Friendly fraud
Facebook's unwillingness to err on the side of the consumer
Based on documents released last week it has become clear now that Facebook has been bamboozling kids and ignoring calls from parents and its own staff to change things.
At some point I have to stop being surprised. Really tho?
The conversation around market leaders in tech and entertainment actively optimizing around a circumstance to their own benefit is not foreign territory. Hell, it’s part of the general business model. I have no doubt that, for instance, Disney operates much like the mafia in Florida. For one, it is its own autonomous tax district after Florida made a string of concessions in the face of Disney’s pile of investment money. In much the same way NY state government Cuomo can’t seem to find any resources to fix the subway but magically pulled together a $2.8 billion incentive package to lure Amazon even though the latter had long ago decided on the move already anyway. It cannot be a surprise that a for-profit organization will seek to use its position, especially when it is a virtual monopolist, to benefit financially.
So what are we really talking about then if Facebook scams a few kids?
It’s not really about the kids.
Having long hid behind a disclaimer that says no one under 13 is allowed on its platform, Facebook has shown little more concern for minors than Apple or Google has. You could argue that most of the insane credit card charges are just a symptom of consumers getting accustomed to a new entertainment landscape where (a) spending has become a lot easier and (b) few people, including kids, fully understand the ramifications of buying digital currencies.
But it’s what this new instance reveals about the firm’s overall approach to safeguarding its users. For one, the tone. The catch phrase around the occurrence of “friendly fraud” is, according to the document:
“What is it, why it’s challenging, and why you shouldn’t try to block it.”
What Facebook is saying is: “Yes, we know that kids unknowingly spend thousands of their parents money because games like PetVille and are set up in such a way that to the average minor it is all an abstraction. We’ll even affectionately call them ‘whales,’ a term we borrowed from the casino business to describe the 13-year olds that spend four figures every month on virtual coins.”
Second, Facebook not only denied refund requests. It encouraged developers to offer free virtual items to children and parents who complained. Hey sorry your kid mistakenly ordered $2,000 worth of muffins. Instead of your money back, would you like a free coffee? One employee suggested it was better than refunding money because "virtual goods bear no cost." Sigh. Another suggestion was to recommend developers to not have the default purchase be the most expensive thing in the game. Kids have no understanding of money.
Publishers, on the other hand, do. But even when a top-tiered firm like Rovio expressed concern over the disproportionately high refund rates between 5% and 10%, which is 10-20x above the industry average, nothing really changed.
Third, apparently management even ignored a solution developed by one of its own teams and instead told it was focused on maximizing revenues. So even when it had the chance to correct what at that point could possibly still be interpreted as a flaw born from the company’s explosive growth, it choose not to.
Certainly consumers had to adjust to this new world, too. And we’ve seen it before. About a decade earlier when virtual worlds were all the rage, there were plenty of titles that faced immediate termination as parents complained about their brood buying thousands of dollars worth of in-game items. Having credit cards blacklist you is a kiss of death, and so there everyone embraced a policy of immediately refunding you.
What makes this different is that Facebook is not a developer but a platform and much, much larger. While I’m certain that it doesn’t want to get cut off by credit card companies, it has a lot more leverage because of its sheer size. Gaming was a big topic of conversation, before Facebook found its calling in politics. (But only the kind where its own politics are held outside and above the law.)
The optimist in me will insist that this and similar occurrences are to be expected from a firm that grew as quickly as Facebook did. As the company exploded in size, no one was going to ring the alarm bell on such predatory practices because no one wants to be a naysayer.
The pessimist in me sees it differently. Historically gamers are the canary in the coal mine when it comes to new consumer behavior, particularly around media, technology, and entertainment. Consequently, I regard Facebook’s response as pars pro totem for its general policies and unwillingness to err on the side of the consumer and optimize for revenue instead.
I realize, of course, how naive I sound when I say that as your success grows a moment comes when you become so large and so powerful that you have to make the conscious decision to look out for your consumers. This is making big tech look like a bunch of robber barons.
Yuck.
On to this week’s update.
NEWS
Viacom acquires Pluto TV
My initial reaction was something along the lines of: “Why would you want to watch old time-y TV on the internet?” But, of course, Viacom isn’t trying to push broadcast TV through the internet; it’s trying to sell subscriptions for its various services and content.
Viacom’s move is part of the overall media landscape consolidation to establish economies of scale and, ultimately, build a subscription-based empire. Since Pluto TV is free (in the traditional sense where you watch tired ads) it serves as the top of the funnel to get viewers to, hopefully, make a monthly commitment. I’ve mentioned this before since I expect to see more of it this year but media companies have figured out that recurrent revenue (e.g. subscriptions) yield them a much higher share price multiple than working on a transaction basis. Quick maths tells us that given an acquisition price of $340MM, if Viacom manages to convert 10% of the Pluto TV’s 12MM free users at $100 a year, it’ll all pay for itself in 2-3 years. By doing reruns of Game of Thrones and some of its other HBO inventory, it’s got a decent chance, provided the overall market maintains the steady subscription price increases we’re seeing today. Still though, they will have to decide to either make ads some kind of tax for the poor or to offer a premium version with no ads. Having it both ways isn’t going to fly.
What does the Overwatch price cut tell us?
With just a few weeks left before the kick off of season two Blizzard announced a permanent $20 price cut for its shooter Overwatch. What makes this one different from other titles is that Overwatch is a proxy for the health of mainstream esports. It is among the best-produced rollouts by arguably the most experience publisher in the esports business. Kotick’s commitment to esports is without question, regardless if he’s doing it because it’s the future of entertainment or because he wants to be on par with his billionaire buddies that all owns traditional sports teams.
I expect that the price cut comes as a way to incentivize people to, obviously, go buy and play the game. A shallow reading says that Overwatch isn’t doing as hot as it used to and to keep momentum going (especially after all the recent Destiny drama), a discount is meant to maintain the game and its esports league’s momentum. Its active user base has been gradually declining over the past twelve months.
A more optimistic reading says ATVI is foregoing on short term revenue (ie. units sold) in lieu of micro-transactions which currently accounts for most of its revenue anyway. Blizzard been on the ball releasing a constant stream of character updates. And on the long term there’s, of course, the media rights and sponsorship deals. The new season will also be broadcast in Germany, Austria and Switzerland. It suggests that the firm is going the distance on making this Overwatch esports thing work. Where season one was arguably a honeymoon for everyone involved, season two is where everyone involved will have to work to make the marriage work. That’s worth watching. Link
GameStop stopped trying to sell itself
Known for its borderline insulting pricing of trade-in titles, GameStop is about to learn. With no new CEO at the helm and no new console hardware on slate, what’s a speciality retailer to do? Certainly its management team can now focus on sorting out its internal issues and figure out a way to pay off its ~$800MM in debt. If it can winter out the next 18 months it may bounce back. Maybe. Certainly Nintendo is not getting out of the retail business. And even if Microsoft and Sony continue to clamor about cloud gaming that doesn’t mean they’ll instantly give up on selling hardware. (Sony is a consumer electronics firm, remember?)
The sense of an imminent acquisition won’t let go of me just yet, though. With -26% drop in share price, you can practically hear the M&A team at Amazon drafting the term sheet. An increasingly distressed, rudderless retail chain with over 7,000 stores would fit nicely into its overall strategy of establishing a broader footprint for its Amazon stores. Perhaps Best Buy is another contender as it managed to outperform market expectations driven by an uptick in headset and accessory sales (Fortnite!). One of the more exotic options is that Sony buys GameStop to establish an analogue moat that forces Microsoft through general retailers for the sale of whatever it builds next.
We’ll see. But for now, the set pieces are moving into place for someone to get a good deal. Which is more than I can say for the in-store credit I got in exchange for a massive stack of used games. Link
The fall of Starbreeze
Here’s a worthwhile article that looks at how Sweden’s most prominent developers first rose to glory, only to fall on its face. The short version of its fate is that its creative vision was a mess, but not worse so than the internal turmoil and lack of direction. It’s a shame, of course, franchises like PayDay have proven to be very successful and a lot of fun, and personally I really enjoyed Bionic Commando which the founders developed for Capcom back in 2009.
Starbreeze’s fate should serves as two warnings. First, game studios struggle constantly with the tension between realizing a creative vision and their financial obligations. But you have to treat your staff right. Certainly that includes healthcare and reasonable working hours, of course. But I’d argue it is more important to appropriately design the organization around the project. The way this article reads the whole thing was a miniature version of the Fyre Festival: poor use of available resources, constant fundraising to pay for all the labor, and big promises in the future that never arrived. (Game companies should be good at making games; not at raising money.)
Second, it provides a sense of how things are going in Europe. Is Starbreeze’s circumstance unique? Certainly. But especially in Northern Europe we’ve seen a string of acquisitions looking to build for scale by combining a bunch of studios and IP under the same umbrella. What works well on a spreadsheet does not always translate into a sustainable creative strategy. Managing egos, as this saga shows, is probably the most devastating among things that can go wrong.
Games Workshop valued at $1bn
The more digital the world becomes, the more we will bask in its analogue glory. According to this article the 40-year old company is now worth $1.3bn or roughly 4x its annual revenue. That is not bad for a category that relies heavily on a traditional retail distribution and, frankly, is costly both in terms of time and money. Two drivers are behind its success. First tabletop gaming is having somewhat of a renaissance right now. On both ends of the market there is growth. Asmodee, a French table top game publisher, recently sold for $1.44bn, and Kickstarter the category saw +20% in investments for the category. Second, Games Workshop continues to stick to its guns and, remarkably, was able to grow revenue not via online sales but through its physical retail channels and trade outlets. Don’t tell GameStop but vertically integrated retail is the new black. Link
RIGHT QUICK TIDBITS
Marc Pincus raises $700MM for new investment fund
NetEase acquires minority stake in Quantic Dream
Unity acquired voice app Vivox
Nvidia’s share price dropped 14% following disappointing sales in China
Farming Simulator 19 now has its own esports league
Apple is building a subscription games service
Jagex is up for sale