The free-to-play business model for video games is thriving, but with play-to-earn a new way to monetize games, gamers and their efforts is entering the industry. Ever since the games industry had its breakthrough in the early 80s, there have been a variety of business models. Alongside the traditional retail sales there would always be an alternative. The concept of buying full priced games in a store never really changed. Yet, these stores have moved from street corners, to web shops and now even to digital distribution stores. However, it's the alternative distribution model that has my interested. I believe that the value proposition of play-to-earn games is incredible. This blockchain-powered business model will convince millions of gamers, developers and investors in the coming years.
Before we dive into blockchain games and the play-to-earn (P2E) business model, it's important to look at the past. Ever since the eighties there has been an alternative for the classic paid video games. In addition consumers have become well adjusted to digital value. These are important trends to highlight, and they enable the play-to-earn business model to succeed.
Short history of alternative distrubution
Alternative distribution of video games outside the tradition retail system has been around since the early days. Independent developers would sell their games from their garage, perhaps advertising their game in local newspapers. In early 1983 Bob Wallace produced a word processor and he introduced the term shareware.
Shareware allowed gamers to play for example a few levels of a game. These shareware games would be distributed through Bulletin Board Systems (BBS) and floppy discs that came with computer magazines. After use, gamers would be asked to pay for a full copy of the game.
The shareware business model was a major success. Modern gaming companies like Epic Games, id Software and 3D Realms started with shareware video games. With the rise of the internet and video game piracy, a new business model came into existence in the late 90s and early 2000s.
The free-to-play (F2P) business model allows gamers to play big amounts of a game for free. At a certain points however, gamers need to pay to get more content. Some F2P games rely only on the sale of cosmetic items, while others sell in-game currencies. MapleStory, RuneScape, Dota 2, Fortnite, and League of Legends are famous examples that use this business model. The App Store and Google Play Store are filled with F2P titles, including Mario Kart Tour, Candy Crush and Homescapes.
The problem with with the free-to-play business model is that it walks a very thin line. There's a difference between offering a fun game with additional payments, and games that force players to pay. Nonetheless, F2P games are popular, and some players invest hundreds of dollars per month in their favorite free-to-play games. At the same time thousands of others leave a game as soon as they need to pay.
Gamers see value in digital goods
The rise of video game culture in the mainstream has contributed to the popularity of digital reward systems. For example, having 'prestiged' Call of Duty brings respect within the online community. In addition World of Warcraft players can earn epic weapons, pets and character titles to highlight their dedication. Digital rewards have even become part of entire ecosystems, where players earn badges, trophies or achievements for their in-game activity.
Reward systems and mechanisms in modern digital games provide social meaning for players primarily through motivation, enhanced status within gaming societies, and the use of rewards as social tools.
Hao Wang & Chuen-Tsai Sun - Game Reward Systems (Research paper, 2012)
The fact that these rewards have emotional value, also gave rise to their economic value. Massively multiplayer online role playing games like World of Warcraft and EverQuest were among the first to have digital goods with real world value. Players would buy in-game gold from illegal services in order to gain an advantage over their in-game competition. According to reports over 100 thousand so-called gold farmers were active in 2011, sometimes even against their own will.
In addition some of the in-game items obtained in certain games can have lots of value. In 2011 a Chinese man bought a $16.000 sword for the upcoming online role playing game Age of Wulin. Six years earlier someone even committed murder over an in-game sword. On top of all this have been reports about virtual space wars in EVE Online. The Bloodbath of B-R5RB is now known as the biggest online battle ever fought. In this war 7548 players fought and lost hundreds of thousands of dollars worth of virtual goods and space ships.
In short: Yes, there's tremendous value in digital goods.
Play-to-earn explained
In order to determine where the play-to-earn business model fits into the gaming ecosystem, we first need to understand it. Play-to-earn is a business model derived of the already popular free-to-play model. A game that follows that play-to-earn (P2E) model is generally playable for free.
However, by performing well in the game, players get to earn digital in-game assets. These assets are stored in a personal wallet, giving players full control and ownership. In order to have full control, player-owned assets need to be stored on a blockchain. As a result gamers can store or sell these digital items for money or cryptocurrencies. That's where the term 'play-to-earn' comes from. Players are likely to find, create or earn valuable items by spending more time in-game.
This will mean that items that can be found or created by low level players will be worth less money. The more time players actively spend in-game, the more valuable items can become. The way this works will change per game. For example, Gods Unchained will soon allow players to merge cards and mint them on the blockchain. At the same time The Six Dragons requires players to level up their skills to create better gear.
Free-to-play still trending
In the current market free-to-play games are still king. In 2018 the online battle royale shooter Fortnite earned 2.8 billion dollars. Even though revenue was down year-over-year in 2019, Epic Games still earned more then any other gaming company on the market. Fortnite alone made Epic Games over 4 billion dollars already.
Riot Games has made it to the big leagues with their Multiplayer Online Battle Arena game League of Legends. Over its lifetime this game has generated over 20 billion dollars without ever making gamers pay to play. Every day over eight million gamers login to play, making 'LoL' perhaps the biggest game of the last decade.
Besides these are just two games there are plenty more examples. Dota 2 has been one of the biggest earning games on Steam, despite being free-to-play. Team based shooter Team Fortress 2 is another example. These two games have earned Valve millions of dollars with the sale of virtual items alone.
In addition the free-to-play business model is thriving on mobile devices. Major brands like Fortnite, Call of Duty, FIFA and The Sims are made available for free. Remember the hype surrounding Pokémon Go? Another showcase for the power of the free-to-play business model. These games allow publishers to make money with in-game transactions. Sometimes this can be done with in-game currencies, and in other games by selling access to more content.
In 2018 SuperData reported that free-to-play games were responsible for $88 billion in revenue. This was an increase of 11 percent compared with one year earlier. The research firm expected more growth in the F2P market, especially in Europe and North America. Don't be surprised if free-to-play games are by now responsible for more than $100 billion in yearly revenue.
Could P2E replace F2P?
I don't have the illusion that the play-to-earn business model will replace the free-to-play business model entirely. Even if this would happen, it requires an evolution and not a revolution. However, these two business models can co-exists.
The true advantage of the play-to-earn business model is that gamers have ownership. As a result they can sell their items once they decide to step away from a game. In addition this business model makes it easier for players to 'stick around'. For example, there's no payment system that requires them to invest money in order to keep playing. Instead even beginning players are creating value to an ecosystem that requires their contribution as well.
The biggest hurdle for the success of the play-to-earn business model is hidden in the underlying technology. Gamers need to get wallet addresses with private keys, perhaps even digital currencies to get started on the online market. At the same time game designers and software developers need to make the on-boarding process as smoothly as possible. In addition blockchain networks need to be fast, smooth and cheap to use. Fluctuating transaction costs, low waiting times or any other bumpy experience would alienate mainstream consumers.
Play-to-earn will come, but when?
It will take at least another 24 months before blockchain gaming can compete with the free-to-play genre. Blockchain companies need to build the infrastructure and make sure everything runs smoothly. Dapper Labs is working on Flow, while Enjin, Xaya, Ethereum, Tron and EOS are growing their market share. But it's not only about transaction speed and on-boarding access.
Game developers need to embrace blockchain technology and see the value this technology can bring towards their in-game economy. Without dozens of case studies blockchain games are really test projects. Some might look at play-to-earn as an alternative to free-to-play, with a consumer-oriented value proposition. Only one success story is needed to convince industry giants to follow. AMD and Ubisoft are in, who's next?
Posted from my blog: https://www.nederob.nl/2020/01/01/why-play-to-earn-will-replace-free-to-play-as-a-leading-business-model/