The hardship of SaaS in the video games industry
At STOMT we've been focusing on the video games industry. And let me tell you, it's been a ride. When we started out, we tried to approach the industry from the bottom-up. We got feedback and love from independent developers first and then started to approach bigger companies. It became difficult right here.
Roughly 50% of that ~$160 billion revenue market (2020, Newzoo) is made by just 10-15 companies. The rest is distributed across many small studios and publishers across the world. But what does that really mean? The gaming industry works like this: game developers have a vision, which then gets financed and marketed by publishers. When we talk about the biggest 10-15 companies, we're actually talking about publishers, which in return work with dozens of globally distributed teams of game development studios to create the next hit. When you aim to sell a service to the gaming industry, make sure to target either 100% publishers or a 100% game developers, which is hard as the line is blurry. Depending on their deal, certain responsibilities are shifting. For STOMT it was especially difficult: Who cares about feedback? Customer service (publisher)? The producer (developer)? The developer? Marketing (publisher)? Finding someone who cares about it is easy, finding someone who wants to make it part of their budget not.
For publishers it's the classic venture capital rule of thumb, that one success out of ten investments have to outweigh the rest. And it's a risky business. Most games fail. Platforms and app stores are saturated and games, as part of the entertainment industry, are competing for consumer's attention. By the end of each year we see massive amounts of layoffs, shutdowns and M&As. It easily cuts your deal flow by 30%.
And that is expensive. Due to the very globally distributed publisher-developer relationship, you spend a lot of money on going to conferences and meeting people face to face, building up relationships. In 2018 I did sale and business development in 14 countries. In fact, if you'd want to attend all gaming industry events, you could be on the road almost every day. In between you try to figure out who your buyer persona / decision-maker is and if that person is part of the developer or part of the publisher side. You better build something that is needed all the time.
Timing also plays a huge role. The development of a game takes 2-4 years. If you're too early, you're not relevant, if you're too late, you won't end up on the roadmap, assuming you're a middleware provider. The sales process is lengthy. So you better have huge pipeline and try to be present in people's head all the time.
As an industry of passion, you're also confronted with certain paradigms, that won't fit your McKinsey brain. There's often a lack of ownership, process or transparency and that makes it hard to keep up with your deal-flow. We also see it in the high fluctuation within teams. Fluctuation seems to be much higher than elsewhere. This is still the creative industry and people are not only passioned about what they are doing but also much more emotional when it comes to decisions. So don't even try to sell to indies (referring to small <10 people teams). They often have very limited budgets and are not very business minded. With the availability of more and more grants for the creative gaming industry, this is changing as considerations about the underlying business model have to be made much earlier.
Another cost-block is the development and maintenance of relevant integrations. The ecosystem of the gaming industry is currently based on certain game engines like Unity, Unreal, GameMaker, Cocos2D and the proprietary ones, often written in C++, of the big ones. On top we have unique to the gaming industry relevant platforms like Twitch and Discord. Most platforms are still young and have frequent releases containing breaking changes. Have fun trying to find a passioned game developer that likes to work on middleware. It's expensive. We're happy to have a capable CTO (shoutout to Max Klenk), who is flexible enough to solve any problem in any language on any system. I mean, look at that.