On fragmentation and commodities in games
Why services like Discord and Fortnite succeeded where most failed.
I was reminded this week of how difficult our market is; a company we once considered our largest competitor had to shut down. I’ve been asked what this means for us and the space by operators, investors, and my own team.
My answer to them was this:
“We operate in a commoditized space. People know how to record gameplay. If you assume your commoditized product is anything but a stepping stone to your actual goal, you will almost certainly fail”
In this post, I’m going to dig deep into why services like Discord and Fortnite succeeded in a heavily commoditized and fragmented space. Here is roughly how the space is distributed, by revenue.
Quick refresher on commoditization in the way I use it:
Commoditization is the process by which goods/services that have value and are distinguishable in terms of attributes end up becoming things people take for granted, often perceive as cheap, free, or easy to come by (a commodity).
1. On commoditization
When you don’t operate in a commoditized space yet, your main goal is to educate users about your service and then have your users educate their friends for you. Over time, most spaces do tend to get increasingly commoditized. Pre-commoditization it is easier for your users to spread the word because it’s a value proposition that is new and interesting, with very little to compare to.
When you operate in a commoditized space, you first have to convince them your service is 10 times better than the 10 other services that exist, and then have them convince their friends of the same thing; each friend with different reasons why they like a certain service, and possibly even being on an entirely different platform.
One thing to consider here is the rate of commoditization, which is directly correlated with the tech-savviness of an audience, and how polished the experience is that they need to solve their problem.
In gaming, generally, users are very tech-savvy. A high-school student can typically build a simple thing that does one thing very well, such as a Discord Bot or Minecraft Server, and get a few hundred, a few thousand, or even a few million people to adopt it, even though the funnel is unoptimized and the barrier to entry is high. It’s important to embrace this — with advanced features, but also be mindful of it. Your audience can likely build scrappy versions of your feature and have their friends use it before you can reach them.
What makes a product stand out is the polish and distribution, not having the feature itself. No single feature will blow up your platform in a sustainable way for very long. Consistent excellence in community, polish and building the right features, might.
This is why it’s so critical to invest in core service constantly — keep a clean codebase, hire great engineers, and value excellency over moving fast on your core components. Your rushed features are worthless. Keep iterating fast over a long period of time with the right communities and your features are invaluable.
Discord is an incredible example of breaking out of a commoditized space — because they built a service that was able to be quickly deployed across platforms (Discord was deployed on Web, Mobile, and Desktop in a very cohesive way, powered by the same backend, react components, and core modules). Discord was incredibly polished when it launched, had a great number of advanced features that lots of people were missing from the services they were already using, and made it easy to onboard your friends with a simple link. Discord also focused heavily on convincing creators, who then convinced their communities that Discord was better than Skype and Teamspeak.
To this day, their website slogan is still “It's time to ditch Skype and TeamSpeak.” — the same it has been for years when they entered the space with a complete package that makes Skype and Teamspeak look weak and incomplete for what gamers need.
Once you break out of a commoditized space with a free product, monetization might still be difficult, because users could still look at your service as a commoditized utility; thus perhaps switching to a cheaper competitor before becoming a paying user.
It’s key here that for users to pay for a product in a commoditized space, especially with subscriptions, the future demand curve on a per-person basis has to be constant. This is where your plethora of well-executed and polished features may help you.
But more importantly, this is why focusing on empowering creators and communities is almost always the right answer for growth and monetization, and also why Mixer paid millions for Ninja and Shroud. There is only 1 of each, and they can’t be commoditized; embrace them, empower them, be successful by making them successful in a way that only you can.
Another great way to move away from being perceived as a commodity is to get friends on the platform. There is only one of each of them, and they are all unique!
Historically, we see heavily commoditized products in tech become features of other platforms. A great example of this is what happened to Google Drive and Dropbox. Most people know you can get storage on Google Drive for free; making Dropbox’s main growth driver of inviting friends for storage useless.
Fast forward to today, we assume storage is part of the platforms we use because it has become such a commodity. The same thing is increasingly happening to streaming, which I wrote about earlier this year.
2. On fragmentation
Gaming is an incredibly fragmented market. The services that fly are the polished un-fragmenters; the products that bring people together regardless of platform, location, or internet speed. The services that don’t, will need to serve a niche audience very well.
Why? Product acquisition loops.
Products grow exponentially when k-factor (the amount of users an average user refers to the service) is larger than 1. If you do not reach a K-factor of 1 or larger, growth needs to be subsidized by paid user acquisition; something you ideally avoid.
Getting this number over 1 is incredibly difficult. When you take into account that the user hearing about an app for the first time can be on a mobile device, a desktop device, a console, and then on either of those devices, in a web browser, or inside an app, you can imagine how many platforms can’t get this number over 1, because they can’t build services that can operate on all those different platforms.
Starting an Instagram for games makes sense, right? Yes — when everyone is on a mobile device, building filters is considered unique for people who take photos, and beautiful image hosting is hard to come by.
When you are building a simple mobile service and integrate with your users’ contact book, you can assume that the person receiving the invite is also on a mobile phone. If you only make your service available in the US, you can also reasonably assume they are going to be on iOS, allowing you to move quickly and introduce features that drive k-factor quickly. Snapchat launched Android more than a year after iOS, for instance.
(Image from https://andrewchen.co/investor-metrics-deck/)
Conclusion
This is why Unreal Engine, Unity, and Discord are so valuable. They are all un-fragmenters. Unreal is the un-fragmenter of high production value experiences across platforms. Unity is the un-fragmenter that lowers the barrier to entry to building 3d experiences across platforms. Fortnite and Roblox are un-fragmenters of playing games with all your friends and family. Twitch is the un-fragmenter of what’s new/happening in the games you care about, and discord un-fragments community on different platforms.
Most of them started as a perceived commodity, innovated their way out of being perceived as a commodity through excellent execution, and ended up hugely successful. Unreal and Unity as Game Engines. Discord as a chat and voice app. Fortnite and Roblox as just another game. Now they’re known for what they empower: community, finding out what’s happening in games, hanging out with friends in-game, and building the coolest games and experiences.
So it’s not a bad thing to start in a commoditized space. But it’s important to realize your commodity is not your end-goal, and leave plenty of space to iterate until your platform identity is tied to how you empower users and not a commodity.