Hello, hello. Good week to you all. I’m engaged on a few different fronts with potential new employers, which is quite exciting. Nonetheless, if you know of any cool opportunities in Berlin, ping me please.

This week’s edition of the newsletter will be centered around gaming and interactive media. I will discuss both its past and present, along with why I see a bunch of future opportunities within the industry for innovative technologies and business models to create and capture value. Onwards!

It’s the Player; Not the Game

On The Next Frontier in Storytelling Universes and the Never Ending Desire for More by Matthew Ball; The players are the artists; the game is the venue by Alex Danco; The Promise of Cloud-Native Gaming by Jonathan Lai

Humans have always sought to escape to an imaginary world. In fact, there is a strong basis to argue that the arc of technology generally has been at the forefront of enabling this. Matthew Ball believes modern technology has enriched the storytelling necessary to allow us to escape in four key dimensions. These are: immersiveness & believablity, persistence & frequency, continuity across mediums, and audience influence.

In the early days, the advent of movie theaters “offered a quantum leap in immersion”. Gone with the Wind, released in 1939, was the first real ‘blockbuster’. It was in theaters for 4 years and sold one ticket for every two Americans. Massive. With immersion achieved through new technology, and importantly, an innovation in the business model—Gone with the Wind was the first fiction adaption to become more successful than the source material—the first of the four dimensions had been tapped into by new technology, setting us off on the course that brings us to today.

Let’s skip over the importance of J.R.R. Tolkien and C.S. Lewis’ blockbuster fantasy series and the immersion-deepening invention of Disneyland for brevity’s sake (see Ball’s article for more) and move on to the specific technological innovations first pioneered in feature films.

The first widely successful film to exploit practical effects was 2001: A Space Odyssey, released in 1968. However, Ball notes that Stanley Kubrick, the film’s director, focused on realism and depicted a cold and unattractive future, not necessarily a place to escape to. It wasn’t until 1977 when the first Star Wars was released, in which significant innovation in the area of visual effects was combined with the creative vision of a fantastical world ‘a long time ago in a galaxy far, far away’ to create an irresistible universe where viewers desired to escape to. And escaped they did. Star Wars sold nearly 140M tickets, 40M more than Avengers: Endgame, even though the population in the US increased by 50% in the meantime and Endgame had tons of previously generated IP behind it. The success of Star Wars led to many similar sci-fi films being produced (E.T. and Blade Runner for example). Importantly, these movies were not made with sequels already planned or a wider IP-driven universe in mind, as the industry simply didn’t think of things that way back then. This was to come later.

It was not until the late 1990s when the paradigm shifted yet again. The success of Jurassic Park’s CGI graphics “made incredible things come to life” which led to further innovation in business models. Sci-fi/fantasy and comic book titles began to dominate, with Star Wars re-emerging with The Phantom Menace and Spider-Man performing wonderfully at the box office. Additionally, this began the era of annual releases, with franchises like Pirates of the Caribbean and Harry Potter coming to the fore with regular and predictable titles. This era would set the stage for the next period in films, characterized by deep cinematic universes and multiple releases per year. This was the era of Marvel and its Avengers franchise. By 2015, when the studio released Age of Ultron, they had scaled to making three films per year. At the same time, costs of production of effects-driven entertainment plummeted, leading to the possibility of highly immersive sci-fi/fantasy TV series like Game of Thrones and The Walking Dead. Simultaneously, reacting to the success of the Marvel model, many studios sought to leverage their existing IP into cinematic universes. Alas, these ventures largely failed, likely due to lack of underlying demand.

(This went over my head as I haven’t seen the show but thought it funny that Benchmark partner Chetan Puttagunta tweeted this. Lol)

Chetan Puttagunta @chetanp

Me: have you ever considered that... Bob Iger: No Me: The Mandalorian is a metaphor for enterprise field sales: competition, partnership, and time pressure. All to save the $1M ARR deal. Bob Iger:

February 11th 2020

6 Retweets125 Likes

All of this now brings us to the fourth and current phase: fictional universes going transmedia. In this era of transmedia, stories don’t just span multiple titles but different media as well (podcasts, books, video games, what have you). This dynamic, for the first time, allows franchises to tell stories best suited to diverse media. The Mandalorian is a great example. Disney, in a bid to increase brand equity, ported Star Wars IP to television. Ball figures that the show has had the largest cultural impact of a new TV series in years. Further, it is likely the first Star Wars title to successfully grow the brand in decades, as the recent films largely failed to expand the franchise’s core fanbase. Also indicative of this era is invasion of film by TV IP, as evidenced by films originating from the Downton Abbey and Walking Dead universes.

So what have we learned from this brief history of technological change driving storytelling innovations? Ball sums it up brilliantly:

“The greatest commercial achievements have had more to do with technological or business model innovation than artistic accomplishment. First it was practical effects, then visual effects, then franchises, now universes and transmedia ecosystems. The companies that breakthrough will seize on this massive transition and create generation defining IP.”

There is one dimension I have completely ignored until now: audience influence. Naturally, this is where video games come in to play (get it?). Phase five, arriving in the not too distant future, now comes into focus. Ball characterizes the essence of phase five as “transmedia worlds that are programmed and user led”. Further, he describes its ideal shape:

“In its “best” implementation, phase five stories will be much more than a movie franchise plus a game that compliments, runs adjacent to, or precedes/follows a feature film or miniseries. It will be a persistent, constantly updated, and living virtual world.”

Such “persistent, living virtual worlds” will be ripe for innovation both on the individual and franchise level. Alex Danco, in his “The players are the artists; the game is the venue”, believes we are heading towards a world in which consumers subscribe not to games but individual players. Consequently, he sees the business model of video games fundamentally changing. He remarks that the gaming industry has, perhaps inadvertently, created a new product format: performers, namely streamers on platforms like Amazon’s Twitch who command a following not because of their outrageous skills playing the games but rather their ability to create fun and engaging environments for their fans to engage with. Think talk-show hosts rather than NBA stars. Consequently, the game itself is less important, instead it’s the talent that consumers will follow. Danco notes that this trend will be incredibly disruptive to existing business models:

“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.” 

Instead, Danco hypothesizes that games will increasingly take on the character of concert venues. Echoing the claim that “Fortnite isn’t a game, it’s a place” (and the fact that Fortnite is, of course, free to play), games in the future will be designed not with maximizing amount of subscribers in mind but rather facilitating as much GTV (gross transaction value) as possible within their universes/ecosystems/games/you get the picture. This is the model of Fortnite, which sold $2.3B worth of cosmetic stuff with no game-play impact whatsoever in 2018 within their game, all at 100% gross margin. Moving forward, not all of this transaction value will go directly to the game developers. Entrepreneurs, who use games as their operating platforms, can capture some of this value themselves, paying a percentage of their revenues to the game makers as take. In this paradigm, the responsibility to provide immersion via audience influence (bringing it all back) will fall on the individual content creators and personalities while game companies will compete with one another through offering star performers greater money making opportunities ‘in their venues’.

Cloud gaming, at least in the view of Johnathan Lai, will facilitate this entrepreneurial economy even more. Three key innovations, made possible by improvements in cloud gaming technology, will leverage both continuity across mediums and audience influence to enlarge the gaming addressable market. The first of these new technologies are called deep links. Deep links decrease the amount of friction in joining online games. Lai writes:

“While deep links that open apps are not new, a deep link to a cloud instance could drop a player directly into a game world amid their friends. Furthermore, these links could be customized to create different onboarding experiences based on the referrer’s group, guild, or faction.”

Combining Danco’s streamer economy with customizable onboarding through deep links, one can easily imagine popular personalities offering their fans the chance to join them in the heat of the action for a small price. Streamers that excel at putting themselves in exotic and exciting situations within the game play will eventually be able to build moats and communities around themselves. Relatedly, Lai writes of viewers being provided a menu of options that could allow them to influence the environments the streamer inhabits without even joining in directly, similar to the gifts sent in to the arena by patrons in the Hunger Games series.

Second of the three new trends involves novel approaches to marketing enabled by cloud gaming infrastructure. Lai believes video will be the inevitable dominant marketing channel. It’s not difficult to see super-popular streamers developing large revenue streams by collecting sales commissions on marketing they do on behalf on sponsors. This is already happening now and will be supercharged when cloud gaming technology ripples into the mainstream, allowing viewers of say, a YouTube video, to begin a demo of a newly released game with one click and no waiting time. Now that’s friction reduction.

Finally, the third innovation could fall in the realm of cloud-driven content generation. With cloud games, client and server lie in the same network, making holistic data collection a rather uncomplicated process. With data harvested without obstruction, it will be possible for fully dynamic environments to be built by AI in real time. This dynamism will enable groundbreaking immersive storytelling. Lai again:

“In the future, real-time content generation could fuel new, immersive story-telling methods. The next generation of “choose-your-own-adventure” might be a virtual world that adapts in real-time to your choices. And to monetize these virtual worlds, personalized, spontaneous ads may emerge, similar to the biometric ads in Minority Report.”

This new economy within interactive media, driven by Danco’s conviction that the player, rather than the game, will become central to future business models and by Lai’s belief in the innovations inherent in cloud gaming to dramatically level-up continuity and audience, will, in my view, present a significant opportunity for blockchain services/infrastructures and cryptocurrency. This could take many forms.

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Most obvious, perhaps, would be economies with the games themselves, especially MMOs (massively multiplayer online games). Lai believes that MMOs, supercharged by cloud-native technology removing significant barriers to adoption, could attain (social) network effects and exhibit growth trajectories similar to that of Facebook. Such economies of massive scale would be, to say the least, difficult to control with traditional means. Blockchain-powered smart contracting, in various forms, from agreements between advertisers and streaming talent to players who decide to incorporate a guild within the game universe, seems like the logical infrastructure to build these worlds on top of. Further, if these game universes scale like Lai thinks and become venues akin to concert halls as Danco sees, there will be a tremendous amount of payments and financial transactions occurring in a world that does not respect the limits of nation-states and their currencies. More so, it’s unlikely that Adyen, Stripe or Shopify, for example, would be able to build product lines suited to this particularly strange and borderless virtual economy.

Independent of these practical reasons, game developers will want to enhance immersion, frequency, continuity, and participant influence in their products, along with seeking to capture as much value as possible from the universes they create. Thus, they will be incentivized to build their own technological—financial, structural, or otherwise—stacks and other services in order to keep the player in their universes and capture the value of their platforms. To me, at this stage, this would be most easily done through decentralized networks and technologies. Nonetheless, if gaming expands to fully dominate the immersive media business, as Messrs Ball, Danco, and Lai seem to believe, it is not impossible to envision a (cloud) gaming infrastructure-as-a-service industry emerging, not dissimilar to that currently revolutionizing financial services, where entrepreneurs could build products addressing particular problems within virtual ecosystems, such as design, payments or even navigation.

While I certainly don’t have the answers and this is something I chalked up only in a few hours, the historical arc of immersive media, alongside business model and technological innovations, points to an enormous role for gaming in the near-future.

In our post-modern world, why not, right?

Have a great week and thanks for reading,

Max