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Five-Forces Analysis has Grim Tidings for Free-To-Play on Mobile
by Justin Fischer on 05/08/14 11:45:00 am   Expert Blogs   Featured Blogs

The following blog post, unless otherwise noted, was written by a member of Gamasutra’s community.
The thoughts and opinions expressed are those of the writer and not Gamasutra or its parent company.

 

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Image from http://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy/ar/1

Let me start by saying I like all kinds of video games. I like console games. I like PC games. I like shooters. I like RPG's. Basically, I enjoy anything except sports games (and that's really a comment about my attention span for professional sports rather than sports games themselves). I also like mobile games and free-to-play games. And I like F2P on mobile. I've had some great experiences with that combo when it's done well. I still periodically dip back into Avengers Alliance*, and I had some great times with Hay Day and Tiny Trains.

My point is THIS IS NOT AN ANTI-F2P/ANTI-MOBILE/ANTI-MOBILE-F2P RANT.

The intention of this post is not to castigate mobile-F2P, but to point out a structural flaw in the current direction the market is taking. In general, it's healthy for the industry to have a wide swath of business models, platforms, and vectors for people to games (or consume them, in business terms). There is a massive amount of potential in the mobile/F2P combo, but the market seems to be cannibalizing itself for short-term gains.

In my last article, "Competitive Advantage and the Productivity Frontier, Or Why Dark Souls is the Ikea of Game Development", I mentioned a Harvard Business School professor named Michael Porter, and his creation of something called the "Five Forces Analysis"°. In short, it's a tool to determine how large an impact the titular forces have or will prospectively have on profitability. The forces are rivals, supplier power, buyer power, new entrants, and substitutes. Performing a five forces analysis means looking at each one of those forces and estimating the impact it will have on profits. Let's run the mobile-F2P industry through this particular prism, one force at a time.

Force #1: Incumbent Rivals

This one is pretty simple: more rivals = more competition. More competition = lower profits. The more rivals you have, the more you have to fight for every dollar of revenue. You can fight by developing a competitive advantage or you can fight on price. I'm guessing that's pretty obvious. But, let's break down the concept of rivalry further:

  • Is there a large number of competing incumbent firms? Holy shit, yes there are. Mobile F2P studios, both independent and publisher owned are a dime a dozen.
    • Impact on profits: Heavy
  • Are the products homogenous? Again, hell yeah. For every Tiny Tower and Boom Beach, there is a horde or Candy Crush, Farmville, and Clash of Clans clones†. And then there's the swarm of CCG's. But, let's digress for a moment: why are homogenous products so destructive to profits? The same reason toilet paper manufacturers make per-unit margins on the order of pennies: if your product is interchangeable with the competition's, you have to compete on price. More specifically, you have to compete on consumer surplus: you need to give consumers more for their money and capture less value for yourself. In short, if you are making the same thing as everyone else, congratulations: you have commoditized your game. There is another, less obvious impact of lots of competition: it is really hard to standout on the App Store or Google Play. Unless you can convince Apple or Google to feature you, get ready for your customer acquisition cost to start eating your margin for lunch.
    • Impact on profits: Heavy
  • Do consumers experience low switching costs? Simply put, a switching cost is the cost (both accounting and economic) you absorb when you switch products or services. The easiest example is cellphone service. You are unlikely to switch from AT&T to Verizon as it requires some combination of paying an early termination fee and purchasing a new handset. F2P mobile games, by contrast, have a switching cost as close to zero as you could ever practically expect to get: the only cost is the time it takes to go back to the app store and download something else. A consumer can easily download four or five F2P apps at a time. And then four or five more. That's the double edge sword of F2P's low barrier to entry: it's also a low barrier to exit.
    • Impact on profits: Heavy
  • Do you have diverse competitors? This is a little different than having lots of competitors: do your competitors come from diverse backgrounds? IE, does the fact that they have different perspectives make them unpredictable? It's a little more abstract, but I would argue it has an impact. If you're in the F2P-mobile market, you're competing with teams from all over the world, particularly Korea and China. And let's not forget the good folks in Finland.
    • Impact on profits: Medium

There are a few other factors that impact incumbent competition but probably don't hurt mobile-F2P too hard. Namely, inventory costs and capacity augmentation (which doesn't really apply to a digital marketplace), high fixed costs (which is more of a concern for large-scale physical industries), and whether industry growth is slow (which is the opposite of what's happening in mobile).

Conclusion: If you're a mobile-F2P studio, then you're in the middle of the largest barroom brawl in history. You either have to think strategically or you need to duke it out with everyone and leverage the living hell out of your analytics. Either way, competition is a huge threat to profits. Mobile-F2P is one of the purest examples of what economists call "perfect competition", pushing price down to marginal cost (it's free to replicate, hence it's free to play). And we haven't even touched the other four forces yet.

Overall threat to profitability: High

Force #2: Potential Entrants

What's worse than lots of rivals? Lots more. And the democratization of game development has a big downside: everybody and her grandpappy can make and release a mobile game. Let's walkthrough why:

  • Are there economies of scale? Not in terms of inventory. Once your game has been submitted/approved to a digital marketplace, you have infinite inventory, the same as Zynga or Rovio. There is no marginal cost, so there are no economies or diseconomies of scale when it comes to the ability to fulfill unit demand. In other words, a new guy is just as able to "produce" units of a product as everybody else.**
    • Does this deter new entrants? No
  • Are there capital requirements? Again, not really. Yeah you need some hardware and an engine license, but those are relatively cheap. These days, you don't need an office, task tracking software is free, and you can rent server space. The biggest cost is salary, but there are lots of creative ways for small teams to figure that out.
    • Does this deter new entrants? No
  • Is there limited access to distribution channels? Not at all. You release a game, you have the exact same distribution channel as Supercell and Gameloft. And so does everyone else. And her grandpappy.
    • Does this deter new entrants? No
  •  Are there government regulations restricting market entrance? Nope.
    • Does this deter new entrants? No
  • Do any of the incumbents have a reputation for aggressively competing on price to deter new entrants? It's difficult to have a price war when your product is already free.
    • Does this deter new entrants? No
  • Is there a learning/experience curve to achieve profitability: This is one area where incumbents have an advantage. Making money with a F2P product is really difficult. Despite what the fervor around F2P would have you think, putting out a mobile-F2P game is not a guaranteed profit. Learning how to effectively support and monetize a game in live service is its own skill set. That being said, does it deter new entrants? Probably not. It just might help thin out some of the herd once they've entered the market.
    • Does this deter new entrants? No
  • Do you need access to expensive proprietary technology? Not with the Unity revolution. Unity's an awesome engine with a wonderfully indie-friendly business model. I love Unity. So do 2.5 million other people.
    • Does this deter new entrants? No

Conclusion: Basically, other than some relatively low startup costs, the only barrier to entry is Apple's certification process. So, if your current competitors hurt your profits, get ready for more of them. Lots more.

Overall threat to profitability: High

Force #3: Substitute Products

Okay, so you've got lot's of rivals, and you know lots more are coming. It can't get any worse, right?

Wrong. It's not just your industry you need to worry about. You need to worry about all the other industries that could pull your customers away. The most obvious substitute product would be console or PC games, but I'd argue that mobile games are contested by different substitutes: social media, e-readers, and good, old-fashioned books. There are a lot of products that compete for a mobile user's time in the context in which mobile games would seem to have an advantage. On the bus. Waiting in line at Starbucks. On the crapper.

Convincing a mobile gamer to monetize is a slow, difficult balancing act. Too much tutorial means too much friction. Too little and the player won't understand how to monetize. Squeeze him for money too soon, and he'll get frustrated and leave. Too late, and he'll lose interest before the squeeze. Too little content and she'll get bored. Too much, and she has no reason to monetize. It's a delicate process of establishing a relationship with the player. And you have to manage it through a barrage of distractions. Texts. Tweets. Facebook likes. Viral content. Or maybe the player decides he would rather read the next chapter of his Ludlum novel.

Conclusion: Mobile gaming is targeted and paced for people on the move: quick bursts of content. But so is every other app on a mobile user's device. And you need players to be actually looking at your game in order to pay you for it.

Overall threat to profitability: High

Force #4: Buyer Power

Most of the factors that impact buyer power are more relevant in a B2B context, and don't apply to a consumer setting. But in the mobile space (as in many industries) consumers have a lot of power. If they didn't, you wouldn't be giving your games away for free. Again, mobile-F2P is an environment of perfect competition. Consumers don't need you. Strictly speaking, they don't need (in the survival sense) games at all. And the switching cost is zero. So, if you want their money, you need to offer them something they can't get anywhere else or give them more value for their money than the competition.

Conclusion: Even though your consumers don't have a lot of leverage over you (in the negotiating sense) they still have the ability to capture more surplus because they have lots of options and no switching cost.

Overall threat to profitability: High

Force #5: Supplier Power

Supplier power is a little tricky for digital goods. The most obvious suppliers are hardware makers and engine developers. But, for the sake of argument, let's count Apple and Google as suppliers for mobile games. Okay, okay, throw Microsoft in there too. Do you, as a developer (or even a publisher) have power over your suppliers? Not a chance, Dancing Dixie.

  • Are there few suppliers? Well, for engines, you've got Unity, and now Unreal and CryENGINE are doing more to support mobile and drop their rates within the price range of indie developers. But does that give you power over them? If there were fewer developers, maybe. But with the massive number of existing users, they'll be under no pressure to negotiate with you. In fact, with that many users, they're probably better off letting you walk than spending time negotiating. Any price drops are more a function of their own incumbent competition than your buyer power. As for Apple and Google, they're flooded with products. You don't like their terms? You want them to take less than 30%? Yeah, good luck with that.
    • Threat to profits: Medium
  • Are there few substitutes for input? Unless you want to develop your own engine or build your own mobile content delivery service, your stuck with the big players.
    • Threat to profits: Medium
  • Is it costly to switch suppliers? If you want to switch engines, that's going to cost you months of productivity, if you're lucky. Switching distribution channels, less so, but you still need to port the product which certainly isn't free.
    • Threat to profits: Medium
  • Do your suppliers have lots of other customers? I'd call that a big yes.
    • Threat to profits: Medium
  • Are they more important to you than you are to them? Again, the answer is almost certainly yes unless you are a huge developer that single handedly makes them a lot of money. Activision and EA might be able to apply some leverage to Unity or Apple.  Maybe. But in general, there are lots of mobile developers out there. You need an engine and a distribution channel, bit the reverse isn't true.
    • Threat to profits: Medium
  • Can the supplier forward-integrate? In non-business-speak, can your suppliers make games? Unreal is made by Epic. CryENGINE is made CryTech. Unity is getting into game development. Google is getting into game development. I wouldn't be surprised if Apple jumped in. So, yes they can forward integrate and they already have. So they are not dependent on you making games for them. But, they do need a critical mass of products in order to keep their platforms healthy, and they still stand to profit from you, even if you end up being a direct competitor in the marketplace.
    • Threat to profits: Low

Conclusion: The market suppliers are dealing with enough game makers that they're not going to squeeze you for more money. But that also means you can't squeeze them. So, if you don't like their prices, or their 30% cut is killing your profits, there isn't much you can do.

Overall threat to profitability: Medium

Summary

Mobile-F2P has a reputation as the place you make products when you have no integrity and you just want to make lots of money. That first part is grossly unfair. There are  developers who sincerely believe in F2P and want to make games that are genuinely appealing to a mobile audience and aren't just Skinner boxes. Supercell regularly kills projects it doesn't think are fun. NimbleBit takes a fun-first, profit-later approach to design. That's why you might actually know their names in a sea of mobile developers. In business-speak, they are market leaders with differentiated products (in other words, they avoid the fast-follow, homogenous product, commoditization trap).

The second part, that mobile is where you go to make money, is simply false. It's a messy, noisy, corporate brawl. There have been obscenely big successes, but that doesn't make turning a profit in mobile any less difficult. It's hard. Really hard. And a five forces analysis tells us why. It's hard to get noticed. It's hard to retain an audience. It's hard to compete on something other than price.

It's true that there is a counter pressure in that the market is continuously expanding, but that expansion has a theoretical limit. At some point, every potential mobile customer will have a device. Then what? It's survival of the fittest, that's what.

And that's not a bad thing. As I said in the intro, this isn't an anti-mobile or anti-F2P screed. It's a healthy thing that some businesses will survive and some will fail. In theory, that means the best companies (though not necessarily the best games) will succeed, and everyone else will go out of business. The mobile market in general, and free-to-play specifically, is currently over-served. And that saturation will eventually force some developers out of the market onto some other platform. Competition on mobile will be a little less perfect, profits will be a little less skimpy, and supply will approach a balance with demand.

And that's a great thing.

Justin Fischer is a Senior Producer in the industry and an MBA candidate at the Kellogg School of Management in Chicago. You can follow him on Twitter at @gamergoeslegit
 
In addition, he is the co-founder of Clockwork Otter, a team of industry veterans that creates tools for Unity 3D. Follow them at @_clockworkotter

 

** - This bullet point was modified due to confusion as to what I meant by "economies of scale". Additionally, community member Eric Seufert correctly pointed out that my analysis ignored the ecnomies of scale that larger encumbents enjoy by accumulating analytics data and sharing marketing resources across projects. This is an entirely fair criticism and those are indeed instances of economies of scale. I would argue that my point about learning curves implies these sorts of intellectual resources. I would further argue, as I do in the learning curves bullet, that even though these resources are an asset and provide an advantage, they probably do not deter market entry (Article modified 5/11/2014).

 
* Full disclosure: I worked on Marvel XP, a story extension platform that first appeared in Avengers Alliance
°For more info, see Porter, "The Five Competitive Forces that Shape Strategy", Harvard Business Review, January 2008
†Has anyone coined the term "Clash of Clones"? If not, it's mine!

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Comments


Tuomas Pirinen
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Would love to hear your thoughts on the similar lines on the premium products in this space. After all, developers have to hang their hat on something.

Justin Fischer
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Premium in mobile you mean? I'd say it's not that different. Other forms of portable entertainment are probably less of a threat, because you get your money up front and so it doesn't matter (purely from a profit perspective) wether or not a consumer actually plays after purchasing (unless you also have micro-transactions). But F2P games are a huge threat to premium titles, because they're free and there's so many of them they tend to drown out any one product.

Developers do have to hang their hats on something. Again, I am not anti-F2P or anti-mobile. But it is a crowded friggin market, and the quality/clone signal-to-noise ratio is all out of whack. To succeed you need a combination of luck, store front featuring, and deep pockets to sustain the development until you find the right monetization mix to make it profitable. It's not impossible. It's just really hard.

Tuomas Pirinen
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This gives a bit of "damned if you do, damned if you don't" vibe. As you said, developers have to hang their hat on something.

Justin Fischer
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I wouldn't express it quite so pessimistically :). My point is more that you should be eyes wide open about any business venture and know what you're getting yourself into.

Curtiss Murphy
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"It's not impossible. It's just really hard."

Does this apply to most F2P products? Newspapers, online publishing, e-books, websites, bloggers, and podcasts/utubers all struggle with this. Even still, it was a great analysis from an unusual perspective and I found it useful. Thanks!

Joel Spolsky made a powerful argument once for Corollaries and Complements. Essentially, you want to be in the business of making a product that is a complement of a free/commodity product. Apple does that - apps are essentially free, making iOS devices more and more valuable. Hence why they still cost $500-$800 seven years later! Not sure how a game dev could leverage that concept.

Justin Fischer
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Glad you liked it. In general, the democratization of content has two consequences. First, it's really easy to get your stuff out there (GOOD!). Second, it's really hard to get paid for it (BAD!), because everyone else is getting their stuff out there too (GOOD!). I'd say that applies as much to any free/pseudo-free product as it does to games. I do think F2P games a exceptionally over served, even relative to other apps. But feel free to run your own five-forces analysis. It's a useful thought exercise.

Complementary products are extremely powerful, but also very hard/expensive to establish. It's called a network effect. The more people using your stuff the more valuable it is for others to do the same, but the reverse is also true. It applies to consoles and social media as much as mobile. The trick is that you need to establish two critical masses at the same time. You need a large enough audience to attract complementary products, but you need a lot of complementary products to attract a large audience. It takes time and a lot of capital to do that. That's why Sony and Microsoft where the only companies to successfully launch new console brands since the 80's. They had the resources to eat the losses and float development until the brand became self-sustatining.

Robert Green
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This is a really good analysis, but I think it potentially ignores some of the subtler distinctions of the F2P market. For example, the 'cost of switching' may be effectively zero in financial terms, but if a player has spent part of every day in the last month building up their Tiny Tower, the psychological cost of switching (and hence abandoning their work) might be quite substantial. Similarly, each game might have numerous similar competitors, but once you're playing a specific game, that game has an effective monopoly over its IAP's. I.E. Only one company can sell you gems for Clash of Clans.

Justin Fischer
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That's a good point, but I think that's more of a sunk cost than a switching cost. The loss aversion you're referring to can be an effective way to keep people around, but I'd argue that it is undermined by the fact that you don't actually have to destroy your progress in one game to try another. You just need to boot a different app.

Eric Seufert
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I enjoyed this article -- I found it well researched and its points impressive articulated. I disagree, however, that economies of scale don't exist in mobile f2p.
- the larger a company's product portfolio, the less it spends to market new games as a result of cross-promotion. New entrants spend far more heavily on advertising a game launch, per user, than do market leaders.
- chart dynamics (top downloaded charts) create opportunities for economies of scale. The larger a company's balance sheet, the less it can ultimately pay for advertising on an eCPI basis through acquiring chart position. Also, large companies with large balance sheets are better able to engage in the kind of business development activities that assist with platform featuring.
- the data generated by freemium games is extremely valuable for the purposes of optimization, even across titles. Companies with large product portfolios can obviously deploy that data as a competitive advantage, derived as a result of scale, over smaller companies (not to mention the overhead costs of analytics infrastructure large companies can more easily absorb).

Justin Fischer
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Those are great points. I was specifically referring to the ability to produce "inventory" (which is infinite as soon as you're on iTunes or Google play, regardless of who you are), but the things you list would also qualify as economies of scale. I concede that point!

Eric Seufert
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I hope you continue to write articles of this nature for Gamasutra, btw. I think this perspective is lacking in games journalism / analysis.

Justin Fischer
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Thanks! I appreciate the vote of confidence. I fully intend to keep posting. The response has been really positive and even the folks who disagree with me are cool about it. Stay tuned!

Phil Maxey
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Nice article, few points I would mention though.

1) "Do consumers experience low switching costs?"

This depends on the game. Most games will try to keep their players by offering them incentives, and encouraging them to spend money. This is actually an area where a game offering non-consumables actually has an advantage because if you buy a magical sword for $1.99 then that sword can only be used in that game, meaning the player once invested will be less likely to switch to another game.

2) "Are there economies of scale? ....In other words, a new guy is just as able to make and sell a product as everybody else."

Not sure if that's actually true. Pretty much anyone can create a Flappy bird clone true. But not many people can create a Clash of Clans clone without a large outlay in development costs with the "new guy" won't be able to do. Equally, as the App store charts prove, once you are in the top of the charts you usually stay there, meaning the established companies are very hard to compete against.

3) "Are there capital requirements? Again, not really. Yeah you need some hardware and an engine license, but those are relatively cheap. These days, you don't need an office, task tracking software is free, and you can rent server space. The biggest cost is salary, but there are lots of creative ways for small teams to figure that out.
Does this deter new entrants? No"

All the above only applies to people who don't know the mobile games market very well. Any kind of research (which I presume developers getting into it would do) will very quickly demonstrate that actually (again like point 2) it does infact cost a lot to not only make a high quality mobile game but also to market/acquire users. Maybe 2+ years ago there was no deterrent to new users, but I think that tide has changed and most developers now know how hard life is on mobile, and are going elsewhere. That doesn't make it any easier for new mobile game devs though because the market is already at saturation point.

You said that the "Best companies will succeed" but "best" in what way? you acknowledged not best in terms of game quality, so I presume you mean best in terms of making money? which will usually mean appealing to the lowest common denominators, and as the old saying goes, you need money to make money, the current App store incumbents are making shedloads of money, so that's it, game over. The App stores were like a competition which certain companies won a number of years ago, but they won, the competition is over, would you enter a competition which has already finished and the prizes have already been given out? That's the App stores. This situation might change if the rules of game are changed, i.e the platform holders change the stores in some fundamental way, but who knows if that will happen or not.

The irony is that I'm actually working on (and have been for 2 years) a F2P iOS MP strategy fantasy game, and I fully intend to get it all done within the next few months. It will be a great game, but I know that in itself won't be enough for it to succeed. The path (to try and end this on a positive note) I'm going to try and take with it, is to market it as much as possible to it's particular niche audience, and try to make sure that they like it, again it's about connection with the players, if you can do that, then maybe, just maybe an indie mobile game can do well on mobile.

Justin Fischer
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1) Robert Green above you had a similar point. The loss aversion/sunk cost combo can be powerful, but I'd argue that switching to a new game doesn't destroy your progress in the previous game, so the loss aversion is diminished.
2) When I say economies of scale, I mean something very specific: does being bigger allow you to be have a better cost per unit ratio? Is it cheaper for Supercell to produce individual downloads of Boom Beach than it will be for you to produce downloads of your fantasy game? No. You both submit your builds to Apple, and then you both have infinite units to sell. Clearly their financial resources give them an advantage, but you both will have infinite inventories.
3) If I understand your argument correctly, you're indicating that developers seem to be learning that mobile isn't the fast buck gravy train it used to be. I think you may be right. But, I'd still argue that cost of capital isn't a barrier to entry. When I think capital investment, I think in the $50MM+/talk to VC's and PE firms/make an IPO range. If indie developers can make F2P games (or any games) and survive by eating ramen and couch surfing, than cost of capital isn't a deterrent.
When I say "the best companies", I mean the companies with the best operational efficiency. As a former boss once told me, companies don't fail because of bad products, they fail because of bad business models. I would much rather see quality win out over lowest common denominator cynicism, but it needs to be supported with good business practices to be sustainable.

Good luck with your game. You're making the right call by focusing on your core audience and building a relationship.

Phil Maxey
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Thanks. I've actually decided to draw a line under things and to launch it within the next 41 days. There's a lot done, but still a lot to do. You can follow my progress (and probable descent into madness) at @clankingdom on Twitter :)

Pallav Nawani
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I have to agree with Phil's points here. It appears that this analysis has massively underestimated the power of the current incumbents in the market. Eventually the leaders might change, but as Zynga did on Facebook, the incumbents will still have a hold on a large part of the market.

Justin Fischer
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Incumbents are powerful, certainly, but does their power deter market entry? I would argue no, given the amount of shops creating content for the app store. Phil himself is making a mobile-F2P product. I'm not saying that the market leaders don't have more resources, just that I don't think it's much of a deterrent to new teams entering the fray. Some (many?) of those new teams will get clobbered and forced out of the market, but that won't stop others from trying. Some will inevitably be successful and then incumbents will have new competitors to worry about.

Justin Fischer
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Also a good call. One of the hardest parts of producing your own product is knowing when to step away and ship. See: Duke Nukem Forever.


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