What does Focus mean for a video game company?
In his book ‘Focus: The Future of Your Company Depends on It’, Al Ries explains this concept very clearly:
“The sun is a powerful source of energy. Every hour the sun washes the earth with billions of kilowatts of energy. Yet with a hat and some sunscreen, you can bathe in the light of the sun for hours at a time with few ill effects. A laser is a weak source of energy. A laser takes a few watts of energy and focuses them in a coherent stream of light. But with a laser, you can drill a hole in a diamond or wipe out a cancer.”
The same principle can be applied to your video game company. With Focus, you are able to dominate the category you intend to attack. Without Focus, you lose all your power. You become a sun that wastes its own energy on too many games and too many categories.
The fundamental concept here is:
Only after your video game has become a leader in its category, then you can start developing a new one.
But Federico, how come big companies have more than one title in their catalogue?
This is true, but as you said they are BIG companies: Ubisoft, EA, Activision, Supercell, etc. They have a cash flow that you currently don’t have. Big companies can afford to burn millions of dollars on prototyping new video games, which will probably have no success, and still remain in the market.
For indie companies, it’s a different game. In the first years, an indie developer must have clearly in mind one single concept:
One company → One video game
Why then, do all video game companies develop more than one game?
There are two main causes that lead companies to lose their focus: diversification and line extension.
1. Lack of Focus: Diversification
Diversification is the by-product of the main objective of all companies: growth.
Management expects an increase in sales and profits every year, even though a company product might show no growth.
In order to reach the target growth, companies start offering variations of the same product, enter different markets, or acquire companies from different markets.
You can call this process either “diversification” or “synergies”. In any case, it’s the process in itself, the urge to grow, that leads companies to defocusing.
This is the main reason why Hiroshi Yamauchi almost destroyed Nintendo in 1964.
Nintendo was created as a small shop in 1889, specialised and focused on one single product: Hanafuda playing cards. The focus of the company reached such high levels that at the beginning of 1962 Nintendo dominated 80% of the playing card market. However, the idea of being restricted forever in one sector terrified Yamauchi.
Yamauchi had two possibilities:
- Diversification, expanding into sectors other than toys and games, or
- Ride the imminent technological progress, and try to create new categories in the toy sector.
Yamauchi chose diversification, giving the following explanation:
“The products of the entertainment industry are, unfortunately, not a necessity. It is possible that the playing card market could disappear at any moment, leaving space to more entertaining products. For just such a reason I intend to diversify the activities of Nintendo into other safer, more useful and promising sectors.”
Yamauchi and two of his partners then started trading instant rice. He created the Sano Shokuhiro Company and built an entire factory of 5,000 square meters on the outskirts of Kyoto. Later he started other projects, such as noodle soups and condiments. Then he launched into Love Hotels, an expanding sector that offered some hours or a night of privacy to couples (married and not). In the same period, he invested in a Taxi company too.
What happened to all these attempts? They all miserably failed. Yamauchi had not understood that in Japan, the name Nintendo meant only one thing in people’s minds: playing cards.
After all these failures, many were amazed that Nintendo was still operative. In 1964, Yamauchi even got to the point of declaring:
“At the end, if Nintendo had not been quoted on the stock market at the time, I probably would have been forced to declare bankruptcy.”
Such are the consequences of defocusing.
Nintendo remained alive thanks to its good old playing cards, the only product still capable of generating profits.
Finally, in the second half of the ’60s, Yamauchi decided to focus again on his prime activity: games.
He created a research and development department and started exploring new territories in the world of toys and games. Two new types of games were created, which, at that time were considered innovative, and in 1969, the instant rice factory was reconverted to produce games.
Yamauchi had understood a very important thing:
“I realised that in order to grow, I had to create and develop entirely new markets. It was too difficult to fight and compete with companies that had been in the sector for much longer than us.”
I write this fundamental concept again:
“It was too difficult to fight and compete with companies that had been in the sector for much longer than us.”
That is, other companies had already positioned themselves as the first choice in the people’s minds; there was no space for Nintendo.
“There were different categories, and anywhere we tried to enter, we always met the power of competition. In which field could we have become dominant? In none except those that were as yet unexplored. And to us, this was the field of electronics. We didn’t take this road because we were genuinely passionate about electronics, but rather because we had no alternatives. It was our last chance to develop and impose ourselves.”
Translated into the language of Positioning:
We created a new category in which we could position ourselves first in the players’ minds.
Yamauchi acknowledged that sometimes passion must be put aside for the sake of the company. The story of Nintendo encompasses everything that should and should not be done to succeed in the video game industry.
2. Lack of Focus: Line Extension
Line extension consists of applying a specific brand to products that belong to a different category, and it clashes with one of the main rules that you have to keep in mind when dealing with marketing:
One product → one brand
The majority of companies do the opposite. They create a brand and then put under it as many products as possible. Everything that comes into their minds.
A typical example is Zynga, created in 2007 by Mark Pincus. The first game of Zynga was Texas Hold’em Poker, today renamed Zynga Poker. For the first two years, the company focused on this game alone, and in 2008, they obtained a first round investment of $30 million.
In the following years, Zynga began to expand their line of products, adding new games: Mafia Wars, FarmVille, Words With Friends, and CityVille, to name some. Despite the fact that many of Zynga’s games were in Facebook’s Top Ten- according to Daily Active Users numbers, the company’s profits started to suffer.
In 2011, Zynga was quoted on the stock market and published 12 new games, among which Empire & Allies, CastleVille and GagaVille (a re-skin of FarmVille, branded Lady Gaga). At the end of the year, the company’s financial report was a record of $1,140,100, but with an operative loss of $405,616.
The line extension continued, and in 2012 Zynga published another 22 new games: Hidden Chronicles, Zynga Slingo, Scramble With Friends, Dream PetHouse, Dream Heights, Draw Something, Bubble Safari, Ruby Blast, The Ville, Zombie Swipeout, Zynga Slots, Matching With Friends, ChefVille, FarmVille 2, Gems With Friends, Montopia, Bubble Safari Ocean, City Ville 2, Coaster Ville, The Friend Game, Ayakashi and Party Place.
The brand “Ville” alone was extended to 9 games (see the picture above).
Apparently, this was the best year for Zynga. Their operative revenue reached a record number of $1,281,267. The number of DAU and MAU was 56 million and 298 million respectively. But it wasn’t all a bed of roses. Zynga had another operative loss, this time of $182,971.
Shareholders started demanding actual results and were not impressed by DAU and MAU vanity metrics. Zynga shares dropped to $2.12 per share. A loss of almost 80% of their nominal value.
In 2013, Marc Pincus resigned as CEO and Don A. Mattrick took his position.
Many managers believe line extension works because big companies apply it. “If they do it, then it must work.” But these same managers don’t verify facts and figures: revenues, financial reports, and profits. They think that whatever a big company does is all good. But if you look at data, it’s not good at all.
Yes, even managers of big companies, who are paid millions, do make elementary mistakes.
Positioning is a discovery that can be compared to Galileo’s discovery about the rotation of the Earth around the Sun. Every innovative discovery meets initial resistance, which is directly proportional to its importance. Brand Positioning is no different.
Why then, do managers of big companies believe in line extension, despite that facts say the exact opposite should be done? The reason is that line extension is a losing game in the long term, but a quite profitable one in the short term.
Profitable for who? The managers.
The first objective of many managers who start working in a new company is to demonstrate that they are better than their predecessors. Instead of building up a brand name and an image for longer-term goals, they throw the company into line extension because this is the best way to increase revenues in the short term.
But if you do that with your startup, be assured that you will fail in no time. Small video game companies that shovel game after game onto the market, each one completely different from the previous one, have no future.
You are not Ubisoft, nor Electronic Arts. Therefore…don’t behave like them.
A second game (whether as a line extension or not) makes production, testing, pipeline, graphics, and QA more complicated. Until the first game has reached a dominant position in its category, it doesn’t make sense to develop a second one, because it means you are simply trying to scrape up money, heavily complicating the situation for the company and its employees.
You may launch a new game and create what is called a family brand if:
- It makes sense,
- It doesn’t compete with your first game,
- It doesn’t clash with the original Positioning or foolishly ends up behind something the competition is already doing, and doing better than you.
…However, you can do this only if your previous game is doing better than competitors ones.
When we developed Fallout Shelter, it wasn’t competing with Fallout. In fact, it did exactly the opposite:
- Fallout Shelter is a mobile game, whereas Fallout is a PC and console game,
- Fallout Shelter has completely different gameplay and target audience,
- Fallout Shelter was developed to hype up players’ expectations while waiting for Fallout 4 to come out. Its purpose was to feed immediately a “starving crowd”.
Fallout is a good example of Family Brand.
To recap: video game companies that survive in the long term are the ones who focus best.
MindArk’s lesson that every video game company should follow
But if the concept of Focus is so important, why do only a few companies apply it? Why is this principle dismissed by the majority of CEOs?
Because defocusing is a powerful force, called entropy in physics.
Paradoxically, for MindArk, the company that has created the video game Entropia Universe, the concept of Focus is very clear.
Entropia Universe is the leader in the category of Real Cash Economy Games. The game was launched in 2003 and is still active today.
Here some extracts from the company’s 2018 Financial Report, published on the MindArk website:
“As MindArk does not have a direct competitor in the segment of virtual interactive universes with a real cash economy, the closest gaming genre to what MindArk offers is the MMO genre (Massively Multiplayer Online game). If we look at the MMO genre, MindArk competes with other global gaming studios such as the largest MMO game in the western world, Blizzard’s ‘World of Warcraft’.”
Entropia Universe is the undisputed leader in the category of real cash economy. MindArk’s strategy was not to directly compete with World of Warcraft, as several other videogames companies did and still do. MindArk understood that doing so it would be a lost battle. They decided instead to create a new sub-category of MMO games and become its undisputed leader.
We also read:
“One factor that differentiates MindArk and Entropia Universe from the competition is the game’s virtual economy with microtransactions, and its own currency, Project Entropia Dollar (PED), which has a fixed value against the USD (10 PED = 1 USD), and the opportunity for participants to both deposit and withdraw money in a safe manner.
A further differentiation is the Planet Partner model, which allows other developers to partner with MindArk and build their own planets within Entropia Universe, sharing revenues generated on the planet. (…) MindArk has a leading position in this area.”
MindArk clearly knows their positioning compared to competition as well as their differentiating points.
Sixteen years developing the same game. And still only 41 employees. Tough luck for most video game companies aiming only at “growing, growing, growing”, and then having to manage a disorganised betentacled monster that leads to crunch times, ridiculous profits (or losses) and mass layoffs, as happened to Telltale.
However, MindArk has been a victim of line extension too:
“The company’s main product Entropia Universe has generated a very good profit, however the company’s total earnings have been negatively affected by side projects. The company has wanted to expand partly by developing an app (ComPet Game) and partly by creating a marketplace for virtual objects (DeepToken). However, both these projects / products have only generated costs and no revenues during the financial year.”
“Looking only at Entropia Universe and its revenues and expenses, one finds an operating profit of SEK 20.4 million and a profit before tax of SEK 17.1 million, i.e. Entropia Universe is an extremely profitable product.”
No need to comment: the data speaks for itself: almost 2 million in operating profits (Euro).
Even the managers of MindArk fell into the line extension trap, although they soon realised that this is not healthy for the company’s finances and made amends.
If you do only one thing, and do it well, you can build up a reputation that most likely will guarantee you success in the long term. Unfortunately, you may have to starve in the short term; and that is why it is crucial for a start-up to have a sufficient initial capital. However, if you have enough initial capital but not a well-defined positioning strategy, you will gain enough time only to stay afloat a little longer.
I would like to close this article with a quote from Al Ries book, Focus:
“If there were nothing but general surgeons and you were the only brain surgeon, you would have an incredible business and you could charge outrageous prices. Companies that find themselves in similar situations think the opposite. Imagine a medical practice saying to itself: ‘We are known as terrific brain surgeons, so let’s get into the heart, liver, lung, and limb business’. In other words, they turn themselves into general surgeons. It never happens in medicine. It does happen in management.”
The next article is a deep analysis of Telltale from a Positioning point of view. We will see which mistakes the company made and what they could have done to save a sinking ship. Subscribe here if you want to receive a notification and read the article before anyone else.
To Your Success.