Economics in the Small and Independent Game Industry Martin Svedal Bergquist Master of Science in Communication Technology Submission date: July 2011 Supervisor: Harald Øverby, ITEM Norwegian University of Science and Technology Department of Telematics Problem description: Students name: Martin Svedal Bergquist The networked computer game industry has experienced a huge increase in active players and income during the last decade. The emergence of online-multiplayer games such as World of Warcraft and Counter-strike, as well as casual games on facebook etc has huge impacts on the value chain in the industry. Further, the possibilities for digital distribution of games opens for production and sales of small games and games made by small teams or individuals who earlier would have a hard time distributing their games. In this assignment, the student will look into the economy of such games. In particular: - Study games made by small teams or in peer production compared to bigger productions with focus on publishing channels and gaming platforms. - Study and analyze business models of selected actors through Osterwalders business model ontology - Identify and describe future scenarios and possibilities for games from small teams or peer production Assignment given: January 28 th . 2011 Supervisor: Harald Øverby, ITEM Abstract In order to look into the small and independent game industry this thesis presents an analysis of the business model of the game Minecraft using the ontology and framework defined in Osterwalders dissertation. The main pillars, product, customer interface, infrastructure management and financial aspects are explained in addition to various common revenue models used by game developers and publishers. The thesis further models the economy of the game and identifies its main cost accounts; storage, bandwidth, office rental, salaries, professional taxes, transactions and miscellaneous costs. Based on this, in addition to the revenues connected to the game, the thesis shows the most important success factors for the developer in regards to peer-production and value creation and shows the most important changes and suggestions for the future of the game. Furthermore, the thesis suggests important traits and effects for independent and small games based on the findings in the case study of Minecraft. Among these are free model effects and network effects in order to attract users and obtain high value networks at low costs and utilizing revenue models based on the value of the network through increased sales of value-added services, advertising and new market acquisition. Preface This thesis concludes my master’s degree in Communication Technology at the Norwegian University of Science and Technology (NTNU). I would like to thank my supervisor, Harald Øverby, for comments and suggestions through the semester. I would also like to thank my family and friends for providing me with support during my work and my employers and coworkers for being understanding and helpful towards the end of my work. Lastly, I would like to thank my parents for their support and contributions through my entire education enabling me to reach my goals. Thank you! Trondheim, July 1, 2011 Table of Contents 1 Introduction .................................................................................................................................... 1 1.1 Contribution .................................................................................................................................. 2 1.2 Thesis Scope and limitations ......................................................................................................... 2 1.3 Outline ........................................................................................................................................... 3 2 Background ..................................................................................................................................... 4 2.1 History and development of Game industry ................................................................................. 4 2.2 Gaming platforms .......................................................................................................................... 8 2.2.1 Personal computers ................................................................................................................ 9 2.2.2 Consoles.................................................................................................................................. 9 2.3 Genres ......................................................................................................................................... 10 2.3.1 Action.................................................................................................................................... 10 2.3.2 Adventure ............................................................................................................................. 11 2.3.3 Role-playing .......................................................................................................................... 11 2.3.4 Simulation ............................................................................................................................. 12 2.3.5 Strategy ................................................................................................................................ 12 2.3.6 Sandbox ................................................................................................................................ 13 2.4 Massive multiplayer Online Games ............................................................................................. 13 2.5 Social and casual games .............................................................................................................. 14 2.6 Online Gaming Services ............................................................................................................... 15 2.6.1 Community sites ................................................................................................................... 16 2.6.2 The long tail .......................................................................................................................... 16 2.7 Value creation ............................................................................................................................. 18 2.7.1 The traditional gaming industry value chain ........................................................................ 18 2.7.2 Value network effects .......................................................................................................... 20 3 Peer production ............................................................................................................................ 22 3.1 Free .............................................................................................................................................. 24 4 Small games and peer-production games .................................................................................... 27 4.1 Indie games ................................................................................................................................. 28 4.2 Peer-production games ............................................................................................................... 29 5 Osterwalders business model ontology ....................................................................................... 32 5.1 Ontology ...................................................................................................................................... 32 5.2 Product ........................................................................................................................................ 33 5.2.1 Value Proposition ................................................................................................................. 34 5.3 Customer interface ...................................................................................................................... 37 5.3.1 Target Customer ................................................................................................................... 38 5.3.2 Distribution Channel ............................................................................................................. 39 5.3.3 Relationship Management ................................................................................................... 40 5.4 Infrastructure Management ........................................................................................................ 41 5.4.1 Capability .............................................................................................................................. 42 5.4.2 Value Configuration .............................................................................................................. 43 5.4.3 Partnership network ............................................................................................................. 45 5.5 Financial Aspects ......................................................................................................................... 45 5.5.1 Revenue Model .................................................................................................................... 46 5.5.2 Cost Structure ....................................................................................................................... 51 5.6 Actors ..........................................................................................................................................