Deep Dive Research
15 Jul 2022
In the previous part, we focused on the player’s experience with gaming throughout its evolution from solo-play, to online multiplayer, to blockchain gaming. In this article, we’re diving into the flip side of the industry: the developers. Read on to learn why game developers should – and already have begun to – buy into the promises that blockchain makes to evolve the industry.
The other party whose roles change fundamentally through the transition of the gaming industry from its centralized, Web2-native state to a decentralized, Web3-native ecosystem is developers. Prior to the arrival of blockchain gaming as a new design philosophy, designers held a role akin to film or television producers in that the titles and intellectual property they developed were created in a quarantined environment; the necessary, talented personnel responsible for creating these fictitious worlds – these immersive universes that viewers or players bought into – comprised a team whose process was minimally influenced by outside factors, including the consumers of their final product.
The singular difference between film or television and gaming is how the customer consumes the product. With television and film, it is merely a matter of viewing, thinking about the content of the product, and perhaps sharing a review online in the form of community-original content. However, with gaming, players directly manipulate the content of the game within the bounds created by their developers. If the bounds provided within the games are too broad or too narrow, the players themselves will find the cost of devoting their time, energy, and attention to that game far too great – greater than simply sitting through a mediocre episode of a TV show, or through a lackluster movie.
Here lies the developer’s dilemma when it comes to creating compelling game titles. The development process requires arguably far greater strategy about the customer’s continuous journey through the experience of playing than any other form of media. For the past few decades, so many titles have seen success for their rich storytelling, compelling interactive gameplay, and immersive artwork. But the appetite of gamers has never been quenched. At some point, the story ends. The worlds they inhabit cease to exist. At the cost of sounding overly dramatic, we believe that gamers truly build ulterior existences in the games they enjoy, but those are often ended against their will by the developers.
In an effort to appeal to players’ desire to continue and extend the lifecycle of the games they enjoy, developers have altered the creative process and business model around games. Instead of singular story arcs with clear-cut starts and endings, games have become more expansive, offering additional story-based content, game modes with a higher factor of replayability, and more strategic freedom on the part of the player. As such, both in recent years and in those to come, game titles’ metrics of success, from a revenue standpoint, have shifted away from standalone full-game sales to prolonged player engagement over time, which provides repeatable and numerous opportunities for revenue generation through in-game sales. In other words, subscriptions and microtransactions reign supreme.
According to a report that came from game data congregator Newzoo in 2020, the global games market has increased substantially in terms of revenue over recent years, hitting $159.3B in 2020 and projected to exceed $200B in 2023. The size of the industry and its upward trajectory are impressive, but not necessarily surprising by any means; games were a staple purchase for many throughout the COVID-19 pandemic and only continue to grow their roots in the lifestyles of many individuals. What is essential to consider instead is the makeup of that revenue – which sales channel contributes the largest to game studios’ annual revenue collectively.
Since 2018, full-game digital downloads and full-game boxed revenues have decreased in the proportion of revenue they generate each year. In 2018, full-game digital and full-game boxed accounted for only 13% and 12% respectively. By 2023, they are expected to make up only 11% and 7% respectively. This is a direct result of the continued transition of the industry toward the free-to-play monetization model that allows players on all platforms to begin playing new titles for free with a subsequent opportunity to purchase premier content that augments the base experience – in-game content, in other words.
In 2018, in-game content already accounted for 70% of the global game revenue generated worldwide. But by 2023, this will increase to 77% of the total addressable market. And for the mobile game market specifically – which, by the way, accounted for 48% of the entire revenue generated by all game platforms, it is a staggering 98% of the generated revenue. For all intents and purposes, the in-game, digital assets of games today are the lifeblood of the industry.
Now, why is this important? It seems like game studios are making enough money the way they operate today.
As previously mentioned at the beginning of this article series, the limited lifespan of a game is a problem that plagues even the best game titles. There have certainly been many attempts to ameliorate this issue, like new game “seasons” filled with novel content, new directives in the game that extend its story, and so on. In a sense, developers have tried to make games “infinite” to the best of their abilities. The expectation that a game “ends” is one that isn’t substantially held by players these days. Today, many games rely on in-game purchasable assets to continue to attract players back consistently over a long period of time – some as long as a few years. However, in doing so, developers run into what is known colloquially as “the design problem.”
Over the lifetime of a game, a small subset of die-hard players – the “whales”, so to speak – will represent the majority of the revenue generated through in-game purchases. What this means is that over time developers have to continue to design new content on a regular basis to elicit a consistent stream of revenue, and that revenue inevitably only captures a small fraction of the entire player base. In a worst-case scenario, the developers provide in-game content that grants buyers a competitive advantage in-game, leading to a “pay-to-win” ecosystem that is unfair to the majority of players. At best, the game provides some means by which players can augment their own experiences, such as with modifications and user-generated content; but inevitably, this opens the door for malicious actors to introduce scams and hacks that capitalize on other players’ willingness to pay for novelty.
Considering this, it seems inevitable that this iterative, in-game sales mechanic ultimately breeds dissatisfaction in the majority of any game community. In the end, it leads to the disintegration of the player base, which lowers engagement overall, and disincentives the whales and loyal players from investing further into the game ecosystem.
Blockchain technology represents a paradigm shift – not just for players, who, as we’ve previously mentioned, gain newfound property rights and the opportunity to enterprise or commodify their in-game assets, but also for developers in the way they create game economies.
This statement seems intuitive on its own. For gamers to enjoy the liberties of purchasing, selling, trading, and interacting with in-game assets at their own discretion, it stands to reason that developers must design the marketplaces that can facilitate this economic activity. However, there is a slew of other reasons to create on-chain game economies that exclusively benefit developers. These reasons corroborate the argument for blockchain gaming not just from a quality-of-life standpoint, but from a business development perspective for the long term.
The first of these reasons is that blockchain games allow for secondary, legitimate marketplaces that replace grey economies. As mentioned in Part 1 of this series, in traditional game economies, these third-party grey marketplaces aren’t licensed by game developers to facilitate the trade of these games’ items on independent exchanges. Tons of users and sellers on these websites and portals have taken advantage of the lack of regulation and oversight in these marketplaces, subjecting many unknowing consumers to scams. The existence of an on-chain marketplace for in-game goods eliminates this threat almost instantly.
And, to be clear, it wasn’t feasible to implement secondary marketplaces in traditional game economies, to begin with, because it was impossible to oversee the trade of non-fungible goods. For this reason, most in-game marketplaces only offered a suite of fungible items. Take, for example, Call of Duty: Warzone, a very popular free-to-play game that offers a large variety of in-game purchasable items. In this game, players are able to customize the weapons they use to compete against others, and every weapon has a number of attachments that alter its in-game, competitive performance. In the game’s marketplace, there are purchasable permutations of these weapons that come with cosmetic designs.
However, each of these items, which come in bundles, is infinite in supply, and each bundle is the same as its counterpart. That means that multiple players could own and use the same items concurrently, and had those players’ items been swapped with one another, no one would be the wiser.
Now, hypothetically, if a game like this were to introduce non-fungible assets into the play sphere, it would be imperative for players and developers to be able to track and keep these items secure. Otherwise, participants in the economy could be subjected to terrible injustices, like losing expensive items.
However, this is a near-impossibility from a developer’s standpoint due to the sheer scale of trading volume that would have to be observed and quality-checked. It would be a very easy feat for a player to hack another’s account and transfer a valuable non-fungible item to his or her own account, and it would be very difficult to track and punish this user in an appropriate manner.
This is why the only all-encompassing solution to this issue is the blockchain. Blockchains, by nature, require the tokenization of assets, which carries two key benefits: provenance and longevity, both necessary things for secondary marketplaces.
Asset provenance, as mentioned in Part 2 of this series, records the history of the asset’s creation and ownership. This information is immutable and cannot be changed. Thus, for tokenized assets on the blockchain, it is incredibly easy for developers to support secondary trading, as they won’t have to concern themselves with the overhead of securing the assets for each individual participant.
With asset provenance naturally comes longevity – not just for the game itself but also for its player engagement over time as well as its revenue-generating potential on the part of the developers. This is because the secondary marketplace provides, for the first time in the video game industry, data that accurately prices goods according to their demand.
Previously, in-game items were appropriately priced according to the aligning qualities they shared. In the case of Call of Duty, gun skins were worth – let’s say – $10 USD, while character costumes were worth $5 USD. However, within each of these categories, certain items were immensely more popular than their counterparts. Unfortunately, there were no opportunities for the developers to reprice the items. Doing so could risk significantly lowering their overall sales of a popular item and also alienating their audience to their detriment. As a result, these in-game assets, after enjoying a short period of intense popularity, would decline in terms of sales volume, and developers would have to continue publishing new purchasable content to preserve this revenue stream.
With a blockchain-based secondary marketplace, however, developers can implement new fiscal policies to not only optimize profits from popular in-game assets but also provide revenue-generating opportunities to players as well.
These fiscal policies can range from royalty fees to taxation, as well as other rules of trading. For example, if a game studio releases a non-fungible in-game asset, such as a character skin, that happens to accrue heavily in value, the game studio can require a 1% royalty fee that must be paid by the item’s latest buyer, thus allowing the developers to continue to gain revenue from the secondary sale of that item, time and time again as it is exchanged between users in the community.
In this instance, not only are the developers able to secure a recurring stream of revenue from the fruits of their design labor, but also provide players who purchase, trade, and sell the item an opportunity to earn a profit as well. The items are no longer commodities but securities. They become investment vehicles that carry value throughout their entire existence and can functionally distribute value across the ecosystem infinitely.
It is worth noting that, already, there are games out there that maintain assets like this, and over the recent months and years, many governments worldwide have pondered and worked toward accounting for blockchain-based game assets appropriately under the regulations placed by the SEC and other similar securities-focused legislation. This is a continued area of development for the GameFi industry, but as more legislation is put into place to address the specific needs of participants in the space, more developers will be able to develop projects that clearly follow these regulations, promoting new players to join and remain in these new game economies.
Provided with greater freedoms and new opportunities to earn, players in blockchain games can finally exist as active participants within their economies not just as consumers but as investors that have a stake in the success of the game’s economy just like developers. For them, this newfound agency is critical to their experience in immersive and engaging alternate worlds. And for developers, the more players can realize their own success and immersion within their games’ organic, mercurial worlds, the more those worlds can sustain themselves – on both the development front and the business front.