In a market state where it feels like “Web3” is taking over, GDC 2022 was probably the first major industry meet-up where a large majority took away that “blockchain gaming” was all that everybody was talking about. But it was also the first major forum where developers (both small and big alike) left with more questions than what they entered with. Of all those questions, I’d like to center today’s essay around exploring one that many major publishers are asking themselves right now - how does one think smartly about integrating blockchain in large, existing franchises?
The answer to this question obviously has many different facets - technology, product, operations, business, etc. But we also know that the bigger the franchise, the slower it’ll move to integrate blockchain technology in a fitting way. Therefore, this essay will focus mainly on the business and product side of things, and will specifically use Fortnite’s ranked mode as the case study. In other words, how should Epic think about implementing a blockchain-enabled ranked mode for Fortnite?
Fortnite is a strong model for two reasons: 1) most people are familiar with the breakout battle royale hit (and current monetization mechanics), and 2) Fortnite’s financials and engagement metrics prior to October 2020 were made public via the Apple vs. Epic trial (through discovery documents).
By the end of this essay my hope is that you’ll have an understanding of how players invest in Fortnite today, how big game publishers look at the economics related to blockchain and NFTs, and what a potential blockchain integration could look like in Fortnite, and thereby large, existing franchises. Let’s dive in.
Fortnite’s “Web2” Economy
First, let’s put Fortnite’s existing business and economics in proper context. The foundation of any game economy is engagement. Fortnite had more than 125M registered accounts in June 2018, just over a year after the game came out with the Battle Royale mode. The average monthly active users from January 2019 to September 2020 was 76.7M - console platforms contributed ~80% of engagement and mobile platforms contributed ~20%.
Monetization in Fortnite comes primarily from microtransactions, with players spending on the Battle Pass and in-game items like skins. Fortnite also had a very small (less than 1%) share of revenues on their Save the World mode, and today Fortnite also has a subscription product called Crew.
Using reported revenue figures from Fortnite, we can see that the game generated $6.9B in the 21 months from January 2019 to September 2020. Layering the monthly revenue on top of engagement, we can see that the average revenue per MAU during this period is $4.22.
This doesn’t necessarily mean that each monthly unique player spends $4.22. Given Fortnite is a F2P game, there is a large subset of the player population that doesn’t spend at all, which is offset by cohorts of players that spend significantly (sometimes hundreds of dollars each month).
After platform fees, Epic gets about 70% of the topline gross revenues. So the average net revenue that Epic gets per MAU is closer to ~$3. Fortnite is the biggest F2P game in the world from a revenue perspective, and the game has massive top line engagement, but ultimately only recognizes a few dollars per user per month.
How can Existing Game Franchises use Web3?
While there are a myriad of methods that Epic could apply to implement Web3 into Fortnite, it would be worth focussing the discussion through a thought framework. I believe blockchain integration opportunities with existing franchises can be thought through using the following risk/reward framework:
In this essay, we will focus on the middle lane, which optimizes implementation difficulty and ROI. Please note that we’ve applied a “product” lens to define both implementation difficulty and ROI. Therefore, questions like how difficult implementing a certain Layer 1 is are out of the scope of the above framework.
There are a few key product questions for game developers to consider when using blockchain/NFTs/tokens within existing franchises:
- What outcomes are we striving for?
- What player motivations are we catering to?
- How can we use the underlying technology to enable both of the above?
In terms of the outcomes that developers could strive for, we’d consider the following two to be critical:
- Incremental monetization: For example, providing a way to allow players to buy/sell an NFT skin could be a monetization mechanism that incentivizes them to invest more money in the game, and thereby generate an incremental LTV uplift.
- Incremental engagement: For example, NFTs or on-chain tradable tokens can be used as reward mechanics to incentivize more frequent or deeper grind gameplay, which could potentially have a knock-on incremental effect on monetization too (more play time correlates with more revenue).
To illustrate the above, imagine Epic creates a Fortnite skin that is minted as an NFT, and has a total supply of 10,000. A potentially likely outcome is that these skins sell for a significant sum (with Epic taking some share of each transaction), players / investors / collectors / speculators would all rush to buy these limited supply NFTs, creating a new revenue stream in the form of royalties on all NFT transactions (first purchase and consequent trades).
Now instead imagine that Epic allows anyone who completes their battle pass to mint their own limited supply NFT skin. Under this scenario, existing players would consider racing towards being the first to complete the battle pass, which could also create a secondary monetization uplift on existing revenue drivers. Further, new players would consider entering the game with the goal of minting their own NFT. And finally, once a certain set of players become NFT holders, they could potentially trade these NFTs with other players in a live marketplace. In the best case scenario, the result would be enhanced engagement through new and existing audiences, and incremental revenue on the back of that.
That said, the economics of NFTs can theoretically be far worse for developers than traditional microtransactions. For example, if Epic sold 10,000 NFT skins, and took a 10% royalty on every transaction (which is on the high end), the transaction value on an NFT would need to be ~1,000x that of a normal skin. Assume Epic makes $10M on a popular skin, selling 1M skins for ~$10 per skin (this is in line with the real game economics). To make the same amount of revenue on an NFT, Epic would need each NFT to have at least $10k of transaction value through a combination of selling price and number of primary + secondary transactions.
This is in a best case scenario, assuming that that player spend on NFT skins is incremental to existing in-game spend. A more pessimistic scenario could look like this - if a player budgeted $100 per month to spend on Fortnite, and should this player purchase a $100 NFT, the typical item store revenue would be 100% cannibalized, leading to a net negative revenue impact for Epic. Of course, Epic could consider playing around with the NFT economics balancing by increasing the total number of available NFT skins to 20K too, if the player demand exists. But who’s to say the effort won’t play out similarly to Ubisoft Quartz’s poor performance.
While all the above is mostly hypothetical, the point I’m trying to make is that developers/publishers need to think carefully when looking to integrate NFTs into existing successful franchises since both favorable and unfavorable business cases exist. However, one use case that I believe could be potentially accretive is “wagering through ranked modes”.
Economics and Considerations for a Blockchain Enabled Ranked Mode
Today, ranked modes are some of the most popular playlists in competitive games. The allure of competition and ranking up is a nearly universal player motivation, especially for male-dominated games. Fortnite has a particularly strong competitive scene; “Arena” is Fortnite’s ranked mode and allows anyone to participate and win. In 2019, Fortnite committed $100,000,000 in prize money to its competitions, with $3M awarded to a single player. The Fortnite World Cup attracted the highest viewership of any esports tournament (excluding China) with 2.3M live viewers on Twitch and Youtube. There can be no doubt that competitive modes are where the most core players engage.
So how can blockchain improve ranked modes? One potential avenue is through wagering. Today, players can make wager bets on 3rd party platforms, where typically two teams will wager on total kills in a game. There are a variety of platforms that facilitate these transactions, but because it’s in a grey area of legality, games do not formally allow wagers.
Blockchain enters the chat.
Blockchain technologies are inherently built to handle trustless transactions quickly. Furthermore, a token used specifically for wagering may be more immune to the challenge of illegal wagering because it is one step removed from betting with currency. For example, tokens that could be earned or awarded without purchases are much less likely to be classified as a security, thereby removing a primary legal barrier. However, this is not to brush away any of the looming regulatory concerns around tokens.
Returning to the Fortnite example, we can identify the desired outcomes and player motivations that blockchain-enabled wagering creates. For Epic, token-based wagers could potentially drive both engagement and monetization. The latter would occur through existing monetization mechanics, while also creating a potentially new revenue stream in terms of transaction fees for facilitating the wagering (see more details below). For players, token-based wagering satisfies two key desires: competing with higher stakes and earning while playing.
Further, token-based wagers could also open up possibilities that are not currently available through 3rd party platforms, such as full lobby wager matches. Instead of two teams wagering against one another, envision an entire lobby of 100 players wagering against each other. Each player would put up a predetermined amount of tokens, and those tokens would be distributed to players based on placement and/or score (using metrics such as kills, assists, etc.). In this expanded playing arena, winning players could earn significantly more than in traditional 3rd party wagers.
The economics of token-based wager matches could also be attractive to a developer like Epic. A wager-based monetization system would live on top of the existing monetization systems and is thereby less likely to cannibalize item store spend. Further, it could potentially unlock incremental value in core competitive player segments. Using conservative assumptions, token-based wagers could drive as much as ~$1B in gross revenue per year for Epic:
Possible additional benefits of using blockchain for wagers include: token appreciation, true play-and-earn mechanics funded by a sustainable wagering mechanism, unlocking a new type of player spend for most core segments, and instant payouts.
Turning a Vision into a Reality
While the theoretical implementation and results of a token-based ranked mode are wonderful, to ground this theory in reality, the current challenges related to this idea need to be discussed:
- Platform considerations: The greatest hurdle in implementing tokens on existing franchises comes from the 3rd party platforms that players use to access games (Sony, Microsoft, Nintendo, PC launchers). Today, none of these gatekeepers have shown willingness to allow blockchain transactions, and until this changes, developers can’t implement blockchain features without the risk of getting kicked off these game platforms.
- Legal: Playing competitively for money is totally legal, and Fortnite already has cash cups which award players real money for winning tournaments. The issue with wagering is that laws change by country, state, and even county. Third-party wagering companies have avoided legal trouble by focusing on the competitive nature of games. If wagers can be proven to have no gambling mechanics or randomness with winning, then they are completely within the law.
- Cheating: Cheating is still a major issue in games, and adding higher stakes to games creates a bigger incentive for cheat developers and players to act maliciously. Robust anti-cheat would need to prove effective before wagering could be commercialized.
- Implementation: Onboarding users into crypto is also easier said than done. Getting players to open wallets would need to be seamless to reach the maximum audience (as outlined above).
Each of the above challenges are pretty huge and will take time to resolve. Therefore, it’s probably not reasonable to believe that a company like Epic could turn on a token-based ranked mode in the near term. But as platforms, regulations and the broader Web3 gaming ethos evolve, there could be a future for this type of game mode across battle royales at large.
Zooming Out
For existing game franchises, blockchain technologies might have little allure, especially considering cannibalization of existing monetization systems. Developers need to have a clear understanding of what player motivations blockchain technologies unlock, and the value-add of blockchain features needs to be weighted against forgone revenue. A pivotal factor is that most players invest in games proportionally to how much they play, so the long-term key to a sustainable game is player engagement.
Fortnite is an example of a highly successful gaming franchise, but Epic only makes an average of $3 per month per user. While there are a variety of blockchain implementation options for Epic, it’s probably going to be the ones that don’t touch existing revenue systems and instead build something brand new and separate on top of them (more revenue, no cannibalization) that gets experimented with first. My bets are on token-based wagering!
