Throughout this piece, we provide a guide and unpack how the gaming category came to formation, where we are today and why the sector is booming. We’ll also explore the current landscape, identifying the new types of Web3 business models, frameworks and economies concluding with the global trends we are witnessing as we actively work with thousands of founders.
Gaming came to formation in 1958 with the first being a tennis game. In 1972, the first video console was launched, the Magnavox Odyssey. Mario Kart then followed suit in 1985 subsequently followed by Pokemon in 1996 which has generated over US$110bn in revenue since inception. Mobile gaming came to market and in 2009, it started becoming a popular way for active players to play Angry Birds, Farmville and the likes. Fast forward to today, revenues are soaring with more than three billion gamers globally which are generating the industry $200b in annual revenue which is set to grow 15-25% YoY. The next types of gaming platforms coming to market are slightly different to what we have experienced in the past - they are games that allow you to play and earn an income at the same time, so called play-to-earn.
Throughout the pandemic, people craved entertainment to escape the real world and wanted to find new ways to interact with their friends in a virtual gaming environment such as the 227 million U.S citizens (two-thirds of the population) who experienced a form of online gaming throughout the pandemic according to recent reports.
On the other hand, when we think about how these games go viral, players are actually the biggest asset to game developers and studios. GenZ's today no longer want to spend as much time watching films or listening to music, instead, they want to game with their internet friends who spend almost eight hours gaming a week, on average. History has shown us that as soon as a friend is raving about the latest game they are playing, their friends follow suit creating insane network effects at almost no cost.
Statistics have also shown us that gaming is a hugely fun and engaging experience however it can be an expensive hobby and as soon as you leave or complete the game - you no longer have access to those assets or avatars you purchased throughout the experience. The next generation of gaming platforms removes those barriers where you can play, earn and own all of your in-game assets which today are being experienced by over three million players on some of the most popular and newest platforms who have raised billions of dollars in venture capital money in just a few short years.
Types of games
When we talk about gaming, there are a few different types of games that may be helpful to explain:
Free to play
Free to play games as stated in the title are games that are free to play. Publishers and gaming studios will typically generate their revenue through premium features. The F2P market generated US$75.6bn in 2021, up from US$73.8bn in 2022 according to recent stats thanks to rising games such as FIFA 2022, Gran Turismo 7 and Mario Kart 8, all of which are the most sought after games as of March 2022.
Play to earn - play games and make an income
You typically have to pay to start playing the game but the key difference is that you own your in-game assets as you play which can be traded, exchanged or stored on the blockchain. If the game producer (the creator of your favourite games) was to ever die, your assets are still available to be used across alternative games - you will simply be able to transfer them and use them in the next popular games.
Cloud Gaming
Netflix for gaming in simple words. You pay a subscription fee to access the hardware and content of the game which generated just US$1.5bn in revenue in 2021 from its 22 million subscribers. Although still, quite a small amount, compared to the three billion gamers there are globally, the revenue numbers are set to quadruple in 2024 and the number of players is expected to reach north of 50 million subscribers.
Frameworks on creating a game (the experience and getting started)
When we are exploring investing in a company, we think about these core characteristics:
- Free-to-play: Is there a F2P element to the game? This will in turn impact the short and long term opportunity of the game
- Partnerships: High profile partnerships for brand appeal
- Advertising: Remember and still today, those pop-up ads halfway through games. Will this cause distractions and frustrations to the user?
- Influence: Are your favourite creators or high profile individuals talking about the game as well as playing it?
- The New Creator Economy: How will your game enable players to generate a potential income
- Mobile vs desktop: Historically, games have been more interactive on mobile as they are more accessible. How will you be different?
- How do you plan to attract millions of users? Do you want to do an NFT drop for example for your first 50,000 users who can use the NFT or digital character to get started in the game, instead of having to buy the digital character as a late comer?
Characteristics in the next generation of gaming platforms
When we recently published our annual creator economy report, this year focusing on the rise of ownership and providing compensation to users based on their contributions - we often think about how this will evolve in a similar way for gaming. From working with thousands of entrepreneurs in this space, we are witnessing a number of characteristics platforms should consider when thinking how to engage players such as:
Gamers are becoming the new economies
Unlike traditional games where once you leave a game, you can no longer take your purchased assets with you - all of them will be lost. The next type of gaming platforms that are emerging allow players to completely own their digital assets without having to leave the game where they can carry them over to the next gaming platform.
Customization of your digital assets
When we think about how NFTs and digital collectibles evolve, for some consumers, they will become part of their everyday lives where they want to look after them, that could be feeding your digital CryptoKitties everyday or when we look back at the days when Farmville was around, if that was your digital asset, you would need to make sure your crops are still alive and harvested. New types of platforms will engrain early adoption and consumer behaviours that encourage the players to come back on a daily or regular basis to look after their digital collective which you have a personal connection with.
Tailoring early content to your frontier and hardcore gamer
As your frontier gamers (who have little education around crypto) who experience your game for the first time - the education around Web3 will need to be broken down and made incredibly simple. This may involve a few trials, perhaps they join a gaming guild (a community on the game) where they are shown how the game works but its own community and in turn, are perhaps rewarded a form of token that allows the game to continue the engaging community early on with potentially higher retention.
Your hardcore gamer is most likely quite savvy around crypto so instead of educating them on the crypto basics, game developers should think about how to make them hyper engaged early with a world-class experience from day one, so they continue returning to the platform as well as notifying all their fellow gaming friends.
The rise of community
The community experience will be a really important factor in how gaming platforms engage and make the immersive experience fun and entertaining for the player. Similar to Web3 communities, community members start becoming protective of who is in the community and are they a valuable member. As soon as a flood of players start milking these gaming platforms to make money, it will really affect the success of the game but also the experience for fellow gamers who are there to game and to earn. However, if the community is hugely engaging, platforms can rely on them for network effects. For example, at Axie Infinity, 80% of their users have been referrals allowing you to launch in new markets relatively quickly.
Drops and gaining momentum
Once you have a highly curated and engaging community, sustaining the moment will contribute to the success of the platform. Some of the engagement characteristics include: Dropping new digital avatars every fifteen seconds, up to your first 50,000 drops. This creates momentum for your first users where they can only buy up to a restricted amount. The platforms today are insanely fun, engaging with immense enjoyment and rewarding, where you have an evangelist feeling where you are all being provided with a shared economy environment where you are being fairly compensated for your contributions.
Well designed games can provide a strong sense of purpose, meaning and connection as they tend to use principles of the self-determination theory, which suggests that people are motivated to grow and change due to three innate psychological needs.
— ANNIE ZHANG, PRODUCT MANAGER AT ROBLOX.
More specifically:
- Autonomy: people want to be in charge of their lives and make decisions for themselves
- Competence: people want to improve and be on the path to mastery
- Relatedness: people want to connect with others
Investors investing in this space
As Web3 becomes the category that encompasses Decentralised Finance (DeFi), the creator economy and other creator-led technologies, we have reached out to the wider ecosystem to provide you with a dataset of who is investing in this space. Download our full list of investors who we have actively reached out to who have provided information on their stage, geography focus as well as their cheque sizes.
As all of us year by year spend a greater share of our days online, it's becoming paramount that traditional sports clubs engage their fans more deeply in the online world, beyond the limits imposed by physical stadiums, merchandise or game broadcasts. On its path to building the leading digital sports & entertainment brand, Sorare has enabled sports fans around the world to engage directly with their favourite clubs and players through digital cards they can collect and play in fantasy sports competitions. It's never been easier to reward true fandom and for fans globally to rally together behind their team's successes.
As all of us year by year spend a greater share of our days online, it's becoming paramount that traditional sports clubs engage their fans more deeply in the online world, beyond the limits imposed by physical stadiums, merchandise or game broadcasts. On its path to building the leading digital sports & entertainment brand, Sorare has enabled sports fans around the world to engage directly with their favourite clubs and players through digital cards they can collect and play in fantasy sports competitions. It's never been easier to reward true fandom and for fans globally to rally together behind their team's successes.
— ANDREI BRASOVEANU, INVESTOR AT ACCE (INVESTOR IN SORARE)
The trends
By working with thousands of founders on an annual basis, we have witnessed several gaming trends which include:
Gaming developers in Korea
With a population of just 52 million, esports has actually surprised the population of real sports. If you are an avid gamer, you’ll most likely see a Korean player somewhere at the top of the leaderboards - they are even seen as celebrities in the region. Gaming become a hugely popular activity for Koreans as twenty years ago, the average TV / Computer console would cost US$4,000. So, internet cafes started popping up across the region where millennials could go and game on one of their consoles for just a few dollars. From there, the gaming industry become so popular that if you went to school and didn’t game, you wouldn’t fit in. Gaming is now ingrained into Korean culture with the country having the second fastest internet speed in the world.
Philippines
According to research, 2% of the GDP for the Philippines in 2021 was directly correlated to play-to-earn games with the region being mobile first, they live in an information and community culture where information, as well as knowledge, is quickly shared and they are early adopters to the latest technologies which we also saw with Facebook when it came to formation.
The ownership economy
Purchasing avatars can be an incredible experience for players, it allows you to unlock new features, and rise up the ranks in the game but historically you don’t actually own these assets - you are just fueling the bank balance of the game developers. In the future, we see you being able to not only own your avatars through blockchain technologies and new types of platforms but you’ll be able to use your digital avatars across multiple games instead of just one. In addition, for the ownership economy to succeed, the middlemen who take up to 50% of the overall revenue of stakeholders will be replaced with us as community members where the economics will be widely distributed among the active community members potentially creating a new generation of wealth.
Community
The future of consumer apps will be built by builders and communities which will allow stakeholders to own the assets and efficiently allow games to have endless chapters - the games may never end.
Live concerts meetings gaming with virtual reality
When creator Marshmallo hosted a concert online on Fortnite, over ten million fans streamed online next to the pop star where audience members were encouraged to create gaming avatars and dance alongside the DJ. With the world now coming together, there will most likely always be a market for real and live in person concerts however the opportunity for virtual concerts is to reach millions of fans globally, where they are being entertained in the world of virtual reality. Creators may be able to create digital NFTs that their fans can purchase as a digital collective which may be able to be used in ways such as gated community access to the creator as well as backstage passes or access to follow on events - once you are part of the community.
The future of work
The next generation of gaming platforms will allow players to make an income anywhere in the world by playing their favourite games - achieved by owning tokens inside the game which can be used, traded or sold on the blockchain. These new types of platforms such as play-to-earn games have a massive opportunity to disrupt the gaming industry where players no longer become the economies that fuel these gaming companies, they actually become the product and the economy themselves. If you don’t think this is a huge opportunity to disrupt, then if we were to say 2% of the GDP in the Philippines was down to play-to-earn games in 2021, what would you say? It’s a huge opportunity and we look forward to partnering with the next generation of platforms that are disrupting this US$200bn category,
It’s not just happening in gaming
We are also seeing a shift in how other industries are becoming community-led where fans, community members and the stakeholders throughout the value chain are being compensated for their contributions. Music, for example, is having a wild ride in becoming decentralised - as of today, only 0.2% of the seven million music artists on Spotify make over $60,000 a year as we published in our annual creator economy report. Imagine a world where musicians could own their royalties instead of the record labels and provide ownership directly to their fans. In return, fans could also support up and coming artists by buying into their future means of income, their first album, a piece of artwork which we may start to see with the likes of Spotify with their recent partnership with Roblox. If this succeeds, not only is this the new creator economy but it may just allow some of us to make additional income alongside our current means.
Play to earn is the entry point for consumers entering crypto
Taking your first crypto bet can be daunting when there is real money at stake, the information can be confusing and you may be spending hours researching online when the advice being provided might not be entirely accurate. Gaming has a much friendlier approach to crypto, with a sense of community where players can interact with each other and start having an experience of what it means to own a digital asset. Gaming we think will be one of the options for consumers to enter crypto.
Free to play games are the fastest growing games
Today, free to play games are the fastest growing games with many of these games being mobile first. In the future, Web3 games may become as or more popular than free to play games. As the gaming industry continues to grow by 15-25% on an annual basis, the new gamers coming through the market today may have an interest in Web3 gaming. If this continues, the audience demographic will have a greater interest in crypto related games however, there will need to be parenting controls for kids however as many of us will all become creators in the future, play to earn is here to stay and will most likely only increase in popularity.
80% of GenZ and Millennials spend eight hours a week gaming
According to multiple studies, millennials and Genz’s are spending 7 hours and 20 minutes on gaming, based on a survey that 48,000 Gen’Z and Millennials completed. From our research, the data is showcasing that GenZ and Millennials are deciding to spend more time gaming than past leisures such as watching TV, listening to music or even going outside which is starting to have an impact on our attention spans which have decreased as much as fifteen seconds over the past decade as reported in our piece, The Attention Economy.
Challenges
Of course, when new types of business models emerge in a very large category, there will undoubtedly be questions and scepticism. Some of the challenges that game developers are facing today and may face in the future include:
Regulation and understanding the impact of crypto
As gamers start identifying opportunities on how they may be able to make additional income - platforms should be educating consumers on what crypto is, the impact and how they can all become Web3 native. On top of this, governments are sometimes cautious about new types of financially technologies such as Korea, which has placed a bun on all cash-out crypto based games on Google Play and iOS.
Impact on the world
With rising gas costs, blockchain technology is expensive meaning it is causing carbon footprint damages to the environment. For every trade we make on the blockchain, it takes a huge amount of electricity to power all of these transactions and these blockchain technologies are here to stay. Platforms will potentially in due course, have to include what impact their platforms are having on the carbon footprint in their public reports for more transparency.
Will the hype continue?
‘’As for play-to-earn games, it has been a major step forward in shifting time spent playing games into a valuable use of people’s time. The biggest challenge is still making play-to-earn games feel fun and engaging rather than just another way to make disposable income. The way I see things progress is twofold. First, more and more traditional web 2 games and developers will start to build the blockchain into their games. This will mean the overall quality and quantity of games that have play-to-earn built in will increase and play-to-earn games will become more fun and diverse. Second, is that the play-to-earn model of virtual experiences will expand into other verticals of experiences beyond gaming where the focus is not on play but on new ways to make money in the Metaverse. For example, service-based marketplaces could pop up in the Metaverse where based on the number of voxels a 3D artist adds to a piece of land in Sandbox, they will get commissioned for their work. That is all to say, mixing work and play is not always ideal. For games, making money should not be the priority, but also play-to-earn games have created a powerful precedent for how monetisation can be built into other upcoming Metaverse experiences.’’ - Annie Zhang, Product Manager at Roblox.
Summary
We believe the next type of gaming platforms will mostly be community-led where players can buy, own and trade their digital collectibles inside of games. For economies that are facing economic challenges, play-to-earn games in the future might be an alternative means of income for individuals to escape economic hardship.
