In 2017, sales of virtual goods raked in more than USD$80 billion of total gaming industry revenue of $103 billion¹.
The top five grossing games that year were free-to-play, a model which generates income from sales of in-game content. The highest grossing of these, League of Legends, last reported revenue of $1.6 billion in 2015.
Further, observe the following examples:
The current situation is that gamers do not truly own the content that they have purchased. Publishers place strict qualifications on what users can do with these items with EULAs (End User License Agreements) that prohibit, amongst other things, the exchange or transfer ownership of items or their use outside certain games or platforms.
According to the CEO of EverdreamSoft, developer of CCG Spells of Genesis:
“Consumers are spending hundreds of billions on content that gives them no real right of ownership. For all the money supposedly being made by skins and in-game items, they are all owned and controlled by the game publisher. These companies have the power to change the terms of service, freeze players accounts, or even just shut the whole marketplace down. The fact that they don’t is because it is so lucrative, to the point that you are seeing more big publishers adding loot crates and tradeable items to their games. It suits many of the games companies to keep it that way. People assume there is no alternative.”
- Shaban Shaame, CEO EverdreamSoft
This is despite the increasing shift towards revenue models that profit primarily from purchases of in-game content. In an environment that increasingly recognizes virtual assets as having real world value, this situation unfairly disadvantages gamers.
This is despite the increasing shift towards revenue models that profit primarily from purchases of in-game content.
“Tens of millions of virtual goods are created, shared and sold in virtual reality and people invest in thousands of hours to create spaceships in space that they battle against each other. So, the concept of virtual goods, virtual worlds and virtual currency all ties together.”
- Jen-Hsun Huang, CEO NVidia, which designs GPUs for the gaming, cryptocurrency and professional industries.
We believe that enabling true ownership of virtual items will result in greater engagement of gamers, more flexibility and functionality in development for content creators, and the expansion of the industry by attracting new market participants.
At first glance, it would seem that allowing users to ‘cash out’ of their virtual items would make it easier for them to leave a game. Not having items locked inside a platform may remove some of the incentive to continue playing.
However, examples from existing markets indicate that enabling free movement of virtual items actually increases engagement within a platform. One of the main reasons for this is that when items can be freely traded, their value increases, providing a greater incentive for players to remain within the ecosystem.
When items can be freely traded, their value increases.
One example of this is the trading of ‘skins’, which are cosmetic add-ons to popular first-person shooter games. The ease at which these items can be traded has led to an increase in their demand, as well as the development of multiple third party websites to facilitate this.
Further, true ownership can facilitate the trading of goods not just within a game but between several games from the same developer or franchise, and on different markets. This increases the interconnectivity of games within the broader ecosystem and the establishment of a more robust network can result in greater awareness and exposure to a wider variety of players than would occur otherwise.
Truly owning virtual content and having it be a part of their real economic situation decreases the risk for gamers to make those purchases. Knowing that they can simply on-sell unwanted items, or even make a profit after increasing its value in-game, lowers the barriers of entry and may even expand the range of games that a player is willing to try.
Truly owning virtual content and having it be a part of their real economic situation decreases the risk for gamers to make those purchases.
Further decreasing the risk is the ability for gamers to rent out items when they are not in use. This has a secondary effect of further lowering the barriers of entry to trying a game for new gamers as they do not have to commit to a purchase. Making games more accessible to people is beneficial to developers as well.
If virtual items have real world value outside just the games or platforms in which they were created, it will attract a new segment of market participants who will get involved purely for the trading and value creation aspect.
…it will attract a new segment of market participants who will get involved purely for the trading and value creation aspect.
One of the effects of this may be to elevate the overall standard of virtual content in games by encouraging particularly skilled talent to create content for this market. Gamers may benefit from the availability of content that will enhance their gaming experience. Further, specialisations may emerge, giving birth to a new industry and rewarding a new type of value creation.
This will also give rise to a new market of virtual collectibles. The rise of eSports and highly publicised video game competitions have attracted millions of dollars in funding, sponsorships, prize money and huge fan bases. Just as people collect memoirs from real world games, like a baseball that was hit in a home run that scored a team their World Series, markets can be established for virtual items used in iconic games or previously owned by high profile competitors.
Blockchain technology will enable the history, usage and ownership lineage of items to be verified, providing competitors with the opportunity to create ‘trophies’ that represent their skill and effort as well as attract investors and speculators to engage in the process of valuing these assets.
We believe that true ownership of in-game content, including levels, storylines, characters, real estate and skins, will enable game developers to build games where aspects of different worlds can flow seamlessly into others. The ultimate implication of this may be the true, universal metaverse, long-anticipated by science fiction.
The ultimate implication of this may be the true, universal metaverse, long-anticipated by science fiction.
Additionally, user-created content may evolve into a kind of massive cottage industry, resulting in an almost decentralized way of actually developing computer games: 10s, 100s, or even 1000s of people collaborating on works that can be assembled into new game worlds, again all connected to the “metaverse”.
A large part of gaming is the fantastical element of being transported to another world and being exposed to experiences and challenges that the real world does not present. This makes gaming more exciting.
Hoard’s platform will make it easy for developers to tokenize virtual items on the blockchain which gamers can truly own and freely transact securely through advanced cryptography.
We believe that enabling true ownership of virtual items will result in a large number of multi-sided, decentralized video game asset markets populated by robust communities of gamers, publishers, and developers.
Further, it will provide the secure, immutability and auditable features of this technology to eliminate existing problems of fraud, duplication and piracy in the current market.
As stated before, we don’t believe that there is any reason for the virtual world not to be fully integrated into our ‘real’ ones — not with the technology available to make this as secure and feasible as possible.
Further, this seems to be the direction that the industry is going with many prominent people in this space predicting that this is the future. With more and more people earning and buying virtual content, the increasing amounts of games adopting a free-to-play model and the amount of both official and unofficial platforms to trade virtual items, it is clear that this is a market that needs to be addressed properly.
Finally, and perhaps most importantly, it has the potential to make gaming worlds more collaborative, exciting and…fun!
Join us in paving the way for this new future.
¹ IDG Consulting, Quarterly Report March 2017