Media & Entertainment

Gaming rules the entertainment industry, so why aren’t investors showing up?

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As gaming’s popularity reaches epic heights, venture investors’ activity in the industry doesn’t seem to equate with the overall size of the games market. Spurred by an unreal year where traditional entertainment has been upended by the COVID-19 pandemic and consumers find unity in virtual worlds like Animal Crossing and Fortnite, gaming has never been more popular.

Late-stage investors have shown that they have a tremendous appetite for businesses in the gaming industry. They’ve been pouring capital into established gaming companies like Scopely, which on Wednesday announced a $340 million investment round at a $3.3 billion valuation. But venture capital simply hasn’t given the gaming industry and the broader synthetic market the attention it deserves given its place in the entertainment and cultural firmament.

Just ask LeBron “Bronny” James Jr., the son of the NBA’s biggest star, who became a professional athlete this week — as a gamer with one of the most popular teams in online gaming, FaZe Clan. Or look at Unity, the creator of a popular game development engine, whose stock price has nearly doubled since its public offering in mid-September. Since opening trading at $56 per share, the stock has nearly doubled in value and is now trading at $100 per share.

In the first half of the year gamers spent $36.8 billion on games through both the Android and iOS app stores, according to data from SensorTower. New game installs are also up for the year. The app analytics company said that new game installs were up to 28.4 billion over the first half of the year. Annually the 15 billion new game downloads in the second quarter represented a 45.2% year-on-year growth in gaming.

Then there’s Bitkraft, one of the only venture firms to focus on the totality of the gaming industry, which announced the close of its most recent fund, a $165 million investment vehicle. The firm, which added a former Goldman Sachs managing director earlier in the year to capitalize on the opportunity in what the firm calls “synthetic reality” investments, raised $25 million more than its $140 million target. One of these things is not like the others.

Gaming-focused investment firm Bitkraft closes in on at least $140 million for its second fund

“I’ve been in the games industry for 23 years now [and] I’ve always had this huge fundamental conviction of video games not only dominating the entertainment industry but sort of taking up a big part of what society is — where video games create the digital identities that define evermore of what we understand of ourselves,” said Jens Hilgers, Bitkraft’s founding general partner. “We feel that these are times of acceleration … it’s great to see how we’re leapfrogging one or two or three years of the games industry in this crisis and it makes it more exciting to invest in these times.”

The Unity public offering, and its emphasis on markets outside of gaming, seems to prove Hilgers point and show just how much opportunity remains around the notion of synthetic reality in business and entertainment.

“Their thesis around democratizing access to gaming tools by letting hobbyists use the tools for free is smart, if you want to win the market,” said Alice Lloyd George, founder of Rogue Ventures, a new investment firm focused on frontier technologies and gaming investments.

Lloyd George compared Unity’s business to its biggest competitor, Epic Games, and noted that both have broad aspirations. “Both of them want to use their game engines beyond pure gaming,” Lloyd George said of the two big new gaming platform developers. “Unity is really well-positioned because they’re so strong on mobile. That positions them well for AR and VR. And you need onramps for the developers for AR and VR.”

Engagement and the future of entertainment

When Scopely’s co-chief executive Walter Driver talks about the attraction of gaming properties for players — and the reason investors have been willing to value his Los Angeles-based company in the billions of dollars — he talks about the connections between players. “People have found — and investors looking at the space have found also — that people value the connection they’re getting from interactive experiences. It’s not just our relationship with the players, but their relationships with each other,” Driver said. “Inside of most passively consumed media experiences, you don’t have an identity. You don’t have friends.“

Gaming and the attendant streaming and esports industries that have grown up around it are inherently social and — for a new generation of consumers — eminently watchable. That’s why the appearance of Rep. Alexandria Ocasio-Cortez on Twitch to stream herself playing Among Us for a get-out-the-vote event makes so much sense. These types of media are inherently interactive and all about engagement. They’re also uniquely accessible to both star players and casual gamers at the same time.

On top of that, games are the most consumed entertainment on the planet. As Washington Post columnist Gene Park noted in his article on AOC’s gaming phenomenon, which broke records for concurrent views, “If anyone is confused why more than half a million people would watch a congresswoman play a video game for three hours, here’s the core reason: Almost 3 billion humans play video games.”

As more people gravitate to games as entertainment, in part because of their ability to act as both a social, shared entertainment experience in a time when physical fora are closed down to stop the spread of a pandemic, the question becomes how to deepen those experiences to encourage more gameplay.

Then there’s the “metaverse.” Many people have written many things about it, but this explanation from Matthew Ball from an early April essay on how the COVID-19 pandemic would effect gaming seems both clear in its concision and accurate in its assessment.

Ball writes:

At a more macro-level, growth in gaming, online socializing and virtual hangouts are part of a broader trend toward the metaverse, which itself is a growing obsession of the major tech companies. Although this concept requires thousands of words to properly describe and understand (at least for me), it is essentially to be a quasi-successor internet that spans both the physical world and many virtual ones, while giving all users a digital sense of synchronous presence, the ability to work virtually and produce virtual goods for virtual or physical use and more. The metaverse is a bet that not only will our lives be increasingly online, but our existence and jobs will be too.

Opportunities in the infrastructure of gameplay

“Most of Silicon Valley has said, ‘Gaming, it’s a hits business’,” said Lloyd George. “But Fortnite and others look like SaaS businesses. If you slice and dice it in different ways, they’re kind of above the median. Gross margins are 73% [and] they’re really strong if you look at net revenue and retention.”

AOC aims to get out the vote by streaming Among Us with pokimane and HasanAbi

That assessment becomes even more prescient as an increasing number of transactions move in-game and online. Nicole Williams, an investor at the New York-based venture firm, Compound, laid out a series of investment areas that stand to benefit from the surge of interest in gaming from consumers — and its assumption as the dominant entertainment category for a new generation of consumers.

One of the markets that Williams thinks shows promise is cloud gaming. Infrastructure providers and analytics startups like Dixper, GameBench, GameStream and Polystream will join consumer-focused startups like Playkey and Antstream in carving up slices of what could be a $4.8 billion market by 2023, up from $500 million this year, according to a report from the data analytics company, Newzoo.

If cloud gaming is one way to expand the reach of gaming, then the other two categories that Williams emphasizes — monetization and the use of artificial intelligence and tooling to improve the mechanics of gameplay are both focused on creating a more immersive in-game experience. In-game economies have been a staple of the gaming industry for at least the past several years as one of the keys to monetization for the free-to-play mobile games that have been one pillar of the industry’s development. From the hundreds of millions that Kim Kardashian allegedly made off of her mobile game, to the hundreds of millions that Fortnite brought in from the sale of skins, it’s now abundantly clear that gamers are happy to spend on virtual goods. As Williams notes, “Out of Fortnite’s $2.4 billion in revenue, over $1 billion was generated from the sale of in-game items.”

She mentions three startups that are currently taking advantage of these trends — dmarket, which helps develop marketplaces and economies for in-game items; Blacknut, which is developing a gaming equivalent to the skinny-bundle subscription model for playing a package of select games rather than paying for multiple subscriptions; Pragma, which is developing a way for multiple games to share the same back-end to create interactions between different potential gaming worlds, and forte, which builds infrastructure for decentralized in-game economies.

Lloyd George also thinks there’s a big business that’s yet to be built by making virtual world wealth more fungible across different games. “No one has built goods and services for trade in an elegant way and certainly across games,” Lloyd George said. “Why aren’t these economies more fluid? Going from metaverse to metaverse but also being able to bring your virtual wealth with you is also important.”

Finally, there’s the application of artificial intelligence to gaming to enhance world building and create nonplayer characters that act more like players. These AI engines can potentially enable the kind of fully immersive world building where the game universe constantly updates itself without the narrative arcs provided by its developers and writers. It’s the kind of immersive gameplay that can take advantage of the rich intellectual property catalogs and assets that have already been developed for franchises like “The Lord of the Rings.” Indeed, it’s the kind of technology that could play a role in Amazon’s planned immersive game, announced last July, that’s set to take place in Tolkien’s fantasy world.

Gaming tools beyond gaming

As the mechanics of gameplay get applied to everything from financial services to marketing, entrepreneurs are increasingly banking on the broad generational embrace of gaming and adding gaming features to other applications — or using the tools of game creation in other industries. While “The Mandalorian” and “The Jungle Book” used Unreal for set design, Sketchfab is building a marketplace for three-dimensional objects created using game engines that can be used in a variety of augmented reality or virtual applications.

“There are economic and social benefits here that are opened up once we transcend between the physical and the digital. I almost see it as the evolution of the internet,” said Moritz Baier-Lentz, the newest investment partner at Bitkraft. Bitkraft founder Jens Hilgers has staked his entire professional career on the growth of the gaming industry, and he sees the current moment as one where technology has finally caught up with the vision industry insiders have expressed for the last decade. “I’ve always had this huge fundamental conviction of video games not only dominating the entertainment industry but sort of taking up a big part fo what society is — where video games create the digital identities that define ever more of what we understand of ourselves,” Hilgers said. At Bitkraft, the emphasis is on technologies and interfaces that “blur the line between the physical world and the simulated world”, according to Hilgers.

Another company that’s looking to blur the line between the physical and simulated world is Kippo, a new dating app from the Los Angeles-based company Covalent Inc. that managed to raise $2 million in seed funding. The mechanics are similar to Tinder or Bumble, but the connections and profiles are centered around a love of gaming and games rather than simply physical appearances. For company co-founder, David Park, the idea was the antithesis of the work he’d done for his previous startup — Riya, the dating app exclusively for celebrities and the superrich.

“The joke was, ‘What if we created the anti-Riya — the dating app for geeks, gamers and nerds?’” Park said in an interview with TechCrunch earlier this year. “This is actually a huge demographic. It’s a very passionate demographic and it’s a demographic that kind of needs this more than anything else.” Park sees his company’s app as an outlet for gamers that spend more time cultivating a digital identity than they do a physical one. “The youngest generations are spending more time online and spending more time online than they are in the physical world,” he said. “There’s the virtual world and the physical world and they each run in parallel to each other. I realized that social platforms online haven’t done enough. They’ve worked as ancillary appendages to the physical world but they haven’t done enough in terms of engagement themselves.”

In the six months since it launched last December, Kippo has already attracted 40,000 registered users and 30,000 monthly active users. The company also nabbed a seed investment from the Korean and U.S.-based venture firm Primer Sazze Partners. “The direction we’re moving with Kippo is an MORPG [massively multiplayer online role-playing game],” said Park. “We want people to find out what it is to discover people in this virtual environment … we’re bringing these social interactions into the virtual world … we’re not just the facilitator for dates, we are the platform for dates and all social interactions.”

What Kippo is doing for dating, Aglet, a startup based out of Germany, is hoping to do for sneaker heads. Creating a gamified social network environment that can bridge the physical and digital worlds in a way that has benefits for its users in both, the company’s focused on creating a virtual sneaker market and offering discounts for sneaks in the real world at participating stores.

As fashion has its metaverse moment, one app looks to bridge real and virtual worlds for sneakerheads

It’s part of broad push from the fashion industry — whether it’s famous designers like Marc JacobsSandy Liang or Valentino dropping styles in Nintendo’s breakout hit, Animal Crossing: New Horizons; HypeBae’s fashion show in the game; or various crossovers between Epic Games’ Fortnite and brands like Supreme (which pre-date the pandemic), to tap into gaming culture to maintain its relevance. Gaming avatars are already making their way into fashion through collaborations like the Gucci partnership with the startup Genies, and the fashion house has a partnership with Aglet in the works as well.

Living in a virtual world

Hilgers sees the blend of real and digital experiences creating a new kind of “synthetic reality” emphasizing the synthesis of experiences consumers will have in both. “We see game companies having experience that we feel could be applied to education and e-commerce and create a significantly better user experience and service in these areas,” Hilgers said.

But the blending of the artificial (or digital) and the real will have implications beyond gaming in the creation of characters, music and art that is generated by the same technologies powering game engines. “There is an ever-increasing amount of humankind that spends an ever-increasing amount of time in simulated realities,” said Hilgers. As automation obviates the need for more manual labor, Hilgers expects more people will be spending time on achievements and labor in virtual worlds.

“Where will people work? What will they earn? The answer lies in a future potential, likely potentially in simulated realities. These worlds that video games create in the first place are where you will find purpose,” he said. “Work provides rhythm … It provides rewards; it is an anchor to your life. Virtual realities will be providing labor and work and purpose for an increasing amount of people on the planet. I don’t think we’ve yet scratched the surface of that.” 

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