Thursday, January 28, 2010

Will Currency Hedges Be Key in the Global Microtransaction Model?

I was chatting with Zack Karlsson and Stephanie O'Malley Deming at Game::Business::Law last evening, and the topic of currency hedging came up. The discussion was certainly interesting, but unfortunately short lived, and I thought it might serve as an interesting point to examine. While hedging has been going on to mitigate risk in the global market for quite some time, the broader question may well be how currency analysis may be the next big step in managing a global micro-transaction model. It may very well already be going on, but among those of us in the discussion, no one was aware of an example of it.

For those not familiar with hedging, there are literally dozens of articles available online to describe the basics, but in short, it's a method to mitigate the risk of a fluctuation of currency values, but can also be a means to make money should good decisions be made on hedges. Similarly, by holding currency and trading it over time without hedging, it may be possible to make more from the transaction than its initial value, which can be compounded if you're accruing interest on the held currency. This is all relatively well known use of currency s an investment.

The reason hedging in particular makes for an interesting proposition for a micro-transaction game is that the lifecycle tends to be longer and that the cash flow can be less predictable than a traditional retail release model. More importantly, these transactions tend to be direct, whereas a game published through Xbox Live Arcade, which may have a long tail through expansions or DLC, may not have the ability or opportunity to hold other currency over time by virtue of the arrangement with Microsoft for global distribution.

The very fact that these discussions are coming up just shows how large and global the industry has become, if there was any remaining doubt. Definitely, there is already complex business modeling and risk structure within the industry, but given the rate of innovation, there may be places where some of these models, as used in other industries, are adopted and applied to these newer business models.

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