Interview: Alex St. John Talks Digital Distribution, Microtransacations, and the Future of Gaming, Part One

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The MMO Gamer: I think we can safely say that the bet you and Microsoft took on DirectX back then has paid off.

Now, with WildTangent, you’re betting that digital distribution, microtransactions, and advertisement-supported games will pay off in the same way once again.

Why?

Alex St. John: Unlike creating DirectX, I’m not really taking a very big bet from my point of view. The game industry is extremely young. We’re witnessing the emergence of an entirely new media, in the case of games, and it’s the media of interactivity.

All other media types that have preceded gaming have moved to digital distribution and ad supported models. It’s an entirely natural and obvious evolution for new media as technology eliminates that media’s dependency on proprietary physical distribution mediums.

In the case of print it was the press and paper, in the case of music, the record and record player, in the case of video it was film and the projector in the case of gaming it will be the console and DVD distribution that are displaced by electronic distribution. As soon as a media type moves to electronic distribution it becomes easier to simply make it free supported by advertising rather than try to extract cash from consumers.

Micro transactions are a business model uniquely suited to gaming because unlike any other media created games are the only highly re-consumable media whose value to the consumer grows with repeated consumption rather than vanishing as soon as it is read, watched or heard as with print video and music.

This property of gaming makes microtransactions the most efficient and effective way of enabling consumers to pay for the premium content they consume in direct proportion to its value to them. Unlike any other media, the value of a game varies wildly to its consumers and microtransactions are simply the best business model discovered for fairly capturing this value by enabling consumers to buy as little or as much game value as they want.

It’s hard to compare the value of our exotic online business models to the value of what we online guys consider the primitive retail game model, but I guess you could simply characterize the difference as follows:

The basic premise of the retail game business is to demand an enormous premium of say $50 bucks from the consumer for a new game sight unseen, or tell them to go to hell, find some other entertainment if they’re not comfortable paying it.

The online business models basically let the consumer download and install the game for free, verify that it actually plays well on their machine, play it a while to be sure they like it, and then pay for it outright if the like, or pay with microcurrency and/or advertising as they consume the content. In short the online models are hands down, unequivocally friendlier to the consumer. There’s no question that they will ultimately come to completely dominate the game market as a consequence.

Of course, I’ve been running WildTangent 10 years now, so if you look us up on Comscore you’ll see that we are the largest privately held game network in the world. We sell thousands of games/day, handle millions of microcurrency transactions and give away millions of dollars in advertiser sponsored free play, and we publish games from over 125 developers including THQ, Atari, Sierra, etc. so in retrospect, I was right about that one as well.

It will take the rest of the game market time to catch up to the business and distribution models we’ve pioneered at WildTangent, but you just have to look at our success in online publishing to see the future of the rest of the game business. The console business is showing its last legs. Tomorrow’s game market will be an online, PC-based business.

The MMO Gamer: What do you think it’s really going to take for a large-scale shift to digital distribution to occur, and aside from the consumer angle, what benefits does a developer get out of it?

For instance, would going through purely digital channels allow a company to do an end-run around the ESRB or PEGI?

Alex St. John: There are two significant barriers that prevent digital distribution from completely obliterating the boxed game market as we know it. The first is game size, the second is that many gamers, especially kids, don’t have credit cards and therefore have no means of buying anything online. Those barriers are vanishing fast as bandwidth increases and mobile billing and retail cash cards have reached the US market.

There will ultimately be no end-run around ESRB or PEGI for mainstream mass market content. Digital Distribution will represent a much better business model for developers however. Today, most of the revenue generated by games goes to the publisher of the game not the developer.

Online developers get a real cut of the profits of their game sales, which makes being an online developer a much more lucrative business than making boxed games. A hit game can also acquire its own organic audience online which means the developer can sell their game directly to consumers with no publisher or retailer in the middle.

There will still be huge publishers and distribution portals online, but it will be a better business for developers overall.