Michael 1's Profile
The frustrations gamers have with day one DLC (downloadable content) and unfinished games are real, and the sense that large game companies are nickel-and-diming us out of value is reaching a head. I completely agree with the sentiment that the Internet-based delivery model may be partly to blame. Consumer backlash has been easy to see, with EA winning “worst company in America” for multiple years (though this is likely more to do with the type of person taking Internet polls than a true representation of reality since there are worse things in this world than overpriced video games…).
Part of this is due to the Internet removing the finality from delivering a game. Back in the cartridge / CD era, a game had to be 100% complete before being shipped. Gamebreaking bugs or severe imbalances would either have to be dealt with or require a massive recall (more expensive back then due to materials, packaging, and distribution). As a result, development teams probably put in significantly more effort into final details. Now that that restriction is lifted, developers can just push a game out and then react to player sentiment. Rebalancing retroactively in is now completely normal, a godsend to competitive gamers who can exploit features and play the game in ways developers could never have achieved.
DLC also allows developers to get better data and spend development time more efficiently. In the old model, teams would have to make two full games knowing one might underperform. In the new model, teams can release unfinished” games, then spend time developing DLC for the more-successful games, thus avoiding unproductive development. This model makes a ton of sense, but the sensitivity around pricing is where it gets hairy. Gamers believe they are paying full price for the “unfinished” game plus more for DLC because there is no true reference point for understanding what a game is worth. One could argue that the new model is exactly what is keeping upfront prices down to where they are, or that video game companies are just extracting the margin from saved development time (with games obviously claiming the latter).
If video game companies were more explicit with this model, we could usher in a new era of video game pricing in which games are essentially free for an hour or so, and players can then buy incremental pieces of the game if they want to continue. The uncertainty would be removed – gamers would only buy games they know they liked for as long as they like it. This could potentially improve volume even if pricing would suffer. Gamers who only like multiplayer would not be forced to purchase single-player campaigns, and vice versa. In this world, debacles like No Man’s Sky would be completely avoided since no player would actually end up spending the money, and therefore no studio would see any value in false advertising.
 “How Electronic Arts Stopped Being the Worst Company in America.” cNet. [https://www.cnet.com/news/how-electronic-arts-stopped-being-the-worst-company-in-america/]
Even as methods like these attempt to solve the adverse selection issues inherent in any insurance scheme, they, too, can fall victim to adverse selection without the right pricing structure changes.
In all insurance, people with higher risk for incident are more likely to take on insurance contracts. Traditional pricing prices that in, and even attempts to allocate some price discrimination into the premiums, but overall, low risk people are subsidizing high risk people to some extent. If a traditional insurance company kept traditional pricing constant and allowed customers to opt into a metrics-based pricing scheme, the already low risk people will be the ones who adopt and end up paying less. Since they are already getting their discount by maintaining their lifestyle, there is little incentive to further improve their behavior, thereby decreasing revenue and maintaining costs. Insurance companies could offset this by instituting faster price increases on traditional contracts than they otherwise would such that, in the long run, they end up in the same place, but that is risky and takes some short term pain. This gets harder to analyze once you look at the pricing actually changing behavior, but there will still be a segment of high risk customers who know they will never reach the threshold and therefore will not opt in.
However, if the entire company’s business model involves this granular risk-based pricing, the adverse selection issue can go away. If everyone who signs up for the insurance is required (through choice of insurer) to do this type of pricing, the company can start with an appropriate price and work from there. The adverse selection just becomes selection, such that while the company may be charging lower prices overall, they will have a lower-risk clientele and can therefore maintain their margins.
Whereas many car companies are facing these existential issues with respect to the future of car ownership and autonomous technology, it seems BMW may be hit harder. Their entire “Ultimate Driving Machine” brand image implies that the majority of the value is in how great it is to drive the car – the “luxury” of the car is more heavily weighted toward the driving experience itself than other luxury car companies.
If customers aren’t the ones driving the car, then much of the BMW differentiation is lost vs. brands like Mercedes that focus more on comfort and quality materials. Therefore, it is interesting to see BMW choose a type of ride sharing that involves the customer actually driving the car (as opposed to General Motors investing $500mm into Lyft). In an Uber-style ride share, in which the customer is attempting to maximize value for the end consumer (who is being driven), a BMW would lose many of its advantages. It would therefore be in a worse position from a value perspective since the driver would not be able to pass through as much of the purchase cost.
This same effect will have an even bigger impact on the value of their brand in the impending self driving car revolution. Customers are not buying a car for the driving experience anymore, so comfort and utility become more important factors. In the short term, this should help them outperform other non-autonomous cars as the market loses share to autonomous. Customers will cling to BMWs longer than they will brands that do not focus on the driving experience because those customers clearly see value in driving. While this can only last so long, it does give BMW a nice cash flow cushion to help them make the transition. Long term, they may have to start thinking about a shift in their brand positioning.
 “General Motors, Gazing at Future, Invests $500 Million in Lyft.” New York Times [http://www.nytimes.com/2016/01/05/technology/gm-invests-in-lyft.html]
It is extremely interesting to see how Magic has survived in an era increasingly defined by e-sports, but it hasn’t been without bumps. More and more, a game’s success is tied to how “watchable” it is given the free marketing it receives on streaming sites like Twitch and YouTube.
Magic is performing quite well. In 2015, player count grew 10.5% and player spend grew 16.7%. However, as I write this, Hearthstone has 95k viewers on Twitch, while Magic has 10k, despite Hearthstone being an objectively less complex and more chance-based game. In 2 years, Hearthstone has achieved the same revenue that it took Magic 20 years to generate. MTGO is regularly panned by users and physical Magic players and it sometimes seems like Wizards is trying to kill it. While Magic’s business model (giving players a rich card game experience) is superior, Hearthstone’s on trend fully digitized operating model has allowed it to excel.
In Magic’s case, it may even be falling behind precisely because of its superior operating model. The higher complexity and technical skill of the game may make it more rewarding to play, but it also makes it much harder to follow on a streaming site. Hearthstone’s far simpler gameplay was designed with spectators in mind, and even features witty audio and visual cues to help guide the spectator through the match.
I agree with your conclusion that they should focus on the online experience, and I would go as far as to say they should completely overhaul it. Wizards is currently treating MTGO as a cash cow – all of the content and game design is able to be leveraged in both the physical and online games, so the only costs to digitizing the game right now are slight software integration time for newly released cards. On the plus side, cards cost a similar amount online without any of the costs of physical production (cardboard, ink, packaging, distribution). If they were to improve the online experience by making it easier to follow for spectators by improving animations and UI, it would definitely add more design costs to the releases of new sets. However, I would argue that the topline improvement resulting from the increased exposure would far outweigh the higher costs.
Your point about fake trees brings up (in my opinion) one of the most important fallacies in the whole climate change discussion — impact of usage vs. impact of manufacturing. As end users, we often only use impact of usage in our mental calculations of how much a given product impacts the environment, whereas there is plenty going on in the manufacturing process that could change the equation. For example, the dirty business of mining heavy metals for electric car batteries causes plenty of environmental harm, or the fact that a more “efficient” Japanese car must be shipped over the ocean while an American-made car might save on those environmental costs. Is recycling valuable once you net out the cost of the effort? The answer is not necessarily a resounding yes . It can be argued that reducing paper use will lower the market price of paper, causing land-owners to shift production on that land to something else that might not act as carbon sequestration in the mean time.
Without good data or disclosure on the true environmental costs and elasticity of various products and services, the end user has no hope of making informed decisions. Imposing this product-level disclosure on the manufacturers themselves seems unnecessarily burdensome, but as corporate disclosure around environmental impact starts becoming the norm, it will be easier to begin making that data accessible to consumers on a unit basis. this will better allow consumers to be better stewards of our environment.
For now, turning off our lights and trying our best with everything else has to be good enough.
While reporting these metrics will be valuable to understanding company performance, another benefit here is to start building the reporting structures that will become relevant if any market-based carbon abatement strategies get implemented. In a world with a cap-and-trade style policy, corporate sustainability practices will much more directly impact shareholder value. Understanding environmental impact will therefore be necessary for making investment decisions.
This is also a perfect example of where past performance is not an indication of future performance, a classic financial dilemma. Accounting standards have been created in order to give investors the best picture of a company’s financial health and performance. These standards therefore have a fundamental backward-looking bias, since they likely look at companies that performed well or poorly and try to best fit various methodologies given the underlying numbers. In the past, there have not been many large scale financial impacts resulting from environmental damage, so these factors have not been taken into account in existing financial reporting standards. Given we will likely continue the trend towards stricter regulation and resource scarcity, emissions, power usage, and water usage will start to have a greater impact on performance, so we need to establish standards that will take these into account on a forward-looking basis. The SASB has its work cut out for it.
Sharif, your reply is a great framework for thinking about climate change’s impact. Many of these endowments already do have certain ethical boundaries set into their investment strategies. For example, Yale’s Advisory Committee on Investor Responsibility (http://acir.yale.edu/) established guidelines that still drive Yale’s investment strategy today. Yale’s proxy voting is expected to support companies’ initiatives to reduce social injury (as long as they do not cause material competitive disadvantages), which in many cases could go against the best return on investment that company could achieve. Once we accept that there are attractive, legal, unethical investments in which Yale already chooses not to invest, we are really just deciding where to draw the line. Framing climate change as a social issue on a scale we have likely never seen in history could lead us to think about it more on the bad side of that line.
Pointing to a mission statement as a way to absolve institutions of ethical improprieties is not the best standard to set. Mission statements can’t be myopic goals. It is a great point that the large friction costs related to divestment could actually impair Harvard’s mission statement, but there are also plenty of unethical and legal learning opportunities the university actively shies away from. Stanford’s infamous Zimbardo prison experiment, or Yale’s infamous Milgram experiment, were tremendous learning opportunities, so why shouldn’t Harvard continue that work? Framing climate change as a more serious social issue could mean the incremental value generated may not be worth furthering the mission statement.
However, I ultimately believe that a well-established company (such as major oil and coal companies) will generate similar cash flows regardless of its investors, implying that its value is unchanged if Harvard invests or not. The end result of Harvard giving up these opportunities is not just that it will lose out on the incremental returns, but that an individual or institution with lower ethical standards will get those returns instead, shifting economic resources toward the exact type of people who will be more likely to use that extra money for less-ethical purposes. As a result, I somewhat agree that divestment has the potential to do more harm than good.
I love the use of insurance companies as a proof point for climate change. Unlike politics and everyday life in which people never have to put their money where their mouth is, insurance is literally the business of doing just that.
However, there is a misalignment of incentives here. Like all problems with long-term consequences, corporations’ short-term focus could cause these insurers to fundamentally misprice climate change risk. By understating the risk of climate change, insurers can offer lower prices in the short term and gain market share vs. those that are adequately or overestimating the risk. Over the tenure of the current CEO, this could look great for the bottom line while continuing to kick the risk can down the road. Of course, this sets the company up for some difficult times once the effects of climate change start to worsen and the mispriced policies start having to pay out.
Given the actions you have stated above, it would seem that Allstate may believe they are correctly pricing the risk, but that a significant portion of the rest of the value chain (potential customers and reinsurers) does not, making their policies look too expensive. The alternatives are avoiding writing the insurance, as you stated above, and ceding market share to insurers who do undervalue the risk, or biting the bullet and taking a lower margin. If a reinsurer believes the risk is lower, then Allstate can make up some of that perceived margin loss by arbitraging the risk with that party, leading again to a behavior you state above. Higher deductibles, too, can limit the impact of writing less-profitable insurance.
Thank you for this post. I had never appreciated the second order effect of receding and thinning ice layers opening up new pathways. I would be interested in better understanding the laws regarding access to any untapped oil reserves that open up as a result. Given Russia’s advantage in ice breakers resulting in their ability to win a race to such reserves, it makes sense that proactively ratifying an existing treaty that delineates sovereignty would be in the United States’ best interest if the alternative is attempting to remove an entrenched Russian drilling operation from waters we claim to be ours.
The discussion seems like an important precursor to the world’s future discussion around gas hydrates/clathrates. Much of the world’s hydrates reserves lie on the ocean floor outside of maritime boundaries, formally “the common heritage of mankind.” The vast majority, if not all hydrates are currently inaccessible with today’s technology, so the precedent set by Arctic oil reserves could have implications on the speed with which the United States must build hydrate farming capabilities. It is unclear how big the potential recoverable reserve of methane clathrates is, but some reports claim it could be an economically viable source of carbon-based fuel in the future. If Russia is able to claim Arctic oil deposits simply due to their “first to market” ability given their technological advantage, it could pull the trigger of the starting gun of a global race to build methane clathrate recovery capabilities.