Self-regulation, creativity, and the gubment
Last week I managed to get the president of the ESRB to speak in my class. I first met Patricia Vance two years ago and had been eager to get her perspective on the industry and how it has changed.
What drove my curiosity was how a self-regulatory body like the ESRB has managed to navigate the recent changes in the industry. Central here is the observation that ‘everyone’s a gamer now.’ Video game makers today cater to a much, much larger and more diverse audience. We’ve seen spectacular growth in consumer spending, counter-cyclical growth during the pandemic, and the resulting financial success on the stock market over the past several years.
But all that prosperity attracts a lot of attention.
Now that games no longer reside on the fringes, regulators are taking a fresh, hard look at gaming. And for good reason. Video games are a larger part of the economy. In fact, in 2019 the games industry contributed $90 billion to the US economy, supported 429,000 jobs, and generated $12.6 billion in taxes.
There is a massive shift taking place in the way audiences like to consume entertainment, and we’re only in the first inning. Digitalization has presented a clear challenge to every industry, and there is a demonstrable transfer of talent and wealth toward gaming.
Speaking of money, regulators have been loosening the rules around gambling and sports betting on a state level to recover some of the missed income from the past year. An important part of why recently IPO’d firms like Skillz (see below) and DraftKings are doing so well is the anticipation of a loosening in regulations which is expected to oxygenate the segment.
Even so, earlier this year the FTC set the tone with its position on “unlawful surveillance, dark patterns, and facilitation of fraud” in a case against TapJoy. What it was really talking about, of course, was the stranglehold that large platform holders have over the games industry, and their ability to control who succeeds and who does not. The brilliant Lina Khan is expected to be nominated for the open position on the FTC and bring her superstar status to a new generation of antitrust policy to confront Apple, Facebook, Amazon, and Google. I have no doubt that gaming will be a constant case in point to illustrate malicious practice.
Next, like brands, politicians are also discovering how to leverage interactive entertainment and adjacent categories to reach especially younger audiences. For all of Biden’s grandstanding on video games, he did have his own little island in Animal Crossing: New Horizons like an actual, normal human. And even if he’s not a fan, I’m happy to wait until AOC becomes president; she’s an absolute genius at making the most of novel channels and platforms to build her base.
Gaming also sits at the center of a lot of a global trade conversation. The smoldering trade conflict between China and the US is unlikely to be resolved any time soon. However, several of China’s biggest firms are building a foothold in the North American market. Tencent, for one, has been actively building not one but three triple A studios in the hopes of gaining more goodwill and market share.
Another motivation is the explosive success of Roblox’ direct listing (see below). Among other things it means that the firm now has everyone’s eyes on it as “two-thirds of all U.S. kids between 9 and 12 years old” play it. Granted, the pandemic has relaxed a lot of house-rules everywhere because as a parent it is heartbreaking to see your munchkins miss their friends and finding an acceptable solution in having them play and build in an online environment. Here, too, do regulators have a clear path to action, just like it does with toys, comic books, and cartoons.
Two more novel phenomena that are likely to draw government attention. Loot boxes have quickly become infamous due to EA’s obvious money grab manoeuvre. Estimated to be worth $20.3 billion by 2025E, this singular monetization tactic has drawn the ire of a host of governments around the world and has single handedly replaced the anxiety around antisocial behavior. And the outright frenzy around NFTs is likely to add fuel to the fire. Unregulated, ungoverned, and, most importantly, untaxed transactions have and will always be absolutely suspicious in the eyes of government.
One of Patricia’s most illuminating observations was that the role of government in gaming is likely to expand significantly in the years to come, and how the industry can, could, and should respond. As video game makers collectively assume their new role as a relevant cultural industry with substantial economic weight, they must not forget about how we got here. Despite their competitive differences, the large players have always maintained a proud tradition of coming together on major issues and committing themselves to reviews and ratings rather than fending for themselves. To safe-guard its creativity in the decades to come, it is critical that it carries forward its tradition of self-regulation.