As a general rule, I try to read everything that Matthew Ball writes about media at REDEF. His work is high-quality, perceptive, and I always learn something. So I was surprised, but also intrigued, when I found myself objecting to his most recent post on gaming:
The essence of the post is as follows:
-The video game industry, which is big, profitable, and a perennial bellwether for what’s going on in tech generally (all true things!) is gearing up for a monumental shift towards cloud-based gaming platforms like Google Stadia. In the future, we’ll stream games just like stream Netflix. Our PCs and consoles will really just be I/O terminals.
-People in the gaming industry are excited about this shift because it’ll grow the gaming industry along the two dimensions that count: number of subscribers, and annual revenue per user (ARPU). Ball disagrees: he doesn’t foresee this happening, mostly because existing game systems already work really well, and streaming doesn’t reduce that much friction relative to status quo. It’s unclear who these new users will be, or who will spend more on games because of this.
-That being said, Ball still sees a path by which streaming games can grow the market: by changing what kind of gameplay is possible. Massively participatory multiplayer games, better eSports, better audience experiences, and other such things can be improved in a cloud gaming paradigm where we get to rethink game design from scratch. So if cloud gaming does create any growth, expect it to come from these kind of creative initiatives.
Here’s the thing. I don’t disagree with any of Ball’s takeaways. I think it’s all well-thought out and reasonable, especially the third point which comes close to capturing what’ll really happen. My issue with the post is that it misses the biggest, most important trend that’s happening in gaming right now, right in front of our faces.
In my opinion, this trend is so important that in ten to fifteen years the business model for most of gaming will be radically different than it is today; in a shift of comparable magnitude to when we moved from purchasing games to subscribing to them. That shift is:
The next great business model of gaming is one where we subscribe to people, not to games. Games will still make lots of money, but in the way that concert venues make money. The future unit economics of video games won’t be Subs x ARPU; it’ll be GTV x Take Rate.
In order to get there, let's first connect some dots between three important trends:
First: the rising popularity of e-sports, streaming, and the general phenomenon of people watching other people play video games. Just like music or sports, watching talented people play and perform can be just as fun as playing yourself. It’s entertaining in a different way, but it’s much more accessible: you don’t need any skills, equipment, or even full attention; all you need is the ability to watch.
There’s a whole spectrum of watching other people game. On one side you have hardcore e-sports, where serious gamers with ridiculous skillsets square off against one another in NBA-sized arenas, and the gameplay itself is centrally situated. On the other side, which I find way more interesting, you have streamers who are more like talk show hosts. The main activity is really the hosts and their guests bantering, having a good time, and generally being fun to watch; the games are sometimes central but sometimes in the background; they're a pretext for everybody being there, but not always the main event. Twitch has really brought this towards the mainstream over the past couple years.
Second: the star power of streamers like Ninja, who own their own audiences and have real leverage over the platforms that host them. Microsoft turned heads earlier this week by luring Tyler “Ninja” Blevins, one of gaming’s biggest stars, away from Amazon’s streaming platform Twitch and onto their own, Mixer. If you are over age 30 and have no idea what this means: this is a bit like when Howard Stern moved to Sirius XM satellite radio and brought his huge, loyal audience with him.
As streaming comes into its own as a new form of entertainment, a whole new generation of talent on Youtube and Twitch have devoted fans who care more about the streamer (who is the star artist) than about the particular game they’re playing. Crucially, you don’t have to be a mega-star in order to make money off of streaming. The format is turning out to be perfect for the “1000 true fans” lifestyle business model, where fun hosts with modest but dedicated fan bases can earn a real living doing this stuff, powered by platforms like Twitch, Patreon and Discord. I am absolutely convinced this trend will take off even more in the next couple years.
Third: the “Fortnite isn’t a game, it’s a place” phenomenon. As originally articulated by Anoop Ranganath and Owen Williams, a lot of new games - and especially Fortnite, the biggest one of all - are embracing their product role as a place you go to have fun with your friends, rather than a challenging game you try to beat. It’s spelled out in Fortnite’s business model: the game is free to play, and users pay money in-game for upgrades of all kinds for their characters, like skins for their equipment and fun dance moves. Crucially, none of these upgrades influence actual gameplay. Players aren't spending money to gain a competitive advantage of any kind; they’re spending money in order to look cool and have fun. It seems silly, but Fortnite sold a ridiculous $2.4 billion (!) worth of this stuff last year. Money talks.
Fortnite has its stars too, but they’re aren’t necessary: it can be just as fun with a group of friends. The game is primarily about people, not just gameplay; their business model admits as much. The game, as we’ve seen before, is a venue where you go have a good time, perform and goof around with your friends; it happens to be successful because it’s a really fun venue.
Something interesting is happening at the intersection of all of this. The gaming industry has a compelling new product format that people love: performers. The customer is someone who cares about specific people, and will spend time and money in order to watch and experience and play with those people; the game is there, and it’s important, but the people are more important.
Meanwhile, the dominant business model paradigm for video games over the last decade and a half does not work well for this new product format. We evaluate games in terms of how many subscribers the game can hold onto, and how much ARPU the game is able to sustainably extract from those users, either through subscription fees or in-game purchases. But all of the interesting growth in gaming is in a format where the primary “subscription dynamic”, if you will, is between person to person (friend-to-friend, or fan-to-star), rather than from person-to-game.
I mean, think of it this way. When a star Twitch streamer gets a million people a month to watch them play Mario Kart, the game doesn’t really win from that in the way it should. The best a game can hope for out of this streaming session is good exposure that’ll translate into more gameplay down the road. I mean, they’ll get it, but that seems like a non-ideal way to think about your business. As it currently stands, the games are getting supremely outmaneuvered by platforms like Twitch, who thoroughly understand the performer-centric dynamic of how gaming works now and were built this way from day one.
Gaming’s next great business model has to embrace the trend of people subscribing to other people, and make money in a way that comes naturally and doesn’t fight the fact that star performers are the ones with the power. The simplest way I can articulate this is that the great games of the future will look something like concert venues. They’ll be the place where you go hang out with your friends, see you favourite performer, and have a good time. And then while you’re spending time there, the game will make money off of you in all sorts of addictive and socially compulsive ways, much like concert venues make their money by selling alcohol.
The next natural business model of gaming is emerging today on Twitch. Consider streamers like The Go Off Kings, who I primarily know from their hosts’ Twitter accounts but have followed curiously into the streaming world a bit. You immediately notice how the game (with the Twitch stream layered on top) is like a venue where everybody goes to see Jesse, Rob, Stefan, and their guests perform, and how naturally and fluidly it monetizes. For example, in addition to fans subscribing to support the hosts, there's a soundboard where viewers can pay $5 a pop in order to insert sound effects at inopportune moments - which is a) hysterically funny when done right, b) a way of monetizing viewers that doesn’t feel phoney or forced at all, and c) a totally natural thing to do when you’re hanging out somewhere with your friends - show off, have fun, and spend a little money on entertainment. Not all of gaming will look exactly like this, of course, but it’s a peek at the future for sure.
As it stands today, most of this is happening on Twitch, rather than in the game itself. (Fortnite, as always, is ahead of the curve as an exception and is building out many of these features in-house.) It’s not hard to imagine how much richer and more interesting things could be if the game designers incorporated this “venue capacity” directly into the fabric of the game itself. As fun as Twitch is currently, it’s limited as a format to a few hosts broadcasting to a large number of limited-ability viewers. Things will really take off when game designers start really building and monetizing their games as platforms to host, facilitate, and monetize interpersonal behaviour at the everyone-to-everyone scale. Fortnite has figured this out, even though they’ve only scratched the surface of what is possible.
The biggest question, then, is how will games differentiate themselves and become hits in this new business model? There are a few possible ways. First is an obvious one: be the most fun venue. A game that’s super fun to play will do better than one that isn’t. Another clear way, as this week’s news makes obvious: offer star performers an attractive format for them to make money off their fans, and lots of features to help them do so. Concert venues have figured this out a long time ago. They provide star artists with everything they need to monetize their fanbase (like selling them concert tickets and merch), and in exchange, take a reasonable cut. They also sell the crowd stuff directly, for a big fat 100% take rate. I have no trouble imagining that smart game designers will be able to create these features in a way that’s just as good as Twitch, if not better (since it’s integrated directly into the game rather than layered above).
I can even imagine a scenario where game platforms might offer other kinds of less glamorous but necessary services for artists to succeed at scale.
Think “security” for super-popular streamers, where moderating and policing the stream is handled by the venue rather than by the artist. I’m just spitballing here but I can think of all sorts of useful services that a game might be able to provide, at solid service margin, to mega-popular streamers who need to manage their newfound popularity.
By now, finally, we can circle back and see how the shift to cloud gaming is a necessary step for the gaming world to pivot towards this new business model. The value of streaming platforms like Stadia and gaming engine building blocks like Amazon Lumberyard isn’t just making game development easier, it’s also standardizing them so that artists can easily and effectively take advantage of what’s there. (Think concert venues all using the same standard XLR microphone cables, so that a touring artist can quickly and confidently jack in their own equipment and be up and running in minutes.)
Something magical will happen when streaming artists are able to insert and carry over their own signature effects, equipment, and maybe even game mechanics into whatever game they’re streaming that day, and audiences recognize the continuity from game-to-game and appreciate it. Imagine if, back when Ninja had Drake on as a guest, Drake did something silly like carve “Property of the 6ix” onto Ninja’s shield, and then the shield retained that marking in subsequent days, and in other games. Or in more competitive gameplay, that same shield keeping a running competitive tally of who’s won how many matches, or who has bragging rights for some specific accomplishment - across streaming sessions and especially across games. Even with ordinary gaming among friends, once you get hooked on "being able to take your stuff with you", there is absolutely no going back to the old “static” format. No way.
One of the most important ways that streamers maintain a loyal audience that tunes in every night is with inside jokes and references that you had to be there for last week to understand; once this mechanic gets inserted both within and especially across games, I don’t see how any games without this capability could seriously compete going forward. You can’t really do this without cloud gaming. If everybody’s desktop client has to sync and reload constantly just to maintain state, everything’ll break. Cloud gaming will let this happen, and the new people-oriented business model will drive it to happen faster.
Ultimately, the future business of gaming isn’t based on maximizing Subscriptions times ARPU. It’ll be maximizing Gross Transaction Value times Take Rate. Games of the future will still lean on their own design and creative gameplay to command a high take rate, but they’ll need the cloud to bring down friction as much as possible, in order to spur as much GTV as possible. As with mobile gaming, most high-end games will be free to play soon enough; any lever you can pull to increase traffic and GTV will get pulled.
Cloud gaming will, indeed, grow the gaming market - and as Ball writes, it’ll grow the gaming market not through more subscriptions or higher ARPU, but by changing the mechanics of how games themselves work. The key to understanding how, though, is by seeing what’s in front of us in plain sight. The future business model of gaming is one where the subscription relationship that matters is between artists and their fans; friends and their gaming partners; people and other people. The game is the venue. And I’ll bet the venues that get it right will make a whole lot of money.
Permalink to this post is here:
A few good reading links:
And three of my favourite Twitter threads from this week:
Have a great week,