The dominance of the major tech firms is very much in the news these days. Yet even mighty organizations sometimes make mistakes that we all can learn from. One such mistake may be the Google launch of Stadia, an online platform for streaming interactive games. Instead of buying games and special gaming hardware, Stadia users can simply pay a fee (reportedly $130 per year) and play with their internet connection and their computer. Yet take-up of Stadia to date has been quite meager, and very few third party game developers currently have games available on the platform. Is Stadia a mistake?
Entering the online gaming industry is no mistake. Video games are big business these days, with 2.5 billion gamers creating revenues of $152 billion worldwide in 2019, according to one estimate.[1] That’s a lot of revenue, even for a company the size of Google! To be sure, it is still early days for Stadia, which only got launched in March of 2019. And platform businesses are all the rage these days, with books like The Business of Platforms [2]
But the comments of third party game developers towards Stadia are revealing, and show that Google appears to be in the process of making a big mistake by underinvesting in Stadia. Developers charge that Google is offering little or no incentive for them to invest in developing games for the Stadia platform.[3] Since Stadia is brand new, and hasn’t yet been widely adopted, there isn’t much market pull for the platform. And Google has withdrawn from other initiatives in the past when the market for these offerings turned out to be disappointing (e.g., Google Hangouts, Google Health, Google Glass). So gaming companies don’t want to be investing, just when Google decides to head for the door.
Google and other platform builders can learn an important lesson from the construction of one of the biggest platforms that has emerged in the past 15 years, the AppStore platform that Apple launched for its iPhone back in 2007. Prior to the iPhone launch, Steve Jobs invited a number of CEOs of leading software and gaming companies to a meeting where he previewed the upcoming iPhone and the AppStore platform offering.
According to John Riccitello (then the CEO of Electronic Arts, who was sharing this story 5 years later during a Berkeley-Haas Advisory Board meeting), Jobs offered the assembled CEOs 30% of the revenue to be raised through the AppStore. Anticipating their disappointed reaction, Jobs opined as to how Apple was the one creating the demand, attracting the customers, assisting them in downloading and installing the apps, and handling all the payment processing. Riccitello allegedly told Jobs, “that may be enough for us to port our existing games to your platform, but it isn’t nearly enough to get us to develop new gaming experiences for your platform.”
Jobs knew that, for all of his bluster, consumers were only going to access the AppStore if there were compelling applications available for them there. So, in that very meeting, he reversed his position, and flipped the offering, so that the developers would get 70% of the revenue and Apple would keep 30%.
This proved to be a much more attractive offering, and more than 100,000 apps were submitted to the AppStore platform within its first 12 months in the market (Stadia has 28 games after one year, by comparison). The abundance of apps, combined with Apple’s smooth integration of a smartphone with iPod music functionality and a camera, came together to create an epochal product and service blockbuster that has catapulted Apple’s market value to one trillion dollars.
The point for Google is, platforms require substantial investment in order to get going, and on top of that, the complementors who contribute greatly to the platform also need incentive in the beginning to get on board. With Stadia, Google appears to be forgetting this lesson, providing little support to its developers, and doing only a little to promote the platform itself to gamers. They seem to be following a “pay as you go” model for launching Stadia. This is in keeping with the Lean Startup concept of holding back from major investments until one is sure of “product-market” fit.
While this Lean Startup logic works well for many kinds of ventures, it is the wrong logic for launching a platform business. In a platform business, there is a “chicken and egg” problem, where gamers go where there are lots of games, and game developers focus on platforms that already have attracted lots of gamers. The platform owner must make a sizeable upfront investment to overcome this inertia. By contrast, a Pay As You Go approach by Google for Stadia will simply send gamers elsewhere.
This has been the pattern for most of the major platforms we have today. Google itself did not generate all that much revenue until it discovered the value of auctioning keywords to advertisers for its search process. Facebook didn’t have any revenue for years. Amazon barely earned any money for years, as it built its customer base and its website and Amazon Prime and AWS offerings. Apple wouldn’t have had nearly as many apps on its AppStore if it had stuck with its initial offer. When you face the inertia of launching a platform, don’t play games.
[1] Source:
[2] The Business of Platforms, by Michael Cusumano, Annabelle Gawer, and David Yoffie, 2019, Harper-Collins, NY, NY
[3] Source:
