The a16z Show - New Business Models for Gaming, Collaboration, Creativity

Starting point is 00:00:00 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 A6 and Z podcast. I'm Sonal, and today, General Partnered Chris Dixon and I are chatting with Kevin Chu, CEO and founder of Forte, which is focused on building a more collaborative future for gaming by realigning the economic relationship between players and developers and others. Kevin was formerly CEO of Cabam, which was an early leader in online and mobile gaming

Starting point is 00:00:41 before it was acquired. So he's seen it all when it comes to the major shifts in gaming from then to now and what's coming next. So today's episode covers everything from what those platform shifts were and are to what it means to evolve the business models for gaming, specifically coming to and from the idea of free to play. And we also touch on where blockchain and crypto economics come in. But first we began by quickly touching on Kevin's early history and gaming and especially what changed during the first decade of the aughts. I started playing games on my dad's 8086.

Starting point is 00:01:17 And so back then there was no hard drive. You had to load it in the floppy disk and change the config.cys files to make sure everything all worked properly. So I started playing games on PC. And, you know, fast forward. I played games all throughout college and started playing some competitive games. And then in 2006, I ended up starting a cabam. And at that time, the world was moving from going to the store and buying a copy of a video game to be able to go on to the internet and be able to load up a game either in a browser or, you know, download a game through Steam or other digital distribution platforms. And so what was starting to happen was, the convergence of cloud computing, even though we didn't quite call it that back then, and this new model called Free to Play. And kind of a third trend, which is social. And so, you know, Facebook was taking off. They enabled applications to be built on Facebook. And games just ended up being the

Starting point is 00:02:17 dominant category by far on the platform. And we all started building games in the cloud that lived on Facebook and then back then on MySpace. So that's how I got started in games. That's awesome. Can you break down for us why free to play was such a big deal? I think a lot of people take it for granted. I mean, I get the pro, the obvious pro, which is that you don't have to pay to start to play. But then how did we get to this world where, you know, it's actually changed? Like that's kind of a given now. Free to play introduced games to probably, you know, the billions of people that play today. So today in 2019, there's roughly 2.4 billion people who play games on a global basis. It basically 10xed the. The player base, right? More than 10x. Yeah, I think back in early 2000s, it was a couple hundred million people that played games.

Starting point is 00:03:10 And that was mostly consoles and hardcore PC gamers. That's right. And so the rise of mobile games and free to play became kind of the 10x movement. In the beginning of mobile, it wasn't free to play, right? As I recall, like you were like these little 399 games. And it took a while for game developers to figure out that that wasn't. as good of a model. Is that right? Yes and no. So the traditional game developers like Sega, who built on the iPhone as one of the very first apps on the iPhone, made their games as traditional

Starting point is 00:03:39 399 or 499 games. But from the very beginning, the Zingas, the Kabams, we were looking at the iPhone app store and we were all in conversations with Apple to say, hey, enable in-app transactions. It was really the Facebook era of what we call social games, but really the convergence of free to play and cloud-based computing that enable kind of all the games on Facebook to explode. And everyone knew mobile would make the market massive. Free to play is also intimately connected with multiplayer, right? Because the way I think about it, too, is like if it's $3.99 and it's only fun if your friend

Starting point is 00:04:14 plays it, like what are the odds that all of, you know, for the same reason that social networks are all free and monetized through other, you know, advertising, et cetera. It's very hard to get that network effect going, right? If it's not free to play, you need a graduated engagement kind of strategy where you start off light and then get heavier as you. your friends get on and you get, right? And there are free to play single player games, but a lot of the big one, dominant ones are multiplayer.

Starting point is 00:04:35 They're all multiplayer, that's right. I mean, that's also obviously with the cloud aspect really comes in because you can, don't have to worry about having everyone in the exact same console, the exact same. I mean, that's really what. Well, and asynchronous is important too, right? Like the Facebook games are asynchronous, meaning you don't have to be online at the exact same moment as the other person.

Starting point is 00:04:52 And in fact, they encourage you not to be, right? A lot of those games encourage you to get off, only play for 10 minutes and you have to wait a day. So when you say multiplayer, There's asynchronous multiplayer and then there's real-time multiplayer. Facebook started with asynchronous multiplayer, but Kabams, our entry strategy into the market was we're going to make real-time multiplayer games on Facebook because we were fascinated by that type of game. Is that harder to get the network effect going because they have to be online at the same time?

Starting point is 00:05:15 It is. So it is generally a more core type of game. But in the game industry, those types of games have much deeper economies, much higher revenue per user, kind of metrics. and probably most importantly, is the time played is just much, much higher. Okay, so the big shift so far were that Facebook opened up its platform for developers to build applications on top of

Starting point is 00:05:36 back in 2007, and the first iPhone came out that year as well. And the App Store entered the picture when? So the App Store, I believe, came out in 2009, the year after the second year of the iPhone. And that first year, you can only do a transaction, you know, before the download.

Starting point is 00:05:53 And I can't remember exactly how long I'm tempted to say two years before they allowed sort of the in-app transactions to really work and tap into the Apple credit cards that were stored, et cetera. And that's when the market just blew up. And so when we launched, we launched our first game in 2012. But then you'd move from Facebook to iOS, like focus solely on mobile rather than over social? We were the first social gaming company to really embrace mobile. So we started our kind of major R&D projects in 2011. And nobody knew what the technology would be.

Starting point is 00:06:28 So we'd try building on Adobe Air because you couldn't, you know, Steve Jobs famously banned Flash from iOS. And so we were trying to, in all of Facebook was Flash. And so we were all trying to figure out what kind of client technology we would use. So we kind of, we had three different projects, HTML5, Adobe Air, and of course, Native. This was on top of the payment issues. It was just in dealing with the network latency and drops and so forth. And so we launched our game in 2012.

Starting point is 00:06:55 Kingdoms of Camelot, which became the number one grossing game in 2012. We saw just how powerful mobile was going to be, and we basically stopped any new game development on Facebook and developed all over. I think of 2012 was a watershed year. That was when Facebook did their pivot to mobile. Remember before that Facebook had the kind of janky HTML5 mobile app, and then Zuckerberg declared we're pivoting to mobile. Oh, right.

Starting point is 00:07:21 That was Zuckerberg's famous statement that the biggest mistake they made as a company back then was betting too much. on HTML 5 versus the more native like iOS. It's interesting because a lot of times when you're in the middle of a exponential growth curve, you don't know you are because at that moment, like you look at an exponential growth curve, the beginning kind of looks somewhat linear. And then, you know, that was sort of the moment where it hit the kind of knee of the curve

Starting point is 00:07:42 and really just everyone was like, whoa. We all knew mobile was a big deal. But 2012, I think, was when it hit people in the technology community that is not just a big deal. It's the, it's the deal. It's not like the, it's no longer the secondary to the desktop. It's now the primary. And it just flipped everything and everyone, you know, it was sort of this really kind of jolting moment, right?

Starting point is 00:08:02 I felt like there was a second inflection point, which is Android. 2012, nobody built on Android. It was incredibly fragmented. Every carrier, every headset. Their entry strategy was you go to the carriers who don't have iPhone. Like in the U.S., it was, you know, AT&T's singular. You go to the other guys who don't have it because they had an exclusive. And you say, hey, don't you want functionality like that?

Starting point is 00:08:23 And so they basically gave them this free operating system, but they let them customize the heck out of it. And that was a way to get in there and appeal to the carriers, which got them distribution and was a very good strategy, but also led to incredible fragmentation. So you had to build, like, essentially custom versions for like whatever. We would have, you know, we have testing banks of 200 different phones that we would eventually try to, you know, install every update, you know,

Starting point is 00:08:45 and QA tests on those buses. At some point, Google put the hammer down and forced to... That was when the second sort of inflection point in mobile came was when that fragmentation started to consolidate and you could sort of build on just Samsung and, you know, a few other. When was that like 13 or 14 or something? Probably more like 14 or 15. So that took us from 2007 to 14. The question I have is what didn't work about free to play? I mean, it worked on one hand, obviously. But then there's obviously things that didn't work about free to play also. Well, there's certainly bad implementations of it. I remember I was a big plants and zombies one player.

Starting point is 00:09:19 And plants and zombies two. Plansomies one was a, uh, It's a paid download. You paid download. And two, they did free to play, but they just, like, everywhere you go, it's like, buy, buy, buy. And it just ruined the experience. It was all these notorious. I think it's in Star Wars.

Starting point is 00:09:33 Just have Battlefront just had a debacle kind of thing. And the world is kind of bifurcated a little bit. I'm simplifying a little bit. But free to play is bifurcated into pay to win, which is there's functionality that you have to pay for. And you can either spend an incredible amount of time and be lucky to get the things. or you could just open up your wallet and pay for it. And so generally those Bifurkid into pay to win

Starting point is 00:09:57 where the top players are paying thousands or tens of thousands of dollars, you pay, you get a significant advantage. Whereas Fortnite is, and League of Legends, they're religious about not letting you pay to win. It's a remarkable thing. League of Legends,

Starting point is 00:10:13 2 billion, 3 billion in revenue, and it's literally all cosmetic items that can't actually help you win, right? That's more true in Fortnite today. I was about to say, I think of trading skins, because to me, Fortnite trading skins is the best example.

Starting point is 00:10:25 That's not that I would think of for that. That's right. League of Legends, nobody knows exactly the division of revenue, but they release new characters. And new characters are infamously a little overpowered. And then you pay for that and you get, you get to use that character and competitive matches. So it's relatively, less pay to win, but there's some.

Starting point is 00:10:46 That's right. That's right. But it does a remarkable job of keeping it not pay to win. And really, the only way that that model works, based on the economics or free to play is that you have to get massively free distribution. And today what that means is that people on Twitch and YouTube creators and so forth need to love your game and create all sorts of content around your game such that you're basically getting you know, just this groundswell of content and marketing for your game.

Starting point is 00:11:12 Because the actual revenue per user is low enough that you couldn't support paid marketing. That's right. You can never support paid marketing for those types of games. And then on the other side, you have it is paid a win game. it's become a science in terms of understanding LTV to, you know, cac ratios by cohort, by channel. So they have a much higher, the paid way and have much higher LTV so they can support paid marketing. So it's a very different acquisition channel as a result.

Starting point is 00:11:36 Okay. That's right. You're buying Facebook. You're buying, you know, Google ads and so forth. Then you're sort of tracking down to cohorts. Whereas in League of Legends, you're saying, hey, great, I'm going to spend $5 million to host this, you know, ESports League, you know, an event and tournament. And, you know, I don't.

Starting point is 00:11:53 know exactly what my cost per user is. And frankly, I think esports today is much more about retention of users than it is about new users, but certainly in the beginning life cycles of a game. It's all about new players coming in and then staying ideally. And the games where you can't pay to win tend to have more longevity, right? Like the League of Legends. I mean, it's been around now 10 years and still going strong. And it's, you know, League of Legends was a fascinating pioneer free to play because they wanted to focus on infinite skill level. So they they really wanted to create a game where the best in the world were playing that game, just entirely differently than how a very good player in that game would play,

Starting point is 00:12:30 which was entirely different than how a new player would play that game. That's fascinating. So infinite skill level means you can essentially play for the entire lifetime, or you can become like a major power user. I think of it as if there's a graph, which is how good you are in the y-axis and how much time you spend on the x-axis, it's like it keeps going up as opposed to, you know, I don't know what, tick-tac-toe.

Starting point is 00:12:50 That's right. You hit your peak at, age eight or something, you know, or a lot of arcade games, you know, where you, once you play 10,000 hours, you can win Pac-Man or something, whereas here you can keep going and coming up with new strategies. So if you think about, you know, Tick-Tac-Too at a very basic level or checkers, there's only so much skill you can put into that game. Chess seems to take it up and then Go Go takes it up significantly more than that. And so the whole idea is that you can, if you're, you know, the most talented Grandmaster and Go, you're playing that game at just a skill level that is

Starting point is 00:13:21 dramatically different. So, e-sports has taken Elo, what's been used in, you know, for chess, matchmaking and so forth to game matchups. And so those the score you get assigned in chess, like your rating, right? That's right. Your game rating. And it allows for, you know, near infinite level of skill death, you know, to those games. Now, now one of the challenges with the, for all of these models, like the free to play is, don't they mostly tend to be whale, based, meaning there's a very small number of users. Yeah, they subsidize the entire game. Is that true?

Starting point is 00:13:56 That's true of most of them or all of them? That's true. So in 2009, roughly 2% of all free to play games players would actually pay. That number today for games like Candy Crush and so forth is in the much higher is by 10x higher actually today. But you have still a relatively small number of users, generally less than a percent that pay for 80% of the game's total revenue. It's not the free-to-play market. It generally works. I don't see that as a problem, is it?

Starting point is 00:14:25 Because it feels like they're just subsidizing like any freemium model. Like, why is that such a bad thing? It becomes bad when those games become real-time multiplayer or even synchronously multiplayer in their competitive. So as a game designer, you're constantly trying to think, how do I make this game fun and interesting for the person who's paying, who's not paying, who's paying maybe $5 to $10, you know, a year? And then the person who's paying $10,000 a year,

Starting point is 00:14:48 it becomes near impossible to balance. that economy after, you know, a year or two. So what happens is by the time you get the year three, four, five of those games, the economies are incredibly lopsided and you generally have lost most of your free players by then. And you're just trying to, you're trying to balance an ever smaller and smaller community to say, hey, here's this person who's spending $10,000 a month with me. And here's this other player who's spending $100 a month with me. How do I make it fun for both of them? It actually becomes an incredible challenge as the years go by. So that's why I think that that type of free-to-play system.

Starting point is 00:15:23 And not every developer falls into that trap, but certainly the ones that are traditionally venture-backed and trying to think about their growth and so forth, you know, fall into that trap more than I'm speaking partially from experience here. There's so much good in it in terms of it lost so many players to come in and enjoy a game, play it with their friends, and you're not being forced to pay up front. You're not, you're not sort of, you know, tricked by a sizzle reel that says,

Starting point is 00:15:48 okay, great, I'm going to open my system. pay $60 before I even know if a game's good or not, which used to happen quite a bit. So now, okay, great, you can come in, you can play with your friends, and then if you find value, you can start paying. The trouble comes. How do you balance that and keep that a great economy for years to come and keep everyone coming back and enjoying the game and participating in the community? So then just to shift a little bit forward because you talked about the period from 2009 to 14, pretty much, where are we now, before we go into the future? What's sort of the latest shifts in gaming today, like as like sort of the big kit list of trends that you're seeing that are the

Starting point is 00:16:22 important ones to pay attention to, the equivalent of mobile social cloud gaming free to play. So we're, I think we're, we've sort of been at a plateau for a little while in terms of business models, certainly in terms of technology. We're kind of on the cusp of VR AR as something that the whole game industry looks at. The other one is cloud streaming. So instead of, you know, putting a CD into your computer or downloading the client onto your computer, the client literally sits in the cloud and you're streaming just a video file to whatever screen you're using and then the input gets streamed back into the cloud. And then, of course, the one that I'm fascinated by is how can blockchain technology and kind of creating

Starting point is 00:17:01 these peer-to-peer trustless networks get incorporated into these incredibly complex gaming economy as that now exist? And it kind of maps. I think the like VR kind of maps to, to me, it's like a new device, new form factor maps kind of to mobile. And then the crypto kind of maps to the new business model free to play, right? So in the game industry historically is new devices, new technology, new delivery mechanisms, for sure, like used to go to the arcade and then the store and then, you know, and then download at Steam and now streaming. So new delivery mechanism, new devices, and new business models.

Starting point is 00:17:35 So there's sort of three tracks of innovation. Yeah, that's right. And the business model ones, or I guess it's not just true of gaming, but true of all technology, business model innovations tend to create the most startup opportunities. Oh, interesting. Yeah. So, for example, mobile was far less, quote, unquote, disruptive to incumbent technology companies than the internet was. Because the internet was provided a new business model, whereas mobile did a little bit with payments and things, but companies like Amazon and Facebook and Google did quite well on mobile. It didn't re-rank the ordering of the companies the way that the internet did.

Starting point is 00:18:09 So it maps onto the Clay Christensen kind of concept of sustaining versus disruptive innovation. So let's dig in a little bit more to blockchain crypto and how it relates to. gaming. So at Forte, we are just incredibly excited about what it means to build a natural economy. Or we're trying to think about it as how does a real community work in terms of the economy? And then what does that mean in a gaming ecosystem? And so, you know, games like the ones that we build at Cabam or many of the other ones that are popular today, they're really command and control economies. So the developer or the publisher controls all of the items in the game. and they control the pricing of it.

Starting point is 00:18:50 They control the inflation rate of the economy. And they prohibit generally players trading with other players. I mean, just for context, for those who are not only in gaming, but just in the world, the real world economy, it's a little nuts if you think about it that a single entity, the game publisher, is like the market maker, the central bank, the sole supplier, the one who coordinates all the activity between players. Like, that's freaking nuts. You really think about it. It's like centralites. central planning to the worst degree. And for some games, it may make sense, but I think there's a lot of games today where you have individuals in the game really creating a lot of value in that economy.

Starting point is 00:19:30 It could be, you know, somebody who's, you know, taking a lot of time to farm and create new items and new skins and new cosmetics for a game. And generally, they're locked into that platform. There's really not an ability for that person to, you know, build a business and make a living from what they're doing in that game economy and realize the value. So, you know, part of that is, you know, we see that mirrored across, you know, if you're a Instagram creator, you're sort of creating a lot of value for the platform, but it's, you know, you're sort of forced to make a living through other means, whether it's, you know, apparel or merchandise, et cetera, versus making a living on the platform itself. And so all of that creates all this unnatural. It makes sense from a

Starting point is 00:20:12 business model standpoint in terms of protecting the revenues for the developer, but it makes it really challenging in terms of how players interact with other players in a game from an economic value standpoint. And so I think there's a potential sea change for what the whole industry will go through in the next 10 years. So can you walk us through an example? Like in a couple of years, what would the game experience be like using blockchain technology? So I'll talk about a few of the implementations. And these are all potential directions for how gaming is going to go. The first is just a loyalty system. And so game developers have always been thinking, how do I keep a player coming back the next day and the next day and the next day.

Starting point is 00:20:46 And so once a game becomes a reasonable business and a good, you know, hit for a game developer, you sort of want to, as we've started this conversation, you want to make that game last for as long as you can possibly make it last. And so one way that a lot of game developers are working with us is to say, hey, we're going to create a new blockchain asset. And you get some of these assets every time you log in, every transaction you make. it's sort of like the equivalent of airline miles or hotel loyalty points, except there's real value on it, right? And players can earn a little bit of value every day.

Starting point is 00:21:20 Other players will say, hey, I need all of these loyalty points to craft my next sword. And I haven't earned enough myself, but I'm going to go into the marketplace. I'm going to buy $100 worth of these loyalty points. So all these other players who log in every day and get their, you know, 10, 20 cents worth of loyalty points can sell them. And what do you say to the cynics who say you could do this without blockchain? You could just have centralized loyalty points. I think the interesting part comes from a couple things. One is that once you create that item, the item itself can also live on the blockchain, right?

Starting point is 00:21:54 So then you can have trading of the items that are crafted, you know, through these blockchain rewards. Game developers can participate every time there's a secondary trade of an item as well. I think this is a really important point for game developers because, you know, this kind of peripheral trading of items in games have always happened. Gold farming. I mean, there's lots of sort of dark markets where people trade accounts, boosting. There was famously, like World of Warcraft had these huge gold farming things. And then some games like Counter Strike do allow secondary trading.

Starting point is 00:22:26 And in those markets, the secondary markets are orders of magnitude larger than the in-game economies. That's why we're so excited about it, is that we see this behavior happening in the kind of periphery of what happens in a game. I think with blockchain, there's an opportunity to bring what's on the periphery into the mainstream. And align what the developer is trying to do from a business standpoint, align the players that are investing their time, energy, and money into a game. Generally, the game developer is not making any revenue whenever that item is trading on an eBay or Craigslist or whatever on a forum. So they get the benefit of getting some portion of the revenue and benefiting from it. But then also the benefit that blockchains bring, which is the openness and interoperability. So you'll have a bunch of exchanges popping up.

Starting point is 00:23:12 You'll have games interoperating with each other. I think another thing is just, as we've seen with Bitcoin, is that if, you know, you could argue, why didn't you just start Bitcoin Corp? The answer is no one would actually think it has value. No one would trust it. The centralized creators could break the sacred rules like there's only 21 million bitcoins. And so people wouldn't value it in the same way. So I think you, I think the hope is you'd get a similar kind of effect here, where people, would feel like the same way they really feel like they own a Bitcoin, they really own this object,

Starting point is 00:23:42 they can do what they want with it, they can take a different places, they can use it in different systems, track the prominence. Different exchanges, different games. You know, it survived beyond the life of the game developer, all those kinds of benefits, right? Which if you did a centralized system, you know, it would just be like another, just another sort of, you know, point system like a lot of games have today. It's a portable data unit and good. Can you answer one thing I'm very curious about because it's almost obvious to me what happens when you have publisher to player payments and even player back to publishers. What's new and what's possible when you have player to player?

Starting point is 00:24:18 Because that's not really been possible before. So I don't think people really think about what it means. They use the word peer to peer in gaming. But what does that actually mean? Well, it just means that a player is directly transacting with another player. And in the past, there's been games like the auction house and Diablo to, you know, what happens on eBay for World of Warcraft and kind of the gold, the gold economy in World of Warcraft. But it means that there's players interacting with trading with other players

Starting point is 00:24:47 in a game. And generally, game developers hate this. Because it creates all sorts of number one economic imbalance in a game. Number two, there's always some weird form of, you know, people hacking the system to try to, um, so for example, World of Warcraft, you design, you know, the number of hours you need to play and the amount of gold you need to earn. And you can sort of say, okay, I'm going to design this progression for players. But as soon as a player is able to go outside and pay $100 for a huge pile of gold, now they're sort of chewing through the content so much faster. It means that when they're paying, when they're $15 a month, you know, renewal comes up. They're like, well, I'm done with the game already. So I don't need to, you know, continue my subscription. So it puts the player base sort of at odds with, you know, developer, right? So somebody else can make a great business, like Brock Pyrrhus famously, who is now, on crypto, you know, created these gold farming businesses and employed tens of thousands of people all throughout the world to play these games basically for other players. And it's just the designers, you know, you couldn't, you know, you couldn't manage the design of the game and the amount of

Starting point is 00:25:52 content in the game and how the players were actually transacting. And it just made the misalignment between the developer and their players and these other businesses that were trying to build marketplaces and other functionality. It just put them all out of odds. with each other. How would you respond to the folks who say blockchain, they only think about it for infrastructure, not for really changing the game itself? I mean, I guess what's the thing that kind of drove you to sort of think about this instead of like, this is not just another case of like blockchain inside? There's been a few other gaming projects started with blockchain in your mind. The core problem in my mind has always been, how do you make it such that the developer

Starting point is 00:26:27 participates as a network participant just as much as the players? Just like realigning the incentives in a big way than what's happening right now. We've seen it from both being lifelong on players of games, but also having to think about how do I create a business, how do I, how do I make payroll the next month, you know, and make sure that it works for everyone. Just abstracting away a lot of the complexities of what making a smart contract and all the security around that, you know, what look like. And so I'm just creating a tool set in a system that game developers are more used to and doing that from the perspective of somebody's making games for a long time.

Starting point is 00:27:01 Yeah. On the peer-to-peer market stuff, one question is, like, doesn't it mean like, more fraud and security concerns? How do you think about that aspect of it? This is another reason why game companies typically don't want to enable this is because of all the fraud, etc. But we're building it right into the platform. We've put together to world class security experts.

Starting point is 00:27:19 There's a lot of things that the security of a public blockchain enables and we're building the platform in a way that we inherit that security. And so security, compliance, regulatory aspects are a big part of what we're helping game developers tackle. It's like sort of making the economy. as a service actually because you don't have to reinvent the wheel every single time. You can actually focus on really being the creator who's really thinking about the creativity of the game and the community of the game, but not the necessary, all the mechanics of how to

Starting point is 00:27:46 set up this alignment of realignment of incentives. And this is something that a lot of free to play game developers still struggle with, which is what is actually going on in my economy? So, you know, now everything's locked down in a central database so you can query everything. But the actual stats of how many of these items are sold, what happened when I moved, I changed the price of these items. These are all things that game developers still struggle with really deeply understanding and having good models for.

Starting point is 00:28:12 And so we kind of think about all these things and how we package it up and make it easy for game developers. Blockchain technology is still hard to use. But I think we're making a lot of progress in terms of rapidly iterating on the technology and usability for developers. And do you think this could change the distribution of, you know, we talked about earlier about how these games are driven by whales, this. that this kind of technology could change that distribution.

Starting point is 00:28:38 And so it would be more evenly distributed. I mean, presumably it would also increase the revenue of the game makers, maybe even also, by the way, you know, and provide an interesting way for the users to generate revenue in a way they couldn't before. And then also potentially kind of smooth out the revenue distribution, right? There's a lot of benefits. So, and then there's going to be some things that we won't know until we actually get it out there. So, for example, if a game developer says, hey, I'm going to let this item trade.

Starting point is 00:29:04 And that item could trade on eBay, Craig's. You could trade outside of the game. And let's say I put a 20% tax on that every time that trades. Well, if the item sells more than five times, right, then the game developer comes out ahead, right? We won't know that until we actually get items out there. We don't, you know, different game developers are playing with different ways to create these economies. And so part of it will be this idea that when you truly give the user and the player value in the game, how will that person trade that item? And so just like GameStop has provided a very liquid market in the past for use games,

Starting point is 00:29:39 there's never been the equivalent of that in a digital world. We're going to unlock that for games. And then game developers are, you know, give them a whole set of tools to explore the economics behind what happens when players and the developers actually own these assets. I think another thing that we may see happen with this when you run this experiment is one of the things that's happened in crypto in the last 10 years is that there's been a lot of really large. and passionate communities built around various cryptocurrencies. Even I would argue in some cases, some which is really the cryptocurrency itself has no really novel features. But the community is very large and passionate.

Starting point is 00:30:16 If you go on the Reddit or Twitter or whatever, you can sort of look at that cynically as like, okay, there's a bunch of overvalued stuff. The sort of positive way, which I like to look at it as, is this thing of owning a token and being part of a community is a really powerful way to bring people together. So if you go to some of these subredits, you'll see that they actually know each other. They help each other with problems. They often, they have meetups, in-person meetups. It's a real community.

Starting point is 00:30:41 And it's a very powerful kind of community, right? It really kind of turbocharges the community aspects that the internet had prior to cryptocurrency. And so I think one of the unexpected upsides you might see in this is just a level of passion and commitment. And you get sort of these people that go out in a van, you know, they own the token in the game. They own a bunch of objects. They have big Twitch and Twitter followings. they become even more passionate evangelists.

Starting point is 00:31:06 And, you know, effectively from a business point of view for the publisher, what that does is it dramatically lowers the cost of acquisition. I think, you know, we talk about why can't you do some of the things in Fiat's a very common refrain in blockchain. The reality is if you, if you're to design a system where players earn a little bit of value every day, that value is pretty much locked into that system. You would say, okay, that person who earned, you know, 20 cents in my game and they want to cash it out. am I really going to write, you know, cut them a check or send them a wire or how am I going to pay that player actually 20 cents versus in a, you know, with the right blockchain, assuming that we solve the scalability problems and in other, you know, challenges that that becomes a really, a really, a more trivial phenomenon to say, okay, we've got millions of players in this game that have earned, you know, relatively small balances and then create ways for them to really feel like they're participating in the community. And if they're paid in the token, the token, you know, and they go and they help evangelize the game or build new object for the game or build new Roblox levels or whatever, the 20 cents can become worth much more, right? So they really, they become true stakeholders in the game. Some of these games will have tens of millions of players, hopefully doing that.

Starting point is 00:32:17 And then you'll have, you know, hundreds of thousands of players, I think, that will figure out how to make a living, you know, from providing, you know, valuable services. maybe they're designing the next cosmetic that, you know, they're able to sell. They're gathering a bunch of materials from other players and then maybe, you know, kind of channeling that to the right. Well, yeah. One of the things I think is unfortunate with the current systems we have, both gaming and non-gaming technology. It's well understood that the way that we, you know, the way startups work, right, is early employees get equity and the earlier you are, the more equity you get, right? And so if the company does really well, the earliest people do better. And then as things go on, and that's in crypto, we call that a bonding curve.

Starting point is 00:32:54 And like, what if you had a similar kind of bonding curve for the end users, right? Or the, you know, market dispense, let's say. So, like, what if the early Uber drivers got Uber tokens? And then they, when Uber IPO, they actually made a lot of money off of it. Now, you know, the person who just joined last week probably shouldn't make a lot of money, but the person who joined seven years ago should. Took on more risk, exactly. And then they become real stakeholders.

Starting point is 00:33:16 And they also, by the way, they would also probably behave differently. They probably would have been more loyal. And that would have helped the economics of the business because they were worried about switching costs of the driver. or something, they would have become evangelist. They would have felt like they're business owners, right? That's right. I mean, it works. It's one of the great secrets of, or not secrets, but one of the, I think, the real advantages

Starting point is 00:33:33 that startups have against kind of non-startup companies is that the employees have real ownership. What if you did the same kind of thing with your customers? So that's a big part of our vision. Every game will go through that same type of network explosion. Yeah. And Swap famously sort of put it all in code in a smart contract, you know, but it's something that we're going to make really simple for game developers.

Starting point is 00:33:56 And this idea that if you come into a game early and you're playing and you're earning what may be a few, you know, tens of cents or a few dollars, that infamously, you know, that person who bought a pizza with Bitcoin, you know, at the time he thought, oh, maybe I'm only paying, you know, 10 bucks for this pizza. But the whole point is that we're going to make it such that early players in the game can really feel like they're part of the community. And if that game does well and that economy does well, they're going to do well. The other effect you'll get, I think if you're, if you're not, you're going to

Starting point is 00:34:23 you look at most financial markets, you have different types of participants, right? And I think you'll get the same thing here, which is you'll have some people who are just enthusiasts. And they become the first thousand players of a game because they're enthusiasts. But as we see this process happen more, they'll enter people with a financial motive, which I think will be a good thing because they will provide more capital into the system. And the two kind of mutually reinforced. And that's how a lot of things work in, you know, I don't know, the stock market or the art market or other kinds of markets. Yeah. Commodity markets are a great example where a lot of of the buyers are users and other buyers are financial buyers, right? And the two kind of play a

Starting point is 00:34:58 symbiotic role. And I think you can get that here in a way that you couldn't pre-blockchain. When there's assets in the game that are worth hundreds or thousands of dollars, then you have a really interesting, you know, real economy where you have some other people who are going to build businesses to help, you know, facilitate liquidity in that market, help, you know, match buyers and sellers the right way or improve upon those items in a way that people who, you know, want a more rare version of that or more customized version of that would want. And so I think there's going to be a whole new marketplace that emerges once people can actually own these items that they're already spending thousands or tens of thousands dollars on. And by making them an actual

Starting point is 00:35:35 asset that other people can customize and modify and for buyers and sellers and other participants to come together, you have a real economy. And so I think that's the exciting thing about these games is that you have 10 million people playing these games, but it's not a real economy. It's not. I mean, one thing that I personally love about this vision is the idea of microclans, because right now you can only have like communities, think of clans as communities. And in gaming, this is not possible in the real physical world as easily, but if you can actually organize like more micro communities on games that can transact with each other, that

Starting point is 00:36:11 enables things that are not even possible in the physical world, let alone the current gaming world. So one of the cool things we're going to enable is this concept. of, let's say you're a part of a guild, and you can buy into that guilt. You can literally, that guild creator can say, I'm going to create shares of this guild. And we're going to go on a bunch of raids together. And as everyone knows from these raids, you know, maybe this type of item drops that a certain class of character can use, but not everyone can use anyway. You have these very complex, you know, charts that get set up around if this type of loop drops, who gets it next

Starting point is 00:36:42 and who owns a share of this like whole, you know, the treasury of the guild and so forth. And there's real value in that. People go crazy about this, you know, kind of these really interesting social systems and economic systems that exist today. And so what if you could actually own a share of that guild? And then if you want to leave the clan, you could sell that share. And then somebody else can buy a part of your shares and participate in that, that clan economy. What are some of the things you've learned on the early days of thinking about managing crypto economies? I mean, granted, it's kind of early, but like what are some of your big kind of surprises or aha moments, things that have surprised you early on.

Starting point is 00:37:17 I think the biggest surprise is when you wrap your head around what a central bank does, it's actually a mind-blowing exercise. And so a big part of what we want to, you know, a big part of what we've dealt with in game making is we're making our own game economy. But it's always tied to a US dollar or some other, you know, currency. But once we start removed, once we remove that and we say, okay, what does it mean to design a network where every participant, including the developer and the players are participating in that,

Starting point is 00:37:45 that doesn't have a fixed money supply. What does that mean? How do you design the number of tokens? How do you design the increased number of tokens on a per period basis, such that you have a healthy network and a healthy economy? And this is basically getting into the realm of what central banks do, which is a fascinating discipline to study. That's fantastic.

Starting point is 00:38:06 Another aspect, I mean, one of the fascinating things about blockchain is there's so many different lenses you can look at it through. Another lens you can look at it through is crypto network built on a blockchain as a community owned and operated digital service. So, for example, you can imagine, you know, this will require solving some technical problems that aren't solved yet, but over the years,

Starting point is 00:38:24 having a Twitch or YouTube that's owned by the streamers via tokens, owned and controlled, I should say. They decide on sort of democratically, what are the rules, you know, what can, what who gets kicked off, what can you do? And also participate in the upside, right? Instead of it all going to a few centers, centralized companies. And eventually, you know, you can imagine the extreme version of this is the games

Starting point is 00:38:49 themselves are, are DAOs, right? I mean, they're truly owned by the community. And they hire a game development team who, you know, has extra incentives, of course, you know, you're going to still need to do that, right? But you can truly have games that are, um, and virtual worlds and all sorts of things. And then you combine this going back to our earlier talk with VR and the metaverse and sort of Ready Player 1 style. Like imagine if in, you know, I don't know, I'm a big fan of Ready Player, the movie. Oh my God, me too. I love that movie.

Starting point is 00:39:18 And the most interesting part is that there's an entire virtual world with so many different types of digital goods and services, like an entire economy inside that world. But how will that world get built out? Like, it could be built out by one company, kind of like Facebook could build that whole world, which seems like a really hard thing to do. And frankly, kind of boring. It's going to be kind of like Disneyland. Or it could be kind of like the web where each world is like, like,

Starting point is 00:39:41 a website and there's like there's like ways to links to travel in between them. And there's an economic model where you can own your own website and you can build it up. One thing it's when you watch Ready Player One is you can take, you know, like there's this orb power orb or whatever it is and you can like take it from one world to another world. And there's some interoperability standards between them. So you can build, bring the orb from one place to another, for example. Right. But you get what I think is you get something that looks more like New York City instead of Disneyland, right? Which is much more interesting. Yeah. I love that. Yeah.

Starting point is 00:40:09 It's more organic. Yeah, it's more organic, right? I mean, if you look at all the great cities, like, you know, they grew organically like that. It's a bit of both. It's a bottom up, like Jane Jacobs, like a more bottom up thing, but also a bit of a top down, but a good balance of the boat. Yeah, no, totally. And I think in the same way that social and mobile and new business models like free to play reinforced each other, we're on the cusp of it where we could see kind of cloud, you know, kind of huge back-end scaling,

Starting point is 00:40:36 new much more immersive devices like virtual reality. like the Oculus Quest, I think it's a breakthrough device, and then new breakthrough business models that let people truly own their goods and let services be operated by communities. And if you see the three converge in the same way Mobile Social and Cloud did in last decade, boom, right?

Starting point is 00:40:55 That's why I'm so excited about this. We're also at a day and age where the number of people who are trying to create new experiences on Roblox and Minecraft and there's just an explosion of creativity inside of these. So once you make it easy to just get right to the creative aspect of game design, there's actually a lot of people with great ideas. And it's just been so hard in the past because you need to have a team of artists and a team of engineers.

Starting point is 00:41:21 And then you finally get to do some of the creative stuff. We're sort of now at a stage where the building blocks, whether it is the devices. And we're kind of on the edge of right now is the economic models that make it such that all these different participants want to be building towards this kind of organ. organic community that's online and people can create cosmetics and the stuff that I'm wearing in the game. Other people can be owning the land and developing land and making the visual aspects of that game amazing and everything can get linked together. I think we're sort of not too far away from that world of Snow Crash or Ready Player 1 and it's a very exciting time. Well, you guys, Kevin, thank you for joining the A6 and Z podcast. Thank you for having me. Thank you.

The a16z Show - New Business Models for Gaming, Collaboration, Creativity

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