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The game industry’s Netflix and Spotify moment

The game industry’s Netflix and Spotify moment

This week in Protocol Gaming, your weekly guide to the business of video games: Gaming subscription services are shaking up the industry, Activision Blizzard continues to dig itself deep into a workplace culture and PR crisis, and video games' late summer earnings season is upon us.

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The Big Story

Gaming subscription services are coming, whether we're ready or not

Subscription services are coming for the game industry, and the shift could shake up the largest and most lucrative entertainment sector in the world. I wrote about this topic at length last week, and you can read the full story here.

This transition has been a long time coming. Microsoft's Xbox Game Pass started in 2017, and gaming companies have long been charging recurring subscriptions for everything from access to World of Warcraft to seasonal Fortnite battle passes. But in the last few years, Game Pass and its competitors have grown into major forces in game distribution, especially as they're now tied to and bundled with cloud gaming services promising to bring game streaming to mobile screens and smart TVs.

The video game industry is now bracing itself for a potential paradigm shift akin to what happened to television, film and music. It could bring about a creative renaissance, unshackling game developers from trying to milk annual franchises and big hits. But it's not clear the industry's economics will allow it without some collateral damage.

  • The growth of Game Pass, which now has more than 18 million subscribers and more than 100 games all for $9.99 a month, has become a catalyst for an industrywide reckoning on the likelihood and viability of such a model becoming the standard.
  • "It's probably the likes of Netflix and Spotify that have ended up pushing us to this point in games," Craig Chapple, an industry analyst with the firm Sensor Tower, told Protocol.
  • "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.

Video games have resisted new distribution models for decades. Due to the technical sophistication and economic realities of making and selling games, it's been difficult to sell them for a fixed price or reliably stream them over the internet.

  • Unlike songs, which digital stores began selling for 99 cents apiece, or movies, which cost the same at the theater no matter their budget, games are priced and monetized in vastly different ways. Some games are still sold for full price at retail stores on Blu-ray discs, while others are given away for free.
  • "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 last week. Layden is worried the limited size and homogeneity of the core gaming audience can't sustain big blockbuster games in a subscription future.
  • "That's where we're headed, whether we like it or not," Ismail said. "On Xbox, people pay $9.99 or $15. How am I going to compete with my $10 game?"

Subscription gaming will require massive scale to create profitable platforms. Even then, how these services pay game creators is still a patchwork of various upfront deals, backroom benefits and other monetization tactics, some of which have smaller indie developers worried.

  • Google Stadia launched a new engagement-based revenue share for its Stadia Pro subscription that pays developers based on how many days subscribers play their games in a single month. "Ultimately, no one measure approach is perfect," said Stadia Senior Project Manager Alan Joyce, who noted that Stadia has other options for monetization on top of its revenue share.
  • "We strive to build a platform where our creative partners can find success," a Microsoft spokesperson told Protocol. "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."
  • "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," Ismail said. "At that point, we're at the mercy of the people running those platforms."

It's unlikely the entire game industry would ever shift entirely to subscriptions; it's far more lucrative to go free-to-play, after all. But just as subscription streaming services like Netflix and Spotify drastically changed the consumer relationship around paying for and owning media, such services for video games risk devaluing products until they're thought of as just one piece of a broader monthly bundle. In an industry devoid of labor protections and struggling under ballooning production costs, the trepidation is understandable.

"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."

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Overheard

  • "Our investigations and litigation have to be strategically targeted at remedying violations that affect as many people as we can reach. Our priority has to be on systemic violation of civil rights law, given the scope of what we have to do. We were given tools by the state legislature and we should be using them." ―Kevin Kish, the director of California's Department of Fair Employment and Housing, offered the state's first official statement to The Washington Post last week regarding the explosive lawsuit against Activision Blizzard.
  • "I welcome my employees to unionize, and I'm giving my full endorsement and support to an industry wide adoption of unions. I also encourage the leadership of game-industry companies, large and small, corporate and independent, to join me in endorsing and advocating for unionization as a concrete, actionable step toward improving our industry." ―Former Blizzard developer and Undead Labs founder Jeff Strain sent an open letter to employees calling for change in the game industry, starting with far more robust, union-backed labor protections.

Lootbox

  • On Protocol: Oculus VR has sold 4 million units of its Quest 2 headset, according to documents made public as part of a face-mask recall the company announced last week.
  • Another new AAA studio, this one from Sony veterans. Members of the development teams behind Sony's The Last of Us and God of War have formed That's No Moon. The new studio has a $100 million investment, IGN reported, and will be focused on creating "genre-defining, narrative-driven games."
  • Riot Games opens a new China studio. The League of Legends developer is opening a new Shanghai office, according to a CNBC interview with Leo Lin, the company's vice president and head of China. The group will focus on developing new series for the Asia market.
  • On Protocol: Activision Blizzard is in crisis mode as California's sexual harassment and discrimination lawsuit has opened the floodgates and led to more victims speaking out, a 500-employee walkout and a tumbling stock price.
  • Sony's Horizon Zero Dawn sequel is pushed to next year. The Guerrilla Games adventure title, called Horizon Forbidden West, is now scheduled to release some time in 2022, Bloomberg's Jason Schreier reported last week. Sony has yet to confirm the delay, but PlayStation Studios chief Herman Hulst hinted back in June that a delay could happen.
  • The Playdate handheld is a big hit. The adorable and unique handheld from game publisher and software developer Panic sold more than 20,000 units in less than 20 minutes last week, TechCrunch reported, blowing through its 2021 production run. You can still place an order, but it won't arrive until next year.
  • Bungie and Ubisoft team up to take down a cheat-maker. The developers behind shooters like Destiny and Rainbow Six Siege have filed a joint lawsuit in California against popular cheat-maker Ring-1, according to PC Gamer.
  • The woman behind a now-viral World of Warcraft Q&A speaks out. Kotaku tracked down Xantia, the in-game moniker of a World of Warcraft player featured in an infamous 2010 BlizzCon clip that's made the rounds on the internet since the Activision lawsuit. Developers mocked Xantia's question about improving depictions of female characters, and she now says she hopes mounting pressure on the company pushes it to improve.

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Look Out For

Video game earnings bonanza

This week and next will be the game industry's late-summer earnings season. Most prominent of the bunch is today's Q1 2021 report from Activision Blizzard, with all eyes on the company's response to its ongoing crisis and its subsequent messaging and PR disasters since California filed its sexual harassment lawsuit last month. Blizzard president J. Allen Brack stepped down this morning, to be replaced by Jen Oneal and Mike Ybarra, but it's unclear if the company will address the situation further.

Scores of other gaming companies are releasing earnings in August, including Electronic Arts, Nintendo, Take-Two Interactive and Sony. Expect to hear plenty about the upcoming holiday season, the struggles around console hardware supply not meeting demand and perhaps news of yet another game delay.

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