The best sign that someone’s qualified to run an Internet startup may not be an MBA degree, but level 70 guild leader status, according to the latest issue of Harvard Business Review.

“Leadership’s Online Labs” by Byron Reeves, Thomas W. Malone, and Tony O’Driscoll is based on the authors’ research into the leadership and management skills required by fantasy/sci-fi MMORPGs like World of Warcraft and Eve Online. In those multiplayer games, the hardest-to-achieve goals (such as killing the demi-god dragon, wiping out a competing space corporation, and so on) often require dozens or even hundreds of players working together in concert, so the skills required to lead a successful mission, the authors argue, are very much like those needed to run a profitable business.

The theory is hardly new; venture capitalist and hardcore WoW player Joi Ito has been talking about this for years. But the HBR team bolsters it with extensive interviews and observations to turn out an article that could help revolutionize business management in the digital age.

So what are some of the main managerial lessons they learned from the worlds of orcs, elves and battle cruisers? Below are the three that stand out most to me — call them the habits of highly effective half-elf managers:

Embrace Failure As a Rung on the Success Ladder

“In one incident that we recorded from EverQuest,” Reeves, Malone and O’Driscoll report, “seven guild members prepared for a brand-new quest that required them to get their team across a large lake protected by a gruesome and hostile creature.” They did this despite knowing they were likely to drown, which they very nearly did. But when the team failed to make it across, it was simply viewed as a learning experience, and after re-orientating themselves, they went right back to try it again. (The classic corporate response would be to simply cut the failed program’s funding, as opposed to re-launching with a new strategy.)

Rotate Individual Managers to Individual Goals

The authors were also surprised that guild leaders often became followers, letting temporary leaders come forward to direct specific sub-goals:

Put another way, leadership in games is a task, not an identity—a state that a player enters and exits rather than a personal trait that emerges and thereafter defines the individual.

It’s easy to see how that principle would apply to real-world business; of course, it would require a managerial culture in which personal pride is attached not to a job title, but to getting the job done. This could be why MMO guild leaders rarely seem to be managers in real life. Indeed, Joi Ito once told me that while his We Know World of Warcraft guild includes top Silicon Valley execs, when it comes to WoW, they’re not always good leaders. One of its best commanders, he said, was an EMT worker.

To Get Better Management, Change the Game

The authors went in expecting to learn managerial wisdom from MMO’s top guild leaders, interviewing them as though they were virtual Jack Welches. But the players suggested a different approach: “If you want better leadership,” they said, “why not change the game instead of trying to change the leaders?”

Quite literally. Online games are highly structured, and successful gameplay is determined by the amount of virtual treasure players have in their possession and the amount of game information of which they’re aware (player stats, enemy capabilities, etc.). The authors suggest a number of ways business data can be given a game-like structure, which would then shape how the company runs. For example, what if your CEO assigned value, in virtual currency, to your company’s internal email?

Attaching a large amount of the scarce currency to a particular message would draw attention to it or even serve as a feedback mechanism: You send me an e-mail you value at 100 units, and I respond with one valued at 200, giving you a credit of 100 units to validate the usefulness of the information you sent. One experiment showed that the currency, as a marker of information importance, in fact influenced how quickly colleagues opened and read different messages in their inboxes.

With online gaming so mainstream (World of Warcraft now has 10 million subscribers), many people in the tech business world have already learned these lessons. The Harvard authors note an IBM survey of its managers who were also gamers, and the results are striking:

Three-quarters of the respondents said that environmental factors within multiplayer games could be applied to enhance leadership effectiveness in a global enterprise. Nearly half said that game playing had already improved their real-world leadership capabilities, particularly for managing teams whose members didn’t fall under their formal authority.

At the same time, the business leaders also worried that implementing what they learned in games would require drastic changes to the companies’ existing corporate culture. Which is why I think we’ll see these invaluable ideas put into practice not by established firms, but by startups eager to level up into world-conquering profitability.

Image credit: harvardbusinessonline.hbsp.harvard.edu. Hat tip: Virtual Worlds Review.

The casual games market is booming, generating over $2.25 billion in yearly revenue despite virtually no brick-and-mortar representation or advertising and marketing costs. But is this market rewarding for investors? For VCs interested in this space, here’s rundown of how it works.

A casual game is defined as a stand-alone entertainment software title that is digitally distributed by one or many “portals,” or independently owned Internet retail sites. Casual games typically operate under a try-before-you-buy business model –- the downloads allow players to play for a set period of time (usually 60 minutes) before shutting down. If the player wishes to continue playing, they must pay the retail price, which they can do electronically from inside the program, instantly unlocking the game for unlimited play. The average rate of purchase to play is lower than 1 percent, and games that convert higher than 2 percent are considered “hits.” The largest market for these games is women ages 30-60, a significant departure from the standard computer games market.

Development costs

The development cost of a casual game typically hovers somewhere around $100,000. That money goes into paying developers, including artists, programmers, game designers, project managers and audio engineers, as well as the developer’s overhead. This investment usually pays for between eight and 12 months of work. Of course, there are ways to reduce costs. In recent years, many developers have outsourced art and coding to companies overseas, in places like Eastern Europe, India or China. But such a move needs to be carefully managed, as many outsourced games are shipped with little quality control, often sporting poor or confusing English.

The primary profit center for casual games is online retail. Games in the genre retail for $19.99, minus retailer discounts and incentives. Since conversion rates for a casual game usually linger below 1 percent, the only profitable games are hits – mid-level successes rarely recoup their development costs. Causal games are not a high-margin business. Because the market involves so many middlemen, the final slice of the pie that makes it to developers is usually quite small.

Investing

Investment in casual game development can come in two forms: as a publisher or as a development partner. Each carries its own risks and rewards. Typically most VC investment in the casual games industry goes to the publisher, and most of the major publishers (including PlayFirst, Big Fish and iWin) were founded with VC money. Publishers then contract with individual developers to create games, paying them an up-front amount as well as a percentage of sales. Once the game is completed, publishers then distribute the game to portals and handle receivables from those portals. Most of the major publishers also maintain portals of their own, retailing both titles they publish as well as other games.

VC money does not, of course, guarantee a hit game. PlayFirst is the best example of using venture capital to successful ends, commissioning Gamelab (where I currently work) to develop their first set of titles, including the very successful Diner Dash. But another Playfirst-commission title we developed, Subway Scramble, didn’t do nearly as well.

Recently, a few studios have worked with VCs on the development side and then self-published the resultant games. This method eliminates the publisher’s revenue share, meaning more of the total income goes to the developer. Studios that have followed this method are typically more established in the marketplace, with at least one successful title under their belts. However, the lion’s share of the game’s sale price still goes to the portals and distributors, and recoupment can be slow.

Revenue streams

Developers and publishers depend on the revenue from hit games to subsidize their output, and there is still no dependable method to predict which games will be hits. With an average of one new game getting released every weekday, the market is already becoming saturated. Because development time is relatively short, a successful game will see its mechanics and theme copied and cloned within six months to a year of being released. So while the development cost of a casual game is low compared to a standard PC or console title, the chance of a single title turning a profit is also reduced.

Secondary revenue streams from casual games include advertiser-supported, “free-to-play” versions, which are generating a higher revenue-per-download rate than purchased games, as well as boxed
physical retail copies (usually handled through another third-party distributor) and ports of the game to other devices, including mobile phones and portable gaming consoles. Because casual games are
typically small in file size, with simple input mechanics, they make this transition more easily than complex PC games.

Investing in the casual games market is much like investing in any content market – dependent on a large number of unpredictable forces. There are proven marketing and content models that are exploitable, but the saturation of the market with products slavishly following those models steadily reduces their effectiveness. For a VC, the best bet is to work with an established developer with a strong, marketable idea and keep costs low. Anything else is way too risky for a market this crowded and volatile.

Written by K. Thor Jensen, who’s worked in the games industry for nearly 10 years and is currently an associate producer for Gamelab.

Image credits: playfirst.com, bigfishgames.com, and iwin.com.

Updated: We all know there’s no love lost between Hulu, the Hollywood-backed online video service, and Google-owned YouTube. The two companies have taken snipes at each other. For instance, at the NAB trade show, Hulu was trash-talking YouTube. Jason Kilar, the CEO of Hulu, said that you can’t make money by posting unauthorized and copyrighted videos — with a YouTube page behind him.

Hating your rival is part of the game, which is why it’s hard to ignore the irony of a Hulu Channel on YouTube. YES! What you just read is right. The LA Times discovered the channel and posted about it on their blog. Seems a little disingenuous! The reason for the Hulu-on-YouTube channel is pretty basic — YouTube has what Hulu hopes for: traffic and an audience. Hulu has content from its backers. It makes perfect sense for the two of them to start working together. Kilar should remember that you can’t make money by posting to a site that doesn’t have a lot of traffic.

NewTeeVee talked to Hulu and got a confirmation from them that indeed they are the ones who set up the channel for promotional purposes.

YouTube head of premium content partnerships Jordan Hoffner says: “It’s fantastic that Hulu is providing content to our global community and using our platform to grow and drive traffic to their business. Media companies large and small can set up channels or even partner with us to interact with the world’s largest and most active community. “