I really like Tony Hsieh’s approach to business. Here’s an mp3 to his talk at the Web 2.0 conference:

In this presentation at the Web 2.0 Conference, Zappos.com CEO Tony Hsieh talks about his first business selling pizza in college, starting Link Exchange after college, and how he eventually ended up leading Zappos as the CEO. Tony discusses how his experience at Link Exchange influenced him to focus on corporate culture as a top priority, and why he thinks culture is so important to a company’s future growth and success.

Tony talks about the internal vision of Zappos not just to be an Internet footware merchant, but to be a brand that is known for an excellent customer experience. He goes on to list a number of specific techniques that the company uses to enhance customer service, and explains why he thinks that the telephone is still one of the best branding devices available.

[via IT Conversations]

This article came up on Slashdot today.

“Claims by the MPAA that illegal downloads are killing the industry and causing billions in losses are once again being shredded. In 2009, the leading Hollywood studios made more films and generated more revenue than ever before, and for the first time in history the domestic box office grosses will surpass $10 billion. … [N]either the ever-increasing piracy rates nor the global recession could prevent Hollywood having its best year ever in 2009. With an estimated $10.6 billion in consumer spending at the US and Canadian box office, the movie industry will break the 2008 record by nearly a billion dollars.”

They reference a TorrentFreak article claiming that domestic box office numbers are higher than ever — and, therefore, movie piracy isn’t having any effect:

Claims by the MPAA that illegal downloads are killing the industry and causing billions in losses are once again being shredded. In 2009, the leading Hollywood studios made more films and generated more revenue than ever before, and for the first time in history the domestic box office grosses will surpass $10 billion.

Those despicable Hollywood liars. Additionally, these kinds of stories seem to be an annual occurrence (What piracy crisis? MPAA touts record box office for 2007, What piracy? Movie biz sees record box office in 2008).

But, I don’t consider TorrentFreak to be a reliable source, and expect a big dose of spin coming from them. Too bad they didn’t provide any statistics so that we could see the trends. That’s okay. I will. Shown on the right are the total domestic (US and Canada) box office numbers, according to BoxOfficeMojo. The dollar amounts are in millions. (Hollywood Box Office, the original source for the $10.6 billion estimate has adjusted their estimate downward to $10.5 billion.)

Okay, you might see some trends here. There’s some pretty strong growth from 1980 until around 2002. Then, after 2002, the box office revenues hover between $9 billion and $10 billion a year.

Let’s take a look at those numbers in chart form. Strong growth up until around 2002, then some leveling off. But, the movie industry is still growing, right?

Well, if you consider that inflation is around 4%, you start to wonder if the movie industry is keeping up with inflation. What happens if we take a look at these same numbers and adjust for inflation using the Inflation Calculator?

This chart shows the inflation adjustment in the third column and the Inflation-Adjusted (2008) domestic Box Office numbers in column four. Once you take the inflation adjustments into account, you can see that 2009 wasn’t the best year ever. The best year ever for the movie industry was 2002. If box office revenue reaches $10.5 billion this year, after adjusting for inflation, it will be the fifth highest year, behind years 2001-2004. Here’s a chart of these numbers:

Once inflation is taken into account, the 2009 box office numbers are about 9% lower (or $0.8 billion) than 2002 numbers. (Hm, that’s a few years after music industry revenues also peaked*.) On average, movie box office revenue increased by $177 million/year between 1980 and 2002. Then, on average between 2002 and 2009, it has declined by $114 million/year. Yes, this could be a short term dip in revenue (like the slump in the early 1990s), but had revenue grown at the same rate between 2002-2009 as it had between 1980-2002, revenues would be $2.0 billion (20%) higher in 2009.

If we wanted to go one step further, we could also point out that the US and Canadian populations have grown from 227 million and 24.5 million in 1980 to 305.5 million and 33.9 million in 2009, an increase of 35%. Based on that, we can see that the movie industry’s growth in the past 30 years has been based on population growth. Per-capita spending has fluctuated a bit, and has declined by 14% since 2002.

Per-capita inflation-adjusted domestic box office:

It’s not a horrible downturn, and it is similar to the decline seen in the early 1990s, but it’s also not an argument that piracy isn’t hurting the movie industry, nor is it “shredding” the claims that movie piracy is “causing billions in losses”.

I should also point out another interesting bit of spin. The Ars Technica article linked at the top says: What piracy? Movie biz sees record box office in 2008. Looking at that headline, it looks all wonderful for the movie business, doesn’t it? But, once you look at the inflation-adjusted numbers, you can see that 2008 numbers ($9.63 billion) were the worst numbers since 2000, and per-capita spending was the worst since 1997. Funny the tricks you can play when you don’t adjust for inflation.

* Graph of the music industry downturn since 1999:

I remembered hearing about Battlefield Heroes a while ago. It was an interesting idea: they were making a decent-looking first person shooter, and it was free to play. You could buy stuff in-game, but it was just avatar customization stuff that had no effect on the gameplay. The question I wondered back then was: would avatar customization make enough money for them to pay salaries? It seemed unlikely. One possibility is that they’d get millions of players, but keep their servers load lightweight (people would play peer-to-peer, which would cost them nothing). Then, even if a few percentage paid for avatar customization, they might do okay. But, it would require phenomenal success (in terms of the number of players). I thought I’d keep an eye on them, just to see what happened.

Well, recently, they announced some changes in their system. You can still play for free, but the changes make it harder to do well in the game unless you’re paying for in-game upgrades. The game has two ways to get upgraded weapons: Valor Points, which you earn by playing; and Battle Funds, which is what you get when you pay real-world money. The new update effectively reduces the value of Valor Points and increases the value of BattleFunds.

I’m going to give them the benefit of the doubt here, and say that they thought their business model would work, but after a while, decided they needed to boost their revenue. It didn’t really seem possible for them to survive on just avatar-customization alone. The whole “pay real-money for in-game upgrades” is quite a balancing act. On one extreme, players pay money for purely aesthetic changes (avatar customization). You get lots of players, people are happy, but the company is earning very little money per player. On the other extreme is a system where you can’t be an effective player in the game without paying money — the game is really a demo unless you pay some real-world money. You get fewer players, and people get more resentful over the bait-and-switch of “free to play, oh wait - you’re nerfed unless you pay” which harms the company/game reputation, but the company earns more money per player. Then there’s the balancing act of staying in the middle ground - trying to earn enough to survive and pay employees, but avoiding guilt and negative stigma of the bait-and-switch. I guess I’m not that surprised to see them shift towards a stronger pay-model, since their initial business-model seemed overly optimistic.

Link: EA restructures Battlefied: Heroes pricing; fans enraged

The guys over at Stack Overflow are saying that they tried Google Adwords, and it was horrible for generating ad-revenue for them. In a recent podcast (Episode 64, 15:00), they say that they had nearly one million pageviews per day*, but Google Adwords were generating 38 cents of revenue per month. That’s astonishingly bad. They said that they hand-picked some advertisers themselves, and their ad-revenue went up 50x — which would still only be about $19 / month. I’ve sometimes wondered if ads on websites actually generated any profit for websites, or if they were just a method to pay for a fraction of the monthly costs. Sounds like the latter. Even at $19 / month, there’s no way that Stack Overflow is paying for it’s own bandwidth and server costs.

* According to Alexa.com, which tracks website traffic, Stackoverflow ranked as the 639th most visited website in the United States, which is certainly respectable.

2d Boy recently had a 1-year anniversary sale on their game “World of Goo”. The game normally sells for $20, but now you can pay whatever you want for the game (minimum of 1 cent). They also asked people why they paid what they did, and released statistics on how much people paid.

The Results:

57,000 people downloaded the game over the past week. The average price paid was $2.03. In total, that adds up to $115,710. Because PayPal takes 30 cents + 2.9% of each payment, they ended up paying 13% of that ($15,000) in transaction fees, leaving them with $100,000, or $1.75 per buyer.

Here’s their bar-chart of the money paid and number of people at each price (click for a larger image):

Full Survey Results are here.

I have to admit that I’d thought about trying the “pay what you want” model for future games. It’s hard to interpret these results, though.

The Bad:
People paid very little - developers saw a scant $1.75 per sale.

There are some reasons that this should be taken with a grain of salt, though. I can think of quite of few reasons why this payment was low. First, the game has been out of a year. This means that everyone who would’ve paid $20 for it probably already bought it. Maybe 2dBoy is picking up the people who were willing to pay for it, but weren’t willing to pay $20. Also, in the questionnaire, asking why people paid what they did, 11.6% said they already owned it on a different platform, so they were just giving 2dBoy a few dollars for the opportunity to have it on another platform.

Of the 12% who actually answered the survey, when asked “How much do you think this game should cost normally?”, 85% said this game should normally cost $10 or more. But, only 12% of survey responders actually paid $10 or more. And only 5% of buyers paid $10 or more. Based on the sales numbers, 23,335 people (41%) paid 99 cents or less, and less than a third paid $2 or more. This is one of my fears of the pay-what-you-want model; that people will admit that a game is worth X dollars, but a large majority will pay much less than that if they have the opportunity to pay you less.

The Good:
They got a lot of sales, which added up to $100,000. That is, $100,000 on top of their previous income.

For comparison, 2dBoy says that the game actually cost about $116,000 to produce. Although, $116,000 is their “minimum living expenses” cost. They said that it took two people two years to produce the game, and $96,000 covered their living expenses - which translates to $24,000 per person per year; which is not a decent living.

I’d like to be able to try to generalize these numbers, but there’s a lot of difficulty in doing that.

First of all, World of Goo is a very popular game. So, trying to vindicate the pay-what-you-want model based on “they already earned $100,000 and only spent $116,000″ doesn’t work very well. Afterall, World of Goo is probably in the top 99th percentile of games produced. So, if they made $400,000 on a $116,000 investment (ie. a good profit), it would also mean that 95% of the games on the market would be showing losses in the same situation.

Second, the pay-what-you-want model generates free publicity. Since World of Goo is essentially a first-tier game, it benefits disproportionately from free publicity. A second or third tier game might get a lot less free publicity, and then they’d get less benefit. To put it another way, let’s say that pay-what you want causes people to pay you less money, but increases the number of buyers. The numbers for some fictional games might look like this:

Using normal sales model:

Switching to a pay-what-you-want sales model, GameX (which is popular) gets lots of free publicity on gaming websites and blogs, GameY (which is obscure) gets a handful of mentions but remains obscure:

In the case above, GameY didn’t gain much in publicity, but it saw a sharp drop in the amount paid for their game. It would be a losing strategy in that case.

I also have to wonder about how pay-what-you-want model will change over time. Right now, it’s relatively novel, but if everyone did it, would the publicity decline — and, therefore, cause a decline in the profitability? In the survey, almost 1 our of 4 people said that they like the pay-what-you-want model and want to support it. But, if it becomes popular, will people stop supporting it because it is “established”? And what percentage of them paid higher amounts of money? Theoretically, the “we want to support pay-what-you-want” people could account for 100% of the people who paid $5 or more, and they could disappear as the model becomes more popular.

Wow. This is sleazy.

Wikipedia: Hollywood Accounting

In accountancy, Hollywood accounting is the practice of distributing the money earned by a large project to corporate entities which, though legally distinct from the one responsible for the project itself, are actually owned by the same people. This substantially reduces the profit of the project proper, sometimes eliminating it altogether. The effect of this practice is to reduce the amount which the corporation must pay in royalties or other profit-sharing agreements.
…
Due to Hollywood accounting, it has been estimated that only about 5% of movies officially show a net profit, and the “losers” include such blockbuster films as Rain Man, Forrest Gump, Who Framed Roger Rabbit, and Batman, which all took in huge amounts in box office and video sales.

Because of this, net points are sometimes referred to as “monkey points,” a term attributed to Eddie Murphy, who is said to have also stated that only a fool would accept net points in his or her contract.
…

Examples

Winston Groom’s price for the screenplay rights to his novel Forrest Gump included a share of the profits; however, due to Hollywood accounting, the film’s commercial success was converted into a net loss, and Groom received nothing. That being so, he has refused to sell the screenplay rights to the novel’s sequel, stating that he “cannot in good conscience allow money to be wasted on a failure”.

Stan Lee filed and won a lawsuit after the producers of the movie Spider-Man did not give him a portion of the gross revenue.

The estate of Jim Garrison sued Warner Bros. for their share of the profits from the movie JFK, which was based on Garrison’s book On the Trail of the Assassins.

Art Buchwald received a settlement after his lawsuit Buchwald v. Paramount over Paramount’s use of Hollywood accounting. The court found Paramount’s actions “unconscionable,” noting that it was impossible to believe that a movie (1988’s Eddie Murphy comedy Coming to America) which grossed US$350 million failed to make a profit, especially since the actual production costs were less than a tenth of that. Paramount settled for an undisclosed sum, rather than have its accounting methods closely scrutinized.

Joystiq has been running a few articles about how companies got their name. The story behind Stardock:

“I was in college and started the company to help pay for school until I could get a real job. I needed to get a computer and got a hold of a wholesale distributor to get the parts to build it. When I called, they asked me what the name of the company was and in panic, I looked around and was reading a book by Raymond E. Feist and the chapter was called ‘Stardock’ so that’s what I said the company’s name was. It stuck and has been since.”

Wow, he came up with a name on the spur of the moment.

The story Randy Pitchford tells about Gearbox (of Half-Life fame) is a little more harder to believe. It involves a high-stakes late night poker game in New Orleans with Gabe Newell. And, if that tall-tale didn’t trip your BS detector, it appears that Valve and Gearbox are now confirming that the story is a fabrication. I wonder if Pitchford was just seeing how far he could string Joystiq along with that unlikely story.

These stories remind me of a recent episode of This American Life, called “Origin Stories”. In the beginning of the episode, they discuss corporate creation myths. Google even has a myth about starting in a garage:

The Apple and Hewlett-Packard garages have now become such a part of Silicon Valley myth, that it’s made other tech companies want stories like it. Google, for example, they did not start in a garage. The founders began working on their search engine in 1996, when they were at Stanford. They didn’t move into a garage until 1998. They already had investors, and they were just in the garage for five months. But in 2006, Google bought the garage as a company landmark.

It’s like no one wants to hear the story of the rich, well-connected guys who meetup at the Marriott conference room to hatch a business plan. You know, there’s no romance in that.

Dan Heath has written about these origin stories in Fast Company magazine. He says one way to measure just how appealing these stories are, is to count all the ones that get quotes widely, even though they aren’t remotely true.

For instance, when eBay began, a story circulated that it’s founder created the company so that his fiance could buy and collect Pez dispensers more easily. Not true.

One of the creators of YouTube used to claim that the idea for the business came after a dinner party in 2005 when two of the company’s masterminds, Chad Hurley and Steve Chen, shot some video and tried to post it online, and found out just how hard that was back then…. Steve Chen later admitted in Time magazine that the dinner party [story] was embellished to provide a better founding myth.

Of course, there’s plenty of other myths created about historical figures, as well. For example, Christopher Columbus didn’t have some crazy idea that the earth was round back in 1492 - everyone knew that the earth was round. In fact, a Greek mathematician had made a pretty good estimate of the size of the earth back in the third century BC. And George Washington didn’t cut down a cherry tree.

A while back, Kevin Kelly (co-founder of Wired Magazine) wrote the article “1000 True Fans”, where he lays out his idea for earning a living by creating stuff (music, books, software, etc). It had provoked a lot of discussion on the internet (searching for “1000 true fans” yields 16,000 google hits). Most people seem to really like the idea, but some of us don’t. I actually find his idea to be overly simplistic, although it does have a certain appeal to make it popular.

In a nutshell, his idea is this:
Step 1. Get 1,000 true fans who love your work so much, they buy everything you create.
Step 2. Create $100 worth of merchandise each year.
Step 3. Earn a fabulous living of $100,000 / year.

Most people look at this and think, “1,000 true fans? That seems attainable. $100 of merchandise per year? Sure, I could do that.” So, what’s the problem?

* First of all, it’s next to impossible to create $100 worth of merchandise per year of real creative output. I suppose someone could create T-shirts and coffee-mugs, too, but that really doesn’t count because (A) it’s unreasonable to expect to have 1,000 “true fans” who are going to buy every T-shirt and coffee-mug you create, and (B) the fact of the matter is that artists earn next to nothing on sales of T-shirts and coffee-mugs. So, we’ll ignore the T-shirts and coffee mugs for the rest of the discussion and concentrate on the real productive output: books, software, music. It’s next to impossible to create $100 worth of this per year. In my case, if you average out the number of years I’ve worked on my software and compare it to the sales price of my software, you’d wind up with a an average sales-value of around $5 per year. I can’t think of any bands that put-out $100 worth of music and videos per year. And no authors are putting out $100 worth of books per year.

* The “1,000 True Fans” idea is confused about whether you’re supposed to bring-in $100 of profit per fan, or merely $100 worth of sales per fan:

Let’s peg that per diem each True Fan spends at $100 per year. If you have 1,000 fans that sums up to $100,000 per year, which minus some modest expenses, is a living for most folks.

Kelly seems to get these two things confused, because he says that each fan spends $100 on merchandise per year. The problem with this is that a sales price of $100 does not mean $100 worth of profit for you (the creator). In the case of, say, T-shirts and Mugs, selling $100 worth of merchandise might mean $10 of profit. I had read recently on an authors website that royalties on book sales are 8%. So, $100 of book sales equals $8 profit for the author. This means $100,000 in sales equals $10,000 and $8,000 in profit - neither are a living. In other cases, where profit is 50% of the sales price, then the creator is earning $50,000 / year - which is a living wage. Fortunately, in the case of music and software, the packaging cost is small compared to the sales price. But, it’s worth highlighting the fact that creators will not be earning close to $100,000 / year, which is what Kelly seems to hint. To really figure out what a creator is earning under this system, you have to figure out the profit per fan, not the revenue per fan.

* Getting 1,000 “True Fans” is hard. I can’t say that I’m a “true fan” of anything, and I suspect that most people aren’t either. Kelly suggests that if you can add 1 true fan per day, you’d have 1,000 true fans in three years. But, I think you’d have to be extremely talented to be adding 1 rabid fan per day. If you were talented and worked hard, maybe you could get 1 new regular fan per day, but not a “true fan” who loves everything you do so much that they’ll buy everything you create. I suspect the number of fans an artist has would scale exponentially because of word of mouth and media exposure. This means you have to be talented enough that you are getting the word-of-mouth and media exposure. Of course, now we’re back in the realm of normal promotion, rather than “true fans”.

If Kelly really was right about getting 1 rabid fan per day, then (based on the exponential growth of word-of-mouth and media) I think it’s clear that you’re on your way to being massively famous. I think most people know that being massively famous isn’t a realistic goal for most creators.

I think a much more realistic thing to do is just concentrate on getting fans, rather than “true fans”. These regular or “fair weather” fans are going to outnumber true fans because most people aren’t going to be true fans of anything, and even if they are, it probably won’t be you. As I said, I’m not a “true fan” of anyone, yet I have hundreds of CDs and hundreds of books. I suspect that even “true fans” have music/book collections where more than 90% of their purchases are for things having nothing to do with their true-fandom. This suggests that more than 90% of an artist’s sales are going to be to people who are not “true fans”, and every artist will have at least 10 fans for every “true fan” (and that ratio is probably generous). Fair-weather fans are going to be easier to get and more numerous.

In fact, if we look at the Nine Inch Nails release “The Slip” we find that they sold a high-end package for $300. They limited the sales to 3,000 copies. We don’t know exactly how many they would’ve sold if they didn’t limit it to 3,000 copies, but if a mega-famous group like NIN has only 3,000 “true fans” willing to buy the $300 set, what hope does the typical creator have of getting 1,000 true fans? Based on my guesstimates in this article, less than 1% of the people who got “The Slip” bought the $300 or $75 package. This suggests that the regular fans outnumber true fans by at least 100:1.

My suspicion is that if someone actually set-out to get 1000 true fans, that about the time they get 1,000 fans, they’d only have about 10-50 true fans. And, if they ever reached 1,000 true fans, they’d have another 30,000 to 100,000 regular fans. In both cases, the majority of the creator’s income would come from the regular fans, not true fans. When you look at it this way, it’s really about getting fans, not true fans.

* The “true fan” idea only works if you’re one (or maybe two) people working together. If you have a larger group, your number of true fans has to increase by the same factor. (Admittedly, Kelly does bring up this fact in the article, but it’s worth reiterating.)

One good thing I can say about Kelly’s idea is this: if you concentrate on getting the mythical 1,000 “true fans” you probably won’t attain it, but maybe the process of trying to get those “true fans” will push creators to do the level of work worthy of getting a “true fan”, which will draw-in the fairweather fans — and that’s a good thing. I think there are some aphorisms that are false, but they point people in the right direction. For example, “the customer is always right”. It’s absurd to say that every customer is always right. A minority of customers will be irrational. However, it’s a good aphorism because it leads businesses to be more customer-focused and it’s better to err on the side of giving the customer too much credit. Businesses will do better in the long run if they act that way.

In that sense, the “1,000 true fans” idea might be a good goal, but the reality of it is sketchy.

While a lot of people have been positive about Kelly’s “1,000 true fans” idea, here’s a few creators who express the same skepticism as I do:
John Scalzi (book author) critiques Kevin Kelly’s idea.
Robert Rich (musician) talks about the sisyphean task of building 1,000 true fans.

I’ve been asked a few times about whether or not I’ll create iPhone applications. I haven’t looked into it much, prefer desktop/laptop development, and generally feel that the iPhone “gold rush” is over anyway. I think there was a time, a few years ago, when you could get a big benefit by being the first one there. But, everyone noticed the opportunity, and now there’s lots of competition. From what I can tell, there are a few success stories, and the vast majority of iPhone apps languish in obscurity.

Here’s two contrasting articles. The first one is written from the user’s perspective. You’d get the impression that iPhone development is a gold-mine. But, of course, he only mentions the most popular applications:

Last month, I became an obsessive air-traffic controller. The culprit: a terrific game for the iPhone called Flight Control. The premise is simple: You’re faced with a crush of planes, and it’s your job to guide each one to its respective runway…. According to Firemint, the game’s publisher, the 99-cent app has been purchased more than 700,000 times since March; at its peak, it was being downloaded 20,000 times a day.
…
Last fall, [Ethan Nicholas] spent weeks—some of it while cradling his 1-year-old son—writing a tank-war game called iShoot. The game, which sold for $2.99, hit the App Store in October, and in January, it shot up to the top spot—selling hundreds of thousands of copies and earning Nicholas enough to let him quit his job and take up iPhone development full-time.
Source: Slate

The second article is about iPhone development from a software-developer’s perspective. It isn’t the gold-mine you’d think it is. There are 40,298 applications for the iPhone. The author does some estimates to figure out the average profitability of an iPhone application (about $1,881). At that amount, you’d better be cranking out a decent application every month to earn a bare-minimum living ($22k/year). Of course, there’s a lot of variability in this: some huge successes and lots of applications that earn next to nothing. So maybe “average” isn’t the best way to look at this. Afterall, if you have 70 applications that earn $1 million each, 2,000 applications that earn $1000, and 38,228 applications that earn $100 each, you’d end up with his same numbers. It would look more like a lottery under these numbers - almost everyone would end up poor, and a handful of people would get rich. These same numbers would also produce a bunch of “success stories” - 70 of them - that the media could write about, as if the iPhone was a sure-way to quit your day-job and earn a great living.

From what I hear, the top-selling applications tend to get a boost by getting onto Apple’s Top 10 list, and (to a lesser extent) the Top 50 list. Again, this suggests that there are some big winners, and a lot of losers.

Update, June 9, 2009: It’s nice to get a little confirmation of my view. In a recent blog post, iPhone developer Rick Strom says:

First, so you know where I stand among the 60,000 or 600,000 (I’ve heard both numbers) registered iPhone developers: I have nearly 20 apps in the app store as of this writing.

Four of those apps are on the charts:

* Zen Jar #34 Social Networking (paid)
* Zen Jar Lite #54 Social Networking (free)
* Spirit Board #36 Board Games (free)
* Spirit Board Pro #95 Board Games (paid)
…
With two apps on the [Top 100] paid charts, one would assume I’m rolling in dough. After all, this is a gold rush, right?

The reality is much more startling. In order to place #34 on the social networking charts, you need 30-35 downloads a day. At the standard app store pricing of .99, and after Apple takes its cut, that means your app needs to bring in a little over $20 a day to chart at that position. And social networking is a popular category.

Perhaps you’d expect the game charts to do better. Board games isn’t a wildly popular category, but it still might surprise you that it takes about 6-8 downloads a day to chart. That means if you are making around $4 a day you’ll be in the top 100.

So what does this all mean? Well keep in mind there are over 36,000 apps in the app store. If the apps on the category charts are doing those sorts of numbers, what do you think the rest of them are doing?

Nothing. Absolutely nothing. The aren’t selling at all.
…
I post these numbers so people can understand what is really involved here. The app store isn’t a sane marketplace at all, any more than the lottery is. When you submit an app, you are buying a ticket. Maybe you will be one of the few who makes a couple hundred grand in a hurry, but most likely you will be just another shlub tossing your blood, sweat and tears into the void where it will be ignored.

A few news articles have been coming out of the DICE Summit. In an article titled, “The Very Different Gaming World Gabe Newell Wants”, Newell had some thoughts on “how he thinks the video game industry should work”.

-Pricing that’s always in flux: Are you ready for the price of a game to go up and down regularly? “One of the things that annoys me is the inefficiency in pricing we have in our industry,” Newell said. He doesn’t like how rigidly prices are set in stores and how slowly those prices are changed… Valve has hired an experimental psychologist to concoct new sales promotions, one possible idea being to reward every 25th purchaser of “Left 4 Dead” with a free game on Steam. Newell joked that this person is “turning us to the dark side of B.F. Skinner.”

Hm. I’m not sure that I’d categorize this under “how the gaming industry should work”. I think what Valve is doing with the price fluxuations is this: attract attention. By having sales, they have an excuse to get into the gaming news. They also give people a reason to keep checking their website (any sales yet)? If you can keep people coming back to your website, odds are better that they’ll buy something - maybe even buying/trying a different product from Steam. As far as I can tell, it’s worked pretty well. I saw gaming websites talking about Valve’s “Left 4 Dead” sale. For example, Joystiq posted this article: “This weekend: Left 4 Dead 50% off on Steam”. Price fluxuations = excuse for gaming websites to talk about you = free advertising.

-Frequent content updates: Newell said “Team Fortress 2″ has received 63 updates from Valve in the last 14 months. That is the future, he told the developers in the audience: “You’re going to be touching [your customers] not every three years but every three weeks — and hopefully even more often than that.

Wait - this if how the gaming industry is supposed to work? If you do the math, there, you’ll see that 63 updates in 14 months is more than one update per week. One of my irritations with Team Fortress 2 was that they were always updating it. Want to play a quick game before you go to bed? Oops! You have to download a patch before you play. Hope you don’t mind a 20 minute download first. One of the other problems that happens with PC games is that the ability to patch games after release means developers feel less bad about releasing a “not quite complete” games, knowing that they can patch it after the fact. One guess here is that Gabe wants to make sure people are tied into the Valve service (since patches are only available through your account) - which means you bought your game (and didn’t pirate it). Frequent updates means pirates are running old versions, and if you want the latest fixes, you’d better buy it. It certainly keeps the uploading-pirates and downloading-pirates busy. I’m doubtful that it improves anything for gamers, but if it helps Valve shake-off some pirates and get some more sales, then gamers are helped indirectly.

-Video game companies acting as “entertainment companies”: Newell said he is “obsessing” over gamers’ expectations for “what kind of entertainment company they want us to be.” They are fans of properties, not forms of entertainment, fans, to use his example, of Harry Potter, as opposed to just Potter books or just Potter movies. As a result, he said he is moving away from thinking of Valve as a video game company. One example is the introduction of “Team Fortress 2″ video shorts made by Valve. The next will be that same team’s “TF2″ comics.

Selling merch - aka: opening up another revenue stream for the company. Not a new idea, but not a bad idea, either.

-No DRM should be offered that can be thought of as DRM: Newell believes that digital rights management software that is presented as copy-protection gives a game a stink. It leaves customers unsure about how flexibly they can access their games. So they turn to pirates who offer games with fewer strings, he suggested. “There is evidence anecdotally that DRM is increasing piracy rather than decreasing piracy.” Valve’s solution: battle the pirates by providing better services than the pirates do. The effectiveness of pirates, he said, is to get content to people who want it more swiftly and easily than the companies who make the content do. An outfit like Valve, however, can get provide even better service, even by doing something as intrusive as data-mining their customers’ computers — as long as they are transparent about it and can prove to the customer that taking such measures will make the customers’ games better.

Well, this isn’t really news coming from Valve. I’m always amused when people rail against DRM, but then suggest following in Valve’s footsteps (oblivious to the fact that Steam is DRM). What this says to me is that there is a right way and a wrong way to do DRM - which is different than view promoted by groups like DefectiveByDesign: that all DRM is bad - inherently wrong, wrong in principle. Ideally, gamers should be able to use their games (and music and movies) without ever running into restrictions during normal use. At the same time, Steam is there to stop people from uploading/downloading games to filesharing sites. Gabe Newell is frequently misunderstood when talking about DRM. You often have to parse his words very carefully to understand exactly what he means. For example, Joystiq paraphrases him as saying “Gabe Newell wants to shake up the way the industry works by … getting away from DRM as copy-protection”. That sentence sounds like Newell is opposed to DRM. He’s not. The original article quotes him as saying: “Newell believes that digital rights management software that is presented as copy-protection gives a game a stink.” Newell is suggesting digital rights management that isn’t presented as copy-protection - it’s presented as a system to automatically download patches, etc. In an article less then six months old, Doug Lombardi (of Valve) was quoted as saying:

Lombardi, and others I spoke to off the record, say that at least for digitally downloaded PC games, DRM and copy protection is here to stay. For Valve the biggest push is to lock down those “zero day” pirates. Day zero is the time between when a game goes gold and when it is available for purchase… The key to making a good authentication system, Lombardi says, is to not stand in the way of customers enjoying what they bought.

By keeping their DRM strings invisible, many gamers seem unaware of the fact that Steam is DRM. I see examples like this all the time:

Valve seems to have managed to simultaneously use DRM and get lots of people to praise them for not using DRM. And, of course, if people break their DRM - well, Valve can fall-back on the fact that only legitimate buyers get the weekly updates mentioned earlier.

-Concept art for everyone: Newell wants creators and customers to be in more direct communication with each other before and after the release of a game. One such method is to show concept art early, which builds buzz. The concept art, Newell said, “is a more effective tool [for building buzz] than most of the advertising around your product.”

This idea isn’t even remotely new.

It won’t be better graphics that determines a winner in the next console generation (which, of course, it never has been: see the N64, Xbox and PS3). It’ll be the extent to which a console allows game creators “to have this relationship with your customers.” The “this” is everything bullet-pointed above.

True. You want customers coming back to your website over and over. I’m sure the Valve-customer relationship will establish their website as great place to advertise their next game, increase brand recognition, open up more possibilities for selling old stuff / merch, becoming more than just a faceless corporation, etc, etc. The other day, I was thinking about how the games industry is different than a lot of other industries. I don’t really remember what companies made which games, and which games were made by which companies. It’s just not that important because titles are so variable. I’m never in a position where I say, “Oh, Valve made X. I like that game. Here’s another game by Valve. I’ll probably like this one, too.” But, when I’m talking about a musician or an author, I think it’s a different situation - I might buy an album from a musician if I like their other stuff, even if I haven’t heard a single song from that album. And people have a pretty good idea what a book will be like if it’s written by Stephen King. But, we just don’t follow game companies like that. Maybe games are more variable in their execution. What this ultimately means for game companies is that they have to convince customers of the merits of each and every game (rather than relying on an “established reputation”). The relationship Gabe is talking about plays an important role in selling the merits of the next game.

In the end, I don’t think Gabe Newell has much new to say, and it certainly isn’t a “very different gaming world” (as the title of the article suggests). One thing that did occur to me while reading this, though, is that the gaming industry is picking up the same strategies that politicians have used on the campaign trail: repeat yourself constantly. Repeat, repeat, repeat - drill in your ideas over and over because different people are listening each time. It seems like the game companies maintain a set of talking points - stuff they can repeat to game journalists for a story. (I remember Brad Wardell of Stardock doing the same thing.) I hope I never have to play that role. I get really bored of repeating myself.