Investing in Blockchain Gaming: Why VCs Are Betting Big

Blockchain integration essentially enables community ownership of the entire gaming ecosystem, which in turn allows game publishers to uniquely monetize their model, create richer and deeper experiences, and extend the lifetime value of the assets that they are creating.

How healthy is the gaming industry?

Fortnite thoughtfully provided a concise answer to that question on June 16th.

In advance of the much-anticipated unveiling of The Device, a live event on the game platform, slots were full half an hour early as eager gamers logged in to witness Epic’s latest twist in its flagship game.

The number at which participation was capped? Twelve million players in-game. Another eight million had to be content watching the stream.

For context, NFL Sunday Night Football on NBC — the highest-rated TV presentation in the United States — garners fewer viewers. And that’s also accounting for recorded shows.

When Blizzard Entertainment released World of Warcraft (WoW) in 2004, few non-enthusiasts could have imagined that the pivot from real-time strategy to the massively multiplayer online role-playing game (MMORPG) genre would result in over a hundred million registered accounts ten years later.

By 2017, the game had grossed almost $10 billion in revenue. It had become one of the highest grossing video games of all-time.

Activision’s Call of Duty: Black Ops launched in 2010, as the seventh in the series. The franchise has since released a new version annually. When Black Ops was released, it set records across games, movies, and books — taking in more than $650 million in its first five days.

Momentum in the industry doesn’t seem to be slowing down. Last year, gaming broke another record for annual revenue, at $143 billion. To put that into perspective, the music industry earned $24 billion, and TV and video combined earned $290 billion. Gaming is expected to grow from 31 percent of entertainment industry revenue to 36 percent by 2023.

According to Microsoft, when you include everything from free mobile games to complex multiplayer PC or console games, gamers worldwide number over 2 billion. And that number is growing. The more elaborate publishers are able to deliver to multiple platforms. Epic Games’ Fortnite, for example, has a version for PC, Mac, mobile, Playstation, XBox, and Nintendo Switch.

And as blockchain technology begins to infiltrate the industry, the financial stakes couldn’t be higher.

New funding models could change the dominance of major platforms. New gaming models could change the way we play. And new revenue models could change the way value is accrued across the industry.

All of which means that major investors are taking an even closer look at gaming, and the potential impact of blockchain technology, than ever before.

How a digital and connected world changed entertainment forever

Digital technologies changed how music and film could be produced. The internet changed how they could be distributed. For both forms of entertainment, technological changes made it cheaper to produce and easier for independent artists to distribute.

Those same changes, however, had the opposite impact on the gaming industry. With consumer demand for enhanced graphics, audio quality and internet-based multiplayer capabilities, the cost of producing video games has exploded.

Budgets for game development and marketing for so-called triple-A games — those with large budgets and heavy development — are now Hollywood blockbuster-esque. Activision’s Call of Duty: Modern Warfare 2 cost around $50 million to produce and had a marketing budget in the order of $200 million.

The most expensive game ever created, Rockstar North’s 2013 Grand Theft Auto 5, was developed for a staggering $137 million, with only slightly less spent on marketing and release costs. At today’s prices, that puts the total just shy of a total of $300 million.

By 2018, there had been 18 games created for a total cost of at least $100 million, with Rockstar, Activision, Microsoft Studios, and Sony featuring prominently on that list of primarily franchise games.

The high upfront costs and long lead times to produce games creates risks for game creators, meaning large developers and publishers have grown to dominate the industry, as startups seek out investors in an effort to compete.

While the high profile games garner a lot of the media attention, the industry should very much be considered as structured along more bipolar lines: indie games and triple-A games. And it is indie games that are attracting venture capital.

Blockchain has created a new funding model for games, with the ability for developers to create tokens that work across games. Block Bastards, creators of the in-beta BLOX game will be using their token, QUDO, to fund the 18-month development costs and to reward players. BLOX will run on the Telos network and, in a revenue-sharing style arrangement, players and games earn 90% of Qudo tokens generated and the company and any founding partners 10%.

Diogo Abreu, Marketeer/Product Evangelist at Block Bastards explains:

“QUDO is a blockchain-based service for games which rewards players for their activity and performance with a coin called QUDO. These QUDO tokens aim to be widely used within the industry, allowing game developers and players to generate purchasing power, without the need for in-game advertisements, while giving them the tools to empower their games’ visibility. Blox uses QUDO, like any other game can do… QUDO is… open for every game developer that would like to integrate this technology into their game.”

However, only a handful of indie blockchain game developers have been able to attract venture capital. William Quigley of WAX, the Worldwide Asset eXchange that bridges the physical gaps between “collectors and traders, buyers and sellers, creators and gamers, merchants, dApp creators, and game developers” says that:

“Indie games are funded the same way all other start-ups are funded… through a combination of personal savings, friends and family, angel investors and, in rare situations, venture capital. The personal capital of the founders is by far the number one source of funding video games.”

The failure rate of new games is high, so VC funds look for a 10x return from pre-release video games, much as they would any other startup. As Quigley pointed out:

“An investor needs to see this level of potential upside in order to offset the strong likelihood that the video game will not succeed.”

According to CoinTelegraph