To better understand the future of Web3 gaming, it’s important to delve into both the history of on-chain games (like we did in Part 1 of this series), and how traditional gaming models have evolved. The trend towards “forever games” and improved retention has created player-owned economies, which are inherently supercharged by crypto and token incentives.
The Forever Game
Game loops have changed dramatically since the introduction of Pong in 1972. They have moved away from unique game releases and shifted towards creating “forever games,” or titles that are refreshed with new content, seasons, battle passes, etc. In fact, the top 20 games of 2022 were actually released years prior.
This is congruent with traditional media, where the number of sequels and remakes has surged 700% since 1993, accounting for 75% of the top 20 films each year. Put simply, if a studio builds winning IP, they are incentivized to maximize the monetization of that IP. It is much more cost-efficient to create Fortnite seasons (and ultimately invite more user-generated-content), than to create an entirely new Fortnite 2. As we’ve graduated from shipping discs to shipping digital content, publishers are able to easily produce additional content to increase their user retention and minimize the upfront investment required to create compelling games.
Forever games, by their very design, turn the traditional gaming model on its head as games become more akin to platforms. You can’t finish Fortnite or beat Minecraft; you simply tap into the world that they have built, collaborate or compete, and are monetized based on your attachment to either your identity on the platform or your affinity for new content. The more time you spend on the platform, the more reason you have to transact and engage with everything it has to offer.
Many models have evolved to deliver content for free to players while offering paths to monetization after the player has decided they want to be a part of the ecosystem, creating a much more healthy relationship between gamer and developer. This shift towards player-owned assets has already begun, but many existing titles have fallen short in terms of empowering users to participate in game economies.
A shift towards ownership
Unlike the traditional crypto ethos, Web3 gaming is not necessarily a revolution against traditional systems, but rather a shift in ownership and the value of time spent on platform. This phenomenon is not unique to crypto. Over the past several decades, there has been a gradual shift as digital identity has become more important and games have moved towards prioritizing retention due to rising customer acquisition costs (CAC).
A rising CAC
Early mobile and flash gaming was characterized by acquiring as many users as possible and converting a small number of them into paid users. If you could scale to millions of users, it didn’t matter if many of them played for free because you were monetizing at scale. This model has started to crumble, and CAC has risen to dangerously high rates for most casual games, forcing a shift in focus from acquisition towards retention.
What’s causing the rise in customer acquisition costs? Here are just a few of the many reasons:
- The rise in mobile gaming during the pandemic was marked by an unprecedented number of new developers in the space, bringing a surplus of games to market. This was compounded by the success story of Among Us, built by only three developers, which amassed over 400 million users and reached between 10-15 million daily users at its peak.
- Mobile usage rose to 4.2 hours per day (a lot or a little, depending on who you are), resulting in higher spending and greater demand on advertising and maximizing monetization of existing users.
- Free-to-play and cross-play games with season passes, such as Fortnite, experienced explosive growth, enabling more connectivity than ever before, but also higher switching costs to other games.
- The iOS 14 ATT update in 2021 shifted the IDFA (identifier for advertisers) to an opt-in model, changing the way mobile apps track and target advertising. This caused the number of trackable users to drop from 71% to 32% in just six months.
- The ATT update has paved the way for the death of the cookie, though this has been delayed a bit to 2024
Enter: player-owned economies
Player-owned economies have evolved out of a need for developers to create multiplayer experiences that enhance retention and collaboration in games. Profit Well reported a 5% increase in retention could increase the bottom line from 25% to 95%, making it clear that keeping existing customers happy and engaged is crucial in a world of rising CAC.
It has been well-studied that creating collaborative environments for communities to form can create powerful retention loops. For example, in War Metal: Tyrant, players in clans have an ARPU that is 20 times higher than those who aren’t part of a clan. This is in part because they invest more time into the game, but more so because there’s inherent value in digital identity, especially when shared in an arena that many friends participate in.
There are plenty of player-owned economies that have evolved out of hit games. EVE Online launched in 2003 and allowed players to own and operate businesses, mine resources and trade virtual goods. This created a sophisticated economy within the game, with multiple paths for players to create virtual wealth. Notably, the creators of EVE Online, CCP Games, have shifted their sights recently towards blockchain games, making their own game in the EVE universe. In many ways, this game has the opportunity to be one of the most complex digital game economies ever created, with player ownership and digital assets being designed from first principles.
Digital Asset Ownership
Games that have allowed players to own and trade the assets they earn in-game have seen remarkable results, and Web3 has the opportunity to amplify the effects that we’ve seen in traditional gaming. It is also a collaborative mechanism that forces players to engage with one another, which creates even deeper affinity for the platform and community.
As an example, Counter Strike skins are tradable outside of the traditional game, and speculative activity has skyrocketed in recent months. One rare skin was sold for $160,000 last month, and an entire community of collectors has sprung up and participates outside of the core game loop. The median price of a Weapon Case One, for example, has risen from a low of $.05 to $60, a 1200x increase (sound familiar?). Around 700k people are actively playing CS:GO at any one time, with over 5 million MAUs, to provide a sense of scale.
As player-owned economies have developed naturally, plenty of publishers have attempted to censor or limit virtual farming. Blizzard, the developer of World of Warcraft, made various attempts to regulate the economy and prevent players from engaging in harmful or exploitative behavior. They reduced the drop rate of valuable items and banned accounts that engaged in illicit activity. Despite their best efforts, if users value something, they are willing to go through extraordinary lengths to pay for it or earn it. Players began to develop bots and other automated tools to build virtual wealth. At one point, WoW gold was worth 7x that of Venezuela’s bolívares.
Things escalated to the point where Blizzard began to seize virtual assets and work with law enforcement agencies to shut down organized gold farming operations. Players argued that Blizzard was not only infringing on player freedoms, but also harming the overall game experience. Blizzard’s overstep famously played a role in Vitalik’s decision to launch Ethereum, and many Web3 game developers have cited these examples when touting the benefits of sovereignty in player-owned economies.
But why crypto?
There is little doubt that Web3 gaming has enormous potential to change the way we interact with IP and the value of our time spent on platform. Recent shifts in the traditional gaming model towards ownership and identity have demonstrated the potential of what’s possible in this new paradigm.
The role blockchains can play in this new model has been the subject of much debate over the past several years. Some early games like Huntercoin have tested the capabilities of blockchains to handle game environments, while others have only touched the blockchain when absolutely necessary, such as for in asset transactions or burnable events. Some games have implemented multi-token systems to incentivize different behaviors, while others have only used NFTs as aesthetic skins.
Given that player-owned economies have already proven successful in closed ecosystems, blockchains will need to deliver even more value to justify the additional technical hurdles (especially for early adopters). The rationale for creating open systems is quite simple: the benefits align gamers much more closely with developers than a closed system ever could.
Achievements have been a part of games for decades. However, outside of personal accolades (most of which no one ever even sees) and the warm fuzzy feeling of beating a game, there are few benefits to completing a title. Studies have shown that less than 20% of players actually finish the games they start, and this needs to improve dramatically as games shift towards retention.
Token incentives (when designed correctly) have the potential to better influence player behavior, increase throughput and collaboration, and create more vectors for other developers to build on the game. A great example of this would be: “if you have over 100 hours in Gears of War 2, you get a unique player skin in Gears of War 3.”
Interoperability & Collaboration
Fortnite has long demonstrated the crossover potential of global IP,leveraging its strong distribution to create powerful, permissioned channels for collaboration. Travis Scott famously made $20 million from a Fortnite event and skins. Kingdom Hearts became downloadable content for Smash Bros Ultimate. The list goes on, and gamers have shown their willingness to throw their weight/wallets behind accretive content creation.
Web3 games, by design, are better equipped to create meaningful collaborations without lengthy inefficient legal processes that chew up time and profitability. While true permissionless may not be the ideal end state for the more lucrative titles, Web3 enables many more opportunities for smaller games to collaborate or license existing IP, creating new revenue channels for older titles and the ability to “refresh” stale content.
UGC and incentivized co-creation
Decentralized content creation is one of the more obvious benefits of an open system, as it can quickly outpace dedicated teams, especially if incentivized correctly. We are already seeing how incentivized open systems can outpace centralized “dark forests”, and this can also be true in gaming.
Roblox has over 600 million users and has shown the power of forever games, largely driven by its players’ willingness to build out their own experiences. They have even created a Call of Duty clone. Crypto has the opportunity to be the incentive layer to power the UGC economy in a much more aligned way, especially if the various assets and rewards can be tied to the game economies in which players are already participating. As mentioned in the prior piece, this introduces new game loops and emergent behaviors that are both fun for players and valuable to developers.
So, what’s next?
Whether or not one believes blockchains have a place in gaming, it’s impossible to deny that the rising CAC is changing the way developers approach game economies and monetization. A shift towards ownership isn’t just inevitable, it’s already begun.
There is a tendency to overstate potential and claim that a certain technology is eating the world. Rather, it’s more constructive to examine the ways in which Web3 can augment experiences that make games more enjoyable for users. If Web3 technology is viewed as a tax on gameplay or a way to extract value from users, then we will fall into the traps that have plagued the space over the past decade.
If we look at Web3 tech as an additive feature that enhances player-owned economies, we enable a litany of ways for users to deeply engage with content, developers to improve retention, and games to, quite simply, become more fun to engage with.
Disclosures: Blockchain Capital is an investor in several of the protocols mentioned above. The views expressed in each blog post may be the personal views of each author and do not necessarily reflect the views of Blockchain Capital and its affiliates. Neither Blockchain Capital nor the author guarantees the accuracy, adequacy or completeness of information provided in each blog post. No representation or warranty, express or implied, is made or given by or on behalf of Blockchain Capital, the author or any other person as to the accuracy and completeness or fairness of the information contained in any blog post and no responsibility or liability is accepted for any such information. Nothing contained in each blog post constitutes investment, regulatory, legal, compliance or tax or other advice nor is it to be relied on in making an investment decision. Blog posts should not be viewed as current or past recommendations or solicitations of an offer to buy or sell any securities or to adopt any investment strategy. The blog posts may contain projections or other forward-looking statements, which are based on beliefs, assumptions and expectations that may change as a result of many possible events or factors. If a change occurs, actual results may vary materially from those expressed in the forward-looking statements. All forward-looking statements speak only as of the date such statements are made, and neither Blockchain Capital nor each author assumes any duty to update such statements except as required by law. To the extent that any documents, presentations or other materials produced, published or otherwise distributed by Blockchain Capital are referenced in any blog post, such materials should be read with careful attention to any disclaimers provided therein.
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