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Happy new year everyone! I hope you all had wonderful holidays. I spent mine in Italy, playing Divinity: Original Sin in multiplayer co-op with my best friend, which inspired me to write this piece on social gaming. It’s not European-centric this time - I plan to write a second piece centred on that. I hope you enjoy it!
Why we’re talking about Gaming
In 2011, science fiction book Ready Player One, written by US novelist Ernest Cline, was published by Crown Publishing Group. The story, set in a dystopian year 2045 gripped by an energy crisis and global warming, centres around a virtual reality game that functions as a MMORPG (massive multiplayer online role-playing game) and has de facto replaced society. From work to education and every social interaction, everything is performed within this virtual society.
Back when it came out, MMORPGs had been growing in popularity for at least ten years, thanks to an increasing number of people having access to a fast internet connection and iconic games such as Ultima Online, EverQuest and, of course, World of Warcraft (WoW). The latter became a pop culture phenomenon that extended far beyond gaming, from references in TV-shows such as South Park and The Big Bang Theory to the highest-grossing video game film adaptation of all time (yes, more than Detective Pikachu). Yet, reading Ready Player One in 2012 as a WoW player, I still couldn’t imagine that today we would be discussing gaming as mainstream entertainment and that the potential of the metaverse - an emerging universe of collective virtual spaces, where players can meet and share experiences that go beyond playing - could become reality.
Note: I decided to include 2019 figures rather than 2020 so as not to present a picture that was highly dependent on the unusual conditions the market experienced due to COVID-19.
Gaming is a huge business. And not just because the pandemic is expected to have helped its global revenues rise over 15% to nearly $180 billion; but also because it now encompasses console, PC, mobile as well as the – still small but growing - segments of augmented and virtual reality and cloud gaming. Business models have also evolved: from the “pay-to-play”, coin-operated arcades of the ‘70s and ‘80s, to console and PC games sold at fixed prices at physical retailers and finally to digital distribution and microtransactions prevalent nowadays. Needless to say, the change in how games are bought and played has contributed the most to the booming number of gamers worldwide - 2.7 billion in 2020, according to Statista. Just like MMORPGs expanded their reach due to more people having access to the internet in the late ‘90s, the rise of general gaming is also closely related to increased accessibility, both financially and from a device perspective. While in the past people had to either play on a PC or own a console, entry barriers to gaming have drastically lowered since smartphones became ubiquitous. So much so that mobile today drives most of the video game revenue today, representing more than half the market size.
Initially, mobile had its own games that targeted mostly casual gamers (think Angry Birds or Candy Crash Saga) and it was rare to find well-known gaming IP available on mobile. Notably, Nintendo, which had always opposed relinquishing control over their games (NB: Nintendo-owned IPs such as Super Mario, Zelda or Animal Crossing are only playable on Nintendo consoles), was heavily criticised for not developing mobile games at a time when the company was struggling due to poor Wii U sales. The potential, after all, was huge: only in 2014, people playing Candy Crush Saga, developed by Stockholm-based developer King (which was later acquired by US video game behemoth Activision Blizzard), spent over $1.33 billion on in-app purchases. However, developing a mobile game with a freemium model, which relies on a small percentage of users to enhance their experience with in-app purchases, requires a different modus operandi from traditional non-mobile games producers, from the way levels are designed to mechanics that encourage players’ engagement (e.g. through unpredictable rewards or social incentives). As mobile games became more sophisticated and brought in a significant number of users, traditional developers took notice and produced versions of their most popular franchises for smartphones. It turns out that:
Strong IP + Immersive gameplay + Prominent social aspect + Low entry barriers = Instant Success
Through augmented reality, Pokémon Go (Niantic, 2016) blurred the lines between game and real life, bringing the world popularised by Nintendo in the 1990s to everyone’s palm and creating a social and cultural phenomenon. According to Sensor Tower, Pokémon Go has accumulated nearly 600 million unique installs and generated almost $4.2 billion in revenue from in-game purchases as of November 2020. Its revenue was the highest ever of any mobile game in its first month, at $207 million.
What made Pokémon Go such a huge success? I’d say a mix of all the elements above. Pokémon is one of the most beloved gaming franchises globally, and the game was already going to have a strong user base, at least initially. However, as it has been shown in the past , brand alone is not guarantee for success. That’s where execution comes in: with its immersive AR focus, Pokémon Go made every player feel as if they really were Pokémon trainers, venturing into the wild to catch new creatures and battling gym leaders. Rather than players making the effort to escape into a fantasy world through their console, the game’s characters were recreated into their world. To the extent that this mobile version hardly feels like the original game. In fact, the gameplay is very basic and quite shallow, which is connected the low entry barrier aspect. It’s not just that the game is available on smartphones and that is free to download: Pokémon Go’s premise is very easy to grasp – go around, find new creatures and capture them – and fun at the same time. That is a key element to consider when assessing the success of several best performing mobile games, which thrive among casual gamers. And it was arguably the reason why Niantic’s Harry Potter: Wizards Unite was not as successful as Pokémon Go, despite enjoying a huge, global following and making use of the same AR mechanics. With its class system, skill trees, potions crafting and more complex turn-based combat system, Harry Potter: Wizards Unite demands a bigger effort from players and is clearly aimed at more hardcore gamers and Harry Potter fans who have the will to delve deeper into the game.
Having low entry barriers allowed several people to get into it, making sure players could enjoy the game with friends or strangers around. This is another, and potentially the most important factor to consider: the social aspect.
Harnessing the Social Power of Gaming
Despite negative stereotypes depicting gamers as antisocial basement-dwellers, a lot of gaming is inherently designed to be a social activity. And even when it isn’t – for example, for many single player games – it becomes an opportunity to socialise. Indeed this is how I remember my very first gaming experiences: playing Donkey Kong Country and Super Mario World on a Super Nintendo surrounded by siblings and friends, cooperating to beat bosses, discussing level design or just watching one of us speed run the entire game. The excitement that comes from watching people play a video game has spanned platforms such as Twitch and gaming video content is now a $9.3 billion industry with 1.2 billion viewers (SuperData Research). Interacting with real people while playing has become an underlying element of most successful games - from PC to mobile - whose high number of players is such that it can be compared to giant content platforms.
Unfortunately, no updated data is available for monthly active users for Fortnite. We know that there are 350 million registered accounts, but that is hardly an indication of how many active users there are. According to a report from GAME, Fortnite has collected over 10 million years of total playtime as of September 2020, the highest number any game has ever achieved. That is not a testament of how good Fortnite is, but rather it shows that users are spending a lot of time “in-game”, talking with friends or watching a concert live with 12 million people. This is what Minecraft, Roblox and Fortnite have in common: they are driven by their communities rather than the game (or collection of games in the case of Roblox) itself. The platforms where users meet to play also function as creative playgrounds for gamers to experiment with creating a game (Roblox), buildings and structures that become part of the map (Fortnite Creative) and just about everything (Minecraft). This allows them to be fed with constantly new user-generated content and retain their audience far longer, thanks to the creative input coming from players.
The huge potential in gaming lies exactly into its ability to create immersive, virtual worlds where users don’t just play, but meet, chat, create, shop or simply hang out; in a word, what media analyst Matthew Ball described as ‘the metaverse’.
[…] The Metaverse has become the newest macro-goal for many of the world’s tech giants. […] It is the express goal of Epic Games, maker of the Unreal Engine and Fortnite. It is also the driver behind Facebook’s purchase of Oculus VR and its newly announced Horizon virtual world/meeting space, among many, many other projects, such as AR glasses and brain-to-machine communications. The tens of billions that will be spent on cloud gaming over the next decade, too, is based on the belief that such technologies will underpin our online-offline future.
Social Games or Social Platforms?
"We earn consumer screen time, both mobile and television, away from a very broad set of competitors. […] We compete with (and lose to) 'Fortnite' more than HBO." Netflix CEO, Reed Hastings
Fortnite is hardly the only game Netflix is competing with. What seems to be even more popular these days is Among Us, an online multiplayer social deduction game popularized by Twitch streamers in mid-2020. The game amassed 500 million (yes, that’s right) monthly active users in November, becoming by far the most popular game ever in terms of monthly players. Let’s put this number in context.
How did an unknown game that came from a small indie game studio in 2018 become bigger than Twitter and Snapchat in terms of users?
Strong IP: Among Us was released in 2018 to little fanfare and it wasn’t until mid-2020 that, thanks to Twitch streamers playing the game live, it went viral. Now it has become its own strong brand, with merchandising and apparel available for sale, and even Alexandra Ocasio-Cortez using it to inspire people to vote.
“The game had been building a small yet loyal following for more than two years before it shot into the spotlight thanks to Twitch streamers,” said Randy Nelson, head of mobile insights at Sensor Tower. “Its current success was really born out of that platform more than traditional social media, which is where most viral app hits find their launchpads.”
This is also why Among Us wasn’t an instant success, the way a game like Pokémon Go was. The lesson for IP holders is that, thanks to social media, a brand can be built virtually overnight and that could make their competitive advantage less relevant.
Immersive Gameplay: Although extremely fun and addictive, Among Us doesn’t present the typical features of an immersive game. Players have a limited set of actions they can perform and a limited space they can move in. However, perhaps it’s because of the relatively simple nature of the game that it looks like people spend time on it without really focusing on it:
“There’s more natural conversation that arises from it. It’s more of a party game. You’re kind of just hanging out with friends and the game is secondary,” Mr. Hayberg said. “To excel at the game, you have to know if people are lying, telling the truth and their general personality.”
Which leads us to…
Prominent social aspect: The core of the game is its social, multiplaying angle. Between four and ten players can play each game, communicate with each other and cooperate (or secretly obstruct) the resolution of each round. To win, knowledge of each person’s character and understanding who’s bluffing and who’s honest are essential. You don’t need to be a “gamer” and to grind and train to excel at this game which, in a way, makes it more immediate and accessible to everyone, another important factor per se.
Low entry barriers: Among Us is available for free with ads on iOS and Android devices as well as on Windows and Nintendo Switch (pay-to-play) and an imminent release on Xbox. Allowing the game to be played on several platforms (cross-platforming) is also what contributed to make the game viral. Players are not limited to the platforms they play with: just like with Minecraft, Roblox and Fortnite, cross-platform support enabled Among Us to reach the impressive amount of users it currently has.
And, as the social and low entry barriers factors keep intertwining, the game’s popularity is further propelled by a never-ending stream of user-generated content:
“The hype keeps growing because everyone is playing it,” said Nicole Draper, 17, who posts Among Us memes on Bruhloon, her Instagram meme page. “My TikTok For You page is flooded with Among Us memes. People are making parodies and voice-overs of Among Us scenes. It grew bigger than any other game.”
Reed Hasting’s comment from Netflix 2019 earnings call doesn’t seem so far-fetched after all (NB: Netflix had nearly 193 million subscribers in July 2020).
Final Thoughts
With the explosion of cross-platform play and online multiplaying as well as the growing potential of cloud gaming and AR/VR technology, gaming can no longer be considered a niche. Not only is it now mainstream entertainment spread over several age groups (yes, my 72-year-old mum plays a multiplayer game with friends on her iPad), but it’s set to become even more massive. Not only savvy investors, everyone has their eyes on the industry as it grows and consolidates.
Tech companies are not just active in gaming M&A – they’re also investing in building a powerful cloud gaming infrastructure, with Google (Stadia), Microsoft (Xbox Cloud Gaming), Facebook and Amazon among others leading the effort.
Only this week, Roblox raised $520 million Series H from Altimeter Capital and Dragoneer Investment group at $29.5 billion valuation. The company has also announced that it plans to IPO this year via a direct listing. It’s important to note that in February 2020, the platform was valued at $4 billion. But a lot has changed this year, especially the number of users on the platform every day (currently over 36 million).
Games have an incomparable ability to grow fast, even when they don’t satisfy all the elements that make them immediate successes - see the excellent Genshin Impact, which generated approximately $393 million within two months of its September 28 launch and it now makes more than $6 million per day.
There are more than 2.7 billion gamers in the world in 2020 (Newzoo). And as CAC has been declining every year, the next big challenge for the industry will be how to monetise this massive audience.
Appendix – Recent notable VC gaming rounds
REC Room, a US-based social hub and gaming platform for virtual reality users has closed a $20 million Series C with Madrona, First Round Capital, Index Ventures, Sequoia and DAG.
Discord, a US-based chat and communication platform heavily used by gamers has raised $100 million in funding at a $7 billion valuation with Greenoaks Capital and Index Ventures.
Appendix – Recent notable gaming M&A
Roblox acquired realistic 3D avatar platform Loom.ai for an undisclosed price.
Epic Games announced the acquisition of Rad Game Tools, maker of game development tools for many years.
Nintendo is acquiring 18-year-old, Canadian game developer Next Level Games, whose popular titles include “Luigi’s Mansion 3”.
Pokémon Go creator Niantic has acquired a small San Francisco gaming startup that's building a league and tournament organisation platform to help gamers create their own communities around popular titles.
Sources & Additional Reading
Matthew Ball on Gaming
Social gaming – fuelling our relationships | GP Bullhound
Global Consumer Spending in Mobile Apps 2020 Report | Sensor Tower
Thanks for reading! This is of course a very broad and complex subject to nail down. Any thoughts, comments, disagreements, additions, ideas - please email me at giuliasurace at gmail dot com and I will make updates.