I don’t use their products, but I’m a big fan of the 37signals blog. Today’s post talks about exploiting different revenue streams.

Your self-imposed limitations on how to make money are often just that: self-imposed. Seek out other routes to your destination.

It’s one of the big advantages that small, agile companies have. They can experiment and change directions quickly. Plus, multiple revenue streams help you diversify so all your eggs aren’t in one basket.

I know a lot of web comics creators and diversification is their bread and butter. Most of them give the “main” product away for free (they rely on people passing the comics along for free word of mouth) and then sell secondary merchandise as the main source of income. Shirts, prints, books, a little advertising - these are the things that pay for most web comics.

Not many indie developers take advantage of the multiple streams thing. The Behemoth is an obvious exception. Alien Hominid was funded partially through house refinancing (risky) and partly because they made and sold the action figures before they finished development. Profits from the toys paid for the game.

More indie studios should consider at least selling shirts, I think. A lot of them have these huge fan bases who hunger for ways to show their allegiance between game releases. And with a year or more between releases, some interim cash seems like a good idea. The risk is that you end up spending too much time or effort on the secondary work (the creation and distribution of physical stuff is not the same as making downloadable games). On the other hand, the risk of leaving money on the table is that you run out of cash before your next project is finished.

(P.S. here is one where 37signals makes my “ideas are cheap” argument but, you know, articulately.)

I don’t normally link to Dilbert, but this is a pretty much spot on explanation of the Developer / Publisher relationship.

It seems like the key to being a tech columnist is having discussable opinions about things. Knowledge is for the sissies over in the reporting department. Making pronouncements of either Doom or Ultimate Glory for some new device is the kind of thing that puts (something I like to call “asses in the seats 2.O”) links in the blogs. It is in this spirit of prophecy for page views that Brian Caulfield of Forbes asks whether or not the Apple iPhone could kill the Nintendo DS. Showing the kind of visionary spunk that gets you employed at one of the top business magazines, Caulfield doesn’t let the fact that a clear answer, “no,” already exists.

It’s a good gambit. Like small town residents cheering whenever their name is mentioned on the Tee Vee, the industry, perpetually suffering from “hey we’re relevant too” syndrome, gets excited when one of the big players mentions us. Here is my prediction about Forbes’ prediction: lots of gaming sites will link to it and then it will turn out to be utterly wrong. Things start to go badly in the early paragraphs.

The Nintendo DS has had a good run, too, dominating the market for handheld gaming gizmos despite determined assaults by Sony and Nokia .

The DS didn’t HAVE a good run. It’s HAVING a good run. There are over 70 million of them out there right now. The PSP is doing well too, with over 30 million units sold. But to describe the sad joke that is the N-Gage - a failed Gameboy Advance competitor / phone that launched in 2003 and may not have even sold a million units - as a “determined assault” by Nokia is to severely misunderstand the market.

Apple is the first to master a pair of tricks that have made Nintendo’s latest products so compelling–a touch-screen interface and the ability to pick up on motion. The key difference: Unlike Nintendo, which has created a gaming console with a motion-sensitive controller and a touch-sensitive handheld gaming system, Apple has crammed both capabilities into its iPhone and iPod Touch.

Leaving aside motion sensing, which the DS doesn’t actually have, Caulfield’s argument is that the iPhone has a touch screen which the DS also has but you can download new software on to the iPhone, and he heard that some companies were making games for it, so it’s a DS killer.

Let’s compare them for real.

The DS is a rugged little single purpose gaming system that retails for $130 in Canada. It has two screens, including a dedicated touch screen and dedicated control buttons, plays GBA games as well as DS titles, has build in local wireless networking for multiplayer gaming as well as a connection to Nintendo’s ‘it just works’ worldwide multiplayer service. It is supported by brands such as Mario, Pokémon and Final Fantasy. You can find it at just about any department store in the world and it’s loved by kids, casual and core gamers.

The iPhone is a multi-purpose device which retails for $400 (minus contract subsidy). It has a single large screen (lord help you if you drop it), no local networking, no wireless gaming service and no library to speak of. In order to buy one, you need to sign up for cellphone service and in order to buy and download games you will need a credit card and an iTunes membership. It is not a device for grubby handed kids, Nintendo’s bread and butter.

If there is any direct competition to be had, it’s between the iPhone and Sony’s rumoured PSP phone. They’ll (probably) cost about the same, and both are convergence devices meaning that for a slight premium, you can get them do to several things that you don’t really want.

It’s too late to kill the DS. The DS is a runaway success. iPhone gaming might have a chance at killing some future Nintendo handheld, but I wouldn’t want to start mouthing off about it. Much as Sony learned when they went after portables, Nintendo is much, much smarter than you think and they know games very, very well.

MTV’s Multiplayer ran a week’s worth of posts about the state of reviewing in the games industry. I feel like this is actually some good journalism, something I wish that there was more of in the gaming press.

Between the MTV stuff, and Level Up’s Reflections on videogame publisher and employer contempt towards the enthusiast press there’s a lot of very good material for people to think about the very broken status of the enthusiast press and review mechanisms of the industry.

When your industry is still in its infancy and at the same time in the midst of a distribution revolution, it’s worth casting your eye around to see how the others are getting along. I did it once already with the comics industry and now’s a good time to talk books.

David Edery (the Worldwide Games Portfolio Planner for XBLA) recently announced that he’s just about finished writing his first book. He paints a grim picture of his prospects.

From what I’ve gathered, less than 1% of published books turn out to be hits. The odds for a first-time author (who isn’t a big name, like Bill Clinton or Alan Greenspan) are so incredibly low that even if your publisher loves your book, your marketing/sales forecast is unlikely to exceed 20k copies at best. At that level, it simply doesn’t make sense for the publisher to do much in the way of marketing until the book has already proven itself.

The parallels (hit-driven) are as striking as the contrasts (so we publish a lot of books but only market some of them). It’s worth considering how publishers in the two industries might have come up with opposite solutions that to the hit-driven problem.

My working theory is that books are cheap to write but expensive to distribute, while games are expensive to make but approaching free to hand out.

So book publishers (or at least, ours) have adapted to their harsh reality, and have forced authors to be more self-reliant. We received a huge “marketing questionnaire,” with questions like “What is the big idea of the book,” “Why now is a good time to publish it,” “Why will people want to read it,” and “Who will buy it and why? Be realistic!” The questionnaire forced us to think about competing books and explain our points of differentiation. It forced us to think through every possible personal contact who could help promote the book, directly or indirectly, through coverage or endorsements, etc. We had to list every website, magazine, and journal that might be interested in the book. We had to answer a list of theoretical questions from journalists. We had to create sound bites. We were asked if we’d be willing to maintain a blog or podcast, and were offered help setting those up. And more.

Edery argues that every publisher of an indie arcade title should require their developers to fill out this type of marketing questionnaire. I’d take it a step further: if the services that publishers provide keep getting cut back like this because of the economics, why have a publisher at all? Developer royalties tend to be awful, but this makes a kind of sense if the publisher is doing the bulk of the heavy lifting with the financing and marketing. Without that support, giving away more than half of your income on the game makes very little sense.

The question as an indie that you need to ask is: will the boost in sales that having a publisher provides outweigh the cost in the portion of income that they take. If you negotiate 50% royalties with a publisher (how’d you do that?), this better be because you expect their support to more than double your sales. If you have a 15% royalty rate, then you are expecting the publisher to improve your sales nearly sevenfold. If your situation is “game gets a publisher or never gets to market” then sure, go for it. But in the land of indie downloadable games, we live in a era of abundance marketing, where publishing your work costs roughly the price of buying domain hosting.

Over at Game Career Guide Brian Nathanson talks about his struggle at breaking in to the games industry. Well, his failure to break in to the industry.

It’s a sad story. He doesn’t mention what school he went to, just an unnamed “game program in Arizona”. He only hints at the details but it seems like he entered a program with high hopes, took out massive loans and discovered at the end of the process that he wasn’t prepared for a job (he can’t even get a phone interview).

I am completely aware of how many people want to be a part of the video game industry. I will admit, openly and publicly, that I probably don’t have a very competitive portfolio.

When I was in charge of hiring at a video game company, I saw a tonne of applications like Brian’s. A lot of people have paid ridiculous tuitions for generalist educations and came out at the other end masters of nothing. It was heart wrenching, knowing how much these people had invested in their education and how little they got for it. They’d have been better off using the tuition money to pay for rent and food while they worked full time on a mod project.

I feel for Brian, but I also totally disagree with him.

Individuals with base skill sets and true passion are ready and waiting to be given a chance to shine. These talented and passionate people bring fresh new energy and commitment into an industry that seems to always be juggling profitability with volatility. New ideas, new game mechanics, and new appeal could be created by those who just want to make a game they would like to play. Smaller, more tightly focused, and perhaps less expensive games could be the result if the industry allowed more inexperienced developers to work while growing their skill sets.

Ideas are cheap and plentiful, we don’t lack for them. Nor do we lack for fresh young talent. This is an industry with an average age of 31 and an average career length of 5.4 years.

I’ve worked with newcomers and with hobbyists and and I’m here to tell you that inexperience does not lead to “smaller, more tightly focused,” games. It leads to sprawling, unfinished, genre-defying epic failures. We don’t need fresh young faces to reinvigorate things. We need old non-burnt-out faces to stick around and be the voices of experience and history.

Brian is right about one thing, it is very hard to even get a phone interview. It’s not because we can’t be bothered to talk to the passionate people who wish they were involved. It’s because there is something like a 60:1 ratio of applicants to job postings. There just aren’t enough hours in the day to call each of them.

Starting in the 1930s, a psychologist named B.F. Skinner did a series of experiments involving rats, pigeons, and something called a Skinner Box. The experiments involved conditioning the animals to activate a lever and rewarding them for the behaviour with food based on a variety of different reward schedules.

It turns out that a Variable Ratio schedule, where you give out rewards after random number of actions is the best way to get an animal to hit a lever over and over again. Unlike more predictable schedules, which are associated with a lull in activity after the reward is given out, Variable Ratios mean that any lever press could be the one that dispenses food. In the delightful language of psychology “Variable schedules produce higher rates and greater resistance to extinction than most fixed schedules.” Extinction is when you stop doing something because it’s stopped rewarding you.

I first came across the Variable Ratio reward schedule in an article on Gamasutra about using behavioural psychology to make games more fun. If you stop and think for a moment, you’ll recognize the schedule in the loot drops of Diablo and just about every MMO and RPG in existence. You’ll see it in the random power-ups dropped by enemies in FPSs and SHMUPs. And you’ll see it in slot machines, Craps tables and just about every other form of gambling.

We have a funny relationship with addictiveness in this industry. When reviewers talk about a game being addictive, it’s high praise. When publishers talk about it it’s a laudable business goal or a selling point. As part of the Civilization IV marketing campaign they released a series of ads and a website for CivAnon, an Alcoholics Anonymous for Civ gamers.

Perhaps conditioned by years of defending ourselves from the charge that games are corrupting the youth, when it comes to the idea that games might be addictive for real we tend to circle the wagons.

At some point, the industry is going to have to take serious stock of the charge the claim that games are addictive. More specifically, that we have a moral obligation that conflicts with our financial obligations to decide how addictive we want our games to be.

Consider this quotation from the Gamasutra article:

The distinct pause shown under a fixed ratio schedule can be a real issue for game designers. Having a period of time where there is little incentive to play the game can lead to the player walking away.

The business side screams “OH GOD NO, we can’t let them walk away from the game! They might stop paying!” The ethical side should be asking “Ok, I want them to like this game and keep playing it, but I also want them to have a rest of their life. Where’s the balance?” Jonathan Blow asked this question eloquently at MIGS 2007. Raph Koster asked it again just last week.

If we can agree that the tobacco industry should be held culpable for deciding how much nicotine to put in its cigarettes and we can believe that there is such a thing as problem gambling, then we have to accept that it’s possible to make games that are too addictive. We have to accept the possibility that we may already have.

N’Gai Croal at Level Up has a pair of interviews with Sony and Microsoft marketing about the 64/36 sales split of Grand Theft Auto IV on the Xbox 360 and PS3 at Gamestop. The close to 2-1 advantage in favour of the Xbox is a clear victory… for everyone!

You see, while there was a 64/36 split on GTA purchases, there is a 70.7/29.3 split on U.S. installed Xboxes and PS3s. While the 360 won on pure sales, the PS3 came out slightly ahead per capita. In other words, it’s a wash. Watch how each of them plays with the numbers and analysis to tell their story.

Microsoft’s Aaron Greenberg has the easier job. The raw numbers look very good for the Xbox 360 and so the only real task is to dismiss the per capita advantage of the PS3 by arguing that they expected it to be worse. Taking advantage of the email interview, he completely ignores the final question, hits ’send’ and then knocks off for some lunch.

Poor Sony’s Peter Dille has to really make the numbers sing. Using the magic of rounding, the sales advantage becomes a mere 60/40 and the console advantage swells to 3-1 (3-1 would be 75/25). Given these new numbers, Playstation is doing FINE, in fact it’s practically 50/50! Later, when talking about the console race, Dille, perhaps realizing that there such a thing as being so far behind that you’re just a loser, quietly revises the earlier rounding and scrappy underdog PS3 pulls ahead to a respectable 70.1/30 install ratio.

The endearitating thing about Dille is that the tactic WORKS. As other blogs,news outlets and fansites pick up the story, they paste Dille’s money quote (”If I had an installed base advantage of 3-1, I wouldn’t be crowing too much about a 60-40 sales advantage.”) uncritically, letting the dodgy math stand.

Raph Koster’s post today got me thinking (again) about Danc’s excellent 2005 article about the touring band as a business model.

The thing about the touring band and about micropayments that gets everyone excited is that there is NO UPPER LIMIT to how much a devoted fan can spend on you. I’m embarrassed when I think about how much money I have spent on pretend Magic cards and judging by the evidence over in Korea, a lot of other people are doing the same kind of thing for all sorts of games.

There is another benefit to micropayments that I haven’t seen people talk about as often: it’s much easier for players to slip in and out of fandom. When I broke my WOW addiction, I cancelled my account, cutting myself off from play. It’s unlikely that I’ll ever return. Meanwhile, on some server in California sits my neglected Magic: the Gathering Online collection. Any time I want, I can drop back in and play a few games with my old cards. How many casual games can I stand before I break down and start buying packs again? I’m scared to find out. Free-to-play micropayment models allow the kind of “oh hey I remember this band” nostalgia to take hold more easily, dragging recovered addicts back in to the fold.

When it comes to talking about marketing, Seth Godin is one of my favourite speakers and thinkers. I honestly don’t know if empirical data matches up with his anecdotal evidence, but the story he tells of being able to distinguish yourself in the marketplace and carve out a niche for yourself is a compelling one when you’re a smaller indie developer, looking to survive in the same business where Halo 3 and GTA:IV are thriving.

He’s got a blog and in today’s post he throws up a graphic and an argument about appealing to a niche or going for the mainstream. There’s a parallel here to game development.

The reason you need to care is that gap in the middle. Every day, millions of businesses get stuck in that gap. They either move to the right in search of the masses or move to the left in search of authenticity, but they compromise. And they get stuck with neither.

I can’t find the reference, but at the GDC a few years ago, one of the speakers put up a graph of sales numbers and profitability for video games, indexed by budget. It turns out that games with budgets under $200,000 or over $10 million tended to do very well. The prospects for games with budgets in the middle (the vast majority of games that are put out every year) were awful.

In the context of Seth’s graphic, this trend makes a lot of sense. Games that have huge budgets are nearly guaranteed to be masterpieces. These are the games that get delayed to bring the quality up, with the team knowing full well that extra development costs will get drowned by sales when the game finally comes out. With a $10+ million budget you can afford to make the game good and you really can’t afford to let the game be bad.

On the other end of the scale, with a $200,000 budget, you’re so limited in your time and money that you can’t have any illusions about what you’ll be able to implement. If you’re making a sub $200,000 game, you have no choice but to make the game tight and focused. This is the realm of Everyday Shooter, N+ or flOw (note: I actually don’t know how much it cost of make any of these games).

Does budget automatically predict quality? Of course not. But if you are working on a $4 million FPS, you might want to sit the team down and have a serious conversation about the scope and character of your project.