Things are more fun in neon blue
Hardware and Games
Ten years ago, the “virtual goods” model for games was described as the “Asian model”. Some noticed. In 2009, when I was running my Asia consultancy +8* I gave a talk on the topic at the Virtual Goods Summit (Asian virtual goods market is seven times bigger than U.S.).
Then in 2013 microtransactions overtook pay-per-download and ads in mobile game revenue. Today it’s a large majority, and gaming has become really hard.
And making games is more and more costly, and risky. Launching a game is difficult due to millions of apps out there. Then you’ll be taxed 30% by platforms, and will likely spend on ads too. Ad costs will eat into your revenue and “lifetime value forecasts”. One download from ads can cost between $1 and $5. Big companies with tons of cash spend millions. Especially those making millions.
Companies use the same tools, the same platforms for distribution and ads. Many replicate proven game mechanics and game genres. Some rare indies succeed but it’s rarely a home-run: Monument Valley made $5.8m, with a $1.4m development cost (it is not clear if revenue already deducts the 30% platform fee).
Why do I talk about gaming? Because it’s a lot like hardware.
- Development time and cost is significant (unless you’re Flappy Bird or the hardware equivalent)
- Distribution and advertising take 30~50% of revenue
- You can’t “pivot” easily
- Hardware monetization is upfront, and you can rarely try before you buy.
- GaaS means you lose lots of visitors.
- Additional sales for hardware hasn’t been done much for hardware except in the telecom field (where devices are subsidized and people pay for a service).
- The old joke was “we lose money on each product… but we’ll make it up on volume”. Today it could be “… but we’ll make it up on data”. Only companies with lots of cash can afford that. Can startups really play that game?
Some key benefits of hardware vs. games (or software in general):
- Technology / differentiation / innovation is much more open with hardware.
- Hardware has much less cultural barriers than software. In many cases it is supposed to be “self-explanatory” and “doing a job”.
Of course, this does not apply to the 100th smart watch, activity tracker, 3d printer or drone (let Xiaomi do that and beat everyone on price). Build something much better or different.
In gaming, “reasonable” investors would bet either on:
- Repeaters (with successful exit)
- Experienced teams (e.g. ex-SuperCell PMs)
- Explosive growth
And that’s about it.
With connected devices, that would be:
- Experienced teams
- New tech
- Great demo
- Good crowdfunding
- Local adaptation of proven success (“Lockitron for Europe”)
What do you think?