New Business Models for Gaming, Collaboration, Creativity

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0:00:21 Hi everyone, welcome to the A16Z podcast.
0:00:26 I’m Sonal and today, General Partner Chris Dixon and I are chatting with Kevin Chu,
0:00:31 CEO and founder of Forte, which is focused on building a more collaborative future for
0:00:37 gaming by realigning the economic relationship between players and developers and others.
0:00:41 Kevin was formerly CEO of Kabam, which was an early leader in online and mobile gaming
0:00:42 before it was acquired.
0:00:46 So he’s seen it all when it comes to the major shifts in gaming from then to now and
0:00:48 what’s coming next.
0:00:53 So today’s episode covers everything from what those platform shifts were and are to
0:00:59 what it means to evolve the business models for gaming, specifically coming to and from
0:01:02 the idea of free to play.
0:01:06 And we also touch on where blockchain and crypto economics come in.
0:01:10 But first we began by quickly touching on Kevin’s early history in gaming and especially
0:01:13 what changed during the first decade of the odds.
0:01:19 I started playing games on my dad’s 8086 and so back then there was no hard drive, you
0:01:23 had to load in the floppy disk and change the config.sys files to make sure everything
0:01:24 all worked properly.
0:01:34 So I started playing games on PC and fast forward and I played games all throughout college
0:01:37 and started playing some competitive games.
0:01:44 And then in 2006, I ended up starting at Kabam and at that time, the world was moving from
0:01:49 going to the store and buying a copy of a video game to be able to go onto the internet and
0:01:55 be able to load up a game either in a browser or download a game through Steam or other
0:01:57 digital distribution platforms.
0:02:02 And so what was starting to happen was the convergence of cloud computing, even though
0:02:07 we didn’t quite call it that back then, and this new model called free to play and kind
0:02:09 of a third trend, which is social.
0:02:16 And so Facebook was taking off, they enabled applications to be built on Facebook and games
0:02:20 just ended up being the dominant category by far on the platform.
0:02:25 And we all started building games in the cloud that lived on Facebook and then back
0:02:27 then on Myspace.
0:02:29 So that’s how it got started in games.
0:02:30 That’s awesome.
0:02:33 Can you break down for us why free to play was such a big deal?
0:02:35 I think a lot of people take it for granted.
0:02:40 I mean, I get the obvious pro, which is that you don’t have to pay to start to play.
0:02:44 But then how did we get to this world where it’s actually changed, like that’s kind of
0:02:45 a given now.
0:02:51 So free to play introduced games to probably the billions of people that played today.
0:02:57 So today in 2019, there’s roughly 2.4 billion people who play games on a global basis.
0:02:58 Wow.
0:03:01 It basically 10Xed the player base, right?
0:03:02 More than 10Xed.
0:03:03 Yeah.
0:03:10 I think back in early 2000s, it was a couple hundred million people that played games.
0:03:13 That was mostly consoles and hardcore PC gamers.
0:03:14 That’s right.
0:03:20 So the rise of mobile games and free to play became kind of the 10X movement.
0:03:22 In the beginning of mobile, it wasn’t free to play, right?
0:03:28 As I recall, you were like these little 399 games and it took a while for game developers
0:03:30 to figure out that that wasn’t as good of a model.
0:03:31 Is that right?
0:03:32 Yes and no.
0:03:36 So the traditional game developers like Sega, who built on the iPhone as one of the very
0:03:42 first apps on the iPhone, made their games as traditional 399 or 499 games.
0:03:48 From the very beginning, the Zynga, the Kabams, we were looking at the iPhone app store and
0:03:53 we were all in conversations with Apple to say, “Hey, enable in-app transactions.”
0:03:58 It was really the Facebook era of what we called social games, but really the convergence
0:04:03 of free to play and cloud-based computing that enabled kind of all the games on Facebook
0:04:07 to explode and everyone knew mobile would make the market massive.
0:04:10 Free to play is also intimately connected with multiplayer, right?
0:04:14 Because the way I think about it, too, is if it’s 399 and it’s only fun if your friend
0:04:17 plays it, what are the odds that all of you, for the same reason that social networks are
0:04:21 all free and monetized through other advertising, et cetera, it’s very hard to get that network
0:04:23 effect going, right?
0:04:26 If it’s not free to play, you need a graduated engagement kind of strategy where you start
0:04:31 off light and then get heavier as your friends get on and you get right.
0:04:35 There are free-to-play single-player games, but a lot of the big one, dominant ones are
0:04:36 multiplayer.
0:04:37 They’re all multiplayer.
0:04:38 That’s right.
0:04:42 That aspect really comes in because you don’t have to worry about having everyone in the
0:04:43 exact same console.
0:04:44 That’s right.
0:04:45 The exact same.
0:04:46 I mean, that’s really what the next is.
0:04:47 Well, and asynchronous is important, too, right?
0:04:50 Like, the Facebook game’s very asynchronous, meaning you don’t have to be on line at the
0:04:51 exact same moment.
0:04:52 Same time.
0:04:53 Is that a person?
0:04:54 Right.
0:04:55 And in fact, they encourage you not to be, right?
0:04:56 A lot of those games encourage you to get off, only play for 10 minutes, and you have
0:04:57 to wait a day.
0:05:02 So when you say multiplayer, there’s asynchronous multiplayer and then there’s real-time multiplayer.
0:05:06 Facebook started with asynchronous multiplayer, but Kabam’s, you know, our entry strategy
0:05:10 into the market was we’re going to make real-time multiplayer games on Facebook because we were
0:05:12 fascinated by that type of game.
0:05:15 Is that harder to get the network effect going because they have to be on line at the
0:05:16 same time?
0:05:17 It is.
0:05:22 So it is generally a more core type of game, but in the game industry, those types of games
0:05:27 have much deeper economies, much higher revenue per user, kind of metrics, and probably most
0:05:30 importantly, it’s the time played is just much, much higher.
0:05:31 Okay.
0:05:35 So the big shifts so far were that Facebook opened up its platform for developers to build
0:05:38 applications on top of back in 2007.
0:05:40 And the first iPhone came out that year as well.
0:05:43 And the App Store entered the picture when?
0:05:48 So the App Store, I believe, came out in 2009, the year after the second year of the iPhone.
0:05:54 And that first year, you can only do a transaction, you know, before the download.
0:05:57 And I can’t remember exactly how long.
0:06:03 I’m tempted to say two years before they allowed sort of in-app transactions to really
0:06:07 work and tap into the Apple credit cards that were stored, et cetera.
0:06:08 And that’s when the market just blew up.
0:06:12 And so when we launched, we launched our first game in 2012.
0:06:19 But then you moved from Facebook to iOS, like focus solely on mobile rather than over social?
0:06:22 We were the first social gaming company to really embrace mobile.
0:06:27 So we started our kind of major R&D projects in 2011.
0:06:28 Nobody knew what the technology would be.
0:06:32 So we tried building on Adobe Air because you couldn’t, you know, App, you know, Steve
0:06:35 Jobs famously banned Flash from iOS.
0:06:39 And so we were trying to, and all of Facebook was Flash.
0:06:42 And so we were all trying to figure out what kind of client technology we would use.
0:06:47 So we kind of, we had three different projects, HTML5, Adobe Air, and of course, native.
0:06:49 This was on top of the payment issues.
0:06:54 It was just in dealing with the network latency and drops and so forth.
0:06:59 And so we launched our game in 2012, Kingdoms of Camelot, which became the number one grossing
0:07:01 game in 2012.
0:07:04 We saw just how powerful mobile was going to be.
0:07:09 And we basically stopped any new game development on Facebook and developed all of these.
0:07:11 I think of 2012 was a watershed year.
0:07:13 That was when Facebook did their pivot to mobile.
0:07:18 Remember, before that, Facebook had the kind of janky HTML5 mobile app, and then Zuckerberg
0:07:20 declared we’re pivoting to mobile.
0:07:21 Oh, right.
0:07:24 Zuckerberg’s famous statement that the biggest mistake they made as a company back then was
0:07:29 betting too much on HTML5 versus more, the more native like iOS.
0:07:33 It’s interesting because a lot of times when you’re in the middle of a exponential growth
0:07:37 curve, you don’t know you are because at that, at that moment, like you look at an exponential
0:07:39 growth curve, beginning kind of looks somewhat linear.
0:07:42 And then, you know, that was sort of the moment where it hit the kind of knee of the curve
0:07:46 and really just everyone was like, whoa, we all knew mobile was a big deal.
0:07:50 And 2012, I think it was when it hit people in the technology community that it’s not
0:07:51 just a big deal.
0:07:52 It’s the deal.
0:07:57 It’s no longer the secondary to the desktop, it’s now the primary, and it just flipped
0:08:01 everything and everyone, you know, it was sort of this really kind of jolting moment,
0:08:02 right?
0:08:04 I feel like there was a second inflection point, which is Android.
0:08:06 2012, nobody built on Android.
0:08:08 It was incredibly fragmented.
0:08:13 Every carrier, every handset, you know, there are entry strategy was you go to the carriers
0:08:19 who don’t have iPhone, like in the US, it was, you know, AT&T singular.
0:08:22 You go to the other guys who don’t have it because they had an exclusive and you say,
0:08:24 hey, don’t you want functionality like that?
0:08:26 And so they basically gave them this free operating system, but they let them customize
0:08:27 the heck out of it.
0:08:32 And that was the way to get in there and appeal to the carriers, which got them distribution
0:08:34 and was a very good strategy, but also led to incredible fragmentation.
0:08:39 So you had to build like, essentially custom versions for like, whatever, we would have,
0:08:44 we have testing banks of 200 different phones that would eventually try to, you know, install
0:08:46 every update, you know, and QA test on those devices.
0:08:49 At one point, Google put the hammer down and forced it.
0:08:53 That was when the second sort of inflection point in mobile came was when that fragmentation
0:08:57 started to consolidate and you could sort of build on just, you know, Samsung and, you
0:08:58 know, a few other…
0:08:59 When was that?
0:09:00 Like 13 or 14 or something?
0:09:03 Probably more like 14 or 15.
0:09:06 So that took us from 2007 to 14.
0:09:08 The question I have is what didn’t work about free to play.
0:09:12 I mean, it worked on one hand, obviously, but then there’s obviously things that didn’t
0:09:14 work about free to play also.
0:09:16 Well, there’s certainly bad implementations of it.
0:09:21 I remember, I was a big Plants and Zombies one player and Plants and Zombies two.
0:09:27 Plants and Zombies one was a, you paid download and two, they did free to play, but they just
0:09:31 like everywhere you go, it’s like buy, buy, buy, and it just ruined the experience.
0:09:32 It was all these notorious.
0:09:37 I think it’s in Star Wars, just have battle, battlefront, just had a debacle kind of thing.
0:09:39 And it’s, the world is kind of bifurcated a little bit.
0:09:43 I’m simplifying a little bit, but free to play is bifurcated and to pay to win, which
0:09:50 is there’s functionality that you have to pay for and you can either spend an incredible
0:09:55 amount of time and be lucky to get the things or you can just open up your wallet and pay
0:09:56 for it.
0:10:00 And so generally those bifurcated and to pay to win where the top players are paying thousands
0:10:05 or tens of thousands of dollars, you pay, you get a significant advantage and whereas
0:10:12 Fortnite is and League of Legends, they’re religious about not letting you pay to win.
0:10:15 It’s a remarkable thing that League of Legends, two billion, three billion in revenue and
0:10:18 it’s literally all cosmetic items that can’t actually help you win, right?
0:10:20 That’s more true in Fortnite today.
0:10:24 I was about to say, I think of trading skins because to me Fortnite trading skins is the
0:10:25 best example.
0:10:26 That’s not.
0:10:27 That’s right.
0:10:28 I would think of for that.
0:10:29 That’s right.
0:10:34 League of Legends, nobody knows exactly the division of revenue, but they release new
0:10:39 characters and the new characters are infamously a little overpowered and then you pay for that
0:10:42 and you get, you get to use that character in competitive matches.
0:10:43 So it’s relatively.
0:10:46 So small, less pay to win, but there’s some, okay.
0:10:47 That’s right.
0:10:48 That’s right.
0:10:52 But it does a remarkable job of keeping it not paid to win and really the only way that
0:10:57 that model works based on the economics of free to play is that you have to get massively
0:10:58 free distribution.
0:11:03 And today what that means is that people on Twitch and YouTube creators and so forth need
0:11:07 to love your game and create all sorts of content around your game such that you’re basically
0:11:12 getting just this groundswell of content and marketing for your game.
0:11:16 Because the actual revenue per user is low enough that you couldn’t support paid marketing.
0:11:17 That’s right.
0:11:21 You can never support paid marketing for those types of games.
0:11:24 And then on the other side, you have, it is paid to win games, it’s become a science in
0:11:29 terms of understanding LTV to, you know, CAC ratios by cohort, by channel.
0:11:33 So they have a much higher, the paid to win have much higher LTV so they can support paid
0:11:34 marketing.
0:11:36 So it’s a very different acquisition channel as a result.
0:11:37 Okay.
0:11:40 In Facebook, you’re buying, you know, Google ads and so forth and you’re sort of tracking
0:11:41 down to cohorts.
0:11:46 Whereas in League of Legends, you’re saying, “Hey, great, I’m going to spend $5 million
0:11:52 to host this, you know, Esports League tournament, you know, an event and tournament.
0:11:55 And you know, I don’t know exactly what my cost per user is.”
0:11:59 And frankly, I think Esports today is much more about retention of users than it is about
0:12:00 new users.
0:12:03 But certainly in the beginning of the life cycles of a game, it’s all about new players
0:12:05 coming in and then staying ideally free.
0:12:08 And the games where you can’t pay to win tend to have more longevity, right?
0:12:09 Like the League of Legends.
0:12:13 I mean, it’s been around now 10 years and still going strong.
0:12:18 And it’s, you know, League of Legends was a fascinating pioneer for you to play because
0:12:22 they wanted to focus on infinite skill level.
0:12:26 So they really wanted to create a game where the best in the world were playing that game
0:12:30 just entirely differently than how a very good player in that game would play, which
0:12:33 was entirely different than how a new player would play that game.
0:12:34 That’s fascinating.
0:12:38 So infinite skill level means you can essentially play for the entire lifetime or you can become
0:12:39 like a major power user.
0:12:44 I think of it as if there’s a graph, which is how good you are in the y-axis and how
0:12:45 much time you spend on the x-axis.
0:12:50 It’s like it keeps going up as opposed to, you know, I don’t know what tic-tac-toe, like
0:12:51 that’s right.
0:12:55 You hit your peak at age eight or something, you know, or whatever, or a lot of our k-games,
0:12:59 you know, where you, once you play 10,000 hours, you can win Pac-Man or something.
0:13:01 Whereas here you can keep going and coming up with new strategies.
0:13:07 So if you think about, you know, tic-tac-toe at a very basic level or checkers, there’s
0:13:09 only so much skill you can put into that game.
0:13:13 Chess seems to take it up and then Go takes it up significantly more than that.
0:13:18 And so the whole idea is that you can, if you’re, you know, the most talented grandmaster
0:13:23 in Go, you’re playing that game at just a skill level that is dramatically different.
0:13:29 So esports has taken Elo, what’s been used in, you know, for chess matchmaking and so
0:13:31 forth to, to game make, to game matchups.
0:13:35 And so those are the scores you get assigned to chess, like your rating, right?
0:13:36 That’s right.
0:13:42 Your game rating and it allows for, you know, near infinite level of skill depth, you know,
0:13:43 to those games.
0:13:48 Now, now one of the challenges with the, for all of these models, like the free to play
0:13:53 is they don’t, they mostly tend to be whale based, meaning there’s a very small number
0:13:54 of users.
0:13:55 Yeah.
0:13:56 They subsidize the entire game.
0:13:57 Is that true?
0:13:58 That’s true of most of them or all of them?
0:13:59 Yeah, that’s true.
0:14:06 So the, in 2009, you know, roughly 2% of all free to play games players would actually
0:14:10 pay that number today for games like Candy Crush and so forth is in the, you know, much
0:14:15 higher is probably 10x higher actually today, but you have still a relatively small number
0:14:21 of, of users generally less than a percent that pay for 80% of the game’s total revenue
0:14:23 is how the free to play market generally works.
0:14:25 I don’t see that as a problem, is it?
0:14:27 Cause it feels like they’re just subsidizing like any freemium model.
0:14:29 Like why is that such a bad thing?
0:14:33 It becomes bad when those games become real time multiplayer or even synchronously multiplayer
0:14:34 in their competitive.
0:14:39 So as a game designer, you’re constantly trying to think, how do I make this game fun and
0:14:44 interesting for the person who’s paying, who’s not paying, who’s paying maybe five to $10,
0:14:49 you know, you know, a year and then the person who’s paying $10,000 a year, it becomes near
0:14:54 impossible to, to balance that economy after, you know, a year or two.
0:14:59 So what happens is by the time you get to your three, four, five of those games, the
0:15:04 economies are incredibly lopsided and you generally have lost most of your free players
0:15:05 by then.
0:15:08 And you’re just trying to, you’re trying to balance an ever smaller and smaller community
0:15:13 to say, Hey, here’s this person who’s spending $10,000 a month with me and then here’s this
0:15:15 other player who’s spending $100 a month with me.
0:15:17 How do I make it fun for both of them?
0:15:20 It actually becomes an incredible challenge as the years go by.
0:15:24 So that’s why I think that, that type of free to play, you know, system and not every developer
0:15:30 falls into that trap, but certainly the ones that are eventually venture backed and trying
0:15:34 to think about their growth and so forth, you know, fall into that trap more, more than
0:15:37 I’m speaking, partially from experience here, there’s, there’s so much good in it in terms
0:15:42 of it lost so many players to come in and enjoy a game, play with their friends and you’re
0:15:47 not being forced to pay up front, you’re not, you know, you’re not sort of, you know, tricked
0:15:51 by a sizzle reel that says, Oh, okay, great, I’m going to open my 60 pay $60 before I even
0:15:56 know if a game is good or not, which used to happen quite a bit to now, okay, great.
0:15:59 You can come in, you can play with your friends and then if you find value, you can start
0:16:01 paying the trouble comes.
0:16:05 How do you balance that and keep that a great economy for yours to come and keep everyone
0:16:08 coming back and enjoying the game and participating in the community.
0:16:12 So then just a shift a little bit forward because you talked about the period from 2009
0:16:18 to 2014 pretty much, where are we now, before we go into the future, what sort of the latest
0:16:22 shifts in gaming today, like as like sort of the big hit list of trends that you’re
0:16:26 seeing that are the important ones to pay attention to the equivalent of mobile social
0:16:27 cloud gaming, free to play.
0:16:32 So we’re, I think we’re, we’ve sort of been at a plateau for a little while in terms of
0:16:39 business models, certainly in terms of technology, we’re kind of on the cusp of VR AR is something
0:16:41 that the whole game industry looks at.
0:16:44 The other one is cloud streaming.
0:16:47 So instead of, you know, putting a CD into your computer or downloading the client onto
0:16:52 your computer, the client literally sits in the cloud and you’re streaming just the video
0:16:55 file to whatever screen you’re using, and then the input gets streamed back into the
0:16:56 cloud.
0:17:01 And then of course, the one that I’m fascinated by is how can blockchain technology and kind
0:17:07 of creating these peer to peer trustless networks get incorporated into these incredibly
0:17:09 complex gaming economies that now exist.
0:17:15 And it kind of maps, I think the like VR kind of maps to, to me, it’s like a new device,
0:17:17 new form factor maps kind of to mobile.
0:17:21 And then the crypto kind of maps to the new business model, free to play, right?
0:17:26 So the game industry historically is new devices, new technology, new delivery mechanisms for
0:17:27 sure.
0:17:30 Like used to go to this, you know, the arcade and then the store and then, you know, and
0:17:35 then download its steam and now streaming, so new delivery mechanism, new devices and
0:17:36 new business models.
0:17:38 So sort of three tracks of innovation.
0:17:43 And the business model ones, I guess it’s not just true of gaming, but true of all technology.
0:17:48 Business model innovations tend to create the most startup opportunities.
0:17:49 Oh, interesting.
0:17:50 Yeah.
0:17:56 So for example, mobile was far less “disruptive” to incumbent technology companies than the
0:18:00 internet was, because the internet was provided a new business model, whereas mobile did a
0:18:04 little bit with payments and things, but companies like Amazon and Facebook and Google did quite
0:18:05 well on mobile.
0:18:09 It didn’t re-rank the ordering of the companies the way that the internet did.
0:18:13 So it can maps onto the play Christiansen kind of concept of sustaining versus disruptive
0:18:14 innovation.
0:18:19 So let’s dig in a little bit more to blockchain crypto and how it relates to gaming.
0:18:27 So at Forte, we are just incredibly excited about what it means to build a natural economy
0:18:34 or we’re trying to think about it as how does a real community work in terms of the economy?
0:18:37 And what does that mean in a gaming ecosystem?
0:18:41 And so games like the ones that we build at Kabam or many of the other ones that are popular
0:18:44 today, they really command and control economies.
0:18:49 So the developer or the publisher controls all of the items in the game and they control
0:18:50 the pricing of it.
0:18:57 They control the inflation rate of the economy and they prohibit, generally, players trading
0:18:58 with other players.
0:19:02 I mean, just for context, for those who are not only in gaming, but just in the real world
0:19:07 economy, it’s a little nuts if you think about it that a single entity, the game publisher
0:19:13 is like the market maker, the central bank, the sole supplier, the one who coordinates
0:19:16 all the activity between players, like that’s freaking nuts.
0:19:17 You really think about it.
0:19:20 It’s like central light, central planning to the worst degree.
0:19:26 For some games, it may make sense, but I think there’s a lot of games today where you have
0:19:30 individuals in the game really creating a lot of value in that economy.
0:19:36 It could be somebody who’s taking a lot of time to farm and create new items and new skins
0:19:42 and new cosmetics for a game and generally, they’re locked into that platform.
0:19:48 There’s really not an ability for that person to build a business and make a living from
0:19:51 what they’re doing in that game economy and realize the value.
0:19:56 So part of that is we see that mirrored across, if you’re an Instagram creator, you’re sort
0:20:01 of creating a lot of value for the platform, but you’re sort of forced to make a living
0:20:06 through other means, whether it’s a parallel or merchandise, et cetera, versus making a
0:20:08 living on the platform itself.
0:20:13 And so all of that creates all this unnatural, it makes sense from a business model standpoint
0:20:17 in terms of protecting the revenues for the developer, but it makes it really challenging
0:20:22 in terms of how players interact with other players in a game from an economic value standpoint.
0:20:26 And so I think there’s a potential sea change for what the whole industry will go through
0:20:27 in the next 10 years.
0:20:31 So can you walk us through an example like in a couple of years, what would the game
0:20:33 experience be like using blockchain technology?
0:20:37 So I’ll talk about a few of the implementations and these are all potential directions for
0:20:39 how gaming is going to go.
0:20:40 The first is just a loyalty system.
0:20:45 And so game developers have always been thinking, how do I keep a player coming back the next
0:20:46 day and the next day and the next day?
0:20:53 And so once a game becomes a reasonable business and a good hit for a game developer, you sort
0:20:57 of want to, as we started this conversation, you want to make that game last for as long
0:20:59 as you can possibly make it last.
0:21:04 And so one way that a lot of game developers are working with us is to say, hey, we’re
0:21:08 going to create a new blockchain asset and you get some of these assets every time you
0:21:13 log in, every transaction you make, it’s sort of like the equivalent of airline miles or
0:21:17 hotel loyalty points, except there’s real value on it, right?
0:21:20 And players can earn a little bit of value every day.
0:21:27 Other players will say, hey, I need all of these loyalty points to craft my next sword.
0:21:31 And of course, if I haven’t earned enough myself, then I’m going to go into the marketplace
0:21:34 and I’m going to buy $100 worth of these loyalty points.
0:21:39 So all these other players who log in every day and get their $0.10, $0.20 worth of loyalty
0:21:40 points can sell them.
0:21:45 And what do you say to the cynics who say, you could do this without blockchain, you
0:21:47 could just have centralized loyalty points?
0:21:50 I think the interesting part comes from a couple of things.
0:21:54 One is that once you create that item, the item itself can also live on the blockchain,
0:21:55 right?
0:22:00 So then you can have trading of the items that are crafted through these blockchain rewards.
0:22:03 Game developers can participate every time there’s a secondary trade of an item as well.
0:22:09 And I think this is a really important point for game developers because this kind of peripheral
0:22:12 trading of items in games have always happened.
0:22:13 Gold farming.
0:22:17 There’s lots of sort of dark markets where people trade accounts, boosting.
0:22:22 There was a famously like World of Warcraft had these huge, you know, gold farming things.
0:22:26 And then some games like Counter Strike do allow secondary trading.
0:22:32 And in those markets, the secondary markets are orders of magnitude larger than the in-game
0:22:33 economies.
0:22:37 That’s why we’re so excited about it is that we see this behavior happening in the kind
0:22:39 of periphery of what happens in a game.
0:22:43 I think with blockchain, there’s an opportunity to bring what’s on the periphery into the
0:22:48 mainstream and align what the developer is trying to do from a business standpoint, align
0:22:52 the players that are investing their time, energy and money into a game.
0:22:55 Generally the game developer is not making any revenue whenever that item is trading
0:22:59 on an eBay or Craigslist or whatever on a forum.
0:23:03 So they get the benefit of getting some portion of the revenue and benefiting from it, but
0:23:09 then also the benefit that blockchains bring, which is the openness and interoperability.
0:23:13 So you’ll have a bunch of exchanges popping up, you’ll have games interoperating with
0:23:14 each other.
0:23:18 And I think another thing is just as we’ve seen with Bitcoin is that if, you know, you
0:23:20 could argue, why didn’t you just start Bitcoin Corp?
0:23:23 The answer is no one would actually think it has value.
0:23:24 No one would trust it.
0:23:32 The centralized creators could break the sacred rules like there’s only 21 million bitcoins.
0:23:35 So people wouldn’t value it in the same way.
0:23:39 So I think the hope is you’d get a similar kind of effect here where people would feel
0:23:42 like the same way they really feel like they own a Bitcoin, they really own this object,
0:23:45 they can do what they want with it, they can take it different places, they can use it
0:23:51 in different systems, different exchanges, different games, you know, it survived beyond
0:23:55 the life of the game developer, all those kinds of benefits, right?
0:24:00 Which if you did a centralized system, you know, it would just be like just another sort
0:24:03 of, you know, point system like a lot of games have today.
0:24:05 It’s a portable data unit and good.
0:24:09 Can you answer one thing I’m very curious about because it’s almost obvious to me what
0:24:16 happens when you have publisher to player payments and player, even player back to publishers.
0:24:19 What’s new and what’s possible when you have player to player because that’s not really
0:24:20 been possible before.
0:24:23 So I don’t think people really think about like what it means.
0:24:26 They use the word peer to peer in gaming, but what does that actually mean?
0:24:31 Well, it just means that a player is directly transacting with another player.
0:24:37 And you know, in the past, there’s been games like the auction house and Diablo to, you
0:24:42 know, what happens on eBay for World of Warcraft and kind of the gold, the gold economy and
0:24:43 World of Warcraft.
0:24:48 But it means that there’s players interacting with trading with other players in a game.
0:24:53 And generally game developers hate this because it creates all sorts of number one economic
0:24:55 imbalance in a game.
0:24:59 Number two, there’s always some weird form of, you know, people hacking the system to
0:25:01 try to.
0:25:05 So for example, World of Warcraft, you design, you know, the number of hours you need to
0:25:06 play and the amount of gold you need to earn.
0:25:09 And you can sort of say, okay, I’m going to design this progression for players.
0:25:15 But as soon as the player is able to go outside and pay $100 for a huge pile of gold, now they’re
0:25:18 sort of chewing through the content so much faster.
0:25:22 It means that when they’re paying, when they’re $15 a month, you know, renewal, subscription
0:25:23 renewal comes up.
0:25:26 They’re like, well, I’ve, I’m done with the game already, so I don’t need to continue
0:25:27 my subscription.
0:25:31 So it puts the player base sort of at odds with, you know, developer, right?
0:25:37 So somebody else can make a great business, like Brock Pierce famously, who is now in
0:25:42 crypto, you know, created these gold farming businesses and employed tens of thousands
0:25:47 of people all throughout the world to play these games, basically for other players.
0:25:51 And it’s just the designers, you know, couldn’t, you know, you couldn’t manage the design
0:25:55 of the game and the amount of content in the game and how the players were, were actually
0:25:56 transacting.
0:26:01 And it just made the misalignment between what the developer and their players and these,
0:26:05 these other businesses that were trying to build marketplaces and other functionality,
0:26:07 it just put them all at odds with each other.
0:26:11 How would you respond to the folks who say blockchain, the only thing about infrastructure,
0:26:12 not for really changing the game itself?
0:26:17 I mean, I guess what’s the thing that kind of drove you to sort of think about this instead
0:26:20 of like, this is not just another case of like blockchain inside.
0:26:24 There’s been a few other gaming projects started with black chamber in mind.
0:26:27 The core problem in my mind has always been, how do you make it such that the developer
0:26:31 participates as a network, just as much as the players.
0:26:34 This is like realigning the assentums in a big way than what’s happening right now.
0:26:38 We’ve seen it from both being lifelong players of games, but also having to think about how
0:26:39 do I create a business?
0:26:45 How do I, how do I make payroll the next month, you know, and make sure that it works for everyone,
0:26:50 just subtracting away a lot of the complexities of what making a smart contract and a security
0:26:53 around that, you know, would look like.
0:26:58 And so I’m just creating a toolset in a system that game developers are more used to and
0:27:02 doing that from the perspective of somebody who’s been making games for a long time.
0:27:03 Yeah.
0:27:06 On the peer-to-peer market stuff, one question is like, doesn’t it mean like more fraud and
0:27:08 like security concerns?
0:27:09 Like, how do you think about that aspect of it?
0:27:13 There’s another reason why game companies typically don’t want to enable this is because
0:27:15 of all the fraud, et cetera.
0:27:17 But we’re building it right into the platform.
0:27:19 We’ve put together world-class security experts.
0:27:24 There’s a lot of things that, you know, the security of a public blockchain enables and
0:27:27 we’re building the platform in a way that would inherit that security.
0:27:32 And so it’s security, compliance, regulatory aspects are a big part of what we’re helping
0:27:35 game developers tackle.
0:27:37 It’s like sort of making the economy as a service, actually, because you don’t have
0:27:39 to reinvent the wheel every single time.
0:27:42 You can actually focus on really being the creator who’s really thinking about the creativity
0:27:46 of the game and the community of the game, but not the necessary, all the mechanics of
0:27:49 how to set up this alignment, a realignment of incentives.
0:27:53 And this is something that a lot of free-to-play game developers still struggle with, which
0:27:55 is what is actually going on in my economy.
0:27:59 So, you know, not everything’s locked down in a central database or you can query everything.
0:28:04 But the actual stats of how many of these items are sold, what happened when I changed
0:28:09 the price of these items, these are all things that game developers still struggle with really
0:28:12 deeply understanding and having, you know, good models for.
0:28:16 And so we kind of think about all these things and how we package it up and make it easy for
0:28:17 game developers.
0:28:21 Blockchain technology is still hard to use, but I think we’re making a lot of progress
0:28:25 in terms of rapidly iterating on the technology and the usability for developers.
0:28:32 And do you think this could change the distribution of, you know, we talked about earlier about
0:28:38 how these games are driven by whales, this kind of technology could change that distribution.
0:28:39 And so it would be more evenly distributed.
0:28:43 I mean, presumably it would also increase the revenue of the game makers, maybe even
0:28:46 also by the way, you know, and provide an interesting way for the users to generate
0:28:49 revenue in a way they couldn’t before.
0:28:54 And then also potentially kind of smooth out the revenue distribution, right?
0:28:55 There’s a lot of benefits.
0:29:00 So, and then there’s going to be some things that we won’t know until we actually get it
0:29:01 out there.
0:29:05 So, for example, if a game developer says, hey, I’m going to let this item trade in there,
0:29:08 that item could trade on eBay, Craigslist, you could trade outside of the game.
0:29:12 And let’s say I put a 20%, you know, tax on that every time that trades.
0:29:17 Well, if the item sells more than five times, right, then the game developer comes out ahead.
0:29:18 Right.
0:29:20 We won’t know that until we actually get items out there.
0:29:24 We don’t, you know, different game developers are playing with different ways to create
0:29:25 these economies.
0:29:30 And so part of it will be this idea that when you truly give the user and the player value
0:29:34 in the game, how will that person trade that item?
0:29:39 And so just like GameStop has provided a very liquid market in the past for used games, there’s
0:29:42 never been the equivalent of that in a digital world.
0:29:44 We’re going to unlock that, you know, for games.
0:29:47 And then game developers are, you know, give them a whole set of tools to explore the economics
0:29:52 behind what happens when players and the developers actually own these items.
0:29:57 I think another thing that we may see happen with this when you run this experiment is
0:30:01 one of the things that’s happened in crypto in the last 10 years is that there’s been
0:30:07 a lot of really large and passionate communities built around various cryptocurrencies.
0:30:12 And I would argue in some cases, some which is really the cryptocurrency itself has no
0:30:16 really novel features, but the community is very large and passionate.
0:30:20 If you go on the Reddit or Twitter or whatever, you can sort of look at that cynically as
0:30:22 like, okay, there’s a bunch of overvalued stuff.
0:30:27 The sort of positive way to, which I like to look at it as is this thing of owning a
0:30:32 token and being part of a community is a really powerful way to bring people together.
0:30:36 So if you go to some of these, you know, subreddits, you’ll see that they actually know each other.
0:30:38 They help each other with problems.
0:30:42 They often, they have meetups, in-person meetups, it’s a real community and it’s a very powerful
0:30:43 kind of community, right?
0:30:48 It really kind of turbocharges the community aspects that the internet had prior to cryptocurrency.
0:30:53 And so I think one of the unexpected upsides you might see in this is just a level of passion
0:30:54 and commitment.
0:30:57 And you get sort of these people that go out in the van, you know, they own the token in
0:30:58 the game.
0:31:00 They own a bunch of objects.
0:31:01 They have big Twitch and Twitter followings.
0:31:08 They become even more passionate, evangelist, and, you know, effectively from a business
0:31:11 point of view for the publisher, what that does is it dramatically lowers the cost of
0:31:12 acquisition.
0:31:15 I think, you know, we talk about why can’t you do certain things in fiat?
0:31:18 It’s a very common refrain in blockchain.
0:31:22 The reality is if you were to design a system where players earn a little bit of value every
0:31:26 day, that value is pretty much locked into that system.
0:31:30 You would say, okay, that person to earn, you know, 20 cents in my game and they want
0:31:31 to cash it out.
0:31:34 Are they really going to write, you know, cut them a check or send them a wire or how
0:31:39 am I going to pay that player actually 20 cents versus in a, you know, with the right
0:31:46 blockchain, assuming that we solve the scalability problems and other, you know, challenges that
0:31:50 that becomes a really an easy, a more trivial phenomenon to say, okay, we’ve got millions
0:31:55 of players in this game that have earned, you know, relatively small balances and create
0:31:58 ways for them to really feel like they’re participating.
0:32:02 And if it’s, they’re paid in the token, the token, you know, and they go and they help
0:32:08 evangelize the game or build new objects for the game or build new Roblox levels or whatever,
0:32:11 the 20 cents can become worth much more, right?
0:32:14 So they really, they become true stakeholders in the game.
0:32:17 Some of these games will have tens of millions of players, hopefully during that, and then
0:32:21 you’ll have, you know, hundreds of thousands of players, I think that will figure out how
0:32:25 to make a living, you know, from providing, you know, valuable services, maybe they’re
0:32:30 designing the next cosmetic that, you know, they’re able to sell, they’re gathering a
0:32:33 bunch of materials from other players and then maybe, you know, kind of channeling that
0:32:34 to the right.
0:32:40 One of the things I think is unfortunate with the current systems we have, both gaming
0:32:44 and non-gaming technology, it’s well understood that the way that we, you know, the way startups
0:32:47 work, right, is early employees get equity and the earlier you are, the more equity you
0:32:48 get, right?
0:32:51 And so if the company does really well, the earliest people do better and then as things
0:32:54 go on that, and that’s in crypto, we call that a bonding curve.
0:32:59 And like, what if you had a similar kind of bonding curve for the end users, right?
0:33:03 Or the, you know, markup dispense, I’ll say, so like what if the early Uber drivers got
0:33:08 Uber tokens and then they, when Uber IPO, they actually made a lot of money off of it.
0:33:11 Now, you know, the person who just joined last week probably shouldn’t make a lot of money,
0:33:13 but the person who joined seven years ago should.
0:33:14 Took on more risk, exactly.
0:33:18 And then they become real stakeholders and they also, by the way, they would also probably
0:33:21 behave differently, they probably would have been more loyal and that would have helped
0:33:24 the economics of the business because they were worried about switching costs of the drivers
0:33:25 or something.
0:33:28 They would have become evangelists, they would have felt like they’re business owners, right?
0:33:29 That’s right.
0:33:30 I mean, it works.
0:33:33 It’s one of the great secrets of, or not secrets, but one of the, I think the real advantages
0:33:39 that startups have against kind of non startup companies is that the employees have real ownership.
0:33:42 What if you did the same kind of thing with your, with your customers?
0:33:43 So that’s a big part of our vision.
0:33:48 Every game will go through that same type of a network explosion and then swap famously
0:33:53 sort of put it all in code in a smart contract, you know, but it’s a, it’s something that
0:33:56 we’re going to make really simple for game developers.
0:34:00 And this idea that if you come into a game early and you’re playing and you’re earning
0:34:05 what may be a few, you know, tens of, of cents or a few dollars, that infamously, you know,
0:34:08 that person who bought a pizza with Bitcoin, you know, at the time he thought, oh, maybe
0:34:11 I’m only paying, you know, 10 bucks for this pizza.
0:34:15 But the whole point is that we’re going to make it such that early players in the game
0:34:17 can really feel like they’re part of the community.
0:34:20 And if that game does well and that economy does well, they’re going to do well.
0:34:25 And the other effect you’ll get, I think, if you look at most financial markets, you
0:34:26 have multi, you have different types of participants, right?
0:34:29 And I think you’ll get the same thing here, which is you’ll have some people who are just
0:34:34 enthusiasts, and they’re, they, they become the first thousand players of a game because
0:34:35 they’re enthusiasts.
0:34:39 But as we see this process happen more, they’ll enter people with a financial motive, which
0:34:43 I think will be a good thing because they will provide more capital into the system.
0:34:48 And the two kind of mutually reinforced, and that’s how a lot of things work and, you know,
0:34:50 I don’t know, the stock market or the art market or other kinds of markets.
0:34:55 Yeah, commodity markets are a great example where a lot of the buyers are users and other
0:34:56 buyers are financial buyers, right?
0:34:59 And the two kind of play a symbiotic role.
0:35:02 And I think you can get that here in a way that you couldn’t pre-blockchain.
0:35:07 When there’s assets in a game that are worth hundreds or thousands of dollars, then you
0:35:11 have a really interesting, you know, real economy where you have some other people who
0:35:16 are going to build businesses to help, you know, facilitate liquidity in that market,
0:35:20 help, you know, match buyers and sellers the right way or improve upon those items in a
0:35:24 way that people who, you know, want a more rare version of that or a more customized
0:35:25 version of that would want.
0:35:29 And so I think there’s going to be a whole new marketplace that emerges once people can
0:35:32 actually own these items that they’re already spending thousands or tens of thousands dollars
0:35:33 on.
0:35:41 And by making them an actual asset that other people can customize and modify and for buyers
0:35:46 and sellers and other participants to come together, you have a real economy.
0:35:49 And so I think that’s the exciting thing about these games is that you have 10 million
0:35:53 people playing these games, but it’s not a real economy.
0:35:54 It’s a fake economy.
0:35:58 I mean, one thing that I personally love about this vision is the idea of microclans, because
0:36:02 right now you can only have like communities, think of clans as communities.
0:36:05 And in gaming, this is not possible in the real physical world as easily, but if you can
0:36:11 actually organize like more micro communities on games that can transact with each other,
0:36:14 that enables things that are not even possible in the physical world, let alone the current
0:36:15 gaming world.
0:36:19 So one of the cool things we’re going to enable is this concept of, let’s say you’re a part
0:36:23 of a guild, and you can buy into that guild, you can literally, you know, that guild creator
0:36:27 can say, I’m going to create shares of this, of this guild, and we’re going to go on a
0:36:28 bunch of raids together.
0:36:33 And as everyone knows from these raids, maybe this type of item drops that a certain class
0:36:37 of character can use, but not everyone can use anyway, you have these very complex, you
0:36:42 know, charts that get set up around if this type of loot drops, who gets it next and who
0:36:46 owns a share of this like whole, you know, the treasury of the guild and so forth.
0:36:50 I mean, there’s real value in that people, you know, people go crazy about this, you
0:36:55 know, kind of these, these really interesting social systems and economic systems that exist
0:36:56 today.
0:37:00 And so what if you could actually own a share of that guild, and then if you want to leave
0:37:04 the clan, you could sell that share, and then somebody else can buy a part of your shares
0:37:07 and participate in that clan economy.
0:37:11 What are some of the things you’ve learned on the early days of thinking about managing
0:37:12 crypto economies?
0:37:15 I mean, granted, it’s kind of early, but like, what are some of your big kind of surprises
0:37:17 or aha moments, things that have surprised you early on?
0:37:22 I think the biggest surprise is when you wrap your head around what a central bank does,
0:37:24 it’s actually a mind blowing exercise.
0:37:28 And so a big part of what we want, you know, a big part of what we’ve dealt with in in
0:37:33 game making is we’re making our own game economy, but it’s always tied to US dollar or some
0:37:35 other, you know, currency.
0:37:38 But once we start removing, once we remove that, and we say, okay, what does it mean
0:37:44 to design a network where every participant, including the developer and the players are
0:37:48 participating in that, that doesn’t have a fixed money supply?
0:37:50 What does that, what does that mean?
0:37:51 How do you design the number of tokens?
0:37:56 How do you design the increased number of tokens on a per period basis, such that you
0:38:00 have a healthy network and a healthy economy, and this is basically getting into the realm
0:38:05 of what central banks do, which is a fascinating discipline to study.
0:38:06 That’s fantastic.
0:38:09 Another aspect, I mean, one of the fascinating things about blockchains is there’s so many
0:38:12 different lenses you can look at it through another lens you can look at it through is
0:38:17 crypto network built on a blockchain as a community owned and operated digital service.
0:38:22 So for example, you can imagine, you know, this, this will require solving some technical
0:38:27 problems that aren’t solved yet, but over the years, having a Twitch or YouTube that’s
0:38:33 owned by the streamers via tokens, owned and controlled, I should say, they decide on sort
0:38:39 of democratically, what are the rules, you know, what can, what, who gets kicked off?
0:38:40 What can you do?
0:38:42 And also participate in the upside, right?
0:38:45 Instead of it all going to a few centralized companies.
0:38:50 And eventually, you know, you can imagine the extreme version of this is the games themselves
0:38:52 are, are dows, right?
0:38:56 I mean, they’re truly owned by the community and they, they hire a game development team
0:39:00 who, you know, has extra incentives, of course, you know, you’re going to still need to do
0:39:01 that, right?
0:39:05 But you can truly have games that are in virtual worlds and all sorts of things.
0:39:11 And then you combine this going back to earlier talk with VR and metaverse and sort of ready
0:39:15 player one style, like imagine if in, you know, I don’t know, I’m a big fan of ready
0:39:16 player the movie.
0:39:17 Oh my God, me too.
0:39:18 I love that movie.
0:39:22 The interesting part is that there’s an entire virtual world with so many different types
0:39:26 of digital goods and services, like an entire economy in that, inside that world.
0:39:28 But how will that world get built out?
0:39:32 Like it could be built out by one company, kind of like Facebook could build that whole
0:39:34 world, which seems like a really hard thing to do.
0:39:38 And frankly, kind of boring, it’s going to be like kind of like Disneyland or it could
0:39:42 be kind of like the web where each world is like a website and there’s like, there’s
0:39:45 like ways to links to travel in between them.
0:39:48 And there’s an economic model where you can own your own website and you can build it
0:39:49 up.
0:39:52 One thing, it’s interesting when you watch ready player one is you can take, you know,
0:39:56 like there’s this orb power orb or whatever it is and you can like take it from one world
0:39:57 to another world.
0:40:00 And there’s some interoperability standards between them.
0:40:03 So you can build, bring the orb from one place to another, for example, right?
0:40:07 But you, you get what I think is you get something that looks more like New York City instead
0:40:08 of Disneyland, right?
0:40:09 Oh, I love that.
0:40:10 It’s more organic.
0:40:11 Yeah.
0:40:12 It’s more organic, right?
0:40:16 I mean, if you look at all the great cities, like, you know, they’re, they grew organically
0:40:17 like that.
0:40:18 It’s a bit of both.
0:40:21 Like Jane Jacobs, like a more bottom up thing, but also a bit of a top down, but a good balance
0:40:22 of the boat.
0:40:23 Yeah, totally.
0:40:28 And I think in the same way that social and mobile and new business models like free to
0:40:33 play, reinforced each other, we’re in the cusp of it where we could see kind of cloud, you
0:40:40 know, kind of huge back end scaling, new, much more immersive devices like virtual reality,
0:40:43 like the Oculus Quest, I think it’s a breakthrough device.
0:40:48 And then new breakthrough business models that let people truly own their goods and let
0:40:50 services be operated by communities.
0:40:53 And if you see the three converge in the same way mobile, social and cloud did in the last
0:40:55 decade, boom, right?
0:40:57 That’s why I’m so excited about this.
0:41:01 You know, we’re also at a, at a day and age where the number of people would are trying
0:41:07 to create new experiences on, you know, Roblox and Minecraft, and there’s just an explosion
0:41:09 of creativity inside of these.
0:41:14 So once you make it easy to just get right to the creative aspect of game design, there’s
0:41:16 actually a lot of people with great ideas.
0:41:20 And it’s just been so hard in the past because you need to have a team of artists and a team
0:41:21 of engineers.
0:41:25 And then you finally get to do some of the creative stuff, which we’re sort of now at
0:41:32 a stage where, you know, the building blocks, whether it is the devices and we’re kind of
0:41:36 on the edge of right now is the economic models that make it such that all these different
0:41:41 participants want to be building towards this kind of organic community that’s online and
0:41:44 people can create your cosmetics and the stuff that I’m wearing in the game.
0:41:47 Other people can be, you know, owning the land and developing land and making the, the
0:41:53 visual, you know, aspects of that game amazing and everything can get linked together.
0:41:57 I think we’re, we’re sort of not too far away from that world of snow crash or ready
0:41:58 player one.
0:41:59 And it’s a very exciting time.
0:42:03 Well, you guys, Kevin, thank you for joining the A6NZ podcast.
0:42:04 Thank you for having me.