It's your old pal, Fuzzy.
As I'm sure you've all noticed, a lot of the stuff that gets posted here is - to put it delicately - fucking ridiculous. More backwards-ass shit gets posted to wallstreetbets
than you'd see on a Westboro Baptist community message board. I mean, I had a look at the daily thread yesterday and..... yeesh. I know, I know. We all make like the divine Laura Dern circa 1992 on the daily
and stick our hands deep into this steaming heap of shit to find the nuggets of valuable and/or hilarious information within (thanks for reading, BTW). I agree. I love it just the way it is too. That's what makes WSB great.
What I'm getting at is that a lot of the stuff that gets posted here - notwithstanding it being funny or interesting - is just... wrong. Like, fucking your cousin wrong. And to be clear, I mean the fucking your *first* cousin kinda wrong, before my Southerners in the back get all het up (simmer down, Billy Ray - I know Mabel's twice removed on your grand-sister's side). Truly, I try to let it slide. I do my bit
to try and put you on the right path. Most of the time, I sleep easy no matter how badly I've seen someone explain what a bank liquidity crisis is. But out of all of those tens of thousands of misguided, autistic attempts at understanding the world of high finance, one thing gets so consistently - so *emphatically* - fucked up and misunderstood by you retards that last night I felt obligated at the end of a long work day to pull together this edition of Finance with Fuzzy
just for you. It's so serious I'm not even going to make a u/pokimane
gag. Have you guessed what it is yet? Here's a clue. It's in the title of the post.
That's right, friends. Today in the neighborhood we're going to talk all about hedging in financial markets
- spots, swaps, collars, forwards, CDS, synthetic CDOs, all that fun shit. Don't worry; I'm going to explain what all the scary words mean and how they impact your OTM RH positions along the way.
We're going to break it down like this. (1) "What's a hedge, Fuzzy?" (2) Common Hedging Strategies and (3) All About ISDAs and Credit Default Swaps.
Before we begin. For the nerds and JV traders in the back (and anyone else who needs to hear this up front) - I am simplifying these descriptions for the purposes of this post. I am also obviously not going to try and cover every exotic form of hedge under the sun or give a detailed summation of what caused the financial crisis. If you are interested in something specific ask a question, but don't try and impress me with your Investopedia skills or technical points I didn't cover; I will just be forced to flex my years of IRL experience on you in the comments and you'll look like a big dummy. TL;DR?
Fuck you. There is no TL;DR. You've come this far already. What's a few more paragraphs? Put down the Cheetos and try to concentrate for the next 5-7 minutes. You'll learn something, and I promise I'll be gentle.
Ready? Let's get started. 1. The Tao of Risk: Hedging as a Way of Life
The simplest way to characterize what a hedge 'is' is to imagine every action having a binary outcome. One is bad, one is good. Red lines, green lines; uppie, downie. With me so far? Good. A 'hedge' is simply the employment of a strategy to mitigate the effect of your action having the wrong
binary outcome. You wanted X, but you got Z! Frowny face. A hedge strategy introduces a third
outcome. If you hedged against the possibility
of Z happening, then you can wind up with Y instead. Not as good as X, but not as bad as Z. The technical definition I like to give my idiot juniors is as follows: Utilization of a defensive strategy to mitigate risk, at a fraction of the cost to capital of the risk itself
Congratulations. You just finished Hedging 101. "But Fuzzy, that's easy! I just sold a naked call against my 95% OTM put! I'm adequately hedged!". Spoiler alert: you're not (although good work on executing a collar, which I describe below). What I'm talking about here is what would be referred to as a 'perfect hedge'; a binary outcome where downside is totally mitigated by a risk management strategy. That's not how it works IRL. Pay attention; this is the tricky part.
You can't take a single position and conclude that you're adequately hedged because risks are fluid, not static. So you need to constantly adjust your position in order to maximize the value of the hedge and insure your position. You also need to consider exposure to more than one category of risk. There are micro (specific exposure) risks, and macro (trend exposure) risks, and both need to factor into the hedge calculus.
That's why, in the real world, the value of hedging depends entirely on the design of the hedging strategy itself. Here, when we say "value" of the hedge, we're not talking about cash money - we're talking about the intrinsic value of the hedge relative to the the risk profile of your underlying exposure. To achieve this, people hedge dynamically
. In wallstreetbets
terms, this means that as the value of your position changes, you need to change your hedges too. The idea is to efficiently and continuously distribute and rebalance risk across different states and periods, taking value from states in which the marginal cost of the hedge is low and putting it back into states where marginal cost of the hedge is high, until the shadow value of your underlying exposure is equalized across your positions. The punchline, I guess, is that one static position is a hedge in the same way that the finger paintings you make for your wife's boyfriend are art - it's technically correct, but you're only playing yourself by believing it.
Anyway. Obviously doing this as a small potatoes trader is hard but it's worth taking into account. Enough basic shit. So how does this work in markets? 2. A Hedging Taxonomy
The best place to start here is a practical question. What does a business need to hedge against? Think about the specific risk that an individual business faces. These are legion, so I'm just going to list a few of the key ones that apply to most corporates. (1) You have commodity risk for the shit you buy or the shit you use. (2) You have currency risk for the money you borrow. (3) You have rate risk on the debt you carry. (4) You have offtake risk for the shit you sell. Complicated, right? To help address the many and varied ways that shit can go wrong in a sophisticated market, smart operators like yours truly have devised a whole bundle of different instruments which can help you manage the risk. I might write about some of the more complicated ones in a later post if people are interested (CDO/CLOs, strip/stack hedges and bond swaps with option toggles come to mind) but let's stick to the basics for now.
A swap is one of the most common forms of hedge instrument, and they're used by pretty much everyone that can afford them. The language is complicated but the concept isn't, so pay attention and you'll be fine. This is the most important part of this section so it'll be the longest one.
Swaps are derivative contracts with two counterparties (before you ask, you can't trade 'em on an exchange - they're OTC instruments only). They're used to exchange one cash flow for another cash flow of equal expected value; doing this allows you to take speculative positions on certain financial prices or to alter the cash flows of existing assets or liabilities within a business. "Wait, Fuzz; slow down! What do you mean sets of cash flows?". Fear not, little autist. Ol' Fuzz has you covered.
The cash flows I'm talking about are referred to in swap-land as 'legs'. One leg is fixed - a set payment that's the same every time it gets paid - and the other is variable - it fluctuates (typically indexed off the price of the underlying risk that you are speculating on / protecting against). You set it up at the start so that they're notionally equal and the two legs net off; so at open, the swap is a zero NPV instrument. Here's where the fun starts. If the price that you based the variable leg of the swap on changes, the value of the swap will shift; the party on the wrong side of the move ponies up via the variable payment. It's a zero sum game.
I'll give you an example using the most vanilla swap around; an interest rate trade. Here's how it works. You borrow money from a bank, and they charge you a rate of interest. You lock the rate up front, because you're smart like that. But then - quelle surprise
! - the rate gets better
after you borrow. Now you're bagholding to the tune of, I don't know, 5 bps. Doesn't sound like much but on a billion dollar loan that's a lot of money (a classic example of the kind of 'small, deep hole' that's terrible for profits). Now, if you had a swap contract on the rate before you entered the trade, you're set; if the rate goes down, you get a payment under the swap. If it goes up, whatever payment you're making to the bank is netted off by the fact that you're borrowing at a sub-market rate. Win-win! Or, at least, Lose Less / Lose Less. That's the name of the game in hedging.
There are many
different kinds of swaps, some of which are pretty exotic; but they're all different variations on the same theme. If your business has exposure to something which fluctuates in price, you trade swaps to hedge against the fluctuation. The valuation of swaps is also super interesting but I guarantee you that 99% of you won't understand it so I'm not going to try and explain it here although I encourage you to google it if you're interested.
Because they're OTC, none of them are filed publicly. Someeeeeetimes you see an ISDA (dsicussed below) but the confirms themselves (the individual swaps) are not filed. You can usually read about the hedging strategy in a 10-K, though. For what it's worth, most modern credit agreements ban speculative hedging. Top tip: This is occasionally something worth checking in credit agreements when you invest in businesses that are debt issuers - being able to do this increases the risk profile significantly and is particularly important in times of economic volatility (ctrl+f "non-speculative" in the credit agreement to be sure).
A forward is a contract made today for the future delivery of an asset at a pre-agreed price. That's it. "But Fuzzy! That sounds just like a futures contract!". I know. Confusing, right? Just like a futures trade, forwards are generally used in commodity or forex land to protect against price fluctuations. The differences between forwards and futures are small but significant. I'm not going to go into super
boring detail because I don't think many of you are commodities traders but it is still an important thing to understand even if you're just an RH jockey, so stick with me.
Just like swaps, forwards are OTC contracts - they're not publicly traded. This is distinct from futures, which are traded on exchanges (see The Ballad Of Big Dick Vick
for some more color on this). In a forward, no money changes hands until the maturity date of the contract when delivery and receipt are carried out; price and quantity are locked in from day 1. As you now know having read about BDV, futures are marked to market daily, and normally people close them out with synthetic settlement using an inverse position. They're also liquid, and that makes them easier to unwind or close out in case shit goes sideways.
People use forwards when they absolutely have to get rid of the thing they made (or take delivery of the thing they need). If you're a miner, or a farmer, you use this shit to make sure that at the end of the production cycle, you can get rid of the shit you made (and you won't get fucked by someone taking cash settlement over delivery). If you're a buyer, you use them to guarantee that you'll get whatever the shit is that you'll need at a price agreed in advance. Because they're OTC, you can also exactly tailor them to the requirements of your particular circumstances.
These contracts are incredibly byzantine (and there are even crazier synthetic forwards you can see in money markets for the true degenerate fund managers). In my experience, only Texan oilfield magnates, commodities traders, and the weirdo forex crowd fuck with them. I (i) do not own a 10 gallon hat or a novelty size belt buckle (ii) do not wake up in the middle of the night freaking out about the price of pork fat and (iii) love greenbacks too much to care about other countries' monopoly money, so I don't fuck with them.
No, not the kind your wife is encouraging you to wear try out to 'spice things up' in the bedroom during quarantine. Collars are actually the hedging strategy most applicable
to WSB. Collars deal with options! Hooray!
To execute a basic collar (also called a wrapper by tea-drinking Brits and people from the Antipodes), you buy an out of the money put while simultaneously writing a covered call on the same equity. The put protects your position against price drops and writing the call produces income that offsets the put premium. Doing this limits your tendies (you can only profit up to the strike price of the call) but also writes down your risk. If you screen large volume trades with a VOL/OI of more than 3 or 4x (and they're not bullshit biotech stocks), you can sometimes see these being constructed in real time as hedge funds protect themselves on their shorts. (3) All About ISDAs, CDS and Synthetic CDOs
You may have heard about the mythical ISDA
. Much like an indenture (discussed in my post on $F), it's a magic legal machine that lets you build swaps via trade confirms with a willing counterparty. They are very complicated
legal documents and you need to be a true expert to fuck with them. Fortunately, I am, so I do. They're made of two parts; a Master (which is a form agreement that's always the same) and a Schedule (which amends the Master to include your specific terms). They are also the engine behind just about every major credit crunch of the last 10+ years.
First - a brief explainer. An ISDA is a not in and of itself a hedge - it's an umbrella contract that governs the terms of your swaps, which you use to construct your hedge position. You can trade commodities, forex, rates, whatever, all under the same ISDA.
Let me explain. Remember when we talked about swaps? Right. So. You can trade swaps on just about anything. In the late 90s and early 2000s, people had the smart idea of using other people's debt and or credit ratings as the variable leg of swap documentation. These are called credit default swaps
. I was actually starting out at a bank during this time and, I gotta tell you, the only thing I can compare people's enthusiasm for this shit to was that moment in your early teens when you discover jerking off. Except, unlike your bathroom bound shame sessions to Mom's Sears catalogue, every single person you know felt that way too; and they're all doing it at once. It was a fiscal circlejerk of epic proportions, and the financial crisis was the inevitable bukkake finish. WSB autism is absolutely no comparison for the enthusiasm people had during this time for lighting each other's money on fire.
Here's how it works. You pick a company. Any company. Maybe even your own! And then you write a swap. In the swap, you define "Credit Event" with respect to that company's debt as the variable leg . And you write in... whatever you want. A ratings downgrade, default under the docs, failure to meet a leverage ratio or FCCR for a certain testing period... whatever. Now, this started out as a hedge position, just like we discussed above. The purest of intentions, of course. But then people realized - if bad shit happens, you make money
. And banks... don't like calling in loans or forcing bankruptcies. Can you smell what the moral hazard is cooking?
Enter synthetic CDOs. CDOs are basically pools of asset backed securities that invest in debt (loans or bonds). They've been around for a minute but they got famous in the 2000s because a shitload of them containing subprime mortgage debt went belly up in 2008. This got a lot of publicity because a lot of sad looking rednecks got foreclosed on and were interviewed on CNBC. "OH!", the people cried. "Look at those big bad bankers buying up subprime loans! They caused this!". Wrong answer, America. The debt wasn't the problem. What a lot of people don't realize is that the real meat of the problem was not in regular way CDOs investing in bundles of shit mortgage debts in synthetic CDOs investing in CDS predicated on that debt
. They're synthetic
because they don't have a stake in the actual underlying debt; just the instruments riding on the coattails. The reason these are so popular (and remain so) is that smart structured attorneys and bankers like your faithful correspondent realized that an even more
profitable and efficient way of building high yield products with limited downside was investing in instruments that profit from failure of debt and in
instruments that rely on that debt and then hedging that
exposure with other CDS instruments in paired trades, and on and on up the chain. The problem with doing this was that everyone wound up exposed to everybody else's books as a result, and when one went tits up, everybody did. Hence, recession, Basel III, etc. Thanks, Obama.
Heavy investment in CDS can also have a warping effect on the price of debt (something else that happened during the pre-financial crisis years and is starting to happen again now). This happens in three different ways. (1) Investors who previously were long on the debt hedge their position by selling
CDS protection on the underlying, putting downward pressure on the debt price. (2) Investors who previously shorted the debt switch to buying
CDS protection because the relatively illiquid debt (partic. when its a bond) trades at a discount below par compared to the CDS. The resulting reduction in short selling puts upward pressure on the bond price. (3) The delta in price and actual value of the debt tempts some investors to become NBTs (neg basis traders) who long the debt and purchase CDS protection. If traders can't take leverage, nothing happens to the price of the debt. If basis traders can
take leverage (which is nearly always the case because they're holding a hedged position), they can push up or depress the debt price, goosing swap premiums etc. Anyway. Enough technical details.
I could keep going. This is a fascinating topic that is very poorly understood and explained, mainly because the people that caused it all still work on the street and use the same tactics today (it's also terribly
taught at business schools because none of the teachers were actually around to see how this played out live). But it relates to the topic of today's lesson, so I thought I'd include it here.
Work depending, I'll be back next week with a covenant breakdown. Most upvoted ticker gets the post.
* In a total blowout, $PLAY won. So it's D&B time next week. Post will drop Monday at market open.
What factors predict the success of a Steam game?
I've seen quite a few discussions, comments and questions on /gamedev
about what determines a game's success. How much does quality matter? Is establishing market awareness before launch the only thing that matters? Does a demo help or hurt? If your game has a poor launch, how likely is it to recover? Is it possible to roughly predict the sales of a game before launch?
In preparation for my game's launch
, I spent a lot of time monitoring upcoming releases trying to find the answer to these questions. I compiled a spreadsheet, noted followers, whether it was Early Access or not, and saw how many reviews it received in the first week, month and quarter.
I'm sharing this data now in the hopes that it helps other developers understand and predict their games' sales.
First some notes on the data:
- One of the important sources of data are the number Steam reviews. There is good evidence that these correlate strongly with copies sold, with frequently cited ratios of 50 sales per Steam review, but there's a wide range. It seems likely that the majority of Steam games fall between 25 and 120 sales per Steam review, but there are outliers. Also, games with a very small number of reviews are much more likely to be outliers in this respect. My own game is the only game I have hard sales numbers for. You can read my lengthy Reddit post on its release, but the relevant numbers are that it sold 1587 copies in the first week and 3580 copies in its first quarter.
- The total number of games in the sample was 115.
- I selected games semi-randomly from from both Popular Upcoming and All Upcoming. This favors the popular upcoming tab somewhat and this was deliberate: I wanted a diverse sample but also one not completely dominated with titles that sold zero copies.
- Games are ordered by their release date which range from 10/26/18 to 12/20/18.
|Game ||Price ||Launch Discount ||Week Guess ||Week actual ||3 Month ||3 Month/week ||Followers ||Early Access ||Demo ||Review Score |
|Pit of Doom ||9.99 ||0 ||7 ||27 ||43 ||1.592592593 ||295 ||Y ||N ||0.8 |
|Citrouille ||9.99 ||0.2 ||16 ||8 ||12 ||1.5 ||226 ||N ||N || |
|Corspe Party: Book ||14.99 ||0.1 ||32 ||40 ||79 ||1.975 ||1015 ||N ||N ||0.95 |
|Call of Cthulhu ||44.99 ||0 ||800 ||875 ||1595 ||1.822857143 ||26600 ||N ||N ||0.74 |
|On Space ||0.99 ||0.4 ||0 ||0 ||0 || ||4 ||N ||N || |
|Orphan ||14.99 ||0 ||50 ||0 ||8 || ||732 ||N ||N || |
|Black Bird ||19.99 ||0 ||20 ||13 ||34 ||2.615384615 ||227 ||N ||N || |
|Gloom ||6.99 ||0 ||20 ||8 ||17 ||2.125 ||159 ||N ||N || |
|Gilded Rails ||5.99 ||0.35 ||2 ||3 ||7 ||2.333333333 ||11 ||N ||Y || |
|The Quiet Man ||14.99 ||0.1 ||120 ||207 ||296 ||1.429951691 ||5596 ||N ||N ||0.31 |
|KartKraft ||19.99 ||0.1 ||150 ||90 ||223 ||2.477777778 ||7691 ||Y ||N ||0.84 |
|The Other Half ||7.99 ||0 ||2 ||3 ||27 ||9 ||91 ||N ||Y ||0.86 |
|Parabolus ||14.99 ||0.15 ||0 ||0 ||0 || ||16 ||N ||Y || |
|Yet Another Tower Defense ||1.99 ||0.4 ||20 ||22 ||38 ||1.727272727 ||396 ||N ||N ||0.65 |
|Galaxy Squad ||9.99 ||0.25 || ||8 ||42 ||5.25 ||3741 ||Y ||N ||0.87 |
|Swords and Soldiers 2 ||14.99 ||0.1 ||65 ||36 ||63 ||1.75 ||1742 ||N ||N ||0.84 |
|SpitKiss ||2.99 ||0 ||3 ||1 ||2 ||2 ||63 ||N ||N || |
|Holy Potatoes ||14.99 ||0 ||24 ||11 ||22 ||2 ||617 ||N ||N ||0.7 |
|Kursk ||29.99 ||0.15 ||90 ||62 ||98 ||1.580645161 ||2394 ||N ||N ||0.57 |
|SimpleRockets 2 ||14.99 ||0.15 ||90 ||142 ||272 ||1.915492958 ||3441 ||Y ||N ||0.85 |
|Egress ||14.99 ||0.15 ||160 ||44 ||75 ||1.704545455 ||7304 ||Y ||N ||0.67 |
|Kynseed ||9.99 ||0 ||600 ||128 ||237 ||1.8515625 ||12984 ||Y ||N ||0.86 |
|11-11 Memories ||29.99 ||0 ||30 ||10 ||69 ||6.9 ||767 ||N ||N ||0.96 |
|Rage in Peace ||12.99 ||0.1 ||15 ||10 ||42 ||4.2 ||377 ||N ||N ||0.85 |
|One Hour One Life ||19.99 ||0 ||12 ||153 ||708 ||4.62745098 ||573 ||N ||N ||0.81 |
|Optica ||9.99 ||0 ||0 ||2 ||3 ||1.5 ||18 ||N ||N || |
|Cybarian ||5.99 ||0.15 ||8 ||4 ||18 ||4.5 ||225 ||N ||N || |
|Zeon 25 ||3.99 ||0.3 ||3 ||11 ||12 ||1.090909091 ||82 ||Y ||N || |
|Of Gods and Men ||7.99 ||0.4 ||3 ||10 ||18 ||1.8 ||111 ||N ||Y || |
|Welcome to Princeland ||4.99 ||0.1 ||1 ||15 ||55 ||3.666666667 ||30 ||N ||N ||0.85 |
|Zero Caliber VR ||24.99 ||0.1 ||100 ||169 ||420 ||2.485207101 ||5569 ||Y ||N ||0.73 |
|HellSign ||14.99 ||0 ||100 ||131 ||334 ||2.549618321 ||3360 ||Y ||N ||0.85 |
|Thief Simulator ||19.99 ||0.15 ||400 ||622 ||1867 ||3.001607717 ||10670 ||N ||N ||0.81 |
|Last Stanza ||7.99 ||0.1 ||8 ||2 ||4 ||2 ||228 ||N ||Y || |
|Evil Bank Manager ||11.99 ||0.1 || ||106 ||460 ||4.339622642 ||8147 ||Y ||N ||0.78 |
|Oppai Puzzle ||0.99 ||0.3 || ||36 ||93 ||2.583333333 ||54 ||N ||N ||0.92 |
|Hexen Hegemony ||9.99 ||0.15 ||3 ||1 ||5 ||5 ||55 ||Y ||N || |
|Blokin ||2.99 ||0 ||0 ||0 ||0 ||0 ||10 ||N ||N || |
|Light Fairytale Ep 1 ||9.99 ||0.1 ||80 ||23 ||54 ||2.347826087 ||4694 ||Y ||N ||0.89 |
|The Last Sphinx ||2.99 ||0.1 ||0 ||0 ||1 ||0 ||17 ||N ||N || |
|Glassteroids ||9.99 ||0.2 ||0 ||0 ||0 ||0 ||5 ||Y ||N || |
|Hitman 2 ||59.99 ||0 ||2000 ||2653 ||3677 ||1.385978138 ||52226 ||N ||N ||0.88 |
|Golf Peaks ||4.99 ||0.1 ||1 ||8 ||25 ||3.125 ||46 ||N ||N ||1 |
|Sipho ||13.99 ||0 ||24 ||5 ||14 ||2.8 ||665 ||Y ||N || |
|Distraint 2 ||8.99 ||0.1 ||40 ||104 ||321 ||3.086538462 ||1799 ||N ||N ||0.97 |
|Healing Harem ||12.99 ||0.1 ||24 ||10 ||15 ||1.5 ||605 ||N ||N || |
|Spark Five ||2.99 ||0.3 ||0 ||0 ||0 ||0 ||7 ||N ||N || |
|Bad Dream: Fever ||9.99 ||0.2 ||30 ||78 ||134 ||1.717948718 ||907 ||N ||N ||0.72 |
|Underworld Ascendant ||29.99 ||0.15 ||200 ||216 ||288 ||1.333333333 ||8870 ||N ||N ||0.34 |
|Reentry ||19.99 ||0.15 ||8 ||24 ||78 ||3.25 ||202 ||Y ||N ||0.95 |
|Zvezda ||5.99 ||0 ||2 ||0 ||0 ||0 ||25 ||Y ||Y || |
|Space Gladiator ||2.99 ||0 ||0 ||1 ||2 ||2 ||5 ||N ||N || |
|Bad North ||14.99 ||0.1 ||500 ||360 ||739 ||2.052777778 ||15908 ||N ||N ||0.8 |
|Sanctus Mortem ||9.99 ||0.15 ||3 ||3 ||3 ||1 ||84 ||N ||Y || |
|The Occluder ||1.99 ||0.2 ||1 ||1 ||1 ||1 ||13 ||N ||N || |
|Dark Fantasy: Jigsaw ||2.99 ||0.2 ||1 ||9 ||36 ||4 ||32 ||N ||N ||0.91 |
|Farming Simulator 19 ||34.99 ||0 ||1500 ||3895 ||5759 ||1.478562259 ||37478 ||N ||N ||0.76 |
|Don't Forget Our Esports Dream ||14.99 ||0.13 ||3 ||16 ||22 ||1.375 ||150 ||N ||N ||1 |
|Space Toads Mayhem ||3.99 ||0.15 ||1 ||2 ||3 ||1.5 ||18 ||N ||N || |
|Cattle Call ||11.99 ||0.1 ||10 ||19 ||53 ||2.789473684 ||250 ||Y ||N ||0.71 |
|Ralf ||9.99 ||0.2 ||0 ||0 ||2 ||0 ||6 ||N ||N || |
|Elite Archery ||0.99 ||0.4 ||0 ||2 ||3 ||1.5 ||5 ||Y ||N || |
|Evidence of Life ||4.99 ||0 ||0 ||2 ||4 ||2 ||10 ||N ||N || |
|Trinity VR ||4.99 ||0 ||2 ||8 ||15 ||1.875 ||61 ||N ||N || |
|Quiet as a Stone ||9.99 ||0.1 ||1 ||1 ||4 ||4 ||42 ||N ||N || |
|Overdungeon ||14.99 ||0 ||3 ||86 ||572 ||6.651162791 ||77 ||Y ||N ||0.91 |
|Protocol ||24.99 ||0.15 ||60 ||41 ||117 ||2.853658537 ||1764 ||N ||N ||0.68 |
|Scraper: First Strike ||29.99 ||0 ||3 ||3 ||15 ||5 ||69 ||N ||N || |
|Experiment Gone Rogue ||16.99 ||0 ||1 ||1 ||5 ||5 ||27 ||Y ||N || |
|Emerald Shores ||9.99 ||0.2 ||0 ||1 ||2 ||2 ||12 ||N ||N || |
|Age of Civilizations II ||4.99 ||0 ||600 ||1109 ||2733 ||2.464382326 ||18568 ||N ||N ||0.82 |
|Dereliction ||4.99 ||0 ||0 ||0 ||0 ||#DIV/0! ||18 ||N ||N || |
|Poopy Philosophy ||0.99 ||0 ||0 ||6 ||10 ||1.666666667 ||6 ||N ||N || |
|NOCE ||17.99 ||0.1 ||1 ||3 ||4 ||1.333333333 ||35 ||N ||N || |
|Qu-tros ||2.99 ||0.4 ||0 ||3 ||7 ||2.333333333 ||4 ||N ||N || |
|Mosaics Galore. Challenging Journey ||4.99 ||0.2 ||1 ||1 ||8 ||8 ||14 ||N ||N || |
|Zquirrels Jump ||2.99 ||0.4 ||0 ||1 ||4 ||4 ||9 ||N ||N || |
|Dark Siders III ||59.99 ||0 ||2400 ||1721 ||2708 ||1.573503777 ||85498 ||N ||N ||0.67 |
|R-Type Dimensions Ex ||14.99 ||0.2 ||10 ||48 ||64 ||1.333333333 ||278 ||N ||N ||0.92 |
|Artifact ||19.99 ||0 ||7000 ||9700 ||16584 ||1.709690722 ||140000 ||N ||N ||0.53 |
|Crimson Keep ||14.99 ||0.15 ||20 ||5 ||6 ||1.2 ||367 ||N ||N || |
|Rival Megagun ||14.99 ||0 ||35 ||26 ||31 ||1.192307692 ||818 ||N ||N || |
|Santa's Workshop ||1.99 ||0.1 ||3 ||1 ||1 ||1 ||8 ||N ||N || |
|Hentai Shadow ||1.99 ||0.3 || ||2 ||12 ||6 ||14 ||N ||N || |
|Ricky Runner ||12.99 ||0.3 ||3 ||6 ||13 ||2.166666667 ||66 ||Y ||N ||0.87 |
|Pro Fishing Simulator ||39.99 ||0.15 ||24 ||20 ||19 ||0.95 ||609 ||N ||N ||0.22 |
|Broken Reality ||14.99 ||0.1 ||60 ||58 ||138 ||2.379310345 ||1313 ||N ||Y ||0.98 |
|Rapture Rejects ||19.99 ||0 ||200 ||82 ||151 ||1.841463415 ||9250 ||Y ||N ||0.64 |
|Lost Cave ||19.99 ||0 ||3 ||8 ||11 ||1.375 ||43 ||Y ||N || |
|Epic Battle Fantasy 5 ||14.99 ||0 ||300 ||395 ||896 ||2.26835443 ||4236 ||N ||N ||0.97 |
|Ride 3 ||49.99 ||0 ||75 ||161 ||371 ||2.304347826 ||1951 ||N ||N ||0.74 |
|Escape Doodland ||9.99 ||0.2 ||25 ||16 ||19 ||1.1875 ||1542 ||N ||N || |
|Hillbilly Apocalypse ||5.99 ||0.1 ||0 ||1 ||2 ||2 ||8 ||N ||N || |
|X4 ||49.99 ||0 ||1500 ||2638 ||4303 ||1.63115997 ||38152 ||N ||N ||0.7 |
|Splotches ||9.99 ||0.15 ||0 ||2 ||1 ||0.5 ||10 ||N ||N || |
|Above the Fold ||13.99 ||0.15 ||5 ||2 ||6 ||3 ||65 ||Y ||N || |
|The Seven Chambers ||12.99 ||0.3 ||3 ||0 ||0 ||#DIV/0! ||55 ||N ||N || |
|Terminal Conflict ||29.99 ||0 ||5 ||4 ||11 ||2.75 ||125 ||Y ||N || |
|Just Cause 4 ||59.99 ||0 ||2400 ||2083 ||3500 ||1.680268843 ||50000 ||N ||N ||0.34 |
|Grapple Force Rena ||14.99 ||0 ||11 ||12 ||29 ||2.416666667 ||321 ||N ||Y || |
|Beholder 2 ||14.99 ||0.1 || ||479 ||950 ||1.983298539 ||16000 ||N ||N ||0.84 |
|Blueprint Word ||1.99 ||0 || ||12 ||15 ||1.25 ||244 ||N ||Y || |
|Aeon of Sands ||19.99 ||0.1 ||20 ||12 ||25 ||2.083333333 ||320 ||N ||N || |
|Oakwood ||4.99 ||0.1 || ||32 ||68 ||2.125 ||70 ||N ||N ||0.82 |
|Endhall ||4.99 ||0 ||4 ||22 ||42 ||1.909090909 ||79 ||N ||N ||0.84 |
|Dr. Cares - Family Practice ||12.99 ||0.25 ||6 ||3 ||8 ||2.666666667 ||39 ||N ||N || |
|Treasure Hunter ||16.99 ||0.15 ||200 ||196 ||252 ||1.285714286 ||4835 ||N ||N ||0.6 |
|Forex Trading ||1.99 ||0.4 ||7 ||10 ||14 ||1.4 ||209 ||N ||N || |
|Ancient Frontier ||14.99 ||0 ||24 ||5 ||16 ||3.2 ||389 ||N ||N || |
|Fear the Night ||14.99 ||0.25 ||25 ||201 ||440 ||2.189054726 ||835 ||Y ||N ||0.65 |
|Subterraneus ||12.99 ||0.1 ||4 ||0 ||3 ||#DIV/0! ||82 ||N ||N || |
|Starcom: Nexus ||14.99 ||0.15 || ||53 ||119 ||2.245283019 ||1140 ||Y ||N ||0.93 |
|Subject 264 ||14.99 ||0.2 ||25 ||2 ||3 ||1.5 ||800 ||N ||N || |
|Gris ||16.9 ||0 ||100 ||1484 ||4650 ||3.133423181 ||5779 ||N ||N ||0.96 |
|Exiled to the Void ||7.99 ||0.3 ||9 ||4 ||11 ||2.75 ||84 ||Y ||N || |
For the columns that are not self-explanatory:
- Launch Discount: Percent first week discount, 0.25 = 25% off
- Week Guess: This is my guess, made before the game launched as to how many Steam purchaser reviews it would have after exactly one week.
- Week Actual: The number of reviews that the game had after 1 week.
- 3 Month: The number of reviews that the game had after 3 months.
- Followers: The number of group followers the game had prior to launch. In some cases this recorded just before launch, in some cases up to a week before.
- Review score: The percent favorable score on Steam at the one month mark. Games needed a minimum of 20 reviews to be counted.
Question 1: Does Quality Predict Success?
There was a recent blog post stating that the #1 metric for indie games' success is how good it is.
Quality is obviously a subjective metric. The most obvious objective measure of quality for Steam games is their % Favorable Review score. This is the percentage of reviews by purchasers of the game that gave the game a positive rating. I excluded any game that did not have at least 20 user reviews in the first month, which limited the sample size to 56.
The (Pearson) correlation of a game's review score to its number of reviews three months after its release was -0.2. But 0.2 (plus or minus) isn't a very strong correlation at all. More importantly, Pearson correlation can be swayed if the data contains some big outliers. Looking at the actual games, we can see that the difference is an artifact of an outlier. Literally. Valve's Artifact by far had the most reviews after three months and had one of the lowest review scores (53% at the time). Removing this game from the data changed the correlation to essentially zero.
Spearman's Rho, an alternative correlation model that correlates rank position and minimizes the effect of huge outliers produced a similar result. Conclusion: If there is correlation between a game's quality (as measured by Steam review score) and first quarter sales (as measured by total review count), it is too subtle to be detected in this data.
Question 2: Do Demos, Early Access or Launch Discounts Affect Success/Failure?
Unfortunately, there were so few games that had demos prior to release (10) that only a very strong correlation would really tell us anything. As it happens, there was no meaningful correlation one way or another.
There were more Early Access titles (28), but again the correlation was too small to be meaningful.
More than half the titles had a launch week discount and there was actually a moderate negative correlation of -0.3 between having a launch discount and first week review count. However it appears that this is primarily the result of the tendency of AAA titles (which sell the most copies) to not do launch discounts. Removing the titles that likely grossed over a $1 million in the first week reduced the correlation to basically zero. Conclusion: Insufficient data. No clear correlation between demos, Early Access or launch discount and review counts: if they help or hurt the effect is not consistent enough to be seen here.
Question 3: Does pre-launch awareness (i.e., Steam followers) predict success?
You can see the number of "followers" for any game on Steam by searching for its automatically-created Community Group
. Prior to launch, this is a good rough indicator of market awareness.
The correlation between group followers shortly before launch and review count at 3 months was 0.89. That's a very strong positive correlation. The rank correlation was also high (0.85) suggesting that this wasn't the result of a few highly anticipated games.
Save for a single outlier (discussed later), the ratio of 3 month review counts to pre-launch followers ranged from 0 (for the handful of games that never received any reviews) to 1.8, with a median value of 0.1. If you have 1000 followers just prior to launch, then at the end of the first quarter you should expect "about" 100 reviews.
One thing I noticed was that there were a few games that had follower counts that seemed too high compared to secondary indicators of market awareness, such as discussion forum threads and Twitter engagement. After some investigation I came to the conclusion that pre-launch key activations are treated as followers by Steam. If a game gave away a lot of Steam keys before launch (say as Kickstarter rewards or part of beta testing) this would cause the game to appear to have more followers than it had gained "organically." Conclusion: Organic followers prior to launch are a strong predictor of a game's eventual success.
Question 4: What about price?
The correlation between price and review count at 3 month is 0.36, which is moderate correlation. I'm not sure how useful that data point is: it is somewhat obvious that higher budget games have larger marketing budgets.
There is a correlation between price and review score of -0.41. It seems likely that players do factor price into their reviews and a game priced at $60 has a higher bar to clear to earn a thumbs up review than a game priced at $10.
Question 5: Do first week sales predict first quarter results?
The correlation between number of reviews after 1 week and number of reviews after 3 months was 0.99. The Spearman correlation was 0.97. This is the highest correlation I found in the data.
Excluding games that sold very few copies (fewer than 5 reviews after the first week), most games had around twice as many reviews after 3 months as they did after 1 week. This suggests that games sell about as many copies in their first week as they do in the next 12 weeks combined. The vast majority of games had a tail ratio (ratio of reviews at 3 months to 1 week) of between 1.3 to 3.2.
I have seen a number of questions from developers whose game had a poor launch on Steam and wanted to know what they can do to improve sales. While I'm certain post-launch marketing can have an effect on continuing sales, your first week does seem to set hard bounds on your results. Conclusion: ALL SIGNS POINT TO YES
Question 6: Does Quality Help with a Game's "Tail"?
As discussed in the last question while first week sales are very strongly correlated with first quarter, there's still quite a wide range of ratios. Defining a game's Tail Ratio
as the ratio of reviews after 3 months to after 1 week, the lowest value was 0.95 for "Pro Fishing Simulator" which actually managed to lose 1 review. The highest ratio was 6.9, an extreme outlier that I'll talk about later. It is perhaps not a coincidence that the worst tail had a Steam score of 22% and the best tail had a Steam score of 96%.
The overall correlation between the Tail Ratio and Steam score was 0.42. Conclusion: Even though there is no clear correlation between quality and overall review count/sales, there is a moderate correlation between a game's review score and its tail. This suggests that "good games" do better in the long run than "bad games," but the effect is small compared to the more important factor of pre-launch awareness.
Question 7: Is it possible to predict a game's success before launch without knowing its wishlists?
While I was compiling the data for each game, sometime prior to its scheduled launch date, I would make a prediction of how many reviews I thought it would receive in its first week and add that prediction to the spreadsheet.
The #1 factor I used in making my prediction was group follower count. In some cases I would adjust my prediction if I thought that value was off, using secondary sources such as Steam forum activity and Twitter engagement.
The correlation between my guess and the actual value was 0.96, which is a very strong correlation. As you can see in the data, the predictions are, for the most part, in the right ballpack with a few cases where I was way off.
Based on my experience, multiplying the group follower count by 0.1 will, in most cases, give you a ballpark sense of the first
quarter review count. If a game doesn't have at least one question in the discussion forum for every 100 followers, that may indicate that there are large number of "inorganic" followers and you may need to adjust your estimate. Conclusion: Yes, with a few exceptions, using follower data and other indicators you can predict first week results approximately. Given the strong correlation between first week and quarter sales, it should also be possible to have a ballpark idea of first quarter results before launch.
Final Question: What about the outliers you mentioned?
There were a few games in the data that stood out significantly in one way or another.
Outlier #1: Overdungeon. This game had 77 group followers shortly before launch, a fairly small number and based solely on that number I would have expected fewer than a dozen reviews in the first week. It ended up with 86. Not only that, it had a strong tail and finished its first quarter with 572 reviews. This was by a wide margin the highest review count to follower ratio in the sample.
Based on the reviews, it appears to basically be Slay the Spire, but huge in Asia. 90% of the reviews seem to be in Japanese or Chinese. If anyone has some insight to this game's unusual apparent success, I'm very curious.
This seems to be the only clear example in the data of a game with minimal following prior to launch going on to having a solid first quarter.
Outlier #2: 11-11 Memories Retold. This game had 767 group followers shortly before launch, ten times as many as Overdungeon. That's still not a large number for even a small indie title. It had a fair amount going for it, though: it was directed by Yoan Fanise, who co-directed the critally acclaimed Valiant Hearts, a game with a similar theme. It was animated by Aardman Studios of "Wallace and Gromit" fame. Its publisher was Bandai Namco Europe, a not inexperienced publisher. The voice acting was by Sebastian Koch and Elijah Wood. It has dozens of good reviews in both gaming and traditional press. It currently has a 95% positive review rating on Steam.
Despite all that, nobody bought it. 24 hours after it came out it had literally zero reviews on Steam. One week after it came out it had just 10. Three months later it had demonstrated the largest tail in the data, but even then it had only climbed to 69 reviews. Now it's at about 100, an incredible tail ratio, but almost certainly a commercial failure.
This is a solid example that good game + good production values does necessarily equal good sales.
The big take-aways from this analysis are:
- The success of a game on Steam very strongly depends on its first week performance
- A game's first week performance is strongly correlated with its pre-launch market awareness
- Quality does not seem to strongly impact first week performance, but may have some positive effect on a game's "tail"
- All inferences regarding sales are dependent on the relationship between review counts and sales
Thanks for reading!
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