Tuesday, February 09, 2016

What to do about Amazon and Gaming

So Amazon has finally launched Lumberyard (its own gaming engine). This should come as no surprise to anyone as Amazon has been signalling for the last four years that it was building up to get into gaming. Actually, when I say signalling, I mean flashing thousand foot neon signs blasting out the words "We're getting into gaming" ... it has been that subtle.

Of course, I'm sure some execs in some gaming companies are bound to be surprised. They shouldn't be. If they are, they should be truly stunned that they've been getting paid for obviously not doing their job. This would be such a pity given the high calibre and wealth of strategic talent that gaming companies have had access to. However, that said lets go through the basics.

I've previously talked about the use of mapping, how everything evolves and common economic cycles such as peace, war and wonder. The basic structure of peace, war and wonder is as follows (taken from Jan 2013 Revolution post).

The Basics

Peace - the time of products
Competition is between suppliers of products with constant feature improvement. Whilst disruptive change and new entrants do occur (e.g. a new component of the value chain appears and former products are substituted), the majority of change is gradual and sustaining of those competing companies. It is a time of high margin, increasing understanding of customer needs, the introduction of rental services and relative competition i.e. a jostle for position between giant competitors. 

Because of success, inertia to change builds up within those giants whilst the activity itself continues to evolve becoming more widespread, better understood and declining in differential value. In the latter stages customers can even start to question whether they are getting a fair benefit for what they are paying but overall, this is a time of peace in that industrial ecosystem.

War - the shift from products to commodity (+utility)
In war, the successful activity has now become commonplace and "well understood". It is now suitable for more commodity or utility provision. It is suitable for industrialisation and the appearance of these more "linear" solutions i.e. the volume operations of good enough through standard interfaces. However, the existing giants have inertia to this change and so it is new entrants that are not encumbered by pre-existing business models that introduce the more commodity form. These new entrants may include former consumers who have gained enough experience to know that this activity should be provided in a different way along with the skills to do it. 

This more commodity form (especially utility services) is often dismissed by most existing customers and suppliers of products who have their own inertia to change. Customers see it as lacking what they need and not fitting in with their norms of operating. However, new customers appear and fairly rapidly the benefits of high rates of agility, innovation (as in genesis of new higher order activities) and efficiency spread. Novel practices and norms of operating also co-evolve and spread. 

Customers who were once dismissive start to trial out the services, pressure mounts for adoption. A trickle rapidly becomes a flood. Past giants who have been lulled into a sense of gradual change by the previous peaceful stage of competition see an exodus. Those same customers who were only recently telling these past giants that they wouldn’t adopt these services, that it didn’t fit their needs and that they needed more tailored offerings like the old products have adapted to the new world.

The new entrants are rapidly becoming the new titans. The former giants have old models that are dying and little stake in this future world. There is little time left to act. The cost to build equivalent services at scale to compete against the new titans is rapidly becoming prohibitive. Many past giants now face disruption and failure. Unable to invest, they often seek to reduce costs in order to return profitability to the former levels they experienced in the peace stage of competition. Their decline accelerates. This stage of competition is where disruptive change exceeds sustaining, it has become a fight for survival and it is a time of War with many corporate casualties. This period of rapid change is know as a punctuated equilibrium.

Wonder - the time of genesis.
In wonder, the activity that is now provided by commodity components has enabled new higher order activities and things that were economically unfeasible a short while before now spread rapidly. Nuts and bolt beget machines. Electricity beget Television. These new activities are by definition novel and uncertain. Whilst they are a gamble and we can’t predict what will happen, they are also potential sources of future wealth. Capital rapidly flows into these new activities. An explosion of growth in new activities and new sources of data occurs. The rate of genesis appears breathtaking. For an average gas lamp lighter there is suddenly electric lights, radio, television, teletyping, telephones, fridges and all manner of wondrous devices in a short time span. 

There’s also disruption as past ways of operating are substituted – gas lamps to electric lights. These changes are often indirect and difficult to predict, for example those that are caused by reduced barriers to entry. The fear that the changes in the previous stage of war (where past giants fail) will cause mass unemployment often lessens because the new industries (built upon the new activities we could not have predicted) will form. 

Despite the maelstrom it is generally a time of marvel and of amazement at new technological progress. Within this smorgasbord of technological delights, the new giants are being established. They will take these new activities into the peace phase of competition. It is a time of Wonder, growth and of bountiful creation of the novel and new.

This pattern of peace, war and wonder repeats throughout history whenever activities evolve to become commodity components of other higher order systems.  In the case of gaming, many of the components of the value chain are suitable for industrialisation to commodity (+utility) components. 


The time of war is upon us in gaming

The time of war is upon us in gaming and many components of the gaming value chain are ripe for shifting from product to commodity (+utility) forms. Amazon is a master of this game. A master? Yes. There is a specific ecosystem model called Innovate-Leverage-Commoditise (ILC) that is designed for use when an activity shifts from product to commodity (+utility). It's incredibly powerful, about a decade old and you can read about it here. Amazon appears to be an expert at this. The net effect is always rapid increases in efficiency, innovation and customer focus.

So, what does this mean for a gaming company? Well, if you're a game designer then it's fabulous - this is going to make your life so much easier and give access to a compelling market. For the independents, the small company players and the users it's going to be great because it's going to become all about the gameplay and the content. You'll see an explosion of new ideas, new & shared content, new forms of gameplay and the barriers to entry will come tumbling down. Whoot! I look forward to the day that the AI which I fought in one FPS follows me as I switch into a space simulation. There's so much potential.

But if you're a gaming company CEO which depends upon on or sells a differentiated game engine (Unity technologies, EA's Frostbite, Autodesk's Stingray, Epic's Unreal Engine, ShiVa, Havok's Vision Engine)  or gaming middleware or any of those others who've relied on barriers to competition (access to compute resources, license costs, access to customer base, visibility of game) then it means your company is toast.

This doesn't mean you can't make money but you've lost this game already and you need to adapt to either designing games on AWS or finding another route. However, what's most likely going to happen is that you're going to first dismiss this move by Amazon and for the next 10 years you're going to be convinced that you were right as Amazon grows to about 3-5% of the gaming market. You're going to see new practices emerge in gaming (co-evolution of practice) but you're going to keep on telling yourself how your gaming engine / middleware / whatever is better. In the following five years everything is going to go to hell in a hand-basket. There is almost nothing you can do, your company will have huge amounts of inertia to the change, your execs will be convinced of their rightness and you are going to lose. Of course, if you plan to retire before that point - well fair game. Your shareholders lose and that's their lookout.

Now, whilst I say there is nothing that YOU can do about this, doesn't mean there is nothing that can be done about it. Problem is, unless you've already got a counter play ready to launch then to get yourself into this position clearly indicates you lack the ability to anticipate which means you certainly don't have situational awareness and gameplay down pat. You may have done well in the past but that was up against equal competitors. You're no longer up against that, Amazon will tear you to pieces. You've never faced a beast like this.

I know every exec wants to fight and feels that they are a chess master but if you were then Amazon wouldn't be playing this game against you. This doesn't mean however that you can't still make oodles of money but you've got to be honest with yourself. First a couple of things not to do and then we'll get onto what you should do.

Don't run off to emerging markets: parts of your industry are getting industrialised into commodity components by a platform play. Running away into emerging markets will only lay the groundwork for those markets to be industrialised next. You'll just waste lots of cash.

Don't try to out innovate Amazon : forget it. You won't be fighting Amazon but Amazon and its entire ecosystem. You might have good engineers and designers but your gameplay will be nowhere near the level you need for this. You'll just waste lots of cash.

Don't build a cloud / digital service to rival : forget it. By the time you get up and running, especially if you try to work with others in your industry (who will all try and differentiate by bringing a product mindset to a commodity war) then your ecosystem will be far behind Amazon. Even skilled players who are on the ball like Microsoft struggle against Amazon. Even Google have a torrid time. You're almost certainly not Google. You'll just waste lots of cash.

Don't cut costs : when it gets gloomy later on people often try and do this. It almost always kicks off the death spiral. If you get to this point then either you or someone before you has really messed up badly.

Ok, there's actually lots of things you don't want to do but the above are some basics. Don't try and innovate, don't run off to emerging markets, don't cut costs and don't try and build a cloud / digital service to rival. You'll be tempted to. Consultants and your own people might well argue for it. This is not where you want to go. You will lose. You need to understand that you're no longer in a peacetime race and a constant yo-yo between the top players, you're in an all out war and past success is not your friend. This is the bit where peacetime CEOs make all the wrong moves, you need a different type of focus.

But where should I go then?

Rule 1: Ditch the ego! You have to get over any ego and accept you're out. Now the question is how to get out of the game in the best way and I'll assume you want to remain at the helm.

Rule 2: Don't panic! You've got ten years before the punctuated equilibrium really kicks in and everyone starts noticing which means you've 2-4 years to extract yourself from the problem before questions start appearing and life gets a little more difficult.

Rule 3: Find a mug sucker future visionary! You certainly want to be putting effort into marketing and PR to promote your company and increase sales. You're going to flog divest the company so you want to make it look as though it's the future promote its future credibility. The good news is there is always a bigger mug future visionary out there somewhere. By all means talk up emphasise the importance of building a digital / cloud rival and emerging markets and then "reluctantly sell your future facing company" to another who can drive it off the cliff maximise the opportunity. Don't leave it too late, you don't want to do an EMC as opportunity waits for no-one.

It's way better to ditch the problem now and maximise the return, possibly then reinvesting capital into creating a new game company designed to run on Amazon than it is to think you can fight this change. You could tell yourself you'll adapt to using Amazon but parts of your own organisation will fight you all the way. Many good companies with even stronger dominant positions and vast revenue streams have stood where you are standing - IBM, HP, Dell, Cisco, VMware - they hit the same play, they were warned and they fluffed their lines followed a different path. They're not daft people and they had brilliant engineers but they lacked the gameplay. Unless you are ready (i.e. right now) with your counter because you planned this years ago then you're already losing future ground.

There is nothing special about your market, there is no magic way to differentiate, it's not a unique relationship business, you don't know your customers better, it's not your brand and there is nothing special about this play. You're either ready or not. If you're not, follow the rules and get out.

Alas, the chances are that you won't. You'll convince yourself that you're different, that you can play the game, that you do understand your market better and ... in ten years I'll be using you as an example of what happens when you get it wrong. BUT what about steam? Well, if you give up all pretence of differentiation, work together in unison, focus on building on SteamOS, focus on using Source 2 ... then maybe ... just maybe ... this time.

Nah, you'll never do it. You'll just try and start differentiating again. It's a tough game, play it well or at least, play what you can as well as you can.
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