something revolutionary.
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