Podcast Summary
The Evolution of Gaming Investing: Historically overlooked, the gaming industry is now attracting investors due to the emergence of 'forever games' with long-term value.
Key takeaway from this episode of Invest Like the Best is the unique history and challenges of investing in the gaming industry. Historically, the gaming industry was not well understood by the venture capital industry due to its hit-driven nature and short-lived games. However, the emergence of "forever games" with long-term durability, such as World of Warcraft and League of Legends, changed the game. These games, like Fortnite, have created a new model for continuity of value that was not well understood before. Mitch Lasky, a partner at Benchmark and a leading figure in the gaming industry, shares his insights on this topic and explains why there aren't many famous gaming investors. He attributes this to the historical lack of attention and understanding of the gaming industry by the venture capital industry. However, with the emergence of these long-term games, the industry is becoming more attractive to investors. Mitch and a few others, like Bill Gurley and Bing Gordon, were pioneers in this space and have made some remarkable investments.
Understanding the modern gaming business model: Investors need to grasp the gaming industry's focus on customer acquisition and lifetime value, diverse monetization models, and the role of content and network effects to make informed decisions and avoid losses.
The modern business model for gaming is primarily focused on customer acquisition and customer lifetime value, with diverse monetization models that go beyond just retention. This model is driven by content and network effects, making it essential for investors to have a strong understanding of the gaming industry and an aesthetic sense for what makes a game fun. This skill can be acquired through immersion in the gaming world, engaging with designers, and understanding the theories of fun in games. The most important factor in determining a game's success is not just its genre or initial metrics but what players do most frequently in the game. For instance, in Doom, while it's known as a shooter, players primarily spend their time moving through a three-dimensional environment and looking around. Understanding these nuances is crucial for investors to make informed decisions and avoid losses in the gaming industry.
Understanding and optimizing core gameplay mechanics: Creating successful video games requires a focus on enjoyable and engaging core gameplay mechanics, as games offer a high degree of interactivity and require less control from developers over the user's experience compared to passive media.
The key to creating successful video games lies in understanding and optimizing the frequency and pleasure of the core gameplay mechanics. Games, unlike passive media like movies or shows, require a high degree of interactivity from the user. The creative process behind game development differs significantly from that of film or television, as game developers have less control over the user's experience and must focus on making the core gameplay mechanics enjoyable and engaging. One of the earliest examples of this approach can be seen in the company behind Doom, which pioneered alternative distribution models, independent development, and recognized the importance of multiplayer and Internet play. Their focus on these elements helped shape the modern gaming industry and continues to influence companies like Epic and Riot today. Ultimately, the success of a video game hinges on delivering a consistent and enjoyable interactive experience, which is a unique art form in and of itself.
Games Changing the Business Model of the Gaming Industry: Quake 3 Arena and Unreal Tournament pioneered multiplayer games, Half-Life introduced Steam for digital distribution, World of Warcraft popularized subscription-based MMORPGs, and League of Legends introduced platform-based publishers. Publishers now control the entire value chain, enabling direct relationships with consumers and frequent updates.
Certain video games have significantly impacted the business model of the gaming industry. Quake 3 Arena and Unreal Tournament paved the way for modern multiplayer games, Half-Life introduced digital distribution through Steam, World of Warcraft popularized subscription-based MMORPGs, and League of Legends introduced the concept of platform-based publishers. Historically, publishing video games involved pressing physical discs, managing distribution to retailers, and investing in advertising campaigns. But with the rise of digital platforms, publishers now aggregate demand and bring communities of users together online, changing the nature of the supply side of the business. Half-Life's impact on the industry can be seen in its introduction of Steam, the first successful online distributor of video games. Steam enabled Valve to become a platform-based publisher, which allowed them to bring their community together in a single online location and publish games as a service, providing updates and patches regularly. Platform-based publishers now control the entire value chain from development to distribution and monetization, allowing for more direct relationships with consumers and more frequent updates and interactions. This shift in power from retailers to digital platforms has significantly changed the business model of the gaming industry.
Platform-based publishing revolutionizes video game industry: Platforms like Steam allow publishers to reach large, prequalified audiences, leading to new business models and engagement strategies in the gaming industry, also seen in other sectors
The rise of aggregation platforms like Steam has revolutionized the video game industry by allowing publishers to reach massive prequalified audiences, leading to the concept of platform-based publishing. This trend can be seen in other industries as well. Platform-based publishers have either migrated existing user aggregations into the game domain, like Tencent with QQ and WeChat, or used hit-driven content to seed the aggregation, such as Disney in the streaming space. Riot Games, an early example of this trend in the gaming industry, taught non-gaming businesses the importance of deeply engaging with their communities and designing products based on their feedback. With the shift from physical discs to instant downloads and lower costs of goods, monetization in the industry has also changed, with publishers exploring various business models like free-to-play, subscription services, and in-game purchases.
From traditional to elastic pricing in gaming: Gaming industry evolved from traditional pricing to elastic, where users pay based on engagement levels, leading to increased revenue from high-spending users and a flexible economic model.
The gaming industry has evolved from a traditional, inelastic pricing model where everyone pays the same price for a game, regardless of usage, to an elastic pricing model where users pay different amounts based on their engagement levels. This shift began with free-to-play games like Nexon's Kartrider, which gave the entire game away for free and monetized users through cosmetic items and other enhancements. This approach, known as the "KartRider monetization method," allows developers to monetize users more effectively after they've already become engaged with the game. The result is a rise in revenue from dedicated, high-spending users, or "whales," and a more flexible economic model for the gaming industry. This change was initially met with skepticism, but games like League of Legends have proven its success, generating billions in revenue each year. Understanding this shift in pricing and monetization models is crucial for grasping the modern economics of the gaming industry.
Experimenting with monetization strategies in gaming: Understanding user behavior and closely integrating monetization with game design are crucial for success in mobile gaming. Adaptation to changing trends and user preferences is essential for long-term revenue growth.
Understanding the dynamics of monetization in the gaming industry, particularly the significant impact of a small percentage of heavy spenders, requires a period of experimentation and integration of monetization strategies with game design. The shift to mobile gaming has been enormous, making up over half of the gaming industry's revenue, and successful monetization strategies on mobile often involve understanding user psychology and behavior, as well as being closely integrated with the game design. Early experimentation and adaptation to changing user preferences and platform trends are crucial for success.
Mobile gaming industry shifting towards community-driven growth: The mobile gaming industry is moving away from reliance on paid acquisition towards sustainable, community-driven growth due to changes in Facebook and Apple ad markets.
The shift to mobile gaming has significantly accelerated the trend towards free-to-play models, leading to a surge in customer acquisition spending. However, this reliance on paid advertising has become risky due to recent changes in the Facebook and Apple ad markets, making it harder to target potential customers and installs being down for some companies. This has forced the industry to explore new, more organic go-to-market strategies, such as using PC SKUs as customer acquisition vehicles for mobile games. The overall impact of these changes is that the mobile gaming industry is moving away from a reliance on paid acquisition towards more sustainable, community-driven growth. Additionally, advancements in technology and tooling on both the demand and supply sides of the business are paving the way for new, innovative approaches to game development and distribution.
Democratization of game development tools: While more people can create and distribute games, making great ones still requires unique skills and a significant investment in learning. The industry remains challenging, but the democratization of tools is essential for increasing diversity and representation.
The democratization of game development technology, such as Unity, Unreal, and even tools like DALL-E, is lowering the barrier to entry for creating games. However, making great games still requires unique skills and a significant investment in learning. While more people can now create and distribute games, the industry remains challenging, and the current lineup of console, PC, mobile, and emerging technologies like AR and VR may represent a mature and long-lasting market share. The speaker, who has experience in the industry's early days, shares cautious optimism about the future, acknowledging the visceral potential of new technologies but also their drawbacks. Despite the challenges, the democratization of game development tools is an essential step towards increasing diversity and representation in the industry.
Communication Platforms: The Sidecar Technologies in Gaming: Communication platforms like Twitch and Discord have transformed the gaming industry by influencing distribution, marketing, and consumption, making games that are good to watch 'forever games' with constant popularity and engagement.
While virtual reality (VR) has received significant investment and attention, it has not yet proven to be a compelling user experience or a successful business model for most developers. On the other hand, enabling technologies like communication platforms such as Twitch and Discord have had a massive influence on the gaming industry. These platforms have changed the way games are distributed, marketed, and consumed, creating a network effect that benefits both the platforms and the games. Games that are natively good to watch as a Twitch stream, like League of Legends and Age of Empires, have become "forever games" with constant popularity and engagement. Unlike VR, which has yet to show its full potential, these communication platforms have proven to be valuable sidecar technologies in the gaming world.
Forever Games: Timeless Titles with Thriving Communities: The most valuable intellectual property in gaming are 'forever games' with timeless design patterns, replayability, and thriving communities. User-generated content fosters strong community ownership and investment, leading to emotionally connected users and new gaming celebrities.
The most valuable form of intellectual property in the gaming industry might be "forever games" – titles with timeless, replayable design patterns and thriving communities. These games, which can include genres like first-person shooters, adventure games, and massively multiplayer online role-playing games (MMORPGs), have proven to be incredibly durable, with some dating back centuries. The longevity of these games is due in part to their user-generated content, which fosters a strong sense of community ownership and investment. The most successful games have communities where users feel emotionally connected to the game and contribute to it through user-generated content, either inside or outside the game. This user-generated content can take the form of user-created levels, mods, or even streaming and video content on platforms like Twitch and YouTube. The gaming industry has seen the rise of new celebrities, such as PewDiePie and MrBeast, who have built massive followings and franchises around their gaming content. Unlike trying to weld existing celebrities into gaming, these new celebrities have driven the growth of the platform and created some of the biggest franchises in the world.
Web 3 technologies in gaming: A new business model: Integrating speculators into gaming through gamification, rather than as separate entities, is key to success in the Web 3 gaming industry.
The integration of Web 3 technologies, particularly NFTs and Ethereum, into the gaming industry has the potential for a revolutionary impact on the business model, allowing for unlimited transactions and higher revenue per user. However, this comes with challenges, such as the introduction of a third party - the speculator - into the relationship between the developer and the player, creating instability and potential antagonism. To succeed, developers must find a way to integrate the speculator into the game experience in a mutually beneficial and organic way, rather than as a separate entity. Successful examples of this can be found in games like EVE Online and the online poker boom, which have allowed for dynamic and interesting economies to develop. Ultimately, the key to success will be creating a gamification experience around the speculator, rather than relying on a Ponzi scheme model that rewards early speculators at the expense of later ones.
Integration of economic elements in gaming: Historical games like Eve Online show how economic elements can enhance play experiences, but care must be taken to prevent NFT owners from having unrelated motivations.
The integration of economic elements like sharks and minnows, skill, and real money in gaming can both disrupt and enhance the play experience. This was evident in discussions about historical games like Eve Online, which featured concentric circles of moderation and user-generated play experiences. These games offered roles and important play experiences that went beyond just owning an NFT. However, there's a danger in creating a bifurcation where NFT owners have motivations unrelated to the play experience. Regarding the transition to more persistent universes in gaming, there's a concern that the concept of fully immersive virtual reality and haptics may be a "boy's fantasy," and we may already be living in a metaverse through text-based interactions. The harder question is the integration of these virtual experiences into our lives, rather than the need for full immersion and haptics.
Understanding interoperability challenges in metaverses and virtual economies: Realizing asset transfer and interoperability between different metaverses, games, and virtual economies is a complex task requiring agreement on protocols and trust. Emerging trends like location-based online to offline experiences and consolidation of distribution could change the industry landscape.
Realizing interoperability between different metaverses, games, and virtual economies is a complex problem that requires agreement on protocols and a high level of trust. The idea of transferring assets or experiences between different platforms may seem like a fantasy, but it will require significant intellectual and coding efforts. Meta's strategy of creating a walled garden may be a business necessity, but it could limit the potential for true interoperability. One emerging trend that shows promise is location-based online to offline experiences, as seen with the success of Pokemon Go. Post-pandemic, there is potential for newer and more interesting forms of these experiences, which could be mediated by augmented reality on mobile phones. Another trend to watch is the consolidation of distribution, as seen with Microsoft Game Pass. This shift towards a software-focused business model could change the power dynamics in the industry. It's important to keep an eye on these emerging trends and the implications they have on the future of gaming and virtual worlds.
Microsoft's Xbox virtualization under Phil Spencer's leadership: Microsoft's Xbox Game Pass offers a Netflix-like experience with a single monthly subscription, making games more accessible and discoverable for consumers.
Phil Spencer's leadership at Microsoft in virtualizing the Xbox platform has been a game-changing innovation in the video game industry. This move, which offers a Netflix-like experience with a single monthly subscription, has made games more accessible and discoverable for consumers like the speaker, who is a Game Pass subscriber. The hack and slash role-playing concept, often seen in modern RPGs, is identified as one of the most important play patterns in video game history. Despite its significance, a deep understanding of the history of genre may not directly translate to business success. As for the future of game investing, while some things may remain constant, the industry's focus on digital distribution and subscription models could require new skills and strategies from investors.
Understanding gaming industry insights for investing: Creative expertise and industry knowledge from gaming can provide a competitive edge in investing. Transferable skills and unique perspectives are valuable.
Having a deep understanding of a specific industry, in this case the gaming industry, can provide valuable insights and a competitive edge when it comes to investing. The speaker, who has a successful background in gaming and has invested in companies like Snap and Discord, emphasizes the importance of creative expertise and experience in evaluating potential investments. He encourages people from the creative side of the business to consider a career in investing, as they would bring unique perspectives and knowledge to the table. Additionally, he believes that gaming principles, such as design and user experience, are increasingly applicable to consumer internet and mobile companies. However, he acknowledges that investing is a challenging field and that success requires consistent returns over an extended period. The speaker also notes that while his gaming background may not directly translate into a competitive advantage in all investments, the transferable skills and knowledge gained from his experience in the industry can still be valuable.
Investing beyond quantitative data and founders' backgrounds: Passion, conviction, and execution are intangible factors that can lead to successful investments, even when founders lack traditional backgrounds or metrics.
While quantitative data and founders' backgrounds are important considerations in investing, they are not the only factors. The investor in this conversation shared a personal experience of investing in League of Legends, where the founders lacked traditional gaming industry backgrounds and had no playable product or metrics. However, their passion, ability to answer questions, and conviction about their product convinced the investor to overlook these red flags and invest. This story highlights the importance of intangible factors like passion, conviction, and the ability to execute in making successful investments. It also emphasizes the importance of looking beyond traditional metrics and backgrounds to identify promising opportunities.
