The missed opportunity in Epic v Apple

NPCs shouldn't make the rules

Imagine a court case that may potentially determine the fee structure in the music business in which a judge asks: 

“What is a song?”

“Oh, I don’t know, Your Honor. I never sing.“

That’s roughly what happened in much of the Epic/Apple lawsuit: a bunch of people that couldn’t be further removed from the very activity they will inevitably impact.

For much of my professional career in games--first as an analyst, now as an investor--I’ve spent most of my time talking to people. You meet thousands of new faces every year and the people that make up this industry are what makes it interesting. But not all of them. There is one qualifying question I generally ask to determine how much of my time I invest in a new business relationship:

“What do you play?”

There are really only two possible answers here. You either get an elaborate exposé on someone’s all-time favorite franchise (“I love turn-based RPGs and re-playing XCOM for the third time.”), or the abyss stares right back at you.

“Oh, I’m not a gamer.”

Then what, pray tell, are you doing working in this industry?

Imagine a film executive who never watches any movies. Or a newspaper editor that doesn’t read the news. Writing means having to read constantly. It is also why my buddies in music spend every waking hour talking about artists, genres, new releases, highlights and low points in, you guessed, music.

Buried deep in the avalanche of industry information and PDF-ed emails that have been disclosed during the Epic/Apple trial we can read between the lines that those that govern one of the most relevant creative industries of our time are fatally disinterested in its output. Large platform holders that reach a certain size are made up of decision-makers who clearly relate minimally to the services they provide.

Come play and see the complacency

One explanation is that video games have long lived in the shadows of other cultural industries. Vilified by some, misunderstood by others, interactive entertainment has long been the runt of the entertainment litter. In part the industry has itself to blame. Or, specifically, the industry’s low self-esteem. We often try too hard to emulate other industries or lack the maturity to taking a clear political position.

Games that find their way to the silver screen are, apparently, a cultural high bar. As if to say that only the very best of what the games industry has to offer deserves to be made into watchable content. Even its most revered creative talent seems to constantly be looking for the exit. Kojima, populated his dystopian vision, Death Stranding, with celebrity actors and actresses. Finally freed from the creative constraints at Konami (can we just acknowledge what an immense opportunity that is?), he gushed about his aspirations to one day make a movie.

The economics in the video game/movie matrix present somewhat of a self-fulfilling prophecy. When it comes to making movies based on gaming IP, the relationship between production costs and profitability is what statisticians refer to as heteroscedastic. It’s a fancy way of saying: as budgets increase, so, too, does the financial return.

The top 5 most profitable game-based films in the last decade (Rampage, Pokémon Detective Pikachu, The Angry Birds Movie, Warcraft, and Resident Evil: The Final Chapter) had a combined production budget of $543 million and generated $1.9 billion in box office return for a profit of $1.4 billion. The top 5 movies from the decade prior had a combined budget of $254 million, box office sales of $786 million, and a profit of $527 million.

The willingness to spend more money on such ventures is, of course, largely a function of how investors estimate their chances of success.

Alternatively, we fail to take a stance. Whereas both the film and music industry share a rich history of giving a voice to the unheard, the idealism chiseled into the buildings that produced some of the world’s biggest franchises is easily forgotten. We wouldn’t want to upset any totalitarian regimes.

During an interview a Hong Kong Hearthstone player, Ng “blitzchung” Wai Chung, expressed support for the protest in Hong Kong. Blizzard immediately cut the feed and punished the player and the two streamers who were interviewing him. The game maker proudly displays a plaque outside its offices that reads: “Every voice matters.” That’s not irony; it’s immaturity.

But it’s a big industry now, right?

It took a pandemic and the full weight of the investment community in search of assets that proved counter-cyclical amid a global economic slowdown. But ultimately it resulted in the headlines that, once and for all, proved that games are a big business and, finally, mattered. If we cannot rely on cultural impact to highlight how it hurts the industry to be governed by indifference, then perhaps we can count on counting.

Economists and analysts, unfortunately, offer little help in raising the industry’s profile. In the US, consumer spending drives 70% of the economy. And so the US Department of Commerce keeps meticulous track of how people spend their money. However, in its aggregation of the total amount spent by consumers each year on recreational activities, services, and products, interactive entertainment does not register as a separate category. Lumped together in ‘Games, Toys, and Hobbies’, we presumably find video games right next to pets and potted plants. For reference, sewing items have their own label. So does stationary .

Among commercial research, depending on which market researcher you ask, the US population spends around $65 billion annually on video games (2021 forecast, including hardware and software). Surely it is now large enough to be counted separately? If nothing else, the industry’s transition to digital distribution would heavily skew its overall category since toys and hobbies are mostly physical in nature. Right?

Also no.

Commercial research is equally flawed. Among investment researchers there is an overwhelming fealty to financial cycles and an obsessive attention but only for publicly traded firms. Much of what drives the industry occurs well outside their purview. By the time large investors get involved in trading shares in gaming companies their information environment is ludicrously asymmetric.

Market research offers a lot of hard work and little reward for most. Often treated like a paria that pulls models and figures “out of analyst's backsides with wild abandon,” it is a fool’s errand. Never mind that console manufacturers spend millions on detailed consumer research to accurately forecast demand across, say, 50 different countries throughout the life-cycles of their devices. They’ll even base the bonus payments of their sales teams on those figures. Even where an effort is made, it goes largely overlooked and dismissed.

So deeply in love with their opinions, many care little for the transparency and rational objectivity that a budding industry needs to grow. It would be in everyone’s interest to do away with the secrecy. But unfortunately, long-held myths about how great content will magically render a market efficient persist, and history repeats itself.

The Epic/Apple lawsuit is a missed opportunity

It is common to all cultural industries that revenue models and the overall ownership structure determines the nature of its output. However, framing the mobile games market in terms of an app store—that is, a specific type of digital storefront—rather than a specific form of cultural expression is a loss. Whether gem-swapping or playing an online multiplayer shooter, we share a need for amusement, creativity, and expression. Kvetching about what is and what isn’t a game is precisely the type of scrutiny that you find in no other entertainment vertical.

Games create meaning in their use. There is no essence to games as if it were some objective truth to be discovered; games matter because they are closely bound with human life and practices. Who gets to govern what is and isn’t allowed on a platform and determines by what standards resources are allocated impacts the full range of what a cultural industry is capable of expressing.

As we await the outcome of the trial, let’s hope the judge picks up and tries a few games in between rulings. Having a bunch of people that don’t sing or dance write songs and choreography makes no sense. Neither does having non-player characters set the rules.