Some thoughts on disrupting (game) publishing

As a follow-up to my previous post on the Value of Publishing, I wanted to type up some quick follow-on thoughts on potential disruptions in publishing, and current barriers-to-entry for would-be ‘disrupters’.

While my last post focused on book publishing, I’m going to focus my thinking on another form of publishing: video game publishing. While the end-product and investment required to produce a video game is very different than a book, I think there are concepts-in-common that are interesting to explore. 

Historically, game developers worked with game publishers for access to their product manufacturing capabilities and large physical distribution network. Publishers leveraged their economies of scale to produce the the discs/cartridges and game packaging, and then sell these games into stores like (once upon a time) Micro Center, CompUSA, etc. in the PC gaming world, and Wal-Mart, Target, ToysR’Us, and Gamestop/EB Games for consoles.

For a long time, this warped the power dynamics in the gaming industry – the folks who managed the relationships with the big-box retailers had significant leverage over the developers, who could make the greatest game known to man, but have limited impact without access to the consumers to play these games. 

When Valve’s Steam unintentionally created a digital distribution platform, it began a process of shifting the power dynamics of the PC gaming industry away from publishers and into the hands of developers, who now could leverage the power of Steam to directly deliver their games into the hands of content-starved gamers in exchange for a 30% royalty paid out to Steam. Suddenly ‘indie’ games like Super Meat Boy and Braid (both featured prominently in the documentary Indie Game: The Movie) became a phenomena, creating thousands of aspiring indie game developers and massive windfalls for the (successful) developers and Steam. 

Despite Steam’s first agreement with third-party publishers in 2005, the rise of crowdfunding platforms like Kickstarter and Patreon, and the growing successes of indie games like Shovel Knight, Stardew Valley, Undertale, and others, game publishers remain a powerful player in the ecosystem. 

Using these successes as ‘case studies’ provides a glimpse into the continued relevance of publishers and the value they provide: 

As seen in the examples above, aspiring developers oftentimes pursue their own games as a labor of love, either as a part-time project or after splitting from a more established publisher in pursuit of indie dreams. 

Unlike writing, which oftentimes requires little more than time and access to a word processor and your local library, game development is a massive undertaking which oftentimes requires funds to finance the game’s art and design, animation, music, and polish / quality control. While a single superhuman or a small, dedicated team could produce a game over a 2-3 year span, developers oftentimes farm out some portions of the development process to contractors or freelancers, who are highly in demand, and command compensation. 

The most successful Kickstarters, such the recently-released Shenmue 3 or Cyan’s Obduction rely on the loyalty of a rabid fanbase familiar with previous games created by the team. Without an established audience, normally borne of a track record of successful past games, using crowdfunding like Kickstarter to finance a relatively expensive game that may take excess of 3 years to reach the funder’s hands seems like an unlikely strategy.

And while there are plenty of examples of developers bootstrapping their own games until they reach a level of polish suitable for players, these games still required expensive “ports” or “localizations” to consoles (Nintendo / Playstation / XBox) to reach the broader gamer audience, many of whom preferred the comfort of their couch and controller to desk and mouse/keyboard.

The need for capital to sustainably finance game’s development is the first (and major) hurdle in disrupting the game publishing space.

The recent entrance of Epic (buoyed by cash flows from their megahit Fortnite) adds another interesting option to the funding picture, both through their Epic MegaGrants (which offers royalty-free access to their Unreal game development engine and funding for games in exchange for a period-defined distribution exclusivity), as well as their eponymous Epic Store, which offers game developers a 88% cut of their games, enticing game developers to eschew Steam’s massive player audience for a larger margin share. 

Another interesting new player is Discord, a deceptively simple chat, messaging, and community management app that has created a way for game developers to sell their games within the application to their established communities

Increasingly however, first-party platforms like Playstation’s Sony Interactive Studios and Microsoft’s XBox Game Studios have become hyper acquisitive of small, medium, and large developers, most famously acquiring Minecraft for $2.5B in 2014, and even more recently continuing to snap up smaller publishers like Microsoft’s recent acquisition of Obsidian. In addition, third-party publishers continue to partner with game developers to produce and distribute both small budget and more ambitious games. Take-Two’s Private Division imprint provides a glimpse into the potential future of game publishers as incubators of talent. 

Other considerations for foregoing publishing beyond mere capital draw other parallels to book publishing – the expertise and economies of scale that come from specialization in other game production-related processes like art & design, animation, tracking bugs and broader quality control, and the previously mentioned “localization” process. In each of these respective areas, game publishers boast access to experienced talent who will work across their portfolio of games in exchange for a fixed salary. And while it is possible to find contractors/freelancers who can partner with you on these aspects of the process, the talented ones are likely to be highly in demand, and certainly not cheap. 

Lastly (for now), another aspect of the game publisher process that continues to drive value for developers is marketing & publicity. This past weekend, I attended my first PAX gaming convention, PAX East 2020. There, and in satellite events related to PAX, hundreds of booths of game developers were vying for the limited attention of the gaming public through showy booths, free merchandise and giveaways, and polished demos of their games.

The vast power of the more established publishers was on display, most notably via Private Division’s massive booth at PAX East for its primer upcoming title, Disintegration (developed by V1 Interactive, a studio founded by the co-creator of the Halo universe). 

It is certainly possible to build a grassroots movement around a game, but in the crowded current landscape this increasingly means actively promoting your game and cultivating communities across platforms like Twitch, Discord, YouTube, Twitter, blogs, and game journalists, all at once. One example is a game called Midnight Ghost Hunt, which was prominently featured in the Discord Game Booth at PAX after catalyzing an impressive audience for their game on Discord and drawing the attention of the management there.

However, this more often requires access to game industry veterans with established connections to the communities and catalyzers that drive game success, which (again) don’t come cheaply, if for a price at all. 

All of the above creates a difficult environment for unknown game developers to go at it (completely) alone, especially without access to capital and industry connections.

What I’ve Learned Chatting Across the Gaming Industry

One of the primary efforts that I’ve undertaken since beginning at Harvard Business School in the Fall is exploring a potential industry ‘pivot’ into the world of video games.

For better or worse, my initial impulse when seeking to learn something new is to cast a broad net and seek out people with informed and experience-driven perspectives. A separate blog post should probably explore the efficacy of immediately throwing the onus and responsibility of teaching onto others, as opposed to other approaches (such as research, or “doing’’ by working on projects / efforts in the space), but I’ve been lucky enough to have 10+ conversations with individuals working across the industry (game publishers, live streaming, start-ups serving the industry, etc.).

What follows are my initial and point-in-time takeaways from these conversations:

Publishers are ‘kingmakers’ – they are at the proverbial ‘top of the food chain’ and have the keys to the kingdom

Major (i.e., AAA) game publishers like Activision Blizzard, EA, and Take-Two sit at the most precarious position in the gaming value chain – they invest years of development and tens-of-millions of dollars to release games, which then become subject to the critical eye of millions of game consumers. Like film studios, game publishers invest millions of dollars in marketing and advertising associated with their games, including traditional forms of media (tv adverts, billboards/bus ads, online ads) and newer, ‘native’ forms of advertising such as paying major live-streaming personalities on Twitch and YouTube to play their games.

However, unlike film studios, whose releases are consumed once and in a single sitting, game publishers compete for a gamer’s time-share in a competitive environment that includes both new and older games. And while both films and games have historically make the majority of their proceeds in the first few weeks of release, as gaming has increasingly shifted online, publishers have sought out sustained engagement over a longer period of time, releasing game improvements (“patches”), or episodic or additional Downloadable content (DLC) to keep gamers engaged and interested in their games. For example, whereas EA Sports franchises like Madden have been traditionally repackaged and repurchased on an annual basis (Madden 18, 19, etc.), games like Tekken 7 now sells “Season Passes” that extend the lifetime of these games. Another mechanism to increase engagement with these games is via competitions, otherwise known as “eSports” (more ink to be spilled on eSports in forthcoming paragraphs).

Behind the millions of dollars invested in these games’ respective intellectual property are mostly publicly traded corporations ($TTWO, $ATVI, $EA) that are beholden to the quarterly financial performance expectations of their shareholders. As a result, these companies are fiercely protective of their intellectual property and other rights associated with their games. Wherever possible, they seek to maximize the financial return of their intellectual property by owning every step of the gaming value chain, including distribution (using walled PC distribution platforms such as EA Origin, Activision’s, Epic Games Store, etc.) and the eSports / tournament ecosystem (Fortnite World Cup, League of Legends World Championship, Overwatch League, etc.)

One notable exception to this is Valve, who were the initial innovators of the publisher/distributor combination via the Steam Store. Valve’s key competitive games, Counter-Strike: Global Offensive and DOTA 2, have been more open to co-sponsoring / producing tournaments than their direct competitors, as Counter-Strike ‘majors’ have been organized by organizations like ESL, ELEAGUE, Dream Hack, and Major League Gaming (since acquired by Activision Blizzard in 2016). However, this may be more of a coincidence than a strategy as the esports ecosystem has continued to grow and evolve.

While enterprising entrepreneurs and faithful fans continue to dedicate time and effort innovating and creating modifications to their games (“mods”), a general assumption is that as whenever dollars become involved, the game publishers immediate seek out a cut of the proceeds, and are not afraid of being litigious if they deem necessary.

Are ESports a Revenue Driver or Cost Center, or is it too early to tell?

Building on the topic of eSports, it is undeniable that eSports represent a major development in the gaming industry, a massive shift from the traditionally conceived basement gaming sessions or LAN parties. World championships of competitive multiplayer games have sold out arenas like Madison Square Garden, and garnered tens of thousands of eyeballs on livestreaming platforms like Twitch. Whereas young people have traditionally gravitated towards traditional athletes and sports, today’s young people are increasingly interested in watching games and gaming competitions, both online and in-person.

Behind this growth are predominantly young male consumers, with a large majority under-18 and a smaller portion within the advertiser-desired 18-34 year old demographic. As a result, there continues to be an open question whether this growth can translate to profits in the form of significant advertiser revenues, in-person event sales (more below), and additional game purchases and brand engagement, or simply another marketing line-item for these mega game properties.

One can easily argue is the consumers who have grown up will continue to engage with eSports as they mature and their purchasing power increases. However, whether the currently envisioned eSports business model is the lasting one, or whether it’s simply too early to tell, remains to be seen.

One compelling parallel drawn in a conversation was to the UFC/MMA – whereas initial advertising supporters of the UFC were ‘fringe’ companies (and many still exist), mainstream advertisers seeking 18-34 male consumers like Bud Light, Harley Davidson, and Boost Mobile count themselves among the UFC’s biggest advertisers.

2020 will be a pivotal year for defining the future of eSports

The answers to some of these questions could be answered as soon as next year, as next year the Overwatch and Call of Duty Leagues, both run by Activision Blizzard, will begin a home/away game system akin to a traditional sports league.

While the first two seasons of the Overwatch League were held at Blizzard Arena, a 450-seat ‘stadium’ in Burbank, California, the third season of the Overwatch League will take place in 20 locations across the world, with teams in China (4), South Korea (1) and Europe (1), as well as North America (15) across four divisions and two conferences. Aside from the logistical complications of an international travel schedule and coordinating logistics for live events in 20 stadiums around the world, Activision Blizzard’s home/away game move is a clear statement that they believe that the future of eSports looks dramatically similar to traditional sports: local franchises owned by individuals, world championships coordinated by leagues, etc etc.

A quote from the (former) Overwatch League’s Commissioner during the announcement helps explain a bit more of their motivation behind the home/away system (emphasis added mine):

“It’s really taking a page out of traditional sports scheduling. This isn’t just an important step for the Overwatch League; it’s an important step for esports. . . . You look at the esports club model where everyone is playing in a central studio or online, the business model is global sponsorships, there’s some competition there, and then monetizing content through YouTube and Twitch and other platforms. But if you look at the way teams drive revenue in traditional sports, it’s because they have a venue. They can sell tickets, VIP experiences and boxes and all of those things — concessions, parking, merchandise and local sponsorships — which to date have had no reason to invest in esports.

There’s been significant skepticism among some of the individuals I’ve spoken with regarding the home/away system, and whether this is a shortsighted attempt to monetize the League in lieu of a longer-term strategy to create something different that what’s come before it. Overwatch ‘franchises’ were initially sold for $20 million, and have since grown to between $35 million and $60 million during the league’s most recent round of expansion, sold to traditional sports franchise owners like Robert Kraft, Comcast Spectacor, and Stan Kroenke, and a newer concept, venture-backed eSports teams, all of whom are looking to recoup their significant investment in these franchises. Whether or not consumers will have any affinity to their local franchises, which were created in other leagues during the age of local media distribution (as opposed to today’s globalized, OTT media streaming environment), is a huge question mark. In a world where Barcelona, Real Madrid, and Manchester United rely heavily on a global fanbase that has never stepped foot in Spain or Great Britain, I believe this doubt is justified.

If franchises are unable to sell out their local areas and monetize these live events as expected in the inaugural 2020 season, I wouldn’t be surprised to see a ‘down round’ in team valuations, which could have significant impact on the viability of the Overwatch League and Activision Blizzard’s desire to continue investing in the product, raising the question (again), of whether eSports is a profit driver or cost center.