a16z Podcast - Come for the Games, Stay for the Party

Episode Date: November 2, 2019

The games industry is in the midst of a tectonic shift. Powered by platform convergence, games-as-a-service, and user-generated content, modern video games—what we call next-generation games—are unlike anything we've seen before. In the past decade, gaming has grown from a niche hobby into a global, culture-defining phenomenon.Not only are the games themselves becoming increasingly immersive, the way we develop and discover them has fundamentally changed. In contrast to the hits-driven business model of the past, now games are shaped in real time by player feedback. And thanks to the rise of influencer gamers, the experience of finding new games has become organic and social.In this episode, a16z general partner Andrew Chen, deal partner Jon Lai, and host Lauren Murrow discuss how gaming is dominating not only the entertainment industry, but also pop culture at large. (Why can't we quit you, Untitled Goose Game?!) Andrew and Jon share how they think about emerging technologies in the space, as well as the features they look for in next-gen games and game developers.

The content here is for informational purposes only should not be taken as legal business tax or investment advice or be used to evaluate any investment or security and is not directed at any investors or potential investors in any A16Z fund. For more details, please see A16Z.com slash disclosures. Hi, everyone. Welcome to the A16Z podcast. I'm Lauren Murrow, editor of the consumer team. Today I'm here with general partner Andrew Chen and deal partner John Lye, both avid gamers to talk about what they're calling next generation games. That is, games that are cross-platform, player-driven, self-published, and above all, incredibly social. We'll discuss how video games are dominating not only the entertainment industry,

but also popular culture through the rise of influencer gamers. Finally, Andrew and John give inside advice for gaming entrepreneurs. What are some common misconceptions in the gaming world that you'd like to debunk? So I think there's a really big distinction between the vast majority of games that have existed over the last two decades versus the small set of these franchises that are getting built today. I think a lot of people will say, why are you even looking at this? Games is like a hits-driven business, right? It's content. You're going to get this big spike and it's going to go away.

So there's a phrase called Games as a Service where you'll publish across console, mobile, and PC. and you'll continually provide updates over time. We're very oriented around things that are really about building communities of people that happen to have an activity at the center of it, uniting them. Those are things that can last for a really long time. I think the other one that I feel like was a thing for a long time was also just that a lot of negative connotations about games

being like they'll rot your brain, they'll make you anti-social, and I think it just turns out that, especially in the genres of games that we're talking about, that these are like the most social things that you can possibly do. Games is the virtual mall. That's right. That a virtual mall and a virtual sports bar.

That speaks to another trend we're seeing, which is games as a social media hub. People are coming here not only to play, but also to hang out, to interact with their friends. That's right. Yeah. And if you think about where games was growing up, maybe many of the listeners remember playing on Nintendo or, you know, Super Nintendo or, you know,

Xbox or whatever generation of console that you use, that a lot of the experience was really kind of solitary, right? And I think one of the really interesting changes over the last decade is all of a sudden the most popular games have all become multiplayer. Come for the games, stay for the party. I think games potentially will be the social network of the future where instead of scrolling through feeds and web pages of static images and liking and commenting on things,

will be in virtual worlds and games, like having very real interactions. in very immersive environments. It's what these kids in Fortnite are during these days. The Battle Royale format is a passive activity that's happening in the background, while the actual goal of what they're trying to do is to just hang out and socialize. So all of a sudden, that means that you actually want your friends to play. You want to pull them into the game.

You want to play at the same time. It becomes another way to hang out the way that maybe kids growing up before would have been like, oh, let's go play kickball together. Instead it's like, oh, well, let's actually play Minecraft together. Well, and that brings up one thing I'm curious about. It's not just kids anymore, right? Who's playing now and how has that audience grown? The majority of these players are young,

and so you have essentially teens and tweens that are going to grow up lifelong gamers, and this is going to be the type of content that they look for for the rest of their lives. We're now seeing parents who are gamers raising kids who are growing up gaming first. So they're playing video games before they're watching TV, before reading books in some cases.

And I think the exciting thing about that is that gaming is truly sort of a cross-generation, cross-gender, and also truly global activity. That's right. We joke around about how much we would love to find an e-sports for old people category where

maybe you've lost your kind of twitchy ability to headshot all of your opponents in the latest first-person shooter, but you still want to play. You still want the feelings of all of that. And so I think taking some of these core dynamics and emotions that this gameplay can create and bringing it into more demographics, I think is very, very interesting. But I think the other thing that's been happening that I think

is really fascinating is that League of Legends from Riot and Team Fight Taxics uses a lot of the same characters. And I think it's very possible that we'll see the next generation Marvel actually coming out of characters that are rooted in the video game world, first and foremost. These are going to be the next kind of character media franchises, the same way that Marvel and Disney and all of these amazing media companies were built off of like ultimately people's childhood relationships with these characters. And so what that means, if you take that to a natural conclusion, is not only do you have games that may last for 10 plus years, but then the actual characters and franchises

might last 50 years, 100 years in the same way that when we love Mickey Mouse in the black and white like Steamboat Willie kind of, you know, version, we may look back at the orcs in you know, Warcraft 2, and 100 years from now think, like, wow, I love those characters, you know? That brings up an interesting point. So it used to be you'd buy a game, you'd play it, you'd beat it. Now, games are living things that are shaped

as you play. In some cases, going on decades. My question for you is, should games go on for 10 years? I'm thinking of, like, Netflix shows where they have, you know, three great seasons, and then you're like, hmm, should have this should have been to an end?

I'm glad you asked that question because I think one of the common misunderstandings when people think about games that they think about it as a hit-driven industry where you have a hit and then it's more of a fad and that it goes away in a couple of weeks, if not months or years.

And I think we're seeing games have 10-plus-year lives. So League of Legends, I think they're coming up into a 10th anniversary in a couple of weeks. World of Warcraft hit its 10-year anniversary already. Games like Candy Crush, Clash of Plans, also 10-year-plus. games. I think what's happened with these most successful games is that they've evolved to become

more than just an app. They've become a lifestyle for the people who are playing them. And so a core part of their identity is the fact that they're a League of Legends player. And so they don't think about this as an entertainment product. This is part of who they are. It's not just content. It's a lifestyle. It's a social network. One great example of that is what's happening right now in the influencer channels. They're games like Apex Legends and Team Fight tactics. which were two of the largest games that came out in 2019 so far, have basically gone from zero to over tens of millions of players. That's primarily been driven by players that are going on Twitch

and watching their favorite streamers play these games, where previously it would have taken months to get to that size. It took only a couple of weeks, if not days. We hear so much about how gaming is growing faster than ever before. How big is gaming? Yeah. So gaming is a $139 billion industry from the last research report I checked by, I believe, New Zoo. And it is at that level larger than both film and the music industry. So if you add up box office sales and home entertainment, I believe the film industry was around $130 billion. And so at this point in time, it's safe to say that games is not only the largest, but it's also the fastest growing segment. And so do you think we'll see more of gaming seep into the rest of the entertainment industry? It's already happening.

So we've seen on Netflix's Bandersnatch episode, which was one of their first attempts at essentially making an interactive narrative game that could be played just using your TV remote. And I think music is also becoming an increasingly larger part of the games industry. So DJ Marshmallow had his first in-game concert in Fortnite a couple months ago. I think there was about 11 million live concurrent attendees in-game. And then the subsequent YouTube repost of the concert drew about 40 million views. Did you attend?

I watched a replay. I wasn't quite cool enough to attend. And I think there's sort of the idea that a lot of pop culture maybe comes into gaming. I think the other one that I'm very fascinated with is how something maybe that starts in games ends up radiating out into the other forms of media as well. And so today we look at something where if you make a movie about a video game, it's probably going to be not very good. But honestly, movies made about comic book heroes. The first were often quite bad also until more recently they became good, right? Like if you watch the Joel Schumacher Batman's, then you know what I'm talking about. The super campy bad ones.

And so I think that's one very interesting version. I'm also waiting for rappers instead of bragging about what kind of car they have, they can brag about what in-game items they've purchased as a, you know, status sort of seeking thing as well. happened yet? I don't think so. But it will happen. It will, for sure, will happen. Drake has gone on record as being an avid Fortnite player, right? So I think those days, if they haven't already happened, I think they're coming up for sure. All of this sort of really speaks to the idea that this next generation, in terms of how they want to use technology, it's going to be more dynamic. There's going to be more video. There's going to be more interactivity.

There's going to be music layered on top of visuals, right? And what better medium to deliver that than games? So then what will these true next generation games look like. Obviously with all the new platforms that are coming out, there's really fun game startups that are trying to go voice first, right, as when we have the proliferation of Alexa and like voice apps and like that kind of thing. VR is another one where the killer app, many of the early things that have gotten a ton of attraction have been things like Beat Sabre, which is an awesome rhythm game that everyone should go play. Super Hot is also another one of my favorites on the new Oculus Quest. And so I think, you know, the other answer to your question

is games are intrinsically part of every competing platform that gets created. Cloud gaming is also something that's on the horizon, and we think there are a variety of ways that can go. I think in the near term, most folks in the industry think of it as a distribution channel. Where we're most excited about it is actually thinking about games that are being made natively for the cloud. If you think about it from the perspective of this is the first time where both the client and the server for a multiplayer game

are persisting in the same cloud instance, I think the things that you can do from that sort of architecture is potentially really, really groundbreaking. And we're seeing some developers and folks out there that are trying to experiment on that. And I think we'll see the first wave of those cloud native games and apps hitting in perhaps a couple of years from now. And are there certain genres that are best aligned with cloud gaming? Yeah, I think this is something where we're all trying to figure it out.

But I think from looking at the current genres that exist on to the PC and console, like we might expect massive multiplayer games like MMOs, things like World. of Warcraft, for example, things that have a lot of players playing together in the same instance, so battle reels are the latest iteration of that. You can expand the size of those sandboxes and those instances massively in a cloud environment. So instead of having 100% battle reels, maybe you have 1,000-person battle reels and 1 million, and instead of having a server instance that's spun up and shut down due to hardware constraints, you have a persistent living world that lasts for weeks at a time that think we'll see

There are sorts of experiences more when everything is living in the cloud and you can log in regardless of where you are and what device you're on. We're seeing more and more developers these days, thinking about how to build properties that are going to be great, not just for one platform, but on every device, mobile, PC, console, browser, Minecraft and Fortnite, I think. One of the reasons why they've achieved the sort of critical mass and the size that they have is because you can play those games

on legitimately almost every platform there is out there. and I think more and more games that we see will be going in that direction as well. What's the shift then? Is it the audiences converging? Are there different demographics for different kinds of play, different platforms, different games?

It's not that the audiences are converging, but that people want to play their favorite games regardless of where they are in the day. And so I might want to play Fortnite when I'm at home and in front of my PC, but then when I'm commuting to work and I'm in the subway, I might also want to play, and I have nothing but my mobile phone or my iPad with me.

And not only are gamers playing more and playing for longer, they're also inherently involved in the development of the game now. Absolutely. We're seeing players as co-creators these days. So instead of just accepting what developers are working on and feeding to them, players these days now have the ability to go out and create mods. They have the ability to go out, create entire maps, skins, items, and games these days are increasingly being architected in ways

where they have systems that enable players to easily create these things and drop them into the world. And then we also see just sandbox experiences like Minecraft and Roblox where you're basically armed at the very beginning of the game with the shovel and then you go out into the world and like the narrative that you create is the one that you make for yourself, right? And so today, like we have people building Keynes Landing and Roblox. These creations are great because they also make the game

viral. And the way that you get it to work is, well, you're not spending tons of money on TV advertising. Instead, you make your game free. You get people excited about it on Reddit, on Twitch, on Discord, right? And so what ends up happening is it goes viral the way that we hear about really cool new apps or really cool new websites. It's really about the same channels, thus circumventing retail and potentially publishers. I would also add on to that, I think a popular sort of misconception that people have these

days is that they see a lot of news articles about monetizations. There's this assumption that free-to-play games and live-service games sort of have these evil monetization methods would try and really hard to squeeze every drop and every dollar out of their players. How so? So there's definitely a difference between pay-to-win and sort of free-to-play, the two of them often get confused. Break that down for me. What's the difference between play to win and free-to-play? So pay-to-win is essentially a form of monetization where you unlock power behind the paywall. So by pain, you unlock access to either higher levels or more powerful forms of equipment,

and players essentially get angry about this because they feel like people who are not pain can't ever beat someone who is pain. And a game like League of Legends, they don't have this problem because there's no pay-to-win component. You win or lose purely based in sort of skill, and sort of most of the monetization in-game comes from cosmetics which allow you to express yourself or they allow you to sort of unlock certain champions, none of which are supposed to be more powerful. than any of the ones that you get access to you

if you're a free player. So that way the experience between a free player and a paying player is largely the same, except you just have more access to cool stuff if you do monetize. We talked a lot about this idea here of super apps, so an app in which you've got your payment information baked in,

you've got social media, you've potentially e-commerce. Do you think that's the way that games are going where everything would be baked into one gaming experience? Well, one of the most interesting parts about the epic games, which is the company that's built, Fortnite, is that both they and there's another company called Valve, and there's a couple other companies to operate like this, both make the game and they also operate a platform around their game.

And so what that means is you play Fortnite and as part of playing it, you end up using this application that's called a launcher that lets you update the game and do all the different things that you need to do. What they've done, which is incredibly fascinating, is they have taken that and they've turned that into a game store. And so there's a whole effort by Epic to go and ultimately build their launcher into a store, partner with many, many other companies in order to promote them. They also have bought the Bay Area Company House Party, which is a video calling thing, group calling thing, that you use with your friends.

And you kind of imagine how sort of a constellation of these different experiences together start to weave together the idea that, you know, it's not just about Fortnite. It's all the things that you do in and around Fortnite. And especially once you have with the Epic Store, you have your credit card in there, you have your user ID and your account information in there, you have identity, then all of a sudden, you know, exactly to your point, it very much has a platform or kind of super app like functionality. Now, this is actually not the first time that this has happened because there's a company called Valve that did Half Life many years ago that went through the exact same process and ended up with the Steam Store on the other side of it. What's changed now and opens the door for entrepreneurs and for startups is all of a sudden you can have a group of people that decide they have an amazing new games concept and they're going to build it by themselves. And they're going to actually not go through retail, of course. They're going to publish it on Steam or they'll publish it on Epic. What kind of games are you guys playing right now? What are you excited about?

Well, I'm playing an amazing game called the Untitled Goose Game, which has been all over Twitter, which is fun. it's on Nintendo Switch. It's an indie game where you basically play goose and you kind of run around and you mess with this farmer that's, you know, kind of like trying to plant his crops and, you know, all that stuff. The other thing that I'm doing is I subscribe to Apple Arcade and so I've now gone and downloaded a ton of different games out of there. And so the one that I am on my home screen right now is card of darkness, which is super fun. And then there's another one that was recommended to me called Sneaky Sasquatch. And it's a stealth game where you play a Sasquatch and you have to avoid the resident ranger who's trying to track you

down and you're trying to steal food so that then you can sell this food to get money in order to save the park that you live in. So that's a really fun one. Yeah, John, what are you playing these days? I've been spending a ton of time, maybe too much time, playing team fight tactics, which is the auto chess game that Riot put out. And I've got maybe two, three hundred hours in at this point and I'm just trying to grind my way slowly up the rank queues. So it's been taking up most of my time, I think that the mobile game that's currently sort of on my home screen is also an Apple arcade title called Bleak Sword, which is basically Dark Souls, but on mobile. So both of you see a lot of gamers, you see a lot of entrepreneurs.

What is your advice for entrepreneurs in the gaming space? I think first is the ability to find a long-term partner that understands that making games is at its heart a creative process. and games can take a long time to build and there can be a lot of twists and turns in that road so Fortnite took a while before it found Battle Royale Roblox took almost 10 years for it to grow into its current user base

Niantic for example took a while before Pokemon Go came out and I think that the game that they released before that Ingress wasn't nearly as big or as popular as Pokemon Go was and so it can take a while for a studio to find their first hit game and that's something that we recognize. And I think as a sideline to that, if you're thinking about building a studio that's going to last not just months or years,

but potentially decades, you also want to be able to maintain control of your IP. I think this is something that in the near term may not seem as important, but IP ownership enables you to essentially, one, have complete control over sequels, ancillary products like merch, videos, comics, books, etc. And more importantly,

it also makes it so that you maintain creative control over the product. Someone else has control over your IP. That means they can take you off the product and actually put a different team on making that exact same game. And we've all heard of cases in the industry where that's occurred. I think one of the big differences in tech that John and I have spent time on is the fact that you actually need years, you know, sometimes two, three, four years to get the first complete version of your product out.

you actually need to fully finance your game to the release date plus all the live operations and content that you're going to do afterwards. And so a lot of that ends up being then navigating the financing world, but then also the various stores that are offering minimum guarantees, the publishers that have certain contract structures, etc. And these are things that if you're a brand new entrepreneur, even if you've developed killer games before, you may not know how to navigate that world. Andrew, what is your advice to entrepreneurs? So my advice really comes from meeting teams that often have worked on really break through amazing franchises at some of the established games companies, but then are going off and starting their new thing

by themselves for the first time. And I think that there's a lot of facets that they have to master in addition to creating the game. The very first thing is that the entire process of self-publishing and going to market is a skill unto itself, right? It's something where you want to build the right relationships with influencers, with streamers, with platforms. like YouTube and Twitch and so on, you know, those become incredibly important as a way to popularize your game. Similarly, many of these games actually end up being just like mobile apps and, you know, websites and anything else. You're going to need to think about what's my paid marketing budget, what is my onboarding flow, what is the LTV and KAC of my users. And so

bringing that all together overlaid on top of a great product. So what qualities do you look for in game developers and entrepreneurs? Are there certain criteria? I think the very first one is it is really clear that the folks that are spinning out of Valve, that are coming out of Riot, that are coming out of Supercell, that are coming out of Blizzard. For many of these teams, they have worked on amazing, amazing games that we all love and we all play. But at the same time, those companies have gotten to a point where maybe they're big established players, right? And so some of that creative energy starts to be a little bit more difficult in a large team. And so what we're often seeing is these groups spinning off and starting something.

And especially over the last couple of years, a lot of the entrepreneurial energy that we've seen at places like Blizzard or Riot, you know, once they're done shipping this big game that they've been working on for years, you know, they're ready to move on to the next thing. And so we're excited to meet teams that are ready for their next adventure. Great. Well, thank you so much for joining us.