• 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.

• Cloud Computing
• Benefits
• Hyper-Virality
• Funding and Revenue Models
• Exploding Intangibles
• People
• The Caveat

Cloud Computing

Cloud computing is poorly defined. Offering computer resources as a service. Across a network. Probably the internet. I prefer Frank Gens’ description – a “grid-utility model”, that anyone can use. Grid computing is the use of lots of individual computers as one. Utility computing is paying for computing resources as you use them. So instead of investing in lots of private computing capacity, one simply buys computing resources from an internet-based cloud of (effectively infinite) computing resources, as they are needed.

Benefits

What’s the advantage?

Most private computing resources are woefully under-utilised. A typical buisness’s computers lie idle while employees are sleeping, and are probably only partly used when they are working. Most websites/services are hopelessly over-resourced to accomodate occasional peaks in traffic. And then promptly collapse when the peaks transpire to be bigger than anyone expected. Sharing huge clouds of computing resources between many users – each with their own peaks and troughs – logically allows the total current demand for computing resources to be met with far fewer computers. Utility charging provides the mechanism that translates “fewer computers” into “lower cost”.

But there’s far more to cloud computing than “making existing things more efficient”.

Hyper-Virality

I define hyper-virality as the near-instantaneous adoption of a service or product by consumers, distributed through a pyramid of social connections.

It is the theoretical end-point of many current social internet trends: That ideas, optimisations, and methods that enhance the efficiency or well-being of humanity, move around the world ever faster than before. The actions of a handful of dominant, successful, or somehow innovative “thought leaders” are copied by those they lead, who are in turn copied those they lead. Since all the people on the planet are connected to each other by a surprisingly small number of links (you know someone, who knows someone, who knows someone, who… not many more times to link to everyone), distributing something down to absolutely everyone is potentially easy.

In an extreme case, a service that really is, the greatest thing since sliced bread, could almost instantly be benefiting billions of people. Clearly this level of hyper-virality is theoretical. The whole notion of absolute hyper-virality may itself be nonsense: That any one idea can be so clearly the best thing to do, that almost everyone is immediately prepared to adopt it. But in a limited way, it is already happening:

The best current examples of the concept are probably Facebook applications. These are still far from hyper-viral, but do demonstrate basic behaviour: When a user starts using a service, that user automatically informs their “friends”. If the service is desirable, those friends start using it, and in turn, inform all their friends. It is already possible to grow from no users to millions of users in a matter of weeks.

With traditional computing services, it is very difficult to scale computing resources up fast enough to keep pace with that growth in demand. Even if you can find enough machines, you probably cannot organise and configure them. You would need to anticipate millions of users and plan sufficient computing resources beforehand. And probably anticipate the wrong number – either be left with a lot of unused, but costly resources, or be unable to meet demand.

Cloud computing solves this problem, because precisely the right amount of computer resources are available, with costs always in proportion to the amount of resources used.

(Well, actually it is not yet a complete panacea – some caveats are discussed later.)

In concept, this “agile deployment” of internet-based services to the cloud, enables true hyper-virality to occur, since it creates the ability to deliver the ultimate product or service to everyone, almost instantly. This becomes far more important if we assume that our economies are becoming highly intangible entities, which primarily function over communications/internet-type services (see a Socio-Economic Environment based on Nothing) – most economic activity will occur in this communications/internet-type environment. But even if we don’t accept that assumption, the cloud potentially changes how we finance internet-based services.

Funding and Revenue Models

In a hyper-viral environment conventional business plans need to be rethought. A wild guess at future usage won’t do: “Somewhere between 3 and 3 billion users, with growth occurring sometime between today and the next decade”. That’s already a real dilemma for anyone developing a mass-market internet-type application.

Instead one needs to answer the question: How do I rapidly scale to meet demand? At the very least covering marginal costs (operating costs).

Broadly, there are 2 solutions:

1. A revenue model that earns money in proportion to usage, with ultra-efficient cash-flow, that allows increasing revenue to immediately pay for increasing operating costs.
2. An ultra-efficient capital market, that will invest in proportion to growth in usage, pending the later establishment of revenue streams.

Both approaches differ from what we tend to do now: Convince someone to invest some money, and hope we’ve established enough growth/revenue/”something good” by the time we’ve burnt through the cash.

Some fairly basic revenue models fit the first method well, such as display advertising or subscription-only services. In others models revenue may lag behind growth slightly: Premium versions of services that don’t earn money until users have enjoyed a free trial, or methods that rely on first building user engagement or trust, such as micro-transactions.

There is a risk of bankruptcy due to slow cash-flow: If your advertising revenue is still written on a cheque, lost for weeks in the postal or banking systems, what do you pay the cloud computing bill with? Fortunately, both incoming revenue and outgoing costs tend to lag behind by about the same amount. Cloud computing tends to be billed after use, not before, so everything is delayed by the same arcane business payment practices. But there’s still an element of Russian Roulette to whether the credit or debit clears the system first.

Parts of the financial system have the potential to be ultra-efficient. For example, in minutes, stock markets can adjust to changes in relative demands for capital. Except that such markets are dealing in established businesses that investors have some understanding of. Even high-risk investors, such as venture capital or private equity, may be unable to respond fast enough to new hyper-viral investment opportunities.

Note that established organisations will face slightly different problems to new entrants. For example, a historic focus on capital expenditure and fixed budgets may require structural change to occur within the organisation.

Astute readers will note that I have only addressed funding after a product or service’s launch. Cloud computing and virality won’t make it any cheaper to actually develop that product/service to the point where it is ready to be used. I hope to return to the topic of iterative product development on the internet in a later article – I contend that less time should be spent trying to develop a “finished” product before launch, and instead design should gradually iterate improvements on a live, “permanent beta” product or service. A logical extension of agile development into the iterative specification of the product itself.

Exploding Intangibles

Corporate finance still seems to be biased towards physical assets. This is great for factories: You can add up the value of all the machinery, materials and stock – all the physical stuff – and discount it all year-to-year. But if the most expensive physical asset is the coffee machine, classic accountancy tends to struggle. Highly intangible companies are not new – plenty of businesses are built up around intangible assets, like brands or franchises. And methods have evolved to account for the value of these companies, even if the process is inherently less precise.

What’s not clear is whether a rapidly expanding, but totally intangible, business can gain access to any conventional forms of finance. Our hyper-viral, cloud-based internet business didn’t even exist last month, and (because of the hyper-virality of unknown potential competitors) might not exist next month. So what is additional investment secured against? The coffee machine? While it is easy to point towards the rise (and fall) of major technology startups that have grown to be stock market-listed within a few years, the ultimate hyper-viral business would want to make that leap almost instantly.

Can finance move as fast as hyper-viral businesses? Current practices suggest not. But that misunderstands the potential advantage in fast-paced hyper-virality: Everything can move faster, including the return on capital. Invest for a few months, instead of a few years. So perhaps the challenge shifts to creating “stuff” that better informs capital markets, which can then react appropriately to other sectors?

People

Does this work organisationally?

Is it naive to assume that one individual can ever develop a solution that can gain mass-appeal, without significant help? Just as at the start of the first internet bubble, many believed that “2 kids in a garage” were going to destroy established businesses. While small developers do sometimes come to dominate emerging markets, most historic business empires remain in tact. And if that help takes time to organise, won’t that human organisational factor limit the speed of virality, giving existing organisations significant advantages over lone individuals?

Perhaps there are just to many unanswered questions? Technology and capital is easy – people are far more complicated!

Curiously, if people both define the structure through which hyper-virality occurs, and are the reason why hyper-virality isn’t quite as fast as it might be, it will be people that naturally establish a happy equilibrium. It would be limited by people, not technology or capital.

The Caveat

A small caveat: Cloud computing cannot yet deliver all its promised potential.

For example, by consensus the cloud does not handle database-driven applications well, particularly where a lot of data is being written (presumably we need to radically re-think the way databases work). Techniques for scaling resources within the cloud, to meet rapidly changing computing demands, are still evolving. It is not yet as automated as it sounds. There are a plethora of concerns related to issues such as security (by consensus, more perception than actual problem), and standards (some commentators suggest inter-operability will be resolved through clever use of APIs, much as different database software were made to “talk” to each other).

Ownership and privacy is a potentially important, but poorly explored issue: Logically a handful of huge cloud computing providers could gain considerable control and influence over the creativity of individual developers (much as early-modern “publishers” historically came to dominate people that worked as printers).