Business Report

Exploiting the Fun Factor

Games are the front line in the battle to dominate mobile and social platforms. They’re also changing how businesses manage employees and engage customers.

Video games have been big business since Atari released the first coin-operated smash hit, Pong, in 1972. By 2010, U.S. consumers were spending nearly $16 billion annually on video-game software, trumping the $10.6 billion spent on movie tickets that year. Video-game hardware and accessories brought in another $9 billion. But these statistics don’t tell the story of how deeply the appetites of gamers are affecting other industries.

Games, game design, and our instinct to play them are forces now driving the technologies at the center of today’s always-on, always-connected businesses. Mobile devices and social networks have become as much platforms for playing games as anything else. Games, in effect, are a new mass medium. Companies that ignore games, even if only as a tool to market to consumers, face the same fate as those that ignored the rise of the Internet in the 1990s. At best, they will be forced to play an expensive game of catch-up; at worst, they will fall irretrievably behind their competitors.

Why are games important? Because people will reward businesses that cater to their appetite for fun, providing commercial incentives for every incremental improvement in the technology that delivers that entertainment. And game designers are masters at stoking that appetite. Every designer from Pong on has deliberately tried to make their games addictive, with a grab bag of psychological tricks that include humor, storytelling, and reward systems similar to the payoff schedules that lure gamblers. And some designers succeed, serving up jolts of pleasure in such a way that users can’t stop coming back for more.

No wonder that game design is at the core of successful mobile devices and online social experiences. Companies that ignore gaming may have to eat humble pie: in September 2010, Jeff Bezos told Wired’s Steven Levy why the third-generation Kindle’s inability to play games was a good thing: “The number one app for the iPad [is] Angry Birds—a game where you throw birds at pigs and they blow up. The number one thing on the Kindle is Stieg Larsson. It’s a different audience. We’re designing for people who want to read.” One year later, at the launch of the Kindle Fire, press photographs of the device prominently displayed an on-screen Angry Birds icon. ABI Research estimates that, worldwide, mobile games alone will generate $5 billion in revenue this year, rising to $16 billion by 2016.

See the rest of our Business Impact report on The Business of Games.

Many of this new wave of mobile and social games are, like Rovio’s Angry Birds, so-called casual games; relatively simple amusements that can be played for a few minutes at a time and don’t require complex controls. Casual games have been essential to the rise of some social media sites, and to reaching new markets. Popcap, maker of the popular Bejeweled series of puzzle games, estimates that over 75 percent of its customers are over 29: Facebook used such players to expand beyond its initial college-age audience.  

The larger and broader audience for games is attractive to marketers, especially those worried about the decline in TV audiences in the coveted bracket of men 18 to 34. The natural response: in-game advertising, which may range from Web-style banner ads placed on a game’s opening screen to product placements, like racing virtual versions of the latest cars. The worldwide market for in-game advertising is still tiny compared to the $70 billion a year currently spent on television advertising in the United States alone, but it is growing rapidly, going from negligible sales just a few years ago to a predicted $2.67 billion by 2017, according to market intelligence firm Global Industry Analysts.

Not surprisingly, companies like Google and Apple have already positioned themselves to capture as much of this money as possible. Through an extension of its AdSense program, Google offers marketers ad placements across a range of popular Web-based games, while Apple has built support for in-game advertising into its iOS mobile operating system; developers just have to allocate some screen real estate for ads when designing a game, and Apple takes care of serving up the actual ad.

In their most amazing feat yet, games designers generate revenue from selling virtual objects that have almost zero marginal cost of production to players through storefronts built into the games themselves.  ABI Research estimates that these in-game purchases are responsible for about a third of today’s mobile-game revenue, and will be responsible for nearly half by 2016. So-called “freemium” games are entirely supported by these in-game purchases, including Zynga’s string of hits such as FarmVille and CityVille, which have tens of millions of monthly active users across multiple platforms.

A consequence of the growing demographic familiarity with video games is the trend of gamification, which borrows techniques from entertainment software to persuade users to persist at things they might otherwise be lax about, such as paying attention to corporate training, eating healthy foods, or staying loyal to a particular television show.

For example, media companies are working with startups like AdaptiveBlue that have online services that award users virtual badges for things like watching television shows or attending a movie showing. As well as building a fan base, these gamified services encourage viewers to watch when a company is most likely to be able to capture value from an audience—such as during a live broadcast or on an opening weekend, through rewards that are only available at specific times.

Games are also turning up as part of the workday. Startups like Redcritter now sell gamified project management software. Under the rubric of “serious games,” large businesses (as well as government agencies and especially the military) are using video games for training purposes.

But the biggest impact of gamification could come from its ability to dissolve the barrier between the virtual and the real. Companies like Striiv, for example, offer a device that attaches to a user’s keychain and counts their steps: as someone with the device walks, he can explore a fantasy island displayed on the device’s screen. The goal is to encourage users to live healthier lives—a notoriously difficult problem. Seeing an opportunity to cost-effectively increase the health of consumers, insurance companies like Humana and Aetna offer, or plan to offer, Web-based games with similar purposes.

As businesses move to take advantage of gamification, there is a danger of diminishing returns. Simply slapping a particular badge reward system onto a marketing campaign may generate a good initial response, but people are likely to lose interest. Instead, companies will likely have to continue investing in gamified systems for a sustained payoff, creating new games that embed their message within a story, so that whatever activity a company is trying to encourage is a natural by-product of playing the game.

Video games have ceased being an end in themselves; they are a front in the battle to dominate technology platforms and delve into consumers’ psyches. Could anyone have predicted the role of the games-machine-cum-smart-phone after seeing the blocky Pong machine of 1972? Perhaps the story of the first prototype, which had been installed in a bar near Atari’s base of operations, might have given a clue. After a few days, the bar owner called Atari complaining that the game was broken. The cause? Customers had stuffed so many quarters into the machine that it was being shorted out

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Next in this Business Report

The Business of Games

Long a multibillion-dollar industry in their own right, video and computer games are now affecting a broad range of businesses. The appetites of game players are driving social and mobile technologies. Games are being used to train and manage employees, as well as to encourage customer loyalty and reduce health-care costs.

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