Image: Epic Games
May 4, 2021
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This week in Protocol Gaming, your weekly guide to the business of video games: fierce debate in the game industry over longstanding revenue-sharing deals, troves of confidential court documents reveal telling financial metrics and Discord is arriving on game consoles at long last.
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The Big Story
The 70-30 revenue split is causing a reckoning in the game industry
When we talk about digital marketplaces and game distribution in particular, the numbers that most often come up are 70-30: That is, the 70% earned by the seller and the 30% kept by the marketplace. This revenue split has been a longstanding industry standard; it's how the App Store and Google Play Store operate, and it's how Microsoft, Nintendo, Sony and Valve have handled digital game sales for years.
Once upon a time, the 70-30 split was revolutionary. Compared to the share of revenues taken by GameStop or Walmart and the costs associated with physical retail, a flat 30% commission was a cause for celebration. And so game makers flocked to digital, and sales soared.
- For developers, getting to distribute a game directly to consumers — as the Xbox Live Arcade, PlayStation Store and Steam allowed in the early 2000s — was nothing short of a paradigm shift for the industry. And the App Store, introduced in 2008, created an entirely new market altogether. "Before the App Store, the industry was smaller, but the revenue sharing was worse," said Craig Chapple, an analyst at Sensor Tower.
These changes helped birth both the modern indie game movement and the mobile market, while also starting the slow, steady transition away from buying games on discs from a store toward downloading them from online platforms. Last year, amid record digital spending during the COVID-19 pandemic, overall digital game sales exceeded physical sales, with major publishers like Activision Blizzard and EA reporting more than half of all revenue coming from digital purchases.
But the 70-30 model is now coming under close scrutiny. The last few years have called into question how justified these arrangements are, and what, if anything, might shift attitudes, business models and developer agreements toward a more equitable sharing of profits for creators.
- The most high-profile of these battles kicked off yesterday, in the Epic Games v. Apple antitrust trial. The outcome will determine not just the fate of the App Store, but also the U.S. judicial system's appetite for these kinds of challenges to the digital distribution status quo.
- The case has already shed unprecedented light on revenue sharing, with bombshell details emerging around Sony's deals with Epic, Apple exec Phil Schiller's willingness to cut the App Store commission and other confidential publishing contracts.
And the industry standard no longer seems so standard. Microsoft last week announced a planned reduction of its commission on PC games from 30% to 12%.
- It's a move to match Epic's revenue split on PC and to better compete with Valve's leading Steam marketplace.
- An internal company document also revealed potential future plans to match the cut on Xbox, The Verge reported.
- Meanwhile, game studio and Humble Bundle creator Wolfire Games filed an antitrust lawsuit against Valve over Steam's "extraordinarily high cut" and the effects it may have on PC game prices.
- In an industrywide survey of game professionals last month, just 3% of the more than 3,000 participants said the 70-30 revenue split was justified. Close to half favored a 10% or 15% split, while nearly a fifth said a 5% or 10% split would be fairer.
This backlash didn't come from left field: It was a trend building steadily over the last decade.
- Smartphone sales, faster internet connections and free-to-play and microtransaction business models fueled the digital boom. Console makers responded accordingly last fall by launching digital-only versions of their next-gen devices, cementing the new reality for millions of customers.
- Global digital spending on video games exceeded $127 billion in 2020, according to SuperData. Most of that is from mobile ($73.8 billion), and most of the mobile money flows to free-to-play games ($98.4 billion).
- The shift to digital in the games industry has put a magnifying glass to the 70-30 split, which streamlined distribution but laid bare how much money is up for grabs. Digital marketplaces have made unprecedented fortunes over the past decade; the App Store grossed an estimated $72 billion in revenue in 2020, with around two-thirds of that generated entirely by mobile games and, according to new testimony in the Epic trial, an estimated 78% profit margin. And though sales have ballooned to record levels, the revenue share has remained mostly static for game makers.
The upshot is pressure on Apple and others to share more of the wealth, especially as the cost of operating these platforms has dropped. Few companies are as willing or financially capable as Epic or Microsoft to forgo profits in favor of shoring up developer support. But it's starting to look like the 70-30 industry standard may not survive the next decade. It's just a matter of which major platform buckles first — or, in Apple's case, is forced to.
- "I don't want to overstate it because I think compared to platforms that are large, massive successes today, it's still obviously on the small end … [but] there's been a very real inflection, in terms of adoption and engagement that we're seeing." —Facebook CEO Mark Zuckerberg said AR and VR account for a lot of Facebook's R&D budget, thanks in part to the Oculus Quest 2's success and the promise of more to come.
- "Epic is a company built on the aspiration of serving a new generation of developers and customers as openly and supportively as Apple did in the era when they invented personal computers. As we go into court tomorrow, it is for those original digital freedoms that we fight." —Epic CEO Tim Sweeney tweeted on the eve of the Epic v. Apple trial, laying out his reasoning for taking his rival to court despite his rich history of owning and loving Apple products.
A MESSAGE FROM HEWLETT PACKARD ENTERPRISE
As the world becomes increasingly digital, we look to a future that's bright with possibilities. But we must first address a stark reality: Unless we radically rethink how we make decisions and who benefits from the outcomes, we risk reducing the chances of participation in the digital economy for billions of people.
- On Protocol: An update to Chinese developer MiHoYo's hit game Honkai Impact 3rd had very real-world consequences. A newly added Playboy Bunny character skin, which Chinese players deemed inappropriate, led one man to bring two knives to the company's Shanghai headquarters.
- CD Projekt Red studio executives netted multimillion-dollar bonuses after the release of Cyberpunk 2077, Bloomberg reported, despite a launch riddled by bugs and performance issues. Staff also received bonuses, but the amount was roughly the same (about $29 million) as that bonuses that went to the top five execs.
- Epic acquired ArtStation, an artist portfolio site and selling platform, and then it dropped the platform's commission from 30% to 12% to match its PC game store.
- Fortnite made $9 billion in just two years. That's another revelation of the Epic v. Apple trial has been Fortnite's gross revenue from 2018 and 2019, which was far higher than analyst firms estimated at the time.
- On Protocol: Discord is coming to PlayStation. Sony surprised the industry on Monday when it announced a new series H investment in gaming chat app Discord, with plans to integrate the platform with its game consoles. So much for that Microsoft acquisition?
- Epic spent roughly $12 million in nine months to acquire new users for its PC game store. Confidential court documents in Epic v. Apple revealed Epic's quest to acquire PC players to compete with Valve, including the money it spent securing free game giveaways.
- Sony was so protective of the PlayStation platform that it initially stonewalled efforts from Epic to add cross-play to Fortnite, The Verge reported. And in court documents mistakenly published prematurely, Sony's secretive cross-play revenue sharing agreement was revealed, with Epic's Tim Sweeney confirming Epic ultimately paid Sony extra to compensate.
- Pokémon Snap sells four times as many copies as the original did way back in 2000, according to U.K. retail sales data. The success can be attributed in part to the Switch's high popularity compared to the N64. Pokémon Snap is the third biggest Switch launch of the year, after Super Mario 3D World + Bowser's Fury and Monster Hunter Rise.
Look Out For
Tokyo will be home to Japan's first esports gym
A PC gaming cafe in Tokyo is opening its doors on May 19 to any and all aspiring athletes who want to come train at what the establishment is calling an esports gym, according to Insider. It's not the world's first esports gym — apparently that honor belongs to LA's E-Coliseum — but the 7,700-square foot Tokyo esports facility will feature dedicated training courses and rentable PC stations featuring the most popular competitive games like Valorant and League of Legends.
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