How I Learned to Stop Worrying and Love the Crash(iphonegames.typepad.com)
iphonegames.typepad.com
How I Learned to Stop Worrying and Love the Crash
http://iphonegames.typepad.com/extremepreneur/2008/10/how-i-learned-to-stop-worrying-and-love-the-crash.html
3 comments
The cheap credit bonanza of the last 20 years has ruined margins in all kinds of businesses. A long time ago I read a post by an old guy who had made millions off a local chain of dry cleaners. He talked about how in the early days he spent some time living in his first shop. He had to struggle hard to scrape up the capital to get going. He eventually got rich, but he completely sold out years ago because the business had been ruined. Most of these Korean outfits you see all over the country are credit financed franchises. The families running them put close to nothing down and then pay themselves slave wages. Of course this drove margins to zero.
Cheap credit and easy funding is an enemy to anyone trying to get a profitable concern going. The hurdle of raising capital is an important barrier to competition.
Cheap credit and easy funding is an enemy to anyone trying to get a profitable concern going. The hurdle of raising capital is an important barrier to competition.
This is an interesting conversation to have, let's explore!
1.
So "no competition" is bad becasue products and processes lack diversity neccesary for "natural" selection. There is also no pressure to innovate. Left unchecked this situation does not rectify itself as monopolies tend to self-perpetuate until there is a diruptive technological innovation.
2.
"A lot of competition" is bad: it drives margins to zero thus no one can invest into more innovation. Further yet, the collective of buyers ends up paying for a 100 small development teams instead of, say, 5 moderately large ones. At this point wastefulness of effort duplication overweights the diversity value that it brings to the table.
This situation is not stable - nearest credit crunch will purge out the weak players and lead to consolidation. Consolidated players will have less fixed overhead to spread over the same user base, thus margins will improve and some more research can be done to further improve the product.
It figures then that there are differetn types of markets: some which require more diversity and some which require less or none at all. Barring government intervention the former will be able to sustain more smaller businesses and the latter only a handful of big players. At the extreme it turns into natural monopoly (e.g. utility) where value of diversity is diminishingly small compared to fixed overhead of one more business (e.g. second water pipeline).
Now let's discuss which markets need diversity and which ones do not!
1.
So "no competition" is bad becasue products and processes lack diversity neccesary for "natural" selection. There is also no pressure to innovate. Left unchecked this situation does not rectify itself as monopolies tend to self-perpetuate until there is a diruptive technological innovation.
2.
"A lot of competition" is bad: it drives margins to zero thus no one can invest into more innovation. Further yet, the collective of buyers ends up paying for a 100 small development teams instead of, say, 5 moderately large ones. At this point wastefulness of effort duplication overweights the diversity value that it brings to the table.
This situation is not stable - nearest credit crunch will purge out the weak players and lead to consolidation. Consolidated players will have less fixed overhead to spread over the same user base, thus margins will improve and some more research can be done to further improve the product.
It figures then that there are differetn types of markets: some which require more diversity and some which require less or none at all. Barring government intervention the former will be able to sustain more smaller businesses and the latter only a handful of big players. At the extreme it turns into natural monopoly (e.g. utility) where value of diversity is diminishingly small compared to fixed overhead of one more business (e.g. second water pipeline).
Now let's discuss which markets need diversity and which ones do not!
I think the difference between 1 and 2 is which side of the cash register you can see. I'd love to be the second player (producer) in a high margin category 1 situation, and I sure do like being a customer in the #2 scenarios I'm exposed to.
Actually you don't want that either. Look at the iPhone app store - most applications are simplistic because anyone can write and sell an app and make tiny profit.
If there was a higher barrier to entry fewer number of developers would chase after the same pool of users, so they would make a bit more money and would be able to invest into making their applications more feature-rich.
If there was a higher barrier to entry fewer number of developers would chase after the same pool of users, so they would make a bit more money and would be able to invest into making their applications more feature-rich.
I think that if there's truly a valuable market there that people will be able to charge a premium for quality products. Granted stuff like the Virtual Beer might not ever cost anything but I think well produced games might have quite a future, for example.
Apple certainly is not doing anyone any (long term) favors with the app store as it stands presently, as it doesn't feel like there's a good way to develop your own brand within the store. It would be funny if this was the invincible iPhone store's undoing. :)
Apple certainly is not doing anyone any (long term) favors with the app store as it stands presently, as it doesn't feel like there's a good way to develop your own brand within the store. It would be funny if this was the invincible iPhone store's undoing. :)
Of course there is value in a good game, but who would develop it? There are too many games already and about 50 new games shipping every day. It's impossible to stand out on your own merit, no matter how good your game is, and therefore people will not be inclined to invest efforts.
It's the crisis of overproduction, bascially. It benefits noone.
It's the crisis of overproduction, bascially. It benefits noone.
I am actually (on accident, not on purpose) mirroring Company B. Having the side income with no overhead or investors in your ear is nice.
It is hard to believe that developers will make enough to justify taking half a mil in investment. The app store is so crowded now (especially in games) that it is not worth the time for many devs.
This applies in a boom or a bust.
What's an extremepreneur?
What's an extremepreneur?
Credit crunch is bad for people who borrow money. It's good for people who don't borrow money and doubly so when competitiors are of the former kind.