Online Games as a Billion-Dollar Business

Autumn 2012: NCsoft just cancelled City of Heroes – a game that back in 2009 (when this post was written) was doing fine (although nothing stellar; it was a mid-tier MMO). If you’re interested in my thoughts on that, I’ve written a 2012 followup on the CoH situation in particular. NB: I no longer work in the MMO industry, although I still work in games dev

I spotted some good commentary on NCWest’s City of Heroes/Villains in 2009 today – modulo one or two quirks (umm … does Cryptic have anything to do with CoX any more? I thought this is now NCsoft’s game; as the publisher, they bought out Cryptic’s ownership last year, no?).

But one theme in particular came up that I want to hilight: why is NCsoft Korea so callous / vicious / greedy / demanding / single-minded / stupid when it comes to the profitability of their games? (NB: those aren’t my terms, as you’ll see by the end of this post – but that’s how I’ve heard people describe them, while trying and failing to understand what’s going on)

(here’s a post which really exemplifies that mystification people seem to experience w.r.t. NCKorea)

It’s all about this: NCsoft’s typical annual revenues (but perhaps not in the way that you think).

2007 – 330 million dollars
2009 – 470 million dollars (estimated)

When profitability ceases to matter

This is MBA 101 (i.e. anyone could work it out for themselves – MBA courses aren’t that difficult) but a lot of people never get a chance to see it in action in the real world, and so forget it.

Which of the following would you prefer:

  1. 50% profit margin
  2. 1% profit margin

Ah! but I missed out a key piece of information…Which of the following would you prefer:

  1. 50% profit margin on $1million annual revenue
  2. 1% profit margin on $1billion annual revenue

(of course, nearly everyone would prefer option 2 – $10million profit, instead of $0.5million profit)

Next question: is there ever a time in the real-world where you’d see a pair of alternatives that were so … extreme?

Well, yes – all the time. Every single day. Because the simple, bare facts for NCsoft Korea go something like this:

  1. We have $1 billion in the corporate bank account (actually I think their cash balance is something like $200 million – but they could *spend* $1 billion right now)
  2. Deciding to cancel a game project, or to fund one, requires 6 highly skilled staff and 1-2 months of analysis
  3. Our $1 billion of unspent cash is earning $40k in interest every week
  4. Lineage 2 earnt us $5 million in revenue every week; Aion earns similar amounts

Oh, and one more thing: It is very hard to find additional teams of “6 highly skilled staff” who are smart enough, insightful enough, and sufficiently experienced to make good decisions.

Rational business management

If you have a billion dollars to spend, and you can spend it on projects that make a billion dollars return, or ones that make a million dollars return … it is a complete waste of your time to spend even one minute per day looking at a million-dollar project.

Note: this is INDEPENDENT of the costs of development.

That’s the keystone of NCsoft Korea’s activity: they don’t care how much a project costs – they in fact have TOO MUCH MONEY already – they only care what revenues it can potentially bring in.

And they are absolutely right to act this way. In fact, since it’s a public company, they are legally required to act this way (or get sued by shareholders / investigated by government and thrown in jail).

The problem for most of us is that we never get to experience what it’s like to own more money than we can feasibly spend. Most of us have never imagined the possibility of coupling that … with a requirement to make maximal additional profit. I mean … what’s the point? If you’ve got more money than you can spend, who cares about profit?

Why I don’t work for NCsoft any more

Well, of course, there’s multiple reasons – and a broad array of contributory factors – but this is one of the mega-big-reasons why I left:

I could invest $1million in each of 50 projects, and be more likely to achieve $500 million revenue than NCsoft Korea was when investing $50million in a single project

I believe everything I’ve said in this article about the rational approach to NCsoft’s business – but the probabilities of backing a successful game at $1million are NOT the same as those for backing a game at $50 million. If you know what you’re doing, the chance of success at $1 million is much, much higher.

So much higher that when you aggregate 50 attempts, on average you achieve a bigger total revenue than the average for 1 attempt at $50 million.

Believing that, I spent a lot of time and energy pushing the company in that direction. I pushed my projects that way, I helped others push their projects that way. In the end, there was too much inertia, some of it due to bad luck (Tabula Rasa failed while I was there), a lot of it due to internal corporate politics. Some of it simply due to incompetent people (who were eventually fired, “told to resign”, or made redundant – but too late)

When the company you work for has proved itself unwilling to work in the way you believe it should, it’s very hard to remain there and do a good job at the same time. I tried for a while, I pissed off a lot of people, and eventually realised I just couldn’t hack it. I was living a lie, and I was doing it badly, upsetting people, and letting people down. My poorly-hidden negativity quickly undermined all the positive things I was still getting done. It was time to go…

10 Replies to “Online Games as a Billion-Dollar Business”

  1. The pool of talent and “span of control” are also problems.

    I think this is the same problem we are having with investors – they all have made too much money and can’t meaningfully make or manage enough small investments to meaningfully invest a sufficient portion of their funds (hence the dearth of angel and seed funding).

    While the “50 $1 Million projects” sounds correct, could you have found/grown a pool of people to make them happen? Was there enough management to oversee them?

  2. A *lot* of work would have been needed to get up and running with that.

    But … we already had a lot of the hard work + practice done. We had vision, experience, plans, and knowledge. We needed manpower, budget, and a mandate (i.e a corporate champion in Korea) (we tried to get each separately, and all three together, but never succeeded).

    (NB: this is all pipe-dreaming: since we never had a mandate to do this properly, we all just did the best we could, while getting on with our real jobs, and pushed for more when and where we could. At times I made a lot of noise trying to get more attention for this stuff, and had some minor victories, but mostly couldn’t get any traction – and then, as noted in the blog post, realised that no-one was allowed to question the corporate strategy at the time, so there was no chance I would even get a fair hearing. I made a lot of mistakes, and learnt how to do it much, much better if I’m in the same situation again)

    At the very least … we already had three people who’d been practising this on real projects for the preceding year, all of us with substantial experience in what we were doing (I was the least experienced of the three, I think).

    We knew what was needed, we already had a core of exceptional people, and we had a handful of very keen and enthusiastic people who had other main jobs but were partially involved – and whom I’m sure would have continued to pour their energies into this if the corporate side had ever allowed us to do it.

    At the very least … that was the first time I’d tried something like this. I now know many things about how to do it right, and how not to do it :).

  3. I’m guessing the reference to Cryptic is just a typo/thinko, as Cryptic has had absolutely nothing to do with CoX for some time now.

    And it would be a shame if CoX was shut down, essentially, because it wasn’t big enough – even though it has been a success. But, it wouldn’t surprise me in the least if NCsoft did finally kill all development at NCwest and simply turned it into a publishing arm. That writing’s been on the wall for a long time.

  4. I’m guessing the reference to Cryptic is just a typo/thinko, as Cryptic has had absolutely nothing to do with CoX for some time now.

    And it would be a shame if CoX was shut down, essentially, because it wasn’t big enough – even though it has been a success. But, it wouldn’t surprise me in the least if NCsoft did finally kill all development at NCwest and simply turned it into a publishing arm. That writing’s been on the wall for a long time.
    P.S. – Sorry, forgot to tell you great post!

  5. I am one of those poor bastards that spent time and money for an ncsoft game that got cancelled due to either internal politics or profitmaking or because they had no legal choice.
    For my whole life, I am constantly being judged not by my intentions or the circumstances but by the RESULT of my actions. Why should I care what were the reasons that made ncsoft [or whoever did this] close down that game? the FRIGGIN RESULT is that ncsoft shut down a game on which i had spent time, money and a piece of myself. Shutting it down was not done by world economic crisis [hey, they launched aion DURING the crisis] and TBH, I dont care even if it was due to a comet falling on earth and cutting it in half or WW3 or the darn apocalypse, or any other reason more extreme or less extreme.
    Thing is, i lost my investments, it took me down, and it still does hurt cause i’m a friggin human being being treated as herd. Well, you know what? Even if they launch my dream game and totaly free, i will not invest time or money or a darn burp on ncsoft, ever again. Even if someone who really cares about my feelings, resurrects the game I loved.

    Not my fail; it’s theirs and I dont give a darn.

  6. “MBA courses aren’t that difficult” cheeky sod Adam :) next you’ll be saying designing MMO’s is easy as going down the shops or making an iPhone game:)

  7. “MBA courses aren’t that difficult” cheeky sod, Adam, lets see you do one and see how you fare. Next you’ll be saying designing MMO’s is as easy as a trip to the shops or making games for iPhone:)

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