Russ Pearlman's Blog

Nice article from Dean Takahashi from GamesBeat following a speech from Rich Hilleman, Chief Creative Officer for Electronic Arts. One part to really focus on: “… Hilleman talked about the changes he has seen in more than 25 years at EA, which he joined as employee No. 39 in 1983. The audience is moving beyond males. The platforms are becoming mobile, social and online-connected. And the play style is moving from hardcore to casual. The business models are in flux as well.” (Emphasis is mine.)

It’s no surprise to anyone who has been engaged in the video game business that change is afoot, but I think the difference between “change” and “flux” is that change is directed, flux isn’t.

Interactive entertainment is quite different than non-interactive – watching a movie on a small screen, on a large screen, etc. is still fundamentally the same experience – it’s just different levels of quality. Not to belittle that, but playing a video game on a small device vs. a large device is fundamentally different. I think the same thing holds true for the connected entertainment device – playing a game against the computer vs. others is a very different experience. Additionally, the opportunity to dynamically add in more content is different – while you can download additional episodes of a TV show, it’s still a serial experience. Interactive is user driven – so adding in new content is more fundamental to enhancing the experience (or completely changing it).

So, while I see “change” in the industry related to video, music and books, I see “flux” in the video gaming space. I see a dramatic opportunity over the next few years to totally transform the experience from the 1983 video game idea (albeit higher quality graphics, physics and audio) of today towards a more immerse, connected, dynamic and growing experience for tomorrow. Just like the Internet opening opportunities for emergent companies to take hold (think Amazon, EBay and others) it also opens up a lot of competition and ways to expand revenue.

I can’t wait…

• First In First Out (FIFO) – the idea here is that items get processed in order – the first request is the first to get processed; this is exactly like the line at McDonald’s or just about anywhere else you go. The problem with this approach is that it doesn’t take priority into account.
• Round Robin – this approach works when there are multiple queues, you pull one item from one queue, one from the next queue, etc. For priority, you can use this approach by having a ‘high priority’ queue and a ‘low priority’ queue; this way, both will get serviced over time. Since I travel a lot, I know of a good example of this one: the ‘first class’ line at the airport. Agents typically service someone from the regular line then someone from the first class line then regular then first class and on and on. This approach works fairly well in helping to assign priority, but it’s still doesn’t discriminate between levels of priority, and it can cause a backlog of priority jobs that don’t get serviced in time.
• Priority based – this is an ‘enhanced’ round robin approach. In this case, you assign a priority amount to each work item. Each item in the queue is then sorted based on priority so that the ‘most’ urgent requests get serviced first. Again, using the airport example, this is how airline employees are treated – they get to move to the front of the ‘first class’ line when going through security – ahead of the elite travelers.
• Shorted Job First – this approach sorts jobs based on what can be completed the quickest. It ignores priority, but it does tend to optimize the system so that you can get the most jobs completed over a period of time. By way of analogy, think about standing in line for a copy machine. If 10 people have 1 page to copy and 1 person has 100 pages to copy, it’s most efficient to let the 10 people go first. The problem with this approach, though, is that as more work items come onto the queue, it’s possible that long running processes get pushed back so far that they never get done – essentially aging out.
• Multi-Level Feedback Queues – this approach uses a number of queues which take into account both processing time as well as priority. It can also take aging into account to make sure that a low priority, large job eventually does get completed as its age eventually makes it high enough priority.

As I’ve continued to approach various digital supply chain problems, I’ve been continuously reminded that most of these problems have been seen before in various other contexts. It’s a good idea to make sure that you don’t re-invent the wheel – if there is a good algorithm or approach already being used, leverage it…

In a discussion yesterday with a client, we discussed some bleeding edge concepts around the Internet – they insisted on calling this Web 3.0.

Tim O’Reilly, innovator of the term Web 2.0, has already staked some ground on that term, however. Web 1.0, according to O’Reilly, was the first generation of the web for Internet sites, basic e-commerce, B2C, B2B, etc. It gave rise to several giants including Amazon, EBay, Google and others. Then – the bust… Following that time, O’Reilly sponsored a conference entitled “Web 2.0″ – it was more about the resurgence of Web 1.0,  but it quickly took on a whole new term as C2C, social networking and a new slew of technologies (e.g., AJAX) hit the scenes.

So, then, what is Web 3.0? Canonically, Web 3.0 can be thought of as the ‘semantic web.’ In Web 1.0 and Web 2.0, there is data, there are transactions and there are SILOS. Does Facebook know what’s happening on other sites? Does Amazon.com integrate with your iTunes account to provide recommendations? In a Web 3.0 world, that can all be broken down.

I think some of the first foundational pieces of Web 3.0 are showing. Microsoft announced that Facebook and Twitter will be available from within the XBox 360 console. Not integrated, mind you, but a step. And, Facebook’s recent announcement of  buying FriendFeed is another good example. On the technology front, things like RDF and cloud computing will become common.

I know I’m excited… But, as the client and a collegue pointed out – what about privacy issues? Oops. The human factor may get in the way.

I’ve been reading Brain Rules by John Medina, and I can’t recommend it enough. It covers John’s 12 brain rules (from exercise, to sleep to stress, etc.) that you should really consider as part of your daily life.

By way of background, I originally wanted to become a neurologist when I went to college. My undergraduate degree was in Neuroethology mixed with a minor in Psychology. Go ahead, look up neuroethology, I’ll wait   Actually, don’t look it up – I can sum it up as basically understanding behavior based on the way you are wired. So, John’s book smacks right into the type of stuff I really was interested in.

When I learned that biology wasn’t really my cup of tea, I then went into computer science and got my master’s degree in neural networking / artificial intelligence. It turns out, you can mimic a lot of what I learned in neuroethology for patterns of intelligent computer processing (see my blog post below about the use of genetic algorithms in supply chain planning as an example).

It turns out, that you can apply a lot of this same learning to people. And that’s exactly what brain rules set out to do. I hope you enjoy it…

Back when I was running the development studio for Koios Works, I was in charge of building out the AI for our games. At first, we built some fairly straight forward approaches to planning, but the AI ended up being so scripted that replay of game levels just wasn’t fun. (Sound familiar?) For our second title, we did a major upgrade of our graphics engine, and in parallel, we decided to do a major upgrade of our AI.

We ended up selecting a genetic algorithm that essentially understands ‘good behavior’ vs. ‘bad behavior’ in selecting a ‘good’ solution to the problem being presented. For games, this is a fairly straight-forward problem – decide on the best move against the human adversary following the rules of the game. It did this based on an ‘evaluation function’ that is able to numerically rate a proposed solution.

The algorithm itself then simulates a genetic evolution to match up the very best solutions found to, hopefully, generate the next generation of even better solutions. (The details are somewhat too complex to describe here, but generally, you just need to focus on creating an evaluation that is able to rate options – all the hard work and intelligence is already coded into the algorithm itself.) In the end, our AI was considered among the very best developed for war-games (at least based on feedback from players in that fairly niche area).

To help bring in additional revenues during that time, I was also doing some outside consulting work. And, we were able to apply the same AI approach to a ship scheduling (i.e., supply chain) problem for the petroleum industry. The reason why you use this type of algorithm is that it is able to develop approximations of a great solution in a short amount of time while still being flexible to appreciate new variations to the problem (for example, the customer is this case was able to add in new ships or new pickup opportunities to perform what-if analysis – as well as insert new rules about profitability vs. customer satisfaction, etc.)

What got me thinking about this recently was some work we are doing for a client in the areas of digital supply chain. Just like the real world, when you are doing content processing from step-to-step, there are some real resource constraints that you should be aware of. From a human perspective, you have to balance the use of QC resources, touch-points for approvals, manual tasks (such as encoding a video or other master material into digital form), financial approvals, etc. On the computing side, you are potentially talking about huge amounts of disk and CPU resource utilization that can quickly translate into expensive infrastructure. To help optimize these resources, the application of AI is a great solution; and, a genetic algorithm specifically, is a nice fit to the problem since it can so easily be expanded with new influencers as well as adopt to variations in the type of content being processed (i.e., music vs. video vs. gaming, etc.)

So, while the emerging area of digital supply chains has different issues than traditional supply chain problems, let’s not forget to incorporate the lessons learned and optimization approaches that we’ve relied on for years.

So, I had lunch with friends today. And, among other topics, came up the fact that I hadn’t put anyone on my blog site for a few weeks because I just didn’t have time to come up with something to write about. At that point, my friend suggested that I think too much and try to make my blog posts full of too much materials.

I guess he’s right. A personal blog site is just a place to put down your thoughts and reactions to things you encounter through your day. According to a study I read, there are over 500,000 blogs out there. Clearly, not all of them are full of insight, education or whatever.

So, with this post, I’m officially joining the ranks of folks that just put ‘stuff’ on their blog hoping that it insights some type of reaction from anyone that may be reading it. I guess that’s the point…

I’ve recently been working with a client who is a major textbook publisher for schools in the K-12 domain. A number of the major publishers provide technology (for free!) that schools can use to augment their textbooks. These online tools can be used by both teachers and students. In today’s world, much of this content is simply an electronic conversion of the text books. But, the ultimate goal is to provide materials that are much richer and experience and leverage multiple ways to teach our children concepts.

As part of the work that I’m doing, we are looking to build out the next generation of these tools, and, as a parent myself, I’m excited by the possibilities. In education, there is something known as exception based teaching which is the idea that teachers focus on the exceptions – students that are demonstrating capabilities well beyond average and students who require some remediation to be able to catch up. In a typical classroom with about 20 students to each teacher, it’s hard enough to be able to understand how each student is doing – so there is an obvious opportunity for software to help. So, encouring students to do some work on the computer along with on-line assessments can really improve opportunities for a teacher in the traditional classroom.

In a Father’s Day article for Parade magazine, Barak Obama said that: “We need to replace that video game with a book and make sure that homework gets done.” For such a young President, I think he misses t

he point – “games”, “books”, “computers”, “Internet”, etc. are all blurring. While his broader point that ‘entertainment’ should not be the substitute for ‘learning’, I agree – but we need to erase the basic premise that ink on paper is somehow “better” than electronic learning; we need to replace the idea that “fun” and “education” are mutually exclusive;

we need to find innovative ways to educate our society that often finds itself lagging behind much of the developed world.

Unfortunately, the attitude espoused by Barak Obama’s article – though subtle – mirrors those at the head of many educational publishers, schools and organizations. While they continue to hold onto the tra

ditional ideas of how education should occur, they really hold back the coming revolution of e-learning, interactive learning, computer based assessments, etc. I’m pleased that at least one major book publisher is trying to make head-way into this universe of possibilities, and for the sake of my children, I hope they don’t delay.

In a recent article from Reuters, Digital downloads spell end for videogame stores?,  John Gaudiosi writes about the push towards digital download for video games. There are some interesting statistics that I’d like to summarize:

• 17% of PC video games were downloaded during 2008
• An estimated 2% of overall sales (about $400 million) this year were digital
• NPD estimates 18% of XBox 360 Gold members regularly download from XBox Live Arcade
• NPD also estimates that 10% of PS3 users regularly buy from Sony’s PlayStation Network
• Valve’s Steam service has 21 million users and 700 games

So, for 2008, at least, digital downloads are still pretty small. But the quote from the article that really got me was from Wedbush Morgan Securities analyst Michael Pachter:

“Downloads will become 20 percent of the market within five years, and probably peak at around 50 percent of the overall market in 10 years,” said Pachter. This assumes an overall market growth of 5 to 10 percent annually, he added.

So, that all got me thinking… how well does the current situation parallel to digital music? After all, from a maturity perspective, music is first, followed by video, followed by gaming, followed by book publishing.

According to another Reuter’s article, a report by the trade group IFPI indicated that digital sales of music represented about $3.7 billion in value – about 20% of total music sales. I was actually surprised to find that so low – I had expected music sales to be majority downloaded. But, I think you could also account for that by the fact that music piracy doesn’t count among the 20% since it represents ‘downloads’ but it doesn’t represent revenue.

Back to the video gaming market, does that mean that 50% of sales is a good prediction, too high or too low? Today, there are a few reasons why physical sales are valuable: 1) a physical copy of a game (or movie or album) is its own backup, 2) there is no download time needed for a purchase, 3) you can browse through a variety of titles and even discuss games with other people and sales reps, 4) you can get printed materials that come with the game and 5) you can buy / sell used games easily. But, in 10 years time, #2 and #3 will have completely melted away. #4 is already on the cusp of extinction – there just aren’t that many printed manuals anymore. #1 can be solved with some work-arounds, but eventually the platform vendors will help solve this issue. But, #5 isn’t so easy to deal with – eventually, retailers will have to help with the value proposition for downloaded titles. And, I expect that to be the potential biggest obstacle to overcome.

Since I have 10 years to make my own prediction, I’m going to go ahead and do it. By the end of the year 2019, 80% of all video games will be digitally downloaded.

The last day of E3 is here. By now, anyone who is really interested in all the gory details will have tracked down a number of sources to get the dirt. So, let me focus on 2 areas that probably haven’t received too much attention: devices and game monetization.

Devices

As for devices, yes, there is a lot of hoopla over Natal – Microsoft’s planned 3D controller that doesn’t require you to have anything in your hands. Sony countered with their own motion controller announcement. But, I’d like to focus on what’s there now as opposed to what might be in the future.

Platforms: the PS3, XBox 360 and Wii are still the top platforms. There is little to no change (outside of pricing) to these consoles this year. That’s a good thing since games are still behind the full capabilities of these platforms in terms of graphics, physics and AI.

Hand-helds: the king of hand-helds is still the Nintendo DS. This last year, they introduced the Nintendo DSi and replaced the DS original with the DS Lite. So, what’s the difference?

• The DSi has a larger screens than the DS Lite
• The DSi has better aesthetics: slimmer and wider, discreet matte finish, better grips and click-able buttons
• The DSi has a camera and can play MP3′s
• The DSi only supports DS games – unlike the DS Lite, it can’t support Game Boy Advance titles
• The DSi can utilize the DSi Shop which provides online access to games

In my mind, only the last point makes any difference – and if Nintendo was really pushing this – it’s a huge difference. Imagine no longer having to buy or rent games. You could just download them like books on the Amazon Kindle. But, alas, Nintendo has only provided 256 MB of internal memory, and major retail titles aren’t available for download.

While at E3, I did get the chance to see a DS competitor called M2. It’s a more robust entertainment device that has a camera, video capabilities, music playback, etc. But, without the availability of titles, I don’t expect much from it.

Sports controllers: probably this biggest innovation over the last year was the introduction of sports controllers that have led to the huge success of Wii Fit. This year, there were a bunch of additional controllers from imitation Wii platforms, to skateboards, etc. I even saw a really interesting wheel that you can put an iPhone in the middle of to play racing games on the iPhone. Overall, I think this is an area where the industry will continue to push – after all, how can mom’s object to kids getting exercise while playing video games?

Monetization

The elephant in the room at E3 is certainly money. After all, this is a business conference. But, little has been said in the way of monetization strategies outside of selling physical products in the retail channel. A few interesting tid-bits during the conference:

• Super Rewards (srpoints.com) provides virtual currency for the gaming and social networking space. Major publishers and platforms have used similar strategies for individual titles, but Super Rewards provides an external capability that can be leveraged. I think this is extremely interesting for not only social networking sites and games but also for any other site where you want to charge a small premium for additional content (can anyone say newspapers?)
• InComm Gaming provides prepaid currency cards that are available at retailers such as Best Buy. They enable branding of cards specifically for games. The best part of this option is that it allows users without a credit-card (i.e., players under 16) to have access to premium content.

Overall, there wasn’t a lot of innovation being discussed at E3 around monetization. Microsoft’s plans around movies and games-on-demand was very short on detail around this, and I saw very little in the way of micro-transaction (outside of Forza Motor Sport 3 which will have a number of add-ons available). As I posted yesterday, I’m skeptical about Microsoft’s plans until we see pricing.

Day 2 at E3 was a bit calmer for me. I had already had a chance to look quickly through everything yesterday, so today I had the chance to slow down and take a closer look at a few things.

Let’s start of by focusing in on Microsoft. I was able to get a bit more specifics on their public XBox Live offerings. This includes:

• Zune Video Store. Movies will be sent to your XBox 360 over the Internet in full 1080p. There are a few caveats that you need to be aware of. First, the movies don’t buffer – which is good – but that means that they expect you to have about an 8 Mbps connection to the Internet. If you don’t reach that threshold, the movie’s audio will be reduced from 5.1 to stereo. Second, you don’t need to have anything beyond an XBox Live Gold subscription. However, they were unable to describe pricing for movies at this time – obviously there is an additional cost, but it isn’t clear yet what that is. On a related point, third, movies are on a ‘rental’ model. At the show, the representative was unable to clarify how it would work – do you get access to the movie for 24 hours?, can you pause it and watch the rest later?, etc. Finally, Microsoft did not specify what movies would be available at launch. So, it is unclear if we are talking blockbusters or deeper into the catalog. This functionality is being promised for the Fall, but it is clear that they are unable to publically confirm a lot of details that will decide how attractive this capability is really going to be.
  

  XBox Live

• Games on demand. Surprisingly, this wasn’t particularly highlighted during the Microsoft press briefing on Monday. But, Microsoft confirmed that over 30 titles will be released for full digital download this summer. Since purchase of these titles is a full-blow game, there are some details you should be aware of. First, it will take approximately 2-3 hours to download the games. This isn’t surprising, but it does present a barrier to some impulse buyers. Second, they were unable to confirm pricing, but after repeated attempts to get an answer, the representative told me: “You should expect [pricing] to be in-line with full-retail prices.” At launch, there will be a number of Microsoft Game Studio titles available along with titles from other publishers – again, Microsoft did not supply a complete list of titles at this time.
• Social movie watching. If you have friends who also happen to have XBox Live Gold Subscriptions, are Netflix members and are willing to watch a movie with you at the same time – you are a candidate for this form of interactive movie watching. For those of you familiar with BD Live – the BluRay offering available on some compatible movies – you are looking at something similar, though the Microsoft platform provides the experience instead of the BD Live service on a title by title basis. I’m not sure exactly how popular this sort of thing is, but clearly Microsoft is exploring areas where the XBox can be used for more social interactions. This extends into their support for Facebook and Twitter on the console as well. In looking at the demos, this felt more like ‘dazzle-ware’ than a compelling offering. But, then again, E3 is about dazzle…

For my next blog entry, I’m going to focus on devices. And, I’m going to wrap up with a dicussion on monitization.