By Brian Hook
(July 2003)
Launch:
Beta May 2001 / Gold October 2002
Download velocity:
Approximately 1 million game downloads per week
Sales velocity:
More than 1 million game sold to date
Customer base:
More than 15 million RealOne Arcade downloads
More than 1 million subscribers to RealOne services
More than 50,000,000 active RealNetworks customers
Primary business model(s):
Subscription and e-commerce sales of downloadable games
Secondary business model(s):
Advertising, sponsorships
Key partnership opportunities:
Affiliate distribution, game distribution and sales, customer acquisition
Basic business model for game developers:
RealOne Arcade provides worldwide, non-exclusive, turnkey online distribution,
marketing, sales, catalog, consulting, and support services in exchange for
a percentage of gross sales through our channel.
Title:
Executive Producer, RealOne Arcade Games
Role:
Developer relations, product selection, investment in, production of, and release
of game content for ESD through RealOne Arcade.
Years in games industry:
14 years
Areas of professional experience:
Project management, game design, QA, web development, online community development
# Titles shipped:
A ridiculously high number which makes no sense out of context, and so I'm
reluctant to quote it
General Bio:
David has a harbored long-standing passion for enabling independent developers
to bring innovative new products to market. 3+ years ago David abandoned
a 10 year career in PC and console development to roll the dice on something
completely different. The gamble has paid off thus far. As a founding member
of the RealArcade team at RealNetworks, David has played a key strategic
role in the establishment and growth of the emerging Electronic Distribution
(eg - "Downloadable") games channel. This allows him to expand
on-line distribution, merchandising, and commerce opportunities that allow
game developers of all sizes to bring unique products to a whole new audience
with less risk and more fun!
Q: How did the idea for RealArcade come about?
RealOne Arcade has been driven in a large part by the vision of Andrew Wright,
General Manager of the games division. He was way ahead of the curve – back
in 1999, while everyone else was building web games and huge server farms
to sell ads to eyeballs, Andrew was envisioning a dramatic evolution of the "shareware" model
and looking at distribution models for downloadable content. For more than
three years, Andrew and his team have been working to realize that initial
vision.
With the belief that the vast majority of real innovation in the games business seemed to be happening in independent studios, RealOne Arcade offeres a powerful tool for enabling independent developers to innovate and expand the breadth of the video game consumer audience.
Q: RealOne Arcade seems to be gaining a lot of momentum over the past year. When it was originally rolled out I know a lot of people viewed it with some skepticism, but now it seems to be one of the pre-eminent portals for indie developers to present their titles. How has this matched up with Real's expectations?
We did a lot of research before entering the market and we’re very pleased to say that RealOne Arcade has met our expectations and exceeded some others, particularly with respect to the success of some independent developers.
Q: RealOne Arcade carries an extremely diverse set of titles, from puzzle games to shooters to pinball games and everything in between. How have the various genres performed for you?
The puzzle game genre has certainly been very successful, but we have had successful games in adventure, arcade, action, platform, and sims. Titles that do well share some pretty clear characteristics which seem to come more easily to puzzle game designs than they do in other genres. Successful games tend to be small, completely controllable with the mouse alone, easy to pick up, easy to learn, immediately addictive, broadly compatible, "family friendly", and broadly appealing.
Q: The top 10 list seems to be dominated by puzzle games. Is this a conscious effort on your part, or just a by-product of the market "speaking" to you? What type of effort is being made to attract buyers from other fields?
Puzzle games often dominate the top 10, but how much of that is self-fulfilling? We spend about 80% of our release capacity on games in established genres that we expect to generate strong revenue. These games are primarily puzzle and arcade games – with puzzle games being far more common. About 20% of our release capacity is spent on games that we think might break new ground for us. We use these to test the waters and see how our audience reacts to them. With an audience as large and diverse as ours, it's fairly obvious when we discover a new sort of game with potential – two good examples are “Geneforge” and “Brave Dwarves 2”. We work really hard to apply the overall design goals I mentioned in the previous answer to new game types. So the 20% of the games we use to expand our market take 80% of our producer time.
Q: Another trend I've witnessed with RealOne Arcade’s popular titles is that there seem to be a few perennially popular titles, and the occasional "title du jour". This feels like a hit-driven market, much like retail game sales, so sustainable sales for a "good but not great" title would seem difficult to achieve. What's your take on this?
If you’re asking if downloadable games are a hit-driven business just like in retail, then the answer is generally "yes".
That said, there are a few significant differences between retail games and downloadable ones. First, "shelf space" is less of an issue. In RealOne Arcade, titles can "find their niche" and though they may not drive sustained conversion at very high download volumes (e.g. - broad promotional placement), many titles' performance stabilize at a constant volume level. If the game then "converts" well at it's appropriate volume level (indicating high customer appeal in that niche), then it can stay on the shelf for a long time. We've had solid performing "niche" titles that have stayed in distribution for years.
Second, the costs associated with both building and continuing to sell these products is pretty small. When your costs per product are small, a hit product can pay for a lot of misses. Not only that, most of the misses at least break even, so the only cost to the developer was the opportunity cost of not creating a hit. It has been very rare, in my experience, that a truly "good" game, one that was solidly executed, with a great concept, that paid homage to the key success factors of the digital consumers failed miserably.
Thirdly, the time it takes to make a downloadable game is comparatively short. As a developer, you no longer have to put all your eggs in one basket, spending millions of dollars and two years of time only to create a game with a very short shelf life, and then spend more millions and more years making up the loss. With RealOne Arcade, if your game doesn’t perform well, make another one – or make three or four more this year. If you are persistent, creative, and you listen to your customers, you will most likely build a profitable business within a year. You might not be a multi-millionaire yet, but you'll be on your way to sustainability.
Q: RealOne Arcade is one of the most visible portals for on-line distribution of titles. What are your feelings on the future of electronic software distribution and how it relates to traditional game titles?
Electronic Software Distribution (ESD) is here to stay. Its making money for everyone involved. It's sustaining a high level of consumer satisfaction with a type of customer that doesn't traditionally buy games at retail, and definitely doesn't buy the games you refer to as "traditional game titles". The potential market size for what has been somewhat disparagingly called "casual games", makes the "traditional" games audience look pretty tiny (though it remains true they are spectacularly prolific about their consumption). Certainly we're working hard to keep RealOne Arcade as the leader in this space, and part of that is helping to create leaders in related areas that are necessary for the overall business to mature (publishing, advertising & sponsorships, game development, editorial).
As far as how ESD relates to "traditional" game titles, we do not foresee the downfall of the retail games industry. TV didn’t replace radio. VCRs didn’t stop people from going to movie theaters. Downloadable music hasn’t closed music stores. ESD isn't going to replace retail games. What we'll probably see is a stratification of game content and creative ways to segment and market the right titles to the right sort of customers – we’ll see a continued broadening of consumer types interested in some form of video gaming. We may also see sophisticated mechanisms evolve to effectively move new players "up the chain" of complexity and investment, essentially migrating new game players from board games, to web games, to download games, to full-blown DVD-ROM games, to MMOG's. As part of that migration we'll continue see companies leverage multiple distribution channels to extend the success of appropriate titles or franchises to the widest possible audience.
Q: Lately RealOne Arcade has been bringing in a lot of high quality older content, such as the emulated titles from Sega and often times second-run titles from traditional publishers looking to find a secondary source of income for older titles. In some ways it almost feels like RealOne Arcade is perceived as the "cable channel" distribution portal for some big publishers. What's your take on this?
Yes, RealOne Arcade may be compared to a broadcast cable model in the sense that it offers consumers the best of the old and the best of the new. These high profile publishers are indeed generating new sources of revenue from late-model, popular content by exposing it to a new audience. It is also a mechanism for those traditionally conservative companies to test the waters of ESD and explore the distribution and revenue potential in the market.
Q: Some developers have expressed a certain feeling of discontent that RealOne Arcade is "sleeping with the enemy", and that thus the true indies will end up being marginalized out of the market. What's your perception of this?
As long as independent developers don’t give up their IP, they cannot be marginalized. We're focused on providing the best content and we make our merchandising decisions almost solely on the basis of product performance (sales) within our channel. We'll license the rights to distribute that content from whomever owns it, and promote the games that sell. As long as the independent developers are careful with their IP rights for their great games, it will be impossible for them to be marginalized. One of the great things about RealOne Arcade is it goes a long way toward leveling the playing field between "big" companies and "small" companies.
Q: What is RealOne Arcade's position on things such as exclusives or possibly advancing development costs to independent developers?
Exclusives are great for differentiating our service from our competitors. We actively pursue, and fairly compensate developers for, exclusivity on titles we think justify the additional investment.
One of the reasons we have been able to advance the quality of downloadable games so far in such a short time (note: “we” is used collectively to include us as well as the developers) is that our desires and the developers' are aligned. We both want to make the best product that will sell, and we'll both do what it takes to get there. A large advance, or in a similar sense overly optimistic sales guarantees, may reduce or remove the desire for the developer to participate in the post-launch success of the title which is often only the beginning of learning how to optimize a game for success in digital distribution.
Q: But you could argue the opposite as well -- without a large advance to recoup, there's not much incentive for a distributor to push one title over another, and in fact if one developer has negotiated a higher royalty rate, there may be a strong disincentive to push their product over another. This is something I've seen numerous times in the retail model, and an advance of some type is usually a way to enforce adequate product support by the distributor.
Interesting point on prepays. RealOne Arcade merchandising and promotional decisions are based 99% on product performance (Conversion rate and Dollars per Download, mostly) and 1% on timing. The opportunity cost of promoting an under-performing or super-niche game is so great that even with a prepay, it doesn't happen. Given that, a prepay as a lever for ensuring visibility and promotion isn't very effective in our channel.
I think this is a function of the economics of a try-before-you-buy model. In retail "promotion = sales", so as a developer you must concentrate on levers that will ensure that promotion, as without it you are dead. In digital distribution, "promotion = increased download velocity", and "great game = sales velocity", and in fact, promotion and sales velocity are actually INVERSELY related for most games. As you increase download velocity, you tend to decrease sales velocity. Promoting a poorly performing game actually drops the conversion rate so sharply that it often has little effect on gross sales.
As for your 2nd point about high royalties, this is a point we often discuss with new developers wishing to enter our distribution channel. It's why we don't go crazy with royalty rates for anyone, no matter who they are or how good the games are. Managing all the moving parts in a service like RealOne Arcade is an exercise in careful balance.
Q: In what ways will RealOne Arcade be expanding its business or business model in the future? Are stronger partnerships with larger publishers and developers going to happen?
Strengthening our relationships with proven content developers and providers will help us ensure an ongoing flow of appealing games to an ever-growing and broadening consumer base. There is also a huge ongoing undertaking to market and distribute our service to consumers who aren't using it today which includes large distribution partners, affiliate distribution programs, expansion onto other platforms, and continued optimization of the customer base we have today.
Q: Titles published on RealOne Arcade tend to have their brands minimized -- logos and links back to developer Web sites are heavily discouraged, for example. Independent developers would love to drive traffic and name recognition to their own sites. Do you perceive this as a possible future problem when trying to attract more developers?
The “Channels” tab on RealOne Arcade strongly promotes the brands for some of our most successful content partners. There is a peculiarity of ESD we have to manage that really doesn't occur at retail - the ease with which our content partners can compete against us directly. We’re actually happy to promote a content partner's brand, but we do wish to keep consumers circulating within our system where we may continue to expose them to our wide-array of developers. As a content owner, you need to ask yourself – does it make sense for me to develop exposure for my own site or do I want to expose my game to the RealOne Arcade audience.
Q: I'm guessing that right now this is a buyer's market, so RealOne Arcade has the pick of the litter when it comes to new titles and things like setting terms. What percentage of submissions actually make it onto RealOne Arcade and roughly how many submissions do you receive in a given month?
Great content is as hard to find in our market as it is anywhere else, so when we see a game we really believe in, we'll go to some lengths to procure distribution rights to it. On average, we probably receive 200-300 submissions a month, and we pursue distribution rights to around 2% of those.
Q: Since you're not tackling the traditional retail market, who do you consider to be your primary competition, or do you think general market awareness (or lack there of) is your biggest hurdle for larger market penetration?
We have a healthy respect for our competitors – both from very powerful and well-established players in both the Internet and games businesses, as well some smaller, but very smart and agile competition from newcomers with awesome drive and technology. Competition is a good thing – the rising tide floats all boats.
Q: RealOne Arcade has a fairly liberal return policy, how do you handle abuse by customers, or has this not been a concern?
We have a very low rate of return, so if fraud is happening, it’s a small percentage of a small percentage. Our belief is that the very small cost of a return-product loophole for dishonest people is more than offset by the loyalty, increased usage, and increased consumption by our real customers. That said, we do track every return so if someone returns more than two or three products we ask, "Do you try these games before you buy them? You can, you know." So anyone trying to “beat the system” isn't going to get many games out of the deal.
Q: How does RealOne Arcade combat the issue of warezing and piracy?
Generally speaking, our core demographic is not a technologically savvy as the traditional hard-core and console gamer so piracy is not as large as an issue as it may be with other consumer segments. That said, we have been and continue to pursue DRM technology that will allow us to further secure content from unauthorized use while preserving the transparency in the honest customer's user experience. Piracy is not an issue to be ignored and there will always be a segment of consumers that want to get something for nothing, but we think that RealOne Arcade offers consumers valuable a service with key free features and benefits.
Q: Can you explain your GamePass concept, and how it has fared so far?
GamePass evolved out of our quest to offer consumers four key things in one service:
How GamePass works…Consumers who sign-up for GamePass for $6.95 per month receive a "credit" in our e-commerce system that allows you to "buy" one full version game with that credit in a 30-day period. We treat that credit use just like a $6.95 transaction purchase, and pay the game developer the same percentage that s/he would make on any other sale of his/her game. In addition, the GamePass subscriber can purchase any other game that month for $5.00 off the full price.
Consumers benefit by buying any game in our catalog for $6.95 (all games within RealOne Arcade are offered between a $9.95 and $19.95 price point) and owning it forever, and they may purchase another game for a reduced price.
Developers benefit two ways – typical GamePass customer purchase approximately 14 games per year (prior to GamePass, typical customers bought 1-2 games per year) and a large percentage of GamePass subscribers had never purchased a game from us at full price, so these game purchases likely never would have happened at all without the GamePass value proposition as the purchase motivator.
One great aspect of the GamePass model is that even if someone drops out of it, they become a regular "transaction" customer again, buying games at full price. And with each purchase, they are reminded of the great value that GamePass provides. So the GamePass business and the transaction business completely re-enforce each other.
Q: One platform that is notably excluded from your lineup is the Macintosh. Are there plans to support this in the future?
Yes.
Q: You also carry free Web games on your site -- what is the purpose of that?
Web games are a perfect merchandising channel for a downloadable games business,
presuming the web and download games are appropriately differentiated. The
web games are a very valuable source of highly qualified customers for your
downloadable product. Since many of our merchandising and promotional decisions
are based on how well your product “converts" (the ratio of downloads
to purchases), you can appreciate the value of qualifying each download as
much as possible before it happens.
Thanks to David for taking the time to talk about RealOne Arcade and his thoughts on ESD.
Brian Hook entered the game industry as the fifth employee at 3Dfx Interactive, an influential semiconductor company devoted to the advancement of 3D graphics for gaming. At 3Dfx he was the original architect of Glide, the popular rendering API used by hundreds of games throughout the world. After leaving 3Dfx, Brian joined id software where he worked on hit titles such as Quake 2 and Quake 3. In 1999 Brian went to Verant/Sony On-line Entertainment, where he assumed the title of Senior Technology Architect, working on technology and development for next-generation massively multiplayer role-playing games. Brian is now the president of independent development studio Pyrogon, which he founded in 2000.
The opinions expressed in this article do not necessarily represent the IGDA.