Monetizing The Video Game Industry

Peter Drucker once argued that a small business has its greatest opening to compete with a much larger competitor when the competitor is more concerned with monetizing some aspect of the business rather than innovating and improving what the customer receives.

This opening is now apparent in the video game industry.

Up until the past two or three years, video games offered the greatest entertainment value per hour spent. If you spent $60 on a video game, but played it 2-4 hours per day for three months, you would receive 270 hours of total cumulative value from the game (I use these numbers as an example because the average video game purchase results in approximately 267.4 hours of use).

The entertainment cost per hour for video games has been about $0.22. That is a very effective cost for your entertainment. If you choose to watch a movie, and pay $15, plus $5 for a snack, your entertainment cost per hour is around $10 and once the experience is over you can’t recapture or continue it.

But that competitive advantage is starting to wane as video game makers have studied the biological reasons for why people play video games for long periods of time and discovered that people stay the longest when they are accomplishing tasks that feel like they can be done within 10 minutes, it will require some skill to accomplish the task but it is ultimately possible to complete, and there is some sense that you are becoming more accomplished as the journey proceeds.

Video game makers are no longer content to only make the one-time $40-$80 cost on the game. They know what an advantage video games offer when the cash outlay is compared to time spent and calculated at the hourly rate mentioned above.

So what have they done? They have identified the moments when a video game player most desperately wants to proceed to the next step, and at this moment when a player feels the greatest likelihood of wanting to prevail, an option to purchase some advantage (such as a secret weapon!) opens up if you are willing to pay $.99 or $1.29.

Instead of a one-time cost, video games are trying to transition to becoming a relatively high upfront cost ($40-$80) that gets mixed together with a regular revenue stream of $0.99 or $1.29 purchases. Like businesses that have added on “fees” in recent years, this new revenue stream is addicting because it is seemingly conjured up out of nowhere and allows a video game to be popular for the producer long after it is sold.

This is what creates an opportunity for a small-time developer to gain a foothold in the market. You compete with the big boys by pivoting towards user experience in the exact place where they are pivoting towards profits. The smaller outfits that make video games, relying on a business model of the one-time initial payment instead of glad-handing for additional payments, will have an opportunity. Especially for video games targeted at the children and teen markets. Parents may be comfortable shelling out $50 for a video game that represents a one-time outlay, but may be more reluctant to purchase a video game that seeks payments during usage.

It is of course difficult for a new entrant to compete with its more established, well-known, and capitalized rivals. The obvious question is: How? I would look areas with the established players are making decisions in the name of monetization rather than customer experience, and then beat them on customer experience to establish the foothold. When a decision is made for profits that is directly adverse to that of the customers, therein resides the Achilles’ heel.