Clay Shirky’s latest column proposes an interesting idea: That not leaving behind the big, dumb business models could be catastrophic.

It comes out of a theory that discusses how civilizations collapse:

Tainter’s thesis is that when society’s elite members add one layer of bureaucracy or demand one tribute too many, they end up extracting all the value from their environment it is possible to extract and then some.

The ‘and them some’ is what causes the trouble. Complex societies collapse because, when some stress comes, those societies have become too inflexible to respond. In retrospect, this can seem mystifying. Why didn’t these societies just re-tool in less complex ways? The answer Tainter gives is the simplest one: When societies fail to respond to reduced circumstances through orderly downsizing, it isn’t because they don’t want to, it’s because they can’t.

In such systems, there is no way to make things a little bit simpler – the whole edifice becomes a huge, interlocking system not readily amenable to change. Tainter doesn’t regard the sudden decoherence of these societies as either a tragedy or a mistake—”[U]nder a situation of declining marginal returns collapse may be the most appropriate response”, to use his pitiless phrase. Furthermore, even when moderate adjustments could be made, they tend to be resisted, because any simplification discomfits elites.

The system needs change to survive.

While it’s not always useful to try and fit large scale models over smaller ones, in this case I think there are some useful lessons to be drawn from the idea that our current inefficiencies and rapid shifts may actually be fundamental to the survival of media.

Here’s the money quote:

To pick a couple of examples more or less at random, last year Barry Diller of IAC said, of content available on the web, “It is not free, and is not going to be,” Steve Brill of Journalism Online said that users “just need to get back into the habit of doing so [paying for content] online”, and Rupert Murdoch of News Corp said “Web users will have to pay for what they watch and use.”

Diller, Brill, and Murdoch seem be stating a simple fact—we will have to pay them—but this fact is not in fact a fact. Instead, it is a choice, one its proponents often decline to spell out in full, because, spelled out in full, it would read something like this:

“Web users will have to pay for what they watch and use, or else we will have to stop making content in the costly and complex way we have grown accustomed to making it. And we don’t know how to do that.”

But it the more turbulent and fluid environment of games, we do know how to do it. And the ones who accept that are the ones who are going to thrive.

Apple has, in the past, always built their consumer products around a need that has either been unaddressed, or closes an obvious “hole” in the marketplace, even if most people didn’t realize how obvious it was until someone built a shiny-white plastic a bridge across it.

CLOSING A GAP

Before the iPod released there were dozens of different mp3 players appearing on the marketplace. With wonky interfaces and minute amounts of *expensive* flash-ram (16-64mb) these overpriced music players had terrible interfaces, and integrated with your computer in often bizarre ways.

The release of Apple’s music device that all changed in a moment. With a hard drive and a clear, visual interface, it let people play music they way they wanted, but they hadn’t realized it until Steve Jobs held it up for them to see.

The gap in utility before the iPhone was wide and deep. After spending years struggling through a variety of poor interfaces and hacked together half-assed features, the average phone user was ready for a “smart phone” that actually worked. They also wanted something that could act asa a replacement for the growing forest of devices that had been cluttering up the average nerd’s pockets, backpacks, and man-purses. While it took a while for the full feature set to come into place, it was clear from the get-go that Apple had seen the problem, and the Phone satisfied it.

THE KILLER APP

When the iPod launched everyone had been so focused on complaining about piracy, nobody had bothered to offer look at the user’s experience of pirated music and offer a viable digital alternative for legally owning songs in a way that actually came close to giving the customer the kind of utility and flexibility that made having a digital music collection so much fun. That was, until Apple launched iTunes. While it wasn’t the perfect program, it was slick, smooth, useful, and fun.

The App Store, while not quite as gee-whiz as the music store was, realized that if you could develop a way for customers to customize the experience of the device in their pocket they would love you for it. Instead of being a single swiss-army knife for everybody, you could choose the different blades you need, creating a device that fit your style perfectly.

WHAT ABOUT THE iPAD?

You can see in this first slide from the presentation that the iPad is basically about answering a question that nobody had really asked: What would you get if you hacked and iPhone together with a laptop? While the answer is kind of cool, it doesn’t tug at our desires. There is no hole.

And that’s why I think the iPad is kind of a dud. I doubt it will be a failure, but as far as I can tell the iPad doesn’t really solve a problem, or offer a killer App. Instead it relies on a maneuver I’ll call the “iPod Shuffle”: flowing out on a river of hype, it promises to build a bridge to nowhere, satisfying nothing more than a vague need to be a part of the world of Apple, and give us an echo of that oh-so-satisfying response we get when Apple has closed an actual loop.

Over on the Wired Gaming Blog, Chris Kohler has some interesting points on a Christmas that seemed to have once again shown that the big N plays by its own rules.

While it’s all interesting I thought this particular chunk of the analysis was particularly relevant to the social gaming space:

Ubisoft, saying on Wednesday that it would scale back its casual-game production for DS and focus more on Xbox 360 and PlayStation 3, pointed out that it was actually experiencing “robust” sales of its Wii casual games.

So it’s possible. How the hell do you do it?

Analyst Jesse Divnich of EEDAR, in a note on Thursday, made what I think is the most cogent, cohesive argument about this situation that I’ve seen yet:

All too often the economy is blamed for the recent industry contraction. In reality, decreased sales in 2009 had more to do with a lack of innovation than economic recession. The growth of our industry now rests more on innovation than it ever has before, especially since non-traditional and casual markets consist of a larger share than in previous years. No longer can developers update a few maps, design some new weapons, add a few new characters, then throw a roman numeral at the end of the box and call it a “sequel”. That may work for core targeted games (Action, Shooters, and RPGs), but this strategy is not ideal for non-traditional and casual gamers.

Case in point: most sequels targeted to the mainstream and casual markets actually underperform in comparison to the original, which is the opposite to what has traditionally been the case for core targeted games. If you examine the Nintendo Wii and DS platforms (the current primary platform for this audience) Boom Blox outsold Boom Blox 2 (Wii); Brain Age outsold Brain Age 2 (DS); Guitar Hero III bested World Tour (Wii); The Bigs crushed The Bigs 2 (Wii); Mario & Sonic at the Olympics (Wii) is on track to outperform its Winter counterpart; Rayman Raving Rabbids (Wii) (2006) outsold its 2007 release; and lastly the original Cooking Mama(Wii, DS) (2006) has out sold all sequel versions combined.

EEDAR believes Nintendo understands the mindset of its consumers the best, which is why Nintendo rarely releases sequels within the same generation and, if they do, they are years apart. A good example of this is Mario Kart. Instead of releasing an annual Mario Kart title, Nintendo opts to only release one Mario Kart per hardware generation. Traditional thinking would assume that after an initial sales bump Mario Kart would simply just fade away on retail shelves—as so many others do. However, Nintendo realizes that if you can get an initial attachment rate on Mario Kart of 25% in 2008, they should be able to get the same attachment for new Wii purchasers in 2009 without having to release a sequel. To no surprise, the attachment rate for Mario Kart in 2009 was identical to that of 2008. Another example is Wii Fit. Whilst Nintendo did release a sequel to Wii Fit, The Wii Fit Plus (2009), the overwhelming majority of sales did not come from the stand-alone software edition, but rather the hardware/software bundle of the Wii Fit Plus. In other words the release of the expansion, which likely had minimal development costs, spurred sales of a 20 month old game wrapped in new packaging.

Of course this rule is not absolute for all casual and mainstream titles, some sequels do outperform the original, but in the overwhelming majority of cases, sequels on the Wii just cannibalize the potential sales of its predecessor. For reference, if the above examples were not proof enough, Call of Duty: World at War (2008) only outsold Call of Duty 3 by the smallest of margins and the most recent Call of Duty Modern Warfare: Reflex (2009) is currently on track to under-perform against World at War.

With the Wii making up the majority of the current casual and mainstream audience this finding should be carefully observed as Sony and Microsoft attempt to become more competitive in this space in future years.

So all you have to do is not release sequels? Unfortunately, it’s not that easy: All you have to do is nail it the first time. That’s harder. And unfortunately, this is not what many software makers seemed to be doing when they first approached Wii. Instead, the idea seemed to be: spend a little bit of money, make something barely acceptable — because screw ‘em, right, they’re casual gamers, they’ll play any old thing! — then follow up with a more polished sequel if it takes off.

Meanwhile, Nintendo keeps producing what are, by miles and miles, the most highly polished games on Wii. Third parties might not be able to have six million-sellers in a single month, it’s true. And, from where I’m standing, even great games like Boom Blox aren’t racking up the sales they deserve. But Divnich makes a compelling point: If software makers are not following the Nintendo-style model, they have very little room to complain that they’re not seeing Nintendo-style results.

As usual when these huge valuations come around, people tend to question whether or not the company is really worth it, especially when you consider they pulled off this kind of value in only 18 months.

But, as Venture Beat notes, this is all about the size of the audience. And let’s be honest here, games have never been this popular before. Even casual’s attempts to be mainstream meant titles only sold a couple of million at most.

Zynga has changed the game because they have done the single most important thing that you need to do in order to succeed online: They found the audience. Then they followed that up with a business model that works. It’s shown us an effective way to business in a world where the old media is still fighting their own biggest fans through draconian laws and DRM.

These are television numbers, and while there are many things that can (and probably will) go wrong as this business is further defined and consolidated, there is no doubt that things are different now then the were a year ago, and we won’t be going back.

That’s led to Facebook taking action– in this case, temporarily shutting down the Fishville application, which would seem to be a just punishment if the allegations turn out to be true.

Obviously, this isn’t over yet.

UPDATE: Zynga now says they’re pulling all offers from their games.

What’s interesting is that I think there’s lots of interesting information here about what’s going on in the core business, and I think there’s a major shift coming in the business models as we head to the next generation.

I’m also wondering if the term “budget title” is being used as a derogatory term for casual and social.

Also interesting that discussion about the developer/publisher relationship.

In this article for Forbeshe not only discusses why Amazon’s opaque DRM standards are eventually going to be the device’s biggest hurdle, but also the subtle, but important differences that have made the iPhone work even though it’s a locked down device.

Amazon’s Kindle file format doesn’t provide support for tables or for so-called monospaced fonts, two formatting features that we use heavily in our line of technical books. And there is a viable alternative: Epub, the open format from the International Digital Publishing Forum, is based on the Web’s native format, HTML, and provides full table and font support. This is the first “strategy tax” paid by those who embrace proprietary platforms: They can’t support the needs of every niche and must prioritize their support for mainstream needs.

The single point of purchase was also a non-starter for us, since my fundamental understanding of information marketplaces is that they grow bigger and more lucrative for everyone when there is a rich ecosystem of cooperating players.

If you’re interested in understanding why open standards work for business and growth, it’s worth a read.

All I have to do is consider that I already spend most of my time gaming on a PC. Partly that’s because I’m an old man with a fetish for humming boxes that I built myself, and partly it’s because I want all the other features that a PC offers: instant access to my email, Twitter, screen-grab software, and my own music to replace generic rock track X on racing game Y.

If the 360 does start to support all these things (there’s no confirmation as to whether Last.FM will be able to run in the background as a soundtrack to your games), it’ll become the kind of gaming machine that I want to spend my time with for more reasons than just because it has some games that my PC doesn’t.

It will become a device that has more of the networked infrastructure, and more of the media tweaks and toys that I take for granted as part of my desktop computer.

I think that there’s way more to it than just this. With the Natal Microsoft is planning to re-launch the XBox. And if I’m reading between the lines correctly, they’re essentially going to do what Nintendo did with the Wii, except they won’t even bother to beef up the hardware. They’ll simply bundle the new motion technology in and go on a media blitz. And I think that could work. After all the box will basically be able to do everything from downloading games to playing movies and music off of your home network.

It’s taken a while, but the 360 may finally be the “everything box”.

Here’s a taste:

But whether it’s what we play, or how we play it, some companies are beginning to figure out that even though they are now directly responsible for dealing with their irate customers, that relationship is becoming as important as the product itself, and that if you treat them with respect, and give them what you want, it’s possible to thrive, even while other people are claiming that the apocalypse is just around the corner.

Businesses as diverse as Netflix, Vivendi, Steam, and iTunes all managing to make a tidy profit by defining their core of what they do around an ongoing relationship with the customer rather than simply focusing on the end profit, or trying to use DRM to redefine their software so that they can get back the control they’ve “lost”

That’s clearly an issue for publishers and developers since games aren’t a tiered business like movies, so there is no point in the business that they can be guaranteed a sale, unlike movies.

That said, it’s hard to deny that some of this is the publishers fault. At $60 AAA retail games are probably overpriced compared to actual perceived value, so consumers are going to look for ways to bring down the cost to a level that’s more in line with their expectations.

It’s clear that first-user-free content, such as the extra maps that were provided with Gears of War, are a good way to get your fans to buy your product new. It also creates a sense of value for your content.

But I have to wonder if it wouldn’t make sense to simply decrease the cost of the product at retail and add some of the features a la carte as DLC. Sure, they’d still lose some sales to used copies, but more consumers might also pick up the product at retail. It also means that you might see games appearing in more places than just GameStop, Big Box, and online stores.

Microsoft did end up releasing those Gears of Wars maps as a separate purchasable download. I’m curious how that did for them.

Ultimately DLC helps turning your product from a single event to an ongoing platform that can has some legs beyond the initial sale. And as the flexibility of the type and pricing of downloadable content grows, you can also bundle together that content at a later date for a lower price.

And one day you might even have a tiered business…