On Business Models (Part 4)

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

Today, we’re concluding our miniseries on business models and their potential applications to onchain gaming. Don’t forget to check out Parts 1, 2, and 3, if you haven’t already.

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Hi friends,

Your intrepid author has returned from a brief overseas vacation well-rested, sun-kissed, mosquito-bitten, and eager to wrap up this miniseries.

In today’s newsletter, we introduce the business model canvas and take a closer look at three specific parts of the canvas in the context of fully onchain gaming.

Did you know that Dark Tunnels has a feedback inbox? I’d love to hear your thoughts, constructive criticisms, topic suggestions, and anything else you’d like to share. Drop me a line at [email protected]. I’d very much appreciate hearing from you. It’s how I improve this newsletter!

Onward!

On Business Models (Part 4)

As you’ve likely surmised at this point in the miniseries, there are many potential approaches to constructing a business model for an onchain games venture.

Partially, this is a function of how early we are in the evolution of onchain gaming (and the web3 ecosystem broadly), but it is also reflective of the many different types of interactive entertainment experiences that might possibly leverage a maximally onchain setup.

Business models cover more than simply how a game makes money. Revenues are but one output stemming from the many inputs that make up a business model. These inputs encompass customers, technology choices, operational decisions, marketing plans, and much more.

One useful way to approach this is to leverage a framework called the “business model canvas.” This one-page thought exercise contains a series of hypotheses to be tested within each of the various components that make up a given business.

While we won’t dive into all nine of these in today‘s edition, I do recommend it as a useful exercise – even if only to force yourself to think through some of these critical questions.

However, there are a few areas that are especially relevant to our examination of onchain games businesses, specifically. Given how frequently I see these topics discussed by builders in the space, I think it’s worth devoting some additional time unpacking these in greater detail.

Customer Segments

A common topic of discussion among participants in blockchain gaming (fully onchain or otherwise) is the question of which players to target. Many opt to chase the “next billion users” – which necessarily includes those unfamiliar with crypto and web3 – while others prefer to make games for the crypto-natives.

On the one hand, the gaming audience outside of web3 is massive, valuable, and hugely varied. Newzoo pegs the global games audience at more than 3 billion people. While there is undoubtedly hesitancy (and in some cases, outright resistance) to web3 among this larger pool of gamers, it represents a potentially gigantic prize if properly tapped into.

Proponents of a crypto-native approach, on the other hand, point to the difficulties in onboarding new users to novel financial mechanisms, the differing incentive structures present in web3, and the greater willingness of users to overcome poor UX and high technical hurdles as reasons for prioritizing a web3 audience that is already accustomed to these dynamics. Naturally, this is a much smaller pool of players to draw from, but it may also represent an unavoidable stepping stone on the path to greater adoption.

Each approach has its advantages, so I won’t attempt to be prescriptive here, but the decision is an important one regardless of where you land. The choice of target audience has upstream impacts on which channels to market into, how the game is designed, how the game’s community is built and grown, and which monetization systems are adopted, among many other related questions.

The choice of customer segment should consistently inform nearly every other aspect of the business model.

Value Propositions

As much as I hate fielding the stereotypical “why do gamers care about blockchain?” question, it is a valid concern worth addressing.

While the ultimate answer is probably that player’s don’t actually care – in the same way that players don’t care about a developer’s choice of engine, or cloud provider, or matchmaking service – the responsibility nevertheless still falls to advocates of onchain gaming to at least convince our fellow game developers why they should build maximally onchain.

Here, it is helpful to consider the value proposition an onchain gaming venture presents to its players, given that they will be the ones to ultimately uphold the long-term viability of that business. You can’t fund your operation on ecosystem grants and VC dollars forever! Crazy, I know…

While a surface-level response to the question of value propositions is to deliver a fun game, “fun” can take different forms for different player personas. One way to hone in on this is to leverage motivation-based frameworks like the Bartle taxonomy of player types, or similar offerings from vendors like Solsten and Quantic Foundry. Derek Lau has also put together a helpful chart that examines this through a lens specific to web3 games, below.¹

Another consideration regarding value propositions is the communication of said value. We’ve already discussed the decision of which customers to target; from there, we must consider how we’ll educate those players about the value provided.

In gaming, this usually requires a “show, don’t tell” approach, but it varies from title to title. Education for Candy Crush is vastly different than it is for Europa Universalis IV, for example.² 

One useful way of thinking about this is to weigh the balance between customer education and average contract value (ACV). In other words, what is the expected economic return of an acquired customer, and how does that inform the level of education required to achieve that return?³

I find this line of thinking to be particularly instructive, given the collective struggle the onchain gaming space has had in succinctly and effectively communicating its value to a broader audience.

In the context of blockchain gaming more broadly, one might consider the education aspect to (at least, in part) be reflective of players’ comfort with web3 technologies. This is made all the more true if a game relies on a web3-forward design: governance DAOs, P2P trading, staking rewards, and the like.

That being said, games with high education requirements have existed long before blockchains ever came into the picture. Furthermore, some blockchain-enabled games choose to intentionally obscure or minimize their use of web3 technologies irrespective of how integral it is to the game’s value proposition.

As such, I propose instead to consider a game’s “web3 forwardness” as an additional variable. All told, this gives us the following three axes:

• Average Contract Value (ACV): Free-to-play / non-spenders on one end; high spenders / VIPs at the other end.

• Education Requirement: The complexity of communicating a game’s value proposition, from low to high.

• Web3 Forwardness: Games accessible to players with zero understanding of (or interest in) crypto at one extreme; games designed for crypto-natives at the other.

The first two axes (ACV and Education Required) are strongly correlated, as described in the Chris Paik quote above. The last two (Education Required and Web3 Forwardness) are also highly correlated, as putting web3 integrations front-and-center typically (though not always!) adds complexity to communicating a game’s value proposition.

These are generalizations, of course, and each axis represents a spectrum of outcomes in between each extreme. One would also hope that the length of the Web3 Forwardness axis shrinks over time as more users are onboarded and the ecosystem sees broad improvements in UX, security, and legal clarity, alongside wider market acceptance.

Nevertheless, when you start to plot this out you quickly realize that most onchain games today exist somewhere in the High Complexity / Crypto-Forward / VIP octant.

Pirate Nation is a notable exception here (I’d chart it much closer to the Low Complexity / Crypto-Minimized / F2P octant), which is likely a contributing factor to its recent traction. Words3 is perhaps somewhere in the middle, as it is still low complexity, but more crypto-forward and definitely not F2P. These are just a couple subjective examples, but I’d encourage you to try this out with your favorite projects and see where they land.

If you accept this as a valid framework, it then follows that casual free-to-play experiences will likely become the dominant model for “traditional” gamers onboarding to onchain games. Casual games tend to be extremely straightforward and easy to pick up, F2P games necessarily have low ACV, and players unfamiliar to crypto will naturally require more education.⁴

Conversely, a more complex, high stakes, competitive PvP model is likely to emerge as the favored approach for studios targeting crypto-natives. These players are already accustomed to paying gas fees, navigating hyper-financialized environments, and spending heavily on NFTs.

Given the higher ACV and larger requirement for education, these models are also the likeliest to attract coordinated groups of players, like DAOs and gaming guilds. In other words, these games can be analogized to a sort of “enterprise sales” model for onchain games.⁵ We have already seen this with early onchain gaming events like 0xMonaco’s Battle of Titans or Dark Forest’s seasonal competitions. This behavior is also evident in the accumulation of gaming assets by DAOs like BlackPool and Yield Guild Games.

Notes:

1. One important nuance to understand when utilizing motivational data is the difference between stated and observed behaviors. Players will say that they find fun in a particular game, genre, or feature set, but their observed actions may reflect an entirely different reality. This is why it's important to test!

2. Note that “education” is slightly different than “onboarding.” We could easily devote an entire newsletter to game onboarding, FTUEs, and so on. For now, it may be easier to think of these as two parts of the user acquisition funnel, similar to the distinction between "awareness" and "adoption."

3. Full credit to Chris Paik of Pace Capital for this idea. I first learned of him and his many useful investing frameworks through his interview with Patrick O’Shaughnessy on Invest Like the Best.

4. Note that ACV is still an average -- there will always be those who choose to spend heavily, but they will almost certainly be far fewer in number.

5. To again reference the aforementioned Chris Paik framework: “High ACV demand must require education. This is enterprise sales in a nutshell.”

Revenue Streams

There are many possible methods to generate revenue with an onchain games business, several of which we have discussed over the course of this miniseries. Given that the correct approach for any one venture will be heavily influenced by the other components of its business model canvas, it may be easier to approach this discussion through a series of fundamental questions that can aid in formulating a more comprehensive strategy:

Question #1: Where does monetization take place: at the protocol or client level?

In many ways, this question is a reframing of another question: “tokens or nah?”

Monetizing at the protocol level is inextricably linked to the use of tokens, whether they are sold outright on the open market, rewarded to participants for their contributions to the protocol, or some combination therein. The challenges here are abundant (determining issuance schedules, establishing token utility, bootstrapping liquidity, and so on), but fortunately, there are many builders across the crypto ecosystem working on solving these problems, both within and outside of blockchain gaming.

Monetizing within a game client, on the other hand, allows great flexibility in terms of approach. Nearly any existing games monetization strategy can be utilized here, with the important caveat that these approaches can also be competed out of viability.

Because onchain games are fundamentally clientless, someone can always come along and create their own frontend with more favorable take rates — or even create a client without monetization altogether. That’s not to say that monetizing within a game client is entirely indefensible, either, but it is important to consider the competitive vulnerabilities.

Question #2: What are you selling?

The question of what to sell isn’t so much about the assets themselves. Cosmetics, power-ups, characters, horse armor — any of these can work, if executed well. Rather, savvy operators must drill one layer deeper:

• Are you selling power (higher level characters, stronger weapons)?

• Are you selling prestige (flashy cosmetics, rare titles, enviable roles)?

• Are you selling time (XP boosters, timer cooldowns)?

• Are you selling variety (different characters, new game modes)?

• Are you selling access to the game itself (token-gating)?

There are likely many more possibilities than those listed above, but the central idea is that monetization must be considered within the context of the players’ desires — the “why,” rather than the “what.” Any widgets you choose to sell must ultimately serve those desires and, importantly, should be supported by additional complementary features throughout your game.

A simple example of this is the use of cosmetics in battle royale games. Titles like Fortnite and PUBG Mobile sell cosmetics as a form of prestige. By outfitting their avatars in these outfits, players are able to show off or “peacock” to their friends and opponents (“I achieved this thing,“ or “I won this draw from a gacha,” or “I have this status in the game,” etc.).

This is further reinforced by numerous opportunities to view and display those cosmetics, both in-game and out-of-game. The pre-match lobby, the home screen, the battle pass UI, friends lists — these all prominently feature player avatars and allow the user to show off their hard-earned cosmetics. Some games, like NetEase’s Knives Out, have even translated cosmetic ownership into its own leaderboard metagame, rewarding points based on the number of permanent outfits the player has acquired.

Question #3: What is your game’s spend depth?

“Spend Depth” is a term commonly used in F2P games to track the total depth of monetization available to a game’s most committed players. Put differently, if a player wanted to obtain all of the content in a game as quickly as possible, how much money would they need to spend?

While most players are unlikely to ever meet a game’s theoretical maximum spend depth, it is nevertheless an important metric to track. Having too little spend depth effectively caps a game’s upside.¹  

Spend depth is a particularly interesting concept to consider in the context of onchain gaming. We’ve already discussed how builders could theoretically create new clients that reduce or remove monetization altogether (i.e. reduce spend depth to near-zero). However, the flip side of that possibility is also true: if payment options in a given client are capped or otherwise restricted, another builder could just as easily create a client with uncapped monetization.

While this might seem unusual to some readers (why would players want to spend more money than they have to?), one thing you quickly learn working in F2P games is that there are a subset of players for whom investing heavily in their game of choice is simply how they prefer to engage with their hobby.

In web3, unfettered financialization can swing both ways.

Notes:

1. A prominent recent example of this can be seen in Marvel SNAP, a topic I wrote about for Naavik Digest around the time of the game’s launch.

In Conclusion

That does it for the miniseries on business models. I hope you’ve found it to be thought-provoking; it certainly forced me to rethink many prior assumptions about onchain gaming. I imagine it is a topic that we will need to revisit frequently.

Clearly, the market for fully onchain gaming businesses is still vastly underexplored…but that’s where the “Dark Tunnels” moniker comes from and that’s also why it’s such an exciting ecosystem to be a part of.

Back to our regularly scheduled programming next edition. Be sure to subscribe so that it comes straight to your inbox when it’s published.

Thanks for reading.

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