One of my startup philosophies is to always plan for two or three things going wrong, all the time.  New businesses are chaotic enterprises, operating on limited information in new domains, constantly adapting.  You have to set an expectation for the unexpected.  If your baseline is a couple surprises every month or so, they’ll feel less like threats and more like business as usual.

That sort of attitude shift goes a long way toward coping with challenges as you build a company.  No more “oh my, what are we going to do?”, just a calm, rational “ok, we thought something might happen, lets figure out what to do about it”.

And if nothing goes haywire?  Great, you had a good month.

Next week I’ll be kicking off a multi-part company postmortem on Knockabout Games, the development studio I founded in 2002 to build games for mobile phones (during the first wave of mobile, i.e. pre-iOS).

I’ve written before about how value chain barriers are dropping, enabling a more product to reach consumers than ever before.  While a boon for consumers (setting aside for the moment the noise/discovery problem), this is a challenge for content creators:  more product means more competition, driving down prices and unit sales.  So the value of content is falling.

But it’s also rising.  Lower barriers make it feasible to bring niche products to market that couldn’t be justified in the past.  And consumers will pay extraordinary amounts for products that address a niche they find compelling.  The evidence for this is all around us, from low budget CCGs (e.g. the now defunct Warstorm) to high budget strategy games (e.g. League of Legends), and it’s been happening for years.

We’re talking about products that generate $50 – $100 per paying user.  Per month.  Do the math and ask yourself how small a niche you can serve and what it will cost to build the product.  You don’t need to spend millions like League of Legends, or even hundreds of thousands like Warstorm.  There are countless underserved niches out there just begging for a product.

This is part one of the four part series on value creation in games. Part 1: Value Creation in Games; Part 2:Engagement and Content Volume; Part 3:Engagement and Personalization; Part 4: The Game Engagement Landscape.

I’ve been stewing a lot lately on how we create value in the games industry.  Given that there’s no explicit utility case to be made for our products, everything we do appears to fall into two buckets:

• Increasing Access
• Increasing Engagement

Increasing access is about friction reduction.  The electronic game value chain is filled with friction – everything from problems of discovery and delivery of product to basic commerce issues (payment types, price points and whatnot).  Even existence has friction when you consider the barriers to creation:  technical expertise, difficult of the platform, access to tools and development resources, and so forth.  Within the game itself, simply the demands of play – learning curve, short and long term time commitments – create friction for the user.

Reducing friction can often enable otherwise average titles to succeed.  A great example of this was consumer reaction to mobile games before the iPhone came along (2002 – 2006).  Multiple studies (from the tail end of that era) showed consumers reaching for their phones to play games in their homes despite the presence of superior products on consoles, handhelds and computers.

On the other hand, increasing engagement is about creating desire.  No matter how much friction we eliminate from the system, there still needs to be something on the other end that engages a consumer’s attention and pulls them to the product.  In fact, just as low friction can enable weakly engaging products, strong engagement can overcome absolutely ludicrous frictions (witness Minecraft).  It’s stating the obvious, but as long as engagement exceeds friction, you’ve got your customer.

Both methods of value creation are key to a successful product, but it’s important to understand the difference.  Early entrants to a new market segment might succeed by making mediocre products highly accessible, only to fail in the long haul if they don’t know how to increase the engagement side (or more telling, recognize the importance of doing so).

There are only two parts of the content value chain you cannot remove:  the content creator and content consumer.  That’s a paraphrase of an unknown journalist from the June 5, 2008 issue of the Economist who said:

“Publishing has only two indispensable participants:  authors and readers.  As with music, any technology that brings these two groups closer makes the whole industry more efficient– but hurts those who benefit from the distance between them.”

So if you want to play in the space between, you need to provide some value in reducing one or more of the following four barriers:

• Existence.  How difficult is it to actually create the product?  Am I coding in assembly or can I just use Flash?
• Discovery.  How does a consumer find out about the product?  Banner ads, google keywords or the social graph?
• Delivery.  How does the consumer get the product?  Do I have to drive down to the mall or can I just download it?
• Commercialization.  How does the content creator monetize the product?  Do I have to pay $20 or can I try it for free and pay for stuff in smaller chunks later?

We use talent and money to overcome these barriers.  In recent years, there’s been a tremendous decline across the board in all of them.  Modern development tools and increased hardware power have put a huge dent in the existence barrier.  Delivery friction is virtually zero given modern bandwidth costs.   Commercialization is almost plug-n-play.  Even discovery has been dramatically improved with the advent of Facebook’s viral channels.

As these barriers drop, a number of interesting things happen:

• Lower barriers mean lower capital requirements to bring a product to fruition.
• Lower capital requirements mean the volume of product that makes it over these hurdles increases substantially.
• More product means more competition, driving down prices.
• More product also means more niche products that address previously underserved interests.  These products can charge a premium over mainstream content.
• The closer these value chain barriers get to zero, the more they commoditize and become hyper-efficient.
• The more they commoditize, the more the costs start to backload, further reducing capital requirements for the content creator.
• As capital requirements drop, the sources of capital change and their influence over the content creation process falls.

There’s a bit of a feedback loop here.  If more products make it over the transom the discovery barrier goes up, for example.  And when a company has an effective monopoly over one solution (e.g. Facebook’s discovery advantage) they can intentionally raise barriers in other parts of the value chain, so long as the net gain is still positive for content creators.