The rise of recurrent revenue

The next 10 years in gaming, part 2

Having only just recently become a US citizen, I voted as hard as I could this election. Currently I’m batting a cool 1.000.

On to this week’s update.

🎙 Hey. I’m hosting a panel discussion on Esports in 2021

Time/date: Thursday January 21 at 12:30 pm EST.

Panelists from Blizzard,, Team Liquid, and Esports Engine. It’s sponsored by Parsec and there’s a few seats left. Just hit reply if you’d like to join, or email me.

BIG READ: The Rise of Recurrent Revenue

What follows is Part Two of a series that looks at what’s coming in the games industry over the next decade. The emphasis is on the formulation of novel strategies and business model innovation. Previously, in part One, I laid out the Video Game Flywheel.

My thesis for 2021 and beyond is that “More is Different.” Creative firms confront a changed market environment today because video games are now a mainstream form of entertainment. Beyond a much larger addressable audience, there is ample access to cheap capital, a slew of incumbents and new platform holders eagerly buying up intellectual property, and a lot of activity around acquisitions and IPOs

Because of the sheer size of the market, game makers can now monetize their audiences in ways that are both similar to conventional media (e.g., indirect) that were previously unavailable and via novel revenue models. Subscriptions are the first of four.

Platform Economics

Briefly described, charging people a recurrent fee offers benefits to both sides of the market. Consumers, on the one hand, get relatively cheap access to a lot of (hopefully curated) content, and content providers, on the other hand, reap the benefits of a recurrent revenue stream in an otherwise hit-driven marketplace. More on this in a moment.

The model is familiar from adjacent categories. According to subscription analytics firm Antenna, premium SVOD streaming grew +37% y/y in 20Q3. Firms like Netflix, HBO, Disney, Starz and others each look to carve out market share by offering subscription-based access to a growing inventory of content. Similarly, Spotify, Apple Music, Deezer, and Tidal seek to commit consumers to their services on an ongoing basis.

So, too, in games. Microsoft’s Game Pass stands out: it reported 15 million subscribers in September. With the launch of its new console it is likely coming up on 20 million subscribers and currently serves as the high watermark for gaming subscriptions among platform holders. By comparison Sony’s PlayStation Now service has only 2.2 million subscribers even if it manages to outsell Microsoft roughly 2-to-1 in consoles.

Long gone are the days when consumer demand was easily described in an annual attach rate (units sold) of 2.4 games per player. Audiences today have a much bigger appetite than that. But the $60 price tag for a box at retail still creates a gamble on whether a game is worth it, or not. Subscription-based services that give access to a broad catalogue of (un)curated titles remove that uncertainty and add value for consumers.

It also benefits the supply side.

Quick maths tells us that at an average selling price of $45 per game and an average attach rate, the traditional console player spent $108 a year. In a physical product model, a platform makes about $8 per game, totaling $19 on average annually per player.

Even in a digital model (not accounting for micro-transactions) it would make 30% or about $32. That is better, but not nearly as good as a full year subscription of (12 * $10) = $120 on the low end. Yes, there is a cost involved with filling up the catalogue, but it reduces demand uncertainty and solves the persistent problem of used game sales.

But that’s not all. In contemporary platform economics it is imperative to have some type of subsidized offering that will draw lots of users to their ecosystem and then cross-sell a range of different products and services. By subsidizing game subscriptions, Microsoft is trying to build a global addressable audience for its software services. It knows all too well from previous misfires with Nokia and Mixer that building a successful platform means getting there early.

With cloud gaming services like Amazon’s Luna and Google Stadia slowly gaining momentum, incumbent platform holders like Microsoft, Sony, and Nintendo can really only compete in two ways: (1) offer better, differentiated content, or (2) lock audiences in by creating high switching costs.

So far both Luna and Stadia have yet to show any truly differentiated content. Serving mostly as a budget buffet, the two services are in their early stages of development. The threat to incumbents is that both of these firms make money elsewhere; they can effectively subsidize their content 100% to drive installs and monetize audiences with another service (e.g., e-commerce) or indirect revenue model (e.g., search, YouTube, Twitch).

Content Creators

The economics of recurrent payments has not gone unnoticed by content providers. Just recently Fortnite announced its own subscription: Fortnite Crew. In the shadow of its ongoing struggle with Apple over App Store fees, Epic Games launched a subscription package that is slightly more expensive than its existing Battle Pass but also offers more.

One benefit is that it removes the need of constantly having to convince players to spend just a bit more money on something. That’s not a huge cost necessarily, but it can negatively impact the length of a player’s life-cycle and cheapen the experience. Subscriptions in the context of digital entertainment don’t seem to mean much more than short burst renewals rather than locking people into a full year as with a newspaper or magazine. And as user acquisition costs continue to increase, it is cheaper to keep them. 

Others sell access to a selection of their catalogue. After Ubisoft’s horrid first attempt at establishing a social layer under the moniker UPlay (which sucked) the French publisher now offers Ubisoft Plus. It certainly remains a work in progress. But there is something quite magical about picking up in Valhalla on Amazon Luna from where I left off on my console.

EA Play similarly offers a buffet of older titles which bundles nicely with the release of new hardware, of course, but currently seems largely focused on generating accretive revenue rather than shaping it as a spearhead in its digital strategy. And in fairness, you also have to ask yourself whether that ultra-loyal audience that buys the new version of NFL Madden/FIFA every year shouldn’t be regarded as subscribers anyway.

One explanation is that legacy publishers are only in the early stages of adapting this revenue model. A decade ago their inherent aversion to risk meant that these firms were equally slow in adapting free-to-play. So it is nothing new. Their fear around subscriptions is that they’ll eventually be forced into providing access to their entire catalogue for a single price as cross-platform play becomes more prevalent and hardware more fragmented.

Back in mid-2019, EA’s CEO Andrew Wilson stated:

“With games becoming an increasingly important part of our lives, subscriptions offer compelling new value propositions for players. Other industries have demonstrated how subscriptions fundamentally shift consumer behavior. We consume more television content in different ways because of video subscriptions. We consume more music in different ways because of music subscription services. We believe the same is happening with games, where subscriptions can offer access to great content at great value with tremendously low friction.”

Recurrent revenue offers legacy publishers a more predictable cash flow and improves player loyalty. That is a welcome change from the traditional hit-driven, win-or-die dynamic in interactive entertainment. But more important than making the CFO’s job easier, subscriptions also yield a higher valuation among investors for publicly traded firms. 

Service-based companies trade at multiples in the range of 10-20 times revenue, compared to the 2-5x revenue for product-based firms. That is a massive difference and reduces the cost of capital. On the short term that’s a nice to have; on the long term access to cheap capital is a must because publishers will be competing over IP and talent. And neither of those are getting cheaper, as Take-Two recently found out when EA elbowed it out of the way to buy Codemasters.

Game publishers as TV networks

Subscriptions are only as lucrative as you’re willing to make them. Stay stuck in a model that is governed by a product-based release schedule and you’ll barely cover your costs. What we’ve learned from Netflix, HBO, and most recently from Disney’s loud-as-hell tripling of its subscriber base forecast for Disney Plus is that you must commit.

That means that both game publishers and platforms must either offer up their premium first-party content, or accept that they’re not serious about subscriptions. With seven million subscribers, EA Play holds the promise of something great, but it is still early. Once Sony resolves the supply issues for its new device, merely suggesting to add The Last of Us Part 2 to its PS Now service will positively impact the size of its user base, revenue forecast, and share price in one swoop.

Game publishers, especially the ones that control well-known intellectual property, are slowly becoming TV networks that each target a specific audience. EA attracts the sports fans and a declining number of Star Wars fans. Take-Two offers edgier content that others don’t want to touch. And Ubisoft focuses on volume. They’ll each try to monetize like an HBO and, just maybe, vertically integrate like Disney. 

The major challenge among game makers when it comes to subscriptions is the anxiety to disappear in a content buffet. Like music, the value of a game originates in people playing it. In that category we currently see a music rights gold rush as companies are eagerly buying up well-known artists’ catalogue to sell to streaming platforms. 

Because playing games is different than playing music, it will be hard to differentiate for medium-sized game companies and middle-of-the-road content. Their challenge is to command enough player attention to earn a high fee from platforms, whose economics dictate that they offer a lot of content for a little and then make a profit in a wholly separate category (e.g., Amazon). That makes content a loss-leader to drive user adoption of a specific proprietary ecosystem rather than the blades that justify the subsidization of the razor. 

Can’t Buy Me Loyalty

Lastly, live-streaming talent loves financial security, too! Esports teams everywhere are developing loyalty programs to establish a stronger relationship with their audience and build a more meaningful experience for eager brand managers looking to penetrate this market. Especially following a period of virtually no live events—the cornerstone of the experience—esports brands are trying to find innovative ways to strengthen their relationship with their fan base.

Not all of it is equally convincing just yet. Team Envy launched a membership program for $30/month that promises “discounts, giveaways, access to the members-only Discord server, and ‘direct Team Envy access’.” Ok. Cool. Meanwhile Cloud9 is offering a ‘Stratus’ experience for painless one-time payment of $500. Oof.

Applying a subscription or paid-for loyalty model to esports obviously borrows from conventional sports: buying a season pass gives you perks and, in exchange, your favorite team collects valuable data that strengthens its position with sponsors and advertisers.

More generally, the proliferation of subscriptions and their emergence as a dominant revenue stream in gaming is a function of the myriad of benefits it offers to gaming companies. Players, platforms, and publishers alike stand to gain from agreeing to a monthly fee. The cost of doing so is also relatively low compared to conventional product-based releases. But above all it is Wall Street’s obsession with recurrent revenue that is going to drive a frenzy in subscriptions: valuing companies that generate income on a monthly basis roughly 10x higher means it is worth it to implement this revenue strategy just to capture that additional value.

As a result content creators will be designing games in a different economic context. Games that are sold to a platform or added to a bundle are different than the ones that need to convince a player to keep putting a quarter in the machine. Games will become mere line items in a cost plus pricing scheme rather than fetching a premium price. So, too, has filmmaking become a different sport with Netflix and Amazon pouring millions into the category. Why ask Netflix for $2 million to make your movie, when you can ask for $20 million?

Taking the volatility out of the equation and subsidizing a growing inventory of content is a strong strategy as the industry’s platform economics start to change. I expect a lot of firms to subscribe to that.


PUBG maker Krafton is considering its $27 billion IPO

Wowsers. That’s a lot of cheese. With revenues of $1.1 billion in the nine months ending September, that puts the firm’s valuation at 24.7x on the high end. By comparison, when Nexon was valued at $10 billion when it was up for sale. It suggests that Krafton, a company known mostly for a single title (which, btw, was crushed by Fortnite as the top Battle Royale title) is also more valuable than Take-Two, one of the most spectacularly successful firms. That one currently has a market cap of $23 billion is and its share price has roughly doubled since the start of the pandemic.

At first glance, such a high valuation for a Korean game maker seems to a tad too optimistic even in a frothy market like gaming. But then Korean game companies tend to make no more than 15% of revenue outside of their domestic markets. Krafton’s global presence in title and studio (e.g., En Masse in N. America, PUBG Production in Amsterdam) may just justify these numbers.

Games and the Pandemic: “Alarming”

The New York Times saw it fit to print about the alarming surge in screen time among children during the pandemic. Imagine that. I won’t impede on the interviewee’s parenting skills but admitting that you have “failed as a father” is not the kind of energy that we need to kick start this year. A glaring omission from the article is the apology to parents everywhere for being shamed. A century ago kids worked in mines and lived on the street. This generation is doing fine. But telling people they’re doing a good job isn’t news, of course.

Console sales are nuts right now

Hardware sales in the US were roughly double that of Wall Street expectations. The PS5 sold over 815k units, the Xbox X/S 696k, and, get this, the Nintendo Switch sold 2.1 million units in December. Okay that last one wasn’t double expectations, but still. It certainly explains at once why GameStop is currently trading at $38/share.

Fortnite plays footy

If you thought that bringing musical performances to one of the most popular online games was interesting, you weren’t thinking big enough. Now Epic has brokered a deal with no fewer than 23 soccer clubs from around the world. You can see the pattern : after movies (e.g., Marvel), music (e.g., Travis Scott), and now sports, Fortnite is becoming a marketing platform where a young consumer audience interacts with their favorite franchises and brands. It is basically in-game advertising but done in such a way that it adds to the experience.


Pass. Will someone please rescue these people from themselves. They’re about to end up in a real-life simulation of Papers, Please.

Play. That inauguration poem by Amanda Gorman. Dang. That hit different.