Two years ago, I stepped into the mobile games market when I joined Planeto in Malmö, Sweden. With more than 5 million downloads, Planeto is a leader in knowledge-based mobile gaming. The experience at Planeto has changed me as a product creator and marketer.

Like many of my Scandinavian tech colleagues, I come from the planet where they build mobile phones. One step up the software stack to apps did not seem like a huge leap, especially as Planeto develops knowledge-oriented games for smartphones. As it turns out, one of the most talented game designers in Southern Scandinavia took me to a planet that was significantly different.

This part one of a three part series on battle insights by a mobile game CEO.

The Magical Gameplay Loop

Having built products with some of the best people in their field, I claim to have a good understanding of how to approach a new product idea. In simple terms, the process involves a deep dive into the needs of the particular user, understanding what technical approach might deliver a product that caters to those needs, creating a first version (1.0), shipping it to the users, learning from the users, and then building an even better version 2.0. Each step has a number of tools you can use to deliver as much “bang for the bucks” as possible. You aim to capture as many facts as possible to keep learning and testing assumptions. Although user experience design and prototyping can make up significant parts, the overall creation process resembles a deductive science project where uncovering the truth is the overarching aim.

The magical gameplay loop makes mobile game creation a very different process. The magical gameplay loop builds on the fundamental premise that delivering entertainment is hard, but when you get there, it is obvious that you have arrived. You will see it in the smile, in the clenched fist raised in the air, or a loud “damn it!” – quite magical, when it happens. 🙂

Endless Iteration of the Loop

[tweetable]The gameplay loop is what the player does over and over again[/tweetable]. In a First Person Shooter (FPS) game, the gameplay loop goes like this:

a target appears
you aim at the target
you pull the trigger
the projectile moves towards the target
you hit the target
the target loses life

You will do this over and over again, so this loop has to work to perfection – because if not, the player will immediately notice a glitch in one of the steps. Sounds easy, but as soon as you start adding depth to the gameplay, you start challenging the loop: different targets (speed, size, life, etc.), different weapons (power, range, accuracy, etc.), different environments (complexity, dynamics, etc.), and so on.

Screen shots from Battlefield 4: Gameplay loop takes less than 3 secs from target spotted to kill confirmed, but type of enemy, weapon type, and environment adds depth to the loop, which is repeated over and over again!

[tweetable]The process of developing a mobile game starts with the gameplay loop[/tweetable]. You iterate the gameplay loop many times. Planeto is on more than 20 iterations of the next game. Forget about graphics. Forget about login. Forget about high score. It is all about getting the gameplay loop nailed down, testing it with real people, and observing whether you get a fist in the air or the “one more time!” that you are looking for.

It is an inductive process, in which you start with the gut feel and experience of the game designer, observe the reaction from the players, and then iterate until you get to something that is highly entertaining. Although you can access courses and tools, like “F2P Toolbox” creating great gameplay requires experience and a lot of patience. The development of the gameplay loop deals with human beings at a very fundamental level of basic needs, like happiness, competition, and the urge to progress.

Only when the gameplay loop is truly magical do you begin the “normal” development process.

Looking for the Loop

Once you realize the significance of the gameplay loop, you start playing games in a completely new way. You appreciate the beauty of the loop in good games and you become much better at looking beyond beautiful graphics and distilling the essence of a game. You also start benchmarking games against each other on a detailed level.

This brings out a number of interesting perspectives. First, can you find a gameplay loop in other types of products than games? Is there something that the user does repeatedly and therefore needs special attention and many development iterations? I have looked back at products that I have been involved in and I can point to the core loop in most of them. Some of the core loops were brilliant, but some of them were average to poor, as the features and general infrastructure detracted from the essence of what the product was supposed to deliver. My first take-away: look for the loop and make it perfect!

Gamification – a Contradiction in Terms?

My second take-away is about the inherent contradiction in the popular notion “gamification.” If the essence of a game is the gameplay loop, then you cannot gamify something that has an entirely different user experience loop and purpose.

Let’s take CRM as an example. The purpose of a CRM system is to improve the relationship with the customer. In other words, a CRM system offers a set of mechanisms that remind/drive the sales person to interact with the customer. A gamification project might introduce badges for different activities, high score lists for the best performing sales people, or other elements you might find in a game. Gamification does not, however, change the core user experience loop in a CRM system, which is: 1) enter data to qualify the relationship with the customer, 2) create a profile of the relationship with the customer, and 3) get notified about needs for actions/next steps, which in turn creates qualification data. This set of user actions is not a game. You might get a fist in the air when a deal is won, but sales people will still hate updating the account in the CRM system – even, if they get a nice “Sales Person of the Month” badge 🙂

Games Can be Much More than Fun

This does not mean a game cannot deliver more than just fun. As I will explore in my upcoming blog post “Mobile Gaming as a Business,” I am a firm believer that business model innovation is one of the biggest opportunities in the mobile games industry. At Planeto, games are used for lead generation. Games can also tell stories or educate. It is, however, essential that the starting point is the magical gameplay loop. If you do not get that right, then you cannot deliver on anything else.

Interested in how to combine Magic and Algorithms to create a successful Business Model? Read part three of this Blog series here.

According to Distimo’s latest report, apps with “freemium” business models, i.e. free apps monetized by in-app purchases (IAP), have dominated revenue charts in 2013. This spurred me to take a deeper look at the “economics of free” and explore new opportunities for innovation in these business models.

The Economics of Free

Let’s begin by taking a brief look at the “Economics of Free” or the “Economics of Abundance”, as described by Mike Masnick. Here’s a short, 2 minute video introducing the concept:

Economics is essentially a social science that examines the best possible way to allocate “scarce” goods or resources, i.e. ones with meaningful marginal cost and limited supply. However, digital goods like apps are abundant because the marginal cost of creating an additional copy is zero. Given the nature of near-efficient competition in the digital world, price naturally approaches the marginal cost of zero.

This explains the decline in popularity of paid app downloads and the decline of numerous traditional business models. However, cheap or free content allows developers to reach a much wider audience which consequently increases demand for related scarce goods or resources. In the music industry, the advent of digital music precipitated a steep decline in US recorded music sales from $14.6 billion in 1999 to just $6.3 billion in 2009, but concert ticket sales grew from $1.5 billion to $4.6 billion over the same timeframe. In other words, digital music converted a scarce resource (recorded music albums) into an abundant resource (cheap, easily downloadable singles), which then increased demand for a related scarce resource, i.e. concert tickets.

Marginal Cost – Cost of producing an additional unit
Efficient Competition – Participants do not have the market power to set prices

The Pyramid of Scarcities

This particular study focuses on scarcity-driven monetization opportunities available to developers of free-to-play (F2P) games like Candy Crush Saga, Angry Birds, etc. As shown in the image below, the scarcities created by F2P games can be segregated into 3 categories, in order of increasing scarcity (or decreasing availability)

Induced Scarcity
Scarcity of Goods
Scarcity of Time or Access

1. Induced Scarcity

Induced scarcity is one that does not exist in reality, but is created artificially — for example, in-app purchases of digital goods. The availability of these goods isn’t really in question and therefore, the value placed on each purchase or transaction is quite low. Consequently, effective monetization depends on maximizing transaction volume from these low-value digital goods, i.e. micro transactions. This strategy is most effective when scarcity is induced because of direct player engagement, and not when it is forced onto players. Game design plays a critical role here as in-app purchases need to be naturally blended into gameplay elements. King’s games like Candy Crush Saga are perfect examples as players pay for boosters to help them progress through difficult levels. In fact, King’s revenue is expected to top $1 billion this year, almost exclusively driven by micro transactions on Facebook and mobile games.

However, exclusive use of this monetization strategy also brings up some challenges. King’s “Games Guru”, Tommy Palm, recently said that 70% of the players on Candy Crush Saga’s final level “haven’t paid anything”. While this is a great sign for consumers, King seems to be losing out on monetizing their most engaged players and biggest fans (excluding a minority population of “whales”). The only reason these players haven’t become paying customers is because they don’t consider digital goods to be scarce enough. The solution isn’t to create “paywall” equivalents, but to explore additional monetization opportunities with even scarcer products.

2. Scarcity of Goods

Scarcity of goods refers to physical products that have a tie-in with an F2P game — for example, branded or licensed merchandise. Since physical goods aren’t as abundant as digital ones, the value placed on each transaction is automatically higher. However, this comes with the trade-off of lower transaction volume. Rovio’s Angry Birds franchise is a great example of a successful merchandising strategy. Led by sales of Angry Birds plush toys, merchandising and IP sales made up 45% of Rovio’s $195 million revenue in 2012. This year, Hasbro sold over one million “Telepod” figures within a month of Angry Birds Star Wars II’s launch. This year, King also dipped its toe into merchandising with a range of Candy Crush themed candies and socks.

These products are likely to appeal to fans of F2P games even if they have never purchased digital goods. However, the biggest fans and most engaged players may be looking for something even scarcer.

3. Scarcity of Time or Access

Scarcity of time or access can be leveraged through a direct connection with the most ardent fans — for example, events like gaming competitions or conventions. Conventions tap into scarcity of time from key personnel like game designers, while social gaming competitions tap into scarcity of access to exclusive benefits and direct competition with other “superfans”. The monetization opportunity from events is likely to be immense, even though the actual frequency may be low.

So far, very few game developers have utilized this particular strategy — a related example from the non-F2P space is Mojang’s Minecraft Convention or MineCon. 7,500 tickets to the event sold out in roughly 5 minutes, generating roughly $1 million in revenue. This may seem like small change for large gaming companies, but it’s important to keep in mind that Mojang may view MineCon as more of a promotional event. Expanded ticket sales and advertising partnerships could easily make gaming events a significant revenue opportunity. Given the competition in allied industries like mobile hardware, there will certainly be no dearth of advertisers.

Opportunity for Innovation

The monetization opportunities outlined in this post show that the free-to-play mobile gaming industry still has a lot of room for growth. Most publishers have focused on just one of these strategies and I have no doubt that we will see more business model innovation from these companies as we move forward.

Having said this, these strategies are only useful for companies if their games remain popular. The gaming industry has proved again and again that companies cannot rest on the laurels of a single mega-hit. Therefore, developers need to focus on continuous innovation across a wide catalog of games. What’s most important is to ensure that players have fun. After all, isn’t that the entire point of playing games?

– Sameer

This post was originally posted in Sameer’s Tech-Thoughts blog – you can find the original article here.

Sameer is a business strategy professional with expertise in mobile ecosystems, asymmetric business models and disruptive innovation. Over the last 6 years, he has held various roles in strategy consulting, investment management, M&A and venture capital. During this time, he has developed a keen interest in the intersection between technology, innovation and business strategy. You can follow his work on his blog at Tech-Thoughts, on Twitter @sameer_singh17 or on LinkedIn.