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Startup of the Week [Episode 2]: Model Innovation in the gaming industry

For many entrepreneurs, it is often the case that what you think you are going to be selling isn’t what people find the most valuable. Steve Jobs suggested that not even customers know exactly what they want. This makes the process of starting a new venture challenging. Consequently, entrepreneurs end up making most of their decisions under conditions of uncertainty. To reduce this uncertainty, entrepreneurs and companies often replicate existing models that have better predictability. However, replicating models because they are predictable and reduce uncertainty leave some customers unsatisfied or marginalized. In these corners of the market, entrepreneurs that are creative in the construction of their models and value propositions find opportunities to be disruptive.

In our second episode of this series, I take a quick look at a company that made a pitch for a new video game. What surprised me about this company and what I want to point out is the disruptive model they developed to capture value within an existing group of customers that had needs that were unmet. It was the interesting value propositions created within their model that allowed Double Fine Productions to break the model so many other existing companies had been relying on.

A Look at Double Fine Productions

Clayton Christiansen, a Harvard Professor and one of the world’s top thinkers coined the term disruptive innovation. He described the central tenants of disruption in a Harvard Business Review article:

“Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others. Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality — frequently at a lower price.” (https://hbr.org/2015/12/what-is-disruptive-innovation)

His theory fits the situation this company finds itself in. The company works within an industry that is exploiting a predictable model at the expense of some customers. By alienating those customers, existing companies leave opportunities for innovative models to capture and secure market share. While I can’t predict whether Double Fine Production will surpass other leading competitors, I think it is interesting to highlight some of the innovations in their model that allow them to provide products to customers that other companies think would not be profitable.

To better understand the disruptive model introduced by Double Fine Productions, let’s first get a better understanding of the underlying models within in the gaming industry that made it difficult for them to create a game for these potential customers.

A quick review of the pitch video clip. First Double Fine Production was not able to find a publisher willing to underwrite/produce their adventure game. Why was this so? While it appears that there were potential customers interested in this niche product, publishers found that this type of game was a niche game that carried a high risk for a publisher. Likely, the market was small and scattered. This leads to the game being more expensive to distribute to a smaller audience.

So, what do publishers really want to produce? To understand the dilemma, let’s take a quick look at a parallel industry with a similar pattern of avoiding this type of risk — film. Film studios have the same risk aversion to niche products as the game publishing industry because niche films carry such a high risk for the studios.

As a result, the film studios rely primarily on sequels to boost their likelihood for success. This is why we have 20 bizzilion Avengers movies, Pirates of the Carribean, and Star Wars. And don’t think it is just Disney playing the low-risk game. Despite eight movies about the young wizards of Hogwarts, Universal Studios is still cranking out Harry Potter related films. There is no end in sight for Fast and the Furious, Batman, Planet of the Apes, and Rocky/Creed. Now, don’t get me wrong, some of these are definitely worth seeing, while others are definitely playing the game.

Despite the criticism, it is the correct formula for increasing the likelihood of success for film studios, and it is not without its evidence. Of the ten highest grossing films of all time, eight of the ten are sequels to previously released films. The only two that are not sequels are Avatar and Titanic. I know why we don’t have any Titanic sequels, and I hope we never do. I also suggest that we never do a sequel for Avatar. I barely made it through the movie the first time (one Avatar movie is enough for a lifetime).

It is the same in the game publishing business. Publishers are not interested in taking large financial risks when there is a model that improves their likelihood of success. It is easier and less risky to develop sequels with a known and often loyal fan base than to venture out into an unknown market or niche. Again, as a result, we get the same games over and over again. I don’t know how many Mario Bros games there are. I lost count. One website I visited suggested that there were a total of 119 in 2016. However, they just continue to release more and more with their new gaming systems. Don’t get me started with Madden. A franchise that rakes in the profits by changing the year on the front cover.

Just like the film studios, the model also works well for the gaming industry. For example, I just took time this weekend to check out the new Smash Brother game being released in the next couple of weeks. I’ll probably get a copy. I’m interested in the game because it lets me play some new characters added to the game since the last release. Specifically, I am interested in seeing what the Duck and Dog from Duck Hunt will be able to do. I hope the dog does it laugh at the other players when they lose.

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Consequently, strict adherence to the model allows for innovative companies and startups to find new opportunities to be disruptive. Entrepreneurs that are able to create and distribute these new innovative models are likely to also find success by providing products and services to customers that are going underserved by the big publishing companies.

A few insights from Double Fine Productions

First, I want to share that the company raised over $3.3 million during the crowdfunding campaign. Under casual observations, the campaign would appear like a presale of their video game. However, a presale is not necessarily innovative. I think it is a good start for this game, but it is unlikely to carry it alone.

The thing I find innovative in their model that allows the possibility to make a game that other companies might find too risky are related to alternative value propositions that have become possible in the last few years because of technology and changing attitudes towards what is valuable for video game fans.

The first value proposition is created by the company to allow individuals to contribute to the creation of the game through a discussion forum. I think they captured an interest of many fans by allowing them to be a part of the entire game’s creation. I see this type of value proposition popping up more frequently now. Technologies like Slack help companies set up channels that allow customers the opportunity to be a part of the creation and development of a product. This type of opportunity is great for entrepreneurs that are trying to speed up their customer discovery process and avoid building things no one wants to buy.

A second value proposition is the inclusion of a documentary video about the process of making a game. At first, I didn’t think much about this proposition. But after discussing the pitch with the students in my class, I connected the dots between the documentary video and all of the youtube shows my kids watch. I realized that there is a huge fan base for videos about video games. While I watch youtube channels like Numberphile (I highly recommend it), my kids watch channels of people playing video games. And it is not just the people playing video games, it is also the videos related to the video games. For example, my kids showed me a music video made about a video game. It was a little bit cheesy. However, it had over 42 million views in one month. I think that Double Fine Production realized the value of the related video. Consequently, they were likely to raise more money than a traditional model for a game.

What can we gain from understanding this startup company? First, I think it is hard to know what the customer really wants. While I believe that there was a good amount of interest in the game alone, it was the added value proposition for customers that allowed this company to offer a game other publishers couldn’t make work. I don’t know if Double Fine Productions realized the amount of value created by these other related offerings before they started, but it was an innovative addition to their model that worked well for them. While it is difficult for entrepreneurs to know exactly what our customers will pay for, customer discovery is critical for finding the new values customers are willing to pay for.

Second, it highlights how new technologies continue to disrupt existing companies and models. Technologies like crowdfunding, online video streaming, and communication tools made it possible for Double Fine Production to create and deliver a number of value propositions outside of existing models. When technology is properly incorporated into a model, it can create new value where past companies fail. Obviously, technology goes beyond what I just listed. Remember, the iPhone is just over ten years old. Look at all of the industries it disrupted. As entrepreneurs, we need to stay tuned to the changing technologies so that we can create better and more innovative models. I think some of the technologies that will really shape the next ten years are artificial intelligence and machine learning.

Finally, I think there is more disruption to happen in this industry and similar industries. For too long, companies have relied on existing models without too much innovation. Now they are facing new challenges from innovative models. Models like the one used for the game Fortnite are likely to really shake up the industry going forward.

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