Open innovation and agile project management in video game industry

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1 Open innovation and agile project management in video game industry RADIM ŠPICAR Department of Business Administration and Management University of West Bohemia Husova 11, Plzeň CZECH REPUBLIC Abstract: Global market for video games is poised to surpass $80 billion in 2016 with more platforms coming to facilitate further growth. Video game players are often very vocal about changes they wish to see and ideas they want implemented and yet major developers and publishers only rarely take these into account. This paper aims to show the value of this enormous pool of ideas and customer base looking to actively participate in shaping the final product beyond its initial release by analyzing the development process behind the free-toplay Path of Exile video game by developer Grinding Gear Games. The main focus lies in describing how using open innovation and agile project management principles helps Path of Exile to grow as a product and retain its player base, which is especially important considering the chosen business model of being free-to-play, thus relying on players spending money on features not necessarily needed for their gaming experience. Agile project management manifests itself in weekly patch schedule, where content is added incrementally in small but frequent doses. Giving players an option to design their own in-game item for a large fee represents some of open innovation concepts that Grinding Gear Games utilizes. This particular option also results in a non-marginal revenue stream. This paper also contains a preliminary survey of video game players aimed at finding out exactly what makes them support a developer financially and whether open innovation and agile project management principles can be used to enhance this revenue stream. Taking results of this preliminary survey into account, related hypotheses for further testing are suggested. Key-Words: agile project management, knowledge management, open innovation, software, video games 1 Introduction What was once viewed as a passing fancy is now a multi-billion dollar industry. [1] predicts the global market for video games to reach $81 billion in 2016 from $66 billion in With new video game consoles announced or released by all of the industry s main players (PlayStation 4 by Sony, Xbox One by Microsoft and Wii U by Nintendo) and new platforms such as increasingly powerful smartphones and tablets, there is little reason to doubt that the industry will continue to grow. This paper aims to show how modern management philosophies, such as open innovation and agile project management, can be applied during development of a video game. It also aims to provide related hypotheses for further testing. To do this, the development of Path of Exile video game by a New Zealand developer Grinding Gear Games was studied from the moment it had entered a Closed Beta stage in June 2011 until March According to [2], open innovation can be understood as the antithesis of the traditional vertical integration model where internal R&D activities lead to internally developed products that are then distributed by the firm.... open innovation is the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively. Open Innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as they look to advance their technology. Agile project management methodology can be understood as an alternative to traditional project management, typically used in software development. It helps teams respond to unpredictability through incremental, iterative work cadences, knows as sprints.... Agile development methodology provides opportunities to assess the direction of a project throughout the development lifecycle. This is achieved through regular work cadences... at the end of which teams must present a potentially shippable product increment.... The results of this inspect-and-adapt approach to development greatly reduce both development costs and time to market. [3] ISBN:

2 2 Problem Formulation Both open innovation and agile project management are principles widely used across various industries. However, their use in the video game industry has so far been largely limited. While agile project management is usually connected to software development, video games are a very specific category of software, where there are many vastly different customers for the same product, making the agile project management principles hard to apply. The question then is: Can open innovation and agile project management be used in game development and if so, to what effect? The following text tries to answer this question by observing the practice of Grinding Gear Games during their development of the Path of Exile role playing video game. First, a proper background needs to be established. Path of Exile is an action role-playing game (or ARPG) developed by Grinding Gear Games. As of March 2013 it is in a public Open Beta stage with no official release date announced. It has entered Open Beta on January 23, 2013 after being in a Closed Beta stage since June It is important to note, that since it is free to play and now open to the general public, the eventual move from the Open Beta stage to a release stage will be largely symbolical. As of March 2013, tens of thousands of players are playing concurrently at any given time with the total player base numbering in the hundreds of thousands. Similarly to the most played video game in the world during a 12 months period in 2011 and 2012, League of Legends, and the fourth most played video game during the same period, Heroes of Newerth [4], Path of Exile is free to play (or F2P). This means that players are not forced to pay for (most of the) content and developers have to rely on players actually choosing to support them by purchasing various features with real money. Some developers choose to provide distinct advantage to paying customers (for example by allowing them to purchase functionally different equipment only for real money), or allow them to skip certain repetitive aspects of the game (or grinding) in exchange for real money. This model stands on the assumption, that players will pay to get ahead or to skip parts they find boring. Such games are sometimes characterized as pay-to-win (or P2W), because they allow paying customers to obtain advantage over nonpaying customers. Grinding Gear Games has chosen a different F2P model, where it only offers cosmetic upgrades for various features of the game. Thus the only difference between a paying and a nonpaying customer are in graphical effects, while gameplay stays equal. While somewhat ethical in the sense, that money cannot buy advancement, thus making all players equal regardless of their financial situation, this model essentially eliminates a big reason for players to spend money. Instead of choosing a P2W model, Grinding Gear Games decided to use communication, agile project management and open innovation concepts to build lasting relationships with its customers. The emphasis is on the future. Since Path of Exile is an online game, failure to generate enough revenue to cover costs would eventually lead to the shutdown of the servers and inability of people to continue to play. Thus players know, that by purchasing cosmetic features they not only gain additional graphical effects but they also help to assure they will be able to play in the future. This is further accented by the patch deployment system used by Grinding Gear Games, which will be discussed in the next chapter. 3 Problem Solution The following observations have been made during the period between June 2011 and March 2013 and are still relevant as of June Agile methods in Path of Exile Before the widespread use of internet among general population, developers had limited options as to how to change their product (through patches ) after it had been released. With no easy way to distribute such patches, most people had to rely on game magazines that came with CDs. At that time, a shipped product was essentially final. Agile development could hardly have been implemented since it requires regular communication with the customer. Shipping out new physical products to hundreds of thousands of customers around the world every few weeks was simply not feasible. However, with video games today moving away from physical distribution and towards digital distribution, changing the product can be done quickly, easily and with low costs for both the developer and the customer. Today, video games will notify their players via the internet when an update or a patch is available and further ease the process of installation. This allows developers to make and distribute changes to their products with ease. ISBN:

3 Most developers have adopted this system of online digital distribution of patches so they can essentially repair their product after it had been released. However, only a few of them (e.g. Arcen Games) realized that such a system enabled agile project management to be used in video game development. With high speed internet connections becoming more and more common, especially among gamers, downloading new versions of a product every week is hardly a problem. Grinding Gear Games decided to take advantage of this distribution channel by developing and releasing content in phases. Closed Beta started with only the first act of the game and little in terms of features. As of March 2013, Path of Exile has three acts and several times as much content as it had when it had entered Closed Beta. Moreover, there are plans for at least one more act and other features. As long as it remains commercially viable, there is no reason to think more content will not be developed. The move from only a handful of features to a large slew of them happened slowly over time. This can be best contrasted against expansions for regular, non-f2p games. Those are released at least several months (but sometimes even years) after the main game and contain a large number of features. Instead of that approach, Grinding Gear Games chose to deploy a large number of small patches containing both bug fixes and additional content. These patches usually come at a pace of at least one per week, though sometimes this may rise to 4 or 5 per week, coming close to one patch per day. The end result for both approaches may be largely the same large amount of content after several months. The main difference is in how the end result is achieved. There are two main advantages to a fast patch deployment philosophy considering the chosen business model. When a patch is deployed, all players can immediately test it and experience the changes. Thanks to feedback provided via the game forums, the developer can quickly gauge the reaction to isolated changes and decide whether or not to keep them. This allows the developer to test out concepts before fully committing the resources. If players react negatively to the logic behind certain features, there is no need to upgrade and polish such features. More importantly, a fast patch schedule allows the developer to react quickly and visibly to customers. When a certain newly introduced aspect is ill-received, the developer can remove it in a matter of days, which shows the customers that they are being listened to. On the other hand, slower patch schedule (especially when coupled with bad communication) creates tension and frustration for customers, which may lead many to leave, believing the developer does not care about their problems and opinions. Both of these points strengthen the relationship between the developer and the consumer, which is extremely important for F2P games, since they rely on continuous support rather than one-time investment. 3.2 Open innovation in Path of Exile When Path of Exile was still in Closed Beta stage, Grinding Gear Games tried to raise funds through several promotions ranging from getting access to the Closed Beta for $10 to a Diamond Supporter package for $1000. This most expensive option (which is still present in the Open Beta stage, although without other benefits) allowed the buyer to work with the developer to design a custom unique item that would appear in the game. As of March 2013, more than 100 such unique items were added to the game with more than 250 people purchasing the associated option. There are also plans to offer packages that would allow players to design their own monsters, skills or other features of the game. In this way, not only does Grinding Gear Games get new ideas for items to implement, it also creates a substantial new revenue stream. During the Closed Beta phase, supporter packages managed to raise more than $2.2 million, with more than $0.25 million from Diamond Supporter packages. People are clearly willing to pay large sums of money to have their ideas implemented. There is also a thread on the game forums that serves as a place for all the people who do not want to (or cannot) purchase the package to post their ideas for unique items. This shows only one of the ways that open innovation is present in the development process. Ideas for new skills, new quests, other new features and even completely new mechanics are posted every day on the game forums. This creates an almost endless stream of innovation ideas for the developer without any costs or time investments. Both agile project management and open innovation can help to strengthen the relations between the customer and the developer. Their true power, however, can only be seen when implemented together. While open innovation brings a constant stream of new ideas, agile development allows them to be tested, all with ISBN:

4 minimal costs. It is incredibly simple to take an idea for a new skill from the forums, reuse a few effects and animations and release it in the next incremental content patch. If the feedback is generally positive, work can begin on designing new effects and animations and on general polishing of the new feature. If the feedback is generally negative, development can be stopped and rolled back to a previous patch with only a few hours of manpower wasted. While new items, monsters and skills are relatively isolated features, people are eager to suggest whole new quests, themes and mechanics for the game. Many of the customers are also customers of other games in the genre and thus can suggest things they liked in other games. This saves the developer huge amounts of time spent on doing research of the present competition and, maybe more importantly, past products. 3.3 Hypotheses for further research Since Path of Exile depends on purchases of graphical effects as its main revenue stream, it is clear that customer retention is a key concept. While non-f2p games do not need to retain the customer beyond the initial purchase (unless they also run some form of additional content offers), a customer of a F2P game has to stick around long enough to actually spend some real money on the offered content. A big question that every F2P developer must solve is how to get players to do just that to spend their real money on additional content that is not crucial for their game experience. As previously mentioned, many developers solve this problem by utilizing a P2W system, through which they offer players functional advantages in exchange for a small fee. Since Grinding Gear Games decided not to follow that road, they can only offer graphical effects, thus rejecting a part of the customers that would be willing to pay for in-game advantage. If not an actual advantage over others or saving time, what else could make customers more likely to spend their real money? In a preliminary survey, 50 Path of Exile customers chosen at random from the game forum s population were asked to answer the following questions: 1) How long have you been playing Path of Exile? 2) Do you prefer a few big patches with large variety of content or a lot of small patches that add content incrementally? 3) Do you feel more inclined to spend real money after a patch with desirable features comes out? 4) Do you have ideas that would, in your opinion, benefit Path of Exile? 5) If so, have you suggested them to the developer? 6) If so, have any of your suggestions been adopted? 7) If so, do you feel more inclined to spend real money afterwards? 8) Do you feel that communication between the developer and the community is important? 9) Does adequate communication between the developer and the community make you feel more inclined to spend real money? The first question was answered with a wide array of responses ranging from the beginning of Closed Beta to only a few weeks. This suggests that the preliminary survey captured both long-time and new players. The purpose of the second question was to gauge the attractiveness of agile development to customers 38 out of 50 respondents answered positively, which suggests with a confidence level of 95% that customers prefer a lot of small patches. The third question is directly related to the second one. Here 32 out of 50 people answered positively, which again suggests with a confidence level of 95% that patches with desirable features make people more inclined to spend real money. This suggests that developers should try to deploy several smaller patches instead of one big patch. Not only do people prefer it as a deployment system, every patch may also potentially bring customers to spend more money, thus generating more revenue for the developer. The fourth and fifth questions aim to gauge to what extent customers come up with new ideas for innovations and their willingness to share them. Unsurprisingly, the vast majority (44 out of 50 people) of players has ideas on how to (in their opinion) improve the game, while 38 out of those 44 have already suggested at least some of their ideas. At a 95% confidence level, it can be said that the majority of Path of Exile customers have and suggest ideas for improvement. Thus there is no shortage of outside ideas. The sixth question measures the extent to which Grinding Gear Games listen to suggestions from their customers. Out of 32 people who voiced their suggestions, 15 have had their suggestion implemented and 12 out of these 15 have felt more likely to spend real money afterwards. While the sample size is too small for any definite conclusions, these results point to another possible revenue stream. The last two questions gauge customer attitude towards communication between them and the ISBN:

5 developer and it is here, where the results are the most one-sided. 49 out of 50 respondents value communication as important and 42 out of 50 feel more likely to spend real money on a product developed by a developer that communicates adequately with the community. This suggests with a confidence level of 95% that customers are more likely to support a developer with good communication. 4 Conclusion Since F2P games are among the most played video games in the world, their numbers can be expected to steadily grow in the future. This growth is bound to bring more developers that shy away from a simple P2W model that bases revenue streams on providing functional in-game advantages. Such developers will need to solve the problem of generating revenue based only on cosmetic features and other features not necessarily related to in-game content. Agile project management helps in deploying frequent patches, while open innovation serves as a stream of new innovation ideas and a revenue stream. Both philosophies also help in letting people know their ideas and concerns are being heard, thus improving the communication between the developer and the community. Based on a small sample preliminary survey, there are at least three revenue streams worth exploring. It would appear that people are willing to spend more money when desirable features come out in a patch, when their suggestions get implemented and when the developer exhibits adequate communication with the community. All these points suggest, that people are more likely to spend money when they feel that their voice is being heard, they see the game moving in the direction they want or they at least have some idea as to what is going on thanks to communication between the community and the developer. Based on observations during the Closed Beta stage, it would also seem that since the purchasable effects are largely cosmetic, people spend money more as a sign to the developer that they are doing things right than for the graphical effect themselves. In conclusion, 4 hypotheses have been formulated that appear promising but require further research with a much larger and more distributed sample size, ideally including a comparison of comparable developers who differ mainly in the suggested aspect: 1) Deploying a large number of smaller patches attracts more revenue than deploying a small number of larger patches in the same timeframe and including the same amount of content total. 2) Implementing suggestions from customers attracts more revenue than implementing ideas that are developed internally. 3) Frequent and regular communication between the developer and the community attracts more revenue than sporadic communication. 4) Players of non-p2w F2P video games spend money more to support the developer than because they want whatever they are buying. While all hypotheses have been formulated based on observing a developer of a F2P game, many other developers use a business model of providing additional paid content after the initial release of the game. The first three hypotheses may be relevant for such developers as well, since they are closely related to customer loyalty and retention. This paper was created as part of the SGS project. References: [1] DFC Intelligence forecasts worldwide video game market to reach $81 billion by DFC Intelligence [online] [cit ]. Available from WWW: [2] CHESBROUGH, H., VANHAVERBEKE, W., WEST, J. Open Innovation: Researching a New Paradigm. New York, NY, USA: Oxford University Press, ISBN [3] Agile Methodology, Development Methodologies What is Agile Methodology [online] [cit ]. Available from WWW: [4] League of Legends most played PC game. DFC Intelligence [online] [cit ]. Available from WWW: [5] Path of Exile - A Free Online Action RPG [online] [cit ]. Available from WWW: ISBN: