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Interviewer: I’m here at GDC Online and with me today is a special guest. How about you introduce yourself?
Alex: My name is Alex St. John. I’m President and Chief Technology Officer of hi5 Networks.
Interviewer: You’ve gained some media exposure because you’ve talked about how social… You have a strong viewpoint about social games. Can you summarize that for the audience?
Alex: Well, I’ve expressed many viewpoints publicly. I think the one I’ve expressed previously is that social networking as it was first formulated and first seen as successful, as kind of a passing fad. It was a phenomena that was in some sense Facebook enabled. From their point of view a security problem that allowed the games to spam their users, and Facebook regarded that as a hostile or negative impact on their user base and cut it off.
The very first games that really succeeded at what we call social networking were really games whose only entertainment value was just sufficient to perpetuate themselves while the perpetuating was good. Once Facebook rolled back the freedom to do that, it really changed the economy and ecology for social games dramatically. And so, we are seeing another generation of social media games that are very different from that sort of first iteration that defined the marketplace originally.
Interviewer: Can it just be said that that’s how everything evolves? When things first start out, people have to get some kind of beachhead in so that they can start making revenue and invest in stuff like that. So, why criticize social networking games for doing that?
Alex: Oh, sure. No, it’s absolutely… You know what’s fascinating? Anything I criticize really is the misperceptions of what was discovered in social networking. I think it’s funny to call social network games social when they’re not that social.
The very first hit game on Facebook was multiplayer poker which, of course, has been on the Internet a long time ago. We didn’t call multiplayer bridge on Yahoo a decade ago social gaming. So, I think it’s very funny that there’s this sort of, well, we just discovered a new kind of game. We’re going to call it social when really you don’t play with people in real time. Zynga never made another multiplayer actual play and chat with people again. And so, I think that there’s a lot of misperceptions.
And so, the irony that I can kind of make fun of in some instances is there’s a lot of people new to online gaming and a lot of mistaken lessons taken from the success of what are called social games on Facebook. And I think that troubles me because I’ve been building online games and publishing them for many, many years.
One of the things I’m concerned about is a lot of small developers risk their business and their success in some cases on a lot of false assumptions about where the opportunity is for their products. If you really want to help these small developers be successful, I think that it’s a disservice to perpetuate wrong ideas about what is making games successful on the marketplace.
As an example, Runescape and games like Club Penguins are light, Flash based. Runescape is Java in this case but Club Penguins are multiplayer games, turn based. They have the same sort of anti-social, can’t really interact with anybody, kind of play mechanic that you see in social networking games. And it took off virally and exponentially on the Internet without any venture capital or any help from Facebook.
And so, one of the things that I think people in social networking forget is that great games structured the right way don’t need any magic help. In fact, the thing that is really novel about what we call social network games is the first generationof them are games that nobody wants to play outside of a social network. If you put them on Miniclip or Kongregate or any of the really popular Flash gaming sites, nobody plays them.
And so, the interesting discovery in some sense is that there is some magic pixie dust associated with social networking that seems to make bad games good ones magically. And if you take the social networking characteristic away, the games don’t perform.
And so, I think the important or exciting lesson is that social networking itself is a new kind of play mechanic. It is a game, and in some sense the first generation of things we call social networking games, really media enhancements to socializing and competing with friends for status and social attention and recognition.
And so, in some sense I think the discovery of social networking itself is the big revelation, and the focus on the media enhancements to social networking or, at least, the first generation is misguided because the companies or small developers who are trying to be successful making those things are destined to fail if their aspiration isn’t to make Facebook itself or a social network itself.
And so, one of the things that I try to talk to developers about, I say, look online games, good online games thrive all by themselves. There are ways to build good online games that succeed independently of a social network. Now, I run a social network so there’s pixie dust I can spray on a good game to make it more successful or sprinkle it on a game to make it more successful.
And I think that’s the real value add of social networking is to take great games or intrinsically great games and augment them rather than the first generation fad of taking viral, you know, spamming games and then annoy a lot of your friends with them, as popular as they are, Facebook included, thinks it’s a bad idea and cuts it off causing a situation where now only game developers and social networks who make really substantive games and have significant financial resources to buy their advertising or distribution on Facebook can afford to be successful.
The thing that I’m interested in doing with hi5 is that having made the game platforms for many, many years, what I want to do is bring to good game developers, companies who really generally make good online games, some of that pixie dust independently dependent of a social network like Facebook or hi5′s interior bubble of users so that those games can go and be successful and thrive on the Internet without having to play by some publisher’s interior network rules.
A lot of what we’re doing at hi5 is what we call externalizing the social graph so game developers can just adopt it and put their games anywhere they want to in front of any audiences they want to, not just to my interior 50 million users on the terms that I want to present your games on.
Interviewer: You know, and I say this in the most respectful way possible, you mentioned Yahoo Games, and then you mentioned the fact that they had these games and then why wasn’t it social back then compared to now. Doesn’t that just highlight that? You’re right. These games on MSN and Real Arcade and whatever, they were there for a long time. Is it just because the game community, the game business, the game industry just doesn’t have a clue about the actual audience that could potentially care about games?
Is the fact that social network games actually are now, in terms of the people, the number of people impacting it so much greater than traditional games, showing the disconnect? Is it just showing the disconnect between the game industry and the Web industry? Is the reason why social games took off, maybe, they needed their own little category just to kind of differentiate them from the other clueless parts of the game industry because how they’re coming from the website? And that’s why you have that heavy focus on analytics and other things.
Alex: I think that is a fantastic question because the answer is and there’s a lot of it. This is one of those areas where you go, people just don’t understand. Social gaming, probably, statistically speaking, did not create a single new online gamer. The thing that’s fascinating is that online game play has been the dominant activity of the use of a broad category of audiences on the Internet for over a decade.
One of the funny things is that in the ’90s, late ’90s, early 2000s, online gambling in the U. S. took off, and sites like MSN and Yahoo carried multiplayer games, social games, carried them because the advertising premiums they were getting from the online casino sites were astronomical.
So, the first multiplayer gaming sites and casual portals like MSN, Yahoo and AOL Games made their money carrying online casino advertising. Around 2000 that was a $2.2 billion online industry. And the gamers were mom, 35 and up on average, and mom, during the afternoon when the kids aren’t driving her crazy, would drop on average $250 in the late ’90s and early 2000s on online casinos.
What happened in 2002 is the U. S. cracked down on the portals for carrying that advertising and pushed the dollars into what we now call the casual game business because those portals said, well, we can’t carry casino ads any more plus the mom was already a gamer 100 percent. That’s what online casinos taught mom, to be a gamer and to use her credit card online fascinatingly enough, but it’s not well understood.
Casual games emerged in the absence of that casino business, and, of course, what is the most successful famous downloadable game in history? You know what it is?
Alex: Bejeweled which looks remarkably like what?
Interviewer: Yeah, a slot machine.
Alex: A slot machine game. What a shocking coincidence. And so, one of the fascinating things is that what we know as the casual game business which today is a multi billion dollar business was a throw off of the casino business.
And if you look at what we call social gaming, what’s fascinating about that is the first hit social game that we all know, Zynga Poker, January, 2007 was a hit immediately after the U. S. government cracked down and started arresting offshore poker operators in the U. S.
And so, all of these multibillion dollar, publicly traded poker operations operating out of Europe withdrew their games from the U. S. market, and people found the same game, multiplayer poker on Facebook when all of these traditional outlets that they’d been consuming vanished. And so suddenly, it created this miraculous success, social gaming, out of Facebook when in fact it was the same phenomena that caused the casual business to change the gambling regulations interestingly enough.
So, today when you say, has social gaming made anybody more ubiquitous, well, if you actually go to Quadcast.com and look Farmville.com on it, and you will see on the right hand side the Affinity is 5 to 10x for traditional casual game downloadable sites. So, the people who are playing Farmville are the exact same people who are playing Bejeweled downloadable games and have been for years. It did not create a new market.
Interviewer: Well, you know, it’s the exact same category, but it got more people within that demographic, Farmville did, mainly because of the business model, too. That’s another thing. You look at Yahoo. You look at MSN Games. They didn’t really adopt any kind of provocative business model. More power to the social game companies that were able to do that and reinvest that.
Alex: Well, you’ve got to say bravo for them figuring out how to monetize the same audiences that were already being monetized. If you look at the casual game business itself, it’s a multibillion dollar business. I think it is absolutely fair to say that social media gaming has, maybe, managed to get more credit cards from people than other game business models have, but I think that audience was playing a huge volume of free games previously.
If you look at the numbers Zynga claims, that is almost an one to one correlation to the paying audience for casual gaming. So, they’re now claiming an audience of paying users that is larger than the same demographic that buys games from Big Fish and Real Networks and Wild Tangent. So, if you look at these set of credit cards they get, it’s not a big difference.
Now, there’s a huge amount of free play. They claim 95 percent of their play, which I would believe, is from people who aren’t paying them anything.
Alex: And that’s the same for casual. So, it’s very hard for anybody to say, this audience of people that’s playing for free over here is a new audience that wasn’t playing for free in other places. There’s a lot of free play that’s been going on for years.
Interviewer: There seems to be a lot of bitterness from the casual gaming industry towards these new social game development companies. Do you think part of that is because in 2007 around that time casual game companies were actually gearing up to make “casual MMOs”. And what happened was that instead of having these casual standalone MMOs that were supposed to come up in 2007, 8, 9, they really got trumped by these social networks that provided that MMO experience to these casual gamers.
Alex: You know, when Club Penguins got bought by Disney, I think there was definitely a rush of the casual game companies to learn how to make social MMOs. I think your point, frankly, is very well taken because I think they were too slow and they really struggled.
So, making MMOs is an entirely different kind of game design from making a single player downloadable game, and these companies really have a had time adapting to it. And the social guys did come along and show them a way to get it done which was really successful.
When I look across a lot of the small casual game developers, I think that there are relatively few that have been very successful in casual. And interestingly enough, PopCat with their Bejeweled game is one example of a company that has had some success making the transition, but I do see a lot of them realizing that it’s kind of a new wave. It’s where they need to take their business, and they don’t know how to do it and, maybe, they got there a little late.
Interviewer: OK. Let’s talk about hi5 some more. So, you’re not too enthusiastic about the social gaming opportunity on Facebook. But for developers, smaller developers who are listening to your advice and want to take it, if they go into hi5 they still have to pay the same amount. It’s a 30 percent cut. What is the benefit of hi5 which has less distribution and the same cut?
Alex: Again, that is a brilliant question because, if I may, the real question is what value is Facebook providing by taking 30 percent of a reduced transaction. If you look at Zynga who’s probably quite sophisticated at commerce, Facebook forced it a bit, probably essentially forced them to give up control of their commerce for Facebook credits. And Facebook’s not a gaming company. They’re not a game publisher. They don’t have any expertise at monetizing these kinds of games.
And so, what you hear from small developers is that they’re giving up 30 percent of the revenue for less commerce transaction. What the leading casual game publishers, like Real Networks and Big Fish and Wild Tangent, did is that we became extremely advanced at marketing and commerce, such that on average the yield across a given audience that we could achieve in commerce over many years of work, was 18X that which the same game could achieve, content could achieve by itself.
Generally, the reason that you pay a premium to a good game publisher is that they produce vastly more dollars from the audience, and so you’re more than happy to share a cut with them. Now, I would not claim that hi5 payment architecture is what I’d like it to be today, but we’re going to rule out several things that come from the casual game business that dramatically amplify monetization models.
The first thing is what you call portfolio pricing. Pricing a collection of games produces more revenue from an audience than pricing them individually. So, social game companies haven’t discovered that monetization technique, and we’re rolling that out in the month of October.
The next piece that’s missing is what we call ad commerce hybridization. Again, I picked Zynga because everybody’s familiar with it. Zynga claims they make almost 100 percent of their money from 5 percent of the audience, which means that they have 51 million impressions a day. If you believe that data on Facebook they make no money from it. That would be another $200 to $250 million in revenue a year if all they did was place a video ad in front of it.
But because the free availability of play would cannibalize their commerce, they’re afraid to do it, and so they choose between the commerce and the advertising dollars. I’ve learned how to build commerce systems that don’t make that trade-off. And so, one of the opportunities, of course, is that you can monetize all the paid play and all the advertising play, and hi5 is going to share all of the dollars, including the advertising dollars which I don’t think Facebook promises to do.
So, the hope is, of course, we’re going to make some money from amplifying revenues, but that’s our big hope. The interesting thing about doing that is really good game publishers do it on an extraordinary scale. There was a time when Yahoo was the number one site on earth. Accidentally, they had a huge publishing business and so forth. All of that has drained away.
Today companies like Wild Tangent, Big Fish and Real Networks own those audiences, and the game publishers go to them because they’re so much more effective at marketing the titles and promoting and monetizing them.
The same will be true of hi5, that we’re going to specialize at being a social media game publisher that monetizes titles extremely efficiently, not a social network that doesn’t understand the commerce business but wants to find some way to tax their success. So, that’s a very different approach even though, yes, we are charging for it.
Interviewer: Do you feel that just having a dedicated social gaming network, something where it’s just dedicated to gaming, is actually going to not attract enough people that something as ubiquitous as Facebook does? And therefore, it’s just too risky for smaller developers to even invest in.
Alex: You know, that is perfect. We should get you our press release because what we’re announcing is the answer to that question. The funny thing is people say, well… I’m an engineer. So I analyze the hell out of everything. One of the things that’s phenomenal is nobody really seems to go, why did games spread so well on Facebook? What was the difference? What was it that caused these games to magically become successful when outside nobody wants to play?
What is the difference between games, between Club Penguins or Arctic’s Adventure Quest which make it on their own? And what’s interesting is there’s several problems. One is getting a registration, a user ID and a password. If you want to identify anybody online, it’s an enormous barrier.
When people come to a multiplayer game, the first thing the game has to say is stop. I refuse to let you play me until you identify yourself. Fill out this boring form for a game you don’t even know if it’s fun, and that’s a huge barrier. A lot of people bounce off that.
Because Facebook created a huge amount of registrations, all the games inside Facebook require no registration. So, that barrier vanishes which really gives games inside that environment enormous virality and freedom for reaching an audience compared to games outside that bubble.
So, one of the things that we’re announcing this week is what we call in our new sociopathic architecture. We’re letting games use our graph importers. We’re allowing and supporting one guest account or anonymous accounts. So, people who come to hi5 can play social media games with no account, no registration. You can go right in.
We have, down the side of each game, both Facebook and social compatible games, so developers don’t go, “So, look, he made a Facebook game?” Throw it up here. It’s no risk, and it’s free money, free additional money and distribution. But if you post a game on our network, starting at the end of the month, the games will be able to be freely played with no account registration.
So, that’s 100 percent of everybody on the Internet, whether they have a Facebook account or not, can go in with no registration barrier, no Facebook connect, no user name and password and play games. And down the sides of each game will be all the other players who want people to play with.
So, you don’t have to play with your real identity and give away enormous amounts of personal information to perfect strangers just to play games with them. Nor do you have to broadcast all your leisure activities to all of your co-workers and friends and family.
You can just enjoy playing a social game with people who want to play the game without any of that other nonsense involved. So, my opinion is that the real identity thing is nice, and you can certainly invite real friends to play and use our infrastructure for doing that, but these games are not that social. They’re just kind of fun to play with other people. It doesn’t matter who they are as games like World of Warcraft and traditional MMOs have long established, that virtual relationships are particularly good for game play.
The second thing we’re doing that’s fascinating is we’re trying to turn the games loose on the Internet without being dependent on our bubble. And so, a lot of people don’t understand the machinery that made sites like Facebook and hi5 as large as they are. We run a social graph. We run a huge network of email importers that we send out hi5s a hundred million messages a day.
That infrastructure could never be built by a small game developer. That’s what blew the bubble in time and space that made our audiences so huge was this enormous messaging and contact in porting architecture. And so, one of the things that’s interesting is that traditionally social networks said that’s our plumbing. We’re going to reserve it for our own application, and thank you by the way, we’ve got some games back in here somewhere you might want to play, too.
What’s interesting is that we can platform hi5 or externalize that functionality and hand it straight to game developers. Every game can be its own little social portal. Invite friends from email, IM, Facebook, directly into the game without going through our portal. Invite them straight in. Message them straight in. Create a social graph around the game. So, you want to play your poker friend social graph, you can do that. You want to create a Farmville or a Back Yard Monster social graph, every game can do that using this plumbing.
So, what we’re doing is lending the social graph architecture, the thing that makes social graph so huge and viral directly to the games without dependence on going to a social portal. Now, of course, we’re going to run our own profile pages and promote the games and do all that stuff inside our network, but any game posted inside hi5 this month, through November, will also be automatically what we call externalized.
It will be able to work with anonymous players without registration. It’ll be able to map straight to our graph portal messaging platform without going through our user profiles. And I think it’ll have a huge impact because as big as Facebook is it’s not as big as everybody on the Internet, and that’s what we’re exposing the games to.
My hope is that the best thing, the most valuable pixie dust that social networks bring to games that make them really successful. We are going to hand directly to the game developers and the stuff that obstructs virality, the fact that there’s a bubble at all, the fact that social networks impose the real identities for people who just want to play, we get rid of. It’s not necessary.
And so, that’s what we’re announcing this month. And so, when you see the technology, I think if you come to our demo and see it, you’ll see very clearly what a powerful idea that is because you’ll go, of course, my God, that makes sense. These games, anybody can play them. They’re just multiplayer. You can play with strangers. You can invite friends directly. What did I need a social network for? I didn’t need any of that plumbing.
Facebook and Hi5 and My Space are just representations of relationships and contacts you already have. It’s not necessary to come to our portal just to find that content or establish those relationships. You’ve already got them. They’re your friends.
Interviewer: This sounds all good in theory, but let’s talk about results then. Every developer cares about 3, 4, 5 different new platforms that are coming out. Why should they even consider this or invest in this, in this new idea versus, say, Facebook which is already proven.
And even though you may sit at the viral channel that’s been turned off, in the last three to four months there’s still been about two to five new games that have reached a million daily actives. That’s still pretty impressive. Even compared to traditional MMO numbers, that’s pretty good.
Alex: Sure. Of course, Zynga has lost something like 40 to 60 million users since April as well, and they’re spending vast sums of money to try to keep rebuying that audience and buy out the small developers. Social gaming, don’t get me wrong, all of these portals like MSN and Yahoo and AOL from a decade ago, they still have significant gaming audiences. They have multimillion dollar gaming businesses. That will all be true.
The thing that I think is going to change is that ideas, the most valuable things that make social networking games so successful, I’d like to say they’ve been learned. They’re going to be turned loose independently. And so, I think you’ll see a new generation of games that embody these ideas but, maybe, without the same kind of restrictions or issues that the first generation games had.
The second part of your question or actually the first part of your question, was why should they believe me because, obviously, hi5 doesn’t have an extraordinary track record of being a social game company. Well, I founded in Wild Tangent. It is the No. 1 largest game network according to CompStore in the U. S.
We passed Yahoo, Disney, Microsoft and AOL and oh, the Electronic Arts last year, 19.2 million users in the U. S. It’s not a social network. It’s not a game developer any more. Didn’t buy the audience or distribution. Didn’t buy companies or acquire to get it. Nothing but publishing the same copy of Bejeweled and Diner Dash that everybody else has, but doing it extremely effectively.
And so, I have an enormous background in building really successful online game publishing for over a decade, and I’d like to think I’m bringing that here. Prior to founding Wild Tangent, I was in charge of making DirectX at Microsoft. So, the entire… Sorry, go ahead.
Interviewer: Is experience dangerous in this case because we’ve got some of the hugest developers now? It’s actually the people who didn’t have a clue about gaming that are actually succeeding.
Alex: So, is experience dangerous? Yes, in my case it’s extremely dangerous because obviously one of the biggest challenges in the game industry is that there are a lot of… In fact, I’d say people from a traditional gaming background come with a certain kind of brain damage. That is more difficult to overcome than complete newbies coming to the space. I would say that that certainly there are properties that are true to me as well.
One of the reasons I joined hi5 is that from the outside, before I joined the company, I was very mystified by the viral phenomena of social gaming. I could not figure out what made these social networks seem to levitate the way they did. I spent years trying to build an audience.
To get Wild Tangent to where it was at took a decade of business development and marketing and audience acquisition and business modeling. And these kids come along in social networking and just blow a bubble in time and space. It’s remarkable.
And so, I would absolutely assert that had I not been highly receptive to listening to what these guys had done and how they thought about things that there is absolutely a danger of coming in and screwing it all up, doing all the wrong things. One of the reasons I joined hi5 is that the team there, they love gaming. They love social gaming, but these guys were fundamentally social networkers. They really understood how they built that kind of levitation machine.
And so, what I’d like to say is that we’ll see, but for better or worse what I’d like to think I did is I came and I said, show me how you made this castle fly. Show me how the warped core works because I want to turn that into a product and give it to everybody else. That’s what I think we’re showing here with our new sociopath launch is the productization of the pixie dust that makes social networking fly for games.
So, my hope is that I brought the right expertise and technology to it and didn’t impose too much of my single player downloadable experience to the situation. And, yeah, that’s certainly a very common mistake. That is absolutely true that social networking, social networking gaming has often been a medium of the new and ignorant who aren’t weighted down by previous misunderstandings about the kind of business that they were in.
Interviewer: Can you talk about where you see the future of social gaming going then?
Alex: Yeah. I think there’s several things. If I look at social networks, I go, it was a big discovery that social networking itself is a new kind of MMO. I think it’s very funny when you hear stats going, well, 40 percent of people in Facebook are playing games. What do you mean? What are the other 60 percent doing? Working? They’re playing, too. They’re all playing. They’re all playing to compete for social status and awareness and getting attention and recognition.
That blends very smoothly into deeper game play which is what’s fascinating about it. So, I think that one, there’s the discovery that social networks themselves are a kind of game. And so, the thing I hope to do with the hi5 social portal itself is to really bring out the play aspects of socializing. So, I expect that hi5.com, our user experience, will become more game like over time.
So, I told our guys when I came in there, I said, you know, we’re going to make just one game here at hi5, hi5: the game. Everybody else, we’re going to enable their business. We’re not going to compete with them by trying to make the kind of games they make. We’re going to make them successful by understanding how to enable and accelerate what they do.
So, I think that first, there’s the discovery that social networking is a type of game play itself, and I think that’s interesting to bottle that and focus it even more strongly. I think that will be a very interesting application. Second, I think that the discoveries about virality, what made social networks spread and reach the audience, is a really valuable lesson for online gaming.
And one of the realizations is that the infrastructure needed to harness that kind of scale isn’t available to a small game developer. So, I’d like to think of heralding a really dramatic change in the market by turning those technologies loose and free them up so that people can just use them without going and playing by my rules entirely, if you will. Of course, I have to host all the architecture and infrastructure, but essentially saying hey, go make your own social network. Here’s all the magic without any of the dependencies.
And so, my hope is that you’ll see a few years out games like the next generation of World of Warcraft will inherently embody social networking attributes and virality and blend from being a 10 gigabyte download into a Web experience rather smoothly. I think the first interesting evidence, I don’t know if you’ve seen this, but Turbines’ Lord of the Rings online has switched from a premium boxed retail game with a subscription to a free to play micro currency game.
So, I think you’ll see the real deep games adopting virality online distribution, micro currency and advertising hybrid business models, and I think you’ll see most of the game industry go that way over time. So, I think over the next few years that will be a fascinating transition.
Interviewer: And so, where can developers find out more information about hi5 and the opportunities of sociopath?
Alex: Oh, man, absolutely. You can go to, of course, the hi5 developer site where all you have to do if you’ve got a Facebook or open social games, you literally just go up there, register it and post it. Now, truthfully if you want to integrate it better and adopt the currency system, it takes about a weeks worth, but it’s really very trivial.
And then, of course, on our developers site we have a press release that’s going to go up there this week, showing off the sociopath stuff. And one of the things, I’ve been building developer platforms for years, and one of the things I’ve learned religiously is that everybody loves you and adopts your technology a lot easier if it’s zero work.
So, earlier this year we cloned Facebook’s architecture so that Facebook games work. The sociopath architecture works for Facebook and open social games with no modification. We just flip some bits inside our infrastructure. We’re doing all the work, so you can get all the benefits of a sociopath without doing the work at all.
Now, clearly once people see how powerful this is, I think there’s stuff they’ll want to change, and we’ll be happy to support them in that. But it doesn’t require any work or adoption at all just to try it. You’ve just got to post the game. And as I said to you, it’s no risk. You’ve got the investment, just electrons. It costs nothing to print. You put it on hi5, and we’ll show what this technology is capable of doing, and hopefully it’ll change all the rules.
Interviewer: Thank you very much.