Game Economist Cast
What does the new wave of open economies mean for monetization? Will negative externalities overcome cosmetics economies in the long run? What exactly does a game economist do?
Game Economist Cast is a roundtable discussion of the latest developments in mobile, HD, and crypto games through a bunch of people figuring it out using the economic tool kit.
Game Economist Cast
E13: Rank Inflation, Chris' New KPI, and Defending the Indefensible
Eric brings us to the streets of Vegas for EVO while Phil finds solace in another hypercasual hit. Chris has a new metric for web3, and the crew laments inflation: it got ranked systems. The crew debates taking a bullet for millionaire execs who desperately need the help.
I used to justify spending money on magic cards by telling people that I was gonna go pro and I could make money off of it, which obviously is not true.
Speaker 2:You sure that was in your mom. You told oh no it was.
Speaker 3:I was like mom Did you ever win any packs at a local Friday night magic?
Speaker 1:Distinctly remember my first tournament because I won it with this dinky little mono white. It was a cheap deck because I had no money and I remember taking out these sweaty blue black control players, the $500 decks, and I came and I just wiped everybody and and people treating me like shit, scrubby, scrubby, aggro player. I remember they would always let my attacks go through. They'd go from thinking they're losing three health to losing 12 health and they're like I'll just never forget this dude. He's fuck, he's literally verbalized. Yet I was like that's right, it's gonna watch out for the blue, black, white warriors anyway.
Speaker 3:Let's start with utility.
Speaker 2:I don't understand what it even means In modeling. Hi everyone, it's Phil from game economist consulting you just heard Chris, chris from star atlas. How do you want to be introred?
Speaker 1:What is it, chris? From star atlas? You can call me head of game econ. How's best by game econ?
Speaker 2:head of game econ Chris, how are you?
Speaker 1:doing Well. We have had some major changes at star atlas since the last cast so honestly, I think you know the belts is tightening in the industry, but Ultimately, probably for the best. I think a lot of these studios are realizing how much can be done in a leaner capacity and I'm really excited to be a part of this as much more, much more lean but also much, much, much more efficient organization.
Speaker 2:And the head of economy design at super layer. Eric, how are you, hey?
Speaker 3:doing alright, been watching a lot of evo playing street fighter. I'm talking about that later, but yeah, this game's. This game's exciting. I wish I could be there, but I'm like, I've kids, so I can't just travel to Vegas for three days.
Speaker 1:Is evo like a big competition, or is it a convention?
Speaker 3:Yeah, it's like a big both, but it's the biggest fighting game tournament. They run like maybe eight, ten different games. Yeah, since Vegas every year, now I got two little babies. We have three wonderful things to talk about today.
Speaker 2:I will be defending the indefensible. I will be defending the Glamorous, ginormous pay packages that take two has paid two of their executives. Ceo stress is zelnick and president Slap off have gotten paid over 70 million dollars. This has been reported by axios. It was also in the filings for sec. Is there any justification for such a large pay package when take two has not been doing well, especially after the tape? The zinga acquisition has landed in flames? Eric, what are you going to be talking about?
Speaker 3:Yeah, I'm about rank systems. I've been playing street fighter, playing the ranked mode and, yeah, just what kind of design considerations there are and like how honest is the rank really and how does that feed into driving player engagement.
Speaker 1:I'm going to try to talk about Transaction fees, especially in the context of web three games. We've talked about transaction fees in the past on this podcast and I've recently had a kind of a. I've reevaluated it and I think I've come up with a way for this revenue model to work, so I'm interested to see your guys's take on it.
Speaker 2:But before we talk about those things, let's talk about what we've been playing. Got a selection of good things on sale stranger I'll go so I can figure out what I've been playing.
Speaker 1:That's how much. That's how much hyper casual garbage you have on your phone. You got a freaking. Lick it up. I Excited by Phil's words on match three. Last episode I downloaded Darden scapes. I think it's called.
Speaker 2:Yes, by parix.
Speaker 1:Yeah, it's so weird. I thought it was a match three and then I get in and I'm like wandering around a freaking garden and I'm what is going? It's like match three meta-ified. You're repairing a mansion but you have these weird match three like you get points by doing puzzles. And then there's this random, really weird puzzle that they've also inserted into the game, where you have to pull fucking tabs on a Weird like tube that sends cash into this woman's Bucket of gold and she's like in the middle of a dad. What the fuck is going on, phil, in this game she needs that money, chris, who is she?
Speaker 2:Okay, so, chris, you have unfortunately been subjected to what is called like the post at world, where companies will use fake ads so they'll advertise a fake version of the gameplay that ends up producing like the lowest cost per install number. So they misrepresent the product, and that's gotten them into trouble with some regulators. The uk took action specifically against garden and homescapes for doing this, and so their response has been to actually put the fake ads in the game, and so what you'll actually see in some games is that if you play afk arena, for example, which is a game by will, this is chinese company. They've actually integrated the first 10 levels of the game as a match three. Before they pull off, they pull off the drapes, and it's actually a squad rpg.
Speaker 1:That's why I was so confused because I saw it's made of ads in other games and I was like it was like the tab pulling and then. I get into the game and I'm like what the fuck is this? And then I see the tab that is so sketchy, because that's that happened to me. Have you guys seen those like roadrunner? You're running on a road and you're like shooting in front of you and you've got a.
Speaker 3:Exactly game I wanted to talk about today and they always show the player making a super obvious mistake. So yeah, and you're like oh, like what an idiot.
Speaker 1:I could do better, I'm gonna download. But I so I downloaded one of those, went through the ad, clicked on the ad banner and it was just a completely different game. Nothing at all like what? The. This telling you what? I'm getting to the end of my fucking rope with these kite casual games, these mobile games. I have a stick with brawl stars. I'm sick of match three. I'm sick oh, another thing. I hit up. I hit my first level where I failed in the garden scapes, the, the match three game, not the mini game or whatever. I failed and I was like all I could think about is Phil's algorithms that make sure that I don't get too cocky. And then I feel like I need to spend some fucking money. Anyway, I'm dropping a lot of f bombs because this game has me feeling lots of things that are not joy.
Speaker 2:Push through, push through, man. There's something beautiful underneath, you know game themed about casually gardening.
Speaker 3:It's really fills you with a lot of rage. Yeah, you would not think so.
Speaker 2:Do you not like the puzzles and the storytelling? Isn't like a nice variety from like the traditional match three gameplay.
Speaker 1:It's definitely interesting. It's a, it's an interesting take and I assume that it's a way of like, just it's a way of delivering the content that feels like narrative. So if you want the narrative, you can take it, if you don't want the narrative, you can just. You could just press the play button over and over again. You don't have to pay attention to what they're talking about. So that's my assumption. It's some sort of retention mechanic, but maybe it's really truly purely for game design purposes.
Speaker 2:I think it's for marketing purposes, just to get, like, lower cost for install. Yeah, it's. It's a fucked up incentive, right? This is a product of incentives which that it's hard to acquire. People, we need to figure out how to lower price.
Speaker 1:Well, when we first started talking about I think I was playing oh, the whole game we had talked started to talk about. It's just this massive network of ads, advertisers and the content, the content, it's advertising, and it just sounds like it's this big giant wheel that's just rolling around trying to pick up as much as it can. Whoever sticks sticks, and they're going to do anything to make the wheel bigger. And anybody who's in the stylist community knows my my use of idioms Freakin horrible. So that that was a very strange. But so, phil, you've been also playing something similar, is it?
Speaker 2:I have. I've been playing a hyper casual game called reload brush and I would say it's been one of the few hyper casual games that I've retained to, I would say, 14 days in. I've also monetized, which is very unusual to remove ads, and so reload rush has like a very simple core. It's massively successful. I think it's done somewhere in the north of 5050 downloads Don't quote me on that and I think that the underlying thing that you see in almost all hypercasual games and it's particularly apparent in a lot of their ads is just this idea of like progression and how they visualize progression. So a lot of hypercasual games use this gate mechanic. So you can either go left or right, you're on rails, you're automatically scrolling through some sort of track and if you swipe at the right time you can get some sort of like multiplication. And in reload rush it's more bullets, and if you get enough bullets then it reloads a gun, and if you have enough bullets it'll reload multiple guns. And if I have more guns then I can upgrade my fire rate, which is another gate. It's another gate that I have to actually shoot, and then I get to the end of the level and I shoot down these little bricks and if I've upgraded and I've had enough guns, I'll get further into smashing more bricks. Smashing more bricks gets me more cash. More cash lets me vertically upgrade each of my guns and it is massively fun to upgrade the guns. They have a golden gun.
Speaker 2:It's a stupid game. It's a stupid game and it works in so many ridiculous fun ways and this is why, like I've now respected hypercasual is that it has to boil down game design to our most primitive senses and that's a strip way all the shit, and I think this game does a really good job of doing that. I just wish it could build a stronger meta. That's the tragedy of hypercasual is not being able to build a stronger meta after they found something that has 50 million downloads Like why not invest a little more in this product? Reload rush, it's worth your $3.
Speaker 1:The form of reinvestment comes garden scapes you start to you add in like a weird storytelling layer and an extra mini game. It seems like they're not good at actually, like you said, creating a metaphor for this product. That's fun, that's interesting. I get into Brawl Stars and I feel like I'm playing an actual game and I know Brawl Stars isn't hypercasual, but you could imagine someone being able to do something like that with a game like reload rush, which actually looks good. I just download it.
Speaker 3:I haven't played a bunch of Street Fighter, not touching my phone at all. Surprise. Yeah, evil's on Big fighting game tournament. It's in Vegas. They have like tons of. This was the biggest one ever they had. I think over 7000 players enter the Street Fighter six tournament, which is, I think, double the previous record for largest tournament entry growing.
Speaker 2:This is. This defies all logic. Racing games are supposed to have the same audience year over year and fighting games are supposed to have the same audience year over year.
Speaker 3:Street Fighter six just came out and it was very well received compared to five, as I mentioned last time in the podcast. And then and also it's kind of that post pandemic Eva was online for a couple of years, so there's this all pent up demand. Street Fighter probably is the premier fighting game, so this is probably the biggest fighting game release that was successfully done and also timed just before the tournament. Those are the confluence of factors Definitely a huge success for the scene overall, but I wish I could have gone. It's in Vegas. I've got a couple times back when melee, smash Brothers, melee was there, but I have kids now so it's hard to be like, oh, I'm going to spend three days playing video games in the desert.
Speaker 3:Why are all the conferences in freaking Las Vegas? It's like a. My friend put it this way. He described dive bars like this it's a place. Nobody lives there, so you can go there and trash it and spit on the ground and no one will get offended. I feel like Vegas is that on the national scale, like everyone can go to Vegas and treat it shit and be like this place sucks, let's go home.
Speaker 2:And I think now, living in Europe, I can appreciate Vegas as one of the most beautiful rip offs of cultures together. No one is safe. There's a. There's an Eiffel Tower, like a literal chunk of the Eiffel Tower not the actual building, but a replica that's very well done that sits inside of a casino. There's the cosmopolitan, which is fantastic. There's New York. New York. You can actually go to some of the streets in Manhattan and grab a $15 slice of pizza. You aren't going to get that anywhere else in the world. There aren't those rip offs of cultures. It's a true melting pot.
Speaker 1:And you can do it all while never having stepped outside into the sun.
Speaker 2:Exactly, and open carry alcohol. I guess is unique for the United States.
Speaker 3:I've been playing a bunch of Street Fighter. I just hit platinum with Lily and ranked, but I don't really know what that means, which I'll get into, because there's always funkiness going on behind the scenes, where things are a little bit misrepresented this great inflation and like artificial progress, rank progression and stuff.
Speaker 1:I don't know if you guys were talking about Street Fighter with reference to this, these people where it's not necessarily about technical skill, it's more about strategic skill. How important is that really? In Street Fighter, I feel like that's more heavily technical, and then you have an RTS where strategy is more important.
Speaker 3:It's definitely both. Like we mentioned earlier, there's people who are blind or are missing fingers on their hands and they're still able to play at a competitive level not the tippy top, but still pretty well. Decision making is definitely very important and the modern fighting games actually are way more lenient on control inputs than the old ones, so you can definitely beat a lot of players with very simple to execute strategies and probably get all the way to gold or platinum.
Speaker 1:How many of you have banks either?
Speaker 3:I think it was iron to master. So iron, bronze, silver, gold, platinum, diamond master, and my guess is they'll probably add another tier above that at some point because you got to keep the treadmill going.
Speaker 1:I have yacht to dive into competitive Fortnite. That's like the next step on my Fortnite journey. I feel like I'm not good enough to do that yet.
Speaker 3:Your friends brought you in. You bought some skins. Time to get sweaty.
Speaker 2:What's the appeal of EVO for you as someone who's into fighting games, like, why is it fun to watch other people play?
Speaker 3:What is just exciting, like the matches are intense and like very high stakes and obviously the commentators and the crowd and stuff. It's the same reason people like to watch sports. Right, why do you want to watch people run around and throw a ball? Part of it is it's impressive to watch them physically execute these things, but also part of it is there's all this social value placed on it. Whoever wins this gets this big gold cup and gets to brag about it and you're in a crowd of hundreds of thousands of people who are all yelling at the same thing. But honestly, for me mostly it's just playing. You go there, you play with all sorts of different people, you meet different people, you learn. You meet someone from Texas and someone from North Dakota and something from Massachusetts and, like you play with them and you swap stories. And at the big social event it's also just a fighting game industry convention. The fighting games do announcements there. They'll have playable demos.
Speaker 2:Will they have an actual fight? Sorry, go ahead, Chris.
Speaker 1:There's so many questions about this niche. Is there a big prize pool or anything like that? I was going to say like in Magic the Gathering. I just remember there was this period where, in order for people to legitimize playing this like card game that for a long time was just for nerds they were like, oh, there's a big prize pool. And the second you say there's a million dollar prize pool. People are like, oh, that's respectable, You're not playing for like an Xbox 360 or something like that. It's a grand prize.
Speaker 3:So the community run events, the grassroots ones. Then Evo started Berry Grassroots at $10, maybe $30 buy into the tournament. So you're making like maybe a few hundred if you place top eight. But the big money comes when the games themselves sponsor it, for just like Magic it's. Capcom says there's a million dollar prize pool for the pro tour If you do well enough. This is realistically. And there's people who are like, yeah, I realistically could place top 10 in the world over the course of this tournament circuit. That would pay me six figure salary. This is actually a reasonable income to get and so that's what really drives a lot of the prestige that you mentioned. But it all starts from grassroots and when that funding goes away there's always people still playing it. It's really more in hobbyist enthusiast thing, yeah, but the existence of those high tier tournaments gets people excited about small scale local competition or even just playing with their friends, even if they never enter a tournament.
Speaker 1:But it sounds like you're saying like that doesn't matter for the core. The core, like player base, doesn't rely on high payouts. So basically the question I have is like are these huge payout esports tournaments revenue? Do they make sense from a business perspective? They have to be executed right.
Speaker 3:I think the companies that have gone into production, running the tournaments themselves, running the broadcast themselves they have struggled and pretty much only lost money. I think Blizzard and Riot are definitely in this pile. But if you're just gonna, they're ready, tournaments already exist and you just throw money at the prize pot. That's a lot easier to do and also a lot easier to scale down when you realize it was a huge financial mistake.
Speaker 2:Could you talk about, from like a general perspective, what are the thesis of these different games? It was very clear to me, when you describe Street Fighter to us, that a lot of what they're trying to do is make it more accessible, and a lot of the single player third person mode is trying to make it a little bit more accessible, a little bit more PvE focused.
Speaker 3:So Riot announced Project L. They had to play a Project L, their fighting game, and they had a playable demo at Evo with a couple of their League of Legends characters. It looks amazing but super high, fast-paced game. But they're doing a couple interesting things. One is the game is being designed for keyboard and mind. Fighting games Traditionally you play on a controller or a fight stick, but there's a lot more people out there with PCs, especially in China or areas where League of Legends is popular, so the game is designed with keyboard and mind. There's no motion controls, just single button specials. And they're trying to put in the social play aspect. I don't know how well it'll work because it's not like the two players are playing at the same time. It's an interesting twist. The game looks amazing. It looks beautiful. I'm sure it was very expensive to produce and I'm pretty sure they're going to go free to play with micro transactions, which most fighting games do not do. Most fighting games have been pretty unsuccessful at that.
Speaker 1:I've been thinking a lot about, just from more of the startup's point of view product market fit, go-to-market, just understanding what you are actually capable of, I would. It almost goes into that same conversation. I'm advising a company right now that I've tried to slowly steer them in a certain direction because they're like oh, we're going to be free to play PC, I'm okay, you're crypto games, so you're pretty much limited to Epic Games Store your PC game on Epic Games Store your crypto game. You just have such a limited audience. By the time you finish with the core thesis, you've got a group of 100,000 people max you could monetize.
Speaker 3:So I've been playing ranked with Street Fighter, climbed all the way up to Plat, but I can tell I'm like 50-50 win-loss and I've pretty much plateaued. But I think it's worth diving into how these ranked systems work, to encourage engagement and to play your motivations behind them, because there's often a lot of behind-the-scenes stuff they use to trick players. You tell me whether you think this is immoral or not, but for some background context, right. So these games are fundamentally competitive games and that's one of the core player motivations, and players want to come to these games to have a fair test of skill like you and I. One-on-one in this arena, better player wins and this attracts a lot of young men who are very competitive very sort of social status-seeking who are like each one is trying to one up the other oh, you're a gold rank, I'm platinum, I'm better than you. And the gold players oh, I gotta try harder to beat them. They're extremely motivating for these like maybe 15 to 25-year-old men. Speak for yourself, eric. Yeah, I'm definitely aging out of that demographic. I'm like it's fine. If these people are better than me, it's okay. I'm not that good Jesus. Yeah, it's true, it's like the basketball player who was a star in high school. They're washed up now, but another big part of this is that they want it to be a pure meritocracy. Like I said, better player wins and there's a lot of injustice and inequality in the world and these people want an arena to compete where it's not. Oh, you came from a wealthy family or you were born in the right zip code and you have a leg up in life. No, this is the same game. We're starting with the same skill set and, like, the better player wins and for a lot of them, that the fantasy, especially with growing socioeconomic inequality. And, yeah, for them it's very important that the game feels competitive and fair. They call it competitive integrity.
Speaker 3:However, at the end, of this ultimately is a fantasy, and if you look at a lot of the most successful competitive games, they actually have a lot of ego protection built in, where people can lose and externalize their losses. And team games like Valorant, you're like oh, my teammate was a shitter and they got run over and that's why I lost. In card games, you can blame RNG. You can say, oh, I got just got a bad draw. I would have won if we played this out 10 times more, but I just got. In hero based games you can blame characters. Oh, that character is unbalanced and the only reason I lost is because that's a cheesy character. And a lot of these successful games have this ego protection so that people when they lose they can blame it on that external factor and then keep playing. When they win, they oh it was all me Like a whole reason I won was my own skill.
Speaker 1:Otherwise they churn out. Is that the idea? I get pissed off and I have no explaining. Like chess, I fucking churn after chess, like I play for three weeks and I'm like eh, I suck at this.
Speaker 3:Socialized the losses, privatize the wins exactly yeah, there's nothing quite as humbling as acknowledging your own mediocrity, and a lot of these players come to this game for an escape, right? Is that fantasy of the fantasy, that it is a meritocracy and that they are one of the meritists and that they are gonna climb.
Speaker 2:So how do you avoid the objection of a character being overpowered? Because can I still blame it on that?
Speaker 3:Yes, everyone can, though, that these games do a lot to try to balance the game and make it fair. But even the smallest asymmetry people will dig into and point at, and I don't think these are intentional design choices. To like Card games, don't put in randomness to so that people can blame it on. They put it because it creates interesting strategic situations. But it's a nice side effect and you can see that the more pure games like chess tend to have a lot of people churn out for reasons we describe. But yeah, with all that in mind. So what is the rank system serve in this context? It it gives players a reference point for how good they are, and a lot of the fantasy of this game is you're playing chess every single day and you're gradually rising in the ranks and you can see your improvement. You want something tangible to say oh, you are getting better at this game, and so the rank is a heuristic for that. But it's important that this is not the same as the matchmaking rating. So a lot of games in the back end they use some Statistical rating, like elo or Glicko or true skill, this matchmaking rating, that what does this player skill level to create even matches between players. But the ranking that it gets shown to players is a fuzzy representation of that, for a couple of different reasons. One is that kind of like grades in school where an a or a b has a lot easier to intuit. Then, oh, you got a 92 and this was the grading curve and so that this is actually an a plus instead of an a minus. It's a lot harder to compare numbers. It's a lot easier to say oh, I'm silver and your golds, you're better than me. This offers easy comparisons and for these young, competitive teenage men it's a great way for them to brag and motivate them if silver Sammy is looking at his friend George who's in gold, and he's oh, I want to be gold like George. I better put more hours into this game. I got to get better, I got to climb and it keep the motivator, whereas if you don't have that comparison and they're just playing together, maybe it doesn't trigger that competitive drive.
Speaker 3:But these rankings are relative right, I mentioned grades right and there's definitely great inflation happening where the rankings mean less and less or they change over time. So, for example, in League of Legends, diamond, the top rank is 1% of the player base roughly, which is very hard to get right. But in Teamfight tactics, a spin-off game, diamond is like maybe 5 or 10 percent of the player base, but people use the same reference when they compare them. You hear people say, oh, I was never that good at League, but I got to diamond in TF T, this is my game. And they don't realize that actually they're not that good. The game is just telling them they're better. And I think over time you're seeing these rank inflation where games are Inflating the top grades and like adding more on top to add more to the treadmill and so when I'm platinum in Street Fighter I have no idea what percent I am at.
Speaker 1:Eric, are you able to elaborate more on like how the actual matchmaking happens within a rank? Why not just randomly assign players to one another as long as they're in the same rank? If you want to match, you gain 10 experience points, and once you hit 100 experience points, you go to the next. If you lose a match, you lose 10 experience points. What's inherently wrong with a system like that? I?
Speaker 3:can't work, especially with large sample size. But so you want close matches because close matches are more fun. You don't want a huge lopsided match where one player is getting stomped and the other player is just have just autopiloting. And so, with that goal in mind, you want an accurate Statistical estimate of the player's skill so you can find two players of a similar skill level and match them against each other. And there's a lot of different algorithms. I don't know too much about the stats, but I know Elo from chess is a very famous one and most games have their own sort of twist on this. Glicko, I think. True skill was made by Microsoft for I think Halo matchmaking to incorporate team components, and I'm sure every game has their own kind of custom twist on it. And if your player base is large enough, your algorithm doesn't need to be that good because it'll just converge eventually. But one of the reasons why you don't just match, for example, silver against silver, is that your display rank is not is Detached from your your matchmaking rating, for a couple reasons. One is that let's say you've only played 10 games. You have a small sample size. So, like the game thinks you're silver, maybe there's a 30% chance you're actually bronze, maybe there's a 10% chance you're actually goal right. Rather than showing your expected rank, it maybe it'll show you the rank. It has 80 or 95% confidence that you're above. So it'll air Downwards, while the sample size is low and the variance is high. As you play more games, even if you stay at the exact same skill level, as you go from 10 to 100 games, it gets more and more confident. Oh, you actually are silver. And if, let's say, we're using a 95% confidence threshold, that 95% confidence will move from bronze up into silver and so players will see their rank go up, even if they're not improving at all, which obviously feels good as a player, even if it's not actually what's happening. So that's the honest statistical reason. But other games will actually Build in artificial progression where it thinks your true rank is gold. But it'll put you in silver and say over the next 50 games we're gonna gradually inflate your rank on purpose, so that you feel better and that it goes up over time. Over time they'll inflate the grading tiers so that gold gets bigger and bigger and bigger, so that people in silver move up to gold gradually, even if they're not improving at all, to fulfill this competitive fantasy, this Karate kid training montage of I'm playing and I'm getting better, this artificial progression. Most games put a blend of the two the artificial versus the like statistical progression and One thing that's interesting is that the expectations seem to vary a lot by audience, like, for example, in mobile games.
Speaker 3:They tend to do this a lot more. For example, if you look at clash Royale or a brawl stars or heartstone even, they tend to do a lot more of this artificial. You playing, you're winning half your games, losing half your games, but your numbers are still going up. Your trophy count is going up, whatever the games ranking system is, and Also the purity of the competitive Fairness also seems to vary. For example, in mobile games. Clash Royale is one of the most competitive mobile games, even though there is very obviously pay for power. You have higher level cards. If you have legendary cards, you're probably gonna have a better deck and card in tournaments, though that does cap in tournaments.
Speaker 3:That's true in tournaments They'll do level caps. Still, having the legendary, the rare legendaries, gives you access to more tools. And I haven't watched a ton of clash Royale but from what I've seen, the top tier decks usually have a couple legendaries in them. In card games is a little. It's more in the middle where, like, people accept that people have different card collections. Some cards are more expensive and they're more powerful, and that's okay. And there's built-in randomness to card games. And I think fighting games lie on a pretty far other end of the spectrum where they're like I don't want any power progression, I don't want any of the stats to change, I want the characters to be as balanced as possible and they Seem to tolerate the least amount of power progression or other factors influencing game outcome.
Speaker 1:So I've not done much on matchmaking before. So I'm curious is if my observation is true. I've noticed like in Brawl Stars, it's either I completely steamroll the other team or the other team completely steamrolls me. I have had very few close matches and I don't know if that's just an artifact of me being very low rank at this point, because I've only been playing for a couple dozen hours and maybe after I hit a thousand hours I'll have much more close, close ranked matches and as I get better but I notice Any triple a game or really like a console game Much more quickly Does it feel like it's a close match every single time and I wonder if that is just an artifact of of the genre, the types of people who are playing these games. Maybe you have a larger like tale of of like bad players. You know it's just super long tail of just casual, don't really care or if it's intentional, if I had to guess.
Speaker 3:Brawl Stars prioritizes quick matchmaking time, which means they're much looser with their matchmaking restrictions. It's also possible they're matchmaking algorithm is weak or there's other factors making it hard. For example, if you play five different characters, you might have very different skill levels on them, your team composition, even if your skill rating in the back end is very evenly matched. If you just happen to have a bad team composition and your opponent happens to have a good team composition or a bad matchup, that might cause it to be steamrolly. And then, finally, the game itself might just be a steamrolly game. The game itself you might be perfectly evenly matched, but whoever gets an early lead quickly snowballs and it feels like you got dominated, but even though it was a fair match. But when all these things happen, people tend to blame matchmaking. Even though it might just by design. Mobas tend to be snowbally. I was going to.
Speaker 2:I was going to hit you up with a theory, all right, so I have a theory of this community. Let's hear it. You have a lot of players, as you mentioned, that play these particular games and are interested in rising to the top and demonstrating something, and this is a playing field. Once you can prove your worth, there's a lot of validation that you get from winning in this particular domain. When we look at what these players value, they play, or they value balance, which I guess means they'd also have some skepticism around new content, like they'd want things to go slower rather than faster, right, so I imagine that any game that's a fighting game could like triple the amount of characters. Perhaps they released into this game, and I guess in some sense you still have characters that are DLC, right, or announced DLC, but that's still a fairly small addition to the rosters, or are they really growing over time?
Speaker 3:They definitely grow over time. I think Street Fighter 5, I don't know where it started, but it's kind of full screen, I want to say at least like 30 characters, and Street Fighter 6 is definitely doing the same thing. They launched with a small roster. They announced a character right before Evo. I don't know how much they cost, I want to say 10 or $15 a pop. And while the players are sensitive balance, I honestly think balance concerns tend to be overhyped. Like I said, it's an ego protection thing. They blame their losses on poor balance or criticize the game for poor balance, when really it's. They're just bad at the game. Could they?
Speaker 2:be led lights in some sense that they don't want new content, Like they want to optimize over something stable and new content threatens their dominance in the game. They just keep going back to Dendy and Dendy was like a Dota 2 player who was famous for playing a particular character called Pudge. He would throw all these hooks into the game and stab characters using the first Dota documentary and then he faded and some eSports players fade right. They can't keep up with the game and I would imagine that there's a relationship between the stability of eSports stars and how sensitive a game is to new content. Overwatch does not feel as stable as something like CSGO. I don't know. Is there something to like stability and content and kind of these type of fighting games? Like to see your point. That actually counters my theories of Street Fighter's adding all these characters.
Speaker 3:Yeah, now, this is actually a great point. So the games that get updated constantly is sometimes called patch games, where the designers are tweaking with the numbers, they're introducing new characters, they're shaking up the game mechanics. And there's other games that are very static, which sometimes are called legacy games, if you Starcraft Brutal War, for example, or Smash Bros Melee.
Speaker 2:CSGO 1.6.
Speaker 3:Yeah, 1.6. Very rarely touched. And there's this trade-off. There's this great video I want to shout out by Kora Gaming on honers versus innovators. And that's essentially the trade-off here.
Speaker 3:Where honers want to hone their skills, they want a very legacy, established game. They want to know that the things they're practicing and training are going to be relevant for the years to come and not just going to get removed by some balance update. And they want a game with a ton of depth where there's a lot to study. Do you think chess is the classic example where there's so many decades and centuries of openings to study, whereas in a game like League of Legends, the openings from 10 years ago are totally irrelevant now because everything has changed. On the other hand, there's innovators who they want to try new things. They want to experiment with a new character, they want to try new abilities. They want oh, they added this new mechanic and it changes the way you have to play.
Speaker 3:This is interesting and, frankly, the vast majority of players like content. Most people like changes, they like updates. It's marketing because you're like oh, the character I play got buffed, maybe I'll try playing this game again. And most modern live service games use updates to keep the game fresh, to add new content, keep players coming back. But yeah, there really is a tricky balance especially if you're trying to be a competitive Is that you don't want to shake the box too much to scare off all your competitive players, the honers but you want enough variety to keep players coming back. I think Street Fighter 6, their plan is, I think, one major balance patch a year and probably somewhere on the order of three to six characters a year.
Speaker 2:That's not a lot by live service standards and you're saying only one major patch a year.
Speaker 3:Yeah, I'm sure they'll do little tweaks here and there, but they're not going to, Because a lot of these things screw with your muscle memory. Like you've practiced this thing and this specific setup, like where you knock them down, you run into the corner, you crouch and median punch it's plus two on block. And then you have this set of options and if they change it so that, oh, it's actually minus one on block instead of plus two, it totally changes your gameplay and you have to relearn that. And what you see sometimes from games that are patched too frequently is players don't bother honing those things. They're like oh, this is strong, it's going to get removed. So it's not even worth my time to practice it because it's going to get probably removed in three months. It's almost like changing your tax code too often, where someone might develop a whole business plan around a specific subsidy policy and if it gets changed every six months, they're like I can't build a whole company around this current policy because it's going to change. That's so interesting.
Speaker 1:Like with card games, especially early card games, a match at the gathering there's no way to. Very seldom do they change the actual rules of the game and never, at least previous to the age of digital card games, would you have seen a card actually be edited in some way. There's no irada to the cards. Really that was exceptionally rare. You just have outright bands of cards because in these fighting games, in these super-high, super competitive RTS types of games, you can have such a tiny little tweak to everything. You can keep it much more smooth. But in card games for the longest time they had to make basically just these massive bands and what it leads to and this is a personal observation like card games typically, the meta is just start to get out of control.
Speaker 1:I remember I think it was Boko Food was like a deck maybe three or four years ago in Magic the Gathering. That was just absolutely. It was the most dominant deck in all of Magic the Gathering history and they banned the shit out of that card and it just. It was shocking to the community that the meta could get so out of control because of one card. It was just causing all these issues and it's a tough thing that they've had to deal with, and I do think with the age of digital cards they're starting to I'm almost positive hurt stone at its will. Change a specific card, the text. Maybe it does one less damage, maybe it has a cost one more energy or something like that.
Speaker 1:Can't edit a paper card Exactly, so now I think Magic is starting to go down that route. I have not played Arena in probably a year and a half, so I'm not sure what it looks like now.
Speaker 2:So they're really starting to branch when it comes to digital. They're really starting to branch into doing more digital specific cards, like a lot of the things in terms of shuffling your deck. We're starting to get rid of those. They're starting to they've had. They're making arena specific cards now that specifically take a fact, take advantage of the fact that the game is digital and this is what Marvel snapped it really well, scare Devil. Let you look at your opponent. Who's played their cards. You can X-ray into them. That's very hard to do in a physical format.
Speaker 3:I have to bring a full circle. I've been. I got Platinum and Street Fighter. I don't know what it means. Right, I know that my rank is plateaued, so the artificial progression has stopped. But I really don't have a great sense of was my progression from Silver to Platinum? Was that me getting better? How much of that was me improving versus the game just telling me I improved when I was really just playing more games? And yeah, what does that actually mean in the grand scheme of things, if I went to a tournament, would I just get O2 and get eliminated from bracket immediately? I actually have no idea, because all these rankings are relative.
Speaker 2:I completely agree with you. I've had this problem in Clash Many, where they also just have a persistent effect where you keep carrying on so that your wins produce more points than your losses. So you essentially have this softening of okay, I only need like 45% win rate to keep progressing and it doesn't. Let me see where I am in the world rankings and you have to be in the top 1000 to be in a leaderboard. So it gives you like this really fucked up perception. But it also means that I'm going to adjust my expectations. I go back to a normal econ model. Even if there's great inflation, then I just reorient myself and we've already seen that anything less than an A or B is embarrassing, whereas those things would have meant a lot more. You can just do everything by percentile and sometimes ranked systems will come out and give you percentile stubs for each of the different ranks and you can construct a distribution. I believe Overwatch did this, but it surprised a lot of people. It surprised a lot of people what the distribution was like, I don't know. I think game designers should get a little bit of license to push people to the right word, part of it, even if there is that rising expectation that happens.
Speaker 2:Speaking of Take Two, take Two has doubled the compensation for CEO Stress Zelnick and President Carl Sladoff for a total of $72.3 million, split between cash and stock. Interestingly enough, the two executives contract their services through Zelnick Media Capital, with the Zelnick receiving 60% and Sladoff getting 40%. Now, by the way, that is a very interesting tax hack that you're able to do when you get into the hyper echelons of the executive world, which is that you contract through a company and so you don't have to take your income as actual income. You store it into a business and then you can invest it in pre-tax money and potentially defer taxes and take it when you're in a lower income tax state. So they might be able to establish residency in Austin, texas, and not get hit with income tax, whereas Zelnick might be in California right now. So it's actually like this really clever strategy, and they can also do things like automatic tax sell-offs, so you can basically get around lockout periods that SEC has as long as you announce when you're going to sell things off. So they I'm sure they have their system down down pat. Now, the compensation generated a little bit of controversy because the price of Take Two stock has gone down recently and I was going to go out and defend them.
Speaker 2:I think it's important to understand that when executives make extra pay, it doesn't always mean that there's less for everyone else. And in the case of Take Two and in the case of Activision, these executives actually grew the pie for everyone and they made everyone else better off and they made everyone else richer than they might otherwise be. And Call of Duty has made a lot of millionaires. Call of Duty has made not just millionaires inside of the Santa Monica HQ, but they've also made millionaires of studios that are in Australia, studios that are in Shanghai, studios that are in Foster City. There's a lot of people who have made wealth out of Call of Duty.
Speaker 2:Okay, how do you actually award any of this back to the executives? Isn't it always the creatives and the artists who end up producing all the valuable things? And that's certainly true. But there are a ton of artists coming at you wanting to have capital deployed against their projects to be able to fulfill their visions. And this is what you have to do as an executive, is that you have to make choices about how you want to deploy capital and you want to deploy it to its most productive use.
Speaker 2:And the thing that Bobby saw very early on is that when he put a dollar into Call of Duty ended up making more than one dollar in return. In fact, it ended up making a lot more than one dollar in return. And so he kept scaling the franchise. And not only does he scale the franchise. I think in many ways he was getting increasing returns to growth, and I think that's a lot of what the Take Two compensation is about as well is that they've hit these certain incentives because they've been able to grow these services. They've been able to play more and more capital and see these franchises grow. And when those franchises grow, there are a lot of people who benefit underneath them, and it seems like there's more demand for these franchises than they otherwise saw. And these executives saw it very early. So in the case of Bobby, he was able to open up six studios against Call of Duty. It's an incredible army of people.
Speaker 1:There's six. There's six studios.
Speaker 3:God damn.
Speaker 2:So when you open up Call of Duty and you see the logos flash for all the different studios, it's getting really cramped on there. So there might be 10,000 people that are working at Call of Duty on any one time. And it's the same thing for a lot of Take Two franchises. They went from Borderlands to being a small game by Randy Pitchfork. It's also growing it with Tina's Wonderland, which was an extension on the franchise. And of course we know GTA V continues to grow every single day and Rockstar has grown with it.
Speaker 2:And so where do I want to go with this? So I would say executives help deploy capital and sometimes just being aggressive with how you deploy that capital is one of the ways you succeed and it's one of the ways you're able to grow and it's one of the ways you're able to enrich a lot of people. And there could be franchises out there that haven't had their capital deployed in the same way. And you just think about Battlefield, which EA has tried to expand. They've tried to make a second game out of Dice LA a long time ago. There's a game called Dice Hardline, which is more of a cops versus robbers. That one didn't work out. But they've never tried again, except recently when Vince has come to power. But again, this is an example of an executive who wasn't able to deploy capital to its most productive use and EA suffered as a result. Battlefield was not able to expand, Dice was not able to grow. There wasn't a lot of wealth generated when it came to that franchise versus Call of Duty.
Speaker 1:Your main thesis, Phil, is that these people made $10 for the company. Seven of those dollars went to everybody else and three of those dollars went to them. It's not like they're stealing from the company. I think that's the big thesis that I'm getting.
Speaker 2:That's exactly right. It isn't the case that CEOs are their own bosses. They report to a board of directors and the board of directors is appointed by the shareholders. And what we see is that, while there are exceptions, generally executive pay aligns with performance. They win by growing the size of the pie, and that is what Take 2 did in some respects. Over the long run, they get the share price and how much wealth they've generated and how much wealth they've distributed to a lot of different people.
Speaker 2:It's pretty dramatic and I'm specifically talking about employees, not your shareholders and you want this productive activity in the economy. I want people to effectively allocate resources to games. How much quicker could we have had Call of Duty mobile if Bobby saw it even quicker? That's a great franchise. I would have loved to have that in my hand faster than I might otherwise had Candy Crush. Same thing. All these different franchises could be bigger and stronger and we could enjoy them even more if more capital were deployed against them. Why can't we have two street fighters a year? Maybe the market demand isn't there, but having efficient allocators of resources means we get better things over time. We get better quality games, and I think that's tremendously exciting.
Speaker 1:The classic rebuttal that I get from more people on the other side of the spectrum. Obviously, I'm a capitalist, so I believe in the free market. If the compensation for you growing a company 25% is $20 million, then that's what you get. The classic defense that I hear is we only need so much money. So why are these guys? Do they really need this compensation to keep doing what they're doing? I think it's a reasonable question. Do they need and I know this is not an economic argument, I know this is not an argument that would hold up in the econ, but do they need this? What? Where they went from 30,000, 30 million to 72 million? Do they need 42 million dollars? That's to keep doing what they're doing? And I think, from a Maybe a more philosophical point of view, you could ask the question.
Speaker 3:I think the point is right like how much of this is really Bobby Kotick's doing? How much of? Because, frankly, we've seen Blizzard flounder under his leadership. How much credit does he really deserve for all that? And from what I've heard from the insiders is like at the C-suite he hires all these like games industry outsiders who have no clue what they're doing. He hired the CFO from United Airlines who came in just dirtled around for a year and a half Like just doing nothing and then left right. Like he hires is like other executive buddies from. There's this whole click of them and it's really questionable whether they're making the games better. Maybe there was some Inside angel. Hey, what's pump money into the call of duty franchise? What's the counterfactual?
Speaker 1:to determine if these guys are adding this value. So the company gross revenue by 30 million dollars. What portion of that is due to the CEO or to the executives, the C-suite, and what portion of it is due to, maybe, middle management doing a really good job with their departments? Do you compare to other other companies, similar companies? This one did badly, this one did well. You must be due to the CEO.
Speaker 2:We at least, we at least usually compare against the S&P 500, so you at least compare against the average performance of other companies in the similar sector, and that's usually how compensation is rewarded. To the rising tides. Do list all boats like you do get Everyone, everyone riding the wave. But I still think there's a bunch of ways that boards, board of directors, evaluate. Everyone has the right incentives here to be effective at monitoring, monitoring the principal, making sure that they don't shirk their duties, although I did see an interesting paper that, like a workplace being close to a golf course was Actually a predictor of some executive tricking their responsibilities. But the counterfactual question is interesting. I don't think there's any experimental evidence that we have. But when you still have someone who's paying out and we could say the same thing for any employee, though We'd say that any employee whatsoever how do we actually observe like their marginal product of labor? It's very difficult to do.
Speaker 1:That's the biggest issue with the labor, the entire labor economics field, is the inability to measure marginal product. You can measure marginal product in more blue collar like labor, very labor fields tons of Scandinavian data on strawberry pickers or these like very Quantifiable operations. But how do you measure the output of an executive? How do you measure the output of a manager? It's very difficult.
Speaker 1:Quick rant about a fucking NPR podcast that came out about Kind of productivity and remote work. They cited a couple of studies that looked at these highly visible marginal product professions. One of them was a labor job I think it was some sort of some sort of agricultural corn picking or strawberry picking, something like this. But then the other one was managers in in like a programming job and they use number of lines of code reviewed as an indicator of Productivity, which is I'm not even gonna go into how that's maybe not the best indicator of productivity for a manager, but the problem is you cannot see this marginal product, or almost for most professions it's just not something that you have visibility on and so these counterfactuals are almost impossible answer. It's one of the big problems facing labor economics and Speaking of impact, that I have no counterfactuals.
Speaker 3:I think there's another issue, which is that these bonus packages tend to be very short-term oriented and there's very long-term oriented impacts on, for example, blizzard's brand has been continually going down the last decade and the value of Blizzard IP is a very durable, long-term thing that these executives might say oh, I can cash out in the next five years, burn the brand a bit to get some extra profits and I'll be out by the time the bill comes to pay. And now Blizzard, the development studios oh, we only know how to make Call of Duty, we forgot how to make other video games. Or, like this, other brand has been tarnished by this Executive who basically came in, collected their bonuses, got a buyout and left whatever instance that you have that, they're only short term share prices.
Speaker 2:Don't go overboard overnight. They usually have really long-term incentives. Sometimes they actually have to hold stock. They have to hold their whole pay packages are almost entirely vested yeah but how long? Like four years, five to ten years. This is a exelnik one I think was ten years in the making.
Speaker 3:When did Diablo 2 come out? Like 20 years ago. Diablo 4's successor failure will have impacts on Diablo 6 that, like he's never gonna be around to eat. These things are very long-term, durable things.
Speaker 2:But he can also have chains to himself when he leaves. They can have. Even if they leave the company, they still might have vesting periods for their shares. So their incentives are pretty lined. This is a pretty effectively solved principal agent problem and if it were the case, why wouldn't the board of directors just increase the longevity of the vest period? I don't understand where they be a breakdown of incentives.
Speaker 3:I don't know enough about how like boards design these incentive packages, but the thing I've always heard about public companies is they are way more fixated on short-term results. Talking to people in finance at Blizzard, compared to finance at Riot, they care way more about quarterly earning reports than but but they don't manage the company like that, though.
Speaker 2:They don't make decisions. That's the one I push back on. They don't make decisions that are consistent with that Overwatched it. Games get delayed right, so they're clearly making a trade-off on hey, there's this future income that I can have, or I can have Perhaps less income, but I could get it out quicker and I could increase the quarterly earnings. If they were operating in accordance with those incentives, I don't think we'd see things like games delay right. There have been times where games always might get delayed.
Speaker 3:They're like putting off earnings, like Warcraft 3 reports should hit the fan because that thing got rushed and was horribly managed. And again, this is many layers away from Bobby Kodak. I don't think it was him directly, but Diablo 4 was rushed to launch. A lot of the criticism about season one is because the game wasn't ready and they were like we want to hit this 6-6 launch date. Yeah, I think these games are getting rushed out a bit and maybe Blizzard is just bad at game development. They're really slow and they do need some gas. But there definitely is an orient. Hardstone has been pushing more aggressive modernization. There's definitely an orientation towards more short-term results.
Speaker 2:So Bobby's been the CEO for like over 20 years. Do you think this is a nuke, like he's only just been interested in like short-term increases in revenue Maybe the case that he wanted to increase revenue before selling off the company or do you think this is more like Pervasive throughout the industry?
Speaker 3:I think, whenever gay companies go public, this seems to be the trend is that they care a lot more about those things.
Speaker 2:I did a lot of like principal agent stuff in grad school. I thought it was like the most interesting course, because there's this big mystery about why CEO pay has increased Significantly in the last five to ten years and there's all these different competing theories. I figured it just has to do with stock price. So the leading theory we had was so one of one of them is the theory of they're just robbing the company. Basically, there's some sort of chiff change in institutional incentives and boards have not monitored their CEOs as high as they've done in the past, and so CEOs are putting their hand in the cookie jar, taking off extra little cookies. That's one theory.
Speaker 2:Another one that's been Strongly debated has been the rise of globalism. So essentially, the ability of a CEO's labor to scale has increased, so their marginal benefit has increased when they're managing multinational corporations, because the market cap of, let's say, apple is so large that even like a 1% increase in that market cap is so significant that their pay, of course, would increase in accordance with this. It's a product of almost software and just like the scale at which you operate. That's the share price argument. Right, that's more. Yet that's more. The share price argument is that is that there really hasn't been a change in a lot of the board of director stuff. If anything, there should be coming better at monitoring.
Speaker 1:Speaking of pay revenue and monetization, I think web 3 is definitely in a an interesting spot. They have the opportunity to. Basically, they're birthing a new monetization strategy via marketplace transaction fees, and I made a post on Twitter that actually had a little bit to do the do with this and I said if free to play games gave us micro transactions, then web 3 games are gonna give us nano transactions. And I met that in a couple of ways. The first way I operate on Solana blockchain. There's a billion transactions going around and each one of those transactions is taxed a tiny bit by the chains. There are a lot of really interesting monetization techniques that you can employ there. For example, if somebody gets ten dollars worth of fees in an entire year, they're not really gonna notice twenty dollars worth of fees, which is huge potential revenue for the firm. That's not really what I want to talk about today. I want to talk about actual marketplace transaction fees.
Speaker 1:We had talked about this topic in the past and we had come to the conclusion that, given Current average revenue per user numbers are poops, it doesn't seem like a viable revenue strategy given the, especially given the limited space that web 3 is operating in in terms of their User base. I've heard numbers anywhere from 1 to 10 million for the current web 3 gamer user base. You consider that as your universe of players and and you know. As for Solana, for example, I think that the number is somewhere around 1 to 2 million potential players, and I think that's even pretty high. I think that those people could be activated. I don't think there are 1 to 2 million active players in that space and the Solana ecosystem at least okay. So we explored this question. We use kind of our poo as a Way to calculate how much could you generate in a marketplace, given marketplace fees, and One of my central kind of my central thought here in this article. I'm hoping to post it. Actually, I'll probably be like my first medium article or something, or footnote, so I don't know how to actually write a medium article.
Speaker 1:There's no equations, though is that you should not use average revenue per user to try to extrapolate out Revenue for marketplace transactions. These. You should use something called average volume per user. So, if we think about a web 3 marketplace, you take $10 into that marketplace. You spend it on a sword. You take that sword, you use it, you sell that sword for $9. You spent $1, you got $9. The net change in your bank account is $1. So that's your actual spend. That's what we think of as our poo. So off poo is that $10, that $19 of volume. I've spent $10. I somebody traded it back to me for $9. So there's all this volume going back and forth between agents in this model and every single time a transaction goes through that volume is taxed at five, seven, ten percent depending on the marketplace. So, for example, I think axi infinity charges four point eight percent.
Speaker 1:So if we use axi infinity as a model here and the numbers that I'm going to throw out for axi infinity are actually pretty consistent with strat list numbers, for example, axi, I think they do somewhere around 36,000 daily volume in their marketplace for axes. This doesn't include the actual sales of their tokens or anything like that on marketplace. This is purely within the Ronin axi marketplace. I $36,000 of volume per day. Now if you divide that by the supposed 10,000 players daily active users in AXIE, obviously there's debate on whether that's an accurate number because that's wallets and, as we all know in Web 3, there's not really necessarily a perfect correlation between player and wallet or, sorry, perfect intersection. So we think about this. $3.6 per day per user of volume. That's certainly not their spend. That's not how much money AXIE is taking in from that. They're taking 4.8% of each one of those transactions. So if $36,000, they're taking 4.8%. And I've got the quick math here. What this essentially equates to is about $5 of monthly average revenue per user. So monthly ARPU Now I try to scour a whole bunch of different places for monthly ARPU.
Speaker 1:I got anything from $1 all the way up to $15 if you're talking about a subscription game, wow, $1 if you're talking about a hypercasual game. So I think this $5 is actually a pretty reasonable ARPU for a traditional game, a Web 2 game. It's not unreasonable for a live service game. I think the battle pass for Fortnite is $7. So if you buy the battle pass every month or if you only have to buy the battle pass every four months, but we take this $4 ARPU, which is really $108 worth of ARPU average volume per user, as I'm going to coin it and this whole entire model, makes a lot more sense. So as you scale your users, you're not scaling, you don't care about this ARPU. You're not taking 5% of ARPU, you're taking 5% of ARPU and ARPU comes from that it's after you take that cut. So when you look at it this way, it's very similar to a traditional Web 2 strategy Grow numbers, grow the marketplace and you're going to grow revenue.
Speaker 1:Now, that said and this kind of goes back to this discussion or this Twitter post I was talking about, where we're talking about nano transactions this is heavily reliant on the fact that players trading back and forth with one another. You could have a game where there's no reason for me to trade with Phil and there's no reason for Phil to trade back and forth with me. Elden Ring is an example of a game. If it had a marketplace, it probably wouldn't be that much trade, whereas WoW has a ton of trade. Because I don't want to spend 100 hours trying to get this weapon. I've got better things to do. I've got to level up my crafting skills. So we do a lot more trade in a game like WoW and Eve Online than we would in another type of game.
Speaker 1:So my argument is not only can you make the transaction fee model work in terms of revenue, so if you need to make $100 million a month to become some sort of unicorn status game and you take this $5 monthly average per user revenue, this monthly RQ from the transaction fees. You basically are looking at the same number of players as a traditional game. That said, it's heavily reliant on the fact that you have a healthy marketplace where people are trading back and forth. And for a live service game, it's the same statement as saying it's important that you have new content that the players can play.
Speaker 1:So for a lot of these Web3 games that are focusing on marketplace transaction fees, I think that they need to really understand what it means to have a good, healthy marketplace where there's lots of trade and you need to have good reason for people to trade. If it's too easy for people to get everything they would like, then there's not enough reason to trade. And I have these five kind of points from Virtual Economies Design and Analysis, a classic book by Edward Castronova and Leiden Verta. I always forget that guy's name, vili Leiden Verta. This is like most people would consider this a decent read. They have five characteristics of a healthy marketplace and I really like these characteristics and I think they're really important. I would also I have emphasized in this discussion, and I'm going to emphasize from here on out, their second point, which is specialization in the marketplace.
Speaker 1:There has to be a reason for me to focus on one thing and not be able to do everything. If I can do everything, then I can get everything and there's no reason for me to trade Now. Obviously exclusive randomness helps to motivate trade a lot, like you could have no specialization and as long as there's exclusive items that are randomly generated that other players want, that's going to help to drive this marketplace. So that's why PFPs and these other kind of more just Web3 art packages art companies can get away with huge volume on their marketplace is just because of exclusivity, which is something that Web2 games in the past haven't really focused on that much. There are other points are number of players. Obviously you need to have many players to scale your marketplace, that's not really a question. The specialization, entry fees, free entry. So the classic competitive market, perfectly competitive market assumption is free entry, homogeneity and method of exchange. Those other points are not as hot on. But the specialization and number of players and I think in the age of Web3 games I would add on exclusivity of items is going to drive your marketplace activity. It's going to drive average volume per user, which ultimately drives revenue because your RPU comes from the percentage.
Speaker 1:Transaction fee doesn't come necessarily from somebody's willingness to pay anymore. Now I do argue that this revenue model has the opportunity, or it has the potential, to extract a very fine willingness to pay from each and every single user because they will participate in the market as much as they would like. That's my thesis on transaction fees. Right now. It's a viable strategy. It relies on producing a very healthy marketplace and giving people to reason to exchange. Just like any other free to play or microtransaction based video game revenue strategy. It relies on player growth and it relies on large player numbers. Can't make this work very easily without large player numbers, which is something that Web3 is naturally facing right now. One final caveat that I want to point out is that right now we probably have the highest spenders in Web3 just due to selection bias. As that player population grows, the average spend or the average volume per user is likely to go down because new, less experienced, more casual players are going to enter that ecosystem.
Speaker 3:This reminds me of the free to play book, where it's step one grow users, step two, monetize them, whereas for you guys it's step one, grow users, step two, make sure they have things in their inventory and then step three, get them to trade. One of the questions I have is obviously an issue is that step two, how do you make sure people have valuable assets in the inventory to trade? In the first place? You mentioned you can increase trading velocity, but you can also just increase the value of the things being traded to grow your trading volume. That often seems like a barrier to players, especially as these games try to go free to play, but then they give people free shit to encourage them to trade. But you're giving them free shit, which deflates everything.
Speaker 1:I think that the mature place for this entire industry to go is the direction that typical like battle, typical free to play mechanics strategies already employ. And it's just because I have 20 skins in Fortnite doesn't mean that I don't want more skins tomorrow. And I think that Web 3 is so focused on creating these assets that hold their value over time and less focused on players engaging in the moment and at the time. And a lot of this is because Web 3 Studios don't have a lot of experience with live service. But just because I spend money on something today doesn't mean that it has to have a ton of value tomorrow. I know that's counter to some of the Web 3 ethos. Some people think that all of these assets, their whole purpose, is to retain value. I don't think that's true. I think persistence is important and perhaps interoperability is important, but ultimately this is a way of opening up the door to exchange between players with real money transactions, and that doesn't mean that my sword today has to be worth $100 tomorrow.
Speaker 2:But we've talked about this before, I think in earlier casts. But you need these numbers just to be so freaking large to go from a place where you care about our poo to a place where you care about our poo. You want people to care about GDP because, ultimately, if you're the government and you're shaving a couple of percentage off points of GDP, but the volume is just so freaking large to make that happen. So if we assume that actually, let's just round it up to 5%. So Axis, do 100 million in transaction volume per year, they're going to get 5 million in revenues just from that. That's not enough to sustain. They need to be much higher than that. So even if you get to a place where you've executed it on the design that you want, that does the things you wanted to do, chris, what do you do? Can you get this up to 10% percent? Can you get this up to 15% percent?
Speaker 1:So I would first of all, don't you want to increase the?
Speaker 2:transaction tax. If this is how you're going to suck money out of the economy, don't you need to make sure that you're appropriately pricing the gains to participating in the auction house, participating in the marketplace If you want?
Speaker 1:I think you're. To me. There's a metric here that I think you're getting at and it's the ratio of actual spend, of whatever's trends, what's being charged the fee on versus their volume. So if you think about that, like you were using the 5% for example, $100 million and $5 million in revenue, that ratio, that like 100 to 5 or 20 to 1, that's going to be a really important ratio for these companies and companies with those let's. I guess, if we were to do the small number on top, the larger you can make that number, the more successful you are. So how can you get people to? Okay, actually, that metric is you can't get that larger except by increasing the fee, but I think the more you can get players to. Ultimately, I think that, like, the fees right now are very low and I'm curious how high we can drive those fees because I agree with you, like there is still a volume question. But I guess one of the things I want to point out in this article is that ratio is actually perhaps it's relevant and it's not as bad as we think right.
Speaker 1:For every $5 they spend in the marketplace, the company gets one. And what is that sweet spot? What are we going to find out. Roblox charges a lot. Now they're offering tons and tons of services along with these transaction fees, but it's certainly more than 5%. It's probably more than 15%. And why did Web3 anchor to 6%? Why is 5%? I don't know? 3% to 7% the sweet spot?
Speaker 2:But do we even know any successful auction houses or marketplaces Even in the real world? Ebay hit a wall very quickly on how much they could do through a second-price sealed bid auction system where they take a share. They hit that tam very quickly and now they do a lot of first-party sales. That's one of eBay's growing businesses. It's just like quick buy, just like buying it like you would any other website. Even when I just think about other marketplaces like Christie's, that's a great business. Like they sell art, it's wonderful. It's also one of a kind. There aren't many marketplaces that exist in such a way. I just find it hard to believe there's going to be all these games that are in your own mini-nations Like to your point. Like getting that scale is just crazy.
Speaker 1:And there's also a strategic consideration for the players. You could have coordination, where everybody decides to transact and something that's worthless essentially, and they say, if we're going to get taxed at 5%, we might as well let's all get into the social contract and slash this thing by three zeros. That said, I do believe that the competitiveness would eventually win out. There's profit to be had. If I'm the one who's, I know we've all got this social contract that we're not going to work in the pennies and we're not going to work in the dollars, but I can make some extra money if I work in the dollars. So I do think that there's a market. I do think that there's an equilibrium price.
Speaker 1:That is non-trivial, but, at the end of the day, my philosophy on all monetization is that there is a pie that a player's willingness to spend, and it is your job as the monetization expert, as the business, to try to extract as much of that as possible. Micro transactions, free to play, is the best way that we have been able to monetize that pie and we're probably extracting most of it. I think there's a big question about does the frequency argument, marketplace transaction fees, this nano transaction, as I meant throughout, does that allow us to get more access to that pie. Is there something there? And I think that the point of this article, the point I'm trying to make, is it is possible. It is a relevant monetization strategy that could make a company money, because I think when we had visited this in the past, we were using our Poo, and I just don't think that's the right metric. There's a ratio between the volume and the actual spend, and you can't assume that the spend is equal to the volume. It's just not the case.
Speaker 3:Are these market place fees just dodgeable, Like you mentioned, if everyone just uses other currencies? I know, for example, Steam Valve has a 2.5% tax, I believe, and people of high-end CSGO traders just use pecuniary goods to trade instead.
Speaker 1:Yeah, you swap your assets into a different exchange and trade them on a different exchange and you completely avoid the fees.
Speaker 3:Yeah, the whole blur open-sea thing right. It seems like by being on chain, you actually open yourself up to not having enforceable transaction fees.
Speaker 1:Yeah, and the way that you do this is by undecentralizing and just say our assets can't lead this environment. Or, if this asset leaves this environment, you write a smart contract that deactivates the asset and this asset can no longer interact with our programs. But that defeats the purpose of Web3. And I think that's a unique challenge to Web3. I wouldn't argue that they've done it to themselves. I think that they're causing more problems, but it is an interesting challenge that they face. How do we get around this issue of needing to centralize with an ultimately decentralized ethos? Because this is probably the biggest point. How do you get people to behave? Nobody wants to pay taxes here, which is why I, ultimately, I'm a big proponent of just Web3 as digital collectibles. I think that is probably the I don't know why Web3 studios don't focus more on primary sales Just fucking primary sales and it goes back to the land tax Directly on the auction house.
Speaker 1:Yeah, exactly the land value tax. Oh, how do you get around people speculating on your assets? Just fucking sell them. People want to play a game. They don't want to invest in this thing. Web3 gaming is not bringing us highly valuable digitized assets. We've already got those and it might produce some. There are other digital assets that are very valuable that are not crypto. You don't need crypto to have a valuable digital asset. What it's bringing us is exclusability, immutability and decentralization. Hey, I got a job, tuxin guys, sweet, see you guys.
Speaker 3:We should teach this to our children. Economics is major, everyone has to major in economics, number one for personal survival.
Speaker 1:Economics is major.
