In this specially contributed piece, Joost Rietveld, Assistant Professor in Strategic Management at UCL School of Management considers the evolution of platforms – from digital game stores to the coming consoles – and the developer strategies and revenue generation options that have emerged in tandem. The insights presented in this series of articles are based on an academic study written by the author, and published in the Academy of Management Discoveries.
These are exciting times for game developers and gamers alike.
We have recently seen two new gaming platforms enter the market in the form of the Epic Games Store and Google Stadia, and soon next generation consoles by Sony (PlayStation 5) and Microsoft (Xbox Series X) will hit the market.
New platforms simultaneously impose considerable risk and uncertainty – as well as excitement – for app and game developers. New platforms and their sponsoring firms often promise to outdo the existing options, and tend to make significant effort to sway developers in joining them. At the same time, since these platforms are only just starting out, they will have a small installed base (the cumulative number of consumers that have adopted a platform at a specific time) and not be fully functional in terms of the technological infrastructure and the opportunities afforded to developers to generate revenues from their products.
Put differently, in certain aspects, new platforms will be lagging behind established or existing platforms, and this will likely affect a developer’s strategies and sales performance. Elsewhere, recently we’ve seen how tensions can rise between dominant platform holders and developers, with Fortnite’s high-profile removal from both Apple and Google’s respective app stores and the resulting fallout – something we’ll look at in part two of this piece.
One thing is clear – understanding the ever-shifting nuance of the platform landscape is essential for most developers pursuing success. But how does a platform evolve as it matures and solidifies its market position? And how does this affect developers’ positioning strategies and their revenue-generating opportunities?
Defining Platforms and Platform Economics
To answer these questions, we must acknowledge that platforms such as Steam and PlayStation are no ordinary markets. Over the past twenty years or so, academics have created a substantive body of knowledge on platform markets, typically under the moniker of ‘Multisided Platforms’ (MSPs).
Multisided platforms bear the following characteristics:
- They bring together two or more distinct groups of customers. These can be gamers and game developers in the case of Steam, or readers and advertisers in the case of a newspaper.
- There exist network effects between the customer groups on the platform. That is, a platform with many gamers will be more attractive to game developers than a platform with few gamers, and vice versa. There can also exist network effects within each of the customer groups. For example, when there are many gamers on a platform, the platform will likely offer a better multiplayer experience than when there are few gamers on a platform.
- One customer group is subsidised, whereas the other customer group is (heavily) monetised. Gamers can join Steam free of charge, and even console gamers tend to pay a price for their consoles that is less than optimal from the console manufacturer’s perspective. Game developers, on the other hand, must forfeit a hefty revenue share – often around 30% of all revenues – if they wish to offer their products on a platform. By subsidising one side of the market and monetising the other, the platform can correct for any asymmetries in terms of how eager one customer group is to see the other group join.
- The platform acts as a private governor or ‘orchestrator’, to make the platform as a whole work. This includes setting rules for who can join and under what conditions, as well as rules customers must adhere to when interacting and transacting with each other on the platform.
Evolutionary Basics: Gamers and Developers
Because of the aforementioned network effects, and the value consumers derive from having many products to choose from, new platforms are often scrambling for developers’ support. After all, without apps or games a platform offers very little value to a consumer; a challenge that is known as the ‘Chicken-and-Egg’ problem in the academic literature.
There generally are fewer consumers and developers who are willing to join a platform when it is just starting out. This is particularly true for platforms by sponsoring firms that lack a strong reputation within the industry. Once users on both sides of the market join a new platform, and network effects kick in, we tend to see exponential growth in user numbers on both sides of the market. This exponential growth typically persists for some time – usually a number of years – before it levels off again and consumers lose interest and developers begin to anticipate and prepare for the next (generation) platform in the market.
These patterns have two very basic implications for developers: On the one hand, as a platform’s installed base grows, the cumulative sales potential for any app or game also grows. On the other hand, as more developers join a platform, the intensity of competitive crowding will also increase. This is further amplified by the virtually unlimited shelf space on many platforms, which means that consumers who join a platform later in its life will still be able to download and buy products that were released earlier in the platform’s life cycle.
Furthermore, research by myself and others has shown that later in a platform’s life, developers tend to enter the platform at a substantially higher rate than consumers. In other words, competition among apps and games tend to increase disproportionately as a platform matures. It should be noted that the reasons for this discrepancy aren’t fully clear and can potentially be explained by a lag in developers’ response to market shifts, some form of inertia, or the platform putting in place rule changes that make it easier for developers to enter the platforms, such as Valve did with Greenlight in 2012.
Data from The Coevolution of Platform Dominance and Governance Strategies: Effects on Complementor Performance Outcomes, by Rietveld J, Ploog J, Nieborg D. In press, Academy of Management Discoveries.
Platform Evolutionary Rule Changes
In addition to these basic evolutionary trends, my research further finds that the platform sponsor tends to change its governance, or the rules that govern customers’ behaviour on the platform and the relevant criteria for joining the platform, as a platform matures:
- Early on, platforms implement mostly structural rule changes. Structural rule changes are aimed at increasing the options for value creation and value capture for developers. One example is Apple allowing app developers to generate revenues via in-app purchases or in-app advertising. These changes thus mostly benefit the developers already on a platform.
- Then, once most structural rule changes are in place, platforms shift their attention by implementing updates to increase the depth and breadth of the content pool. Steam, for example, increased the depth of games on the platform through Greenlight, which allowed gamers to vote on which games would be admitted on the platform. Over the years, Apple introduced a number of new app categories (such as ‘Kids’ and ‘Shopping’) to increase the breath of its application pool. We label such changes boundary spanning rule changes.
- Finally, platforms typically proceed to implement rule changes that mostly benefit the consumers on a platform, and to redirect them in their choice of products. Steam has famously introduced several Discovery Updates; algorithms that promote the most popular games on the platform’s landing page. We call these changes redistributive rule changes.
My co-authors and I also discovered that the extent of these changes is more pronounced on platforms with a stronger (rather than weaker) orientation towards appropriating value for themselves and their shareholders. Put differently, a publicly traded platform like Apple’s iOS will implement more rule changes and changes with a stronger impact on developers than a public-benefit platform such as Kickstarter. This can be explained by the fact that developers are often monetised by the platform and that platforms with a stronger orientation toward value appropriation will be strongly motivated to generate income from its developer base.
What This All Means for Developers
Platforms broadly consist of three components, each with their own evolutionary trajectories: consumers, developers, and, lastly, the platform itself. I have briefly described how each of these components evolve in the context of multisided platform markets in the app and game industry. For developers, these evolutionary trends hold strong implications for business and product-market strategies. At a minimum, these include:
- The platform’s evolutionary trajectory matters. Not only will newer platforms be characterised by lower levels of competition and demand, but also the support and ruleset implemented by the platform sponsor will evolve. Earlier, the platform’s governance rules tend to be more supportive of the development community, while later this will shift more to the side of consumers. As I will explain in the follow up to this article, redistributive rule changes tend to amplify the ‘blockbuster’ effect and make it harder for most developers to be successful.
- More consumers to sell to comes with some downsides. Though there are more consumers on an established platform, research shows that this disproportionately attracts developers resulting in excessive crowding. Furthermore, as the developer pool starts to populate a platform, the platform sponsor will implement rules that will help consumers sift through the supply of content. This amplifies competition and leads to lopsided market shares.
- A platform’s evolutionary stages demand different strategies and expectations of success. Early on, success is more likely, but what constitutes success will differ with time. Also, entering a platform early can help establishing positive relationships with the platform owner. These relationships hold option value: Preferential treatment (e.g., through selective promotion) by an established platform often has huge (positive) implications for sales.
- Not all platforms are created equal. Platforms with a stronger orientation on capturing value will implement more rule changes and these changes likely serve the platform’s higher order strategic objectives (e.g., maximising shareholder value). The extent that a platform faces threats from disruptive competitors also affect how it manages its ecosystem. Where possible, it can be beneficial to join a platform with a weaker orientation on capturing value, such as a public benefit corporation or a non-profit organisation. It can also be worthwhile to partner with a platform that faces competitive threats from a competing platform. Valve recently lowered its revenue shares in direct response to Epic’s entry as a games platform.
This article is part of a series of two articles on platform evolution and game sales. Part 2 is now published here on Department of Play, and looks at how sales tend to drop over time on such platforms – as well as what you can do about that. These articles are based on an academic study titled ‘The Coevolution of Platform Dominance and Governance Strategies: Effects on Complementor Performance Outcomes’ published by the Academy of Management in the Academy of Management Discoveries. You can find the published version of the paper here, or you can download a pre-publication version of the paper for free here. This article and the academic paper are written by Joost Rietveld, an Assistant Professor of Strategic Management and Entrepreneurship at the UCL School of Management of University College London. Joost has a background of working in the games industry prior to joining academia, and much of his academic research is based in the games industry. This series of two articles was edited for clarity and readability by Will Freeman, and published by the Department of Play.