Gavin Baker @GavinSBaker Husband, Becky Painter. CIO, Atreides Management. Former PM, Fidelity OTC fund. investorfieldguide.com/baker/ No investment advice, views all my own. Oct. 31, 2019 4 min read

1) Took the market some time to understand that transitioning from a software license model to SaaS creates value. IMHO, videogames shifting from the traditional $60 paid upfront model to F2P will create a similarish increase in value – curious to see how mkt reacts.

2) A friend recently told me that he thought there was $.10 of EPS risk if a certain PC/console game went F2P in 2020. My thinking was the opposite, that there was $.10 to $.20 of EPS upside from the game going F2P.

All the world’s largest games are F2P, led by Fortnite.

3) The most important long term effect of Fortnite on the videogame industry may be that it catalyzed more videogame publishers to get serious about experimenting with F2P business models, which I think will create significant value. Especially for the first ones to convert.

4) Despite its sharp decline in revenue and engagement in 2019, Fortnite is here to stay – multiplayer videogame franchises are super durable – more so than other entertainment franchises because they are all social networks.

5) Fortnite is a “place not a game” to quote @ow and @ballmatthew has written eloquently on this. All multiplayer games are a "place" in addition to a game. The Metaverse/Oasis are being built today without nongamers even realizing.

6) However, Fortnite revenue/engagement in 2018 was really inflated by casual users swept up by the cultural phenomenon that it became – Drake, Marshmello, etc. – similar to the Wii. These casuals have departed and revenue is down quite a bit in 2019.

7) Fortnite should stabilize between $1-2b and be a significant positive for the industry in that it will be an entry point for new players along with Nintendo and IOS/Android games that leads to more players and engagement for other AAA console and PC games.

8) However, the fact that Fortnite was briefly annualizing around $4b in revenue likely gave more publishers the confidence to experiment with F2P. All of the world’s largest video games are F2P. $60 upfront is a recipe for suboptimal monetization – just scary to give this up.

9) I believe that the first few large mainstream console shooters to offer a F2P mode – whether battle royale or something else – will do shockingly well. Destiny2 going F2P will be telling and closely watched by all publishers. Early read is positive.

10) Important to be early in this transition to F2P as I think being early will lead to sustained competitive advantages for the first games to transition. Matchmaking is the way in which videogames manage PvP status as a service, so a large player pool = a better experience.

11) So the first few games to go F2P will benefit from a dramatically larger player pool & consequently much better player experience with these advantages persisting as the social network driven durability protects them from later F2P conversions.

12) Might be possible to have the best of all worlds – huge player pool from F2P that drives high quality matchmaking which is the most important driver of the PvP experience, less pushback on mtx and still charge $40ish for campaign, PVE and lower player count PvP modes.

13) Imagine how much smaller and less valuable Facebook would be if it charged people $60 per year to be on the platform (pls don’t multiply 1.8b MAUs by $60). Videogames are no different. Harder to get the mtx tails that drive huge revenue if charge $60 upfront.

14) i.e. Fortnite would likely have been a sub $300m franchise if it charged $60 upfront. Instead, it is likely to settle out somewhere 5-10x larger as a result of being F2P.

15) Apex Legends likely would’ve been a $150 to 200m franchise along the lines of Titanfall if it charged $60 upfront rather than the guided $300 to $400m in 2019.

16) Battle Passes, Cosmetics, Emotes – there is lots of healthy mtx that does not involve either loot box or play to win mechanics. And players are much happier to pay for all this if there is no $60 upfront charge for the game.

The tails are everything in F2P.

17) Battle Passes in particular turn the business model from license to GaaS, which should be higher multiple revenue. And really reduces sequel risk for successful franchises - there is no reason to ever have a sequel.

18) And F2P also naturally leads to cross platform to optimize player count and matchmaking. This reduces the power of the platforms and should combine with cloud gaming to put immense pressure on take rates to the benefit of the publishers over time.

19) Conclusion is that the transition to F2P/GaaS especially in combination with the tailwind from lower platform take rates is likely to be positive. Both for the publishers and the players. But the future is ever uncertain so curious to see how it all plays out.


You can follow @GavinSBaker.



Bookmark

____
Tip: mention @threader_app on a Twitter thread with the keyword “compile” to get a link to it.

Enjoy Threader? Sign up.

Threader is an independent project created by only two developers. The site gets 500,000+ visits a month and our iOS Twitter client was featured as an App of the Day by Apple. Running this space is expensive and time consuming. If you find Threader useful, please consider supporting us to make it a sustainable project.