Investing in Game Infrastructure: How We See The Future of Gaming
This post originally appeared on our blog, find it and other updates here.
Gaming is the unacknowledged cultural powerhouse. After years of being considered a niche pursuit, it has gone mainstream thanks to the success of games like Fortnite. Earlier this year, the Guardian dubbed gaming the “most important aspect of youth culture”, with revenues exceeding those from sports and movies combined.
There are more games, more players, and more ways to play than ever before. Such growth should be exciting for entrepreneurs and investors alike, but it also poses a challenge: as the space grows, how can you tell which companies will make a long-term impact?
The risks are high. Blockbuster games’ development budgets rival those of major movies and it’s difficult to know in advance which will be a success. So, instead of trying to pick winning games, we take a different approach, investing in the infrastructure that will grow the whole ecosystem.
In order to understand the space, it helps to visualise how it fits together. Here’s how we look at it:
Infrastructure providers: The cloud or dedicated server providers who sell or rent their services to the game studios. AWS, Photon and Multiplay are all examples.
Orchestration layer: Orchestrators connect the game studios to the infrastructure layer and manage the servers to keep gameplay running smoothly. This can be done by a third party, some Studios handle it themselves, and some infrastructure providers offer orchestration services, such as Gamelift by AWS, or Azure’s Playfab.
Game DevOps: DevOps covers the continuous process of updating, refining and improving games after release. This is becoming more important as new content and features extend games’ lifecycles and keep players engaged for longer.
Game Engine: This is the set of tools developers and studios use to actually build and power the game. A single engine can be used by many different studios. Unreal and Unity are perhaps the two best known.
Game Studio: The companies that produce and publish the game. Think of big names such as Rockstar, Infinity Ward or Electronic Arts.
Consumer layer: This is how we describe external applications that plug into the game and help to improve the experience. For example, they might enable non-intrusive advertising, as in the case of Admix, or provide analytics to help gamers improve, as with OP.GG or Mobalytics. This also includes services such as Twitch, which allows players to stream and build an audience.
Anyone who follows gaming will be able to name some major trends reshaping the sector, but these won’t impact all parts of the system equally. By understanding how the ecosystem works, we can understand where to look for the companies that might push the whole sector forward. We have focused on the orchestration and consumer layers.
For our part, we have identified three trends that are sweeping the sector:
Trend One: The rise of Hypercasual, and the issue of monetisation
Society has an outdated idea of what constitutes a ‘gamer’. An image search for the term shows a young, predominantly male crowd, sitting at a PC or console. This is not most gamers.
Mobile gaming is almost as old as mobile phones, but it took off with the smartphone. The radical improvement in computing power, internet connection and an endless supply of new games led to a new type of gamer. Smartphone games are now the largest segment of the gaming market, worth $63.6bn in 2020 and growing at 15.8% year-on-year, according to Newzoo. This will only increase as 5G-enabled phones become prevalent.
‘Hypercasual’ gamers favour playing simple games in short bursts, and their demographics skew towards females in their thirties or above — an audience not traditionally reachable via games. What’s more, the simplicity of hypercasual games compared with console releases means the developers are more likely to be small independents or hobbyists.
The commercial opportunities this presents are clear, but monetisation has been a problem in hypercasual. Most rely on advertising and in-app purchases but, although advertising penetration for gaming is low relative to TV and streaming, the advertising models are intrusive and overwhelming. Research into hypercasual gaming by Adjust and Unity found that 2–3 ads per minute was the sweet spot for profitability, and some games have more ads than gameplay. Understandably, as the number of intrusive ads goes up, player retention rates fall.
As game designer Tom Kinniburgh said in an article for MobileFreeToPlay.com, “The biggest issue in [hypercasual] isn’t the games, it’s the ad units. Quite simply they suck. They don’t allow for smoothness, beautiful transitions, different sizes, timings or formats to fit into the game experience”.
This is why we invested in Admix. Admix is creating a better future for gamers and developers through the invention of in-play advertising, which is non-intrusive and sells advertising space programmatically. The results it generates are impressive, with one developer increasing their average revenue per daily active user by 31% after integrating.
We believe as people realise how underutilised gaming is as a commercial platform, they will pay more attention to the companies making it sustainable and enjoyable for players and developers alike.
Trend 2: Cloud gaming and the challenge of latency.
While Fortnite is not, strictly speaking, a cloud-streamed game, as it requires a download to play on most platforms (Vortex notwithstanding), it woke much of the world up to cloud gaming’s potential.
The tipping point came in 2018, when Netflix Founder Reed Hastings acknowledged “We compete with (and lose to) Fortnite more than HBO”. If a single game can challenge the dominant streaming service, the potential for streaming-based gaming services offering a library of games must be massive.
And this is only half of the picture: streaming technology enables most of the computation required to run the game to happen in the cloud, rather than the console. Freed from the constraints of console size, the possibilities for what games can be changes dramatically. The Metaverse of Neal Stephenson’s novel Snow Crash begins to look plausible. Indeed, Jeff Bezos has reportedly said he wants Amazon’s Lumberyard game engine to use cloud technology to create “computationally ridiculous games”.
Amazon is not the only big player in the space. Microsoft, Google, Facebook and more all have designs on dominating the cloud gaming world. However, there is debate over how mature the technology actually is. As Matthew Ball, Venture Partner at Makers Fund, notes, there are concerns over pricing, data usage and latency. We are focused on the latter.
The interactivity of games makes the latency challenge radically different than in TV and movies. While Netflix can preload segments of a show to allow it to keep playing smoothly if the internet connection slows, games can’t. Gaming is fast-paced and competitive, requiring split second reactions. Delays of a few milliseconds can be decisive.
We believe edge computing can help here. Where traditional cloud computing centralises computation in data centres — which may be hundreds of miles away — edge computing uses all the nodes in a network to decentralise computation. This drastically reduces the distance from the user and dramatically improves the speed.
This is where Ori comes in. Ori’s edge-cloud offers a brand new way to deliver modern applications with unparalleled performance at a global scale: their technology runs applications close to end users, allowing customers to experience huge decreases in latency and reduced networking backhaul costs. Radically faster processing will be instrumental in the development of a number of key technologies such as autonomous vehicles, smart homes and game streaming; Ori is already working with a number of companies in the gaming sector.
Google Stadia’s launch in 2019 started the race to become the dominant player in game streaming in earnest. Regardless who comes out on top, the technology will only work if the underlying infrastructure is smart enough to give players a fast, stable experience.
Trend 3: Gaming as sport and self-expression — Personalisation and analytics
As the number of gamers and amount of time spent gaming grows, the line between physical and virtual worlds blurs. We can see this in the way Fortnite has become a social space for young people, the growth of esports and the booming virtual economy around in-game items.
In psychological terms, we are seeing a rush to help gamers fulfil their esteem needs — the fourth level of Maslow’s hierarchy of needs, whether through achievement and mastery or prestige and status.
These needs are manifesting in two ways. As esports has grown in popularity and prize purses have increased, becoming a gamer is being seen in the same terms as more traditional athletics. In fact, Demetrious Johnson, one of the most decorated athletes in the sport of MMA, has spoken publicly of his plans to become a professional gamer when his fighting career ends.
Professional aspirations require professional approaches, and we already see strong and growing demand for platforms that help gamers improve. These include 3D Aim Trainer, Mobalytics and OP.GG.
It’s not all about competition, however. Gamers are also seeking ways to express themselves in-game through personalisation, purchasing items, character skins and more. The term ‘default’ has become a playground insult, implying the victim plays Fortnite using the default (i.e free) character settings.
Research from Atelier.net found roughly 85% of the $109bn in revenues from multiplayer gaming, virtual simulation platforms and interactive media came from repeated purchases of digital goods. Luxury brands are beginning to take notice, with Louis Vuitton releasing a bespoke outfit and weapon for a League of Legends character. Gucci, meanwhile, has collaborated with Tennis Clash. In fact, the trend is now going both ways, with gaming brands releasing physical products such as Fnatic’s limited edition dive watch, also released in collaboration with Gucci.
Gaming is no longer just an activity. Games are becoming destinations for people to socialise, express themselves, trade and, yes, compete. This has been helped by the pandemic, but the trends were moving in this direction long before.