a16z Podcast - What's Next in Gaming

Episode Date: May 7, 2020

Video game technology has evolved into a global phenomenon that extends far beyond entertainment. In this episode, John Riccitiello, CEO of the game software development company Unity Technologies, is interviewed by a16z general partner Andrew Chen on the rise of esports and streaming, the potential of cloud gaming, and  far-reaching applications for game technology. This conversation originally took place at our most recent innovation conference, the a16z Summit.

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, and welcome to the A16Z podcast. Today's episode is about the evolution of video game technology into a global phenomenon that extends far beyond entertainment. In this fireside chat, John Riccatello, CEO of the game software development company, Unity Technologies, is interviewed by A16Z general partner Andrew Chen on the rise of e-sports and streaming, the potential of cloud gaming, and the far-reaching applications for game technology.

This conversation originally took place at our most recent innovation conference, the A16C summit, and was also released on YouTube if you'd like to watch it there. One of the really interesting things about Unity's early formation story, is that a lot of its success started with adoption by indie developers. And very small studios, that's now scaled into AAA studios. Unity was originally a couple dozen people. We were the Pipsqueak on the block, but a lot of Indies found our tools super easy,

and they could do prototyping and building content. If you fast forward, we've invested an enormous amount in technology. A couple dozen engineers will become 1,700 engineers. And that engineering power shows in products like Mario, Cart Tour, Pokemon Go, Honor of Kings of Call of Duty. Many of the games that you mentioned are on mobile, but also desktop and console. The startups that we often meet at Andrews-Norowitz come in pitching cross-platform, multi-platform from day one.

Talk about how you think that'll affect the industry over time. It used to be you played a game on your PlayStation or Xbox or PC or Mac or iOS or Android. And what we're starting to see is games that are played from all those devices. that's increasingly an important aspect of the game industry. And they can consequently attract larger and larger audiences. At best, there's only a couple hundred million people in the world that will touch a console on a given generation. But mobile is well north of two billion.

And when you combine those audiences, you get the people that pay the most to participate with the largest possible audience. It's really a massive expansion of the addressable market to be able to play a single game across all of these different platforms. It is. These markets are big. There are more players in the world than there are TV watchers or music listeners on a regular basis. Through your time in the game industry, what has been the set of most impactful changes that are driving it forward?

I'd say the first is the scaling of the industry driven by technology. A decade or two ago, all games were 2D because you couldn't power a 3D game, though. You couldn't do online gaming. You couldn't connect to another live player. And for the most part, you were strapped to a device parked under your TV or a large, best-top PC. That's not true any longer. Networks work better than they've ever worked before. 2D became 3D, what was non-interactive, non-social became interactive. The second thing that has changed so much is that the underlying technology allows games to be real-time. If you try

to create a picture in a traditional tool from an Adobe or an auto desk, or Pixar's render man, It might take an hour, a day, or a week to produce that frame based on the input. When you're playing a video game, you're creating a frame that's never been seen by another human being on this planet in the 60th of a second. When you're going to make something that's going to be interactive, it's got to have a system for rendering pixels on a big screen. It's got to have a system for animation. It's got to have a system for processing sound. It's got to have a system for bouncing light around. It's got to have a system for basic UI and UX.

What Unity does is we create an underlying technology base that allows all of those things to happen instantly and easily so you could focus on the content. We composite the code for over 30 platforms, from Oculus to HoloLens, Xbox, to PC to Mac, and that vastly accelerates the speed with which one can produce and lowers the cost. The other big change that's happened in the games industry is you have Fortnite, League of Legends, Minecraft that are really operated as services. The games and experiences got better and they got bigger. If you take a look at the television industry, whether it's Game of Thrones or Breaking Bad,

there's more innovation unrestrained by the 90 minutes that you can see in a cinema because they're not constrained by packaging. And in the game industry, we're not quite at the point where we've left behind all physical media, but we're close. Increasingly, that's a silly and inefficient way to deliver content. And that games as a service approach unlocks the ability to build multiplayer experiences, to build social experiences. You're thinking about these products as your social network, right? It's the way that you're hanging out with your friends.

I totally agree. And I actually think the reason the game industry kept growing at that 20, 25, 30, 35 percent compound growth rate is it was different than the other media for exactly the reasons you mentioned. It's different every time you play it. It's interactive, while they're linear. So you're getting a much more compelling experience. playing against other live players, not just against AI. Humans are a much more interesting opponent than the AI that can be driven into the game by some designer. And they're social.

More than any other media, gaming takes advantage of the most important technologies available to reach and retain an audience. The top games franchises are now thinking a lot about e-sports. We're going to have teams. We're going to have leagues just like traditional sports. I believe the single largest category on YouTube is, watching people play video games. Amazon's got a massive business on Twitch, which is allowing you to watch other people play video games.

It is a massive medium that, in time, will rival television, which is completely crazy from any historical perspective. A lot of people want to talk about investing in esports and drawing an analogy to investing in, I don't know, the NFL or the NBA. And I do think the analogy is a tortured one. No one actually owns the NBA, Major League Baseball, the NFL, soccer. There's a bunch of individual team owners, and they work together under sanction from the government to break down some of the anti-competitive rules that would otherwise preclude them from cooperating with one another.

They have an exemption in the United States from Congress to create leagues where they can collaborate, compete, cooperate. What's different about esports is 10 cent or riot owns League of Legends. It's 100% every last share owned by one company. Activision owns all of Call of Duty or Overwatch. Electronic Arts owns all of the FIFA franchise. And Epic owns all of Fortnite. And so ultimately the economics of e-sports is different because it's not an aggregation of teams that make the league.

It's the league that owns the teams. And in this case, the league is Activision, Electronic Arts, Riot, take to, Bethesda, and they completely control how the economic outcomes are going to end up. It's not an unfettered competitive marketplace. It's one controlled by an individual capitalist that thinks e-sports as a marketing program. Right. It's fascinating the recent deal that Ninja got from the mixer. Huge amount of money much, much higher than any e-sports player.

It would be the equivalent of if Harlem Globetrotter player were better paid than any NBA player. One of these to look at YouTube subscribers, there are individual games. gamers with over a hundred million subscribers, two-thirds to three-quarters of what Netflix have, the number of subscribers. So there's no question that there's something about the celebrity here that is monetizing better than what Brad Pitt gets in Hollywood. Absolutely. How does Unity think about emerging game markets and the international market? What do you think we can learn from them? So if you go back 15, 18 years ago, China had a very successful business. business in CD and floppy gaming. So physical media. And piracy had completely destroyed

the industry. A similar thing happened in Korea. These markets fell apart because there was no ability to protect intellectual property rights. What rose like a phoenix from the ashes was digital online gaming where you couldn't really pirate it. It was in a server and it required an authentication key and it required a number of technologies to access it. And Korea and China, China today are two of the three largest markets in the world for games, U.S. being the third. They are staggering multi-million dollar businesses with high growth rates, but they're all digital. And with the rise of digital gaming and the technology innovation in Korea and China, some amazing businesses have grown up. Tencent is arguably in the same league with a Facebook of Google and Microsoft or Apple in terms of market cap and market impact.

They're basically the Netflix of Games of China. They started as a gaming platform. They're way more than that now. So they've batastasized in a positive way. And they're reaching beyond China in many ways. Some of the most important developers that are outside of the United States rival the biggest in the U.S. Exxon, dual headquarters in Korea in Japan, Nettys in China.

Today, if you looked at the gaming industry for surging influence, you'd have to include China. You'd have to include Korea. You'd still include Japan. northern Western Europe in the United States. Then you've got markets like India where there's a lot of developers, not a lot of consumption yet.

The market's now truly a global phenomenon. A lot of what people are so excited about now with Fortnite's free-to-play model and being cross-platform and building these core experiences on the mobile lab, these are all ideas that were pioneered in Asia and people were not even sure that it could be executed this way in the United States.

I can't think of many industries that has as much innovation, coming from as many different places. Next, on the company you mentioned, probably does the best job of husbanding the value of players looking at the long-term lifetime value of an individual player.

Neti's got some of the most important games of the world. Tencent created some admixture of if Netflix was a gaming platform and you would marry it to a social network, and that's what you have in China. And that may be the future in some significant way in the West. But you've still got the most important

AAA graphic, compelling content coming out of two West Coast Company, Electronic Arts, and Activision, and an East Coast company called Take 2. You've talked about this Netflix analogy a couple times. One of the really interesting things that we're starting to see in the market is Epic Games kicked off a new store to download games directly. Valve has the Steam store to download games there. You also have Stadia. You're starting to see a lot of folks trying to buy experience.

exclusives. One of the things that we've seen with Netflix, Hulu, and Amazon is how much money they've put into content. Do you think that these dollars are here to stay in the games industry, or is this something that is a little blip as people are trying to bootstrap their store strategies? I think I'd frame the question a little bit different. The App Store model, where you pay to download something, runs directly into conflict with the notion we talked about earlier, which is those multi-platform games. So the idea that a game would be, everywhere as opposed to captive on an individual download site like Steam or the Epic Store. First, the music industry is transformed fundamentally around Spotify, Pandora,

and other music services. The labels on a relative basis have lost a lot of value, and the consumer relationship is with a platform company. Clearly, in the film industry, television and theatrical content, there's a lot of money being spent by people like Netflix and Disney and Amazon and Apple that are trying to create a direct relationship to the consumer and disintermediate the producer of the content. And at least in music and in film, there's the old expression that content is king, but distribution is God.

There's this notion that the distribution layer is more valuable. A lot of people believe that the game industry will end up in a somewhat similar way in time. What we don't know is Tencent going to figure out how to get global, Is someone like Google going to invest enough to become the Netflix of games in the West? Well, companies like Electronic Arts and Activision and Bethesda and Take 2, Western strongholds for content, will they build that direct-to-consumer relationship? There's no question there's an enormous amount of value in that direct consumer relationship.

The skirmish is massive, and the world's largest companies are chasing it pretty hard. So Google, Microsoft, and Amazon now have various plays within games. and Microsoft and Google are putting a ton of money into cloud gaming. Is there a Netflix subscribers out there? Most of you, right? So when you got Netflix, did it really cross your mind or did it matter to you that it was streaming versus downloading? Maybe not. So when Netflix stream something to you, they use a technology called a codec, compression, decompression algorithm.

They can shrink a movie down to a much, much, much smaller footprint so they can send it compressed on a pipe and then decompress. in your home, and they can buffer in front of that, meaning they can delay it for a quarter of a second, half a second, so it can work well over a network. It's a very smooth experience. And they can do that because they can look a frame in advance, 10 frames in advance, 100 frames in advance, 1,000 frames in advance, and reduce the size of the frame that would need to move because they know what's coming. In a game, you don't know what's coming. So you can't delay it half a second, a quarter of a second, or even a tenth of a second, because if I shot you and you don't fall over, that's a problem.

If I'm racing around the corner and I pass you and you don't know it, that's a problem. And so the first observation I would make is a lot of game types, first person shooters like Call to Duty, the consumer would notice anything north of maybe 30 milliseconds. That's not a lot of time. You can measure the latency on your network. And there aren't, I'd say in this room, maybe 10 of you would have a consistent network connection that is faster than 30 milliseconds. So the gaming industry can't do streaming exclusively

as easily as the movie and music industry because you can't compress it to the same degree and because latency is a controlling factor. So what I expect to happen in gaming won't be the big streaming solution, but people are going to end up with different solutions depending on the content type, and it'll live behind a brand,

like a Google or a Microsoft or a Sony, or a Netflix. And sometimes they'll stream it, and sometimes it'll be a local application on a device that's in your home. If you play Candy Crush, why would a network bear the cost of a single-player game being delivered at a penny a minute when you can play it for free on your device and the only thing you're burning is your fingers on the screen? By sense is the gaming industry will form differently around the distribution mechanism because of performance issues, cost issues, and because some things don't work. You're going to end up with edge of networks, you're going to have central cloud, you're going to have on-device. You're going to see a blend of

things come together. To your point, not only are we going to need technology evolution, but people are going to have to innovate on the content as well. Ten years from now, if cloud gaming works, it'll be this whole new genres that are unlocked. Novelists for years have been describing a world where you have a valid life in a digital world. And we've seen every possible indication that's in fact happening. And games are the most compelling place to do that. You can have a permanent house and a piece of digital real estate that feels like home. For a lot of your children, if not some of you here,

their digital handle around gaming provides them a level of social status that is actually both exciting and a little bit scary. They're important in that world. Now, look, a lot of you have got an important job, you are what you are at work, go home and you're a dad, you're a mom, you're a brother, you're a sister, you're a child. You have a different social structure that you adapt into, and all the esteem that you have in the office is blown away by kids that say, daddy. Right? Well, in the digital world, people have valid, legitimate purchase upon which they sit and live, and that's getting ever more important. Gaming is perhaps the most important media for that to take place because they are what they decide to be in that world.

And increasingly, people are living in that space. Right. We spend a lot of today's conversation on games, but you're also doing quite a lot outside of games. We're beginning to penetrate architecture and engineering and the auto design world and aerospace and other markets where they need extremely high fidelity tools. So we can take things that might have taken hours or days to render and do it in a 60th of a second. things that were a solo experience, is a social experience, things that don't move, do move. And that's driven by the ever-increasing power of multi-core CPUs, multi-core GPUs, faster network times, faster internet, more bandwidth and things like 5G and other technologies.

As those things mature, industry after industry is going to shift to real-time 3D for content creation and dissemination. It astonishes me that most car configurators in the world today by way of example, they take the 12 colors they make the car and they drive it into a warehouse. They take hundreds of photographs. And when you go through the selection, you're picking the one photo from the angle they took it, but it's based on that description. That's an insanely inefficient thing to do. And to render them photorealistic is better, faster, cheaper, and more options available to it. And that's a cloud service. We recently released a product called Unity Reflect. It allows you to look through

your Android or iOS device for someone on a construction site. to hold it up, and the architect that might be in a head office 100 or 1,000 miles away, to see what he or she sees in the BIM data is the pipe really where they say it is, do I need to move it? And it dramatically shortens the cycle from something that involved marking up a piece of paper and dropping in a tube to go to the bottom of a construction site to be couriered or flown to another location to solving these problems in real-time in the moment, which saves an enormous amount of money. And we're now working with auto industry, aerospace industry. So many industries are going to move from traditional tools to more advanced

tools. Not only is it better, faster, cheaper, but you can apply the new data algorithms around AI and machine learning to these models in vastly improve the outcomes. We're revolutionizing how they create and distribute content. What are you the most excited about in the technology landscape? There's obviously a ton happening in AI. There's a ton still happening in ARVR. There's blockchain. There's a lot of new things around the horizon. What excites you the most? So one is a whole bunch of consumer experiences. They're going to change because they're real-time 3D. Look, I don't want to make a prediction for Netflix, but I am certain within the next two to three years, you'll be able to freeze the frame, put on a set of VR or AR glasses or look for

your phone, and walk into the scene and go anywhere. Let's say they've produced a Godfather movie, and it's in 1960 New York. The traffic will be there. The shop keeps will be there. You'll be able to wonder around that world to interact, not just by yourself, but with your friends and their friends. And it can be while the film was taking place, or freezing it, just looking at the way it looks right now, we're completely independent of the film. The world will be real. And that is true of industry after industry. There's no question, if you use the car configurator the way I've described, you're going to design the car, you'll look around, you'll see everything around you exactly as it is, and you go home and hold

your phone up and see the car in your garage and decide if that's the one you like. And so we're reaching a new place in the world today where we're going to conjure up anything that is real or non-real and mix it together in ways that defy imagination. All right. Thank you, John.