Author: Ian Emerson, Fabric Ventures analyst; Translation: 0xjs@Golden Finance
overview
The gaming industry has annual revenues of $200-300 billion, which is larger than the music and film industries combined.
This is not a new phenomenon, with arcade games alone surpassing pop music and Hollywood combined in 1982. Gameplay is certainly a core draw for players, but surprisingly, throughout the history of the video game industry, value generation has often come from new business models rather than novel gameplay: the adoption of home consoles, digital downloads, and free-to-play games to name a few. These new business models have been made possible by both technological developments and cultural shifts. The next big shift is the sovereign ownership of assets enabled by blockchains, and the permissionless nature of smart contracts that manipulate those assets. When looking for venture capital opportunities in games, one of the best candidates is forever games, games that continually offer players new challenges and progression without ever reaching an end. Such games require balance, eventfulness, competition, player investment, and community. With player-owned assets and permissionless development, such games can now be made possible by increasing player investment and strengthening community involvement.
Video game industry annual revenue (billions of U.S. dollars) by platform
history
One perhaps surprising conclusion when examining the history of gaming is that popular game modes remain relatively durable over time.
This is certainly true for board games like Backgammon, chess, and Go, but it turns out that the biggest drivers of revenue growth in the video game industry are often the result of changes in business models rather than radically new ways of playing the game.
Find the differences between Halo: Combat Evolved, released in 2001, and Halo: Infinite, released in 2021:
Given that 20 years and three console generations of development went by between the first and last versions of Halo, you'd expect more changes.
The biggest change in 20 years isn’t what you do in games, but how you access them and how developers charge you. Halo: Combat Evolved required buying a physical disc in a box at a store. Halo: Infinite was instantly downloadable for free but had pop-ups asking you to spend money on cosmetic items, including $20 just for the privilege of looking like the original game’s protagonist.
Halo's business model has changed more than the game itself
This is not an isolated phenomenon, if we look at the past few decades, technology has disrupted the gaming industry many times by enabling new business models:
In each of these cases, games were early adopters of new technologies and harbingers of broader societal change:
● Home computer
● Digitally distributed software
● Freemium SaaS
● Social virality
● LTV and CAC optimization
● User Generated Content (UGC)
● Modern Internet Consumer
By looking at the industry’s revenue growth through this new lens, one can see the impact these technologies are having.
Games have always been a pioneer in new technologies
Modding
The popularity of new gameplay methods can often be traced back to modding.
A testament to the power of the open movement is “modding,” the practice of modifying video games through built-in editing tools (like the Warcraft III map editor), licensed mod managers (like Steam Workshop), or even illegal, third parties independent of the game publisher.
New business models have spurred so much growth in the industry, but this has not diminished the innovation in the gameplay itself, nor the requirement for games to be fun. However, if you look at the successful new genres recently, most of them are direct descendants of mods.
The game behind Counter-Strike is actually Half-Life
Notable examples of popular game types that came from mods include:
Tactical shooter: Valorant, inspired by Quake's Team Fortress
MOBA: League of Legends from Warcraft III Defense of the Ancients (DotA)
Battle Royale: Fortnite from Arma II DayZ
Most modern competitive games exist thanks to mods
Unfortunately, in each example, despite subsequent games creating and capturing billions of dollars in value, the original creators are not always rewarded for their innovation.
In some examples, the modder found a job at the studio that originally modded the game, or at another studio building a similar game, such as:
● Robin Walker and John Cook, two of the 3 co-founders of Team Fortress, were hired by Valve to develop the standalone Team Fortress Classic and Team Fortress 2
● DotA developers Eul and Icefrog were also hired by Valve to participate in the development of Dota 2
● Dean Hall, the creator of DayZ, later created an independent game of the same name
However, this is only meager compensation considering the success of the mod itself and the entire creation of the new genre. What can be done to ensure that more credit goes to the creators of value?
future
Now that we’ve established that new business models enabled by the adoption of cutting-edge technologies are disrupting the gaming industry, and that mods are creating new game genres, what might be the next big technological shift? Digital sovereignty and the decentralization of data networks, which will lead to:
1. New business model where players own assets
2. Improve modules through permissionless development
Future disruptors of the video game industry
The result of these shifts is the realization of everlasting games, which continually provide players with tangible progress, new experiences, and new challenges, with no end point. They offer one of the best opportunities for creating highly successful venture-scale games, and require 5 key components:
Balance、Eventfulness、Competition、Player Investment、Community
How does web3 impact these components? Gaming is broad, so we’ve broken it down into 3 verticals, each of which can leverage blockchain to varying degrees:
1. Autonomous World (High Touch)
2. MMO/Hardcore
3. Mobile/Casual (Low-Contact)
Autonomous World
As of 2023, most Web3 games primarily explore only one consequence of the blockchain: player-owned assets
The core feature of these early games is that game assets (skins, items, currencies) are not recorded on centralized servers, but on a decentralized blockchain so that users can control what they want to do with them (p2p trade, lend, rent them). This protects players from being punished, but also protects basic services (such as fiat currency exports) from being shut down, such as the CS:GO skin trading account with $2 million worth of skins being banned because Valve wants to maintain its closed ecosystem.
In addition to player-owned assets, blockchain also enables persistence and permissionless development.
Why Web3
Persistence increases people’s willingness to invest value (time, money, and effort) in a game (player investment). As long as there is an active player base, the effort and resources directed toward the game are an investment in a permanent game, rather than an expenditure for a short-lived experience. While it’s nice to have a decentralized ledger of assets, if the game logic is executed on a centralized server, then much of the value of those assets is subject to counterparty risk from those who control that server (developers and server owners). This leads to tragic scenes, such as players’ 14 years of hard work in the Chinese version of World of Warcraft being wiped out in an instant when the licensing agreement between NetEase and Blizzard expired. The game is still popular and the game has not declined, but the disagreement between the companies has hindered player enjoyment and players’ accumulated value/status.
Permissionless development has fostered modding activity, giving rise to the most successful new genre of games. This concept goes beyond simple UI/client/map mods, it takes the community to the next level. MMOs have always been shaped by the actions of the community and players who find bugs or coordinate in unexpected ways. However, rather than leaving the heavy lifting of putting out these fires to the core developers, Autonomous Worlds makes it part of the metagame (evenfulness). Not only does this empower the modding community to fix issues, it also helps with balance, with different metagames running in parallel, with users choosing which state to play, giving them a stronger voice instead of forcing them out.
As we all know, Vitalik Buterin created Ethereum in part because of Blizzard's centralized decision to nerf his warlock's Siphon Life spell in World of Warcraft. If his views were shared by a large portion of the players, the unnerved state might have continued. In fact, there are many private World of Warcraft servers, the largest of which had 800,000 registered accounts, but was shut down by Blizzard. Only after 200,000 people signed a Change.org petition to create an official classic server did Blizzard finally admit to starting development in 2016, and released World of Warcraft Classic in 2019, more than a decade after Blizzard rejected the matter in 200.
We can learn a lot from the story of open source in the early days of the internet. Based on his observations of the Linux kernel development process, Eric Raymond wrote an article in 1997 and later a book in 1999 called The Cathedral and the Bazaar. In it, he describes two competing models of software development, The Cathedral, where code releases are restricted to a select few developers, and The Bazaar, where code is developed in full public view. His central argument is that the more widely available source code is, the faster bugs are discovered and fixed. This is similar to the pattern observed in modding communities and the acceleration of community contributions; even in great games, mods add quality of life improvements and expanded content within days of release. So by empowering the decentralized collective power of the bazaar, much more can be accomplished than if we only looked to the central cathedral for answers.
Open Questions
The following questions remain unanswered, but are currently being explored by many studios and platforms (such as Cartridge and Lattice):
● How we overcome technical limitations, such as incomplete information, automation and collusion, ticking
● How do we align incentives in composable systems?
● In a system without centralized content producers and immutable ground rules, how do we prevent the meta-game from stagnating?
● What areas of game design does Autonomous Worlds uniquely explore?
It is expected that within a year, some of these problems can be solved in production, such as using zero-knowledge proofs to obfuscate the global state, while others may be prohibitively expensive to implement and require games to be designed to avoid them, such as witch resistance and ticking. Others are long-term challenges that require continuous iteration, such as designing incentives, meta-games, and exploring game design.
Hardcore/MMO
Everlasting games are not a concept unique to web3. The longest-lasting board games (e.g., backgammon, chess, and go) have existed in various forms for hundreds to thousands of years. Competitive single-player games like Tetris and split-screen multiplayer sports and fighting games have the potential to become everlasting games even without the internet (sports games like FIFA and Madden would be perfect candidates if it weren’t for the broken console business model that requires annual releases).
Early MMOs like Ultima Online and later Lineage, EverQuest, and Asheron’s Call created communities and iterated events, pioneering virtual economies. Hardcore conversational games like Counter-Strike, League of Legends, and Fortnite brought competitiveness.
Where web3 can contribute is in empowering player investment through tangible virtual goods and inclusively governed communities.
Why Web3
As mentioned above, people are more likely to invest in games and participate in them when they own and fully control their digital assets. There is early data supporting this in the emerging web3 games that compares the population of asset owners to the population of regular players. One of our portfolio companies compared owners to non-owners:
● Conversion rate from visitors to players increased by 4.3 times
● Retain more than 1.8 times of D1
● Retains 7.2 times more D7
● Retains 8.3 times more D30
● Retain 10.1 times more D90
● 1.8x increase in the number of games played per active day
● Combined 2.5-year LTV per player is 10x the highest among similar games in the US
This effect is possible in traditional video games, as an investment of time or money would produce similar results, the difference would be the strength of the attachment - no longer just psychological, but also obviously financial, and aligning the motivations of community members to watch the game (and its assets) succeed.
In addition to increasing player engagement, there are tools available to developers to enable virtual economies. Due to the development of decentralized finance (DeFi) primitives, the surrounding infrastructure for value transfer in web3 is more developed than traditional games, not only in simple p2p transactions, checkout, and fiat currency deposit and withdrawal functions, but also in other areas such as leasing, loans, licensing, and other derivatives. Historically, these activities have only been possible through informal agreements based on trust between players, or with huge compliance overheads that only the largest publishers can support, and even then, they cannot act given the cost. Smart contracts not only enable more enforceable financial agreements, but also reduce or completely eliminate the compliance responsibilities of publishers through self-custody and emerging regulatory changes, thereby enabling real money transactions through fiat currency in/out channels.
Community is where web3 really shines. Almost all games come with End User License Agreements (EULAs) that limit publishers’ responsibilities and liabilities and restrict what players can do, but have you ever read what’s in them? EULAs give publishers ultimate power over players and can ban or penalize players who don’t play by their rules if you’re caught engaging in revenue activities, off-platform transactions, or otherwise consuming/providing services not provided by the publisher itself, but there’s an unmet need among the player base. The most players of traditional games can do is write furiously on community boards that publishers rarely read, or in the most privileged cases vent their frustrations through player boards that may provide feedback to publishers in an advisory manner.
In contrast, one of the core values of web3 is decentralization and providing governance power to the community. Of course, if this is only implemented superficially, the publisher retains control, but at least the game is developed with this in mind, so the publisher does not ignore the community as a source of success (both direct revenue and income) given these expectations. If implemented more meaningfully, such as programmatically without a core developer backdoor, the community can control things like quality of life improvements and dispute resolution that may not require the strict attention of the core developers.
Open Questions
Outstanding issues with the adoption of hardcore, partially offline games revolve around player behavior and the additional friction versus the value proposition provided by blockchain:
● Is there a channel to convert PC gamers to login with their wallet when entering a new game? Why would they want to do this?
● Do the user base of MMO players prefer blockchain games because they participate in deeper governance?
● How do we avoid a game economy where early adopters dominate without providing a proper upgrade path for new players?
These are ongoing problems that studios and developer tool/service providers are iterating on and will continue to improve, just like UX and live services in traditional games.
Leisure/Mobile
Success in casual games lies in minimizing customer acquisition cost (CAC) and maximizing its lifetime value (LTV).
Since casual players mainly use mobile devices and are less involved in the game and the surrounding community, the barrier to entry and the required education level for complex economic and governance systems may be too high.
Why Web3
Therefore, casual games will primarily benefit from the ideological shift towards player-owned assets (player investments).
This has been discussed in the previous sections: Autonomous Worlds and Hardcore Games. The goal is to reduce CAC through the attractiveness of coupons/rewards/assets and increase LTV by increasing retention and willingness to purchase assets that can be recovered in the future or have greater utility than a single game.
Open Questions
It remains to be seen whether casual gamers will indeed have more fun from having assets/prizes/status across games and/or being able to see a return on their investment, and whether the net effect will be increased spending or cause value to drain from previously closed games.
in conclusion
There is still a long way to go to prove the benefits of blockchain in live gaming, but free-to-play games with player-owned assets could present disruptive opportunities to change the business model of video games and permissionless development to accelerate experimentation with novel gameplay, resulting in some truly timeless games.
