Game Asset Ownership — Part 1: Evolution of Ownership
In this series, we’ll be exploring a critical pillar of community economics: Digital asset ownership. We’re beginning this series with a look at how game distribution has moved from physical media to digital downloads, a critical step in the path toward the emergence of digital assets. In subsequent articles, we’ll talk about the distinction between licensed control of a digital object and “true ownership” of digital assets, made possible by blockchain. Then we’ll talk about blockchain tokenization and the innovative new economic models that tokens can enable in games.
As video games have become more popular and more interwoven into our life, the systems by which they’ve been distributed have evolved — and with that evolution, their basic business model. In particular, the move from distribution of games via physical media — e.g., cartridges, chips and disks — to distribution on digital channels has made possible the emergence of “free to play” games. These allow users to download and play full games at no cost, allowing them to sample the experience with no up-front expense. Once in the game, however, players are given opportunities to spend money through in-game purchases — whether to unlock new content, purchase power-ups or special tools or customize the look and feel of their avatar or environment.
The rise of “free-to-play” has transformed the industry. According to Superdata, a Nielsen company, four out of five dollars earned by games are now generated by the free to play business model, driven by massive hits like Epic Games’ Fortnite, which earned $1.8 billion in 2019 from sales of its Battle Pass (a quarterly subscription that gives special access to certain game content) and V-bucks, the in-game currency that allows players to buy aesthetic enhancements for their characters.
The success of Fortnite also points to the underlying challenges of the free-to-play model. That staggering $1.8 billion haul is actually down 25% from 2018 revenues, when the game earned $2.4 billion. And early 2020 revenue and engagement numbers suggest that interest in the game may be flattening further. Free-to-play games depend on a significant number of players purchasing a constant stream of new content and virtual goods, and in an era of unprecedented competition from an increasingly crowded marketplace, that’s harder than ever to maintain. That may especially be the case when the virtual goods in question represent an irrevocable purchase that can’t be traded or given to other players, and can’t be converted back to real-world currency.
The promise of blockchain-based tokenized virtual goods — which might be better called “digital assets” — is that they provide the potential for purchased items to have real-world value, while allowing players to truly own what they buy. Digital assets have an independent existence from the games that generate them, because their existence, traits, ownership status and provenance are immutably recorded on the blockchain. This means that players can remove items from games if they like, and retain title to them even if they quit or if a game shuts down. More critically, it means that players can freely buy, sell and trade these items, including for real-world fiat currency, both within games and on third-party platforms, opening up brand new economic opportunities for players, and enabling new economic models that in turn empower developers to deliver a better experience to gamers.
The evolution of ownership in games
In 1972, the very first game console was released to the public: the Magnavox Odyssey. It was a rudimentary device that could only generate basic black and white shapes — three square dots and one line of varying height — and had no sound. (The “play arenas” for the Odyssey consisted of plastic overlays that were literally stuck to the surface of the TV screen to define the zone of play.) Cartridges for the Odyssey contained no actual components — they were simply wire-jumper packs that connected the system’s existing diodes in different patterns, changing the rules of play. The inherent limitations of this system led manufacturers to retreat to “dedicated” game consoles that could only play one hard-coded type of game (like Pong) for the next half decade.
In 1977, however, the personal computer revolution arrived, bringing with it both new technology and the expectation that electronic devices should have at least rudimentary programmability and expandability. That same year, the Fairchild Channel F (“The F is for Fun!”) became the first console to use cartridges containing ROM chips encoded with game data, followed by the Atari 2600 — the industry’s breakout hit game console — in 1978. ROM cartridges continued to be the primary mechanism for distributing games until 1988, when the NEC PC-Engine debuted an add-on peripheral that accepted CD-ROMs. In 1986, Japan’s Super Famicom provided an option for user-rewritable media — cartridges that could accept saved games — but cheap, easy to store optical disks would end up winning the day, and remain the primary medium for physical non-handheld game purchases even now. But Sega’s introduction of the Sega Channel in 1994 pointed the way to the digital distribution future. With the arrival of Valve’s Steam platform for PCs a decade later and the arrival of mobile app stores in 2007 and 2008, the shift to digital as a predominant means of distributing games was complete. As of 2018, 83% of all games were sold in digital form, versus 17% on physical media.
Digital downloading meant that users could purchase and play games on demand, without going to retail stores or waiting for disks to be shipped through the mail. It vastly expanded user choice and developer competition, since game stock was no longer limited to the relatively small percentage of games that could be kept in physical inventories; while older games could have longer shelf lives as a result, it meant that new games faced a much greater challenge to be discovered and adopted.
For players, the shift to digital meant a significant change in their relationship to games — and to developers. Without a physical medium, games couldn’t be shared or resold, something publishers and developers often sought to limit even in the era of physical media, through DRM, online registration requirements and lobbying for legal and commercial restrictions. But the intangibility of digital downloads underscored that players don’t have ownership of the games they play, or any of the content within them: players merely have a personal license to access those games and content; a license that is rarely transferable.
In the context of free-to-play games, though the license cost for the game itself may be zero, buying virtual goods also constitutes the purchase of a license. What that means is that a skin you purchase in Fortnite isn’t owned by you — it’s owned by Epic Games, who’s given you a limited license to use it in their game, and only in their game. Based on that license, the terms of which are generally presented to players in the form of a lengthy scroll of text known as an End User License Agreement or EULA, Fortnite skins can’t be resold, can’t be shared with or given to friends, and nor can V-bucks, or even whole character accounts.
There are many reasons for this, with perhaps the most critical being simply that game resale marketplaces are tricky to implement, especially those with what’s known as “fiat out” — the ability to withdraw real-world cash earned through item sales. When sales are unidirectional from the developer to players, developers have a way to assure that players who properly purchase goods aren’t being scammed, and that virtual goods aren’t being used as a value store for illicit behavior, such as gambling or the hiding of profits from criminal activity. (The latter is why any game that allows money to be withdrawn from its system must adhere to a complex set of regulations nicknamed “KYC / AML,” short for Know Your Customer — a requirement that the platform has the ability to verify the real identity of users — and Anti Money Laundering — a set of rules and procedures that must be complied with to detect and report suspicious financial activities. )
But with no legal way to transfer purchases, spending money on virtual goods is, by intent, a one-way street. It’s not surprising that players have found ways to end run these restrictions, often through “grey market” transfers on social media or jury-rigged third-party marketplaces. This is, in many ways, the worst of possible outcomes. Grey-market sales open game systems up to exploitation by scammers and hackers, expose players to the risk of being robbed or having their data or identities stolen, and provide no revenue or benefit to developers.
Players clearly want to be able to buy, sell and trade digital goods. But developers have not yet had the technology required to build a truly trusted, reliable and secure system for digital asset exchange.
In our next article, we’ll look at how blockchain addresses this problem, opening up a new horizon of true ownership of digital assets in games.
Interested in contributing to our Community Economics series? We’d love to hear from you. Comment below or email us at cec@forte.io
Follow us on Twitter @FortePlatform.
