On Business Models (Part 1)

Welcome back to Dark Tunnels, a newsletter dedicated to exploring the emerging ecosystem of fully onchain games.

If you’re enjoying this newsletter, please consider sharing it with a friend! We have an amazing group of early subscribers — games industry practitioners, venture capital investors, onchain game developers, and more — and we’re just getting started.

If you stumbled across this post on social media or you haven’t yet subscribed, you can join us on this exploration by clicking here:

Hi friends,

Today, we’re kicking off a series of newsletters discussing business models. This is a subject that is top of mind for many of the builders that I’ve spoken with in the onchain gaming space in recent weeks, and one that will inevitably need to be resolved in order for sustainable onchain games businesses to thrive.

In Part 1, we’ll review the existing business models prevalent in the games industry today and discuss their potential applications to fully onchain games.

In Part 2, we’ll seek out sources of inspiration beyond the world of gaming, including new models uniquely derived from web3.

Let’s explore.

On Business Models (Part 1)

Counterintuitive though it may seem, a sound business model is not a strict requirement to start a company. Countless new ventures (including many in crypto) have been funded handsomely despite having no real business model to speak of. Perhaps that has been more of a ZIRP phenomenon than a repeatable trend, but nevertheless, every company must eventually find a way to generate cash. Having a proven business model to build around is critical to establishing any sustainable operation.

Most onchain gaming companies today do not have a solid business model, nor do they yet bring in any meaningful amount of revenue. Fortunately, the games industry has 40+ years of business model evolution for us to draw inspiration from. While the onchain games businesses of the future may look completely different from the gaming ventures of the past, it’s likely that today’s early attempts will skew towards existing best practices, if only to keep them afloat until a viable, uniquely web3-enabled model emerges.

For now, let’s briefly review what’s out there today before projecting out into the future in Part 2.

Premium Games

Premium games are the historical standard that most of us born before the turn of the millennium grew up with: a $60+ boxed product, typically released by AAA publishers for PC or console. There are many variations and additional layers that can be applied to this framework (e.g. paid DLC, pre-orders and upsells, season passes, etc.), but, generally speaking, a game following this model will bring in the vast majority of its revenue within the first few weeks post-launch. This is typically followed by a series of discounts coinciding with holidays and other promotional periods (e.g. Steam Summer Sale, Black Friday, etc.).

To date, this model has largely been absent from early web3 games (fully onchain or otherwise). However, token-gated blockchain games (i.e. those that require players to hold one or more NFTs in order to play the game) can be viewed through a similar lens. In such cases, the price of the NFT has a massive impact on both the business model and player perception of the game. There’s a huge difference between token-gating an experience behind an uncapped supply NFT at 0.01 ETH vs. a 10k PFP collection with a floor price in the tens of thousands of dollars.

Subscriptions

Though less prevalent today, the subscription business model has previously been utilized by some of the most innovative and noteworthy titles in the history of gaming. Most prominently, long-running MMORPGs like World of Warcraft and Final Fantasy XIV have charged users recurring subscriptions for many years. Mobile games like PUBG Mobile and Boom Beach have also tried their hand at subscriptions, as have social casino games (via VIP loyalty programs), and hypercasual titles (e.g. pay $X per month for an ad-free experience), among many others.

(Note that we are referring here to subscriptions for an individual game, and not bundled content offerings like Xbox Game Pass, Apple Arcade, or PlayStation Plus).

Another way to think about subscriptions is through the lens of the ubiquitous battle pass feature. Though not quite the same as an auto-billed monthly fee, seasonal battle passes operate in much the same way, bringing in recurring revenue and offering unique “subscriber” benefits to those who choose to pay.

While subscriptions have been less discussed in web3 gaming, they are at least theoretically possible. A recurring currency withdrawal could be enabled via smart contract, for example. Battle passes also seem inevitable, given their success in traditional gaming. However, this presents at least two major problems.

First, battle passes and subscriptions entail some amount of centralization to deliver content, service customers, maintain and update the games, and so on. Centralization is fundamentally at odds with decentralized gaming, making it a non-starter for most fully onchain gaming teams.

Second, subscribers expect to receive something of value for their money, and in web3 value typically means ownership. However, traditional subscriber models are largely incompatible with ownership, as subscriptions normally entitle users to rented access to the product. It wouldn’t make sense for Netflix to allow subscribers to download and resell their catalog of movies, nor would it be profitable for Equinox to allow members to bring home the weights and exercise bands.

Nevertheless, subscriptions are not impossible in web3 and there are certainly teams outside of gaming working on subscription products. Cask Protocol is one such example, in which subscribers are provided NFTs as proof of subscription. These NFTs can then used to token-gate content or experiences. Mirror, too, has launched a subscription product. I will be interested to see if these can be adapted for gaming use cases, but ultimately any subscription will be predicated on content worth making repeat payments for — in other words, a great game that keeps players coming back.

Free-to-Play (F2P)

For better or worse, free-to-play games have completely rewritten industry dynamics ever since they exploded onto the scene in the early 2000s. Buoyed by a wave of mobile adoption and innovation from Chinese and Korean game developers, F2P games eventually grew to dominate every major platform and today drive a majority of revenue at industry-leading companies like Tencent, EA, Activision-Blizzard, and many more.

F2P games are typically supported by some combination of in-app purchases (IAPs) and/or advertisements. Because these games have no up-front cost, they seek to monetize users over a longer period of engagement – in some cases, multiple years. F2P games also make use of microtransactions (MTX), selling small bits of content for relatively low prices and in so doing capturing a potentially larger share of consumer value.

By offering multiple MTX across a variety of price points, F2P games cover a broad spectrum of consumers’ willingness-to-pay, leaving less untapped revenue potential on the table. When compared to a singular $60 price point, F2P games are able to serve all the consumers willing to pay some amount between $0 and $59, while also serving consumers willing to pay more than $60.

The F2P model is well understood at this point, and I am generalizing here for the sake of brevity. There is much to discuss on this topic that goes well beyond the scope of this essay, but if you’d like a more in-depth breakdown of how F2P works and the metrics that F2P operators seek to optimize, I highly recommend this great write-up by Beamable CEO Jon Radoff.

Free-to-play has already made its way to blockchain gaming, too. Many “web2.5” games utilize a F2P model for primary gameplay, obscuring the more blockchain-oriented aspects behind custodial wallets or limiting their use cases to meta features such as player-to-player trading or so-called “digital ownership” of in-game cosmetics.

In these cases, game operators may still seek to use traditional F2P monetization methods (microtransactions, non-tokenized virtual currencies, etc.) as their primary source of income. If you’ve read the first edition of Dark Tunnels, you already know my thoughts on this approach. On the other hand, there are other companies taking a more web3-forward approach to F2P. One such example is Limit Break, which has proposed a “free-to-own” model.

Most early experiments in fully onchain gaming have also been free-to-play, though not as a result of any grand plan to turn a profit. As discussed in The Inevitability of the Format, fully onchain games have thus far prioritized design and innovation over monetization. Nearly all F2P revenue comes downstream of engagement anyways, and the current audience of fully onchain gamers is too small for F2P monetization to make much sense in today’s market.

However, another way to reframe the F2P model for fully onchain games is to consider it within the context of transaction costs, or “gas fees.” One can think of gas fees as a sort of overhead cost for engaging with these games. Someone needs to pay those fees. By default, this falls to the players, but that doesn’t necessarily need to be the case. As mentioned in Perspectives for Readers with Zero Knowledge, it is possible for wallets to authorize gas prepayments such that a game developer could fund a given amount of play on behalf of a player.

Taking this one step further, a developer could choose to pay all gas fees on behalf of players, as Proof of Play has done with their onchain game Pirate Nation. According to the team, they’ve been able to make Pirate Nation unit economic positive by focusing on gas optimizations (thus driving down transaction costs) and subsidizing gas fees with royalties from sales.

A slightly different strategy is being adopted by Playmint, which has offered a nice write-up on their approach here. Their model is perhaps more akin to the pay-to-play model of early Internet Cafes or PC bangs – but worth mentioning, nevertheless.

Regardless, one hazard to be mindful of when taking on the financial risk of covering gas fees is the potential for unexpected surges in transaction volume. This could be particularly problematic when bots are also interacting with an onchain game alongside human players. If transactions are being fired off at a high rate with no cost to the entities triggering them, a developer could be in for a hefty bill that could quickly turn their business model upside down.

In Conclusion

Now that we’ve explored the established business models from traditional gaming and provided some early examples of how they relate to the evolving world of blockchain-enabled games, we have a solid foundation upon which to build future iterations. From premium games with upfront costs, to subscriptions and recurring revenue, to the free-to-play model of microtransactions and advertisements, the games industry offers many potential sources of inspiration for onchain games. The challenge, of course, is to decide which examples to imitate, which to ignore, and which to reinvent entirely.

In Part 2, we’ll expand beyond the established practices of the games industry and begin to peer down less-traveled paths, including crypto-native business models, open-source software, and more. I hope you’ll join me.

Be sure to subscribe so that the next entry comes straight to your inbox when it’s published.

Thanks for reading.

Have an idea for a topic? Want to provide feedback? Interested in sponsoring this newsletter? Need to get in touch?

Email me directly at [email protected].