Evaluation of business models and strategic bets in Web3 Gaming
Defining Strategy
Strategy is about making the right trade-offs.
It is important in the context of building games, because resources are always limited, so focusing on the right thing can be the difference between a game being successful or not.
In this article I’d like to share some approaches and examples of how I think about strategy in the context of web3 games and studios.
Web3 fundamentally impacts unit economics
Financial sustainability is important for any game studio. However, there is no standard “model” yet for web3 games and therefore no standard approach to quantifying the business model.
Hypothetical P&L of a web3 game
Key assumptions:
Revenue cannibalisation: Assumption is that revenue would be reduced due to cannibalisation. For example, if League of Legends skins were tradable, the assumption is Riot Games would make less money because players sell to others once they churn. It's possible that trading fees can offset this, but only if trading is a core part of the design.
Ownership premium: Assumption is that players are willing to spend more for things they “own” rather than rent. For example, players will spend $20 on a Fortnite skin they can re-sell rather than $10 on one they can't.
Better experiences: Assumption is that web3 can create unique experiences for players (emotional connection, social equity, emergent gameplay, etc.). These positive experiences translate into more players, players staying longer, or players spending more.
Web3 development cost: Assumption is that blockchain costs are additional to standard game development costs which means they cost more to build. Some examples of costs that don't typically exist in games today: blockchain game integration, smart contract development, NFT sales, wallet solutions, web3 products like staking, legal and entity fees, community management, web3 customer support, and economy management.
UA savings: Assumption is that there are UA cost savings in web3 because the community tend to be evangelists and “owners”, and because tokens provide studios with a war chest of incentives for acquisition.
The key point of this hypothetical is that adding blockchain to a game can both improve and reduce the bottom line for game developers, depending on what assumptions you believe in.
Adding blockchain to a game doesn’t automatically mean you make more money, and in fact might mean games make less money. It therefore needs to be done with a deliberate strategy in mind.
Impact on strategy
Assumptions around the P&L impact of web3 on games can be helpful in figuring out the right strategy. For example:
Build, buy, partner decisions: Teams can’t be the best in the world at everything, and need to decide where to focus and where to buy or partner to obtain expertise. For example if a studio is really good at finding the fun, it may make more sense to partner with blockchain partners to do integration, marketplaces, on-chain data analytics, wallet solutions, and more.
Financial forecasts & budgeting: It is important to have a view on what the “edge” of web3 is when it comes to the unit economics. This helps inform the investment case for web3 games. Some examples might be the assumption that web3 can reduce the cost of user acquisition, increase retention, increase spend, and so on.
Business model innovation: Web3 ultimately enables new business models, which may look nothing like the hypothetical example shared above. Some examples include: sale of NFTs to fund development, giving away NFTs to attract new users, focusing on taxing secondary markets and letting players create assets, or even opening up parts of the game to decentralised decision making via DAOs.
Strategic Bets in Web3 Game
Below I’ll outline some examples of strategic bets that teams can make in web3 gaming.
The question that I like to ask is “what do players want and how can web3 make it better?”.
Few key things to note:
This list is not exclusive or exhaustive. Games may combine strategies or add new ones.
This approach is not about “solving problems” with web2 games, but starting with what players care about and using web3 to make it better.
Great Game + Ownership: Assumption is that the core gameplay is all that matters and web3 doesn’t really help. However, players still will spend money for enjoyable experiences and want to feel like they are getting value for money. NFTs help by giving ownership, meaning players can re-sell things once they are done playing.
NFTs as emotional premium: Assumption is that once someone “owns” something for real, they build a strong psychological connection to it. NFTs provide this true ownership, making people feel a stronger sense of attachment. This may particularly apply for games with high customisation of progression such as RPGs or fantasy sims.
NFTs as tradable collectibles: Assumption is that people love completing collections and being in communities which share this passion (e.g. Pokemon or baseball cards). NFTs are a digital collectible, which helps players collect and trade with no physical wear-and-tear, no delivery, proven scarcity, and authenticity.
NFTs as distribution edge: Assumption is that players who get a share of something that could have value (or can appreciate in value) are more likely to be advocates. NFTs can be given away for free to build this psychological bias and help games build more positive social environments and advocates.
Merchant fantasy: Assumption is that players enjoy playing the economy and trading metagames, such as specialising in production, being part of a manufacturing guild, or cornering parts of the market. NFTs and tokens help this as they can introduce scarcity of resources and secure trading to games.
Endless play variety: Assumption is that players enjoy playing familiar game environments but with a variety of experiences, such as those in Roblox. NFTs and tokens can help with UGC driven platforms by creating stronger incentives and ownership for developers, which ultimately leads to better and more content for players.
Token flywheel: Assumption is that players would love to get compensated for playing or adding value to about games they are passionate about. Tokens can be used to kickstart the flywheel and incentivise players and creators who add value to the gaming ecosystem.
Risk-based money games: Assumption is that some players love the thrill of risk-taking and the dopamine of winning a payout. Web3 can create trustless games focused around strategic risk to compete for assets worth money (similar to poker).
Decentralised dev / publisher: Assumption is that creators have many ideas and want a creative outlet and recognition for contributing to games. Web3 can be used as governance to coordinate a large group of individuals who work together and are incentivised to help build or market games.
Composable, on-chain games: Assumption is that players enjoy frequent updates and emergent gameplay mechanics. Fully on-chain games can help with this by setting some base logic and then allowing anyone to add or change the gameplay. This can lead to interesting emergent gameplay and rapid branching content updates for players.
These strategic bets all have differing levels of ‘innovation’ if you compare them to games today. Indicators of low innovation games might be that they “feel” like a traditional game, web3 is likely optional, and monetisation is sales based with a blend of IAP. Indicators of high innovation games might be that they are highly financialised, game systems and rules are composable on-chain, or monetisation is focused on trading.
Future Strategic Direction
One of the fascinating things about web3 games is that everyone has their own thesis on what “works”. Many teams are competing across the entire spectrum of innovation and strategic bets outlined above, and all of them have potential.
I believe what will ultimately be important in finetuning the strategies of these games will be testing & iterating the key assumptions with real players, finding ways to ship and learn quickly, and ultimately using blockchain to enhance and add value to the player experience.
About me: Lifelong gamer and crypto native degen. Experience in startups, consulting and web3 games. Formerly VP@Immutable where I built out Guild of Guardians from the ground up (squad based mobile RPG with ~1 million players on the waitlist) and advised partner studios on web3 economies. Passionate about pushing the web3 gaming industry forward by sharing strategic yet practical perspectives. Find me on Twitter.