Gaming 3.0 Means FinTech, and Lots of it

Driven by consumer demand for more intimate, dynamic games, the gaming industry is evolving and emerging with unique innovations to support this demand. Yet, today’s infrastructure fails to keep up with players’ insatiable appetite for sophisticated in-game capabilities and functionalities. In the midst of this disruption, we believe FinTech is uniquely positioned to provide the required enablement layer that will satiate gamers’ desire to seamlessly purchase in-game assets and engage in virtual gaming economies where they can pay, earn, and invest entirely in-game.

tl;dr

1. Gaming has become the largest revenue-earning media segment, driven by COVID-19 and the growth of mobile as the preferred channel.
2. “Boxed games” have been abandoned in favor of dynamic free-to-play (F2P) games, which attract a broader range of users and boost supplier profitability.
3. Monetization in this space remains relatively untapped. To fully optimize gamer spending, platforms must enable in-game payments, P2P transaction capabilities, and enable the ownership of in-game assets.
4. Ownership is more important than ever to today’s gamers. Currently, blockchain is the best response to enable all gamers to easily earn and own in-game.
5. Dynamic engagement is the core focus of gaming 3.0. Whether it is reliance on blockchain and or full-stack expansion from developers, gamers want to feel more meaningfully engaged both financially and socially.

gaming_goes_viral

In the past year, gaming has become the #1 revenue-generating media sector in the world. Generating more than $176B annually, it has surpassed the combined revenue of the sports and music industry.

While the industry’s demand has traditionally been driven by a smaller community of predominantly male (aged 30–35) gaming enthusiasts, today’s “gamer” archetype has fundamentally transformed. In 2020, 46% of all gamers identified as female, underscoring the industry’s movement into the mainstream. Today’s gamer is increasingly casual, having only played games for less than five years and engaging in games to pass time rather than to compete.

According to Jackson Vaughan, co-founder and managing partner of Konvoy Ventures, the advent of mobile gaming broadened the definition of who is “a gamer.” While previous evolutions of gaming required high conviction with expensive game hardware and upfront costs for the game itself, today games can be easily accessed on a phone for no upfront cost.

“One thing you’re seeing today is that people are gamers without realizing it. They don’t actively describe themselves as such, but if you look at their phones they probably have four casual gaming apps — think of something like Candy Crush,” said Jackson.

Mobile devices have revolutionized gameplay by removing the traditional barriers to entry for new gamers. Instead of having to purchase expensive consoles to play, today anyone who owns a smartphone (more than 6B people today) can become a gamer.

Figure 1: Value chain convergence among gaming business models

the_mobile_takeover_demands_convergence

For suppliers, this consumer shift has driven new opportunities to launch new, more profitable revenue models. In particular, mobile games have risen in parallel with “free-to-play,” or F2P models, where the game itself can be downloaded or accessed at no cost. Rather than generating revenues per sale, suppliers can instead monetize games through repeated in-app purchases enabling them to collect long-tail revenues from frequent microtransactions. On a proportional basis, these in-game purchases have become the industry’s dominant monetization method, making up 34% of the total game spend in 2020 and projected to generate $74B by 2025.

As illustrated in figure 1, each evolution has further dissolved intermediary players, enabling developers to gain more market share as they move closer to end-users.

As suppliers adapt to changing consumer demands, the industry has witnessed three major supply chain transformations in the past decade:

1. Online-driven model: While publishers traditionally relied on retailers to facilitate distribution, online distribution platforms have eliminated the need for these intermediary players. Instead, major publishers (e.g. Epic Games and EA) developed proprietary digital storefronts, effectively enabling them to move downstream and distribute titles directly to consumers.
2. Platform model: Further up on the supply chain, digital distributors (e.g. Steam) have enabled more direct relationships between developers and consumers. This model offered significant cost advantages as the wide-scale accessibility of online marketplaces and digital storefronts enabled developers to circumvent publishers and sell games directly to consumers. In fact, in 2020, 47% of developers distributed games directly via Steam, demonstrating the affinity among developers to disintermediate publishers.
3. D2C model: As distribution has democratized, the game development process itself has undergone a similar transformation. New entrants, such as Roblox, remove frictions for a growing population of indie developers. By providing a sandbox environment for developers to create and distribute games, Roblox removes the need for developers to rely on publishers for distribution, enabling consumers to directly access games developed on Roblox’s engine on its proprietary platform.

what_a_gamer_wants

As developers move up the supply chain, they are now closer than ever to their end-users and have more nimble capabilities to meet demands. But what exactly are the desires of this broad and diverse audience of new gamers?

More than ever, modern gamers want:

• To generate value in-game: The rise of in-game purchases has served as the impetus for a new, growing demand for ownership over these assets. Whether that be through creating, buying, and or selling in-game assets, gamers want to see their in-game purchases generate and hold value. Instead of just buying skins, weapons, or coins for one-time value, ownership is becoming more valuable to gamers in a way that is more enduring than traditional one-time purchases. Today, this need is being met by blockchain gaming, which is a game built on top of a crypto blockchain, where game elements are can be owned and sold as non-fungible tokens (NFTs).
• To interact (and transact) with their peers in a secure and delightful way: The dynamic engagement modern gamers are looking for isn’t just relegated to influencer-audience relationships. More than ever gamers crave the ability to compete, interact, and transact with their peers. Considering the demand for higher levels of ownership in this context, gamers are looking for marketplaces to buy or sell in-game assets securely.

Figure 2: The evolution of gaming zeitgeists

welcome_to_gaming_3.0

The next evolution of gaming requires infrastructure that radically democratizes the nature of in-game commerce. The most obvious opportunities for innovation in the gamer economy address the pain points we mentioned earlier. We think about these pain points in the context of ownership, monetization, and P2P:

1. Ownership: The possibility of a true stake in gaming opens up doors to think about loaning, owning, selling, and earning all as a result of gameplay. The more developers can intertwine ownership in the core structure of games the stickier games can be. We see this most promisingly in blockchain indie games like Axie Infinity, which have a fraction of the resources and players that big box developers have and are able to keep up in revenues with ownership first, play-to-earn model.
2. Monetization: In the same way creators are moving past platforms like Instagram and Facebook, we anticipate gaming influencers will seek out new methods to overcome the extremely high take rates from existing platforms (notably Twitch’s 50% revenue share). Developers themselves could create native streaming platforms or even integrate in-game gamer-fan payments/donations capabilities.
3. P2P: Spanning both in-game payments and marketplaces, the P2P component of gaming 3.0 is driven by gamers’ desire to securely interact and transact with their peers. With a safe and secure environment for purchases, gamers can partake in an independent secondary economy and there’s an opportunity for game developers to step into these spaces while leveraging their credibility.

No longer just a recreational platform, third-wave gaming enables developers, gamers, and brands to seamlessly transact in a digital economy that exists without the limits of physical commerce.

Stay tuned for a deeper dive into the challenges and opportunities of gaming ownership and blockchain in the near future!