Starting a Games Company in a Recession

This is a guest post by Bret Terrill.  See more at www.bretterrill.com.

Warren Buffett says that the economy in a recession. When it comes to the economy, I believe Warren Buffet. Recession is a scary word. But if you’re a social games company (or thinking about starting one), a recession may actually be a good thing.

Obviously macroeconomic factors affect tech startups, and the big and the wise are raising enough money to weather a 2-3 year drought. Most small startups are not in the position to raise 2-3 years of runway money. Instead, we have to tighten our belts or become profitable. Startups in most fields have a very low likelihood of becoming profitable, check out Jeremy Liew’s fantastic analysis on profitability in the consumer interest space.

However, profitability is not a problem in social games. Most, if not all of the top social games companies are already profitable (or would be if not for their rapid expansion plans). Many smaller, quieter players are also seeing excellent revenues, but you’ll have to take my word for it, since no one seems eager to advertise their success.

When it comes to a recession, the common wisdom is that home entertainment surges, because people feeling the pinch opt for staying home rather then the more expensive option of going out.  If that holds true during this recession, then online games are certain to benefit.  After all, no one is giving up their Internet connection.  And if you’re a free online game, then…well, I mean is there any better entertainment deal for a consumer then a free game?  

Of course, the problem as always with free services on the internet, is that we rely on advertisers for our revenue stream. Fortunately, the digital goods model removes that dependency, making it even more attractive in the face of an advertising downturn. It’s still an open question whether people will buy virtual goods with a thinner wallet.

This is an aside, but I’d suggest that virtual goods can offer an excellent substitute for purchasing more expensive real goods. The desire to shop does not go away just because a consumer has less money. That desire to buy real items, such as clothes, shoes, and accessories is easily transferred to vanity virtual goods. Goods that come at a fraction of the cost of a real item, and therefore attractive even when you have a thinner wallet.

However, some people believe that that online advertising will actually increase during the downturn, as ad agencies turn their budgets toward the measurable world of online v.s that vast unmeasurable wasteland that is TV and print.   If you look at data aggregated by Pubmatic, smaller publishers (around the scale of most social games companies) have seen rising ad rates, even as the rates of larger publishers have fallen.

So to summarize:

Free online games using a virtual goods model with an advertising kicker are one of the safest bets you can make in a recession.  So come join the party.

And if you need further convincing, the biggest games company in the world, EA, started in a recession.