Distribution innovation drives value creation

Lasky: Innovate In Distribution, Not Content

Gaming is at a crossroads, says industry veteran Mitch Lasky, keynoting the Game Business Law summit at SMU's Law School -- and not the sort of crossroads most conventionally-discussed.

Lasky, now a partner at Benchmark Capital, once started his own MMO, worked as an executive at Activision, and was responsible for Jamdat, a mobile company purchased by Electronic Arts.

Benchmark has been one of the most prolific investors in games, including companies like Linden Labs, Riot Games, and Vivox.

"I think the risks and the opportunities are tremendous," Lasky says, stressing that we're in the middle of a profoundly changing market -- "Not the conventional transitions that you hear people talk about in the game business."

Everyone talks about the hardware cycle. But these changes, Lasky says, will "sweep away many of the companies we've come to take for granted."

The key for Lasky's scenario is understanding the concepts of content innovation and distribution innovation. He states: "Content innovation and distribution innovation change the industry in very different ways."

Citing Guitar Hero, and Wii as examples, Lasky says, "Content innovation drives audience expansion." "But what's really interesting is the second rule, not the first," he continues. "Distribution innovation drives value creation."

"Content doesn't create value in the videogame business. Everyone writes about it," Lasky says, "But distribution creates value. He gives the example of id Software and Doom's shareware model. It wasn't gameplay, he says, it was the distribution method that made the game a success. Lasky sees Valve Software's Steam service to be a later-day successor to shareware's innovated distribution.

And with twenty-million users: "I consider Steam to be one of the most -- if not the most -- valuable assets in the videogame business."

Lasky sees EA's recent announcement that the world's largest disc publisher will now use Steam as extremely important -- both as proof of Steam's legitimacy, and of EA's transition from disc-based publishing.

Discussing "The Shiny Disc Era," from 1992 to 2004, Lasky charts the high-performance of Electronic Arts, well above the performance of the Standard and Poor's 500 Index during those same years.

EA was the leader in CD-ROMs. Lasky says that during senior management meetings inside Activision, they would lament that Electronic Arts could produce fifty-percent more discs than anyone else. "They could get 5,000 units into Zimbabwe," groused Activision.

"It was really their distribution muscle that was responsible for their tremendous success," says Lasky of EA. But there are problems with discs, including huge asset creation costs, manufacturing and platform licensing, recurring customer acquisition costs, shipping, retail, inventory management, and piracy & IP protection.

"The world changed in 2004," says Lasky. "Really, really changed. Obviously, the shiny discs didn't go away. But the primacy of the shiny discs as the sole method of distribution for the videogame industry started to erode."

"This is what changed. The tsunami of the internet finally reached the shores of the videogame industry in a big way," explains Lasky. "What changed in 2004 was that online became a viable method for distribution for software -- not for content, but for distribution."

"In the online business, distribution and customer acquisition are merged. It's the same event," concludes Lasky.

And, as Lasky believes, it isn't gameplay innovation that creates value -- it's distribution innovation. Content might be what gets the good press, but distribution is what gets the profits. "These are services, instead of products." Instead of developers making gold masters, Gmail is still in Beta. "You're never really done with the software."via GamaSutra