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Why suing your rivals makes good business sense

By on September 24, 2009

The social games space is full of lawsuits. Mob Wars creator David Maestri left SGN to launch the game himself, so they sued him. They settled and Maestri then sued Zynga (creator of Mafia Wars) and Playdom (creator of Mobsters). Zynga has filed 22 lawsuits itself so far this year. Even Playfish, which has generally stood aloof from these shenanigans has filed a lawsuit this year (although that was about a third party item seller that was selling Pet Society goods, not a copycat game).

Companies generally avoid lawsuits. They are expensive and time-consuming. The outcome is never certain, no matter how good you think your case is. And they run the risk of a counter-suit, particularly in the murky world of “who is copying who” amongst social games companies.

But there can be a good reason to sue a rival. And that is to scare off VCs.

Social games companies are in a landgrab. At stake: a huge slice of the $45 billion that is spent by consumers on games and games-related consumers at retail stores. The leading social games companies are already making hundreds of millions of dollars or revenue, and are profitable. Playfish and Zynga, for example, haven’t had to dip into their most recent rounds of VC funding at all.

But now that they have blazed the trail, others are following. The social games market will get more competitive. One way of competing is to outspend your rivals on marketing. When you have a warchest of $39 million, that’s a lot of marketing.

But the other way is to prevent your rivals from raising their own warchest. And nothing frightens VCs as much as “contingent liabilities”, a fancy phrase for “uncertain amounts we may have to pay in the future”.

So if you want to march ahead in the battle to win market share on Facebook, spend more than your competitors on marketing and slap a lawsuit on anyone you think might be trying to raise capital to compete with you.

It’s aggressive, but all’s far in love and social games development, right?

About Nicholas Lovell

Nicholas is the founder of Gamesbrief, a blog dedicated to the business of games. It aims to be informative, authoritative and above all helpful to developers grappling with business strategy. He is the author of a growing list of books about making money in the games industry and other digital media, including How to Publish a Game and Design Rules for Free-to-Play Games, and Penguin-published title The Curve: thecurveonline.com
  • JasPurewal

    Hi there Nicholas – a really very interesting article, which gives a gamer/lawyer like me much food for thought.

    A few observations spring to mind (in no particular order):

    (i) While litigation is of course an important strategic weapon in the right circumstances, it is worth bearing in mind that it can also be a double-edged sword: you have to have grounds for the claims you make otherwise, sooner or later, you are going either to get smacked down by the Court or you will come up against someone who won't settle and is willing to take the battle all the way to Court. Which most companies definitely do not want even if they a have strong case (see (ii) below…)

    (ii) Litigation has other risks as well. In particular, the real problems tend to be negative publicity and disclosure of uncomfortable/commercially sensitive information (either of which could be a killer for social gaming businesses which depend upon their gamers' goodwill towards them, as well as third party funding).

    (iii) While I don't disagree with you that targeting other gaming companies' VC funding may be one of the objectives of this kind of litigation, I would have thought a more obvious objective would be that litigation can help to to shut down rival games so that their customer base becomes your customer base, which = £££.

    Best,

    Jas

  • http://en-gb.facebook.com/people/Nicholas-Lovell/739651170 Nicholas Lovell

    Hello Jas,

    I disagree with (iii), and think that the obvious objective is just too risky to be the real reason: The chances of winning are hard to quantify, especially as, for example, Zynga is on the receiving end of a number of lawsuits arguing that it has used other people's ideas. (See the ongoing litigation over Mobwars/Mafia Wars/Mobsters for an example).

    http://www.insidesocialgames.com/2009/09/22/whe

    To my mind, shutting down other people's games isn't a strong enough incentive to run the risk of a counter-suit, and it will only work if you win in court, which is far from assured. Whereas just issuing a lawsuit in the first place (even if you intend to settle) might prevent VCs investing, and that seems to me to be worth the risk.

  • JasPurewal

    Fair point – VCs might just run away at the sight of a lawsuit. But, if lawsuits are so common between games companies of this nature, presumably the canny ones would take a more enlightened approach and only worry about those claims which stand reasonable prospects of causing damage to the prospective fundee company – i.e. claims which may end up shutting down the game or at least reducing its gaming population.

    Jas

  • http://en-gb.facebook.com/people/Nicholas-Lovell/739651170 Nicholas Lovell

    Hello Jas,

    I disagree with (iii), and think that the obvious objective is just too risky to be the real reason: The chances of winning are hard to quantify, especially as, for example, Zynga is on the receiving end of a number of lawsuits arguing that it has used other people's ideas. (See the ongoing litigation over Mobwars/Mafia Wars/Mobsters for an example).

    http://www.insidesocialgames.com/2009/09/22/whe

    To my mind, shutting down other people's games isn't a strong enough incentive to run the risk of a counter-suit, and it will only work if you win in court, which is far from assured. Whereas just issuing a lawsuit in the first place (even if you intend to settle) might prevent VCs investing, and that seems to me to be worth the risk.

  • http://www.olswang.com/profile.asp?sid=118&staffid=6959 JasPurewal

    Fair point – VCs might just run away at the sight of a lawsuit. But, if lawsuits are so common between games companies of this nature, presumably the canny ones would take a more enlightened approach and only worry about those claims which stand reasonable prospects of causing damage to the prospective fundee company – i.e. claims which may end up shutting down the game or at least reducing its gaming population.

    Jas