• Corporate deal, not the “founder buy-out” traditionally commonplace among gaming fansites. MMO-Champion was previously owned by Major League Gaming, already a multi-million dollar enterprise (by comparison, $46 million funding).
• Completes a duopoly (2 dominant businesses) in the core World of Warcraft “fansite” market – Curse and ZAM. While there are other large businesses and specialist niches on the fringe, none of those appear to be growing into the core WoW market.
• Exposes an intriguing driver of this market structure: Systems costs – the underlying technology and support costs. Intriguing because these were crucial in determining the market structure of far more traditional sectors of the economy, like groceries.

This article analyses the latest acquisitions and discusses the unseen importance of systems costs. On this page:

• The Other Online Game
• Curse vs ZAM
• Sold!
• Systems Costs
• Descent into Madness

The Other Online Game

New readers may be surprised to learn that there are millions of dollars involved in World of Warcraft-related websites. A Strange Game and Learn2Play, the new Real Money Trading provide an introduction.

My Map of World of Warcraft Online Communities showed the structure of this market in 2008. By 2010, all the communities in the core top-left quadrant of that map had become owned by large (typically multi-million dollar) businesses. The centre-ground is now commercially mature: In 2010 there is no big fansite that didn’t exist in 2008, while many of the large fansites in 2008 had barely existed in 2006.

All these large businesses are now diversifying into other games, because WoW hasn’t expanded beyond around 5-10 million players (excluding China), and inevitably this will fall at some point in the future (no video game can remain so dominant forever). Diversification is a tricky strategy because WoW continues (through strong marketing and new player retention) to attract customers, while competitors fail to challenge it. Indeed, its competitors are increasingly not even “Massively Multiplayer Online Games” – instead, browser games like Maple Story, or (Facebook) social games like Farmville.

Owners’ focus varies: For example, IncGamers has almost forgotten its roots as WorldofWar.Net, while WoWWiki is increasingly a platform to aggressively promote Wikia’s wider gaming portfolio. In contrast, Curse and ZAM still feel like they have World of Warcraft at their core, and continue to develop (or invest in) a range of services for World of Warcraft players.

So if World of Warcraft continues to be popular, and the core market remains mature, Curse and ZAM will tend to dominate popular fansite content. Other larger sites, without sufficient focus, will tend to get left behind (just like WorldofWar.Net), and smaller niche sites will tend to remain in small niches. This is why Curse and ZAM are interesting.

Curse vs ZAM

The Curse gaming network emerged from a World of Warcraft guild of the same name, originally as a database of addons – small scripts/programmes that can be run within the game. WoW addons remain its forté, with both developer and player-facing services. Curse started buying up WoW fansites in 2008, including MMO-Champion’s traditional competitor, World of Raids. World of Raids subsequently lost many of its visitors, while MMO-Champion thrived. Curse also attempted to launch a database website, in direct competition with ZAM’s Wowhead. Rather too direct: ZAM threatened legal action due to the similarity of WoWDB’s design.

ZAM was created from the acquisition of 3 large databases of gameplay information (Thottbot, Wowhead and Allakhazam) by some combination of Brock Pierce/Jon Yantis/IGE/Affinity Media (accounts vary). ZAM is understood to still to be privately owned. ZAM have also had some success with addons (especially WoW Interface), and have become interested in guides: Acquiring Tankspot’s video guides, writing event guides on Wowhead, even acting as a host for Deca/Alex Albrecht’s Project Lore.

In 2008, Curse’s ties with World of Raids would not have made it a natural ally of MMO-Champion. However, MMO-Champion hasn’t had flawless relations with ZAM either: Wowhead publicly appologised for “not appropriately crediting” the reuse of MMO-Champion’s content. The appearance of MMO-Champion’s own database probably didn’t help either.

While Major League Gaming does run World of Warcraft tournaments, MMO-Champion’s audience isn’t solely interested in tournaments. It is not surprising to see the site sold. And if my analysis is correct, there were only ever 2 potential buyers: Able to find the (undisclosed, but presumably substantial) fee, able to guarantee a reasonable amount of editorial freedom, and able to offer systems support:

Sold!

Independent fansite acquisitions typically involve:

• A creative founder suddenly discovers they can’t manage servers, staff, legal issues, or… and yet dealing with these things prevents them from continuing to do what they are good at. It might sound odd, by selling often isn’t about “the money”.
• An operating/managing/owning network that has experience of doing all the things the founder cannot, and can gain an “economy of scale” or market share or something useful from doing so: Typically by sharing expertise, management and information across many somewhat-similar websites.

At least that’s the ideal model. Some acquisitions are far more cynical or aggressive: Sites acquired solely for short-term advertising revenue, to resell a domain name, or to promote some dubious third party product or service.

This case is more complex, because the site hasn’t been independent for 3 years: It is difficult to judge all the reasons for a corporate acquisition (accountancy can often justify such decisions), but the main motivation for the sale appears to be technical. And not just visual issues, like the desire for fully-functional forums or a modern design. This is the most interesting reason Boubouille (the founder) gives:

“I think some people just underestimate the technical shitstorm behind each Beta patch or every single news. Having the backup of a WoW-focused company with tons of WoW-focused developers is a pretty huge thing for me.”

I hinted at the complexity of the process in the Adventures in DBC Files box. There are 2 problems:

1. Large amounts of regularly changing, but partial data, which must still be delivered accurately, as fast as possible. Hundreds of thousands of things, many inter-related.
2. Only a few “fansites” that need tools to analyse this data, and only a modest number of people with sufficient specialist knowledge to work with the data.

This is a lot like… groceries.

Systems Costs

Grocery stores’ (especially supermarkets’) competitive advantage lies in the rapid turnover of stock: The faster the store can buy merchandise from suppliers and sell it on to consumers, the sooner that cash will be available to buy more stock. Effective inventory (especially “supply chain”) management is key to profitability. That means lots of data, constantly changing.

But that’s not the only similarity: Each grocer gains advantage over competitors by developing “better” systems to manage inventory and related information. Sharing those systems with others would lose competitive advantage, yet ever-better systems cost more and more to develop. The only way to survive is for grocers to merge businesses, and share systems costs in a single merged business, even if they continue trading under familiar store names. It’s what forced US giant WalMart into Europe, and many European grocers to do the opposite. And for the whole industry to slowly agglomerate into a handful of huge global businesses.

Gaming fansites aren’t quite on the same scale as Wal-Mart. Yet. But the pattern emerging is similar: For example, programming expertise (and code) can’t be freely shared between competing fansites, because then everyone would produce precisely the same analysis at precisely the same speed, and any notion of competition would be lost. Yet several sites in the same network can share expertise much more freely between themselves – meaning fewer programmers or more flexibility.

While gaming sites are often profitable, most continue to make remarkably little money from so many customers: MMO-Champion may have 7 million monthly visitors, but it will struggle to earn a cent ($0.01) out of most of them. Most of that revenue disappears in operating costs, before a 40% profit margin (typically expected by early-stage venture capitalists) has been paid. On a fansite property that has probably already reached its maximum potential (barely 7 million people both play World of Warcraft and read English). So either this acquisition was part of an ill-conceived rush to spend venture capitalists’ cash (possibly before Games Workshop take it all in damages), or someone is planning to gain some serious efficiencies.

Descent into Madness

In theory almost anyone can setup a new WoW fansite. But in practice they won’t be able to compete anywhere except an undiscovered niche, because the technical, systems “barrier to entry” is now so high. The “fansite” market structure that emerges is the ultimate reflection on the complexity of the game itself: So much information, that individual websites can’t sustain themselves alone.

But then, rationally, none of this made any sense at the outset. As I previously concluded:

“Much of the third-party information is already coded into the game by the developers, obfuscated as game-play, discover by players, fed into third-party services, and then used to play the game by everyone else.”

We shouldn’t be concerned about systems costs because there should only be need of one system: The one in the game.

And I didn’t even mention that these third-party services are not licensed, but still tend to profit from the developers’ intellectual property. Or that such information might be better delivered in-game, not via websites. And that websites are preferred precisely because they can be operated commercially without permission. But then we’d have to acknowledge that these websites remain popular because they’re doing something game developers seem unable or unwilling to do.

While Curse and ZAM are still small businesses compared to mainstream game developers/publishers, both now have much to lose should anyone try to unpick this mess. Strange game indeed.

Do you like the sound of £100 million ($150 million)? Can I tempt you with £160 billion? Expressing these figures per person in the population can be useful. The first figure is one bar of luxury chocolate for everyone. Doesn’t sound so big now, does it? The second figure is like everyone having a £2,500 bank overdraft (loan). Strange that, because indirectly, we do.

Unfortunately, applying the economics of household groceries to major items of government expenditure introduces certainty. The idea that one can visit a store where luxury chocolate bars are sold for precisely £1.70. Yet many large elements of government expenditure are akin to ordering a chocolate bar years before it can be eaten, for a price that transpires to be somewhere between £1 and £5.

Larger businesses will be familiar with this concept. It’s called risk. Such businesses are often far more interested in what “it might cost” (£5) than what “it will cost” (£1.70), because what it might cost might lead the business to bankruptcy.

The national economy is chaotic in its complexity, but overall, things should average out. So long as all the assumptions are broadly reasonable: Ultimately some will earn/cost more, some less. Short-term in-balance can be solved by (basically) printing more money, and then down-grading future assumptions until everything is back in balance.

However, this breeds a form of arrogance. A sense that government doesn’t need to consider the possibilities. That we can deliver a radical new policy – that has never been done before – and, in spite of it never having been done before, we know precisely how much it is going to cost. Just like a bar of chocolate.

Unfortunately, assumptions tend towards optimism. On average, projected costs are less than actual costs. This isn’t just a problem for accountants. It means that decisions are taken which do not reflect reality. Potentially leading to a Disneyland scenario, where everything is affordable until after the decision is taken, when suddenly everything has become too expensive. It ultimately challenges the validity of decisions, and in doing so, the moral authority of those that take them.

This article uses the Edinburgh Tram project to demonstrate the inherent uncertainty of large government infrastructure projects. It discusses the role of optimism in planning, and the methods used to reconcile planned optimism with subsequent reality. The article describes how the involvement of the private sector in public projects has evolved over the last 20 years, and the highlights the different time-scales applied to private investment and public choices. It concludes that optimism is not only unavoidable, but necessary. Rather, the true problem lies in tendency of people to demand certainty from the public sector, while accepting uncertainty in the private sector. On this page:

• Digging Holes
• Optimism Bias
• The Downside of Up
• Evolution of Public-Private
• Paradoxes of Uncertainty

Digging Holes

Edinburgh’s Haymarket used to be one the busiest transport junctions in the city. Used to, because for the last 2 years, the highway has played host to a unusual urban art form: Holes.

The exact location of these holes changes from month to month. An elaborate game to confuse pedestrians and drivers, as they fail to navigate the shortest path to their destination. Like the best urban art, the artist is rarely seen – although the presence of various pieces of mechanical digging equipment indicate that the work is somehow still incomplete. Yet the most intriguing part of this sculpture is it’s name, “Edinburgh Trams“. Because in spite of the preponderance of construction activity in the locality, the only track to be seen at Haymarket is the same mainline railway that has run under the road junction for the last 170 years. No new stations, no over-head power cables, and certainly no trams.

“Light rail” requires slightly heavier engineering than road traffic. So laying tram tracks often involves rebuilding almost everything underneath the road surface before the rails can be laid. In a large British city, this means modernising about 200 years worth of poorly (that is, not) planned subterranean infrastructure. A maze of pipes carrying all those important things that normally remain unseen – water, power, communications.

That doesn’t just cause the appearance of a lot of track-free holes. It means that we aren’t entirely sure what’s down there until we start digging. This is one example of what makes the construction planning process especially uncertain for trams: How many holes should we plan to dig, and, hence expect to pay for?

Now that most of the utility work is complete, we know that almost 50 kilometres of utilities were diverted, almost double the 27km originally estimated. Estimation which appears to be fairly typical of the way the rest of the project is progressing:

The Edinburgh tram project was originally conceived as part of a package of transport measures, funded by a new road pricing scheme. The road pricing was abandoned by popular vote, but the tram scheme proceeded anyway.

Before construction had started, a perceived shortage of funds reduced the 3 proposed tram lines (and some extensions), to 2 core routes. Yet by the time the first hole had been dug, the estimated cost of this (smaller) network had already risen above £500 million. That’s a thousand pounds for every city resident – including those that don’t have £1000. By the start of 2010, the (generally accepted) estimated cost had risen to £600 million, with some private estimates closer to £1 billion.

This in a period when (money) inflation has been almost stationary, especially in an otherwise recession-hit construction industry. And all the while, the completion date continues to slip backwards – curiously, always 3 years from now. The Edinburgh Evening News provides a timeline.

This inherent uncertainty doesn’t just make a mockery of announcing something “will cost £375 million”, when the only thing we can be reasonably sure of, is that it won’t cost precisely that much. It creates scope for optimism in planning: To bias all the cost assumptions down. Nobody can convincingly dispute an estimate, because nobody has accurate figures about the cost of building trams through Edinburgh. Estimates are biased down because securing popular (specifically political) approval for a project is easiest when the cost is lowest. Naturally, once a proposal has political support, there is considerable reluctance to abandon it. So everyone keeps digging.

Optimism Bias

The tendency for costs to be under-estimated has been apparent for several decades. Indeed, it has been formalised in the planning process as “optimism bias“. Literally, add n% to the projected cost, because, on average, past infrastructure projects have cost n% more to finish than originally estimated.

For light rail schemes, n is at least 40%. That’s quite a big error for a sector that claims to employ professional people for forecasting and planning.

Of course, adding n% still doesn’t solve the problem: We merely proceed to make even more optimistic assumptions. Claim that that much optimism bias shouldn’t apply to us. Like a gambler, convinced that their luck is somehow above average. Yet (unfortunately) secure in the knowledge that British government doesn’t “go bankrupt”: However bad the bet, those gambling debts will always be funded from somewhere. And you’d be amazed how few people working in government can explain where somewhere actually is.

This isn’t a grand conspiracy. It’s the same kind of optimism that concludes parents to believe their children are somehow “better” than they actually are at school. It’s inbred in planners and politicians alike: They’re fundamentally the kind of people that want to affect change. To get things done. They have a natural disinclination to believe proposals are unachievable.

Extend the planning horizon over (often) decades, and, frankly, almost anything can be made plausible.

Consider an operational, rather than construction example: Optimism fills our new trams with people that were previously causing road traffic congestion (policy objective), and who happily pay a premium over bus fares (operational objective). Yet pessimism would fill our new trams with former bus passengers (minimal policy impact), and who are paying bus fares (unfortunately trams have higher operating costs than buses). Only a couple of inherently uncertain assumptions separate these 2 scenarios. Separate success from failure.

The Downside of Up

There are several methods of managing the financial crisis that (invariably) occurs once reality challenges optimism.

For example, we can always do less. Build 1 tram line now, and another one “later”, maybe. Commission a single aircraft carrier, rather than a pair. It’s a terrible fix:

• 1 tram line clearly delivers less benefit than 2 lines. If the prime objective is perception, not transport (as I contend), then running trams past the Royal Bank of Scotland headquarters and on through the city centre, may be sufficient. But it is not always so easy to scale back. A single aircraft carrier reduces the solution to farce: If one wishes to maintain an active sea-based air capability, then you can’t do it with one ship: Wars rarely adhere to maintenance schedules. Strategically, the choice is between 2 ships or no ships.
• An initial decision to build 2 tram lines triggers an immense amount of preparatory work, the cost of which tends to be lost. Even if no work has been done, contracts have been signed, organisations have been scaled up to deal with the initial (larger) proposal. In defense procurement, the naval architecture associated with a one-ship fleet is rather similar to a 2-ship fleet.

We can also try and pass costs on to commercial contractors. Transfer the risk from government to the private sector. When the price doubles, it is the private contractor that picks up the bill. Sounds great, except:

• Short term, relations between contractor and client can become exceedingly unpleasant. Not least because government is a less aggressive environment than (most) commerce, so public officials often aren’t prepared for unpleasantness. In Edinburgh, work has been stopped completely by disputes with the main contractor, Bilfinger Berger. Disputes that rumble on.
• Medium term, a commercial contractor may default on the contract. The largest businesses struggle to manage hundreds of millions of pounds of unexpected cost. The result can be a half-finished thing, eventually completed late, by a far less optimistic contractor – who has inflated the cost still further.
• Long term, the risk associated with all government contracts rises. Potential contractors increasingly regard public sectors clients as liabilities. Or more likely, greater liabilities.

Evolution of Public-Private

That final observation contributes to the view that it is more cost-effective for the private sector to do everything, with the public sector reduced to buying the result like a service. That the private sector is better at managing risk, and the public sector can only be trusted to purchase at fixed prices – like chocolate bars. It’s one of the logics behind the 1990s-era Public Finance Initiative, Design-Build-Finance-Operate, Public Private Partnerships, and. There’s another problem:

The public sector isn’t sure what kind of chocolate bar it wants. Not just that difficult choice between Almond and Toffee. Rather, today it is buying luxury chocolate, but at some point in the near future its political objectives will change, and the public appetite will be for… somewhat cheaper milk chocolate. Or maybe… biscuits. Feeling hungry yet?

The private sector process is akin to trying to order groceries a decade in advance. A nonsense to consumers that expect to decide while standing in the store, seconds before they buy.

The catch is that, unlike chocolate bars, physical infrastructure lasts decades. The private sector can only invest in, and fund, such infrastructure over decades. Faced with the certainty of political uncertainty – whatever it builds likely won’t be wanted for some of its lifetime – the only sensible solution is not to build.

Box: Over the Sea to Skye
The Skye Bridge connects the Isle of Skye, in Western Scotland, to the mainland. Although technically sea, the crossing traverses a narrow channel of water, about a mile wide. The bridge was constructed as a “Public Finance Initiative” project. The contractor both built and then continued to own the bridge, charging road users a toll. The bridge had replaced a ferry crossing, so rational (economist) planning assumed that bridge crossings could be priced much like the old ferry. Unfortunately people perceive a ferry more like a “cruise”, while a road bridge is considered more like a (“free”) road. A situation that was further confused by the economics of the original ferry operation: In the best tradition of public sector transport operation, the Skye (Kyle) ferry had been cross-subsidising other ferry routes in the Western Isles. So where paid, the Skye ferry fare had been excessive for the distance travelled, and hence bridge tolls became rather excessive. Where paid, because local people had tended not to pay to use the ferry, yet found the privately owned toll-booth less accommodating. Opposition to the toll was initially small (the area is sparsely populated), but intensely passionate. As Scotland gained devolved government (including transport responsibilities) in the late 1990s, the toll was subjected to increased political pressure. Under the previous Conservative administration, Scotland was governed much like an imperial province – devolved government was a very dramatic change to the political landscape. Tolls were first subsidised by government – at significant public cost – until complete capitulation occurred: The bridge was bought (effectively at the price of the contractor’s lost future earnings, not the price of construction), and tolls removed. This political climate then spread beyond Skye – a belief that any Scottish bridge toll was unacceptable, apparent in current discussion about the Forth Bridge. In less than 20 years, the politics of bridge tolls have been inverted. The legacy of the Skye Bridge is not just funding inefficiency (George Monbiot calculated that the bridge should have cost no more than £25 million, but actually cost over £90 million). It also clearly demonstrates how the commercial construction/investment time-scales (in this case, originally a 27-year operating contract) can be completely at odds with far shorter public/political timescales.

Uncertainty can be reduced by what civil servants used to nervously refer to as “the P word”: Partnership. By close communication, shared understanding of each others’ problems, and, ultimately, strong personal relationships between the individuals involved, both the public and private sectors can better predict and adjust to future changes in objectives. Demands that might otherwise appear “from nowhere”. In a stable political environment, this can work – that is, one with rather limited democracy. But it rarely survives the sudden and dramatic shocks to the political system, that are associated with elective democracy: 15 years of gradually evolving, but broadly similar policy by one government, may be completely reversed by a newly elected government. In the British system, literally overnight.

This big uncertainty – the risk of a sudden change in direction – makes everyone cautious. Government officials are reluctant to commit to processes their future political masters may not be committed to. Commercial organisations become reluctant to invest in a process that might be “taken away” at a later date.

The result is a move back to formal contracts, as a way of protecting everyone against this big uncertainty. Except that a “partnership-contract” looks rather too cosy. At best uncompetitive. At worst outright corrupt. And, as the Skye Bridge box above shows, contracts still won’t stop a determined politician. Such contracts merely confuse the strategy, and inflate the final cost.

Now consider that, having merged public and private into one almost seamless project-completing entity, we logically start to wonder why we ever bothered to maintain any distinction? Why not just let government do everything itself?

Why – well, among other things, because the public is too optimistic. Yes, that again. We’re back where we started.

Paradoxes of Uncertainty

The underlying problem is one of time. The paradox, that people excel at evolving and adapting from day-to-day, but struggle to predict their own evolution and adaptation. They cannot conceive in the future, what they can do in the present.

Of course, people tend to live in the present. This isn’t just reflected in the inherent difficulty of trying to order groceries a decade before they are consumed. There’s a fundamental disconnection between the present self and the future self, even though the 2 states of being are logically related.

William Hazlitt is attributed with the observation that our present self views our future self the same way as it views other people. This starts to explain why we tend towards future optimism – we’re applying the same sense of optimism to the future, that we do to other people. That hints at how deep optimism runs through the human condition.

(Optimism could be equally well described as empathy. Which, in turn, probably reveals why depression – arguably a lose of human empathy – tends to make people more rational.)

So:

• Clearly, we are not going to solve the problem by solving optimism. It’s a part of what it is to be human.
• Indeed, managing optimism is no easier than managing people – a largely empathic process that tends to fail when applied rationally, or into the future.
• Meanwhile, optimism appears fundamental to the types of decisions that push society forward. Optimism is what biases human endeavour away from the currently accepted average. Possibly a necessary condition of “trial-and-error” evolution.

I reluctantly conclude that optimism is not only unavoidable, but entirely necessary.

So why is it such a problem for the public sector? Simple: Government doesn’t do uncertainty. Much as it doesn’t make mistakes. Of course it does, it just has terrible difficulty acknowledging that it does.

An investor in a commercial business accepts that some of the money they invest will be spent on unprofitable activities. They judge the success of their investment on the overall return of the entire business. In contrast, public investors in a government enterprise – or taxpayers, as they are called – expect every penny (cent) to be “well spent”. Anything the population deems to be “waste” can approximate to a moral right to “demand their money back”, with almost no consideration of overall performance.

Culturally this makes it hard for the public sector to acknowledge misjudgements, consequently harder to learn from them, and hence, exceptionally hard to learn from them while they are happening – at the time when something still might be done to improve the situation. In practice, either the situation gets so bad that it dissolves into scandal and farce, or once the dust has settled, the National Audit Office (or Scottish equivalent) reports about the woes of British tram procurement. The current generation of local politicians and officials will learn not to try that again (I suspect they already know). But nobody will address the underlying structural problem.

Which leaves an important question: Why do people demand financial certainty from the public sector, while simultaneously accepting uncertainty from the private sector?