Xsolla is a massive player in the games industry, but you may have never heard of the company. That’s because Xsolla provides back-end payment services and operates behind the scenes in its customers’ games. It provides a “Transaction Engine” and a “Business Engine” to help developers and publishers market, sell, connect, and optimize their games globally. Xsolla has been helping game developers across the world for over 15 years, and among its customers are major gaming establishments like Valve, Twitch, Epic Games, Roblox, Krafton, Ubisoft, and miHOYO.

Given Xsolla’s global reach, integration with leading gaming franchises, and the nature of its products (payment integration), it is uniquely positioned to facilitate the adoption of blockchain elements in games. Further, its founder and former CEO started a new web3-focused initiative in February 2022, X.LA, which is a decentralized protocol that allows content creators to leverage their IP so that they can profitably participate in the metaverse economy by utilizing revenue-sharing smart contracts.

To learn more about Xsolla and X.LA, we interviewed founder Alexander “Shurick” Agapitov. This conversation is exclusive to Naavik Pro, and we’ve included key snippets (lightly edited for clarity) throughout this essay.

Xsolla Overview

Founded in 2005 by Shurick Agapitov, Xsolla’s platform (formerly 2Pay) tied in local payment methods like cash kiosks, prepaid cards, and money orders to help games monetize audiences in countries where typical credit cards were less common. Xsolla was a market leader in the internet banking services that arose in the early 2000s, and since the company’s inception it has been focused on the games industry. Today, Xsolla provides a full suite of monetization and live operations products and services to game developers and publishers. The company, headquartered in Sherman Oaks, California, operates in more than 200 countries and over 20 languages, and it has more that 450 employees. Its gaming business engine helps game developers and publishers operate more efficiently and provides the infrastructure for microtransactions and related security/compliance. Xsolla caters to its customers, which range from indie to enterprise, with solutions that solve the complexities around in-game monetization.

Founder Shurick Agapitov describes Xsolla as “Shopify for video games” and credits its revenue-sharing model for much of the company’s success. In 2020, Xsolla reportedly recorded a revenue of $67M (with 75% YoY growth) and EBITDA of $33M (50% YoY growth). In April 2022, Bloomberg reported that the private company could be worth as much as $3B on the public markets — a higher valuation than companies like Netmarble and CD Projekt.

How Does Xsolla Help Gaming Companies?

Xsolla offers a variety of products, which fall under three categories: 1) payments, 2) monetization, and 3) user management.

Pay Station is Xsolla’s flagship product, which has been around for 17 years and unlocks over 700 payment methods. More than 1,000 developers use Pay Station to process transactions, and it gives them valuable insight into payment data. Pay Station has two primary value drivers:

1. Local payment options: different geographies/countries have different local payment methods and tax and compliance regulations. In Tier 1 countries, credit cards are common, but in most parts of the world gamers cannot pay with credit cards because the infrastructure isn’t there.
2. Tax and regulatory compliance: if a game developer collects revenue from players all over the world (which should be the goal for all game devs), then they are subject to taxes and regulatory scrutiny in each country where they have paying users. Pay Station takes care of all tax and compliance considerations so that game developers can focus on making great games.

In addition to Pay Station and related payment products, Xsolla offers other solutions ranging from web shops to in-game stores and NFTs:

Web shops are sites that game developers/publishers can set up to sell games and microstransactions directly to players. Xsolla has released some information about how web shops have improved player spend for mobile games:

• Midcore games: ARPU 4X (games that made $1 per user in app stores started making $4 from the same users in the web shop)
• Core games: ARPU 8x (same as the above but with an even larger lift)

The reason behind the improvement in player spend is that app stores are great for delivering games, but that’s about all they are good for. In app stores, developers do not have the ability to engage with the player community, whereas in a web shop they can do that, plus customize storefronts for adaptive commerce and personalize the whole experience.

Xsolla’s products are easy to integrate and are all aligned with the interests of game developers, helping to improve revenue streams. With its market leading position, Xsolla has cemented itself as a critical component of off-the-shelf live services infrastructure.

In addition to products and services that support live games, Xsolla also has programs to support the growth of the industry and new teams:

• Xsolla Accelerator: a 16-week program with mentors and experts to help teams launch their games
• Game Investment Platform: a Kickstarter-esque platform that helps indie games raise money for development and gives investors the opportunity to have ownership in new games

Xsolla’s Web3 History

One natural extension of Xsolla’s business is cryptocurrency (for payments) and NFTs (powering sales and transfers between games). The company has a long history with cryptocurrency — it teamed up with BitPay in 2014 to allow Bitcoin payments for customers like Twitch and Nexon. Even today Xsolla has NFT solutions to help integrate and sell blockchain-based assets, but to date there has been lackluster interest as many game developers have been especially wary of using blockchain technologies.

Over the last few years, the Xsolla team has been trying to understand the hesitation around NFTs. Founder Shurick Agapitov tell us:

“We (Xsolla) are at game conferences every week, and we have been asking developers and customers about crypto and NFTs for a few years. We even built a research portal to survey game developers, and we have been conducting research for the last few years with more than 4,000 customers. We found two reasons why game developers don’t like NFT’s. The first reason that developers don't like NFTs is that it’s not easy to move digital items across games. It’s technically challenging, and it’s artistically burdensome if you want to re-theme the assets to match your game.

My first “aha moment” came from a comment from developers that said "Why would I add digital items to my game that someone else made and sold?" I realized the developers need to be compensated for bringing other people's NFTs into their games. My second aha moment came from mobile developers who said "In my F2P game, 95% of rev is from 5% of players; why would I put them on blockchain and let my competitors see who they are and steal them from my game?" I realized that game developers don't want to give away their whale spenders.

This gave me the idea for X.LA, a revenue share for the metaverse.”

X.LA Overview

In February, Agapitov stepped down as CEO of Xsolla to launch X.LA. He brought a team of Xsolla employees with him, and X.LA is essentially a sister company of Xsolla focused exclusively on metaverse and web3 initiatives. Agapitov told us that as part of Xsolla’s research on NFTs, they measured how many players that use Xsolla products have a MetaMask wallet — 4% of players have one (mostly PC/web users and Twitch payers). They also found that the number of players with MetaMask wallets is doubling every 9 months, a 152% CAGR. Agapitov noted that there are only 3M users who have ever touched an NFT, and currently there are only ~300K people who own one. However, there are more than 3B gamers who have experience with digital items. To address this opportunity, the X.LA community has around 50 separate initiatives in development that collectively produce content that appeals to a massive creator audience.

At the highest level, X.LA is a web3 organization focused on revenue-sharing smart contracts (RSSCs). Agapitov is laser-focused on the revenue-sharing model and thinks that there are opportunities in gaming and beyond for X.LA. He says:

“While the majority of casual users are not educated on web3 transactions yet, I think there is an opportunity for games to onboard players into web3, and to do this, game developers need to be incentivized appropriately. I see a world where X.LA builds the infrastructure to enable revenue-sharing agreements, and game developers become affiliates of other web3 companies. For example, MetaMask could say, “I’ll give a 10% rev share to games that onboard new users.” Games would then proactively onboard players, and the games that did it most effectively would be compensated proportionally.”

Metaverse Applications

Agapitov sees another application for RSSCs. In his vision for the metaverse, the internet has a front-end that looks like a video game (and is built in a video game engine) and a back-end that is built on blockchain technology. Each website will have a 3D version (a “meta site”) that is cloud-streamed to internet users. In this 3D environment, doors would be like traditional internet links, and walking through a door entails a referable agreement.

In this new internet paradigm, Agapitov sees the fundamental economics change, where we go from an internet today that is free, and users pay with their data, to an internet that costs money to use, but users’ data is private. The key components of this metaverse are digital items, which he sees as the Trojan horse for revenue-sharing agreements. As Agapitov says:

“Digital items can be a new kind of cookie that tracks leads. In the future, every time a user sees an ad or a commercial they will have the opportunity to get a digital item, and that digital item will be like a referral or an affiliate code on the blockchain. Digital items will be the key to getting users’ attention; giving away free digital items of value will be the way that users get compensated for their time.

If you think about real-world examples of this today, Twitch giveaways are a good proxy — players get digital items from Prime and from watching. It is an effective tool for user acquisition, and when those digital items are on the blockchain we can track that user acquisition very precisely. The core idea for X.LA is, we will help bring new users to developers, and developers will pay 10% for those new users’ revenue, and this revenue share can go multiple layers deep. Revenue will be split on the blockchain.”

Agapitov’s vision for X.LA and the metaverse is extremely lofty, and most of the projects that X.LA is working on are still nascent, which is to be expected for a newly formed organization. The focus on smart contract revenue sharing is prudent, especially for a team with deep expertise in this type of business. However, the potential use cases are extremely varied, and the team does not appear to have found a niche to focus on. Even promotional materials reflect an extremely vague picture of what X.LA is about:

X.LA’s Near-term Challenges

If I were to bet on a team to create a framework for revenue sharing in the metaverse, it would be the Xsolla team, as it has deep experience managing the payments infrastructure in the gaming industry and a plethora of industry connections. That said, the necessity of RSSCs today is somewhat limited, and there needs to be a major pickup in the adoption of web3 technologies for the X.LA vision to play out.

When I asked Agapitov about the near-term execution of his metaverse ambitions, he jokes, “Well, I still have Xsolla, so I can keep the lights on.” This highlights an important distinction about X.LA compared to most other Web3 startups — X.LA doesn’t need external investors and still has almost unlimited runway given the connection to Xsolla.

When I pressed Agapitov on the near-term focus for X.LA, he talks about validating the revenue-sharing model without NFTs or blockchains:

“What we are going to do is ask developers if they are interested in us bringing them new users under the agreement that we would receive 10% of those new users’ spend. After getting buy-in from developers, we will go to influencers and work with them to create a user acquisition funnel that hinges on offering free digital in-game items to their fans.”

Agapitov notes that in the near-term these “digital items” will probably not be NFTs given the allergic reaction most game developers still have, but the hope is that they eventually would be NFTs and the rev share payments would happen on the blockchain through smart contracts. For developers, this solution is interesting, because user acquisition is one of the most difficult hurdles to overcome with a new game. Agapitov says most developers he’s talked to are receptive to this revenue-sharing model, and their only concern is that they don’t want to pay more for an acquired user than they can pay on their own.

Outlook for X.LA

X.LA has an ambitious agenda, and it’s backed by a team with the operational ability and relationships to make it work. The metaverse and web3 components are still somewhat ambiguous, but the revenue sharing for user acquisition is an application that has a valid role in the current gaming industry. In the event that the X.LA team creates a compelling offer for user acquisition for developers, there will inevitably be web3 companies that would gladly use the same method to onboard users into their ecosystems. If the internet of the future is constructed of referral programs made with RSSC, then X.LA is in a tremendous position to capitalize on this new paradigm.

I’ll leave readers with a few calls to action from Agapitov: 1) if you are a web3/tech entrepreneur, Agapitov is looking for co-founders, 2) if you are (or know) influencers who are interested in RSSCs, reach out to the X.LA team to be one of the first, and 3) if you are interested in the meta sites concept, subscribe to the X.LA newsletter.

A big thanks to Alex Summers for writing this essay! If Naavik can be of help as you build or fund games, please reach out.