Thursday, May 20, 2010

Google TV is Sony’s Last Stand Against the Apple Juggernaut

This post was also published in VentureBeat.

Everyone’s buzzing about Google’s new TV platform. But the real battle in your living room is Apple vs. Sony.

Over the past few years, Apple has muscled its way past Sony as the top purveyor of premium, high margin consumer electronics products. Sony has long had a deep culture of NIH (Not Invented Here) ranging from Betamax in the 1980s to the Memory Stick in the 2000s. But the iPod replaced Sony’s Walkman, the iPhone replaced Sony Ericsson handsets, and the resurgent MacBook and iPad have leapt past Sony’s Vaio PCs.

Apple’s unique blend of software, hardware, content relationships and rich developer ecosystem has eviscerated Sony’s core markets. The television set, Sony’s last bastion of premium consumer electronics, is already undergoing a relentless assault by Samsung. Now it’s facing a rumored Apple TV upgrade.

Upcoming: Apple TV

Apple’s much maligned Apple TV mini set-top box has long been due for an upgrade. Even Apple executives call the product a “hobby”. The next step for Apple is to start producing actual TVs. A lot of people who live in small apartments or dorms already use 24″ and 27″ iMacs as their primary TV viewing device. This trend has been widely rumored in late 2009 and early 2010 (although I think I was the first to publicly blog about it back in August 2008).

Apple doesn’t actually produce parts like its own display panels. The 27″ iMac screen is manufactured by LG, for example. Display panels, even large ones, are commodities. Instead, Apple specializes in beautiful packaging, excellent integration of hardware/software, and a seamless user experience.

Imagine a stylish, aluminum TV with a lighted Apple logo that comes in sizes ranging from 37″ to 60″. It automatically connects to the Internet and streams all of your iTunes video and audio content. It is CableCARD compatible so you can still get HBO until they finally decide to let you stream it direct. It has an iPod Touch based remote app that lets you easily find content and control the TV. It can easily install apps such as weather, sports, and games just like an iPhone, so your family can play Monopoly together.

Do apps on TVs even make sense?

The TV is the last frontier in Silicon Valley’s relentless drive to computerize every screen. With the price of fully Internet-enabling a screen at below $300, everything that people see and touch is being turned into a computer: mobile phones, billboards, price displays, and with the iPad even magazines, books, and newspapers.

Some say that running apps on a TV is silly. The same people said that running apps on a phone was silly. TVs that can run content apps make a lot of sense when coupled with the trend towards unplugging from cable and streaming all content from the Internet. Apps like Netflix, Amazon Video on Demand, and YouTube are incredibly useful when integrated into a TV. Add to that pulling up the weather, sports scores, horoscopes, and games and all of a sudden apps on TVs make a ton of sense. Most modern TVs already include an integrated computer with chipsets from Intel and Broadcom that run the Linux operating system in order to control onscreen guides and decode digital media signals in real time. So the incremental cost is not that high to add a full fledged platform like Android to a TV.

Many newer high-end TVs already include app frameworks, such as Yahoo Connected TV and Flash Lite. Content companies are likely to only support apps on a few platforms, so Sony needs to partner with a platform that will offer content companies scale, reach, and developer infrastructure. Pictured below, for example, is a CBS app Transpond has delivered running on a Yahoo Connected TV.

Sony’s Google TV bet

Stylish, high-end TVs is the last consumer electronics frontier for Apple to dominate, and it will make apps as much of a differentiator on TVs as they were on smartphones. In order to survive, existing TV manufacturers like Sony need an open platform with an apps ecosystem, and will flock to Google’s Android TV platform just like existing smartphone manufacturers had to flock to Google’s Android phone platform.

Google, with partners like Intel, Logitech and Sony, is launching a smart-TV platform that fully computerizes TV screens, replacing cable boxes as well as integrating an Android-based app store. Apple has been successful in consumer electronics because it created both well designed products and iTunes — an end-to-end user experience around discovering, purchasing and enjoying music, TV, movies, and apps.

If Google TV is going to be a successful consumer electronics product, Intel, Sony, Google, and Logitech will need to deliver both a great Android-based consumer electronics product and a compelling end-to-end user experience that supercedes the functionality of cable boxes and delivers the broadest and best consumer media consumption experience.

Sunday, May 16, 2010

With Social Game Market in Flux, what Zynga Needs is Farmville 2

This post was also published in VentureBeat.

There’s been a lot of chatter over the past few weeks about the long-term viability of social game developers. Facebook essentially shut down the viral channels social games were using to fuel their growth and is now attempting to force game developers to use Facebook’s own virtual currency, the very expensive Facebook Credits. While social game developers like Zynga are contemplating moving games to their own destination sites and launching full fledged mobile versions, they in fact have a much bigger challenge that needs to be addressed: their games have got to get a lot better.

Social Games are Now a Hits-Based Business

While there’s a tendency to think of social gaming as an extension to the casual gaming market, they are, in fact, a major growth market that is quickly becoming a high stakes, hit-based business. Social gaming is now generating over $1 billion a year in revenue and attracting major gaming players such as Electronic Arts. Now that free social viral channels are no longer available to promote a game, it costs quite a bit of money to launch a successful social game.

Zynga’s launch of its new title Treasure Isle was relatively successful, but this launch did not leverage viral channels and must have been enormously expensive to promote. Without viral channels, the only avenues for promotion are Facebook Social Ads (where Zynga is reportedly already spending a third of its revenue), and cross-game promotion, where a click in Farmville to promote Treasure Isle has the opportunity cost of a missed click for an offer or virtual good purchase. Even after this significant investment, Treasure Isle did not become a huge hit like Farmville. It ended up with the same metrics (daily active users, monthly active users, and % daily active users/monthly active users) as other Zynga titles such as CafĂ© World.

Now that the cost of promoting a social game has become extremely high, development will transition from the scattershot, let’s-see-what-goes viral approach in the early days of the market. New game titles are shifting to a much more calibrated approach with fewer titles that have a higher level of investment in order to hedge the promotion costs. EA Playfish has publicly stated that its revenue target for individual social games is as high as $1 billion, just like successful console game franchises. There is going to be a lot of upfront thought, development, and promotion for individual titles with that level of revenue target.

Social Games are Going to be Much Higher Quality

Even within Zynga’s short lifetime, its level of investment and the quality of its games has increased significantly. Mafia Wars is made of text and images. Farmville is a scrolling 2D graphics game that requires an order of magnitude more effort to develop. So what’s next? Emerging gaming platforms go through the three phases of game infrastructure: text, 2D graphics, and 3D graphics. A small team can create a text game and even a 2D game. By the time games get to 3D graphics, though, they’re extremely expensive to create.

In the past year there have been two huge developments for web browser based gaming: Flash 10 support for 3D gaming, and HTML5 support for 3D gaming via WebGL engines such as GLGE and Copperlicht. Very soon, web browser based casual gaming is going to go 3D. And although the Farmville audience is not interested in first person shooters, who doesn’t want their farm to look photorealistic, watch things grow and move as if they were cartoons, and see how different elements in the game interact with each other with a high level of realism? Similar casual games for the iPhone 3G, with its OpenGL graphics, look far better than the current stock of games in Facebook. Flash 10 and WebGL have now made it so that browser-based games will look as good as iPhone games and casual games like MapleStory that have a lot of the same game mechanics as social games and currently require web browser plugins. In addition, Facebook is improving its platform by streamlining its APIs away from its proprietary FBML, so very soon Facebook social games will look like the 3D casual games that currently require a browser plugin, such as this screenshot of MapleStory.

3D gaming is inherently a hits-based model. The cost of a great 3D console game is increasingly expensive, estimated as high as $60 million, with the average at $28 million. Fortunately, 3D social gaming can be done iteratively, but the costs are still very high. On the low end, it will take a team of 3-4 engineers six months to develop a title, with another six months of iteration, totaling a little over $1 million, before any promotion cost. On the high end, titles like Farmville that need Facebook, website, and mobile versions require teams of up to 100 people and already cost $20+ million/yr to develop and deliver. After the transition to 3D social gaming, these high-end social games will start to reach the development cost of console games.

The Competition is Coming

Zynga is clearly the leader in this new gaming platform and was the first to master the art of social obligation in a game – a friend helped you out on your farm, so now you need to help them out. However, every new gaming platform has a clear initial leader that blazes the trail for other game companies. Farmville is to Facebook as Super Mario Bros is to Nintendo and Halo is to Xbox. Eventually others catch up, and now companies like RockYou and EA/Playfish are starting to have results as good as Zynga’s new titles.

Well known franchise properties like Madden NFL and Civ have announced support for the Facebook platform. No doubt Disney/Marvel is right behind them. These games will get consumer name recognition, a ton of upfront investment, and great name-brand advertisers and offers. Some of these games will be released completely for free just to drive purchases of their console equivalents.

The Shift to Franchises

Zynga has great things going for it: two well known titles that can become franchises — Mafia Wars and Farmville. Zynga has figured out how to attract and retain the elusive 35-50 female demographic. And Zynga has figured out how to maximize casual gaming revenue via offers and virtual goods purchases. However, it is now competing against companies with massive gaming franchises that have all acquired companies with the talent to do exactly what Zynga is doing. Adding Zynga Live, its own destination site, is a great step in Zynga’s move to determine its own fate, but the company’s future is nevertheless contingent on the quality of its games, not its ability to leverage the Facebook platform. Historically, it’s been incredibly difficult to create a new game franchise. Rather than try to replicate Farmville and Mafia Wars into a bunch of similar titles like everyone else is doing, it’s time to double down an the franchise and make a Farmville 2 that looks a lot better and re-engages the existing audience that has gotten bored and moved on. Hey, Call of Duty Modern Warfare 2 pulled in $1 billion, and pretty much everyone who saw Iron Man is going to see Iron Man 2. Welcome to the big leagues.