On Monday morning, colleague Heinz-Roger Dohms surprised in his financial scene newsletter with a side note, which was probably overlooked by many readers, due to the reports of the German Commerzbank Mergers. Deutsche Börse is setting up its joint venture (JV) with the Naga Group for a marketplace of digital game goods (in-game items in the jargon). See financial scene: “Exclusive – Deutsche Börse withdraws from bizarre fintech joint venture.”
Deutsche Börse has returned its 40% stake in JV to Naga. The cooperation was announced in 2016, as it is known only by StartUps, extremely offensive and euphoric using many superlatives from the German stock exchange. The press release at that time was also still on the corporate side of the German stock exchange until very recently, because it is even in the Google index with the beginning text with a search for the name of the platform, “Switex”, to be found far above. Today, however, a click leads to an error message. After the research of colleague Dohm, did you delete the press release quickly and do you not have your own past?
“This is not going to work”
A worth reading report on the announcement at the time of the entry into the huge “46 billion market with 10% growth per year” without a specific gaming cooperation partner with quotations from the project participants Deutsche Börse, Deloitte and Naga, but is still in the Swiss blog Fintechnews.ch.
Already at the announcement expert market observers scratched their heads, where the project participants see the real business potential. Listening to this is the issue of the Mikroökonomen podcast from December 2016 and the comments and rating of the announcement from minute 52. Sobering conclusion at that time already: “will not work”.
A look at the marketplace Switex, which has now been renamed Naga Virtual, unfortunately shows today a rather manageable offer of only two relatively unknown games.
Our readership may not be the classic gaming audience, so here’s a quick explanation of what it’s all about: Driven by other innovative and successful German games startups, including publishers Bigpoint, Innogames, Goodgames and Gameforge and others massively changed the general monetization of computer games.
If you once bought a game for a one-time price (referred to in the jargon boxgame) in the electronics trade, the price model has changed only in browser games and today in almost all mobile smartphone games on the so-called “free2play” concept.
Closed marketplaces
There, the game itself costs nothing, but the player must later acquire an individual game currency, in order to buy so-called “items”. An item can be the special sword, armor, or even a different look of the digital avatar.
At some point, individual providers such as World of Warcraft or the gaming platform Steam started with closed marketplaces for the purchase or exchange of such items. Interesting anecdote on the sidelines: Steam had hired Yanis Varoufakis as an external consultant for their own pricing strategy, before this Greek Finance Minister and opponent of Wolfgang Schäuble was in the negotiations of the euro rescue packages for Greece.
Trading on these two closed platforms is still very successful in the special niche. Incidentally, just a few years ago, a computer game was by far the largest user of the PayPal feature Mass Payment in the USA.
This allows PayPal a form of mass transfer of an amount with a transaction to thousands of PayPal accounts of the players. Mass Pay was used to pay game currency in USD.
The many mistakes of the stock exchange platform
The idea of the joint venture was to open up tradability – on a regulated marketplace of the Deutsche Börse. Unfortunately, the makers of the marketplace have conceptually ignored some very obvious basic facts:
1) Gaming providers in Europe who allowed trading and, if necessary, payment in cash of their virtual currency fell long ago under the requirement of the Payment Service Directive. The publishers mentioned above had to obtain a ZAG license from BaFin in order to join a marketplace at all, as he envisaged the stock market. Steam & Co, which today offers closed marketplaces, is located in the US and therefore does not fall under the European Payment Service Directive. How likely was it that the German gaming champions got a ZAG license, “only” so that their items could be traded on a third party exchange?
2) The large volumes in gaming are usually now mobile, ie in the Apple App Store or Google Play Store, issued. The rapid change in game use to mobile has also caught the well-known browser gaming champions on the wrong foot long before the launch of the stock exchange platform, as described, for example, in recognizes Bigpoint, Goodgames and Zynga. “The change in the use of games to mobile has taken the Browsergaming champions on the wrong foot.”
But if the vast majority of games and their items were long under the control of Apple and Google long before the launch of such a marketplace, how much trading volume was left outside?
3) Game balancing is an important factor in keeping a game attractive. If too much items from a game are flowing in or out of an external exchange, or users are in bulk, e.g. From game A to game B, game balancing is compromised and thus the appeal of the game itself. Again, how big is the added value for a publisher to support an external marketplace? the danger to lose one’s own attractiveness?
4) A certain lack of transparency of the actual values in the game and the items is quite wanted by the publishers. This would deprive the participating publisher on a transparent marketplace. Why should he do that?
5) Last but not least: A similar initiative by Amazon to buy game items on its own marketplace had failed even before the launch of the platform in Europe. This is limited today to the sale of gift cards for games and gaming platforms. Even if Amazon, despite customer market power, media literacy and its distribution through its own game streaming platform Twitch, with 140 million active users per month, fails on such a model, where does the market foreign Deutsche Börse from the confidence to do better ?
Post-mortem analysis
We always encourage the blog and podcast corporates to try new ideas and, of course, to let them fail. So it was good that Deutsche Börse had the courage to go new paths. It is difficult, however, if all the facts from the industry in advance signal very clearly that it will have such an initiative, at least extremely difficult. When things are simply “too much wanted” politically, sometimes the facts only disturb – post-fact times.
Should one have the same malicious joy about the failure of Deutsche Börse as some corporate executives show when a start-up with real entrepreneurial risk fails? NO. We have another chapter that can be added to the multitude of stumbling local corporate fintech initiatives.
Hopefully the right conclusions will be drawn in the individual houses. Startups and the US tech companies with their culture of mistakes make a post-mortem analysis in such cases that the mistakes are not made a second time. Hopefully next time, more will be on the subject matter experts and less on the politicians.