source-codesource codeauthorLevi SumagaysayNoneWant your finger on the pulse of everything that's happening in tech? Sign up to get David Pierce's daily newsletter.64fd3cbe9f
×
Get access to Protocol
Your information will be used in accordance with our Privacy Policy
I’m already a subscriber
protocol
Want to better understand the $150 billion gaming industry? Get our newsletter every Tuesday.
Are you keeping up with the latest cloud developments? Get Tom Krazit and Joe Williams' newsletter every Monday and Thursday.
David Wertime and our data-obsessed China team analyze China tech for you. Every Wednesday, with alerts on key stories and research.
Want your finger on the pulse of everything that's happening in tech? Sign up to get Protocol's daily newsletter.
Do you know what's going on in the venture capital and startup world? Get the Pipeline newsletter every Saturday.
Hear from Protocol's experts on the biggest questions in tech. Get Braintrust in your inbox every Thursday.
Get access to the Protocol | Fintech newsletter, research, news alerts and events.
Your guide to the new world of work.
Coverage | Newsletter | Intel | Events
Coverage | Newsletter | Intel
It's not clear what might fall through the cracks if most of the biggest game studios transition away from selling individual games and instead embrace a mix of free-to-play and subscription bundling.
Image: Christopher T. Fong/Protocol
Subscription services have existed in gaming for decades, both for individual games like World of Warcraft and for console platform services like Sony's PlayStation Plus. But a new wave of game subscriptions — Netflix-style, all-you-can-play buffets — have only just begun emerging in the last few years. Now, as these subscriptions are married to nascent but fast-growing cloud gaming services that allow you to stream games to almost any screen, the industry is bracing itself for a potential paradigm shift akin to what happened to television, film and music.
"It's probably the likes of Netflix and Spotify that have ended up pushing us to this point in games," said Craig Chapple, an industry analyst with the firm Sensor Tower. "How many times have you heard, 'When's the Netflix of gaming coming?'" (Netflix, it turns out, is getting into gaming itself, although it's tempered expectations by saying it will focus on mobile games first.)
It's not clear the industry is ready, or that the economics of gaming today can withstand a full-blown switchover to a subscription and streaming-only world. Video games come in many shapes and sizes, and monetize in vastly different ways. One game might cost $4.99, another $69.99. Some are free, while others charge as much as $14.99 a month just to access.
It's unlikely the whole industry would ever shift to subscription bundling because of these factors. But it's also not clear what might fall through the cracks if most of the biggest game studios do transition in some way away from selling individual games and instead embracing a mix of free-to-play and subscription bundling.
"I am reluctant about subscription services. It's worse than in music. The potential risks here are huge," said Rami Ismail, an independent game developer and consultant who co-developed a series of hit games under the label Vlambeer. "The amount of money that goes into a video game compared to an album is relatively large. There are more people working on them, and it takes more time to make them."
Unlike Hollywood or the music industry, which can standardize pricing because the length and presumed value of a single song or movie is more or less agreed upon, the video game industry has resisted distribution models other media adopted more than 10 years ago. Many consumers still buy games on Blu-ray discs sold in shrink-wrapped plastic boxes at brick-and-mortar retail stores.
"We're looking at the same model [as the music industry]," Ismail added. "People aren't going to pay more for the game subscription than they are for the Spotify subscription. I don't think I could meaningfully argue that people play more games than they listen to music."
The perils of subscription gaming
The game industry's slow adoption of new distribution models has helped create an atmosphere of apprehension around subscription services. It's not necessarily because everyone is resisting change, but rather because it seems an almost Herculean task to yank a ship as large as the nearly $200 billion video game business into the future all at once.
"It's very hard to launch a $120 million game on a subscription service charging $9.99 a month," Shawn Layden, a former PlayStation exec in charge of its internal studios, told Gamesindustry.biz this week. Layden's concern is that the kinds of games that are most at home on subscription services — big-budget console games sold for between $60 and $70 nowadays (like the kind Sony still makes) — aren't catering to a large enough customer base to recoup development costs through a subscription service. That's especially true, he said, as the cost of making those AAA games has ballooned in recent years, all while the price has remained in the same $10 range.
A subscription service doesn't necessarily work for all types of games.
Image: Microsoft
"You pencil it out, you're going to have to have 500 million subscribers before you start to recoup your investment. That's why right now you need to take a loss-leading position to try to grow that base," Layden added. "But still, if you have only 250 million consoles out there, you're not going to get to half a billion subscribers. So how do you circle that square? Nobody has figured that out yet."
Layden's math may be a bit of an exaggeration. Microsoft's Xbox Game Pass most likely does not need half a billion subscribers to make it a profitable and sustainable enterprise. But it does need tens of millions, and perhaps even hundreds of millions, to become a true Netflix-for-games platform, one that can recoup investments on all the games Microsoft wants to include on release day, and the many more games from non-Xbox owned studios it will need to pay for to keep people subscribed.
Take-Two President Karl Slatoff expressed similar concerns last fall, saying on an investor call, "We're highly skeptical that subscriptions will be the only way or the primary way that interactive entertainment is distributed." He added that the typical consumption of video games vastly dwarfed how much consumers pay for them, making them a better deal when sold individually than when bundled. "That's because of the way people consume it. And the price point for owning a title, which is very reasonable and very, very low, actually, on a per-hour basis."
Microsoft bought Bethesda Softworks parent company ZeniMax Media last fall for $7.5 billion as part of a strategy to bring more game studios under its wing and release those developers' backlogs and future games on Game Pass. If Microsoft owns the intellectual property, it can release a new title on Game Pass on the same day it's sold for $60 or $70 everywhere else, as it plans to do with upcoming hits like Bethesda Game Studios' Starfield. That's a huge incentive to sign up for Game Pass, and it's a viable strategy because Microsoft earns enough revenue through its other products and services to make up for it.
"Now, Microsoft can say, 'Subscribe to us. We've got all these first-party studios and also third-party studios,'" Chapple said. "Subscription potentially also makes gaming a bit more accessible. You're not forking out that $60 or $70 to play one game. You're forking out a monthly fee that's quite low to access a whole variety of games." But Microsoft will still have to convince many more third-party developers to join Game Pass to keep subscriber numbers growing, and that means compensating them fairly so they keep coming back.
Microsoft declined to answer individual questions for this story, but it did provide Protocol a statement on its stance on subscription gaming and the way it compensates developers who join Game Pass. "We strive to build a platform where our creative partners can find success," a company spokesperson said. "Our model for how we support and compensate developers who participate in Game Pass is designed to be flexible and was built based on partner feedback. This includes options like fees, bonuses based on usage, and more."
The big free-to-play question
Game developers have offset rising development costs over the years through the use of microtransactions, such as loot boxes and the selling of cosmetic items like character skins. In fact, many developers have simply taken the path of least resistance and opted to design their games as entirely free to play, monetizing the experience through in-game purchasing. Those kinds of games — Fortnite, Roblox, Call of Duty: Warzone, to name a few — do not require subscription platforms at all because they are already at everyone's fingertips for free.
"Free-to-play doesn't fit into a subscription," Chapple said. He noted that there could be a world in which subscription services cover the cost of some in-game microtransactions, but that would "destroy the design of the game, and just cap revenue." Genshin Impact and PUBG Mobile didn't need Xbox Game Pass to become some of the highest-grossing games in the world. All they needed were apps on multiple platforms and a free-to-play business model.
It's likely more games in the future are modeled after those free-to-play hits rather than designed to be bundled into a subscription platform. But there will always be an appetite for big-budget console titles like Sony's upcoming sequels to Horizon Zero Dawn and God of War that cannot be given away for free.
The same is true for breakout indie hits like developer Acid Nerve's new action-adventure title Death's Door, which launched exclusively this month on Xbox devices and PC for $19.99. Critically, the deal Acid Nerve and publisher Devolver Digital struck with Microsoft did not include availability on Xbox Game Pass.
"There's always a bag of money somewhere involved that entices people to take that risk with their work. A lot of those deals are what are keeping a lot of beloved studios open right now," Ismail said. "For a lot of developers this is sort of the new reality. We're not in the business of selling to consumers. We're in the business of selling to platforms, and platforms monetize those games and hopefully give a kickback."
Still, Ismail said it's not clear how that translates to subscription services, which risk undervaluing games as consumer products in the same way streaming music and television made it easier for more people to stop buying CDs and DVDs.
"I have no idea where this is going. I understand how exclusives work and how people make money off exclusives. But with the subscription models, things are obviously new and shifting to a new place," Ismail said. "That's where we're headed, whether we like it or not. On Xbox, people pay $9.95 or $15. How am I going to compete with my $10 game?"
What's fair compensation in a subscription gaming future?
Concern for indie developers has been a focal point of recent discussions around subscription gaming, especially regarding how those services share revenue. One model, an engagement-based revenue-sharing system, is one that might gain traction.
Google Stadia recently implemented it for its Pro subscription tier, offering developers 70% of revenue based on how many days a subscriber signs into the game on Stadia. It's extra revenue for game makers, but it also evokes controversial models like that of Spotify, in which musicians are paid fractions of a penny per stream.
"I feared this day. I warned about this for years and feel no one really took it seriously. Devs being paid based on playtime is the true horror of the subscription-based future — it's the death of creativity, of shorter experiences. I hate this with every fibre of my being," gaming news curator Ryan Brown tweeted on the day of the announcement.
Brown told Protocol he now understands that Stadia Pro also involves other financial incentives brokered directly with Google, and that the revenue a game developer earns isn't solely from the revenue share. But, he said, "I still have very serious concerns regarding monetizing playtime like that. Seems inevitable that'll become the future focus of streaming subscription services."
It should be noted that Stadia Pro is much different than Game Pass, and concerns about its revenue-sharing model do not foretell what Microsoft might implement, though the company did tell Protocol it has "bonuses based on usage." Unlike Game Pass or other cloud offerings, Stadia Pro adds a small number of free games every month and advertises its $9.99 subscription mostly as a way to get discounts on full-price purchases and added benefits like 4K resolution support. In that way it is more similar to platform services like Sony's PlayStation Plus and Microsoft's Xbox Live Gold.
"Our goal while creating Stadia's new 70% revenue-share program was to be as fair as possible, with engagement measured via session days to ensure that different types of game genres weren't adversely impacted," said Alan Joyce, Google Stadia's senior product manager. "For example, if we had merely measured engagement based on total time played, then partners offering narrative-focused RPGs might see drastically more revenue than those with games from pick-up-and-play genres like roguelikes."
Joyce said that "ultimately, no one measure approach is perfect," and the company says it has other methods for generating revenue, like a new affiliate program and a more generous revenue share on full-game purchases.
Still, if the industry does shift toward subscription models en masse, it will likely involve standardized rates, something gaming platforms have resisted and game developers clearly fear. "Even if it's daily, a player might finish [an indie game] in one day or several days. They're not coming back day after day every month. That developer gets a small share of the pie," Chapple said. "It's up to the developer to see if that undervalues their product."
"Platforms right now need to aggressively court developers. At some point they're going to hit a critical mass, and they wouldn't need to do that anymore. At that point, we're at the mercy of the people running those platforms," Ismail said. It's not exactly a rosy future, and he admitted it's not one small developers are being given much of a choice about. But he added the silver lining is that game makers are used to maneuvering such tectonic shifts in the business, and that one way or another, the people who create video games will figure out how to survive.
"Games are woefully unorganized. We don't have the protections that movies or music have," Ismail said. "But we are relatively flexible and pretty adaptive."
The crypto maturity model
Level 1: Open for business
The first step for banks is to train staff so that they understand which cryptocurrency businesses their customers are most likely to interact with and the varying amounts of risk those businesses would introduce.
Crypto-friendly banks can also begin taking on cryptocurrency businesses as clients. Silvergate Bank became one of the first banks to work with cryptocurrency businesses in 2013 and, since then, has onboarded over 900 cryptocurrency businesses as clients. In 2018, the bank rolled out the Silvergate Exchange Network, which allows institutional investors to buy cryptocurrency assets from several different exchanges. The bank's stock price has risen over 1,500% in the last year as bitcoin and other crypto assets have rallied.
Financial institutions are also now able to offer many more products and services to cryptocurrency firms. We've recently seen banks like Citi, JPMorgan Chase and Goldman Sachs offer M&A services and advise on IPOs. Many cryptocurrency businesses now also need foreign exchange services and more robust global settlement mechanisms.
Banks can tap into a huge opportunity by taking on cryptocurrency businesses as clients, but only if they do it safely. Luckily, risk assessment in cryptocurrency is actually easier than in most other industries due to the inherent transparency of most blockchain-based assets. Unlike with fiat currency, most cryptocurrency transactions are recorded on a public ledger. That means that with the right tools, banks can monitor cryptocurrency businesses' transactions, ensuring every client they take on fits into their desired risk profile.
Banks can tap into a huge opportunity by taking on cryptocurrency businesses as clients, but only if they do it safely.
Level 2: Synthetic cryptocurrency products
Once a financial institution has become comfortable working with cryptocurrency businesses, it may want to help both retail and institutional customers get exposure to cryptocurrency markets. That doesn't mean they have to enable direct trading of cryptocurrency. Instead, they can offer synthetic, cryptocurrency-based investment products that allow customers to capture some of cryptocurrency's upside without setting up custody infrastructure.
Asset management firm BlackRock recently invested in bitcoin futures, a useful way to test the cryptocurrency market and attract potential clients interested in crypto assets. Firms like Grayscale Bitcoin Trust allow investors to trade shares the same way they would any other public asset.
Long considered a possible game changer in the industry, no cryptocurrency ETFs have received SEC approval yet, though Canadian investment firm Purpose Invest recently launched North America's first ever bitcoin ETF. And asset manager VanEck recently launched an alternative ETF that holds shares in cryptocurrency infrastructure providers like exchanges, miners and storage providers.
Level 3: Custodial services
Custodial services represent the biggest chasm for banks to cross in their cryptocurrency journey, and only a few traditional financial institutions have rolled out such offerings.
However, those that have begun work on cryptocurrency custodial services offer a helpful model for others. BNY Mellon announced plans to launch a custodial platform in partnership with Fireblocks, a cryptocurrency custodial services provider, and digital asset custody company Northern Trust and Standard Chartered Bank announced plans to partner on a similar solution called Zodia Custody. Asset manager Fidelity took a different approach, using its early start to build its own custodial platform from scratch.
So far, traditional financial institutions have mostly steered clear of offering custodial services for retail customers, but fintech platforms offer an example of how they might do so. Square launched its cryptocurrency custody solution in 2018 by building its own cryptocurrency custody platform called Subzero, allowing its customers to buy over $4.5 billion worth of cryptocurrency in 2020.
The key lesson: While Square and Fidelity show that it's possible to go it alone, many financial institutions are partnering with companies that already have deep cryptocurrency expertise to launch their custodial services. That allows them to test a radical new offering with fewer resources invested, while also drawing on outside cryptocurrency expertise.
Level 4: Beyond custody
Very few financial institutions have gone beyond custodial services in their adoption of cryptocurrency. Fidelity recently announced plans to provide institutional clients the ability to pledge bitcoin as collateral in DeFi-based loans in partnership with BlockFi.
Payments are another place traditional financial institutions can incorporate cryptocurrency. Visa recently partnered with BlockFi to roll out the first ever credit card to give customers bitcoin rewards on all purchases they make, and has a partnership with Crypto.com to release a debit card that allows customers to use their cryptocurrency holdings for purchases.
Cryptocurrency trading is the next service we expect to see mainstream financial institutions offer. Goldman Sachs has already made some cryptocurrency trading possible for institutional clients through its cryptocurrency trading desk. But with the success of exchanges like Coinbase, we expect financial institutions to offer these services to retail clients as well.
Good times ahead
With cryptocurrency becoming increasingly mainstream, banks are no longer viewing it as money for criminals or looking for ways to ban it. Instead, they're recognizing the ways it can help their customers while driving revenue and trying to incorporate it into their larger strategies.
Want to learn more about how funds move around the cryptocurrency ecosystem? Check out Chainalysis Market Intel for real-time metrics to inform investment decisions and improve your understanding of the industry landscape. Sign up for the Market Intel Report and get our latest data and analysis delivered straight to your inbox every week.
Latest Stories