Most of you are probably familiar with the notion of low-end Disruptive Technology. In a nutshell, it happens when products focus on the least demanding, least profitable customers in a market. These customers are largely ignored by the incumbent; they simply aren’t worth chasing with their current business model. However, the new entrants give these undesirable customers a “good enough” product, all the while improving their technology. Eventually, the entrants create more value than is needed for the low-end customers, and the product moves up-market, stealing market share from the incumbent. Because they were forced to innovate and create better value-add with lower costs, the entrants give better value to the encumbent’s mid-value customers, and the encumbents are forced to serve an ever-shrinking high-end market.

The obvious analogy here are AAA console games as the encumbent, but who are the new entrants?

Let’s take a look at what’s happening in our industry at the moment:

The AAA console developer’s dilemma

Often, the incumbent knows about the rise of the disruptive technology, but does nothing about it. In this instance, the reasons are:

1) The cost of switching is way too high. Companies have so much money invested in developing multi-million dollar games that it’s unreasonable to focus their energies somewhere else.

2) Companies do not want to compete with themselves. For example, all three next-generation consoles have a very precarious balancing act to not aggrevate their partners (developers and especially retailers), and thus must treat digital content as more of a novelty than as an alternative to retail games.

3) Business is good. This is probably the number one reason that developers feel no pain at the moment — year-on-year, retail games are making more money; not less.

Looking at the AAA console market’s target market, we see that they target between the mid to the highest performance demands of the consumer.

The Rise of the Free Game

These days, there are so many new business models targetting the lower-end markets that it would take a book to cover them all. I believe many of these are here to stay and will thrive: innovating on interface as the Wii does, for example. Mobile games, as horrible as they are, will continue to improve and will one day be “good enough”.

However, to me one of them sticks out to be particularly promising: the free online game. I believe that there are several key innovations on this type of game that will make it extremely successful.

To see how closely this matches the theory, we can start by looking at its history: the early web games targetted the least demanding customers — those who want a small distraction. The experience has horrible — slow connection speeds and poor implementations allowed for only the worst games. The web bubble came and went, and many games that were meant to be never happened.

As the free games gained ground, the first offerings that were successful were still far below the quality of console games (by traditional measures of features and graphics, that is): Neopets, Habbo Hotel, BnB are all examples of this. However, as these companies innovated on their technology, their offerings became more advanced and each new offering met the demands of higher and higher markets: Kart Rider and Gunbound are recent examples. Let’s see how they can do this and still keep a competitive edge:

Key Advantage 1: Initial Cost of Development

Because the games are free, they have the luxury of lower expectations — they could launch faster, and receive input faster, before a large investment is made. Indeed, free online games can launch with an initial investment that is a fraction of the cost (in time and money) of a traditional game.

Key Advantage 2: Better Value for Consumers

Once the game is made, they can quickly test the waters with the consumers. These consumers have an extremely low barrier to entry, so a userbase is quickly built. If the game was successful, they can then build on the success and move up-market, reacting to consumer demand as needed.

The end result is that the game is made with less money, costs less for the consumer, and is more in tune with the demands of the consumer. These games, if built properly, simply give better value to the consumer.

Key Advantage 3: Multiple Monetization Avenues

Whether it be advertising revenue, item selling, market research due to the large user base, or premium subscriptions, free games have a large number of monetization avenues. I’ve complained before that boxed products generally only have one point of monetization, possibly two if downloadable content is sold, but in general this type of upfront costing causes a large barrier to entry that is non-existant for Free Online Games.

When, not If

I think it’s clear that there will soon be a convergence from Web 2.0 companies and Game Development studios in the race to build value in free online games. These games have and will continue to move up-market. Things that can only be done on large budgets today will become available at a discount, or become irrelevant, tomorrow. The key now is to determine how to position yourself to not only take advantage of this new model, but also position yourself to bring unprecedented value to the consumers.

Exciting, isn’t it?