Let me start by sharing how I experience the lockdown in this new COVID-19 reality... Na! Who cares?! I'm at home. My employees are at home. My employees' kids are at home driving them crazy (sorry kids, I love you). Everyone is safe. Just stay safe and learn from this experience. I've learned a lot. End of my COVID-19 intro.
In the past few weeks, I took some time to speak with clients from the gaming industry about their businesses and operations. With the coronavirus impacting different aspects of our lives, it's not a secret that entertainment companies and specifically game publishers are seeing a significant increase in users. You'll read plenty of articles talking about the race to the billion-user run by gaming companies. The Hyper Casual game industry is based on this. The equation is simple: the economic model is based on ad revenues - the more active users, the more incremental revenues.
It sounds pretty simple. But if you look a bit closer, most of the new game publishers are interested in launching multiple games and looking at the combined number of DAUs across their multiple titles. This is quite new. The traditional game studios are still there, releasing one big hit each year, but new, big hyper-casual publishers are rising each month. Their model is Hyper Casual but also linked to hyper-growth. It is actually their only way to survive. Why is that?
CVP (Cost-Volume-Profit) for Game Publishers
This new model takes me back to my days in university, sitting on a bench at one of those boring Economics classes. The Cost-Volume-Profit analysis consists of a very simple ratio: Cost/Marginal Contribution
With this ratio, you realize how much you need to sell to breakeven. If margins are high, production and operations costs will be covered faster, and you can afford to sell less. If margins are low, you'll have to sell much more to cover the expenses. That brings most companies to make a decision: either to sell a high-quality product that costs a lot to produce at a high price and compromise on the number of sales, or to sell a lower quality product at the lowest price point but with a high target of sales. End of the flashback.
Now let's apply this lesson to the video game industry. Until recently, there was only the traditional games business model, which is quite similar to the movie industry. Every game is the result of months of design, production, and reflection. Applying a high level of investment to release a top chart game that users will stand in line to purchase or empty their pockets on in-game currency. These companies are relying on fewer and more valuable players, as the breakeven point can be reached quite fast if the game is a hit. In their case, the counterpart is that there is a high risk that the game won't be a blockbuster, and the massive investment will be lost. So just like in Hollywood, to create the next big thing, you'll need a lot of money, extensive experience, and a huge team. Only the big ones succeed, and there's not much room for newcomers.
Now there's a new way to make history in gaming: a short production game development (casual, hypercasual). You need to find a small creative team that's able to design original, simple games. The cost of it is much lower than the classic games I mentioned above. The value you give to the user is quite limited in the long run, so you need to make it free and rely on advertisements for monetization. But revenue per user is quite low; the retention is not so high, which limits the exposure to ads and, therefore, the number of impressions and, as a result, the revenue. This means you need to make the most out of each user in the short term, but mostly, you need to get a lot of users very fast. A lot of users that generate low profit will still allow you to cover costs. The bright side of the story is that the risk is limited. You don't need to invest so much to know if your game is a hit or not. The downside? You need to have more than one game in the top charts to score the one billion users that will make you rich.
A simple Price/Volume strategy: multiple low-cost products, low value, low retention, low price, and low margin. You need to generate lots of sales to compensate for the small margin contribution. Hypercasual is born!
With a big H because it's more casual than Casual, but also because it leans on Hypergrowth.
Test – Learn – Scale – Repeat
And it works. And it grows super fast. Many markets raised leaders in this field, influential companies that can raise a few hundred millions of dollars. The next Unicorn will come from there if it hasn't already. These companies trust the game industry. They created their own ecosystem funding indie developers, becoming the best game marketers/monetizers,
merging or buying studios...
Okay, all this sounds very exciting! Someone might say, where is the "Hyper Casual for Dummies" book, I'm starting tomorrow. Wait. Who said that there is no risk? You're manipulating low-profit clients. A competitor can come and take your users. You can bring millions of users that will never use your app. You can fail so many times that you can burn your cash in a blink of an eye. You need experience, you need a method, you need the right chain of production, you need the right tools to streamline everything and limit the risks. You'll need to acquire users quite fast and to invest money in it. You'll need to scale globally 1, 2, 10, 50 games at the same time to make a profit. You'll have to design and test multiple creatives, a number of Ad Networks, various optimization models. Again, and again. One small mistake can result in burning a lot of marketing dollars and ruin everything. You'd better be equipped before starting.
If you think about it, every industry tries to gain productivity by automating tasks. Gaming is no exception. Data science is the key here. If you find the right algorithms, you win. But you'll need to automate everything. One right decision can get you an uplift in profit? What if you take 100, 1000, 100,000 right decisions, automatically? What if you could handle 10, 50, 100 games with the same methods, task force, and with a gradual budget increase. Remember the CVP ratio? The improvement is simple mathematics.
Take this from a digital marketing Dinosaur (or don't) - you can analyze your data forever, and it can tell you terrific stories. If you can't scale with it, they will stay good stories. If you manage to use your data and automate your decision at scale, it will become The Story. Especially if your business is based on scale.
Many companies are already writing this story. I'm happy to be working with some of them and contribute to their writing ;)
Stay safe!
Stephane Pitoun