What is failure?

Probably due to the usual summer slump in MMORPG gaming, the MMO blogosphere has erupted in another round of discussion on failure of MMORPGs. That discussion pops up from time to time, but always suffers from the same problem: Lack of definition of what failure actually is for a MMORPG, which then leads to very different impressions of which games actually "failed" and which games "succeeded".

I guess its time for some basic economics. Because if you base yourself on economics instead of public perception, it is actually rather easy to define success and failure. A MMORPG after all is a business venture, not unlike putting a new car on the market, or a new shampoo. A business venture starts with an investment, which in the case of a MMORPG consists mostly of the development cost, that is paying for all those programmers toiling for several years to make that game, their offices, their computers, and so on. Plus there is some investment in server hardware. For big MMORPGs that investment can be significant, in the $100 million order of magnitude. Smaller games can have much smaller investment cost.

Success or failure is defined by the return on investment you get. Imagine you had spent the $100 million on a 10-year treasury bond with 2% interest, then in 10 years you'd not only get your $100 million back, but also $20 million of interest, for a total payout of $120 million. That is "risk free", as long as you consider it unlikely that the government stops paying its debts. For a business venture like an MMORPG to be a success, it has to deliver *more* than those $120 million back after 10 years. Because obviously a MMORPG is a more risky venture, and only the idea that you could get a higher return on investment would justify doing something this risky instead of buying bonds.

So far, so good, but unfortunately we usually don't know the financial numbers for MMORPGs. We don't know the total investment (World of Warcraft plus the first two expansions is said to have cost $200 million in investment), and we don't know the profit. Sometimes we have an idea of the revenue, if we know subscription numbers and monthly fee. But even if you know that the game has 100k subscribers paying $200 per year for a total of $20 million, you don't know how much of those $20 million remain after operating costs, taxes, and the like. We have some data from Blizzard from a few years back, where they made $500 million of profit on $1 billion of revenue, thus half of the revenue was profit, but 50% profit margin is rather high, and it isn't sure that every company reaches that.

So we are back to public perception. But wait, all is not lost: Companies react to success and failure in predictable ways. Watch what the company does, and you can deduce whether *they* think their game was a success or a failure. One of the better documented cases for example was Warhammer Online. Was that a success or a failure? In this case the head honcho, Mark Jacobs, helpfully announced their criteria for success or failure before the game launched: He considered less than 500k subscribers and the closing down of servers as a failure. And that was exactly what happened, after an initial rush the game dropped to under 300k subscribers and closed over half of their servers. Even if you take Mark Jacobs' success criteria with a grain of salt, the fact that he and many other developers got fired is another sure sign that the game company considers WAR to have failed.

The ultimate failure is the game company going bankrupt, or the game closing down. But that isn't the only form of failure. Imagine you invested $100 million in a game, and that game makes $5 profit every year. It is clear that after 10 years you only got $50 million back, and would have been better off if you had bought bonds, or even just tucked the $100 million under a mattress. But as long as the game makes more revenue than the operating cost, and thus still makes a profit every year, it is better to let that game keep running, in spite of it being a failure, than to shut it down and lose all your investment. Better $50 million back in 10 years than nothing at all. So the fact that a game is still up and running isn't an indication of success.

So how does success look like? Companies making a profit have two basic choices, and usually do a mix of both: They can return the profit to the people who invested the money, or they can reinvest the money into a new business venture. Imagine you invested $100 million into a MMORPG, and that MMORPG is making $20 million of profit every year. Great, in 10 years you'll have $200 million, significantly more than what you would have gotten our of treasury bonds. But then what do you do with the $200 million? Having launched one successful product makes you think that you have a recipe for success, and you can do it again. And you don't even have to wait for the 10 years to end, you can already start investing in the next game by putting half of the profits into your pocket, and reinvesting the other half into the development costs of the next MMORPG.

So lets look at another example, Everquest 2. Everquest 2 launched in the same month as World of Warcraft, and at launch it wasn't obvious which of the two games would "win" that "race" for popularity. So as EQ2 obviously "lost" this direct competition, some people think of it as a "failure". But Everquest 3 (called Everquest Next) was just announced. That is a pretty strong indication that SOE considers Everquest 2 to have been a success, that they got their investment back plus some good rate of return on investment, and that they think they can make even more money by reinvesting their profits into the next Everquest.

So how is the general state of the MMORPG market? As said before, MMORPGs are a risky business with an uncertain rate of return, a bit like making a movie and waiting for the first weekend box office receipts. The fact that some movies flop, and some games shut down or game companies lay off developers does not mean that the industry as a whole is in a bad shape. Not only do we have big new entrants, like Bioware with SWTOR, but also many of the existing MMORPG companies are successful enough to be working on their next games: Guild Wars 2, Final Fantasy XIV, the next generation Blizzard MMO, Everquest Next, and so on. The continued investment of companies that know the market very well tells us that the industry is generally profitable. The success can range from the billion dollar business of Blizzard to the small eGenesis game A Tale in the Desert running for 7 years now and starting their 5th telling. The total number of subscribers doesn't matter so much as the return on investment does, and it is the continued investment which is the true hallmark of success.
- posted by Tobold @ 6:30 AM Permanent Link