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tommy refenes sm.jpgBy Tommy Refenes

I think I can safely say that Super Meat Boy has been pirated at least 200,000 times. We are closing in on 2 million sales and assuming a 10% piracy to sales ratio does not seem unreasonable. As a forward thinking developer who exists in the present, I realize and accept that a pirated copy of a digital game does not equate to money being taken out of my pocket. Team Meat shows no loss in our year end totals due to piracy and neither should any other developer.

For the sake of argument, some of those people that did pirate Super Meat Boy could have bought the game if piracy didn't exist but there is no actual way to calculate that lost revenue. It is impossible to know with certainty the intentions of people. With the SimCity fiasco and several companies trying to find new ways to combat piracy and stating piracy has negatively affected their bottom line I wonder if they've taken the time to accurately try to determine what their losses are due to piracy.

My first job outside my parents cabinet shop was at KMart. KMart, like countless other retailers, calculates loss by counting purchased inventory and matching it to sales. Loss is always built into the budget because it is inevitable. Loss could come from items breaking, being stolen, or being defective. If someone broke a light bulb, that was a calculable loss. If someone returned a blender for being defective, it wasn't a loss to KMart, but a calculable loss to the manufacturer. If someone steals a copy of BattleToads, it's a loss to KMart.

All loss in a retail setting is calculable because items to be sold are physical objects that come from manufacturers that have to be placed on shelves by employees. You have a chain of inventory numbers, money spent and labor spent that goes from the consumer all the way to the manufacturer. A stolen, broken, or lost item is an item that you cannot sell. In the retail world your stock is worth money.

In the digital world, you don't have a set inventory. Your game is infinitely replicable at a negligible or zero cost (the cost bandwidth off your own site or nothing if you're on a portal like Steam, eShop, etc). Digital inventory has no value. Your company isn't worth an infinite amount because you have infinite copies of your game. As such, calculating worth and loss based on infinite inventory is impossible. If you have infinite stock, and someone steals one unit from that stock, you still have infinite stock. If you have infinite stock and someone steals 1 trillion units from that stock , you still have infinite stock. There is no loss of stock when you have an infinite amount.

Because of this, in the digital world, there is no loss when someone steals a game because it isn't one less copy you can sell, it is potentially one less sale but that is irrelevant. Everyone in the world with an internet connection and a form of online payment is a potential buyer for your game but that doesn't mean everyone in the world will buy your game.

Loss due to piracy is an implied loss because it is not a calculable loss. You cannot, with any accuracy, state that because your game was pirated 300 times you lost 300 sales. You cannot prove even one lost sale because there is no evidence to state that any one person who pirated your game would have bought your game if piracy did not exist. From an accounting perspective it's speculative and a company cannot accurately determine loss or gain based on speculative accounting. You can't rely on revenue due to speculation, you can't build a company off of what will "probably" happen. Watch "The Smartest Guys in the Room" and see how that worked out for Enron.

Companies try to combat piracy of their software with DRM but if loss due to pirated software is not calculable to an accurate amount does the implementation of DRM provide a return on investment? It is impossible to say yes to this statement. Look at it as numbers spent in a set budget. You spend $X on research for your new DRM method that will prevent people from stealing your game. That $X is a line item in accounting that can be quantified. Can you then say "This $X we put into research for our DRM gained us back $Y in sales"? There is no way to calculate this because it is not possible to quantify the intentions of a person. Also, there's no way of accurately determining which customers would have stolen the game had there not been DRM.

To add to that, the reality of our current software age is the internet is more efficient at breaking things than companies are at creating them. A company will spend massive amounts of money on DRM and the internet will break it in a matter of days in most cases. When the DRM is broken is it worth the money spent to implement it? Did the week of unbroken DRM for your game gain you any sales from potential pirates due to the inability to pirate at launch? Again, there is no way of telling and as such cannot be used as an accurate justification for spending money.

So what should developers do to make sure people don't steal games? Unfortunately there is nothing anyone can do to actively stop their game from being pirated. I do believe people are less likely to pirate your software if the software is easy to buy, easy to run, and does what is advertised. You can't force a person to buy your software no more than you can prevent a person from stealing it. People have to WANT to buy your software, people have to WANT to support you. People need to care about your employees and your company's well being. There is no better way to achieve that than making sure what you put out there is the best you can do and you treat your customers with respect.

Lets loop back to what's going on with SimCity. I bought SimCity day one, I played it and experienced the same frustrations that countless others are experiencing. For total fairness, I know the always on DRM isn't the main issue, but I can't help but think that the server side calculations are a "wolf in sheep's clothing" version of DRM. I won't claim to know the inner workings of SimCity and this isn't a Captain Hindsight article because that is irrelevant. EA and Maxis are currently facing a bigger problem than piracy: A growing number of their customers no longer trust them and this has and will cost them money.

After the frustrations with SimCity I asked Origin for a refund and received one. This was money they had and then lost a few days later. Applying our earlier conversation about calculable loss, there is a loss that is quantifiable, that will show up in accounting spreadsheets and does take away from profit. That loss is the return, and it is much more dangerous than someone stealing your game.

In the retail world, you could potentially put a return back on the shelf, you could find another customer that wants it, sell it to them and there would be virtually no loss. In the digital world, because there is no set amount of goods, you gain nothing back (one plus infinity is still infinity). It's only a negative experience. A negative frustrating experience for a customer should be considered more damaging than a torrent of your game.

Speaking from my experience with SMB, I know for a fact we have lost a lot of trust from Mac users due to the Mac port of SMB being poor quality. I could go into the circumstances of why it is the way it is but that is irrelevant...it's a broken product that is out in the public. We disappointed a good portion of our Mac customers with SMB and as a result several former customers have requested and received refunds. I'd take any amount of pirates over one return due to disappointment any day.

Disappointment leads to apathy which is the swan song for any developer. If people don't care about your game, why would people ever buy it? When MewGenics comes out, I doubt many Mac users are going to be excited about our launch. When EA/Maxis create their next new game how many people are going to be excited about it and talking positively about it? I imagine that the poison of their current SimCity launch is going to seep into potential customers thoughts and be a point of speculation as to "Is it going to be another SimCity launch?".

This is not a quantifiable loss of course, but people are more likely to buy from distributors they trust rather than ones they've felt slighted by before. Consumer confidence plays a very important role in how customers spend money. I think its safe to say that EA and Maxis do not have a lot of consumer confidence at this point. I think its also safe to say that the next EA/Maxis game is going to be a tough sell to people who experienced or were turned away by talk of frustration regarding SimCity.

As a result of piracy developers feel their hand is forced to implement measures to stop piracy. Often, these efforts to combat piracy only result in frustration for paying customers. I challenge a developer to show evidence that accurately shows implementation of DRM is a return on investment and that losses due to piracy can be calculated. I do not believe this is possible.

The reality is the fight against piracy equates to spending time and money combating a loss that cannot be quantified. Everyone needs to accept that piracy cannot be stopped and loss prevention is not a concept that can be applied to the digital world. Developers should focus on their paying customers and stop wasting time and money on non-paying customers. Respect your customers and they may in turn respect your efforts enough to purchase your game instead of pirating it.

[Tommy Refenes wrote this on sister site Gamasutra's free community blogs.]

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GoGlobal is Morten Lund’s new venture. Earlier this month, Lund pitched GoGlobal live on stage at The London Web Summit. Despite a few people thinking it was a ruse, GoGlobal aims to be a platform to grow globally for Software-as-a-Service (SaaS) companies. Lund says he wants to take three to four companies in to 40+ countries every quarter. Here is the problem I think he is looking to solve.

As soon as an Internet startup shows signs of success, somewhere in the universe its business model is replicated with razor-sharp execution tactics. If the startup is under the radar still, selling its products and services internationally is difficult without prior knowledge and business network.

Take online music streaming industry for example, its pioneer Spotify launched in Germany this month. Eagerly awaited by the German public, whose current suppliers of streaming music services include Deezer, Rhapsody, Rdio and Simfy, Spotify is now present in only 13 countries. Its French competitor Deezer has gone to as many as 45 countries and expects to conquer the world outside of the US by the end of 2012, according to its CEO Axel Dauchez. Will Spotify ever catch up?

First movers have good reasons to worry about competition. Deezer may not be a copycat, it was founded only 16 months after Spotify, but its plans to grow are much more aggressive.

So I spoke to a number of industry players to understand what it takes to grow an Internet business internationally.

Product Localization

Dauchez says that customizing the service was key to entering new markets. For Deezer it meant adding local artists, negotiating licenses with the labels for each individual country, and segmenting music into relevant genres (adding French Chanson for the Russian audience and Schlager for the German).

For some companies product localization may not need to be so extensive: for example Instagr.am did not do anything beyond translating its app into eight languages. For-website translation tools from EasyLing or SmartLing could work well.

In mobile apps industry, app store optimization, including localization of the screenshots in the appstore promotional materials, can increase download rates of a mobile app by 30 percent according to the mobile expert Stefan Bielau.

Marketing

Distributing mobile apps internationally goes beyond Google Play and iTunes. Distimo lists 60 app stores, but some local ones would not be included. Publishing apps in those stores is still largely a manual task, according to Bielau.

For an online business operating in the B2C space a desirable marketing channel would be a global partnership with Facebook. Having accomplished that, Deezer enjoys a Facebook-driven user base growth of 20 percent per week.

Using other social networks such as Nasza klasa in Poland, Orkut, owned by Google and popular in Brazil and India, or Russian Facebook equivalent Vkontakte for marketing purposes also makes sense, as they are admittedly cheaper for user acquisition, although Facebook’s audience is larger.

Earning money from some of the social networks may be tricky. According to Danil Kozyatnikov of Questli from Novosibirsk, Russia, his social games company partnered with Russian social networks, but in some cases the company did not get paid.

Thankfully, for those with a sizable budget, B2C user acquisition can be done through advertisement. According to Siegfried Müller, the co-founder of a hugely successful Munich-based Travian Games (120 million registered users), advertisement networks are well established globally, and buying ads in different countries is an easy task. Travian is present in more than 50 countries.

Payment

All the “likes”, clicks and registrations are useless without adequate payment methods. PayPal and credit cards may not always be a payment method of choice outside of the developed countries. Even in Germany bank account transfers are still preferred over other payment tools, and the country has one of the lowest numbers of credit cards in the EU.

XS Software, a Bulgarian online games company that sells its games in 80 countries, uses over 100 payment providers. According to the company’s project manager Dimitar Yanchev, SMS payments are the third most popular payment method after PayPal and credit cards. This is especially true for those customers who have not yet reached the legal age to have a bank account or a credit card. Such payment methods can be quite expensive, as telcos take a significant cut as a commission. InSyria, for example, it can be as much as 80 percent of the total revenue.

Many countries have so-called e-wallets for those who are unwilling to use their bank account or credit cards for online payment. In Russia and some Eastern European countries it is QIWI, in the Middle East and North Africa there is CashU, BoaCompra in Brazil, DotPay in Poland and ePay in Bulgaria. The way most of these e-wallets work is by allowing the customers to deposit money into the online account through a payment terminal or a kiosk. But even in Russia, e-commerce leaders such as Ozon still receive over 80 percent of payments as cash on delivery, as its CEO Maelle Gavet shared at TechCrunch Moscow.

In Serbia, Internet businesses cannot implement payment methods because it is necessary to register a legal entity there. In Eastern Europe the same requirement applies in Bulgaria and Croatia. A group of Serbia’s leading e-commerce sites, which includes Limundo (Serbian eBay) and Kupindo (Serbian Amazon) is currently developing their own escrow-based payment system called Platindo which will eventually become an e-wallet.

There are of course payment aggregators such as Moneybookers, recently rebranded as Skrill, which offer integration of 100 payment methods in 200 countries, but they do not come cheap and according to Müller of Travian Games have a small market share in many countries.

Deezer’s international roll-out did not go beyond credit card and PayPal payments for now, but the company intends to improve on this and other localization efforts gradually by establishing offices in 15 key countries, and participating in local scenes: marketing at festivals, and engaging local artists. Currently its international team is 20-strong, but the company expects to grow its total staff from 120 to 300 by the end of this year. As for payments, bundling its music streaming service with telcos’ annual mobile phone contract is likely to boost their user retention and allow them to collect revenue from their telecom partners.

Online Piracy

Deezer’s product is a digital good, and online piracy is its main competitor. Russian Vkontakte, for example, is blacklisted in the USbecause its users are enabled to freely upload music files and listen to them through Vkontakte free of charge. There is even a tool called Meridian that offers the creation of playlists using music on Vkontakte, all perfectly illegal and completely free. Dauchez believes that offering its users a premium music streaming experience. The rest is down to finding the right price point to get them to pay for it.

Logistics

For online retailers of physical goods, further challenges abound. I spoke to Jonathan Teklu, the managing partner of Berlin-based incubator SpringStar, which backed KupiVIP, the Russian version of Ventee Privee. He told me that when its founder, Oskar Hartmann, launched KupiVIP in Russia, he had to buy a fleet of trucks to deliver goods to its customers.

Indeed, logistics is another significant operational challenge in many of the world’s markets, where consumers are likely to cancel a purchase if no suitable delivery method exists. To address the challenge, Russian iTech Capital has set up QIWI Post, a joint venture with Polish Integer (owner of InPost), which leverages the brand of QIWI e-wallet and its network of terminals. QIWI Post is a terminal where a courier deposits a shipment, and buyers pay for the goods at the terminal and open the box using a provided code. Similar solutions exist elsewhere: for example in Germany, Estonia, and recently – thanks to InPost – also in Ireland under the name of Parcel Motel.

Other Issues

Companies looking to establish presence in the large developing markets such as Brazil or India will need a local partner to set up a legal entity, according to Teklu.

Educating online users is also essential. The online room and sublet reservation company AirBnB partnered with SpringStar in October 2011 to boost its international expansion. In Israel and the Middle East it is currently facing a problem of a cash economy, where the apartment owners prefer to be paid in cash, rather through an online transaction, an essential element of the Airbnb user experience. Changing such an attitude requires time.

Another example of having to educate consumers is India, where Internet users still have trust issues with buying online from unknown brands. A ticket-selling website MakeMyTrip engaged local travel agencies to let them use its website to book trips, and by so doing, educate their customers that it is safe to do so, according to Teklu.

These are few examples of challenges that come with need to grow internationally. Going back to Lund, he plans to target SaaS companies supporting them with legal, accounting, affiliate marketing and payment services amongst others, all offered as one platform.

Interested in what others thought of the idea, I asked Tom Cupr, from the Czech Republic, who has grown his daily deals business, Slevomat Group, into a 60 million Euro company with a presence in 7 Eastern European countries in just over a year. He said what’s really important is execution, but then again, he thinks that GoGlobal could make international expansion a lot easier.

This post is written by our regular contributor Natasha Starkell, the CEO of GoalEurope, the outsourcing advisory firm and a publication about outsourcing, innovation and startups in Central and Eastern Europe. Twitter @NatashaStarkell. Gplus.to/natashastarkell.

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Deezer

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Axel Dauchez

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Morten Lund

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