Three Melons – Case Studies on Marketing Management

15

Three Melons*

INTRODUCTION

Buenos Aires, 15 March 2009, 7:45 a.m.: Mariano Suárez Battán is deep in thought about what he has gone through on his trip when suddenly he notices that they are about to take his suitcase. ‘Madam, please wait, that suitcase is mine!’

Mariano had attended the Game Developers Conference (GDC) event in San Francisco. The GDC is the biggest annual event for professional video game developers, where the main companies of the sector unite and showcase new market trends for the video game industry. Their objective is to inspire, train and foster networking.

Some conclusions were clear: the industry was becoming increasingly attractive and more challenging and was supported by the social media networks, and the consumer market for online video games (gamers) was entering a strong expansion phase. While he was placing the recovered suitcase and his hand baggage in the trolley, some doubts came to his mind: Had he faced the business well? Was it time to change?

His company, Three Melons, had been developing online video games for big advertisers, publishers1 and media companies. It was working very well for him and he had a very good client base but, operating in the business-to-business (B2B) market, he was not the owner of the games that he used to develop and consequently he did not get the direct benefits from the increase of the new gamers. Mariano was thinking how he could reach the gamers directly, that is, how to enter the business-to-consumer (B2C) business. The challenge seemed mammoth but the thought of the large number of people who made presentations in San Francisco gave him the intuition that the profits were also such.

On the way to the Federico Lacroze and Cabildo office, in taxi, Mariano’s intuition told him that the new game ‘Bola’ that they were developing was on the right track. However, he was worried about how to go deeper in these new horizons without neglecting his greatest strength, that is, B2B products. Rather it was, ‘Could I compete with the companies that are already positioned in the B2C market? What was the development investment that would be estimated? Would his business model change? Was his corporate structure adequate? Would it need a new brand?’

He left his suitcase at the entrance and sat down quickly in his office, switched on his notebook, checked his mobile, asked for coffee and croissants, and called everyone for a meeting in the ‘playroom’.

THE VIDEO GAME INDUSTRY

The video game industry (development, marketing and sale of video games and sale of consoles), with hardly 30 years of history has an important commercial potential. Its increased popularity, especially during the 1990s, positions it as an option of the entertainment sector complementary with the rest of the recreation forms audio–visual (e.g., TV), and even as a substitute for cine. It is estimated that the global video game industry has a size of $50 billion per annum.

The global sales of video games reached $32 billon at the end of 20082 (a growth of 20 per cent compared to 2007), divided in similar percentages between North America, Europe and Asia. Approximately 70 per cent of the global turnover comes from video games for consoles, handheld or mobile games and PC games and the rest from online3 video games (see Fig. 15.1).

 

Figure 15.1 Video Games Market

Online Video Game Industry

In terms of the gamers, in 2007, the online video game market reached 217 million players. Europe represented 32 per cent, Asia-Pacific 30 per cent, United States of America 28 per cent, Latin America 6 per cent and the eastern region of Africa 4 per cent.4

There exists a fine link between the number of Internet users and gamers (see Exhibits 15.1(a) and (b)). It is worth highlighting that in 2007, the number of global users of the Internet was approximately 770 millions. An emblematic case is the Chinese5 market, wherein terms of gamers, it is estimated that the number will reach from 58 million players in 2009 to 119 million players by 2012. This growth is reflected in the income of the sector: in the year 2008 the online games market had incomes of $2.75 billion reaching $3.8 billion in 2009 and an estimated profit of $8.9 billion for 2012.

Within the online video game market there are diverse sources of incomes (see Fig. 15.2):

  • Sale of the games (online retail and subscriptions).
  • Sale of the games through micro-transactions: These are sale of virtual goods or access to higher levels of the games. For the majority of the players, these purchases are impulse buys.
  • In the United States, according to a study,6 12 per cent of Americans bought some virtual products in the last 12 months with an average annual expense of $50 and an estimated transaction of $30. The market size was approximately $250 million7 in 2008, and it is estimated at $600 million in 2009.8
  • The Asian virtual goods market is around $5 billion (almost 20 times more than the American market). A study by Pearl Research in April 2009 showed that in 2007, in South Korea, the micro-transactions generated $1.5 billion and in China the profits made by online games reached around $2.8 billion. According to a study,9 it is expected that the micro-transactions at the world level would grow to $17.3 billion by 2015.
  • The sale of advertisements in the games: Given the growing number of online gamers, many companies (or advertisers) saw the opportunity of utilizing video games as a means of communication with their clients. The brands are integrated with the video games through different modes—sponsorships, banners and virtual goods in the game.

     

    Figure 15.2 Different Sources of Business of Online Video Games
  • Currently the online advertising market in video games in the United States is around $400 million and it is estimated to reach $1 billion by 2014, representing 1.5 per cent of the online advertising10 annual expense, which is already $23.4 billion.11
ACTORS IN THE ONLINE VIDEO GAME BUSINESS

In the online video game market, different actors interact—video game developers, publishers, investors, advertisers, access channels (or distribution platforms), payment modes, ad networks and gamers. Figure 15.3 shows the link between the different actors of the online video game business.

  • Video game developers: They are those who create video games. They can be part of big publishers or independent (as in the case of Three Melons).
  • Publishers: They are those who have the intellectual property of the game. There are different modes of being the publisher of a game.
    • Game publisher: They develop their own games and are owners of the intellectual property of the same.
    • Media companies (e.g., Disney, Warner): Media companies are big groups that have multiple means. They can have internal publishers as well as contracted developers. Usually they have their own Web sites where they propagate their games (see ‘access channels’). The media companies are oriented to generate a monthly audience of visitors for selling online publicity to different advertisers. A method commonly used to generate traffic and awareness of their Web site is through free-to-play games.
    • Advertisers: They are generally companies that employ different modes of online publicity (banners, sponsorships and so on), however, sometimes the advertisements take the role of publishers with own games (developed by them or subcontracted to developers).
  • Investor, venture capital: They are private investors with high-risk propensity, who bet to obtain potentially high rates of returns for their capital in a determined time period. In this type of business, these kinds of investors are common.

     

    Figure 15.3 The Activity Links Between the Actors
  • Advertisers (and their agencies): As mentioned earlier, they are companies that employ different online advertising modes. In the case where they utilize games as a means to participate as sponsors, with banners or with products with their brands for generating awareness (e.g., the character uses Nike sneakers).
  • Access channels or distribution platforms: These are the mediums through which the games are accessed. There are diverse types of platforms:
    • Game distributors: Game distributors are the companies that allow uploading the games to their portals so that the users can play through the download of the online game. The main suppliers are Yahoo! Games: 19.4 million visitors with an increase of 6 per cent in 2008, followed by EA online: 18 million visitors (see Exhibits 15.1(a) and (b)).
    • Social networks: Social networks are Web sites where users interact socially and can play with other users. There exist different social networks:
      • Facebook: It has 200 million active users.
      • QQ: It is the leader in China and is the largest social network in the world (300 million active accounts).
      • My Space: It has lost its leadership globally, it is expected that the advertising investment in My Space would fall 14 per cent while that of Facebook would increase by 20 per cent.
      • Other networks: V Kontakte (Russia), Orkut (in India and Brazil), Hi5 (in Peru, Colombia, Ecuador, Portugal, Mongolia and Romania), Odnoklassniki (in the former USSR) and Maktoob (Arabic community).
    • Web sites: It can be game adders (e.g., Miniclip.com), publishers’ sites, media companies’ sites or own sites of a game.
    • Mobile devices (iPhones and iPod Touch): Mobile devices allow the user to access the games by downloading from a Web site (e.g., AppleStore.com). In March 2009, there were more than 25,00012 applications (games) available, representing a growth of 312 per cent compared to November of 2008 (when there were only 8,000 applications).
  • Payment modes: These are companies that manage the payment collection of the online transactions (e.g., an upgrade). There are of following types:
    • Direct methods: It can be credit card companies or companies specialized for online payment collection, for example, PayPal,13 Facebook Credits,14 Amazon, Socialgold, Spare Change or Google. The credit cards charge 10 per cent for the service (or revenue share), whereas the specialized companies (e.g., PayPal) charge 3 per cent.
    • Mobile methods: These are companies that offer the management of payments through telephonic lines. It can be sent via SMS (short message service) or landline (e.g., Zong, Allopass, Boqu). Generally, they do not cover all the countries of the world but specialize in geographic zones. There is a revenue share wherein the developer receives 50 per cent or less than the transaction price.
    • Pre-paid cards bought in businesses: Pre-paid cards are similar to the telephonic pre-paid cards (e.g., Ultimate Game Cards). They are normally used by young people. There is a revenue share which ranges between 10 and 20 per cent.
    • Intermediaries of sponsored offers: These are intermediaries that manage offers where the players are invited for an activity (like registering in a site or buying some product/service) and in return they are paid virtual money. The value of the payment is generated from the total dollars that they are ready to repay the advertiser for getting that gamer. In the jargon that gamer is called lead. In these cases, the revenue share is between 10 and 15 per cent depending on the sales volume that is generated by the visit to the promoted site.
  • Advertising or Ad networks: They are sellers or buyers of publicity space on multiple sites.
  • Player or gamer: A person who plays video game.
THE BUSINESS MODEL IN THE B2B MARKET

The B2B is the denomination that is utilized when the client is another company (and not the final consumer).

  • Financial risk of developing the game (investment): The publisher makes the video game developing company directly (or through its media company) incharge of the game. In this type of business, the publisher is the one who finances the entire or part of the development and is also incharge of starting the game through some channel or platform. In some cases it is possible that the process is initiated at the instance of the media company who suggests its client (the publisher) who would invest in the development of a game. In this circuit there is a transaction between the publisher and the video game developer (that may or may not include a commission from the media company). These games can operate through diverse channels or platforms: the same Web pages of the publishers (e.g., www.lego.com), in the game’s own portals (e.g., www.clubpenguin.com) or in the media company’s sites (e.g., www.disneylatino.com). These games may or may not be free-to-play.
  • Other incomes: On developing the game, other incomes can rise as a result of inviting other companies as advertisers within the game through three forms: advertising, advergames or sponsorship.
    • Advertising: Advertising is the possibility of including banners (advertising piece in the Internet) or breaks (advertisements in the pauses of the game and/or before the game starts) of a determined brand in the video game. Making an analogy between the video games and cine, a car commercial of 30 seconds before the movie starts is equivalent to a banner or a short video before the game starts.
    • Advergame: An advergame is the practice of using video games for publishing a brand, a product, an organization or an idea. In general, it is a game that during its development includes brand advertising. In this case, the characters of the game could appear driving a determined car brand.
    • Sponsorship: In the case of sponsorship, the game has the function of transmitting the message of the sponsor. This transmission can be as subtle as a board next to a football field or a mascot that represents the advertiser.
    • Payments of the gamers: If the game is not free-to-play the income generated (payments) is managed through a payment media company in name of the publisher. In this circuit, the video game developing company (unless they have agreed upon some form of deal) does not share the income that is generated from transactions made by the gamers within the game.

The Business Model in B2C (Publishing)

B2C is the denomination that is utilized when the client is the final consumer.

  • Financial risk of game development (investment): The developer of the video game takes the financial risk. On some occasions there can be an investor who finances the development of the game.
  • Other incomes: It is the developing company that decides whether to invite the advertisers (with banners for sponsorship).
  • Payments of the gamers: There exist different business models that generate recurrent income—retail, freemium, subscriptions and virtual goods. A lot of this income enters in the category of micro-transactions. It is the developer company that decides which ones to employ.
  • Retail: The user access the game through the purchase of a physical (DVD) or digital device. It is a unique transaction and the following interactions with the users are for the digital upgrades or for the purchase of a sequel or another product of the same creator. In the United States, the retail prices of games for console are between $40 and $60, for PC, on an average it costs $20 and the games that are downloadable, an average of $10.
    • Freemium: The word freemium is a combination of the words ‘free’ and ‘premium’. This is the business model that functions offering free basic services, while more advanced or special services are charged. That is, the gamer pays for what he consumes from the game that is not basic. These games have a low-entry barrier, giving incentives to the players to utilize a payment mode for continuing to advance in the game (credit card, paypal system, SMS or other methods of digital payments described in the previous section).

      This type of game can be found in the social networks (e.g., Pet Society or mafia wars) or can be accessed from a Web site (e.g., http://www.puzzlepirates.com/ or http://www.maplestory.com/). This type of game has a longer life cycle than that of the retail games, given that the experiences of the users are strengthened by the community15 and are permanently updated through the new contents. A clear example is the case of Nexon Corporation that reached $100 million in 2007 selling ‘upgrades’ (ascending to superior levels in the game) either one or two dollars, to its players (http://maplestory.nexon.net/Intro/). Apart from the payments for accessing the highest levels, virtual goods can also be bought, within the games.

    • Subscriptions: In this type of model, the players pay a monthly charge online through a prepaid card or their credit card. One type of sale of games by subscriptions is the ‘try before you buy’.16 In these cases, the players are given a window time/access where they can try the game before paying the subscription amount. During the use of this ‘free’ window there are restricted places, levels or functionalities for the new player. At any moment during this trial, the player can opt for the full version of the game for one full month’s (or more) subscription or by purchasing the rights of the game.
    • Virtual goods: In this case, the user can buy different items for beautifying the virtual world of the game (hedonism: clothes, characters, accessories) or for improving the experience in the game (functional: to increase the time of the game: new levels, weapons).
    • Example: The Chinese company Tencent (www.tencent.com) sells virtual objects (avants, mascots and accessories) in the range of $0.10–$1 with profits of $421 million in 2009. The virtual goods premium also exists, that reaches up to $7/$15 or more.
TYPES OF GAMES AND CONSUMER PROFILE

Types of Games

The games can be grouped into three broad categories:

  • Casual games17: They are those played in short sessions, they are easy to learn and difficult to master. Casual games are directed to a specific type of consumer, for example, a 35-year-old who wants to distract himself from his work and relax or entertain himself some minutes in a day. Examples of casual games: Diner Dash, Chocolatier Crónicas & Sueños, Bejeweled (http://www.popcap.com/games/free/bejeweled) and Wii Sports.
  • Hardcore: They are more complex games with lots of levels where generally the players spend a lot of time playing. This type of game is targeted towards players who dedicate their entertainment time to practise and study of the said games. Many of the players of this class of games are proud of mastering the rules, or the use of the game. Examples of hardcore games: Grand Theft Auto, Madden 10, World of Warcraft: http://www.worldofwarcraft.com/index.xml) and Pro Evolution Soccer.
  • Social games: They are generally casual games with the particularity that they are played on social networks with friends, they are easy to access and they use the viral channels of the social networks for diffusing within the friends’ groups. Example of social games: Bejeweled Blitz, Pet Society, Farmville and Mafia Wars.

Profile of the Players

People, who play video games, form an ever-increasing group. Today the video game players are students, employees, army men, senior citizens, housewives and working men. The average age of the players is 35 years and they have played for 12 years. Sixty per cent of the players are male (a percentage that is now changing).

According to a study by Entertainment Software Association,18 the information about gamers is as follows:

  • In 2009, 25 per cent of the Americans who were more than 50 years of age played video games. In 1999, this was 9 per cent.
  • 37 per cent of American male play on wireless devices (compared with 20 per cent in 2002).
  • 53 per cent of Americans, more than 18 years of age are online users.
  • 42 per cent of the players are between 6 and 44 years, and play for an hour in a week.
  • The average age of the player who is a frequent buyer is 39 years.
  • For 92 per cent of the players who are below 18 years, their parents are present when they buy or rent games.
  • The online game sites have an average of nine visits per player per month, who dedicate some six hours per week to the game.
  • In the European Union, one out of every four persons plays regularly.
THREE MELONS IN PERSPECTIVE

The Beginning

Mariano transformed his favourite hobby—video games—into an annual business worth $1.2 million. Passionate about technology, with his father working for IBM, he always had access to computers and PC games (when he was 5, he had his first Atari). He was restless and with an enterprising profile, in the year 1999, while still in university he participated in an Internet startup named RegaloWeb.com. He did not succeed as expected but his energy was not exhausted there. In December 2001, on graduating from Universidad Torcuato Di Tella, along with two of his friends founded Syncromind, a software development company. The company managed to grow locally and even incorporated some international clients (some clients were Brahma and Tyco19) and had a team of 15 persons and an annual turnover of $1,50,000.

Mariano was trying to sell more e-marketing services from Syncromind and when in a business interview a programmer said that he had made video games for the company Cyberjuegos.com, he had no doubts: Marino was obsessed by the idea of creating a company that could make online video games from Argentina for the world.

In April 2005, Mariano attended an event in New York about advertising and video games and it was at that moment that he felt that it was the opportunity to internalize advergaming. This event made him realize that he needed to think big, look for capital and chalk out a business plan. He also understood that selling these products in the local market was going to be very difficult since the industry was incipient. The first few drafts of a business plan took shape and the target was set at a figure of $1,50,000. Mariano estimated that amount would allow him to manage fairs, form an excellent team and establish the first few commercial international contacts.

In June 2005, he started looking for investors in his company, but nothing materializes because of two reasons: firstly the local investors did not understand the growth potential of the enterprise and secondly it did not have a relevant track record in the industry. However, at the end of 2005, Mariano obtained the finance that he needed for handling his project. Thus ‘Three Melons’ was born—an online video games developer company. The team set up was successful. Mariano’s contacts in Syncromind had made him meet Patricio Jutard who became the Chief Technology Officer (CTO), Nicolas Cuneo (Lead Developer) and Augusto Petrone (Lead Designer). Besides he called Pablo Mayer (Producer) and Santiago Siri (Game Designer) to join the team.

According to Mariano, ‘The first steps of the company were difficult because we had to evangelize a new concept and besides continue learning to develop video games, given that we did not have experience in this type of products’.

In the beginning of 2006, thanks to the contacts and references that they had got through Mariano’s father, the first few clients came: Repsol YPF Disney. For Repsol YPF they made a game promotion for TC 2000. On the other hand, with Disney they developed games for their portal. They were not profitable projects, but it allowed them to generate reputation and experience in the industry. At the end of 2006, Coca-Cola contracted them for developing three games for their portal with a contract of $40,000. For that year the annual turnover was already ascending to $1,50,000. These clients made it possible that, till date, technically, Three Melons is positioned as a developer in the advergaming market within the category of the casual free-to-play games.

In the beginning of 2007, they won the first international project with CISCO for $70,000. At the end of the year, the team had grown and the turnover increased to around $4,50,000 annually. This meant that the possibility of investing in the purchase of Unity 3D technology (Exhibit 15.2 describes the technologies adopted by Three Melons and some applications). Besides, in 2007 it became the first video games developer in Latin America with processes certified according to the ISO:9001 norm, validating a process well achieved and ‘a result of combining repetition, consistency and predictability with agility and good technology’.

In 2008, ‘Three Melons’ turnover increased to $10,00,000, 85 per cent of which come from clients that are based abroad. The emblematic case is the development of the game LEGO Indiana Jones which won various prizes and that had 18 million users in less than a year of being online. The game was highlighted by LEGO as the best game within their Web site. Figure 15.4 shows the clients who incorporate Three Melons during the first two years.

In mid-2008, 4 mm games20 gave Three Melons the charge of developing an online game of paintball multiplayer—Cement Factory. The project meant $6,00,000 in income and the agreement was to continue the development for $1.5 million more, with a 10 per cent revenue sharing on the profits. However, at the end of 2008, the project was cancelled. Due to being dedicated to this huge project, the team did not have an established sales pipeline (list of potential projects) for the following months. This caused a financial imbalance in Three Melons in the beginning of 2009. In any case the entrepreneurs decided to maintain 100 per cent of the work team of the company.

In October 2008, Mariano and Patricio were selected as endeavour entrepreneurs after a rigorous selection process. Thanks to the endeavour programme during 2009, they worked with two consultants from The Boston Consulting Group for defining the value proposition of the company and for improving the internal processes. In mid-2009, two MBA students from Harvard Business School and from Chicago University started to work firmly on two concrete projects—analysis of the business model that best adapts itself to the company and that launch strategy of a new product.

In March 2009, the entrepreneurs closed a round of investment led by Nexo Emprendedor, investment fund of the bank Banco Santander Rio. The primary objective of the money was to finance the growth of the company and the conception of new products, one-third of the capital was destined to cover the financial debt generated after the cancellation of the cement factory project. In mid-2009, they developed the game ‘LEGO Star Wars’,21 an advergame utilizing 3D unity technology that generated a huge impact in the industry. Besides, Three Melons incorporates its logo in the main screen of the game, making itself known to the final consumer of LEGO.

 

Figure 15.4 Clients of Three Melons in the First Two Years

 

Figure 15.5 Types of Clients of Three Melons

Type of B2B Clients

When Mariano speaks with his potential clients, he describes Three Melons as ‘positioned as online video games developers, and that’s where we want to be’.

Three Melons has accumulated a wide client base in the online video game development market. The company categorizes their clients of the B2B video game market, in three groups(Fig. 15.5)—publishers, media companies and advertisers and agencies.

Evolution of the Offer

In the B2B market, there are two types of video games that Three Melons develops:

  • For advertising (Advergame): These are video games for the company’s own pages that the project is in. Its objective it to generate greater content and traffic for the client company of Three Melons.
  • Entertainment: These in general are free-to-play video games operated by third parties (e.g., a media company). Many of these games generate income through the sale of virtual goods.

    These projects are developed by Three Melons under two different contract modes:

  • Work for hire: In this type of project, Three Melons is contracted by publishers or media companies to develop a game and receive the payment once the same is complete. The intellectual property of the game, that is, the rights and the future income that can come from the game, pertains to the company that commissions the game. This type of game represents 75 per cent of the turnover of Three Melons.
  • Concessions charge: In this type of project, the company receives a payment for the development and a minor percentage from the concessions generated by the game. The major percentage of the concession is obtained by the company which contracts it—publisher or media company—that is, usually the main beneficiary, if the game is successful.

In future, Three Melons aspires to increase its participation in the projects originating from the concession charge mode (characterized as being the biggest and the one with the greatest economic incentive) and enter the B2C business. Table 15.1 summarizes the current and desired position of Three Melons.

When Mariano speaks with his team, he always argues: ‘If we are positioned in the B2B market, the potential of B2C makes us reflect upon our objectives. Currently, we do not have an experienced team in online marketing for working on strategies and actions of acquisition, conversion, retention, virality and monetization of the business. That is our challenge.’ However, separately, it is doubtful.

His doubts arise since Mariano knows that the current product portfolio is in an instable equilibrium. Till date, the company has not developed any cash cow product (as per the terminology of the portfolio model of BCG products) that can facilitate it to finance new challenges. On the contrary, they are income generated by star products (e.g., Lego Indiana Jones) which utilize undiscovered products for funding (i.e., new video games). As a result, the entrepreneurs have not yet managed to define clearly, the optimum portfolio that would allow them to enter the B2C business, without putting into risk the road already travelled.

The Structure

The company has its operative base in Buenos Aires (Bs As) but also has commercial operations in Los Angeles. In Bs As, 42 employees work, of whom 36 are involved with the department that Patricio manages the CTO (Chief Technology Officer): development; Nicolas, art and design (animation 2D/3D, art and design); Augusto, project management Pauline; and testing Cristian. The rest of the team is in the administration, sales and marketing departments (see Exhibit 15.3).

 

Table 15.1 B2B and B2C Business Models

Regarding the sales strategy, Mariano systematically attends all the industry events (6 or 7 per year), besides complements it with trips to New York and San Francisco for visiting potential clients. In the beginning of 2009, they contracted Nacho Harriague, a corporate economics student of Universidad Torcuato Di Tella, to take charge of the development of new businesses and proposals from companies that come unexpectedly. In the Los Angeles office, a part-time employee, Larry Schott, manages the business and projects with entertainment companies such as Warner and Disney.

At the same time, Three Melons works with small offices in Argentina and Uruguay for increasing the production capacity and making the production flexible. Even when they outsource, they maintain the centralized control of all the processes of the projects, from start to finish, including the art direction.

Even if Santiago Siri had left in order to do his own business, Mariano knows that he has a great team with excellent technological abilities in Web games. He feels that from the technological ambit there would be no limitations for the challenge of becoming the game operator with intellectual property of the same.

THE INDUSTRY COMPETITORS

Being an emerging market, the actors go on incorporating different business lines according to the perceived opportunities. That is why there are direct, indirect competitors, competitor–client, competitors–collaborators and other hybrid modes. In summary, the competitors’ field becomes broader and more confusing, involving different actors who reach the gamer directly with online games. The following list reflects the competitive complexity of this business (see Exhibits 15.1(a) and (b) about the main competitors):

Developers

Publishers

  • Playfirst (http://www.playfirst.com/): It is a net publisher of digital retail games and their most popular success is Diner Dash.
  • Popcap (http://www.popcap.com): Their games have so far been downloaded more than 150 million times and sold more than 5 million units of their pilot game Bejeweled. (http://www.popcap.com/games/free/bejeweled).
  • Blizzard (http://www.blizzard.com/): Net publisher that commercializes its games through the subscription model. It is known for its famous game World of Warcraft with more than 11.5 million monthly subscriptions.
  • Playfish (www.playfish.com) and Zynga (http://www.zynga.com/): These are two publishers focused on social networks. Their business model is based on the sale of virtual goods (with annual sales between $50 and $100 million). For example, in the Christmas of 2008, they sold 2 million virtual Christmas trees for $1 per tree.
  • Playdom (www.playdom.com)

Destination Sites

  • Miniclip: Games portal and advertising. It distributes games of other developers charging each user who enters to play.
  • Nevertheless, the gamer does not know about the developers or publishers. If Three Melons would enter the B2C market it should compete with the mentality of the gamer, and the relevance of the rivals, is known by the capacity to attract millions of players to their video game.
THE COMPANY 2020

The Three Melons team is working on Bola, a prototype of an online game for social networks, a demo of a football game that would show future investors or sponsors.

Mariano analyses the possibility of launching it strongly between 2009-end and beginning of 2010 keeping in mind the World Cup in South Africa in 2010 and taking advantage of the lack of a high-quality visual game in social networks. For the purpose of starting an entry strategy in the B2C business, the Three Melons team developed an ARVM model (acquisition–retention–virality–monetization) characteristic of the modus operandi of entry of a new game in the B2C market. The model estimates:

  • Acquisition: They estimated 5,00,000 active monthly users in this model for the first four months of 2010, reaching 4 million at the time of the world cup. The acquisition process would have a cost of between $0.5 and $0.8, advertising the game on social networks. For attracting the biggest number of players possible and for making the insertion in this market profitable, the Marketing Department had thought of the possibility of forming a blog of the game where the players could share their opinion, obtain information and interact with other players.
  • Retention: According to industry data, the average retention index of an online video game is between 25 and 30 per cent, that is only 25–30 of each 100 players continue playing the game after playing it for the first time.
  • Virality (capacity of Web content to spread among the users): It has an index of 0.8 if it is bad and 1.3 if it is good.
  • Monetization of the game: It is estimated that during approximately three months, 5–10 per cent of the gamers will pay and 10–30 per cent of the gamers would pay through offers and the rest of the gamers will not pay anything.

Mariano is clear that the acquisition cost plus the cost of serving the player should be less than the life time value (amount of money that the user generates, i.e., how much this user pays and for how much time).

Mariano closed his notebook after the weekly team meeting in the Playroom, while he looked from his window on the fifth floor. He imagined the possible scenarios for the year 2010. He had two thoughts: put all the efforts for making the model grow in the B2B model, taking advantage of the achievements obtained during the last few years; or march into the B2C market with the possibility of generating greater profits in the future, knowing that the challenges would be significant.

He was thinking of all that he had spoken in the last two hours. At the same, he was planning how to generate projects where Three Melons would be the owner of the intellectual property. In this way, business would be easily scalable through the concession of licenses and through the sales of the game for the next five years.

Seeing the Excel he questioned himself which was the optimum project portfolio. He was conscious that the screen that he had was more intuitive than professional. He knew that he needed a more formal methodology of analysis. On the other hand, the freemium business analysis model was very sophisticated. Then he asked himself, which was the optimum number of ‘work-for-hire’ projects necessary for having an internal cash flow that would allow developing the B2C projects and which would take into account the HR restrictions. If the best people of Three Melons were working on ‘work-for-hire’ developments, they were not investing time in the B2C market. Mariano knew that the best brains were needed for the B2C market to develop a game that would attract external investors.

In his last trip to Seattle, he had contacted potential sponsors, partners and investors so that they would participate in the new football project and so that Three Melons could operate it. The meeting had closed with phrases like ‘I think that we have the potential for generating an online video game platform and create intellectual property’.

On the meeting table was the investigation report that the undergraduate students of Universidad Torcuato Di Tella had made about successful and influential case studies of social games that was going to help in completing the analysis of the new B2C business. This investigation took into account aspects on the graphic design, business model and user retention models and mainly the role that the virtual goods play in the games in question. Mariano was very interested in the advice that the students had given him on how to operate the Bola game (see Exhibit 15.4).

His head was spinning like a cyclone. He was trying to put together his thoughts to see where to start from. On a sheet, he started to write which were the most important questions that he had in mind for getting organized. He knew that in first place what he had to find out was the optimum number of ‘work-for-hire’ projects that would allow him to launch the B2C market. Secondly, he knew that being an enterprising company, the leadership role in each business was central. He maintained his focus in the original B2B business and delegated the development of the B2C market or focused in a ‘start-up within the start-up’. What additions would be necessary to form the team? Would it have to be in United States? Another question that was running through his mind regarding the B2C market was, which are the factors critical to success in such a changing industry: The volume? Contact with sponsors? The design of the games? The virality of the games? He continued thinking and his uncertainties did not stop. He asked himself which are the ‘best practises’ of other industries that can be incorporated in this industry.

Mariano knew that the market in which he worked was clearly dynamic. In fact, the factors and actors who came in were transitory, even ephemeral. That is why for him it was very important to understand what were the ‘fixed’ points on which he should construct his business in the future.

Trying to relax for a while, he stretched his legs a bit, logged on to Facebook and started playing Bejeweled Blitz

ENDNOTES
  1. The publisher is the owner of the intellectual property of the game.
  2. http://www.gamedaily.com/articles/news/worldwide-video-game-sales-hit-32-billion-in-08-top-dvd-bluray-for-first-time/?biz=1
  3. http://www.slideshare.net/Eth0s/video-game-industry-trends
  4. http://avistapartners.com/news-newsletter.html
  5. http://www.gamespot.com/news/6214598.html
  6. Frank N. Magid Associates, http://gigaom.com/2009/07/30/12-of-americans-bought-virtual-goods-in-past-12-months-survey/
  7. http://www.charleshudson.net/my-best-estimate-for-the-size-of-the-virtual-goods-market-in-the-united-states
  8. www.insidefacebook.com/2009/08/17
  9. Strategy Analitics (2009), http://eon.businesswire.com/portal/site/eon/permalink/?ndmViewId=news_view&newsId=20090730005376&newsLang=en
  10. http://www.mandmglobal.com/archive/2009/may?1=1&BlockID=198698625&cms_search_keywords=#keyword
  11. http://www.iab.net/insights_research/947883/adrevenuereport
  12. ‘Iphone as a platform’.
  13. http://www.paypal.es/es
  14. Ibid.
  15. Blogs generated by the users on opinions and comments about the video games.
  16. http://www.casualgaming.biz/news/27467/Casual-Biz-Models-No-4-Try-Before-You-Buy
  17. http://www.casualgaming.biz/news/27402/Casual-Games-101
  18. http://www.theesa.com/facts/index.asp
  19. un productor internacional de componentes electrónicos (http://www.tycoelectronics.com/)
  20. http://www.4mmgames.com/
  21. http://starwars.lego.com/
EXHIBITS

Exhibit 15.1(a) Total Internet Users (USA) and Total Visits to Video Game Sites (USA)

Source: comScore Media Metrix.

 

Exhibit 15.1(b) Total Internet Users (Region-wise) and Total Visits to Video Game Sites (Region Wise)

Regional breakup of the top 10 game companies of the world classified by total unique visitors, globally, May 2007.

Source: comScore mundo Metrix.

 

Exhibit 15.2 Technology Employed in Three Melons

The company continuously invests in technology. SCRUM is a process of iterative and growing software development utilized commonly on environments based on the Agile development of software.

Unity (3Dwww.unity3d.com) is a tool integrated for the creation of 3D video games that allows developing interactive contents like architectural visualizations or 3D animations, something that could not be done with the Flash technology.

Some applications are as follows:

  • Melons Daiquiri is a framework designed for developing high-range Internet games that support multiple players in Flash 10 and Silverlightr 2.0.
  • Camarero is a development of high yield for multiple players Web developed games in Flash and Unity3D. It is simple to use, reliable and extensible.

 

Exhibit 15.3 Current Organization Chart of Three Melons

 

Exhibit 15.4 Undergraduate Work—UTDT Marketing 2009

Conclusions: Success factors generated in the MMOs

  • Personalization is a fundamental factor and should be developed with a high degree of detail allowing the users innumerable possibilities of combinations.
  • If possible, according to the style of the game, the act of adding brands and objects that are globally well known to the personalization generates an incentive in the purchase of the video games. At the same time, the promotion of ‘virtual goods’ through famous personalities can increase the desire to purchase.
  • Including tutorials and understandable, complete and interactive manuals are essential for the first impression of the game.
  • It should be distinguished whether to give realism or friendliness to the game, since the corresponding graphics depend on this (as in the case of WoW and Maple Story).
  • The paid subscription has not had success (except in the case of WoW, whose success is an exceptional case) for which it is recommendable to develop other business models, which in the majority of cases can act as complements without any problem.
  • One has to explore the huge number of business models, since these are complementary and not substitutes, whenever they are well integrated.
  • More than one payment method should be offered and, if possible, the greatest possible number, so that the user can select the one that is most convenient for them. The use of prepaid cards allows the youngest users, who usually do not have access to credit cards, to spend on the games in question.
  • It should be clear who is registering for the game, for the purpose of understanding which aspects of the game should be highlighted more, allowing differentiating a game of social interaction from a ‘hardcore’ style game. According to the type of game, the predominant motivating factor differs at the time of purchase of ‘virtual goods’.