Fabrice Grinda

As a self avowed gamer and gaming enthusiast with a true passion for games and clear game design ideas, I often get asked why I don’t pursue that passion professionally.

The reason I am not in gaming is that economic dynamics don’t favor startups:

• As Moore’s law and Metcalfe’s law continue unabated consumers expect ever richer gaming experiences. This leads to rapidly increasing game development costs in all segments – from low end online and mobile casual games to hard core games.
• Gaming is inherently hit driven and a few hit games (for which there is no recipe) generate the bulk of the revenues in the industry.
• Startups cannot easily raise the $100+ million necessary to develop some of today’s high end games – and even if they could they would have all their eggs in an incredibly risky basket. A large company like EA can easily finance multiple large projects knowing that even if most fail its hits will likely pay for the failures.
• Very few game companies successfully transition from being low-end casual game makers to multi-billion gaming behemoths (though Netease and Shanda in China successfully made that transition).

In many ways what I describe above is reminiscent of Hollywood. The large studios are the only ones capable of bankrolling $100+ million movies hoping that the hits pay for the flops. The “startups” are the smaller independent movie studios which develop lower budget movies. The risks are lower but so are the rewards as they can’t create billion dollar revenue movies such as the Lord of the Rings trilogy or Titanic.

That is not to say one cannot build a small successful gaming business – especially in the short and medium run. I know many companies such as Boonty or Jamdat who have become successful building online or mobile games. But despite those successes, I don’t like the long term dynamics of the business – even the supposedly low cost casual online and mobile game segments.

In both of those markets, a few years ago it cost less than $50,000 to make a game. Licenses were cheap and most of the games made money. In many ways this was reminiscent of the PC gaming industry in the 1980s. However, as the devices grew in complexity and the market grew, licensing and development costs increased dramatically moving the market in a hit-driven direction. I am sure that by now several mobile games have cost over $1 million to make. That’s why it made so much sense for Jamdat to sell itself to EA to leverage its licenses and balance sheet.

Conclusion: I love games, but for now I will remain a gamer on the sidelines of the gaming business.

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This time I am not blogging about how lucky I have been in the past but about how lucky others have been.

Paul Kedrosky, a venture capitalist, recently posted the shareholder information from the Youtube transaction on his blog (see: http://paul.kedrosky.com/archives/2007/02/07/goggling_at_goo.html), which I reproduce below.

Clearly Chad & Steve did extremely well for 18 months worth of work on Youtube. What is even more extraordinary is that they did not intend (at least as far as I can tell) to create an amazingly successful company to change the way people entertained themselves with video. They just wanted to create a simple way to upload their own videos on the web. It happened to take off and become incredibly popular.

When I look at some of the other mega-successes on the Internet over the past 10 years, most of them were not intended (again if the legends are real):

• eBay: Pierre wanted to allow his wife to sell pez dispensers online
• Yahoo: David & Jerry built a directory of the Internet for their personal use
• Craigslist: Craig’s list was a list of fun parties and events for him and his friends to attend
• Google: Larry & Sergei started Google as a Stanford PhD research project
• MySpace: While Chris knows why MySpace took off (inherent virality and the early focus on music), he clearly did not expect it to have the success it ended up having

The only extremely successful consumer Internet company that seems to have been intended is Amazon. Jeff decided that his entry strategy would be the book market because of the long tail (to offer books bookstores could not). He located his company in Seattle to be near Ingram – the largest book distributor in the world. He already had designs on other product categories from the beginning. In other words, he intended to build the company he built.

While I have somewhat more respect for Jeff as I like to see intended successes (it would be depressing if outcomes were purely based on luck), I still tremendously respect the entrepreneurs who got lucky. They might have gotten lucky, but they did so by trying to solve a problem that they – and as it turned out the entire world – faced and they fully used their skill and intelligence to capitalize on their luck.

In a famous 2001 meeting between investment bankers who will rename unnamed and Larry, Sergei and the newly arrived Eric Schmidt, the bankers were excitedly telling Google that Overture (or Goto) had successfully raised money and that its business model was becoming very successful as a means of monetizing search. Larry, Sergei and Eric went on to reply that they would never put ads on Google because:

• The quality of their algorithmic search results was so good no one would ever click on paid search results
• They did not want to interfere with the purity of their search results

They went on to produce a 55 page Powerpoint (that my banker friend still has saved for historical purposes) to explain that they were going to make money by selling their search services to enterprises to help them sort through all the data they collected and mostly did not use. If anyone needs 55 pages to tell you how they are going to make money it’s a very bad sign! Today this accounts for less than 1% of Google’s revenues.

Clearly, they had the strength and intelligence to recognize the error of their analysis and then went on to copy and then greatly improve upon Overture’s model – displaying the highest revenue generating ads on top, not the ads with the highest CPC – and the rest is history… All the “lucky” upstarts mentioned previously probably had such forks in the road where they could have gone down another path. Hats off to them for successfully managing growth and getting to where they are today!

On a related topic, Joel Cutler, a great venture capitalist at General Catalyst and friend of mine, pointed out to me yesterday that the companies that got lucky and grew extremely rapidly with little capital in the past few years had at least one of two things going for them: they were inherently viral, had great search engine optimization or both. Wikipedia clearly benefits from the fact that its millions of articles are indexed in Google. MySpace and Youtube truly succeeded because of the viral nature of their services.

As my companies are not inherently viral, I will just have to slug it out for a few years and see what happens. As for you, if something is nagging you about your online experience – go fix it – it may actually be something that’s nagging everyone else too! If whatever it is you are fixing is viral and produces lots of content – preferably created for free by users – all the better! Maybe you can get lucky too :)

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Recent scientific research suggests that good games improve players’ sense of well being by giving them feelings of independence, competence and connectedness to people. The games allow people to feel effective and rule their own universe in a way that real life often does not.

Read the full article at:
http://health.yahoo.com/news/171041;_ylt=A0Je5_6asbFFIPwAjhtLvs8F

P.S. Note to Mom: I was right all along :)

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“Having gone though two university departments, I was fairly cultivated, thanks also to my long inertia, which I consider highly educational. He, on the contrary, was a great businessman, ignorant and active. But from his ignorance he drew strength and peace of mind, and I, spellbound, would observe him and envy him.”

Zeno’s Conscience

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