In my first post about NFTs, I covered the fast-growing market for digital assets in the collectibles and art space. Another sector of the NFT market that saw big gains in 2021 was blockchain gaming, which are video games with digital assets that are bought and traded on chain. This market can get huge fast and should bring millions of new users rapidly into the web3 world.
Let’s start with a quick review of the gaming ecosystem. Video gaming is a massive sector, with $150Bn in annual revenues worldwide. The gaming sector has seen multiple evolutionary shifts over the prior decades. Going back to the 1990s and early 2000s, most gaming revenue came from selling PC and console games to players for an upfront fee of $25–75. Top games like Madden and Call of Duty routinely cross the $1Bn revenue threshold. Gaming consoles like the Xbox and PlayStation saw 100MM units sold.
With the rise of the iPhone in the 2010s, the revenue model of gaming began to shift from upfront sales to in-game purchases. These small purchases added up to big money, as companies like Zynga saw revenues grow fast. Interestingly, Zynga was purchased by console game leader Take Two Interactive this month for $12.7BN.
The microtransaction model migrated from mobile phone games to console and PC games with hits like Fortnite and Roblox crushing the billion-dollar revenue threshold. These titles sold in-game assets like costumes or characters that gamers could play with inside the game. You can play Fortnite as a Stormtrooper or Iron Man, for a small fee. In Roblox, you can purchase accessories for your character like hats, headphones, and more. The big problem with this model is that these assets are not really yours. You can use them in the game, but they are not portable and cannot be resold. If you purchase a hot item that sells out, you are not allowed to sell it at a profit to another player. Also, if you get bored of the game, all the money you spent is locked up in your player account. You are not able to sell these assets when you move on. This centralized gaming model is great for the game developer’s profits, but terrible for the players.
The promise of blockchain gaming is to unlock the value of your assets. Players will purchase an asset on the blockchain, and it will be in their own personal wallet outside the game. Assets can then be sold on NFT marketplaces like OpenSea freely to other players, with a royalty fee back to the game developer. Want to take profits on a hot gaming asset, no problem. Get bored of the game, sell your assets and play something else. We haven’t seen it yet, but in the most decentralized future, maybe Marvel makes an Iron Man skin that can be used in both Fortnite and Roblox, and maybe even tons of other games. Buy it once and use it over and over again.
None of the big game developers have launched blockchain games yet. They are too concerned about damaging their very profitable current business models. However, this is coming soon. I don’t know whether Epic Games chooses to introduce blockchain assets to Fortnite or if they will launch a new blockchain-first game. But I know it’s coming soon. Same for Take Two Interactive and EA Sports and all of the big players. This will move some serious market cap of the stocks for the ones that get this right.
The biggest success so far in blockchain gaming has come from a new game studio called Sky Mavis out of Vietnam. I know, crazy right? Back in 2018, they launched a game called Axie Infinity. To play, you need to buy three Axies, cute Pokémon style characters. These currently cost around $200 each. You take your team of Axies and battle another player. You own your Axies and can sell them anytime you like. The game started off slow, monthly sales bounced around $10–50K through summer 2020. Things started to pick up for Axie Infinity later in 2020, when sales grew to around $1MM/month. Then the game exploded. $100MM in June 2021, $600MM in July, peaking at nearly $850MM in August. Sales have settled in around $500MM monthly in the back half of 2021. 400K+ unique digital wallets have bought an Axie.
While the growth of Axie has been super impressive, the game relies on a funky economy described as Play2Earn (“P2E”) for much of its usage. When you win a battle in Axie, you are rewarded with a token called Smooth Love Potion ($SLP), which is used to breed new Axies that can be sold for profit. The rewards are small, like $1–2/hour of game play or so. This may not sound like much here in the U.S., but in the Philippines and Indonesia it is a living wage. Most of the players today are in Southeast Asia, and they are playing the game as an alternative to other low wage jobs. Groups have sprouted called gaming guilds that purchase the Axies, lend them to players who can’t afford the upfront cost, and then split the profits. This type of structure won’t scale in the U.S., but it did open the door to blockchain gaming.
Where does blockchain gaming go from here? We have already seen really fun games pop up that are capturing people’s imagination. Zed Run created a horse racing game where you buy a digital horse NFT, train it, race it, and breed it with other horses. Star Atlas is building a AAA style game that they describe as a “grand strategy game of space exploration, territorial conquest, political domination, and more.” There are MMA games, car racing games, sports games, and many more in the works. New blockchain-first game studios are seeing big dollar funding from eager venture capital investors, and the incumbent leaders in PC/console and mobile phone gaming are sure to join the party soon. This technology will battle for a big share of the $150Bn gaming market and will create winners and losers in the stock prices of the participants.
In the next post, I’ll cover how NFTs are impacting the entertainment industry for TV, movies, and music.
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