Gaming Industry in Web 2.0
In typical Web 2.0 games (current online games), game developers sell in-game currency and virtual goods to the players. They are essentially called microtransactions. Secondary market in the gaming industry is limited to such transactions which by the way helps to reap humongous revenues. And we can’t really blame anyone for that. Web 1.0 and 2.0 were all about accessibility and experience which delivered from a UX and UI standpoint. Even cryptocurrency is only a use case in Web 3.0. Although it inspired the breakthrough storage technology called blockchain, it was more or less a necessitated reaction to the 2008 financial crisis.
In a nutshell, Web 2.0 did not have the capability to empower players to monetize their in-game assets by way of trading or other means due to lack of demand for the same. This effectively meant that the take rate of any asset sold by the gaming company was close to 100%. Out of industry’s total revenue, 75% is from the sales of such in-game assets and this is only going to consolidate further to around 90% by 2025 as per industry estimates.
Blockchain based Games
With blockchain-based gaming (web 3.0 games), players will be able to own the in-game assets thanks to the concept of NFTs which makes such assets verifiable for authenticity and ownership. Anything you store on open source blockchains is transparent to anyone sitting across the world. Users now will be able to sell these NFTs to other players inside or outside of the game. NFTs enable tokenization of assets which will assign a real-world value to the in-game currency. Further, players can stake their in-game cryptocurrencies to earn more of them. Ownership, tokenization and staking of assets will lead to revenue distribution to the entire gaming ecosystem that includes gaming companies, their users and retail investors.
One seemingly legitimate complaint or excuse, shall I say, of critics is that the games in Web 3.0 will stop being recreational and a source of labor/productivity. Well as noted above, if the gaming companies can successfully create their own secondary market since the early 2000’s without compromising on the ‘engaging’ part, the complaint is unfair to loyal gamers or users who over the years have spent a ton of hours and money in games only to show nothing for it. This already sounds like gradual democratization of wealth, however, on top of flourishing business opportunity for the industry. Curious to know how? Keep reading 🙂
Given Web 3.0 gaming will decrease the take rates for the gaming companies, let’s try to understand how this may impact the gaming industry as a whole with a specific focus on existing game developers/companies. To understand this, let’s take a look at three possible scenarios.
Scenario 1: Total value of transactions remain constant
If we assume that the number of transactions will remain the same, the take rate of game developers along with their revenues will go down in Web 3.0. Given that blockchain gaming enables peer-to-peer (P2P) transactions in its now expansive secondary market, real world money will move not just between the game company and the players but also between the players.
Let’s assume a scenario where 40% of the transactions are, let’s say, in the primary market (game company to players), and 60% of transactions are in the secondary market (player to player).
Other assumptions :
- The game company takes a 10% take rate on the secondary transactions.
- 5% of players convert into paid users under both free-to-play (Web 2.0) and play-to-earn (Web 3.0) models
What we found is that the revenue of gaming companies decreases by at least 45% in this scenario.
Scenario 2: Increase in total number of players
Transition from Pay-to-Play to Free-to-Play in 1990’s
If you see scenario 1, this is not a new hypothesis. In fact the take rate reduction problem was considered when free-to-play games originated in the late 1990s.
When the gaming industry shifted from the pay-to-play model to a free-to-play one, there was lot of skepticism around what that would entail for gaming companies. However, smarter entrepreneurs knew that if they provided an amazing user experience to their users without an upfront payment barrier, it would only result in more adoption. And with more adoption, their avenues of monetization will only increase because now your demand is more organic.
How did Free-to-Play Model Fare?
Fast forward 20 years. The free-to-play model has proven to be one of the most profitable ventures in the modern age which has shaken a world beyond just die-hard gamers. Today, a significant chunk of the gaming industry’s revenue come from the demand for in-game items. Here are few notable observations with the rise of free-to-play model
- Free-to-play opened new markets for the gaming industry. From Asia to South America, games like Minecraft, CrossFire, PUBG, Candy Crush took the gaming industry well beyond its usual suspects
- As suggested above, free-to-play games drive around 75% of the gaming industry’s revenue today
In retrospect, free-to-play games led to :
- Lower barrier to entry: People can download the game and start playing without being preoccupied with cost or time constraints. This led to more users trying the games
- Effective monetization: Once players have started playing and enjoying the game, they are more likely to spend money on it
- More content and engagement: Game developers were incentivized to create high quality games through arduous research that paid off for the most part. The more engaged users are, the more likely they will subscribe to paid/locked contents. Good examples are ‘World of Warcraft’, ‘Grand Theft Auto 5’ among others
Transition to Play-to-Earn Model
A similar thing can occur as free-to-play shifts to play-to-earn. The key drivers of this could be :
- It is safe to assume there are still some users who felt online or video games were just money and time sink. But with Web 3.0, they could find that missing motivation to play games as that will offer them a chance to make money simultaneously
- In free-to-play, typically 5% of players convert to pay-to-play users but this number could significantly increase given now players are not just consuming but are investing in assets that can be productive leading to future earnings. Imagine a scenario where users from anywhere in the world put the time and effort to upgrade their in-game character and transform it into a rare/rarest NFT. This NFT can then be sold to anyone who will perhaps use it as an in-game item to enhance their games or even as an investment
- Now that we addressed those who had explored gaming previously in some shape or form, the most significant accomplishment here would be to welcome first time users into the gaming industry. The correlation between money and fun will be more than just FOMO for them
In this scenario, even with a decrease in their take rate, gaming companies will end up generating more revenue. If our assumptions prove right, revenues of gaming developers will see a rise of 40-50% in this scenario
Scenario 3: Scenario 2 + Increase in microtransactions
In addition to the increase in the number of gamers, the number of microtransactions in the game can potentially increase due to play-to-earn economics. Play-to-earn gameplay can further introduce advanced/locked stages within a game, more types of virtual currencies and game awards than ever.
This directly results in an increase in the number and frequency of transactions. And remember, with more such transactions, there would be more expectations from players for a superior UX and UI even if that means spending more money to buy the latest consoles. Which could tie back to the gaming companies manufacturing or distributing such powerful devices or taking some type of revenue sharing there.
This can only go one way – massive increase of revenue for the gaming industry. Based on our assumptions, in this scenario, we are looking at revenue increase of over 120%! And based on our limited understanding of the Web 3.0 gaming ecosystem, it appears we are unlikely to find ourselves in Scenario 1 and we may actually end up somewhere between Scenario 2 and 3. Case in point – As this source reports, “in countries like the Philippines and Indonesia, people are playing popular play-to-earn games like Axie Infinity to support their families. Whether that proves to be a sustainable model remains to be seen, but it’s a potentially powerful and revolutionary idea that is already being put into practice.”
If we simply cut through the noise, the best business minds will ultimately realize Web 3.0 offers organic and bigger growth with more mainstream adoption in the gaming industry. As we’ve seen above, we would like to bet that their revenues will only go up significantly.
Businesses will continue to thrive be it in Web 2.0 or 3.0 because entrepreneurship is incentivized to innovate and disrupt the market frequently. But Web 3.0 just made it easier for gaming companies to add icing on the cake by incentivizing their users in a secondary market which now looks more democratic and wholesome. That too without burning their pockets. Talk about repaying the debts in style!! 🙂 And mind you, unlike in Web 1.0 and 2.0, they can oversee this transition with barely any research which would otherwise demand pan-world resource strapping efforts to innovate. Thank us later!
And yes the trading aspect of Web 3.0 would invite more regulations, but game developers would not have to worry as long as their games are skill based. They know very well if games are not skill based on top of being addictive, it amounts to gambling in the eyes of regulators.
People across ages find gaming as a top source of entertainment today because unlike other forms, it involves their interaction. Vitor Dal Pra, a blogger on medium.com wrote, “ For the gaming world, the idea of being present day-after-day in a digital world with social activities, such as virtual gatherings, has been going on for a while even before the pandemic struck. Nonetheless, it is still not mainstream, but the wish to change that exists”. That is what keeps us excited to learn and build this space in Web 3.0 because it is a win-win for all parties.
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Disclaimers : This opinion piece is based on a research article published on yourstory.com. Opinions expressed in this publication are those of the author(s). They do not necessarily purport to reflect the opinions or views of Shardeum Foundation.
About the Author(s):
Lakshika is an engineer turned MBA graduate (ISB- Hyderabad). She developed keen interest in blockchain, Web3 and play-to-earn ecosystem over the last 2 years. Lakshika currently leads strategy & marketing at two DeFi protocols – Router & Dfyn. Follow her on Twitter and Substack.
Subbu is a fintech blogger @ his website livingstable.com. Through his contents, he seeks to guide people to utilize financial resources online and realize the power they have on their fingertips. Follow him on LinkedIn and Twitter