Their argument is witty, but it’s not new. It paints file sharing as stealing money from developers’ mouths, and so has an either/or perspective. Either we get paid or we go out of business. Either we see sales or we’re bust.

They’re seeing their business as a content business, where the content is the thing that has value. This is not the case.

The games industry, like all the arts, is about finding and interacting with fans, so that value comes from a relationship. As we slowly move into the post-platform, single-franchise future, understanding the difference between the two is crucial.

Thomas Paine

The pattern of sharing, copying and stealing as a way to generate sales is not new. The Internet may make it more apparent than ever before, but it’s at least as old as Thomas Paine’s Rights of Man.

When Paine wrote his seminal tract during 1791 and 1792, it caused a storm. Framing the ideas of the French and American Revolutions while dis-enfranchising the rights of kings, Paine’s book became a touchstone for a generation of intellectual thought. It also sold in excess of 250,000 copies (which is like selling 5m copies today) and made him a household name.

Paine’s book actually sold in two parts. The first was published as a typical high priced book in 1791, and the second in 1792 in a cheaper edition for wider circulation. It was the second part that drove sales and turned Paine into a storyteller. The question is why.

The curious aspect of this story is that many customers never owned the first part, and yet to understand the second part they would have required at least some familiarity with the first. The simple answer, of course, is that more people read, shared and passed on the ideas in the first part than physically bought it.

We see a similar pattern with many game franchises today, where the second or third edition of the game is the one that actually achieves the maximum potential sales. Even in games that have a story element, such as Halo, this is shown to be the case. Again, the only explanation is that more people must have played the first game than actually bought it.

Art seeds the idea in the audience that there will be more art. When Damien Hirst creates a newsworthy shark in a tank, it seeds the idea that there will be more work of similar bizarreness. He finds a following that want to view, buy and interact with his art for the long term. However in order for that to happen, it has to feature in a gallery. The gallery makes access to the art free, which exposes it to millions of viewers, and some of them go on to become customers and fans.

The One Shot Fallacy

Many developers and publishers never think in terms of sequel potential, or they only think in terms of sequels if the first game that they have made turns out to have been an explosive hit. Many of them also fail to maintain or continue the conversation with their customers between releases, and this means that they fail to maintain the connection that they were building.

They are thinking of their business in the terms of one-shot economics. One-shot economics views their game as a bullet in a gun, and they have only one shot to hit the target. The target is, of course, that the game has to make a lot of money. It can’t fail, and can’t only acquit itself. It must be a hit, or else the developer will be destroyed.

This quickly leads to ARPU (average-revenue-per-user) obsession. The focus is on distributing the game but making sure that every sale is achieving enough to meet revenue expectations. This places the publisher in a state of conflicted ambitions, because they also want to ensure that the game sells many copies.

That’s where advertising costs come into play. In order to make a high price game sell big, you better have the muscle to tell everyone on Earth that it exists. And to do so in as short a time as possible to avoid discounting and dropping popularity.

That’s how the games industry basically thinks. A lot of indies think the same way, for these reasons:

– That’s the advice that they read
– It’s the conventional wisdom
– Some of them come from the bigger industry and learned this there
– Several of the major sales channels are constructed to sell in this way
– It seems like common sense
– They’re afraid of customers

The only difference between indies who think this way and big publishers is just a lack of deep pockets. They can’t afford the big marketing spend, but still charge more than they should for copies of their games (I think the optimal price for indie games is $5, not $20) to get that ARPU.

This works to keep their game in a small niche and frustrated that their customers seem intent on ripping them off. Viewing customers in that manner will drain you of enthusiasm for making games because it feels like continuously fighting a hydra in order to get a shot at a golden fleece.

One-shot economics mostly don’t work because the developer or publisher makes the mistake of thinking that all sharing is the enemy (torrenting, second hand sales, rentals, borrowing in the school playground etc) because these activities take away from the one shot of ARPU that they need. In so doing, they actively work against the most powerful potential weapon in their arsenal: Seeding.

Value

Realize that your game content is entirely valueless. You may have spent days, months or lifetimes working on it, but what you have created has no tangible value. At all.

However, before this makes you commit suicide, consider this: Google has no tangible value. Facebook has no tangible value. Twitter has no tangible value. And yet each of them is considered to be worth many billions by investors and stock markets, and each makes billions in revenue. Google is a $200 billion corporation that has made its fortune on a product that it gives away, completely free, to everyone. The same is true of the others.

The reason that they, and many games, have zero value but plenty of worth is that they are gateways to something else. Google makes money from advertising. Facebook makes money from advertising and sales of virtual goods. What these companies are doing is leveraging relationships (in search and social) on a vast scale in order to make a profit. The fact that the product is free is why it spreads so far, and the revenue comes later.

This does not mean that you have to run a hosted game that gives its content away for free all the time and charge for virtual goods. You can, but it’s not the only way. What it means is that your game, and you as a developer, needs to be built with the idea of forming a connection with players, and to do so with as many players as possible. The relationship that you establish with those players is the true source of revenue and success. I call this single franchise publishing.

For example, suppose you made a cool strategy game and sold it for $10. You expect it to be pirated by various sites quickly. Your choices are to install some DRM to make sure that every copy sold is legitimate, and then have a running battle with pirates who crack that DRM.

Or alternatively you can let the pirating just happen and instead build social features into the game (which could be as simple as links to your company forum) and a requirement that people who need customer service buy a legitimate license. Then you participate in your forum all the time and start telling everyone about version 2 of the game, which will be out in 6 months and cost another $10.

If your model is based on one-shot economics, the risk is that you will not make your sales requirements first time. So the second option (let pirates be pirates) is directly eating away at your bottom line. On the other hand, if your model is based on valuing relationships then it doesn’t matter.

A pirate will likely pirate anyway, but instead you are focused on converting them into a customer eventually. And when the second version comes out, the process is the same. More customers, more pirates, more participants in the community, and here comes version three.

What you are doing is seeding relationships, and then those relationships are yielding positive dividends from customers. Regardless of where the customers come from, legal or otherwise, they will eventually pay you money out of a sense of support, interest, convenience or any one of a dozen other purchase motivators as long as you don’t let the relationship die.

Of course, you can apply the same thinking to online games, massive multiplayer games and social games. The main difference is simply the frequency of releases and the kind of financial model that those games can support. Each is making money from relationships in different ways, but relationships are at the heart of their businesses.

The ultimate goal in all this is to own a keyword. What that means is that your game franchise or company becomes a search term that Googlers use in their day-to-day searching. Establishing a popular keyword, or becoming the top search result for a keyword that already exists, creates a ‘to the winner, the spoils’ effect. And the best way to do that is through building relationships because that will result in links. Links are the currency of the keyword economy. The more you have, the better.

Minding the Gaps

The chief argument leveled against this kind of thinking (such as by IFPI in their latest report) is that sales gaps emerge. They note that in the last seven years, sales of physical music have dropped, and that digital sales have not covered the gap. The accusation is to say that all this talk of sharing and fan clubs may well add value, but it’s about the bottom line. So let’s get real here. We need to protect ourselves.

Indeed. Let’s get real. The reality is one of two situations. Either:

1. The IFPI’s measurements are incomplete because they do not take sufficient account of the increasing numbers of independent artists who simply don’t bother selling through traditional channels.

2. The IFPI’s measurements are correct, and the amount of sales revenue has in fact dropped.

Assuming the second version is more likely to be true (actually it’s probably a combination), what layer of the distribution chain does it come out of? The answer is the publishing layer.

The scare story around piracy infers that in the future a developer will no longer be able to make a profitable living, but this is just not the case. The Internet automates sharing and connection between the artist and his fans. So in games what this means — like in any industry — is that the price of distribution drops to near zero. That also means that the amount of available competition increases, and so the sustainable price of the product also drops.

The missing revenue caused by the sales gap is not hurting creators. What it’s doing is slowly putting a lot of people who work in the publishing factory out of jobs because what they do is simply less essential. Single franchise publishing probably implies that much of the one-shot economy will shrink down to a more manageable size. Right or wrong, there’s not really much that can be done about that, however, as automation of the processes that publishing used to offer is here to stay.

The essential reason why you should love your pirates, sharers, borrowers, lenders, second hand retailers and so forth is that they become your new levers of publishing. Everyone that plays your game, legitimate or otherwise, is another node in your network that may spread the name of your game and its marketing story. Each is an opportunity to build a relationship, convert into a customer, become an influencer on your behalf, and so help your single franchise to spread.