Gaming has come a long way. I still remember vividly in 2006, when my parents would regularly rebuke my gaming sessions. The “normal” kids would join sports leagues, while gamers were stereotyped as nerds.
Gaming used to be heavily stigmatized as reclusive, anti-social, and a colossal waste of time. Fast forward to today, and gaming is the most popular pastime in the world, connecting billions of people around the world. What changed?
The short answer — pretty much everything.
The long answer? It’s obviously impossible to mention every single momentous event in gaming, but let’s take a look at some of the most transformative trends to help us build perspective.
The rise (and fall) of MMORPGs.
Ah, this one takes me back. MMORPGs transformed my life when it hit the scene in earnest in 2004, with the launch of World of Warcraft (WOW). WOW took the world by storm, amassing over 12M paying subscribers by 2010.
What made WOW successful? It was certainly not the first MMORPG (remember Ultima online?), so what drove its virality? For me the key factors were (1) Building off of the existing Warcraft lore and universe, which already had an established fanbase, (2) content, content, content (we’ll come back to this), (3) network effects from social systems like guilds, community, factions, raids, etc. and (4) timing - WOW was one of the first AAA-quality 3D MMORPGs published by a Tier 1 game dev (Blizzard at the time). WOW also coincided with the rise of digital payments, which made subscription models more accessible and efficient.
At its peak in 2010, WOW had over 12M paying subscribers, generating $1.5bn of subscription revenue for Blizzard in 2011!
Because of WOW’s success, it quite literally set off an entire wave of MMORPGs for the next decade, with many games being coined “WOW clones.” There are too many to name here, but some “WOW clones” I personally played included Cabal Online (2005), SWTOR (2011), Rift Online (2011), and FF14 (2013). There was always a slightly different twist to the game (e.g. Cabal’s combo mode, FF’s story-driven progression), but they ended up all playing very similarly in terms of content. Many gamers call this period (from 2005 to around 2015) the golden age of MMORPGs, when new MMORPGs were being released at a torrid pace.
An interesting sub-genre of MMORPGs emerged from this golden age and started to gain popularity in early 2010 - action MMORPGs. In my opinion, this was the peak of MMO innovation. The combat was completely overhauled from the tab targeting mechanics you saw with WOW and 99% of the MMORPGs back then. Action MMORPGs introduced dodge/parry mechanics, i-frames, and some of the most exciting gameplay mechanics I’ve seen to date. They required lightning quick reaction speed and brought adrenaline back to MMORPG gaming. Every combat encounter was now different, which was a complete game changer as it greatly improved replayability and user engagement (grinding is no longer boring!). This was a defining moment and turning point for MMORPG gaming. Black Desert was an action-MMORPG launched in 2015 and has generated over $2bn in lifetime revenue. Shout out to Tera Online (2011) for being the pioneer of the open-world action-MMORPG genre and paving the way for successful games like Black Desert. I bring this genre of gaming up because I believe there are many lessons that can be taken away (i.e. how to create an engaging, fun, and highly replayable experience for consumers). I could write a PhD thesis about this topic (perhaps another time!), but in the spirit of not making this a 100-page post, let’s move on to the genre’s period of stagnation and decline (2016+).
Unfortunately, the MMORPG genre’s glory days are now long past. Most gamers will tell you the genre has descended into what’s commonly called a creativity draught. Lazypeon (popular MMORPG streamer) posted a video that walked through this topic in detail (would highly recommend watching it). The summary is that there has been no innovative MMORPG releases since ~2015. This is a sentiment that I strongly agree with. The recent Tier 1 MMORPG releases were mostly met with mixed reception (New World from Amazon Game Studios, Bless Unleashed, PSO2, etc.), and didn’t introduce any exciting new gameplay concepts. As a result, user counts have dropped precipitously since launch (per Steam user charts, New World had 913k(!) players at its peak but is averaging only 21k players over the last 30 days). If you looked at this chart below without context, you would’ve proclaimed the genre dead, right on the spot. To me though, this chart tells a much more interesting story. This is the most telling sign that gamers are desperate and starving for an exciting and innovative new MMORPG. I’ve played through all the new releases up till late-game, and the reality is they are “more of the same” compared to previous MMORPGs.
Coupled with the lack of new releases, the once behemoth of the industry (WOW) is also declining at a rapid pace. At its peak, WOW had 12M+ subscribers. Today, that number is <5M (est.). According to a recent Activision earnings call, in the four years since 2017, the average monthly user base for Blizzard games has fallen from 46 million players to 26 million. Ouch.
Despite WOW’s recent decline, I want to give credit where it’s due. The game set many precedents for the MMORPG industry, including popularizing the $15/month subscription model. The amazing thing is that the subscription fee remains at $15/month after almost 18 years (!) despite having gone through 8 expansion packs. This brings us to our next key trend in gaming - microtransactions.
Microtransactions eat the world
When most gamers hear the word “microtransactions,” the common reaction is usually a combination of disgust, cringe, and grimace. I don’t blame them. Microtransactions destroyed many, many games that I personally played (RIP Dragonica Online), and more often than not was poorly implemented.
I think it’s important to look at why it was so often poorly implemented. Fate Grand Order (FGO) was released in 2015 and generated over $4bn in lifetime player spending over the next 4 years. Let that sink in for a moment. A mobile game targeting a niche population, that monetizes purely through in-app purchases i.e. microtransactions, generated more revenue in 4 years than some of the most successful console games in their entire lifetime. It’s mind boggling. As a point of reference, Elder Scrolls V: Skyrim (popular console game) has generated ~$600M in sales, and likely took much longer to develop.
Let’s dissect this further. The way FGO monetizes is through what is commonly referred to as a “gacha” model - akin to buying a gacha or lottery ticket and hoping you win the “RNG” and get a rare drop. In FGO’s case, there was a ~1% chance of getting a 5-star character (the strongest characters in the game). The reason this model works is because psychologically it is tapping into an inherent gambling addiction - you’re always just 1 click away from getting lucky and hitting that 1%. It’s not uncommon for users to spend tens of thousands of dollars on FGO in a day to max out their 5-star characters.
Given the context above, it’s not hard to see why microtransactions slowly creeped into every game. It’s a high margin software business model that takes advantage of your gambling addiction for recurring, big ticket spend. I can think of no better business model on the planet (you know it’s ridiculously profitable when regulators had to step in in some countries and change the rate disclosure requirements). Can you argue this business model is predatory? Sure, but the reality is consumers are willingly spending the money knowing that the rates are low (including myself), and these consumers are deriving real entertainment value out of the content. Content is king in the gaming world, and microtransactions are a natural and effective way to monetize premium digital content.
To slam home my point, look no further than the smashing success that Genshin Impact had since launch in 2020. Surprisingly, not many people are talking about this game, but the numbers don’t lie. Genshin generated over $1bn in revenue in its first 6 months post launch and became the fastest mobile game to hit the $1bn mark. That. is. absolutely. ridiculous. You guessed it, they also monetize through a microtransaction-based gacha system. As to why Genshin is so popular? Content, content, content (you’ll hear me say this a lot). Objectively, Genshin had some of the best character and open world designs (even surpassing League of Legend’s designs, which most gamers would agree is top tier in the industry). Now you have millions of passionate and recurring users waiting to drop $1-2k on every character launch (the avg. cost for maxing out a 5-star character). The game generally releases 2 new characters every 28 days. It doesn’t take a mathematician to figure out that this is a ridiculously profitable business model, if implemented optimally. The below chart is a bit dated, but shows how insanely profitable some of the character banners have been for the game.
The rise of competitive eSports, streaming, and social gaming platforms
It would be remiss of me to focus only on MMORPGs. Concurrently with the golden age of MMORPGs was the rise of competitive MOBA games like League of Legends (LOL) in 2009 and DOTA2 in 2013. I credit League and DOTA as two games that made e-sports relevant. I still remember watching the S2 LOL championships, cheering on Toyz from TPA. That was a lightbulb moment for me in realizing how powerful the gaming ecosystem has become.
Not long after, we saw competitive card games like Hearthstone take the world by storm, and battle royales like PUBG and Fortnite enchanting users around the world with their fresh take on third person shooters.
What do all of the games above have in common? They are competitive PvP (player vs. player) games. They are also similar in how they monetize. Due to the competitive nature of these titles, they cannot introduce P2W (pay to win) elements and are forced to monetize through character / item skins and other content that don’t affect the actual gameplay (e.g. visual effects). The exception to this is competitive card games like Hearthstone / Duel Links as they’ve demonstrated they can successfully monetize in a similar way to gacha systems with card packs.
It is very important to note this structural difference - what this means is that your monetization options are tied to the type of game that you make. Some monetization models scale with users only (recurring subscription), while some are non-recurring but scale with content (gacha). I cannot stress enough how powerful the gacha model is when implemented thoughtfully, and why it’s important to start thinking about the different avenues of monetization before you even build your game. To illustrate my point, League of Legends generated ~$1.75bn of revenue for Riot in 2020 (10 years after launch), and has ~100 million active players. That implies the average active player is spending $17.5 / year on LOL. In comparison, Genshin Impact generated $1bn of revenue 6 months post launch, on a base of ~10M active players. That’s $200 / year for the average active Genshin player. Genshin was my #1 spend in 2020. Effectively, if we exclude food, the majority of my spend is now on purchasing in-game digital assets (isn’t that crazy?). Both games are free to play. Think about that for a second. It’s frankly mind blowing how successful Genshin can be at scale!
Last but not least, Discord came onto the scene in 2015 and was a massive catalyst for growing the gaming community. The social platform is intuitive, easy to use, and loved by gamers across the world.
Streaming platforms like Twitch and Youtube also contributed heavily to building the ecosystem and lowering the customer acquisition cost (CAC) for games (streamers effectively acted as free marketing for the games they streamed). More on this in another post!
So, what’s next for gaming?
The backdrop:
The ecosystem is ripe for innovation. Multiple forms of monetization, increased efficiency of digital payments, latency is no longer a big issue (in part thanks to things like cloud gaming), game development engines are much more powerful vs. a decade ago, and the ecosystem is much more interactive and massive due to social platforms.
Here are my current top thesis areas:
Innovative MMORPGs. If we look back at all the success stories in gaming, the common theme for me has been (1) premium content that drives high immersion, (2) strong community, and (3) robust monetization model that scales with both content and user base. I see many opportunities to combine the immersion of an MMORPG with competitive and exciting action PVP elements. Think the MMO version of Genshin (which is mostly single player or small co-op). The gaming community is dying to throw money at a good and innovative MMORPG with both PVE and PVP content. There’s a reason why Epic wants to build a metaverse (hint: it has to do with immersion). More immersion = more engagement = more $$.
Crypto infrastructure. To be candid, most crypto games that I’ve tried aren’t very fun (or were not specifically designed for entertainment). Axie catapulted play-to-earn games into relevance but the gameplay essentially mimics other turn-based strategy games. Duskbreakers plays like other third person shooters. DeFi Kingdoms is mostly a resource-gathering simulator until the battle system release. However, these projects are all still very early, and it’s been exciting to see early adopters embrace the crypto mechanics (e.g. play-to-earn, play-to-mint) of these games. If anything, the early traction of these games gives me strong conviction that crypto and web3 will have a place in gaming. The sky is truly the limit. Having digital assets live as a non-fungible token (NFT), so users can see the entire ownership history of a legendary rare sword, is exciting. Being able to take these assets outside of the game (and trade on OpenSea, for example) may incentivize players to spend more on the game. What people don’t realize is that in most games, there are tons of offline transactions happening (buying gold from a gold farmer, paying him through Paypal, and having him mail me the gold). Imagine if the game publisher was able to take a % off of all these offline transactions? It recaptures all of this lost value! In summary, tools that help conventional games leverage crypto infrastructure is an area that I’m very excited about.
Virtual Reality. Super, super exiting, but still in early innings (hopefully one day I’ll be writing about VR as the next big transformative event for gaming). I’d argue that true VR (which I’ll coin as immersive VR) is going to capture multiple senses, vs. just sight today. I speak with neurologists often about the necessary medical and tech advancements that need to happen for us to get to true immersive VR. I’m 100% convinced that once that happens, it will change how we live our lives forever. This is a space I’m monitoring very closely, but proceeding with caution.
Could crypto revitalize gaming?
I think this topic deserves a much longer post in the future, but this is an area that I’m very excited about and would love to have more discussions with people on (mostly to learn!).
Lastly, please feel free to message me directly on LinkedIn, Telegram (@devinmaa), Discord (#mizsky0432), etc. to chat. I’d love to know what you are working on!
Note: As I re-read this post, I realized that there were a LOT of things that I didn’t cover. Frankly, trying to convert 200+ pages of messy notes that I’ve put together over the past 2-3 years is impossible, but hopefully this was helpful content and good food for thought regardless.
Stay tuned for some in depth case studies on games that I’ve studied closely over the years. I’ll dig into why I think they were successful (or not), and key lessons to take away for game developers, operators, and investors alike.