The video game industry is in the midst of a significant business model shift. Publishers have started to pivot from the unit-sales model they have relied on for the last 40 years, toward the free-to-play approach popularized over the last half decade (see: Halo Infinite, Call of Duty Warzone). “There’s no technology disruption causing that. It is totally consumer driven,” Mike Sepso (CEO, Vindex) said. While the transition is likely to cause some short-term pain for many publishers, the gaming executive believes it is unquestionably in their long-term best interests to make it. Free-to-play has the potential to drive more players, increase engagement and still generate billions of dollars in revenue (see: Fortnite)—all of which is good for the big four sports team owners who have invested in esports teams. It should be noted Sepso is an investor in Andbox, the esports club owned by the Wilpon family.
JWS’ Take: Over the last 40 years, video game publishers have largely operated like Hollywood studios. “They would develop a game, release it, and like a movie model, focus on opening weekend sales,” Sepso said.
There is nothing wrong with the “consumable” model. Many game publishers have built meaningful businesses off it. But in recent years some studios have started to experiment with subscription, games-as-a-service and free-to-play strategies in an attempt to meet changing consumer expectations. Sepso explained that with mobile and casual gaming taking off (both of which are primarily free-to-play) and with several popular PC titles and cross-platform titles using the same free-to-play model (think: League of Legends, Fortnite), customers have become accustomed to it and are now “pulling the industry” in that direction.
Much like the music labels that initially struggled to adapt to the shift from CD to MP3, it isn’t easy for publishers founded on unit-sales economics to make the change. “The free-to-play model relies on in-game transactions as the key revenue driver,” Sepso explained. “Publishers need to rewrite the playbook to drive long-term player engagement and that often requires more time, energy and resources [than are available] to manage.”
Of course, sooner or later they won’t have a choice. Sepso said the consumer is “ultimately going to decide what they’re most comfortable with.”
One way a publisher can try to adapt to the free-to-play model is by converting games into esports. “It is very tough to take a game that you sell for $65/pop and move to free-to-play without a really robust content ecosystem around it,” Sepso said. That is because “games are no longer single channel entertainment platforms. The vast majority of the gaming consumer base today does not just buy a game, finish it and move on. They buy or download the game for free, they play the game and watch Twitch streamers and YouTube videos of people playing the game. They are invested in a whole social strata around the game.”
Publishers failing to invest in that social aspect “are missing a huge part of the value proposition to most consumers,” he said.
The good news for publishers is that an esports league can serve as a north star for their newly developed content strategy. The Vindex CEO said the competition would give a publisher highly produced programming featuring the best players in the world and spark the “excitement and attention that tends to stoke an ecosystem around the game of players and content creators alike.”
Esports can lead to an increase in the size of the player base. The competition should also provide those individuals with a reason to continue to engage with the game. Sepso suggested thinking about it this way. “How many people would golf if the PGA Tour wasn’t on TV? Significantly less. The PGA Tour drives people to golf.”
While esports competition and entertainment structures (think: Marshmello concert in Fortnite) can draw people in and keep players engaged, it is the “move to free-to-play or even to subscription, a lower friction point version of the game, that reinforces those outcomes,” Sepso said. “If you make a game free-to-play, there should be a lot more players.”
While some publishers may look at free-to-play purely as a vehicle to increase the player base, Sepso said the approach should also help “drive audiences into the game’s esports content” and “further monetize the game’s IP.”
Remember, there is a feeling that esports teams in some leagues have been under-monetized relative to expectations, for a host of reasons. “You could start with expectations out of the gate were probably a little bit high,” Sepso said. “The lack of events the last two years has also been a factor.” Unfortunately, a lot of the monetization at this early stage of esports development remains dependent on events.
The Vindex executive expects a strong resurgence in attendance over the next 12 months “as live events continue to come back.”
That should be a tailwind for esports teams and leagues. “It’s not the ticket sales from the event that make a difference,” he said. “It is the excitement in the room and the ability to broadcast what feels like a big event. A lot more people watch esports when it is a big, live event.” Call of Duty League set a new four-day viewership record for a “major” earlier this month, its first with a live audience since the COVID outbreak.
As events return to normal, Sepso said to expect “to see a lot more attention on how to better monetize that content, which will inevitably generate better monetization opportunities for the leagues and the team owners.”