Web3 3A game selling pre-sales, will the leveraged development model reduce high costs?

Author: Simon, IOSG Ventures

3A has some similarities with real estate; construction is time-consuming and costly, involving numerous stakeholders. How to satisfy the interests of all parties, incentivize them, and improve the efficiency of capital turnover may be where web3 has its own solutions for many idealistic practitioners in this field.

From a business model perspective, existence is reasonable. Perhaps in the crypto gaming space, those 3A teams that seem to be making grand promises and selling NFTs early are not as bad as they appear.

TLDR:

WEB3 can provide for 3A:

1. Advance capital recovery, reduce exposure, and allow players to share risks.
2. Enable early players to become shareholders and establish a player equity program.
3. Assetize content to increase the fault tolerance of individual products.

The High Risk of 3A Games Restricts Innovation

A minor incident occurred in the gaming community a few days ago, concerning a $10 increase:

Ubisoft has raised prices! The standard pricing for its 3A games will increase from $60 to $70 (the CEO emphasized that this is in line with other competitors). Before Ubisoft, many major companies had also announced price increases for 3A products. The pricing standard that has persisted for over a decade has finally crumbled under the rising development costs and inflation, despite many companies opting for indirect methods (including but not limited to: adding more loot boxes with winning probabilities, stuffing paid DLC into buyout games, and releasing unfinished games with excuses for live-ops updates… etc.).

A beautifully crafted 3A game is undoubtedly a worthwhile audiovisual feast; for the price of three movies in North America, you can enjoy an interactive immersive entertainment experience that lasts over 30 hours. The pricing that has persisted for many years is actually the result of a multi-party game among manufacturers, channels, and players. This small $10 price increase reflects the high costs of 3A development and the unsustainable old paradigm.

Essentially, games themselves, as the ninth art, as spiritual consumer goods, and as the ultimate form of entertainment, possess the most robust content quality-user demand spiral in the current cultural and entertainment consumption field------high-quality games cultivate users with high demands for content quality, and these demanding users, in turn, drive games to continuously improve content quality.

RDR2 is the ultimate product of this trend, with different types of horses having different muscle textures.

This seems to be a virtuous spiral, a force driving the improvement of game quality, but looking at the evolution history of games and even the broader content field, this self-reinforcement can also lead the industry down an irreversible path.

Specifically, the so-called content quality of games has two different dimensions of evaluation: fun & quality. The former is more like artistic creation, relying on genius creativity and innovation, while the latter can, in some sense, be bought with money. Since the returns on fun and gameplay innovation are unstable, why not pile money into graphics, details, and content? With enormous expenses and cost-agnostic R&D investments, stunning fantasy worlds are created—despite many game design purists scoffing at this, believing that returning to the essence of gaming, as seen with companies like Nintendo, is the true path. However, players are actually buying into this cost model; the experience of cost-no-object and extreme luxury is inherently a form of spiritual enjoyment.

The current 3A game industry is infinitely close to post-World War II Hollywood, a time of great explosion and prosperity but lacking in growth and innovation. The industry has gradually evolved into a budget-intensive game. The budget for the film "Cleopatra" reached $44 million (equivalent to $500 million in 2022), nearly bankrupting 20th Century Fox.

"Red Dead Redemption 2" was the highest-selling video game of 2018, with global sales exceeding 40 million copies to date.

However, RDR2 cannot be considered an excellent business.

Quoting estimates from gamelook (with edits):

In August 2018, Take-Two CEO Strauss Zelnick revealed in a media interview that "we have invested more than three times the resources on R&D and some unexpected matters compared to GTA V." The R&D and marketing costs for "GTA V" were $265 million; even simply multiplying by three brings it to $795 million. Some foreign media predict that the R&D and marketing costs for "Red Dead Redemption 2" may actually exceed $900 million, with R&D funding at $644 million + total marketing costs at $300 million, meaning the total project cost could reach $944 million.

http://www.gamelook.com.cn/2018/10/342327

As for revenue, gamelook calculated the break-even point at "23 million copies" based on retailer and platform cuts. Considering that "Red Dead Redemption 2" has sold a total of 35 million copies across platforms to date, taking into account factors like Steam's low-price regions and old game promotions, the profitability of "Red Dead Redemption 2" is unlikely to exceed 50%.

The revered game design guru Raph Koster wrote an article on the cost of games, using a dataset from 1980 to 2017, showing that game development costs have been increasing at a rate of tenfold every five years.

When considering the size of games, the actual cost per byte is decreasing, and the efficiency of game development and distribution is undoubtedly improving. However, 3A games are becoming increasingly large, each turning into a Goliath.

High, unrecoverable costs make the development of 3A games a gamble with time and money as stakes. Of course, there are risk-averse individuals trying to find the secret formula for success, attempting to reduce the risk exposure of individual products through sequels, standardized gaming experiences, etc.—but this undoubtedly hampers innovation.

Now that we know 3A is expensive, what solutions does web3 offer? I believe there are three directions that the industry has yet to consider:

Advance capital recovery, reduce exposure, and allow players to share risks.

Game development is a complex, long-term computer engineering project, but often resembles a process of trial and error, akin to natural selection in species evolution.

During the development process, the prototyping ←→ kill the idea cycle often leads to unpredictable and uncontrollable early costs.

The design costs invested in the early stages of development are often unrecoverable sunk costs.

The cost curve during the development cycle looks something like this:

I know of a successful project with a $40 million budget for a PC game, where costs before open beta exceeded 60% of the total budget.

Web3 games can allow development teams to quickly recover some funds by pre-selling game content (including but not limited to NFT pre-sales, token sales, early development of mini-games, etc.), even when the main gameplay is still in the iteration phase.

Timely capital recovery means a longer runway, more time and opportunities to make mistakes, and greater development freedom, with less reliance on VC funding. Without worrying about survival, truly talented development teams can focus calmly on product delivery. Perhaps one day, 3A will not just be a private club for a few wealthy and willful studios.

Although there is considerable criticism within the industry regarding games that start selling land and PFPs before they are fully formed, I personally believe that this model could represent a paradigm shift for 3A games (of course, any model has the potential for abuse).

Typically, a typical 3A budget breakdown looks like this:

A significant amount of money is spent on art production and marketing, especially art resources, which may have a large "inventory" of valuable items created with substantial real money and labor hours even in the early stages of game development. However, in traditional 3A, these art resources become backlogged inventory until the day of the game's release. If inventory remains backlogged for years, doesn't this indicate a significant problem with the game's factory's turnover efficiency?

Existing art resources can be separated from the game product and pre-sold to players through NFTs. This is akin to breaking the game into smaller parts for sale. Of course, selling demos and pre-selling game content is not a new concept; it's just that the existence of NFTs allows games to be more finely granular.

By not relying on the game itself, a relationship of ownership between players and certain art resources is established. Will there be a gameplay where players purchase a modeled shell of a house during the game's development phase, and the development team allocates a portion of the 3D modeling hours to this player, with a dedicated modeler (or AI) helping them complete the interior design according to their ideas? Is the boundary between developers and players starting to blur? The developers recover the costs of the shell house development in advance, and players can arrange their little homes early (and if they later find they are not interested in the game, they might even resell it).

Of course, so far, most game NFTs lose significant value outside the game itself, effectively transferring some of the risks of game failure (pivoting, project cancellation, difficult births, etc.) to the players. In fact, for some high-quality 3A games sold at fair prices, players are willing to share some of the risks. In traditional 3A, the way players share risks is by enduring studio delays over the years, tolerating repeatedly postponed release dates, and continuing to support the project as fans by paying for the game and its peripherals.

NFTs, as a means of confirming ownership, have a certain liquidity in third-party markets and may even give rise to more gameplay in terms of interoperability in the future. I believe this is more substantial than some web2 peripherals. The pre-sale revenue that both can leverage is not on the same scale.

Because of this modular pre-sale model, perhaps the 3A industry will see fewer players waiting for 5 or 6 years for a buggy product like Meng Jiangnu crying over the Great Wall?

Let early players become shareholders and establish a player equity program.

The main cost of game development is labor costs, and game dev pay is often among the highest in the developer sector.

The labor costs of studios capable of 3A development in Europe and America have risen significantly.

The formula for calculating the minimum development cost of a game is:

Cost = Average member cost * Development time * Team size

Development time and average member cost are largely constrained by the market and current technological levels. Teams with limited early funding can only make adjustments in team size. However, team size is often strongly correlated with the quality of the game delivered, and compromises in team size can sometimes lead to declines in quality and competitiveness. So how can we mobilize more manpower within the constraints of a limited team size?

Let’s improperly compare game A to a company,

At the same time, early core players are more like employees of A, using their early attention and word-of-mouth to exchange for the experience after the game goes live. For startup company A, early core players cannot participate in the upside; even if the company grows strong, aside from boasting "I was there when the company started"—I am an old player—there seems to be no additional benefits.

For startups, the design of equity and employee incentive mechanisms is crucial. If players can participate in the upside, then for the studio behind the game, it would mean having more mobilizable manpower.

In fact, game development teams mainly consist of three roles: planners, artists, and programmers. Some of these roles are relatively labor-intensive, such as testing, copywriting, and translation. Some core player groups can fully take on these roles. Alternatively, some studio employees could also be compensated with governance tokens or NFTs.

If A is a crypto game, what should A's governance token correspond to? It should represent the equity of this game (note: distinct from the equity of the studio developing the game), representing a portion of the players' ownership of game A. NFTs should be the core assets of this game.

Core players who help with testing, translating copy, or even modeling and community building could own the core assets of the game and enjoy the upside of asset appreciation after the game's success, greatly enhancing the incentive alignment between core players and the development team, thereby improving the efficiency of 3A game development.

Assetization of content increases the fault tolerance of individual products.

The reason traditional games are dominated by mega-hits is that their fault tolerance is too low; a game can fail in millions of ways, and players have millions of reasons not to play a game.

To some extent, this is because, as content consumer goods, players have a disposable relationship with games; if they don't enjoy it, they discard it. Although players invest time and money in games, these are merely consumption expenses without investment attributes. Once the meal is over, or if the food is not good, players will naturally walk out of the dining room. This survival of the fittest based on content quality is an unbearable burden for many 3A games. Besides development costs, many other factors can cause large-scale games to fail. For example, team conflicts; "HALO" once faced production difficulties and had to be restructured due to office politics, with a top-notch product in terms of gameplay and quality stumbling because of human issues.

Web3 games, on the other hand, are more like consumer goods built on assets. They are like Texas Hold'em (assets are poker) in poker, or 3v3 basketball (assets are basketball and AJ).

The existence and value of game assets no longer strongly depend on gameplay and worldview. For instance, Yuga Labs first created the poker before starting to develop Otherside.

The clarity of ownership fundamentally changes the relationship between players and games; players have a naturally stronger attachment to products they own.

On the other hand, this essentially isolates risks; as long as gameplay, themes, art, economic systems, and IP do not fail simultaneously, the game can survive in other ways.

If Texas Hold'em becomes unplayable, we can play Dou Di Zhu! If the AXIE economy collapses and the PONZI model is criticized, we can create an SLG; after all, your AXIE and SLP can still be used here!

It is conceivable that in the future, there may be products that thoroughly separate assets from gameplay. For example, the MAGICAVE team started with the most solid entertainment asset—toys—creating some fun dice, and then players and the team gradually developed various gameplay to enjoy these dice.

Or… can gameplay itself also be assetized?

Conclusion:

After 1949, many people from the mainland began to flock to Hong Kong, and the population of Hong Kong surged from 500,000 to 1.5 million throughout the 1950s. The population boom led to a severe housing shortage in Hong Kong.

At that time, many buildings in Hong Kong had hallways, rooftops, and basements filled with people. Entrepreneurs like Ho Ying Tung saw the opportunity in real estate. However, the real estate system at that time was very inflexible; houses had to be sold as entire buildings, which was beyond the financial means of many people, leading to inefficient capital turnover for real estate developers.

Thus, Ho Ying Tung invented the concept of pre-sale properties, starting to sell houses as soon as he acquired the land, with buyers purchasing based on blueprints. Once the plan was announced, the real estate industry accused him of being a fraud selling air.

However, because of pre-sale properties, Ho Ying Tung was able to recover a large amount of capital from buyers in advance, which could be used to cover construction costs, saving on bank loan costs. He passed on the savings to buyers, allowing those purchasing pre-sale properties to buy at a significantly lower price than those buying completed homes. Buyers found it profitable, so they were more willing to buy pre-sale houses. Hong Kong's real estate market took off from there.

When an old paradigm becomes unsustainable, a new paradigm may emerge in a rather unremarkable way. However, for a young industry, nothing is politically correct or taken for granted.

Embrace those naturally occurring phenomena and solutions, and then through trial and error, let it grow wildly.