The Business of Games

UPDATED: June 11, 2012
PUBLISHED: June 11, 2012

Part I: Bandits and Pirates

From Atari to Zynga, the game industry has always been a hotbed for mind-bending stories. Let us start with just one. It was widely reported on the Internet, which means it might not even be true, but because it’s plausible, it demonstrates just how feverish the business has become and how much we as a people now covet the life-altering pleasures programmed into our games. At 8 a.m. on Nov. 6, 2011, a van carrying 6,000 copies of the latest release in Activision’s wildly popular Call of Duty video game series collided with a car on the streets of Paris. When the driver and a colleague stepped out of the vehicle to investigate, they were ambushed by two masked men armed with knives and tear gas. The thieves took their keys and made off with a cargo valued at more than $500,000. In the hours that followed, news surfaced of a second strike—also in Paris. Once again the target was Activision’s Call of Duty: Modern Warfare 3. The company had taken steps to hunt down pirated copies of the game, sending a team of mercenaries out across the globe to knock on doors and initiate the destruction of the contraband, but it had not, it seems, the foresight to deliver its treasured product in armored trucks.

No matter. When Modern Warfare 3 officially went on sale at midnight on Nov. 9, people were lined up outside the doors of 13,000 stores. Within five days, the game had logged $775 million in sales to become the most successful launch in the history of entertainment. Bigger than the Beatles, Harry Potter or The Avengers.

Now maybe you don’t identify with the Call of Duty crowd—the hardcore gamers who devote hour after hour of their free time to saving the world from imaginary foes. Maybe you studiously avoid the overtures from your Facebook friends to join the fun in FarmVille. Perhaps you even have resisted the army of Angry Birds plush toys that recently invaded America’s toy stores. But it’s hard to dismiss the great green wave of money—$3.75 billion—that was invested in the industry in 2011. Dean Takahashi, who has covered the business for 16 years for publications such as the Los Angeles Times and Wall Street Journal, described it not long ago in his VentureBeat column as the “biggest gold rush in the history of games.”

On Dec. 13, Asia’s largest online game publisher, Nexon, emerged from an initial public offering on the Japanese stock market with a $1.2 billion war chest. Three days later, in the most eagerly anticipated initial public offering of the year in America, FarmVille’s creator, Zynga, sold $1 billion worth of stock, pushing the firm’s value above $7 billion. According to Takahashi, another $1.5 billion in venture capital—divided among 145 companies—flowed into the arms of eager game makers in 2011. And that’s a remarkable achievement, given how reluctant venture capital firms once were to… well, roll the dice on game companies. Much like in Hollywood, the development costs for each new title had soared to such stunning heights ($40 million on average) that it was a nightmare to predict what the public would embrace. Better to simply release Mario Kart 7.

It took a genuine swashbuckler to put the anxious investors at ease. A man openly hostile to venture capitalists. A man with no experience whatsoever in game development. A man who—in his own words—“did every horrible thing in the book… to get revenues right away.” (He allowed predatory companies to scam his gamers with offers that featured financial obligations in the fine print.)

In 2007, Mark Pincus launched the company that demonstrated how the business will work for the foreseeable future. For decades, the industry giants in Los Angeles—Activision and E.A. Sports—had operated like movie studios. To create a game such as Madden NFL (which now includes more than 10 million lines of source code), E.A. hired dozens of developers and set them to working around the clock for close to three years. Pincus launched FarmVille in just five weeks—with fewer than a dozen developers. He saw the promise of social media platforms, invented simple games people could play with their friends, and monitored the online action with a Moneyball-like devotion to analytics.

According to Pincus, if players responded better to the brown cow, all the cows in FarmVille would be brown.

Because Zynga’s games were free, the audience grew quickly. Within three years, the company had registered more than 230 million players. Some 3 percent of them gladly coughed up a buck here and there for virtual goods. Those players now spend $3 million a day on Zynga’s crops and barnyard animals.

In 2008, the company generated $19 million in revenue. By 2010, that number had climbed to $597 million and venture capitalist John Doerr of Kleiner Perkins—an early champion of Google and Amazon—was making the rounds in Silicon Valley to sing Zynga’s praises. He called it the fastest-growing investment his company had ever made.

Part II: The Warrior Princess

Jessica Rovello is the sort of woman teenage gamers dream about. She has a seductive smile, bright eyes and lovely long brown hair. She radiates confidence. And as president of the game company Arkadium, she not only understands their passion, she shares it. Her staff occupies two floors in a Manhattan building overlooking Broadway just north of Union Square. The Flatiron Building looms large outside the windows. Arkadium has offices with artists and developers in the Ukraine, Los Angeles and Toronto, too. Last year it generated more than $10 million in revenue.

Rovello founded Arkadium with Kenny Rosenblatt in 2001, back when Sony, Nintendo and Microsoft ruled the industry. Rovello and Rosenblatt were dating at the time. One evening, they started talking about how many hours they’d logged in arcades as children. Soon they were arguing about who was the better Ms. Pac-Man player. Insults were tossed, money wagered, and the two rushed home to settle the bet. When they reached the computer and searched online, they were surprised to discover that Ms. Pac-Man was nowhere to be found. That’s when they decided to team up as entrepreneurs.

“It was a horrible time to start a business,” Rovello says. “No one wanted to hear boo about the Internet because the dot-com bubble had just burst. Everyone was talking about how ridiculous the business plans were.… Nobody would touch us with a 10-foot pole.”

They quit their jobs anyway (both worked at the broadband media company On2 Technologies), cashed out their 401(k)s—all of $15,000—and went to work developing games in their apartment, building websites on the side to pay the bills. To stretch their funds, they hired developers in India at $2 an hour to help them code. “One of our first employees wanted to get into video games and he had just graduated from Princeton,” says Rovello. “We offered him a train ticket. That was his salary—a Metro card.”

The couple planned to give it a go for six months. They ended up squeaking by for years. In 2004, they were still chasing the dream. “We got married in May. I said, ‘Let’s give it till the end of the year,’ ” Rovello says. “ ‘We have until Dec. 31. If things haven’t turned around by then, one of us needs to find a job.’ As fate would have it, in November and December, we landed our initial deals.”

A poker craze had swept the nation. Harrah’s green felt table was ubiquitous on ESPN. R.J. Reynolds phoned Arkadium to request a card game for its website. Then TV Guide called in search of a pop culture trivia game. The projects generated $400,000 in revenue. Companies such as Disney, Dunkin Donuts and Mattel were just beginning to discover that games lured people to their websites and—better yet—prompted them to stay awhile.

In short order, industry executives also learned what Rovello had long known—that women enjoyed games as much as men. They represented a huge untapped audience.

For years, they had been sitting in the shadows, waiting on their brothers to give up their controllers. If you had looked closely, you would have recognized that they were a chief reason for the immense popularity of games such as Super Mario BrothersThe Sims and Bejeweled. Today there are more adult women than teenage boys in the gaming community. With their daughters, they represent 42 percent of the market and take credit for 46 percent of all game-related purchases. They are the driving force behind Zynga’s stratospheric success (71 percent of the players in the company’s user base are female).

Little by little, the industry giants looked beyond the tried-and-true shoot-’em-up speed-demon titles that sucked in young men and toward Arkadium’s specialty: casual games. Think solitaire, TetrisWords with Friends. You don’t need a lot of time to play them. They’re a snap to learn, but hard to master.

“I am the definition of the casual gamer,” Rovello says. “I’m a 37-year-old woman with children, who plays games to relieve stress, take a break and have me time.”

In 2006, Nintendo launched the Wii game console. Though the wireless controller was billed as the big breakthrough, the company made a point of noting that Wii sounds just like we—“a game for everyone.” The system arrived in your living room with a disk that contained five games for players of all levels, virtually anyone who could appreciate the fun of bowling or tennis. In no time, Wii became the world’s best-selling console. According to one British newspaper, even Queen Elizabeth gave it a try.

As the audience expanded to include the whole family, advances in technology brought sweeping change. In 2007, Facebook opened its platform to third-party developers and Apple introduced the iPhone, paving the way for the App Store. Just like that, Sony, Nintendo and Microsoft lost their chokehold on the marketplace. “It used to be that you had to be a large corporation, a hard-core programmer or backed by a lot—a lot—of money to create and release a title,” Rovello says. “That’s just not the case anymore.” Arkadium has 150 online titles that generate 100 million impressions a month. The staff used to celebrate each new deal with a steak dinner. Now they storm the roller coaster at Six Flags.

Rovello and Rosenblatt find themselves working hard to maintain the company’s indie spirit. There’s a red vintage phone booth to your left as you exit the elevator. Polaroid photos with funny captions written by employees line the walls in the dining area. Shelves hold board games like MonopolySorry and Risk; a black sectional couch circles the screens and consoles in the player lounge.

 The company recently signed a long-term deal to produce games for Microsoft. By contrast, the world’s console giants have seen their sales slip every year since 2008. Last January, Nintendo forecast its first annual loss in three decades. Company president Satoru Iwata preferred not to discuss the firm’s shortcomings. He did, however, admit one regret: waiting too long to produce a 3DS handheld device for women. 

Part III: Good vs. Evil

On Dec. 6, 2011—nine days before Zynga’s IPO—Alec Baldwin boarded an American Airlines jet in Los Angeles. As the aircraft was preparing to leave the gate, bound for New York City, the 30 Rock star was tossed from the flight for refusing to turn off his cellphone. He wasn’t taking a call from his agent. He was immersed in Zynga’s latest blockbuster. “He loves Words with Friends so much that he was willing to leave a plane for it,” said his spokesman.

We have become, it seems, a nation of gamers. Working moms who settle in behind the laptop for an evening of FarmVille after tucking the children into bed. Corporate executives who squeeze in a few hands of poker on the iPhone while waiting for lunch to arrive. Silver-haired patriarchs who meet with their granddaughters for 18 holes of golf on Wii. “Angry Birds is like a drug, only cheaper,” says Slash, lead guitarist of the hard-core rock band Guns N’ Roses.

According to one estimate, there are 183 million active gamers in the United States today. They play 13 hours a week on average. What is it that drives them? Jane McGonigal, resident expert at San Francisco’s nonprofit Institute for the Future, tried to answer that question in her book Reality Is Broken: Why Games Make Us Better and How They Can Change the World. We turn to games, she wrote, to quench a “hunger for more satisfying work, for a stronger sense of community, and for a more engaging and meaningful life.”

We are by now accustomed to reading about the misdeeds of players—the South Korean couple who got so wrapped up in a game involving a virtual infant that they let their real child starve to death. But games have become a force for good, too. Weeks after his billion-dollar jackpot, dressed in a dark T-shirt and his familiar hoodie, Mark Pincus outlined his vision for conquering the world. “We’re not just trying to build a company, we’re not just trying to build an industry, we’re trying to build a movement around play,” he told VentureBeat. “We want people to put play in their day.”

Before you dismiss this as goofy nonsense, check out Sojo Studios in Lexington, Ky., where Lincoln Brown has taken Pincus’s business strategy and applied it to philanthropy. Late last year, Brown launched a FarmVille-like game called WeTopia. Ellen DeGeneres and Justin Bieber have both signed on to promote it. More than 700,000 people play it. They use their hard-earned cash to improve life in their online communities. Each time they buy a new crop or build a school, they help to purchase real goods for people in need. To date, they’ve donated more than 750,000 meals to schoolchildren. Going forward, Brown’s company has committed to sharing 50 percent of its profits—no less than 20 percent of its revenue—with partners like Save the Children, Heifer International and several charities benefitting Haiti.

The 2010 earthquake in Haiti inspired Brown to start Sojo Studios. He had visited the country several times as a volunteer when he was in high school. When he watched the outpouring of support for the victims fade with each passing week, he set out to find a new model for humanitarian aid. He spent months combing through research studies to learn how charities work, studying the effectiveness of monthly child sponsorship campaigns and dissecting the successful messaging in the hit TV show Extreme Home Makeover. He was determined to find a way to make giving a part of everyday life, to replace guilt with pleasure as a motivation, to show contributors exactly where their money was going. WeTopia was the ideal answer, he says.

“Social games are in a way a guilty pleasure,” Brown explains. “So if we can add context, provide people with an uplifting message, create an environment where they can give every day just by having fun—play for good, that’s our tagline—then to me, that’s a big opportunity.” The clincher, he adds, was the huge overlap between the profile of the average social gamer and the person most likely to contribute to a cause.

Brown is by no means the only entrepreneur to embrace the dynamics of gameplay. Dennis Crowley used points and prizes to lure people to Foursquare. Target, Siemens and Hilton employ them to train workers. And companies like Home Depot and American Express send representatives to the Annual Gamification Summit to learn how to apply levels and rewards to marketing and sales. Try as we might, we cannot duck the pull of these enticements.

Our lives today are like one big gameboard.

We strive to earn platinum credit cards, stockpile mileage points, support our schools with raffle tickets, vie with our friends to lose weight, fight breast cancer with walkathons, and vote for our favorite contestants on American Idol. Modern dating has a streak of brinksmanship to it, too. If you can’t sell yourself in six minutes or less, you’re likely to get booted off the island.

The thrill of a good challenge, the desire to win—the allure of these impulses is somehow wired into human nature. Show us a leaderboard, and we want to be on it. Give us a way to keep score, and we start searching for ways to earn respect—points, badges, access to the best window table at the five-star restaurant, you name it. Who hasn’t paused at least once to consider the number of friends they have on Facebook? What would it take to complete that last 3 percent of the LinkedIn profile? These instincts are by no means random. Game designers—and savvy businesspeople—learned long ago how to use subtle prompts to influence our behavior. We see levels of status and power and we start to strategize. What’s the point of the game? How do I win? The reward need not be a new car. A cup of coffee will do—or even the “mayorship” of the local Starbucks.

Some very smart people are learning to embrace these developments. Former Supreme Court Justice Sandra Day O’Connor recently launched a series of computer games designed to teach students civics lessons. New York Times columnist Nicholas Kristof and his wife, Sheryl WuDunn, asked Games for Change to create a game that helps them fight injustice against women. And last September, the White House hired Constance Steinkuehler as a senior policy analyst and charged her with finding ways to use games to promote civic engagement, education, health and ecology. All are coming around to a discovery that America’s teachers made long ago. “By playing video games,” wrote David Sheff, author of Game Over, back in 1994, “children gain problem-solving abilities, perseverance, pattern recognition, hypothesis testing, estimating skills, inductive skills, resources management, logistics mapping, memory, quick thinking and reasonable judgments.”

So as the world of gaming reaches deeper and deeper into our lives, people with fresh ideas are drawn to the possibilities. Stories of indie success are now legend. In 2009, Markus Persson of Sweden walked away from a full-time job as a game developer to launch Minecraft on his own. He was rewarded with $33 million in sales. Joshua Kushner, Daniel Kafie and Mario Schlosser founded Vostu—which became Brazil’s largest gaming company—in a Harvard dorm room. Rovio released 51 games before Angry Birds took flight.

New York City—the home of Arkadium—is no hotbed for game design. San Francisco, Los Angeles, Seattle, Boston and Austin, Texas, all have larger, more fertile communities. But once a month, nearly 200 would-be developers descend on the Broadway workspace of General Assembly to drink bottles of Sam Adams, chat with peers and try to generate some of that Rovio magic. To understand just how enticing the dream has become, check out the micro-funding site Kickstarter, where game development outpaced all other categories in growth a year ago. Two 23-year-old Costa Rica natives—Jose Cayasso and Phillipe Casorla Sagot—launched a project on the site in November. They hoped to raise $7,000 in seed money, enough to cover their legal fees and purchase a MacIntosh computer. Thanks to a post on Tech Crunch, they achieved their goal in four days. It didn’t hurt that the post’s headline had declared their idea the next Angry Birds.

By mid-December, Cayasso and Casorla had quit their jobs to work full time on the prototype. Rovio offered them new ones. They were flown to San Francisco by Pocket Gems to discuss a potential partnership with a company founded two years earlier by a pair of Stanford master’s of business administration students who had themselves solicited $5 million in capital. The Tech Crunch post generated so much interest the hopeful developers found themselves taking a crash course in angel investing. “There was this guy who offered $30,000 in exchange for nothing,” Cayasso says. “He said, ‘OK, I’ll send it to you and when you get it back in sales, you just give it back.’ ”

So what exactly is this irresistible idea? Inspired by an old personal computer game called Bang! Bang!, Cayasso’s brainchild challenges iPhone users to launch, yes, cartoon potatoes over buildings, mountains, trees and rocks with the swipe of a finger. But, as the graphic artist points out, Pota-Toss has one very novel feature: Thanks to a GPS component, it allows people to battle one another on landscapes that reflect the local terrain, weather, sunrise and sunset.

Cayasso and Casorla decided to table all offers until they have completed a Pota-Toss prototype. Even with the buzz generated by their pitch, they’re facing a mighty tough road to success. There are already 85,000 games in Apple’s App Store. And thanks to Zynga’s success, Facebook has made it harder to get a new product in front of the FarmVille crowd, roughly doubling its cost-per-click ad rates since 2010, according to marketing agency TBG Digital. And, of course, Google, Microsoft and Disney have now brought their muscle to the market. But don’t count the young Costa Ricans out. As we go to press, they’ve been invited to join a startup incubator in New York this summer. Soon all those Angry Birds plush toys you see at Target and Walmart could be replaced by plush potatoes. After all, stranger things happen in the game industry pretty much every week.


Read more about the Psychology of Play and five unexpected places you'll find gamification in real life.–the-game-of-life

Chris Raymond is a contributing editor for SUCCESS magazine.