E39: Law & Economic Order, A Game Economist Investigation

Pokémon's patent of spherical objects throwing of cartoon creatures threatens Palword's lifeblood, while Tim Sweeney has lifted, at least a percentage point, in total gaming GDP with its injunction success.

How does Apple's rent-seeking rate change in the face of this ruling? Should Apple lower its rate to 15%, like it did in subscriptions? Remember, it faced competition primarily from "webstores" too. We premier a new segment: SOLVE that for EQUILIBRIUM.

We discuss the marginal *monetization* effects and debate the benefits of personalization opportunities (hint: there are none) with webstores.

@Chris is intrigued by Joost's piece on rising game costs, while AI's effects on the industry are measured in the Solow model. @Phil insists rising game costs mean rising revenue and stable margins, while Eric has his own doubts.

Eric's on IP Laws: https://substack.com/home/post/p-161276950
Joost's On Gaming Costs: https://superjoost.substack.com/p/gamings-billion-dollar-gamble

Transcript

Eric Guan: 0:00

Oh, you can really see my nipples through this shirt.

Phillip Black: 0:02

Yeah, you really can. Man. That's a nip. That's a nip slit.

Eric Guan: 0:05

It's so thin. It's crazy.

Chris K-S: 0:07

They're

Eric Guan: 0:08

Yeah.

Chris K-S: 0:08

really sharp.

Eric Guan: 0:09

Yeah. I just, I've had it for 10 years. just been through the wash bunch.

Chris K-S: 0:16

Oh my God, dude. I can see your

Phillip Black: 0:18

I think you should stop at 10 years, man. I

Chris K-S: 0:21

see the picture. behind you through the shirt. If you do one layer,

Eric Guan: 0:26

yeah, you're,

Chris K-S: 0:27

I can straight up see Yeah,

Phillip Black: 0:29

did. Did they not use enough threads in the shirt.

Chris K-S: 0:32

Oh my God.

Eric Guan: 0:33

Yeah.

Chris K-S: 0:34

anyway, we should start the episode 40, breaking News.

Eric Guan: 0:56

What they did,

Chris K-S: 0:56

wins its epic

Eric Guan: 0:58

they won.

Chris K-S: 0:59

I don't know if they like won one, but my understanding of the situation, and Phil, you can correct me if I'm wrong, is Apple won And then they were like big dicks about it and then the courts were like, wait, you can't be a big dick about it. No Or something

Eric Guan: 1:13

wait, so this is the thing where, okay.

Phillip Black: 1:16

Alright. Alright, let's rewind. Let's rewind. Let's rewind. Let's go back. I think it was 2021 where the lawsuit starts. So if you remember, there's Project Liberty at Epic, was them implementing an update to Fortnite Mobile on iOS and Android. And what it did is it showed that when you went to the IEP store to make a purchase in Fortnite to buy virtual currency, saw the price to purchase the virtual currency on a web store that they had implemented, that you could do it via the web, which was a violation of Apple's rules. for people that are unfamiliar, there's something called anti steering. And anti steering is basically preventing people from telling users that there's lower prices elsewhere for the same good or service. And so Apple prevents you from telling anyone that there's a, another price for this. Because if you remember, like you can have dual linking, right? So you could for instance, play call duty war zone, and if you make a purchase on call duty war zone on the desktop and then you log into the mobile app, you're still gonna have that hard currency available to you. They have an exception called the reader app exception, which is how a lot of people are doing this. but. you could still have the same situation with a web store. So if I went to the desktop and I made a purchase on the web for hard currency and then I logged back into the mobile app, then I was able to access the hard currency. And so what Apple banned you from doing is telling users that there was this other price. So even if, for instance, if they, you collect an email address during signup. Apple prevented you from using that email address to tell people that there's a web store which they could get lower prices at. So this is all this anti steering shit. So when Epic sued, they sued on a bunch of different criteria, and what they ended up winning on was the anti steering rule. And so what the Judge, judge Gonzalez decided, and this is under what's called the Unfair Competition Law in California, this is how they, this is, this was really smart for them to go to California to basically use it as a fulcrum wedge to get this law applied. So she issued this injunction and the anti steering thing said you could have a link out, right? So I could go to a mobile app and I could have a link to web store in the mobile app where I can make that purchase. And Apple put all these fucking rules around it, and one of the fucking rules they put on it, and this is where the judge just gets absolutely a rate, and this 80 page ruling, what Apple did is they said that if you wanted this link out, you had to apply for it. the Entitlement Program. And when you applied for it, apple would approve it. And what they said is that if a user clicks a link that has this web store in it and they make a purchase, apple is entitled to 27% of the revenue that they make. And it, oh, It's, fucking worse. Because what would happen is that Apple claims that if you click this link, if you click this link, and let's say you don't make a purchase, but then you're on your desktop. Let's say you, you click the link on your mobile app on Monday, and then on Friday you go to the desktop and you decide you wanna make a purchase that mobile game. Apple claims that within seven days of you clicking that link, any revenue you make, they are entitled to 20 fucking 7%. And this happened in the Netherlands because they had the different different series of laws, and this happened in South Korea. so the judge was like, what the flying

Eric Guan: 4:32

It's, they're like doing the opposite. They're like probably getting more muddy, right?

Phillip Black: 4:36

Exactly. And not only that, what we saw in the court documents is that there was all this fucking internal conversation that they specifically chose 27% Unprofitable for

Eric Guan: 4:45

That's so ex explicitly anti-competitive. Yeah.

Phillip Black: 4:49

I've been waiting to say this.

Chris K-S: 4:50

No. That I forgot that like the subtle if you go

Eric Guan: 4:54

and then they also have too, right?

Phillip Black: 4:55

it's so bad, Eric, because you go through the court documents and Epic, or excuse me, apple was specifically designing the screens for when you would go to the web store, when you're in the mobile app being as scary as possible. And so there's a quote, there's a quote from a UX designer, a direct quote from a UX designer where they're going through different potential mockups for the scare screens, and he says ha. Oh my God. What if, instead of saying link out, we said. Go. Or I God, hold on. Let me, lemme pull up the quote. Lemme pull up the quote'cause it's just so fucking good. up the quote. this is this is where there are time. The, by the way the ruling's super readable. Yeah, for sure. The ruling is the ruling is something else, man. It's very readable. She

Eric Guan: 5:36

Hey.

Phillip Black: 5:37

second bite of the apple at the end of the the ruling.

Eric Guan: 5:40

Yeah. Fuck Apple dude. Holy shit. That's the craziest, yeah.

Phillip Black: 5:43

Here's what. So here's what the, this is an exact quote from the case. This is internal Apple documents that were discovered during the discovery process. And for people unfamiliar. What happens in a law case is that when you're suing, you have the right to evidence that the person you're suing has in a discovery process. And if you want to get internal emails, what you can do is you submit search terms and the defendant has to and Epic as well. They have to give you documents. Related to that search term. And so what people do, and this also happened in this case, is that they add a lawyer to basically all of the email threads. And adding a lawyer makes the thread privileged client attorney privilege. So it's not admissible during the discovery process. And so the other thing that happened is they started to look into some of this because they were claiming that all these fucking documents were privileged documents and Apple was clearly abusing this. And after they started to look into this, they retracted 50% of the

Eric Guan: 6:38

Wow.

Phillip Black: 6:39

were privileged 50%. so Judge, judge Gonzalez was not happy about this. Okay here's the UX quote from the UX designer, if we want to scare users a bit, I like the addition of out because it raises the questions of hesitancy ha out where, oh my God, what do I do?

Eric Guan: 6:57

Damn.

Chris K-S: 6:58

Dude, that is insane. It makes me like you think about all the emails that you sent or stuff where you're like, oh, how can we make more money? It's oh geez. Now I'm scared. that I work at a company that would ever be

Eric Guan: 7:11

But this so then what did the judge say to Apple this time?

Phillip Black: 7:14

I, oh,

Eric Guan: 7:15

Or yeah. What's the new ruling? Yeah.

Phillip Black: 7:18

so a couple things. So they had this injunction and so Epic was basically like, look it, they're not following the injunction. And so they went through another discovery process, and this is where all of the internal conversation about how Apple was going to comply with the injunction comes out. This is where you get all the text messages, the emails. And so what happens is, like one of the VPs at Apple directly lied under oath, directly lied under oath about what their conversations were in terms of responding to the injunction and trying to execute it. And they were, they're basically trying to sa, I know you just mentioned they use it to enhance their position, nothi it.'cause they had the seven day link out bullshit. And so the judge is recommending proceedings. Criminal proceedings for the On

Eric Guan: 8:04

Fuck him. Get him.

Phillip Black: 8:05

executive who

Eric Guan: 8:06

Get him.

Phillip Black: 8:06

and they absolutely lied under oath. I will tell you, like I, I've been following Tim Sweeney, the, CEO of Epic on Twitter, and every time he would talk about this, he just seemed unhinged, just completely unhinged. I'm like, dude, come on, man. Like I get, they don't want, I get They want you to play by their rules and their playground, and they're dumb and they're bad. But after

Eric Guan: 8:26

Yeah.

Phillip Black: 8:26

document, I'd become radicalized. I'm like, fucking shank. These people shank, shank Caesar, let'em bleed. My I'm Tim Raged.

Chris K-S: 8:35

what's the result now? Obviously. They got a judge who finally saw the case and was like, this is fucked up.'cause I can imagine a scenario where you get a judge who's not quite as favorable to Epic. What's the result? Now you can link out to your web store, get 100% of those profits.

Phillip Black: 8:54

Let's let's look at this together. So I'm about to share my screen. We're gonna go through the most the the greatest hits to the ruling here. Lemme get

Eric Guan: 9:02

I'm,

Phillip Black: 9:03

so right now for those watching on the YouTube version, we got the the text of the ruling, restraints and enjoins. And so there's six key things that come out of this injunction. So what Judge Gonzalez says is that imposing any commission or fee on purchases customers make outside the app not allowed. So that 27% we just talked about, apple can never take any share of anything that happens outside the web store, is what she says. also says, apple cannot limit how you choose to communicate those prices to players. So you can have that side by side that we were just mentioning Fortnite had in the app. So you can say, Hey, look it's five bucks off on the web store, which by the way, Spotify launched that

Eric Guan: 9:42

Yeah. they had it. They had it in the hopper.

Chris K-S: 9:45

Oh

Phillip Black: 9:45

they moved on this. And they had it in the opera. The other thing you can do here is that you can also now have dynamic links. So the other thing that Apple restricted is that when you click that web store link out, it was a static link. And the reason you want dynamic links is that you want to know for instance, oh, if they hit it at this part of the UI or if hit it at this part of the ui, or you might wanna personalize to the user Id like you, would you want attribution? And so they prevented that. Can't do that anymore.

Chris K-S: 10:12

link thing all about? Like why would like insane?

Phillip Black: 10:17

Yes. Yes. Just to make this as painful as possible. It's in the documents. You can read the actual emails from the Apple executives and the internal notes Apple had trying to sabotage this.

Chris K-S: 10:30

I didn't even look at Apple stock. Did they take a hit from this?

Phillip Black: 10:35

did take a hit. So the other thing that's really entertaining about this? whole situation is that it's the Q2 earnings calls. So all these CEO e publicly c CEOs are fielding calls about this, and Tim Cook took a call about this on the earnings call and it was super awkward and weird. And I'm really looking forward to getting the transcripts of

Eric Guan: 10:52

it looks like number four means no more approval process. Anyone can link to a web store.

Phillip Black: 10:57

That is also correct. You do not have to imply anymore.

Chris K-S: 11:00

monopoly

Eric Guan: 11:01

Yeah.

Chris K-S: 11:01

to say who can link out, then this,

Eric Guan: 11:03

Yeah.

Chris K-S: 11:03

They could just say, nobody can fucking link out. That's insane.

Phillip Black: 11:06

Yep.

Chris K-S: 11:07

number four is essential.

Phillip Black: 11:09

Yep. And the other thing is that you cannot you cannot do scare screens anymore as we're talking about no more scare screens.

Chris K-S: 11:16

Are you sure you want to click on this link?

Eric Guan: 11:18

It goes out. Do you wanna go outside?

Phillip Black: 11:21

as the UX designer said out, out to wear,

Chris K-S: 11:24

bring consumers restricting a developer's use of dynamic links consumer to a specific product page that's pretty similar

Eric Guan: 11:31

A logged in state, basically, like it'll automatically log you into the web store as opposed to forcing you to log in again.

Chris K-S: 11:37

Oh, so you don't have to, so

Phillip Black: 11:40

Correct.

Chris K-S: 11:41

will I be able to sign up for Spotify premium in the app now?'cause I remember that was always like a funny thing with Spotify. You go to try and do premium and they'd be like, yeah, you can't do that on the app. Sorry,

Phillip Black: 11:53

Yeah so to quick to quickly recap on that if you remember, apple normally takes 30% of IEP purchases. Now remember they had the rule where if you make less than a million dollars, I think it was 15% or zero, but it wasn't a marginal tax bracket

Eric Guan: 12:07

Oh, it was just a flat blanket.

Phillip Black: 12:08

Everyone gets this. It was like you had to have, exactly. So you actually had this cliff where if you made more than million dollars, it actually became unprofitable for you. There was like the dead zone. It wasn't a marginal tax system. Steam actually does remember the marginal tax system. Now they have the inverse marginal brackets, so it's 30%, but then I think if you cross 50 million, becomes 25. This was like the most fucked up version of this possible. And so what Apple ended up doing for subscriptions a while back though, is that if you subscribed in app, you would actually end up only having to share 15% of user's revenue after one year. And this was a direct response to competitive pressure Exactly for what you're talking about, Chris, which is that Spotify stopped putting in-app signups for subscriptions because they don't wanna give Apple the 30%. And so use the reader exception. So you gotta go to the web and do it, and then you can log into the app with your credentials. Same thing with Netflix. If you remember, they also went through this and they all ended up moving to IEP after the 15%. And so this is exactly what you mentioned, Chris. Now you'll be able to go into Spotify. You can see the different prices. I forget if they offer IEP subscriptions anymore, but you can now do it from the, app.

Chris K-S: 13:16

So How does

Phillip Black: 13:17

or browser.

Chris K-S: 13:18

how does this change the model for Fortnite Creative? Because I know I do, they have a mobile version of Fortnite Creative, I would imagine not.

Phillip Black: 13:26

Do. They do. So to, to rerun on this one a little bit too. So Fortnite has always has always, they've done a mobile SKU of Fortnite, right? They had a mobile SKU for iOS and they have a mobile SKU for Android. And then when all the shenanigans were going down, they pulled off. So Project Liberty is when it gets pulled from the App store, they've always direct distributed an A PK on Android. But because they didn't go through the Google Play Store,'cause they didn't want to pay the 30%, there was a ton of install fraud. It was just an absolute nightmare, right? And so that didn't end up really going anywhere anyways. So now the iOS version will be coming back and it's a full featured version of Fortnite. Like you can play UAFN stuff in the mobile app. It's a really impressive demo of Unreal

Eric Guan: 14:08

So we're all economists here. We all like competition. We all think this is probably beneficial for the ecosystem. And it sounds like a bunch of people are benefit, like you mentioned, Spotify and Netflix, even non-gaming people are benefiting. I'm curious, do you think this was a positive? Play for Epic or even ex-ante, the, was the expected value of doing all these lawsuits positive for them, or is this just Tim Sweeney going on a crusade for for the people?

Phillip Black: 14:32

Even better, Eric, because we know how much they pay the lawyers in the fucking lawsuit. Because one of the things is that there's an identity process where you can, you're always trying to counter Sue to get your lawyer fees if you win or lose. so it turns out that Apple paid$80 million for their lawyers over the course of this three to four year trial. And so I imagine epic's probably around 50 million. But man, this guy increased mobile.

Eric Guan: 14:55

Do you think he's, do you think Epic specifically is making 50 more, million, more dollars because of this?

Phillip Black: 15:00

Yes. Because first of all they've sacrificed, I think they actually, Tim really hurt Epic games by not putting Fortnite on iOS. If you go back to the original trial documents, iOS and Android were significant portion of their DAU. And not only that, a significant portion of their revenue. And you need every single user you can get, especially when they went to UFN because we know there's networking effects. When you have UGC there, there's all the things we were talking about with copyright.

Chris K-S: 15:25

Roblox. The vast majority of their players are mobile and Fortnite or Epic's trying to play a similar playbook with Youi with creative and Fortnite. Phil, yet you said something there. I think we should probably digest more as like mobile. GDP just grew. You might look at this and say it didn't grow. We were just moving around the pieces. It used to be that Apple got 30% of this, and now these guys get 30% of it. But does this seem like an actual growth vector? Do we expect more innovation? Do we expect more

Eric Guan: 15:51

Yeah,

Chris K-S: 15:52

the mobile gaming sector because there's no longer this massive, I don't know, you could call it a weight,

Phillip Black: 15:57

Rent seeking. Rent

Eric Guan: 15:58

Yeah.

Phillip Black: 15:58

Let's go there. We got rent seeking baby. This is

Eric Guan: 16:01

Okay.

Phillip Black: 16:01

1 0 1. So I here would be my predictions so far. So I think you're right. There's a transaction. We're shifting money around. Remember, we're shifting money from Apple, which is engaging in non-productive rent seeking activity to putting more dollars in the hands of developers and that moves GDP from Apple to gaming. And if we have more GDP in gaming, we're more likely to see innovation. I think almost all of these gains are gonna get, in a sense, bid out. Because what's going to happen is that the realized LTV to a developer is now 30% higher. So I was making a hundred bucks on a user in, in, in revenue to a developer. Now I'm making one 30. And so what does that mean? means that if I bid in terms of UA traffic, I'm not bidding at a hundred dollars LTV, I'm bidding against a one$30 LTV.

Chris K-S: 16:45

Yeah.

Phillip Black: 16:45

so if I'm meta or app loving, I'm gonna win. And their stocks are already up 4%. This is exactly what's happening.

Chris K-S: 16:52

Now

Phillip Black: 16:52

I think we'll see more total games.

Chris K-S: 16:54

isn't, this is not a removal of the 30% Apple store fee. This is just a re Now people can link out to a web store.

Phillip Black: 17:03

So let me throw it back to you guys. What now we have this is this a competitive pressure? If you're Apple now, you gotta figure out how you set the revenue maximizing price, right? Because you're facing real competition, So what does Apple do?

Chris K-S: 17:15

no, I think that's a super interesting point. It's okay, 30% was clearly just like some arbitrary number that they chose that seemed like high enough that it was ridiculous, but low enough that people weren't like we literally have to shut our doors down. I always was like, why not 35%? Why not 40% that nobody can say anything? You obviously want to balance. I think what they were pricing before was if we increase the rate by 1%, do the number of, does the number of developers decrease? And thus revenue decrease by more than 1%. So there's still elasticity there, but now it's they have a lot elasticity is much more elastic than it was before, where it was like we have no alternatives, so we have to pay this 30% fee. Now they have other choices. So elasticity's gonna get less elastic.

Phillip Black: 18:00

Wanna get more elastic. Aren't people gonna be more sensitive to price?

Chris K-S: 18:04

is gonna be more elastic. So now for any change in their price, consumers or I guess video game, developers are gonna be, I'm like, trying to run through this live here are gonna be more reactive to an increase and they're gonna leave, they're gonna lose. So I don't know, you could see the price come down, 5% or is it 15%? I'd be very surprised if we didn't see the price come down. If you're a developer, what? There's not really any harm in adding the web store. It's like a. It's it's not really an, it's not an either or. It's both.

Phillip Black: 18:39

Yes, That. I think there,

Chris K-S: 18:41

the

Phillip Black: 18:42

I do think there's some very interesting economics about whether or not you choose to remove IEP altogether if you're a developer, and just use the web store and I forget what the rules are if they're still allowed to mandate both.'cause that was one of the Apple rules as well, is that they,

Eric Guan: 18:54

Are you allowed to have lower prices on the web store?

Phillip Black: 18:56

So it'll be interesting to see how that, of course, they cannot do, they cannot do the most

Eric Guan: 19:00

So you could just have like ludicrously high IAP prices? So the question is, are you allowed to sell things exclusively through the web store or do you have to have it on both. But because you can raise the price in the app, just make the price in the app very high. That's like basically the same as not selling it. Yeah.

Chris K-S: 19:17

Yeah.

Phillip Black: 19:18

You could do that. That's exactly right. And that's it Eric, I think that's the economic analysis, You wanna set your in-app prices. There's an equilibrium here where there's still an optimal in-app price and there's an optimal web shop price that maximizes revenue because there's still convenience associated with the in-app price. I think people forget, like when you hit that web store button, there's still some shenanigans, How fast is the webpage load? The UX isn't as good. There's some sign in issues, but I think you're totally right, Eric. There's gonna be some movement of prices that make this make the most amount of sense. And same thing with the discounter, How much do I discount the web store prices that drive the optimal amount of traffic? Now here's one thing that I think is very interesting, So if you play Monopoly, go right now, and I was asking about this to some colleagues. They were already in my view, violating this before the ruling. They were violating the entitlement program. So if you go into the sidebar and monopoly go, you can go to something called the Tycoon Club and then you can make purchases there, which I thought was just a clear violation. I thought what was really interesting about this saga is that when you try to go and make a purchase there, it'll pull up ola, which is one of the web store providers. And in the Ola web store page, when you're trying to make a purchase for Monopoly Go, pay with Apple Pay. Remember, apple Pay is just an an API that you can use in Uber or really anywhere. You can use it on just the web. you can use Apple Pay anywhere. You can use it on any It's, just

Eric Guan: 20:44

it's still doing it.

Phillip Black: 20:45

it's just an API. You can plug in.

Chris K-S: 20:47

Okay. I really I wanna go into the the optimal pricing. So you've got the developer who is now choosing optimal p in game and optimal P out game. Let's say that the delta between tho those is like 15% or 25%. Let's just say it's some number 15%. Can Apple extract more revenue by reducing the fee that they extract by encouraging people to prefer in-app? It's like, how does that dynamic work? I think there's three different prices going on, which is confusing to think about on the spot, but it's okay, if we lower our price, then people care less about moving, so the delta goes down. So more purchases happen. So it'd be interesting to see how it plays out with the delta between in app and out of app and the delta between current apple pricing and the new Apple pricing.

Phillip Black: 21:36

So here's something that was really interesting in the documents too, that I haven't had a big chance to absorb, is that they hired the analysis group, which is a group of economists in California. It's a consulting firm to do an analysis on what the actual value is that apple adds to the ecosystem. And of course I would say I don't, I dunno if those results were intellectually honest. I think they got to a number that was greater than 30%. Yes,

Chris K-S: 22:01

paid the consulting group to to calculate what's our value add to this ecosystem.

Phillip Black: 22:07

exactly. Because the claim is that the 30% was super, was it super margins? There was a specific term, super margin. Super competitive. Super pricing. Yeah. And so what Apple's basically trying to argue is that basically everyone charges 30%. So there's, so it's very interesting. So in the document, what they do is they talk about the fact there's these headline rates and there's the effective rates, right? Which is what we talk about in economics all the time, right? You got your margin, your real rate and the effective rate. And so what they were saying is Amazon charges 30%, but one of the things Epic pointed out is, Yeah. 30% is the headline rate for sellers on Amazon, but the effective rate is 18% because they're always cutting deals with people. And the other piece that was extremely interesting is that they pointed out This happens on game consoles.'cause you remember like Xbox and PlayStation still charge 30% for MTX if you're making a virtual currency purchase. But it turns out a lot of people got some deals going on in the back though we don't know about getting that 30% down. So that 30% might be a headline number, but it's not a marginal rate. It's not the effective rate. Excuse me.

Chris K-S: 23:06

be good for Roblox too. Because there's almost like a compounding effect. When they get a ch when they get a better deal, so do their developers and they've got in number of developers. So I bet Roblox is feeling pretty good right now.

Phillip Black: 23:20

Yeah. I think the thing I've always been confused about Roblox is I think they like push, push. It's an 80% marginal tax, and if at home, I'm sure you just shit the bed. They provide a lot of value for that 80%, but 30 percentage points of that was fees. The thing I always throw shade about them at is that a lot of their money comes from fucking gift cards. Gift cards are huge for robo. I guess you still have to pay the 30% to the, I actually don't think you have to pay

Eric Guan: 23:44

No,

Phillip Black: 23:45

to the

Eric Guan: 23:45

there's a small fee. There's a small fee. Yeah.

Chris K-S: 23:47

A fee. It's, I

Phillip Black: 23:49

fee.

Chris K-S: 23:49

I wanna say it's in the teens, maybe 20. But, I forgot

Eric Guan: 23:53

So here's a question, right? This is a huge win for the gaming ecosystem as a whole, or I guess mobile gaming. How come this didn't happen earlier? How come we needed one person like Tim to like really champion this? This seems like a collective action problem where like the game developers could form a collective, some kind of like industry group and collectively fund some kind of lawsuit against Apple. Yeah. How come that didn't happen? And yeah,

Chris K-S: 24:16

of

Phillip Black: 24:20

Trillion dollar. Yep. I think, Eric, I think you're exactly right. An expected value function is especially if it was 80 million in costs in terms of legal fees, first of all for Apple, that's nothing. Now, let's say it's 80 million for Epic, which I think is too high. I don't think they paid as much for their lawyers, are you kidding me? Fortnite makes, billion, like what? I. forget what the number is, but let's say one$2 billion a year, right? so you gotta compound that over time. And so 50 million for a lawyer I think you could win on expected value. But to your point, Eric, they actually did do this. So in Europe they formed a commission. Tim and Spotify and a bunch of other people have been pissed about this shit forever. Of course, none of the game developers joined and it's because they don't wanna piss off Apple.'cause remember, apple still controls featuring, so whether or not your game appears on the app store that drives a bunch of free organic traffic and they've been trying to like basically bring back control to the app store that they previously had. Featuring isn't as powerful it used to be, but everyone's really afraid to speak out against Apple, and Apple is extremely vindictive If you do shit like this.

Chris K-S: 25:19

So we, it's funny'cause this is, I think, better for competition, but because there's no alternative, doesn't Apple have, I guess like what economic principle did Apple violate by doing this? And was there anything like as I'm assuming. Where it breaks down is you can't, you cannot sell an alternative app store on the Apple App Store. So you're not, they're literally saying, no, you're not allowed to do that here. They're almost making laws as opposed to, in a perfectly competitive market, a new app store would come out and undercut them and say, Hey, there's zero fees or 5% fees. But Apple was like almost like using virtual warfare in order to create these rules and laws that are not competitive, not, not really capitalistic. So I guess I answered my own question.

Phillip Black: 26:12

Yeah. To total ran seeking behavior. Yeah. No. App stores with an app stores and the way, by the way, go Google. Sometimes you can be like, oh, Google Android. Open. First of all, Google still prevents still prevents app stores within app stores, and then you have to do side loading with APKs. You still get scare screens if you do side loading with APKs. And the problem is without a sanctioned way A sanction, trusted way to get apps. It becomes like the early internet, right? Am I downloading porn? Am I downloading a virus? You know what's going on here? And Apple extracted the monopoly by tying, right? this is where like all the regulators go. Wild tying. But they tied Android the parts of the Android operating system to Google Play Services. So if you want some versions of Android, you gotta make sure you have all the Google Play Services, which means the Google Play Store, means you're gonna go side loading to get the store. And this is how they counteracted Samsung, right? Because Samsung was trying to build their own store and they still have it, which is where Fortnite was, by the way. Fortnite was in the Samsung store on Android.

Chris K-S: 27:09

the legal side of things. That's something that I'm completely, I have no idea. Never been a part of anything.

Phillip Black: 27:16

I

Eric Guan: 27:16

Yeah,

Phillip Black: 27:16

into antitrust economics. I think it's really interesting. I'm surprised, Eric, you didn't do more

Eric Guan: 27:21

I, I,

Phillip Black: 27:21

have

Eric Guan: 27:22

dude, my classes were all just fucking math. It was all just solve the grungy and I don't remember shit. Yeah, I didn't, no, nobody got a class at 11. There was like a, there was triple the demand as the amount of supply for that class. But

Phillip Black: 27:35

God, him.

Chris K-S: 27:37

I just wanna be an expert witness. That's my goal in life is to become an expert witness.

Phillip Black: 27:41

No. You can make good money doing that.

Chris K-S: 27:43

Really?

Phillip Black: 27:44

you can make good money.

Chris K-S: 27:45

Not if it's like an employment lawsuit or something like, oh, this person owes

Eric Guan: 27:49

also you have to do a bunch of intellectually dishonest shit like Phil was talking about, where you just have to glaze your defendant,

Chris K-S: 27:54

that's like the. Didn't they? Didn't they find that there's basically there, there's you were to hire the same consultant for, if you're on the, what

Eric Guan: 28:03

Defendant.

Chris K-S: 28:03

plaintiff side and

Eric Guan: 28:04

I don't know.

Chris K-S: 28:05

what are the two sides in a civil

Phillip Black: 28:07

Plaintiffs have been defendant.

Chris K-S: 28:08

Yeah. You do the plaintiff side versus the defendant side, the same consultant is gonna give you completely different results. It makes sense,

Phillip Black: 28:15

we have the analysis group. Man, it takes some real soul searching to find out how Apple is providing more than 30% value to the ecosystem.

Chris K-S: 28:22

So that's topic number one.

Phillip Black: 28:24

Yeah. anyways let's see how this all plays out. There's a bunch of competitors. I think the economics here is super interesting.

Chris K-S: 28:31

Yeah.

Phillip Black: 28:31

I think the only other thing is when you go to the web, remember there have been restrictions on what you can offer as an IEP as well, right? And they started to remove some of these restrictions. But if you remember a while back, there were only so many SKUs you could have, right? Which is why virtual currency exists, right? Is that every time you wanted to make a virtual a SKU you wanna make a purchase, having it be an in-app purchase was a lot of friction. This is what people get wrong about why virtual currency exists, right? So if you play a mobile game, you probably might be making, you might be spending, let's say you might spend a hundred currency a hundred times in a single day and making that an in-app purchase for real world money is an extremely laborious and high transaction cost system. And not only that, it's literally transaction costs, because remember, there's a fixed fee on credit card processing. is 10 cents, which means that you're making negative money every time someone would make a 10 cent hard currency purchase or sub Tencent hard currency purchase. And So, they would not only limit the number of SKUs, but remember they also limited the price for a really long time. You could only have the a hundred dollars sku. Now they've changed some of this where you have more SKUs and you can raise the price. But I still think there's a lot you can do on the web that it's free, man. It's the web. You can do whatever the fuck you want, that you couldn't do under apple's rules, which I think is also gonna be an interesting piece of innovation.

Chris K-S: 29:44

My gosh. I well last night. I dropped a dart on my foot last night and I, it was hurting I didn't sleep well, so I'm not as up and

Eric Guan: 29:52

What were you at, like a bar playing darts.

Chris K-S: 29:57

emergency episode? No. I have in my basement. And I was pulling

Eric Guan: 30:01

and they're like real sharp darts. Not like the, yeah.

Chris K-S: 30:04

place. Yeah, it's they're like 24 grams. Anyway, so now want me to introduce Game. Economists cast episode number 40, the big four. Oh, Emergency topic, epic apple, amazing, analysis by our lovely Philip here, who is our legal consultant, out. but before we get to Apple and our topics, which involve a used, t Van Nan piece about, how do we grow from here with our budgets exploding? It seems every five years, the budget than doubles for producing AAA game. But before we get to our, our fun topics, let's chat about what we had been playing.

Phillip Black: 30:47

Chris, you're gonna put me at a job with that host. That was awesome, man.

Eric Guan: 30:51

The big four. Oh.

Chris K-S: 30:54

Just came to me. What can

Eric Guan: 30:55

No.

Phillip Black: 30:56

I'm just sit back and relax now. This is great. Is this what it's like to be you guys to, just let it happen?

Chris K-S: 31:00

I have to do that. Yesterday I had my economic, my 12th economic forum. I started this thing where I like go in front of the community and I talk about the economics and Star atlas. I go through the go

Phillip Black: 31:10

Whoa.

Chris K-S: 31:10

of prices, So I'm used to it.

Phillip Black: 31:13

One thing we didn't add, this is game changing for

Eric Guan: 31:15

Why?

Phillip Black: 31:16

If you're a Crypto game, you can now link out to web store

Chris K-S: 31:19

doesn't pay attention to any of these fucking rules.

Phillip Black: 31:20

if true. Gabe Layden does. This is, I, Gabe Lin was talking about this and I think he's exactly right. This is a boon for crypto.'cause now you can go off on the web store and offer crypto payments that you were never able to do IEP. I think this is gonna be huge for crypto games.

Chris K-S: 31:37

a really good point. One of the reasons we hesitated to produce an app was because, it was very ambiguous can you pay for this in crypto? Does the crypto get charged at 30%? And then that's a big liability because you've got this asset that's constantly fluctuating. You, 30% tomorrow might be 50% or sorry, 30% yesterday might be 50% tomorrow. And vice versa. But

Phillip Black: 32:00

So one, one crystal, one crystal clear example of this is re So if you remember re Web3 NFT Fantasy Footballer Platform, incredible company, incredible founders love the new pieces, one of the best implementations of Web3. And so the way they chose to integrate into the mobile app for re is that you still had the marketplace, but when you were going to purchase something, they would just add 30% to whatever the price was on the peer-to-peer marketplace. So if you want the privilege of buying something on mobile, you would add that 30%. And so now what they can do is they could remove IAP and they could just say, go to the web store to make the purchase.

Chris K-S: 32:35

How does peer-to-peer trade work though? Or how did it work? If you wanted to buy something off a market?'cause that's like the whole Web3 thing is people are buying trading back and forth. Do you have to pay on the fee to Apple? Let's say you extract a 10% fee, are you paying Apple 3% of that fee or three percentage points of that fee, or are you paying them like 30% on every single fucking trade? Because that seems insane.

Phillip Black: 33:00

every single trade.

Chris K-S: 33:02

I don't even understand. Yeah. So that's basically

Phillip Black: 33:04

Because remember, it's an IEP. If you're making a trade, like a trade is still a purchase, you're making an ip. Now What, you can al you could have always done is you can trade things off platform. Or you could just trade things for zero in the platform and do

Eric Guan: 33:15

what if it's like an NFT for NFT trade.

Chris K-S: 33:17

Yeah.

Phillip Black: 33:18

payment.

Eric Guan: 33:19

Yeah, but how do you charge 30% on that?

Phillip Black: 33:21

it's there's no money involved.

Eric Guan: 33:22

I see.

Phillip Black: 33:23

30% on that. There's no IEP involved.

Eric Guan: 33:24

So if they already have currency in their account, there's no IEP. But if you have to add currency, that's where the tax is paid. Okay.

Phillip Black: 33:32

Correct, just as we were talking about with the dual linking and if you buy something in Call of Duty, warzone desktop, it'll be in the mobile app.

Chris K-S: 33:38

This is actually really great for us. We've always avoided a Star Atlas app because it was like, just keep people on the web the webpage, it's so much easier. But because that was the big thing is okay, when they log into our, their account and let's say they've got a bunch of Atlas, do they have to, do we have to follow any regulations and rules? And I think with the old framework, it was like actually not allowed in the old system for us to allow people to, IM import their Atlas into their account once they download the app. So that's interesting.

Phillip Black: 34:09

Yep. And we'll talk about this in what we've been playing.'cause there's some peer-to-peer market stuff we should talk about.

Eric Guan: 34:14

Speaking of legal issues it's been playing Tetris. I'll circle back to that, but I was playing the Tetris effect. It's just Tetris, but there's like amazing, like kind of this like audio visual stuff happening. As you, there's like different environments with like different sound effects and the music synchronized to how you play. And if you get if you clear four lines at once, the whole screen will go rainbow and make a bunch of sound effects and stuff. It was pretty, pretty good. But the thing that's really interesting to me about Tetris is that the core game is basically unchanged. Like this thing like. When it was created was basically like the final form. Like it's been decades and all the iterations have been super minor. And anytime someone tries a dramatic design innovation like 3D Tetras, Tetras, what if there was, three dominoes and five dominoes instead of just like four dominoes. They all fail. And so this game knew that and they were just like, look, the Tetris is Tetris. We're gonna keep Tetris the core the same and just add stuff around the audio, the visual, the experience, the progression. But Tetris has also done a very good job of clamping down on clones. Like we were talking last time about how game mechanics are not copyrightable. And I did this whole deep dive onto what exactly is Tetris protecting?'cause they seem to be able to enforce the copyright. I won't get into it here, check out my article if you're interested, but

Phillip Black: 35:25

in the show notes.

Eric Guan: 35:26

successful at protecting. The game. Tetris or Tetris, like games, whatever you want to call it. And yeah, it is. Whereas other game, there's this Pokemon Powell world lawsuit happening and I think Pokemon's gonna lose, I hope they lose. And like most game clones are successful at cloning

Chris K-S: 35:43

So did Tetris. So you, I remember in that article you specified like copyright versus,

Eric Guan: 35:48

like patents. Yeah. So basically there's quick version. So there's three main categories of intellectual property protection here, trademark, patent, and copyright. So trademark is just like your brand name. So like calling your game Tetris, you can't call it Tetris. You know that's not a big deal here. You could just call it, block drop. The second issue is patents. So patents are like technological innovations, right? Think of, like a si, a patent. And Tetris does have patents, but this game is not being protected by patent. It's being protected by copyright. So copyright is the creator's rights to copy and reproduce and sell the work and for other people to not be able to copy it. And that, but it gets into this weird thing where there's a distinction between the idea and the expression of the idea. For example battle Royale game, where a bunch of people shoot each other and last one standing wins, right? That's an idea, but there's multiple expressions. You got PUG and war Zone and apex and all that. And so different expressions of the same, a particular expression is copyrighted, but the idea itself is not. Most games are fine because, the game mechanic is just the idea and you can express it in many different ways. And those are distinct enough to be considered a different expression. It's a different copyright, but Tetris is so simple, so abstract. And also I think just it's such a pop culture phenomenon that when people think Tetris is a very specific game, they're thinking of that it seems like every expression of the idea is, seems, is so close to Tetris that they get, copyrighted and sued and taken down. And yeah, so basically it's licensed, it's by the te licensed from the Tetris company. Pretty much every Tetris game is licensed by the Tetris company. Yeah. Tetris 99 Tetris Effect. Yeah.

Chris K-S: 37:27

That's funny.

Eric Guan: 37:28

But if it's got Tetris in the name they licensed it from, if it's got the Tetris trademark they licensed it. yeah.

Phillip Black: 37:34

of C

Eric Guan: 37:35

But

Phillip Black: 37:36

40.

Chris K-S: 37:36

Seriously,

Eric Guan: 37:38

none of us are lawyers, so we're all just like armchair lawyers here, just reading some Wikipedia article. Yeah.

Phillip Black: 37:46

there's been a lot of mischief of

Eric Guan: 37:47

Yeah. But, all so one weird thing is in the Pokemon Powell war lawsuit, it's not a copyright lawsuit, it's not a trademark lawsuit, it's a patent lawsuit. And Pokemon claims to have patented the technology of what? Throwing a ball and catching a Pokemon or a target, a combat character is how they phrase it. And that gets used in combat.

Phillip Black: 38:07

In the patent is hilarious. They like

Eric Guan: 38:09

Yeah.

Phillip Black: 38:10

monster, they show the trying to hit the monster. It's really funny.

Chris K-S: 38:13

Does it

Eric Guan: 38:14

fear or ball.

Chris K-S: 38:15

Or is it

Phillip Black: 38:17

spherical? object.

Eric Guan: 38:19

Yeah. Yeah.

Chris K-S: 38:20

have made it like a world, it should just throw the square, but.

Phillip Black: 38:24

Maybe, you could throw a loop

Eric Guan: 38:25

It is just weird to me that's a patent, like that doesn't seem like a technological innovation.

Chris K-S: 38:30

The thing that I've realized about law, like the more I hear about law, the more I realize that it's just a bunch of everything. It's quite literally, like everything is a very specific case and the people that were involved with those cases are the reason that law came about or that the ruling held. So like with this judge, if it was any other judge, it would've happened a completely different way with the Epic v Apple, with pal world, depending on, how it's litigated. It's crazy and it goes all the way up to the federal level, obviously. But it's it really is just all time and a place. It's not as mathematical and logical as I. At least my interpretation is that the law is not as mathematical as we would like it to be. We're like, oh, A plus A is equal to two A and it's always that way. Sometimes A plus A is equal to like, A plus B. It's just, it's not as methodical as I think we

Eric Guan: 39:22

You hear about how in, I think it was in like Indiana, they tried to pass a bill saying that pie was equal to three.

Chris K-S: 39:28

No, I didn't see that. is literally two

Phillip Black: 39:31

Sacrilege.

Chris K-S: 39:31

five. and two

Eric Guan: 39:33

Anyway that's my bit.

Chris K-S: 39:33

That is okay. Phil, have you been playing anything interesting?

Phillip Black: 39:38

So if you remember, there's this game called Delta Force, which is an old IP that was created in America and Tencent bought. And so they decided to make a game called Delta Force, which is basically just a rip off of Battlefield. And I say this as someone who worked on Battlefield. They were stealing everything from Battlefield 24 2 we're talking UI elements operate, just everything. And they basically slapped on a bunch of Call of Duty monetization on top of that. So they just launched their mobile version in, globally, outside of China. So it was already in China. And the thing that I found really unique is that they brought the peer-to-peer marketplace into this game. So you can buy and sell guns, skins. And the other thing that's been happening very quietly is that rainbows from Ubisoft also introduced a peer-to-peer marketplace. And so now you've got Cs Go, you've got Rainbow Succeed, and you've got Delta Force all having peer-to-peer marketplaces. it's been this subtle trend. And I'm really curious to see if we'll see Apex Legends go in this direction because EA already has all the tech, right? They already have all the auction house tech from FIFA and FIFA Ultimate team, which also has a auction place. And like we kept going back and talking about Web3. And to me the Web3 revolution is really about marketplaces. Whether or not blockchain is involved to me is secondary. It's about marketplaces because it becomes a plank of engagement. Playing the market is really important.

Chris K-S: 41:00

Don't need a blockchain to do that though. That's the thing that's always frustrated me with that is like Web3. It's no, it's just open economy. You doing that for years.

Phillip Black: 41:09

Now technically though, the money's still trapped in the system. Like in the sense that you can't cash out. This is what all the third party controversy is about with CS go, is that you can find people to cash out off platform and then you do the trade in game.

Chris K-S: 41:21

Fair.

Phillip Black: 41:22

But I think this becomes an engagement plank. And again, it's really controlled. Like everyone who does trade really controls it. We've talked about all the problems with trade, particularly in digital economies, right? Because if you continue to make more and more assets, then your supply curve is gonna shift outward, which means equilibrium price is gonna drop because there's no deterioration methods. So how do we reduce circulating supply? What's the answer for that in a cosmetic economy? First of all, I'm still worried about that, but I think what I've come a little bit more around to is just the idea that fashion. Has like this cyclical, these cyclical trends. And I don't think in cosmetic economies, we've really figured out how we can control the cyclical trends other than just like making more content. But I really thought a lot of cosmetic economies would tend towards degradation over the long run because of people just purchasing cosmetic items. And then once you have the best cosmetic item, why do I, once I have a Prada bag, what could be better than a Prada

Eric Guan: 42:15

a vintage Prada bag.

Phillip Black: 42:16

What I really un, yeah.

Chris K-S: 42:18

Prada

Eric Guan: 42:18

You gotta match your whole outfit. Yeah.

Chris K-S: 42:20

But seriously, I actually really like this point, Phil, like this is something that I've come to realize. Like in, in the Web3 realm. It's like something doesn't need to have a high price forever. It needs to have a high price in a moment in time. Like prices are dynamic. They're inter, they're temporal, they're not this thing that like your in-game shoes are not the US dollar. It does not have to have stable value over time. And obviously with a cryptocurrency, you would like it to be a little bit more stable, especially if it is supposed to be time resistant. But especially with NFTs items like that, it's like fluctuate and if something becomes worthless I just don't get this obsession with iron ore in A RPG needing to have this forever value. That's incredible. Obviously you can balance it with sinks, but yeah, I like that point.

Phillip Black: 43:09

And yeah, I just, I don't think we've really mastered the economics of fashion and kind of these cyclical trends and really cracking the code on this. Pe people talk about form, function over form all the time, but it's not like I see people go to Goodwill and spend three bucks on a T-shirt, right? We still spend hundreds of dollars because what do cosmetics do? They signal things, right? It's embedded in the clothes that you wear. Like when you were talking about that product bag that says something, it communicates something. And I don't think we figured out how to really master that communication and subject it to our evil monetization, will

Chris K-S: 43:42

I think that's the powerful thing about an open market is that at least for a specific set of quantity or a specific quantity, it gives you the equilibrium price. And that's a really powerful thing. I don't think we figured out how to wield that yet, but, I know the

Phillip Black: 43:56

I? I.

Chris K-S: 43:56

of everything we sell.

Phillip Black: 43:58

I agree. The problem is that we still control supply, which means we still control price in a sense.

Chris K-S: 44:05

Yeah, though, if you're a crypto person and you have a cryptocurrency, you know that supply actually has nothing to do with price. But that's different. can go on my soap box later.

Phillip Black: 44:15

What's the saying? I can stay I can stay, the market can stay irrational rather than You can stay liquid. Sorry. You wanna go ahead and say it

Chris K-S: 44:22

I think it's, the market could stay irrational

Eric Guan: 44:24

I think it's, yeah, solvent.

Chris K-S: 44:26

It's either liquid or solvent. I can't remember

Phillip Black: 44:28

solvent? Yeah. I'll edit that in. So it seems really smooth.

Chris K-S: 44:31

we I have a joke. I think I've told you guys like I could slash the supply of that was tomorrow and the price would not bump. It wouldn't it wouldn't change at all. I couldn't but one could. Anyway, that's that's interesting. So I'm curious if Ubisoft was planning on, because they were like super loud about Web3 for a while,

Phillip Black: 44:50

Remember, quartz, rainbow sex, age, a little serial code you would have in a cosmetic.

Chris K-S: 44:54

was that like their whole thing, they were like, we're gonna introduce markets into Rainbow Stage six, or were there more there were unnamed projects that ended up being canceled.

Phillip Black: 45:02

remember, they did actually launch an NFT game recently with a developer, and they had another one in development, but Quartz ended up getting shuttered. And yeah the, by the way, Ramo six, each marketplace is not blockchain powered is the other thing I'll point out. I have, I wonder if they're doing something on the backend, but it's so weird to me that Ubisoft is the most progressive about this. Yeah. Yeah.

Chris K-S: 45:25

They're like hurting for money, so they're probably more willing to take risks,

Phillip Black: 45:29

Yep.

Chris K-S: 45:30

just lay off 20,000 people or something crazy.

Phillip Black: 45:33

Oh, it's not there's a whole lot we can talk about with Ubisoft. A lot less, talk about illegal. They sold the IP the company to a holding company that they also own that's privately held. They sold Rainbow six CH Far Cry and a bunch of their popular IP to this privately held company. So they basically just, robbed shareholders because they're not getting payouts. That's a very different aside. We're getting back into the legal issue, but

Chris K-S: 45:55

just, yeah, I was gonna say that's just like corporate financing. How do we, how do we avoid having to pay how and penalties and tax when we inevitably go bankrupt.

Phillip Black: 46:06

What have you been playing, Chris?

Chris K-S: 46:07

I've been playing. So I actually, in the last week my wife had a conference in Colorado, so I just went to Colorado and didn't have a lot of time to play video games. But I've been playing. Before that I was playing a bunch of platformers so I busted out the limbo and then the limbo limbos follow up. I forget what it's called. Even finished limbo. Do you guys know that game?

Eric Guan: 46:26

Spooky.

Phillip Black: 46:26

Yes, it's the black and white one, right?

Chris K-S: 46:28

Inside,

Eric Guan: 46:29

Yeah, he's like running through this like the scene with a robot. The lights.

Chris K-S: 46:34

Yeah. So I've been playing like some more. I would, I don't know what you would call that, like atmospheric platformers or something like that. Puzzle games. Also Celeste, Eric's favorite game. Celeste is, I don't actually like it that much, I gotta be honest with you, but I'll get into that. Inside was really cool. I played inside first, and then I played the prequel. The game that came out before inside was called limbo, this like dark creepy vibe. You're like, it's like black and white with a lot of fog, and you're like. a puzzle platformer inside the mechanics are greatly improved from the first one. So it was really weird to go back to the old clunky version and I'm like, missing jumps because the controls suck. But the game was really interesting. It was like a, I don't know, like a five to six hour experience. I really like those types of games sometimes where I know, okay, I can just play this for a couple hours and it's gonna be over. One of my favorite gaming experiences ever was playing

Phillip Black: 47:27

Turmeric,

Chris K-S: 47:28

start No, no turmeric. That's a 20 hour experience. That's a high quality, 20 hour premium experience. But like Journey I played, I think it's like a two three hour game. I played it from start to finish in one sitting with some buddies, sitting around watching. But anyway, inside was very similar type of experience but just like really creepy. I'm not a big creepy fan of games. But yeah, there's nothing really interesting to talk about in terms of the economics. You pay$15 to play this game for four hours, five hours. I do think it's interesting how much higher the dollar per hour plate is for these like, short games.'cause you could still get away with paying, charging 30 bucks for one of these like six hour experiences versus you try and tell somebody you're gonna charge a hundred dollars for GTA six, which they're gonna play for a thousand hours. And they're like, how fucking dare you? I'm not paying that much money. I actually think and we can, we might talk about this when we talk about use Bruin's piece, but it's like, are these cheaper games that you charge 15, 20, 30 bucks for, that cost you a million dollars to, to develop a better bang for your buck than the game that costs$500 million to develop? Yeah, platformers just short, fun stuff that I can just dive into. I haven't been I haven't been playing much other than Monster Hunter in terms of like lifestyle games. And I fell off the Monster Hunter. I'm done with Wilds. They had an update come out. I logged in. I didn't give a fuck about it because it's like the same, it's the same game. Like they just revamped a few bosses and they're harder now. And it's okay,

Eric Guan: 48:56

Wait, tell me about Celeste. What's your beef with Celeste?

Chris K-S: 48:58

Celeste? So I, I like games where I can get into a flow state. And Celeste, it's like every scene is a new challenge that I have to figure out, and it's probably gonna be controversial. I think that there are parts of Celeste that if there's a part of the scene that is off camera, you literally, it is almost impossible to do it on the first try. I'm sure that there are crazy maniacs out there like Eric who can do it on the first try. But it's kinda there are scenes in Dark Souls where you would not know that you're about to get backs stabbed by an enemy because it's just impossible to know. It's kinda like this

Eric Guan: 49:33

But that didn't stop you from playing Dark Souls.

Chris K-S: 49:35

there's no way you could have prepared. No, I know, but it's also not every fucking scene in Dark Souls, it's one or every, it's two or three of those throughout the entire game versus in Celeste it's okay, I can plan out how I'm gonna solve solve the scene in terms of, jumping and stuff. But every scene takes me, I would say within each chapter, there are probably five, five or six scenes that take me over a hundred tries each,

Eric Guan: 50:00

You know how just turn up the assists mode, slow down the speed and stuff. Yeah. There's like a assists mode where you can basically, you can slow it down, you can have infinite rip time. There's other easy mode options, but it's very calibrated, which is nice.

Chris K-S: 50:14

and I, I. I on beating it. I plan on it was a game that I thought I was gonna

Eric Guan: 50:22

Yeah,

Chris K-S: 50:23

lot more than I, I am

Eric Guan: 50:24

You're definitely right that it's not a,

Chris K-S: 50:25

through number two is

Eric Guan: 50:26

yeah, you have to be willing to bang your head against the same wall like a hundred times, that's part of the point, right? It's like you're trying to climb this mountain and like it's a struggle and like you're like, why am I even doing this? Halfway through you're like, man what's the point of trying to overcome this difficult challenge that there's no in extrinsic reason why I'm climbing this mountain.

Chris K-S: 50:44

yeah. So I would lose a hundred times in a row in Celeste or, okay, let's say 20, 25, 30 times in a row in Celeste and I would just go play inside.'cause it was, it's still a puzzle game. Still scratches that itch, but it's much, much easier. But without further ado, talking about cost of games, and I'm sure Celeste costs probably like a million dollars to make should we jump into used van rein's? Latest blog post gaming's Billion dollar Gamble. the piece is not, I wouldn't say one that has a strong thesis. It's more a bunch of observations about some of the challenges facing gaming. How do we come out of this? What are some of the, what are some of the things that we should keep in mind, obviously he he's been pretty vocal about the fact that tariffs could have a pretty significant impact on the gaming industry. I think it's interesting, like 30 years later, we're probably much better insulated to, to fight off increased cost of imports. Than we were, 30 years ago'cause of the digital digitization. So he talks a little bit about that. One of the really like. Stark visualizations that I like is this one, he shared this on on LinkedIn as well. But it's just like looking at, on a roughly four year timescale, the increase in cost of producing AAA games. This is for a selected number of games. But you can see every four years we almost double the cost of producing AAA game. Now a lot of this is just, a lot of this is just due to the fact that we're producing, we have more pixels in our, or we have more bites in our game. They're bigger they're batter. But it's interesting because you'd think oh, we've got all this technological growth. Why are we not seeing, shouldn't this be linear? Shouldn't our productive capabilities grow linearly with the complexity of the space? Like AI shouldn't AI technically lower these costs? And he makes an argument that's actually not necessarily going to be the case. I forget what he said specifically.

Phillip Black: 52:39

These are all real numbers too. He just in for inflation, so

Eric Guan: 52:42

Yeah, I was gonna ask.

Phillip Black: 52:43

an econ box for us.

Chris K-S: 52:44

Yeah. This is like real numbers. It's right here. The primary consequence of technological advancement has not been innovation in game mechanics, but rather escalating production demands, particularly in art, sound, and network infrastructure\\\development costs are rising exponentially, and the audience's willingness to pay remains relatively fixed the demands are, have increased, but our ability to produ produce the supply has not increased the same exponential rate that the demand has. So it's the expectations for quality of graphics is, exponentially higher than it was 20 years ago. But our ability to produce content has not increased exponentially, which I think is interesting. And maybe, one bull case for gaming is that our costs will go down from ai, but I don't think that's a growth vector that's just like cost going down. Yeah, he does a little bit more chatting about the space the issues with costs and then can ai save the day? And this is where gets into an interesting just chart, obstacles, game publishes, face or expect when adopting generative ai. So it's I don't know.

Phillip Black: 53:43

I hate this argument. I hear it all the time. Costs are rising. Costs are rising. Costs are rising. This is unsustainable. First of all, it absolutely is sustainable because if it wasn't sustainable, costs wouldn't rise. The reason costs keep going up is because the game industry has increased demand for our goods and services and our ability to scale that budget or amortize it over a wider player base has increased. So of course, budgets are gonna go up. If the demand for gaming did not rise, the budgets would not increase. What he doesn't show here is the correlation between the increase in budgets and the increase in demand for gaming, which has to be correlated, right? Or what he's arguing is that margins in the industry are decreasing. There's no evidence for that. And then this argument that game prices have not changed is also a false argument because we're forgetting that all the different ways we price discriminate, We have special editions which are a hundred, 200,$300. And not only that, when you have an MTX model, it might be theoretically possible that you want the price lower to be than it might otherwise be without MTX.'cause you want to get that post back LTV, right? So I've never really understood this argument about costs that people are always doing

Chris K-S: 54:51

yeah, benefit has met

Eric Guan: 54:54

Yeah.

Phillip Black: 54:55

Of course.

Eric Guan: 54:56

Yeah.

Phillip Black: 54:56

also is true,

Eric Guan: 54:57

Here I agree with Philip. Everything he said

Phillip Black: 54:59

I log him into pieces. I actually think he's I anyone who can, who has a serious contribution to. the conversation of gaming as a winner in my book. I do disagree with a lot of his theories, though. They're un econ.

Chris K-S: 55:09

I, I

Phillip Black: 55:09

he's not a what is the name? Add Econ Eco. What's the

Eric Guan: 55:11

homo rationales or something. Homo economists.

Chris K-S: 55:14

econ.

Eric Guan: 55:15

Okay,

Chris K-S: 55:16

Homo Economists.

Eric Guan: 55:17

There, there's one point he made, which I thought was interesting, which basically he's, his claim is that this trend towards a small number of giant blockbusters is actually the rational decision to be making when the media landscape is saturated. He cites that blockbuster book, which I haven't heard of, they, apparently the same trend happened in movies and music and like other media industries. And yeah, I was curious about that because we've definitely seen this pattern, right? Like Activision's cutting all their small games and they're basically just the cod company now and other be soft, cutting a lot of their games. And my initial reaction was like, oh, like AI is gonna allow more small bets to, you can make a lot of small games more quickly, and maybe that'll be the direction the industry moves in. But he makes the opposite argument.

Chris K-S: 55:59

Yeah, I think we should probably plot the cost of the games the, to produce the games along with the revenue that those games are generating.'cause yeah I, like we've seen, what have we seen every 10 years? What's like the current growth rate of the gaming industry up until obviously 20, like 23, it was like, what, 10% a year, 20% a year. It was something insane. seeing like ridiculous growth. I don't know if you would get the same, if you were to plot the growth in costs over the growth in revenue. I don't know what it looks like, but I think that's a really important one. And I'm guessing you're right, Phil, those would those two curves would line up.

Phillip Black: 56:34

We, we can just look at margins. We can look at margins, right? Because margins is the output of this minus this, And so first argument to be valid, you have to assume that Margins

Chris K-S: 56:43

would've to

Phillip Black: 56:43

are declining

Chris K-S: 56:44

Which I doubt is true. Do you know what margins look like for these big companies?

Phillip Black: 56:49

like an ea.

Chris K-S: 56:50

Yeah.

Phillip Black: 56:50

Obvious, obviously it changes based on what projects from the pipeline, cancellations yada. But you're looking like last quarter EA reported a net profit margin of 15%. Obviously that's one sample for one company in a point in time. but. just as a taste test.

Chris K-S: 57:03

isn't 30% like considered really good for tech, so I'd be surprised if we were at 50. You said 60% right?

Phillip Black: 57:10

Yeah, that's net margin. If you look at the gross margin, it's closer to 70, 75%.

Chris K-S: 57:15

Jesus.

Phillip Black: 57:16

Yeah.

Chris K-S: 57:16

I was thinking of net margin, but so I agree. I agree with that. I do think that there is something there is something to be said for the cost of games perhaps being higher than they, is there a competitive, is there some, game to be had by creating a cheaper to produce game? Could you get the same revenue? Because a lot of the growth is due to the player base growing and people just spending more of their income on games. It's not necessarily that people are like spending more because it's better, if that makes sense. So it's not like people are spending. hundred dollars instead of$50 because the game is two times as pretty to look at. So is there an argument to be made that maybe there is a comp, there's some sort of value to be extracted from this market if you were able to create a game at a lower cost but kind of perform the same way that an that a triple A would. So I'm thinking of games like that new what's that new game called?

Phillip Black: 58:11

Schedule one.

Chris K-S: 58:12

Clear Obscure Expedition 33, like it's AA probably gonna produce, I'd imagine on a game like that, you're gonna see pretty. A much better margin than you would average if you were to repeat this process over and over and over again. Create a thousand of these and then, one of them's a hit. I bet your average margin would be better there than if you were to try to create AAA game. now this is like pure, theory speculation on my part, but I just have to imagine that the margin is better on a cheaper game to produce.'cause you still have this hit thing. Is the AAA game gonna make that much more than a double A game in Claire Obscures expedition 30 three's case. So I guess my point is there's, I think there's something to be said for the pie has grown. much of that can you extract while keeping costs down? The marginal cost increasing over time and the and the revenue growing over time. These are codependent. I don't think it's fair to necessarily say that because I'm

Eric Guan: 59:10

I think the idea is that the revenue distribution is super long tail, right? And like a small number of giant blockbusters are out there. And the idea is that if you funnel more resources into something, it's more likely to be a blockbuster and more likely to be that superstar That is a unicorn game. So everyone's competing to make the next unicorn, and they all believe that throwing more resources at it will make it more likely to be a unicorn.

Phillip Black: 59:33

What I may buy, what I may buy coming out of this that I think is a stronger thesis here is that the risk profile has increased. Like the rewards have increased, but the risk has increased, right? Budgets are rising and the expected, the expected value may stay flat over time, but we can see all the

Eric Guan: 59:52

I wonder if that's still true in a high interest rate environment, like with a low interest rate environment, you are way more likely to take risks, right?

Phillip Black: 59:59

A very interesting point, Eric.

Eric Guan: 1:00:01

So in a low interest rate environment, you're more likely to take risks.'cause taking on a ton of debt is less costly, whereas in a high interest rate environment, which we're in relative, currently in, relative to, last decade taking on that debt is riskier. And so maybe you'd be less willing to take these big gambles that we've been seeing for the last five years.

Chris K-S: 1:00:18

Yeah, that's interesting. I would say there's not no reason for me to believe that we have not seen riskiness in the market. It seems we've got all these, like VCs

Eric Guan: 1:00:30

they still, haven't they pulled back basically in the last two years?

Chris K-S: 1:00:33

They pulled back but I guess Q1, 2025 we saw an increase. But also like

Phillip Black: 1:00:39

to what though? Last quarter when it was the lowest of the last five years. It's rough out, there, man.

Chris K-S: 1:00:45

the put out a report.

Phillip Black: 1:00:47

I, it was up quarter, over quarter. But you gotta the thing is like the pandemic just fucks up all these numbers.

Chris K-S: 1:00:54

Yeah. Do you think the pandemic tr front loaded a lot of demand for video games and people did almost, it was almost like a hangover effect where like they spent all their money on video games'cause they had nothing to spend it on and now they're like pulling back.

Phillip Black: 1:01:05

I don't, I wouldn't call it a hangover effect, I would just call it people are spending a lot of times on games because their opportunity cost was much lower during the pandemic. You're trapped inside a house. You can't go out, you can't meet with friends, and now your opportunity costs are back on the table. So you reorder your menu and gaming's lower on your menu now, and so it's gonna capture less of a share of revenue. I would say the thing that's I feel like has been understudied from the pandemic Is how we had such shitty retention numbers, Don't think about retention as a game. Think about a macro level, what is our like year one retention in gaming for all the marginal people we introduced to gaming during the pandemic. This is, this to me is a blow to the entertainment hypothesis that I think Matthew Ball really built his career on, or made me pay attention to Matthew before kind of the metaverse stuff, is that we were supposed to win because we're the most engrossing form of entertainment, We have dynamicism that no one else can have, right? It's not omnidirectional, it's bidirectional entertainment that no one else can have. And I think that vision is under

Eric Guan: 1:02:04

Yeah, I guess the fact that people are so quick to substitute in and then substitute out of games, suggest that it's not like these activation barrier frictions anymore. It's no, people understand what games they're offering and they will play them when they want to and stop playing them when they don't want to. And it's not like this, I don't know, you gotta convert them and they're permanently sticky.

Chris K-S: 1:02:24

So basically you guys of are, you guys are of the opinion that and I'm just trying to synthesize here. AI should technically not have any impact on this whatsoever because

Eric Guan: 1:02:34

don't believe that, but I think AI's gonna benefit smaller studios. Ones who, if you go down to that AI risks list, right? Those are all things at a small studio, especially one with a bunch of new people, like cares a lot less about, iP risk, no. Like security, eh and a bunch of these. Yeah. Like potential bias and offensive output, take more risks. Employee knowhow. Just hire people who know how to use it. Pushback from customers. If you don't have an established customer base, you don't have to worry about your reputation with them. Yeah.

Chris K-S: 1:03:01

That's interesting. Yeah, I guess like my question is so I, I don't think that AI is going to revolutionize gaming, especially in the monetization front. And that's mostly because it's not going to be a growth vector, I don't think. In terms of cost reduction, I don't think it's actually gonna co reduce costs. I

Eric Guan: 1:03:19

Or the same game could be produced cheaper. Yeah. But what ends up happening is we produce bigger games at yeah

Phillip Black: 1:03:25

E elasticity effects,

Eric Guan: 1:03:27

But I think it's a mis to, to Phil's point earlier, I don't think it's a misnomer to say costs aren't going down. It's the same game can be produced cheaper, and that is a cost reduction.

Chris K-S: 1:03:35

Sure. Okay. But is that that's not a reason for, that's not like

Eric Guan: 1:03:40

I think we'll see more games being made, I think especially like lower scale games. Yeah.

Phillip Black: 1:03:46

Yeah. SU supply increases, right? Because everyone's productivity just went up and I think you gotta solve for equilibrium here,

Eric Guan: 1:03:53

It's possible that the demand is unaffected and so the net pie is unaffected. And so

Chris K-S: 1:03:59

that's what I'm saying,

Phillip Black: 1:04:00

correct.

Chris K-S: 1:04:00

might have more content out there, but that's actually just gonna make it worse for everybody on average, because we've got the same players. Is AI going to make games that are more attractive to players and players are gonna spend more time and more money? I

Eric Guan: 1:04:13

I agree with you. Yeah.

Chris K-S: 1:04:14

I don't know. I, to me that's the question is is this e, is this evolution, is this innovation going to the interest or the consumption of this good? I don't think so. I don't really

Phillip Black: 1:04:25

Oh

Chris K-S: 1:04:26

it's like purely on the supply side.

Phillip Black: 1:04:27

I just, yeah, but see if it's on the supply side. So let's take an example, right? So we got this company out in Finland called cosmic Lounge. And so they're trying to build like an AI focused match three engine. so the idea is I can make a lot more levels than I could ever make. And so one of the biggest churn points in match is when you get to the end of the level curve, right? There are no more levels to experience. And don't me wrong, there are a lot of tricks you can level loop people back to the first level yada. But the biggest turn point almost all games is end of content. So now we're gonna be able to have more content, which means less churn. Like that to me is unilaterally good. That's GDP enhancing. Our PPF curve has moved out. We're sitting on a higher indifference curve. Everyone's gonna be better off. I would say from an equilibrium perspective though, I think all those gains are gonna get bit away in the long run that I would agree with, but it still moves us to a new part of the PPF curve

Chris K-S: 1:05:14

Yeah.

Phillip Black: 1:05:15

we're larger than we otherwise would be.

Chris K-S: 1:05:17

It's like a one time shift. Which is totally fair. I think that's totally fine. I am curious so of content, does this make running live service games easier?

Eric Guan: 1:05:27

It's,

Chris K-S: 1:05:28

what part of ai?

Eric Guan: 1:05:29

Yeah, the Gen AI works great when you've got a large, stable training set, right? And just need to produce more content of this type. Yeah.

Chris K-S: 1:05:36

Yeah. Yeah. I'm curious if the marginal value to the consumer goes down, though. If it's AI generated. just a, it's just a of content that already exists.

Phillip Black: 1:05:47

What I would argue though and I was looking pulling this graph it was someone from Convoy reported this. It's the share of venture capital that is going to AI right now, overall in tech is around 70% share of. Investment in gaming VC that is AI related is only 13% and it's been flat for basically the last three years. so if we think about like games as a supply chain, like to say that games are where like art meets science. so that being the case, there's only a certain part of the supply chain that AI can optimize because part of it is things that AI can't optimize. Like a lot of the design stuff and how a lot of these really complex systems fit together a design task that I think AI is uniquely unable to take on at this moment. And so what I would argue is Yeah. you can triple the amount of cosmetics that you can make

Chris K-S: 1:06:38

Yeah.

Phillip Black: 1:06:39

think about things like systems design and building all this architecture like that is something a game designer does. And that's the art piece that I think is gonna be much more AI to be able to add to the supply chain. So I still think you're gonna get ramming. You're gonna get ramming part of the supply chain, right?

Eric Guan: 1:06:54

it makes engineering a lot easier. Like way the fuck easier. And that's gonna reduce that, that by itself, I'm sure engineers is a huge chunk of game costs right now.

Chris K-S: 1:07:02

When you say engineering, do you mean

Eric Guan: 1:07:03

All parts of it, like any coding is so much easier with ai. Even understanding a code base if like a giant complex game, you can ask the ai, hey, can you tell me how often this cache is refreshed and I don't have to dig through the code. I can just ask the AI and it tells me how does this system work? It can explain it a lot better than me asking three different humans who all only know one part of it.

Chris K-S: 1:07:22

so the, yeah, I guess this might just be like a me problem, but we spend way more money I realized it's hard to talk about a piece like this because there's no thesis, his thesis is that costs are rising too quickly. But I, I agree with your guys as like com market compe competition. Okay, Mar marginal cost is going up'cause marginal benefit is going up. Not because, like somebody's

Phillip Black: 1:07:46

He's reasoning from cost change, which I think is very dangerous. Like costs are a response to demand. The only, again you have to look at margins for his argument to be true. I find it really unlikely that there's been all this, economic profit sitting around and what we're seeing now is people are just bidding out that economic profit. I find also unlikely.

Chris K-S: 1:08:06

I do think people are much more prone to think about fixed costs than they are to think about the marginal costs, like a lot of these costs are because they're investing those resources. They're invest investing an additional person towards this task. but yeah, I, he doesn't really have any hot takes on ai talks about an a coming correction. I don't know if I'm convinced of a coming correction, but I am really, I feel like I'm probably a bull a, a bear when it comes to the impact of AI on, on gaming. I just like. And I would love to be proved wrong. I see the way that people are using it. In my company, I see the way that people are talking about it, oh, what if of the Rings was remade, but it was Taylor Swift. It's okay, that's great, but you also needed fucking, like the whole movie to be made before you could make the Taylor Swift version of, of the Rings. So I haven't really seen like anything that has made me, Is my workflow quicker than it was before? Yes. Am I able to do, 50% more analysis now? With ai yes. Our, the engineers probably twice as productive. Yes.

Eric Guan: 1:09:11

Yeah.

Chris K-S: 1:09:11

That fundamentally changes anything though. I also don't think it has any impact on the consumer

Eric Guan: 1:09:15

Yeah. I agree. I don't think it's like mobile phones or internet level of revolution for sure. But do I feel like AI is this like black hole topic where every time it comes up we just.

Chris K-S: 1:09:25

My, my hot take on the cost thing is that I think that there's like probably a competitive advantage to be had by creating a product that is to the consumer mostly the same. Maybe it's got fewer bytes, but clear obs. Clear obscura, expedition 33 30 gigabyte file. It's still like a, 30, 40 hour game. It's an amazing experience. Looks amazing, but you wouldn't know that it's half or 25% the size of a new Call of Duty game.

Eric Guan: 1:09:52

I like the lead, the law theme for this episode too.

Phillip Black: 1:09:55

So I gotta run guys.