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October 24, 2008

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bikingbill

Thank you for posting this:

I didn't mean to imply that Company A is stupid or that Company B is brilliant.

These examples are archetypes, based on real examples but exaggerated to make a point.

The point is that in a conventional VC scenario, Company A isn't expected to become cash flow positive after round A (much less B or C). The plan is to create value, in intellectual property and people. The problem that they may face now is that a followup round isn't a sure bet. Company A, as the Sequoia presentation makes clear, will have to make drastic changes or face the "death spiral" as outlined in the presentation.

However Company B can only prosper in a "no marketing funds required" ecology, which existed when the iPhone App Store first opened. The iPhone market is evolving away from that, there are over 1600 game titles alone. Company A can afford to place ads in iTunes etc.

Company B is really two companies in one. It's 'services' business is the cash cow that funds the title publishing business. That takes management resources and impacts the title side.

The real advantage of Company B is the lack of 'interference' in its decision making process. There's no venture board member to answer to. Of course they can make bad decisions as well.

The real advantage is that Company B evolved to have a efficient cost structure and Company A must now adopt to the realities of the Venture Capital and reduce their cost structure in a major way.

It all comes down to how much does it cost to produce a title and how much can that title can be expected to sell.

If we assume that out of the 100m App Store downloads that 10m are paid and 5m are games, that means 1600 game titles are driving an average of 3,125 unit sales per game. We know from traditional game markets that the top 10 games drive at least half of the sales so the picture is even more bleak that that. Maybe an 'average' game is selling 2000 units or less.

That is the 500lbs gorilla in the room.

Both companies have to find clever promotional campaigns and find niches they can own.

Here's a good blog on the consolidation in the game industry due to these financial events:

http://www.bruceongames.com/2008/10/20/game-industry-consolidation-during-the-economic-downturn/

Thank you.

Adam

Totally unrealistic and massively biased; you've described company A's scenario as if it had an exceptionally stupid / poor management team (if they managed to raise that much money yet only get that low sales, they're obviously exceptional BS'ers), and described company B's scenario as if they were run by one of the most skilled management teams on the planet (what you describe is exceptionally difficult to achieve, especially on low receipts, in software generally, let alone in teh games industry).

In reality, with equally skilled teams, A would probably take some of the money and buy customers (probably through partnering with other companies that had a captive audience / wanted to cross-promote products), and B would see that their income was flat while inflation (economic) and development inflation (industry expecations, skills required, infrastructure costs) made their cost base increase each year more than they could reduce it through savings.

Eventually, some company that is better resourced than B (probably because they "got lucky" with one game; quite possibly a company A, but equally could be another copmany B) will come along and *destroy* B, since B's only value is in their cashflow.

A will survive, because they've used their money to build up defensible features of the company.

Basically: Company A, run even half as well as Company B, gets the same opportunities, but gets a second chance each time they screw up. Company B never gets second chances.

IMHO. As someone who's worked for both types of company.

Mark

Great observations; what I like is how powerful the Internet has “Leveled” the playing field. Flawed markets living on “Leverage” can no longer survive. Innovation and Performance Trump “FOD”.

Got to love it!!!

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