GameDaily Connect USA 2019: Consoles are ripe for a rev share overhaul

Will Sony and Microsoft go down to a 15% platform cut? During our Hot Topics Debate, our panelists weighed in on loot boxes, game addiction, esports' potential, and revenue share for developers.

At this week’s GameDaily Connect USA in Disneyland, GamesBeat’s Dean Takahashi moderated a debate panel touching on some hot button topics such as loot boxes and video game addiction. Sitting in on the panel were GameDaily freelancer Mike Futter, Wedbush Securities analyst Michael Pachter, Rogue Games CEO Mike DeLaet, Jago Studios CEO Stuart Drexler, and Jim Ying, Managing Director at CV Capital. 

Loot Boxes

The panel kicked things off with a spirited discussion around the loot box controversy that the industry, and especially publishers like EA, have been facing over the last year. 

“There is a lot of discussion right now about whether they skirt the line towards gambling,” Futter began. “When you look at the way loot boxes work, it's not click the button and all of a sudden you see what you've got... A lot of the way loot boxes work, according to some psychologists, is the way slot machines work. So there's a lot of alarm right now... about whether loot boxes are an unethical or abusive form of monetization. There were some workshops that the FTC held and I think the conversation around it is whether or not the video game industry walked itself into potential government regulation by failing to self-regulate in a way that the public deemed fit."

There are essentially two viewpoints to examine loot boxes from. One is how they hold up legally, and the other is whether pursuing them at the expense of consumers is actually ethical. 

Pachter, who used to be a practicing attorney many years ago, remarked, “The term gambling in the law requires a wager, so buying a loot box is definitely spending money. There's consideration for a chance, and there's very clearly a chance to win something of value. And that's the trick. When you win something in a loot box, does it have value? And so far, only one court has said yes. It was the only legal opinion ever. It was the Court of Appeals for the 9th Circuit in Utah. The judge was 78 years old, and Mormon, which means he never gambled in his life…”

There has been no declaration on the federal level that loot boxes are gambling, but internationally, some courts have weighed in. Belgium was the most notable example, as the country stated that loot boxes should be deemed gambling. EA decided to pull FIFA Ultimate Team from the country, and suddenly there was a spike on French servers and Dutch servers because all the players in Belgium simply migrated to those, Pachter said. The end result was that Belgium collected no money while its players continued playing on other servers.

Ying pointed out that the controversy has somewhat tainted the free-to-play sector, too. 

“I think people conflate free-to-play and a lot of free-to-play mechanics with gacha boxes and loot boxes when it is, in my mind, two different things. Free-to-play mechanics, it is a digital good, but you know what you're buying just like when you buy a physical good,” he said. 

“It's another thing when you're spending money on the chance to get something and you have no idea what it is going to be, just like when you go to the casino and you're rolling the dice, you don't know what the outcome is going to be. At least then, you theoretically know the odds if you look into it. For many of these games, you don't even know the odds. And there is increasing legislation or guidance to reveal what these odds are, which I think is a good thing, but the fact is it is the Wild West for these types of loot boxes, and that’s concerning.”

Disclosing the odds on loot boxes is something more and more developers likely will need to do if they pursue this mechanic. 

“Apple has done a great job of making developers disclose the odds in the games,” DeLaet said. “From a business standpoint, I love gacha boxes and loot boxes. From a consumer standpoint I hate them. So it's a fine line for what we do from a business standpoint versus a consumer standpoint.”

Unlike the law, ethics is far more subjective. Every game maker could have a different opinion on the loot box mechanic.

“Ethically, somebody's going to lose their house because they're addicted to buying these items in loot boxes, but it's not gambling,” Pachter said, adding that the law already made an exception for baseball card packs years ago. He also said that every state discloses the odds on lotteries and that doesn’t typically deter anyone from playing the lottery. 

Futter pointed to the scare around Mortal Kombat and violence in games that led to the creation of the ESRB ratings in the early ‘90s. Perhaps that’s an example for how the industry should proceed when it comes to loot boxes. 

“I would say that the fact that we've gotten to this point indicates, maybe the industry isn't doing enough to self-regulate,” Futter remarked. “Maybe it's time to look at whether the ethical nature of loot boxes are causing so many problems and exposing the industry to the risk of government oversight, because once it starts, the risk exposure is huge.”

Pachter noted that EA is really the only major company to earn significant money from loot boxes. “FIFA Ultimate Team is loot boxes. We can talk about Hearthstone card packs, but that's a small fraction of FIFA Ultimate Team,” he said. 

Perhaps game companies will decide to follow the Finnish model. Supercell, for example, has certainly proven that it can succeed and not exploit players.

“I spoke to the Finland trade council for games in the U.S. My impression was the Finnish mobile games all do this masterfully, and the rest of the world can't get their shit together,” Pachter said. “So I asked, 'Why is that?' And she said, 'We're a social democracy and we believe in fairness' ... and it's true, if you play Finnish games, play stuff from Supercell, you can see it, you get why their games work.”

Drexler added, “Fairness is the key word. Kids want life to be fair, and I think that inner child in all of us keeps opening loot boxes and if you're not getting what you want, you're going to be annoyed. So if you have a sense of fairness in it all -- and I don't know who's going to regulate that -- then I think you have a system that people are willing to accept. I'll pay that $500 or $5000 as long as I get what I want.”

Addiction

The next hot topic, addiction, is at least partially related to the loot box conversation. There’s no question that some people can get addicted to loot boxes, just as they can to gambling. Last year, however, the WHO officially designated Gaming Disorder as a legitimate addiction. And while some in the industry were up in arms about this, it’s not necessarily a terrible thing.

“There are some positive aspects of something being classified by the WHO, and one is that it can be diagnosed,” Futter said. “So if you have addictive behavior, and a child is too young to gamble and they're not going to necessarily be diagnosed with substance addiction, but you can identify early in their life that they are prone to addiction. This is the way your addiction is emerging. Then you can have medical professionals that you can turn to and lean on. Then we can start to talk about that and start treatment for that and insurance will cover it. So in the U.S., there's some benefit from that.”

Another misconception with the WHO disorder is that the number of hours an individual plays is directly related to addiction. But a person can play a long or short period of time and still have an addiction problem. Ultimately, so long as a child’s development isn’t affected or a person’s life isn’t disrupted, it shouldn’t matter. 

“Who cares what they're doing with their free time, unless it's stopping them from developing as humans and socializing properly? I think Snapchat is a bigger threat to society than games,” Pachter quipped. 

From left to right: Drexler, Ying, DeLaet, Futter, Pachter, Takahashi
From left to right: Drexler, Ying, DeLaet, Futter, Pachter, Takahashi

Drexler chimed in that it’s not just a games issue. We live in a society that’s heavily dependent upon technology. 

“It's not just about kids, it's about all of us,” he said. “We all have a smartphone in our pocket, and we use it X number of hours per day for work but then we socialize with it and we game with it and we watch videos with it, and we do all these things with it. There's a socio-cultural aspect of how our society is changing... but from an addiction standpoint I think it's just a choice of how you want to spend your time. And there will be a percentage of people who are truly addicts or have addictive tendencies and the rest of us are just really excited about a particular game right now.”

Ying believes that developers are partially to blame, designing with certain mechanics (including loot boxes) that can lead to addictive behaviors. 

“As metrics-driven as a lot of these games are, people are so focused on Day 1, 7, 30 retention that they are optimizing for those metrics, and if you think about it, those are the types of things that do lend themselves to addiction because you're literally trying to design the game to get people to come back at regular intervals. All of that wasn't possible when there weren't these metrics to track in these types of games,” he explained.

Ying added, “I think that in the long run the companies that are going to benefit the most are ones that are able to design game mechanics where it does inhibit highly addictive behavior, because if it is highly addictive it's not going to be a long-term game play. At some point they will walk away or something is going to cause them to delete the game.”

That’s exactly what happened with Ying at one point. He said he definitely felt a pressure to be online all the time. “I used to set an alarm for 2 am to wake up and play, and that I would say is definitely addictive behavior. Over time, you learn that this is not healthy, and so I deleted the game. And now I play Clash Royale and I do think they have a good mechanic of limiting how much you play,” he said.

DeLaet, having worked at Kabam, witnessed some of the developer choices first-hand, and he recognizes that some things might need to change.

“We definitely try to limit it... As developers, there are ways to do that. You can turn off some things like login counts and social push notifications and [do] things like that help tone down the constant notifications... It gets really annoying,” he said.

Esports hype

The next big topic that the panel decided to tackle was the potential of esports, or more specifically, whether or not the market is completely overhyped. According to Niko Partners, mobile esports generated over $15 billion in revenue last year. Nevertheless, some investors are worried about a bubble. 

“The value chain of who is going to make money off of it is way overhyped,” Pachter stated bluntly. “Everybody wants to be the ESPN of esports and Activision claimed that they are, but what do they own? They own Overwatch, Call of Duty... are those going to be around in 50 years? Are we going to be watching people play those?”

While traditional sports like soccer or football are very likely to stand the test of time, Pachter isn’t so sure about any particular game doing the same. 

“I don't think there's a game yet that has universal appeal that's easy to understand and that everybody wants to watch,” he continued. “I think there's an amalgamation of games. And so a few million people want to watch each game and if you add them all up it's hundreds of millions of people. I think esports is largely like a bunch of sports like golf, women's NBA, tennis; they are all interesting but you probably don't watch them all… I don't see how Activision with two games is ever going to dominate. Twitch is the [new] ESPN, they have the audience. And the most interesting thing is these celebrity casters. You have a better chance of being Ninja [than the next esports pro champion]. There isn't going to be one game for a long time that's as big as NFL or FIFA is.”

Speaking of ESPN, broadcasting rights is where the real money is, Ying noted. And the simple fact is that people aren’t willing to pay enough for those broadcasts yet.

“It gets interesting when there's enough of an audience that there are people willing to secure the broadcast rights. If you look at the real sports, that's where they are getting all their money,” Ying commented. “It's not about selling the merchandise, it's not about ticket sales. It's what the ESPNs or ABCs are willing to pay. That's what floods the ecosystem with money and right now it's still pretty far away from that. So all the valuations that the teams are getting, all those are inflated and they are all banking that they will be able to survive until that point and they'll be one of the leaders, so they'll get a slice of that pie.”

When it comes to inflated valuations, Pachter said he thinks that it’s partially due to people like Activision Blizzard boss Bobby Kotick doing a good salesman job with other billionaires. 

“He's got his club billionaire boys and he's convinced them that they're going to make more billions,” he said. “He's positioned it like, ‘This is the NFL. You're getting the Cleveland Browns of 1930, and 50 years later it's going to be worth $2 billion.’ Maybe... or 50 years later Overwatch isn't a thing. If you bought the LA team for any game Activision ever made in perpetuity I could see that. Not Call of Duty. If EA ever got their act together and made Battlefield well every year, Call of Duty would get cut in half.” 

There’s also the ethical quandry of how the esports ecosystem is fueled by young players who aren’t always ready for the spotlight and the immense pressure. 

Drexler remarked about a pro player he knows: “He didn't know how to take this kind of pressure and this kind of intensity. You throw five or more teenagers in a house together and they've never lived on their own before, and they've never seen this kind of money before and they're being asked to play the game for 14 hours a day. And if they're not playing the game well enough they're out. It does some things to your head.”

Futter added, “And who is the adult in the room? Who is helping these kids learn how to manage their money?”

Revenue Share Battle

The final topic that the panel discussed was, fittingly, one raised by a developer in the audience: what’s going to happen to revenue shares for developers in the wake of Epic Game Store’s enticing 88/12 split? If Pachter’s theory is correct, the console business in the next few years will go as low as 15% for the platform holders, literally cut in half from the traditional 30% share the industry is accustomed to. 

And ironically, Kotick -- someone who’s been vilified by some developers and the game community at large for cutthroat decisions like laying off 800 people despite record performance -- will be chiefly responsible for the 15% share reduction.

“Bobby is the only person in this whole discussion who matters,” claimed Pachter. “[Take-Two CEO] Strauss Zelnick feels the same way, but Bobby is on record. He's like, 'I'm playing them off against one another.' Strauss was President of 20th Century Fox 30 years ago. Strauss gets windows… Movie theater first, then it comes on video, rental, then pay per view, then streaming video on demand… there's all these windows. So Bobby's going to say to Google, ‘You want our game? You want it the same day as the console guys? 20%.’ And Google's going to say yes, and Amazon is going to go, ‘We don't want Google to have that, we want it only for us for streaming. And Bobby will go 10%. And Amazon will say yes.

“Then Bobby is going to go to Sony and Microsoft and say, ‘I'm giving it to them for 10%, why do you get 30%? I don't get that. And Sony will pounce in, say fuck off, 30% too bad, and Bobby will go, ‘Ok Amazon gets an exclusive window for 3 months. Amazon will you take 5%?’ This is an auction. This is fucking awesome.”

Pachter envisions this happening by 2025. He said that on mobile, it could be harder for change to happen thanks to the duopoly of Apple and Google.

Epic may not “matter” to Pachter, but the industry can at least thank the company for reshaping the revenue share conversation. There’s been some controversy around EGS and exclusives, but ultimately that’s a perception issue that should go away. 

“It's a platform conversation versus a storefront conversation,” Futter said. “This is where we get into trouble with consumers who are like, 'Oh Epic is being anti-consumer because they're doing platform exclusives.' No, it's a store. You load it up on the same PC that you load up your Steam games. They're just giving developers more money. And in some cases you have indie developers who are saying, ‘We had an uncertain future but we have a minimum guarantee from Epic now. I can guarantee that we are going to more than break even. We're going to be able to make game two.’”

Futter agreed with Pachter that the consoles are currently the holdouts on revenue share, but the influence of cloud gaming is about to usher in a sea change. 

“I think we're going to see pressure against Sony and Microsoft, especially as we start blurring the lines between what it means to have a living room console, because that line is starting to blur with Stadia and any other streaming platform that comes in,” Futter said. “And especially as Microsoft pushes towards xCloud, now you've got the whole ecosystem thing where they are less focused on the hardware, which does expose them to the conversation about platform fee. There are a lot of moving pieces here, and as we enter the new console generation and streaming becomes a bigger deal with new entrants into the market, everything is being disrupted right now, and it's super cool.”

That cloud gaming battle could be a fierce one in the years ahead. Everyone is talking about Microsoft and Google, but Sony has been in the market longer with PlayStation Now, and Pachter believes that they’re the dark horse winners of the whole thing. 

“I actually think the winner in all of this with the streaming wars is Sony,” he said. “People have been ruling them out, but Sony has PlayStation Plus and Sony right now has 40 million people paying them 5 bucks a month, so it's $200 million a month of essentially pure profit. If you take that audience and make it 300 or 400 million people and they're streaming, what does Sony care about royalty on the games? 

“They are perfectly happy to get 300-400 million people paying them 5 bucks a month to play multiplayer, so there's a reason they bought OnLive and Gaikai. They have the technology just like everybody else does and they have consoles and they have a shit ton more exclusive content than any of these other clowns who think they are getting into this business.” 

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Editor-at-large

James has been covering the games industry since the early 2000s and was most recently the editor of GamesIndustry.biz. He loves Zelda, Metroidvania-style games, action adventure and single-player narratives. He's also the proud father of twin boys and is obsessed with good coffee and Yankees baseball. You can reach him @bright_pixels on Twitter or you can email him at james.brightman@gamedaily.biz.

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