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Summary:

Want to get a good idea of where the gaming business is headed? Follow the money — or better yet, follow the trends the folks with money are looking at. With that in mind, I recently contacted three top venture capitalists in the gaming space to […]

Want to get a good idea of where the gaming business is headed? Follow the money — or better yet, follow the trends the folks with money are looking at. With that in mind, I recently contacted three top venture capitalists in the gaming space to get their take. What interests them most in this rapidly changing economy?

Here’s the short version: We’ll see a lot more games that are free or funded with other models besides subscription and retail, and a top-to-bottom transformation of how games are deployed, developed and played. At least one of the VCs, however, anticipates an imminent backlash against the overheated casual gaming business. Get the full scoop from Benchmark Capital’s Mitch Lasky, Lightspeed Venture Partners’ Jeremy Liew, and Susan Wu, formerly of Charles River Ventures, below the fold.


After The Casual Backlash, Look At Platform Companies

“I’m sensing that we are on the verge of a casual games backlash,” Mitch Lasky, general partner at Benchmark Capital, told me in an email. (Benchmark is invested in noted interactive entertainment companies/ products such as Second Life, Gaia Online, Red 5, Vivox, Riot Games and JAMDAT.) “The space is so ridiculously over-funded, the barriers to entry are so low, and the media models require such high traffic to generate meaningful revenue, that I think there has to be a shake-out. I think the sites with traffic, like MiniClip, will benefit, because everybody is going to be buying referrals from them.”

Lasky also says he sees a wave of new non-casual games coming to market, but the top beneficiary may be middleware. “I read a recent analyst report that showed almost 90 MMO’s, virtual worlds and online game services scheduled to come to market in the next 18 months,” he said. All that activity is “going to benefit the platform companies — we’ve been seeing tremendous customer growth at Vivox, for example, which provides high quality voice services to online games.”

Instead of casual games, he added, “I’m increasingly interested in more gamer-oriented online games, not based on subscription billing models. Our investment in Riot Games grew out of this thinking. We’ve seen strong evidence that this combination works in the Chinese and Korean markets, but it’s been slow to take off here. It is going to take the right game to unlock this market, but it could be huge.”

The Rise Of Free-To-Play– And Companies To Serve That Model

Jeremy Liew, a managing director at Lightspeed Venture Partners, concurs that the U.S. will shift away from the subscription model, a transformation that has already taken place in Asia. (Liew recently led funding for Serious Business, creator of the Friends for Sale social game.)

“Free-to-play gaming and virtual worlds (monetized through up-sold virtual goods and subscriptions) are gaining increasing traction in the West,” he said in an email. “Companies like K2, Nexon, Gaia, Habbo, Neopets, Runescape/Jagex, Gameforge, Eve/CCP and Bigpoint all doing revenues now in the tens and even hundreds of millions of dollars. But gaming, like media, is not a winner-take-all business, and there are many up and coming companies building free to play experiences and growing fast.”

Because of this, Liew noted that companies who can help with player acquisition, billing, fraud, and player management/game mastering are poised to profit from the industry’s rapid growth —a point echoed by Susan Wu, formerly a VC at Charles River Ventures. “[W]ith the death of retail and the greater accessibility of games in the hands of an order of magnitude larger audience,” she told me, “free to play with some premium components becomes the most logical conclusion. Then of course with alternate billing models comes alternate payment systems.”

Games Become Social Bonding, Which Means Even More Venture Opportunities

Wu is now a part-time startup advisor and full-time CEO for what she calls “a groundbreaking, stealthy new online gaming company.” She cites Susan Choe’s Outspark, Acclaim, and Nabeel Hyatt’s Conduit Labs (developers of Loud Crowd) as companies she’s following most closely in what she sees as a Net-wide transformation.

“We are still at the cusp of a sea change in the gaming space that rivals that of Web 1.0 in scope,” she told me. While she notes that the industry is moving in the same direction as it has been over the last few years, she says she’s been surprised by the pace of change, “in part due to the rapid adoption of social networks as an entertainment platform.”

It’s also attributable to innovations in technology and game development capability; Flash is now a viable deployment platform for games, as is the iPhone, while even a hardcore title like World of Warcraft has demonstrated how popular a well-executed can be, despite less flashy graphics. With these innovations come changes in user behavior among players, with “social relationships as primary catalysts for game playing; we’re moving back to the playground where games reinforce and create social bonds.” She points as well to innovative games and genres that reshape our expectations, from Portal and Braid, to Alernate Reality Games, to indie iPhone game Tap Tap Revolution.

“So as you can see,” Wu concluded, “this is an industry that is in the midst of great, inevitable transformation. Some of the larger companies will be able to adapt slowly, and in piecemeal — but the bottom line is that there is extraordinary opportunity for entrepreneurs.”

Update, 8/26: Liew, by the way, frequently writes about the business of games on Lightspeed’s blog.

  1. [...] Here’s the short version: We’ll see a lot more games that are free or funded with other models besides subscription and retail, and a top-to-bottom transformation of how games are deployed, developed and played. At least one of the VCs, however, anticipates an imminent backlash against the overheated casual gaming business. Get the full scoop from Benchmark Capital’s Mitch Lasky, Lightspeed Venture Partners’ Jeremy Liew, and Susan Wu, formerly of Charles River Ventures, below the fold.” read more [...]

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  2. Keith (Harvard Business School) Monday, August 25, 2008

    Actually, why didnt you include the Battery or Panorama in this? They actually have the top game and top title.

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  3. [...] climate – where casual games have become a billion dollar market. Some are already predicting a casual gaming backlash, but with the type of creativity on display below, I think these guys have made a wise choice. Have [...]

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  4. [...] James Au from Gigaom recently talked with three top VC’s about the gaming industry.  His goal?  To find out what the people with the [...]

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  5. [...] agree with Benchmark’s Mitch Lasky, who just told me that, “We are on the verge of a casual games backlash,” since ,”the space is so [...]

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  6. INDIA: ONLINE GAMING OPPORTUNITIES

    With 40 million internet users in India and another 24 million people of Indian origin outside India, game developers should target the Indian audience.

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    1. I agree, Indian market is really big with so many people there.

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  7. [...] as more venture capitalists see us “on the verge of a casual games backlash,” members of the media are trumpeting the rise of so-called social games. (That would be, [...]

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  8. [...] as more venture capitalists see us “on the verge of a casual games backlash,” members of the media are trumpeting the rise of so-called social games. (That would be, [...]

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  9. Of Course, free online games are great opportunity for most people in Asia because of lack of monetary funds for whatever they wanted to play. And with their lower wages are given for many workers (since monetary value is low) on average are provided. It would just be logical that companies would aim for this effort.

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  10. In my opinion, game developers should target the Indian audience.

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  11. I agree to the above, the world should pay attention to the indian market.

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  12. Games are rapidly improving at present. Actually the reason is the progress of software developing field.

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  13. The development of software and games along with the rise in markets in the middle east, like india, will rapidly increase more and more online games. Does anybody know any other articles like this one.

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  14. The gaming industry is growing. The internet and the traffic system will surely turn into a huge business.

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  15. The development of software and games along with the rise in markets in the middle east, like india, will rapidly increase more and more online games. Does anybody know any other articles like this one.

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