Can’t stop talking about Fortnite

Granted, it’s a great game. And, yes, it’s hugely popular right now. From an industry perspective the game raises the question whether its success is a statistical outlier or the shape of things to come.

I’ll get right to the point: its battle royale game play mode was clearly added later in the development cycle. Initially designed to be a co-op sandbox survival game (“Minecraft meets Left 4 Dead” according to Tim Sweeney), the bulk of its success has so far come from adding and later spinning off a stand-alone free-to-play battle royale mode.

That tells us two things. First that agility is key to making a successful game. What ‘works’ in today’s market is much less predictable and Epic’s success here comes from deftly adapting to demand. What you set out to do and what ultimately works may not entirely be the same thing. Don’t be afraid to deviate from the original creative vision and explore new variations. If nothing else, the success will sustain the next several decades of other projects.

Second, digital games have fantastically different adoption cycles. The traditionally seasonal pattern that governed physical game sales is hard to identify in the way this new generation of games creates value. Instead earnings follow an exaggerated hype-cycle as players and streamers alike throw themselves at the game of the moment. It raises questions regarding marketing allocation and longer-term sustainability. Current success obligates you to answering a string of questions now that you’ve captured everyone’s attention. When’s the next update/item drop? When do you release on mobile? Will it be playable cross-platform? What about China? Are you investing in esports? And, do you have the necessary resources to build a franchise from this initial success?

Combined this substantially raises the risk profile of traditional game development. Wall Street worries that such sudden success chips away at the dominance of triple A titles. In a world where development takes years it is nothing less than terrifying to see a competitor rise from a complete blindspot and claim all the attention.

As for console firms: they’re happy. Last week’s earnings release taught us that Microsoft is on the up and up, with monthly active users jumping +13% to 59 million. The firm noted that this was the result of a “third-party title” and I’m going to let you speculate which one that could be. Similarly, Sony also had a good quarter with revenues up +30% for its PlayStation Plus subscriptions. Finally, the Nintendo Switch continues to sell well, with 15MM units to date and a rumor that Fortnite might soon be coming as well.

So far, platform holders have seen only moderate success with free-to-play and Fortnite’s success presents a break-thru moment (please don’t quote me saying “tipping point”). The game has managed to crack the walled garden that is console because of its innovative game play and an innovative monetization strategy. In particular the latter is relevant here because it deftly avoids the growing criticism from consumers and governments alike on loot boxes.

With Fortnite as the largest free-to-play console game of all time, it is clear that the console market has shifted just like PC and mobile have previously. This has important ramifications for legacy publishers who have long enjoyed relatively unfettered control over the console space because its barriers to entry are much higher. On the short term I’d expect continued strength in earnings, especially on the Xbox which is thriving as a result of the free-to-play adoption. On the long term it challenges the design strategy for the larger console publishers, especially as some of the more novel ways to monetize (e.g. loot boxes) are now under scrutiny.

Epic Games’s success with Fortnite evidences that, in addition to great content, organizational agility and the ability to spot relevant ebbs and flows in the market present a key competitive advantage. Perhaps Fortnite is an outlier. Or maybe it’s a sign that you’re not ready yet.

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On to this week’s update.

NEWS

Valve acquires Campo Santo

It’s been a while since Valve bought a studio, but it obviously saw merit in the crew behind Firewatch — a popular first-person mystery adventure game. Firewatch earned an estimated $30MM across PC and console since its release in early 2016 but clearly has its best days behind it. This suggests that Campo Santo’s upcoming title In the Valley of the Gods looks amazing enough to convince Valve. More so, all of Valve’s top earning titles are online multi-player games. Could it be that Valve is responding to the growing demand for single-player titles? Link

Former advisor to FCC chairman arrested

In a formidable display of irreverence, Elizabeth Pierce, a former adviser to FCC chairman Ajit Pai was arrested (yes, arrested) on fraud charges. She had forged signatures on sales agreements to convince two New York-based investment firms that her company had signed nearly $1bn in business contracts when it didn’t. She got busted. The headlines are a bit overblown, honestly, since Pierce only served as an advisor for four months and folks like Pai have dozens of these industry experts as advisors, not in the least to keep up appearances. Nevertheless, it is encouraging to see at least some of the liars out there getting caught. Link

Konami relinquishes UEFA license

After ten years Konami is giving up the license to UEFA Champions League for its Pro-Evolution Soccer franchise. Over the past few years PES had been losing significant ground to FIFA. Despite having the rights to the official Champions League music and logos, PES lacked several of the key European teams like Real Madrid and Juventus. In 2017 FIFA sold 3x as many digital copies than PES did, and earned around $500MM in digital revenues compared to $20MM for PES. Link

Dutch gaming authority determines loot boxes in violation of law

Following EA’s Star Wars Battlefront 2 loot box fiasco and its deserved apology, a growing number of government outfits is now in hot pursuit of the monetization mechanic. Last week the Dutch gaming authority published a report that concluded loot boxes are in violation of Dutch gambling laws. Specifically, the content of a loot box is determined at random and has a market value. The report also states that the design of the loot box mechanic resembles that of slot machines and encourages socially vulnerable groups to play chance games. Critics argue that loot boxes are similar to the booster packs common in trading card games like Pokémon and Magic: the Gathering. Link

Facebook rolling auto face-recognition in Europe, Canada

If there was any need for a sign that FB is now so large that its head doesn’t know what its ass is up to, here’s one. After shutting things down in 2012 in response to criticism from data privacy groups, Facebook just re-booted its face-recognition feature. According to the firm that is under fire for several critical data breaches, providing it with more data will help its users better manage their identity online. Link

PlayerUnknown’s Battleground esports kick-off

Building on its success (yes, Fortnite may be big but PUBG isn’t dead yet!) PUBG Corporation announced the inaugural PUBG Global Invitational with a $2MM prize pool. Over four days 20 professional teams will compete in three different categories: four-player squad battles, third-person perspective matches, and first-person perspective matches. Like a triathlon but with PUBG. Battle royale-style games present a slightly different format than your traditional CS:GOtourney because it requires a hundred players to play simultaneously and needs multiple referees. Daybreak figured out as much at TwitchCon last year, and I imagine it is not cheap. Nevertheless, it’ll be more fun to watch. Link