In this episode of Industry Focus: Wildcard, Nick Sciple interviews Joost van Dreunen, author of One Up: Creativity, Competition, and the Global Business of Video Games, about his book and the business of video games. They discuss how developers, game publishers, console makers, and distributors approach the industry, and what's behind their revenue model. They also talk about the rise of the mobile gaming industry and the business of monetizing content, the cultural significance of games and how they've grown from attracting select niche players to practically everyone. They discuss the future of the industry and much more.

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This video was recorded on October 26, 2020.

Nick Sciple: Welcome to Industry Focus. I'm Nick Sciple. On this week's episode, we're taking a look at the video game industry with my special guest Joost van Dreunen. Mr. van Dreunen is the Co-Founder and former CEO of gaming research firm SuperData Research, and works as an investor and advisor to start-ups and investment firms in the video game industry. In addition, he's a lecturer at the NYU Stern School of Business where he teaches the business of video games. He joins us today to discuss his recent book, One Up: Creativity, Competition, and the Global Business of Video Games.

Joost van Dreunen, welcome to Industry Focus.

Joost van Dreunen: Thanks for having me, Nick.

Sciple: Great to have you on the podcast. Before we dive into the substance of your book, how did you first get involved in video games?

Dreunen: That's a good question. It was really a fool's errand for me, personally, I came to the U.S. in the time right before the internet bubble burst, and so, I ended up going into academia as a result, and in there I had one of the most interesting aspects of all things media entertainment, it was gaming, wildly uncovered, underreported on, you know, there was no research or anything on it. So, as I started to set up my little academic tents, that turned out to be a good decision. And then once that happened, the business kind of came on its own terms. But it's always been a passion of mine, I just didn't realize, up until 20 years ago, you could actually pursue those.

Sciple: Right. And when you look over the past 20 years, this growth that we've seen in the video game industry has really been massive. When you compare video games to other forms of entertainment today, like TV, film, and music, where does the video game industry stack up?

Dreunen: Compared to other forms of entertainment, the games industry is now $150 billion or so in consumer spending, so that makes it a multiple of music and movies combined even. And this has been, sort of, the catch phrase for the last 10 years, right? Gaming is big, it's growing, what's going on? But I think it's more interesting that, you know, as audiences shift to new forms of entertainment, both on a consumptive, but also productive measure, right, as we now start to see gamers have become much more direct impact on the type of games that they play and, you know, contributing to those games by building things. We're no longer just passively sitting on the couch, we're building things together with the creators. And so, it's a whole new dialogue between, on the one hand, an entertainment industry that is large and growing, at the same time, this audience of hundreds of millions of people that all want to somehow participate in their Fortnite universe and their Pokemon GO universe and leave their own mark. So, I think it's a radically different configuration between the traditional patterns of consumption around entertainment.

Sciple: Right. One of the things I think about when you look at video games is what we think of as gamers has really changed over these past 15, 20 years.

Dreunen: Correct. So, the big affordance over the last few years has been that games are mainstream. So, the catchphrase is everyone's a gamer now. For the longest time it was always defined by a very narrowly delineated audience, it was especially younger men 18- to 34 year olds, [laughs] you know, playing shooter games or role playing games in their parent's basement covered in Cheetos dust, right; so, that's, sort of, the stereotype. And so, they've really grown from out of the basement into, sort of, a mainstream form, where now you see anybody and everybody in the New York subway playing games, in the same way that you see people reading books and listening to music.

And so, what that has done to the industry, I think, has quite a dramatic shift, but for all intents and purposes, the games industry always was mainstream focused, they sort of just lost track of it because of the shifting economics and the incredible costs that would come with developing for newer hardware generations and so on. And so, because of that, game companies became very risk averse and they started to really get very stingy with spending and they would only greenlight very small numbers of projects that they knew were going to be successful, and thereby, catering only to the same sort of audience over and over. In the last few years then we have this digitalization and the popularization of the smartphone has opened the market up, and now you see this wealth of new content trying to meet these audiences.

Sciple: Right. You talk about in the book, you say there's been, kind of, two eras to video games so far, you have this period from 1984 to 2008 that you called the games as the product era, and then 2008 to today, is this Games-as-a-Service era; what really shifted in 2008?

Dreunen: So, 2008, it's really the introduction and the popularization of the smartphones, or the iPhone, specifically. So, what Steve Jobs did well was to provide a device that would harness all the creative energy that you see in the mobile gaming space. So, to give you an indication, pre-iPhone, the mobile games industry was about $600 million, $700 million worldwide, most of which was governed by EA, right; so, one of the largest U.S. publishers. And you know, nobody was having a really good time in mobile gaming. It was a very cumbersome way to make a living. You'd have to placate to AT&T and the Verizons of the world at the time if you wanted to have your game on their platform, on their mobile platform, you'd have to develop the same game 400 hundred times to be compatible with each of the 400 different handset models they'd have in the market at any point. So, that was a total disaster from a creative standpoint.

With the iPhone, you start to see this harmonization, where all of a sudden, it's just one device, one set of hardware specs, and off you go. For $100, you were a developer and you can have a good time with that. So, that, sort of, then changes the model for a lot of creative firms and consumers, because now with their new devices, they're starting to look for cool stuff to play.

And then from 2007, it's really late-2007, early 2008, you know, not much happens in terms of revenue, but really, 2009, when Apple (NASDAQ:AAPL) approves free-to-play monetization in its app store and allowing game companies to make money by selling in-app purchases with no limits to what you can sell a consumer, you end up with this incredible boon in revenue against a background, of course, of very conventional, the legacy publishers, having a hard time seeing the value of this new platform. So, there's no apex predators lurking around, you have all these newcomers, a new platform that is governed by this idea of, like, everybody should be able to make games for this, because it's in Apple's benefit to allow lots of third-party content, and it just skyrockets into billions of dollars very quickly.

Sciple: Yeah, you have a quote from the book, maybe you can expound on this. You say "In the Apple universe, content serves as a complementary asset that increases the use value of its various gadgets and computers. This is the opposite strategy to that followed by most console manufacturers which sell hardware at a loss to subsidize the sale of content." Does that explain why those legacy publishers missed the boat on the initial growth in mobile gaming?

Dreunen: Yeah. So, there's a lot there to unpack. So, for the traditional publishers, the EAs, the Activision, I remember talking to an executive in Ubisoft at the time, saying what about it, like, why aren't you on mobile more? And his answer was, look, it's an unproven platform, so I'm not going to take my A grade franchise and give it a go, we're going to very slowly, you know, take more of a slow approach to the market rather than jumping in. And it just created a space where everybody else could, kind of, run ahead of the incumbents, the deep pockets.

For Apple, Apple has this, sort of, evolved platform economics model. So, in a traditional console, in the physical model, you'd really expect people to only buy one console. You only get a SEGA device or you get a Sony device, or then later Microsoft (NASDAQ:MSFT) device, and that's because they are $300, $400, $500, and then the games are $50 to $60 depending on the generation. So, really, rather than buying two devices and stocking each of those devices with a library of interesting titles, you end up doing one device and just spending the rest of your money on, on average, 2.4 titles per year.

So, that was the traditional model. And so, the platform economics are rudimentary, in that, the platform manufacturers would create a relationship with the audience, and saying, we're going to subsidize this, we're going to get it marketed, we're going to really push hard. As you see now too in the lead up to the next-gen, where it's just all over the news, and they're trying to really market very aggressively. So, that very quickly we rack up 10 million, 50 million, 100 million units of installed devices worldwide, which is then turned around to the publisher saying, like, come to us, make content for us that is either a timed exclusive or something novel to our platform, because we have all those users.

And so, traditionally, in the physical space, you played an intermediary between the publishers and the audience. In the Apple universe, it's a more involved platform economical model, in the sense that you have the App Store, but really, you know, Apple doesn't care. Apple is a consumer electronics company, right, so they want you to buy a new phone every year and they want you to buy an expensive laptop, like I have, and all the other devices that they have. And so, for them, content is a complementary asset, right, it is not the thing that makes them money, as in the physical console space. It is, cool, you want to spend some money, yeah, we'll take 30%-and we can get into that rate later, but we'll take a cut and then everybody else is happy. But it just makes it so that our phones have that much more value compared to Android phones and other competitors. So, for them, it's a complementary asset much more so than critical to the revenue model, as I see it.

Sciple: Yeah, when I think about this rise of mobile gaming, when I grew up, I was a '90s kid, I had the Game Boy, there's this whole handheld gaming industry, and that's kind of gone away with the rise of the iPhone and mobile gaming. Is it fair to think of the iPhone as the biggest console platform in the world?

Dreunen: No, I would disagree, but that's because, like you, you know, I'm a die-hard, but this is a mobile platform, right, which not an endorsement for a Switch, although it's my favorite, it's currently the true mobile play and mobile gaming experience, it's very different on a handheld device in this than it is on the phone. So, the mobile gaming is designed really to pass the time, sort of, on the side, right? You're standing in line and you're sitting on the couch for 20 minutes and you just want to quickly jump into some Clash Royale or you want to play some title or game that, sort of, entertains you for a bit, but that's about it. Whereas the longer, more deeper multiplayer components, solo campaigns, narrative-driven games, you'll find those on handheld devices.

So, I would carve up the universe in PC, console, and mobile. So, mobile is its own category and it doesn't really overlap with the traditional dedicated hardware in the console space, which would also include, of course, portable like a Switch. But in addition to that, the audience is very different for mobile gaming than it is for conventional dedicated hardware. So, I wouldn't put them in the same bucket or say that they're the largest, it's really a high revenue -- yes, it's an impressive device, but it's the same difference as say, going to a concert and listening to music on the radio, just the form factor makes it so that they are fundamentally different. A Walkman is not the same thing as the stereo set, right? So, that's really the difference for me.

Sciple: Okay. You talked about earlier this idea that the growth of mobile gaming, legacy publishers weren't the first to embrace this industry, which has allowed new companies to rise up. One company I wanted to talk about, at least briefly, was Zynga (NASDAQ:ZNGA), this is a company that's been recommended at The Motley Fool in the past, and this is one of those first companies to really capture a significant share in this mobile gaming industry as it developed. How did Zynga establish itself in this market?

Dreunen: Zynga has been around for a while. So, Zynga has a lot of the cuts-and-bruises, let's put it that way. And I think that that's by now working to their benefit. Zynga started really as a web-based poker game maker. So, they had just their main websites on a dot com and then you could buy virtual game currency to play poker. So, then Facebook (NASDAQ:FB) started to become a big deal and Zynga jumped in. Zynga became very quickly the largest content provider on the Facebook gaming component, the gaming side at the time, with Farmville and games like it. And it proved very effective in getting people to stick around on the Facebook Canvas longer, and of course, monetize it. So, they would make lots of money off of the microtransactions, they would be excellent at optimizing which type of cow and what colored cow would sell the most depending on your profile as a Facebook user, and so they've really figured out how to make money. But most importantly for Facebook, they figured out how to keep you playing longer. And so, the stickiness of Zynga on the Facebook Canvas, that was, sort of, key to its initial success. Then, of course, Facebook started to overhaul the monetary system where everybody had to use Facebook credits as opposed to having your own credits as a publisher, just to kind of reduce the opaqueness in the industry on the platform for the consumers. And then finally, you know, once everything turned mobile, Facebook was, kind of, slow to move on that and Zynga was too, and against the background of all these other competition flooding into the platform.

So, that's when Zynga kind of came public and then lost a whole bunch of its value in its first week. Since then, it's shuffled its executive team a few times, but it's proven to do really well is to become more of a destination that has a particular audience in mind. So, rather than trying to be everything to everyone, they are far more focused now on creating experiences and being a step ahead of other mobile and casual game providers, and that's what they've done really well. So, under the leadership of Gibeau, you could see that they have this reorganization of its organization, it's studio structure and also the creative projects that they're working on, and the willingness to spend against that. So, the $1.6 billion acquisition of Peak Games, which is focused on more hyper, casual games, I think that those are things that put Zynga in a renewed light, whereas after it was thrown out of the Facebook universe or fell out of it, rather, you see now that they've been rebuilding the empire. And I think to a large degree, they have been very successful with that.

Sciple: Yeah, one of the data points I pulled from your book, toward the end you talk about these new revenue models that we see in gaming, one of which is advertising and Zynga appears to, at least from your dataset, be among the most active in that space, 26% of their overall revenue in 2018 derived from advertising. How significant an opportunity is this advertising opportunity for Zynga and for game makers, in general?

Dreunen: So, the way that I think about this is, very simply put, gaming has always been a, sort of, weird industry on the side, but as we mentioned, every form of entertainment, every form of media has some kind of advertising component, either as part of its revenue model or as its entire revenue model, so whether that's sports or film or music, there's always going to be advertising there, you know, you can't watch any music videos without seeing a cellphone or some kind of drink or something being advertised inside the music video while people dance around it in some clumsy way. So, advertising is just part of the natural lifeblood of entertainment and media and it's been, sort of, odd that gaming hasn't adopted that more. So, of course, you can talk a lot about, like, well there's this inertia, like maybe decision makers or the creatives, they want to be approached. We saw in 2004, Microsoft spend a bunch of money on the massive to integrate ads into its games. So, there's been these attempts before, but I think previously there wasn't any critical mass, and there wasn't enough people and there wasn't enough diversity in the audience to really attract an abundance of advertisers to be spent against it.

For a game company like Zynga, specifically then, you know, as they've moved from casual into hyper-casual, hyper-casual games are very quick-moving games, it ends very quickly, there is only a very short burst of time that you spend in them. It is way too complex to then ask consumers, like, oh, why did you click here a bunch of times? And give me your credit card number and you can buy a bunch of stuff. What they're going to end up doing is just show an ad before, in the middle, and after, and that's how they monetize, because it's just not reasonable to expect people to quickly grab their wallet while they're trying to do this for 30 seconds. So, as the audience moves toward even faster paced, shorter burst session gameplay, advertising then becomes very quickly one of the only reasonable ways to monetize, because you're not going to sit there and wonder how to spend, what to buy and all these other decisions you see in a more traditional model. So, I think that's how advertising is shifting, but it's still very early days.

Sciple: So, there is this kind of gap between on the hyper-casual side is where you're seeing advertising really gain traction, whereas in some of these more AAA titles, it's still a long way to go there?

Dreunen: Yes, absolutely. You know, FIFA came out recently, they will continue to push these ideas, like, oh, we need to have banner ads in the soccer stadium, and it's going to be so cool and realistic. You have Blizzard saying, hey, it adds to the games -- like, kind of, yes, no, I don't know. But it always feels like an afterthought and never baked into the fundamentals of the game design itself, whereas with hyper-casual games, that is much more, how can we make games that are, sort of, on the same level as like a TikTok quick video burst, where I can show an ad or do something around a product, as opposed to, we built this massive spectacle, and then, oh, right, let's hang some ads in there at some point. But I think that that conversation is much easier to have if you start with it rather than do it in the end.

Sciple: So, you talk about these evolving revenue models when we look at the mobile gaming industry. [laughs] And you mentioned earlier, Apple's 30% cut on sales in their App Store, what we've really seen evolve over the past year has been this rising conflict between Epic Games and Apple over that 30% App Store tax. Why is now the time that the industry is starting to push back against Apple and why Epic?

Dreunen: That's a good one. So, I'll start with the second piece, which is, why Epic? So, Tim Sweeney, as I know him, is someone who is really into the conservation of ecosystems. So, this is someone who's been buying up stretches of land to preserve them around North Carolina. That's his thing, right, he just buys all these swathes of these acres and acres of land just to protect them. And so, he is of that mindset of like where you got, you know, some of it needs to not be touched for future generation's sake or whatever. So, I think that that's his approach. He, as a leader or perhaps as a philosophy, he focuses on the larger ecology or the ecosystem of both plants and I guess of apps.

Why now with Apple? I think that the time is there where, you know, Apple has been the biggest for a long time, and they've been sitting on that. But it's of course increasingly clear that as the complexity of mobile game design is starting to go up, as the cost of development for mobile has increased and live-ops. So, to take a step back, what's been driving the success for Apple and its game creators has been that there were so many people coming into the ecosystem that they could do whatever, and so marketing costs were negligible, that is now shifted, marketing is now much more, you know, duck-and-weave kind of exercise, it's expensive, but there's more complexity to it. And so, that just makes it so that the margin decreases. And so, then you start looking around, saying, oh, why are they getting 30%, because all I see is, I'm having a harder time reaching the audience that wants to play my content?

So, Apple then is really the king in that conversation. Where you see every other digital storefronts charging 30%, you have to eventually wonder, well, this is a prisoner's dilemma, right? Why would everybody maintain that ratio as opposed to dropping it 10% or even further so that they'll have some exclusive content or maybe some timed exclusive content coming to their platform? Epic has successfully done so with Steam, owned by Valve, a digital PC distribution platform. For years they were king of the hill until Epic launched the Epic Games Store. And instead of 30%, charged 12%, which is a huge boon, of course, for creative, especially small- and medium-sized, which is where generally most of the innovation comes from. So, that really keeps those companies alive in a big way, it preserves the ecosystem, if you will.

So, then Steam relented, and now does a tiered structure. It goes from 30% to 25% to 20%, kind of, depending on how big you are. And so, it worked there. To answer your question in one phrase is that Tim Sweeney has been looking at this for a long time, has booked some success on the PC market, now goes after Apple and the mobile market. And Apple really doesn't have a lot to stand on. I mean, perhaps, yes, legally, certainly. But, you know, competitively everybody is charging this ridiculous amount then you kind of have to wonder why. So, I think it's the size of the market and the timing of the success of a Fortnite that really drives this moment.

Sciple: Yeah. So, as you mentioned, there was this big tailwind of growing user base in the iPhone, which helped support growth of the industry. Is it fair to say now that this mobile games industry is maturing or has matured?

Dreunen: We're getting to the stage where the novelty is certainly wearing off. And for me, a clear sign in the entertainment market that it's starting to mature or perhaps even saturated is when marketing expenses go up. So, we can spend a lot of time throwing money at tech by making things more efficient, by trying to improve advertising and marketing budgets and so on, but really, it's of course, like, well, how many games can you play at one go, and are people still as eagerly looking for new content? And if you look at the top 10 or the top 50 titles that make most of the money in the year, in all of the app stores, really, it is consistency, you know, 80% of them are the same year-in and year-out. So, you have to kind of wonder what are those incumbents, those companies at the top of the list, what are they spending? And so, their budget for marketing has to go up every time. And then as a newcomer or as a competitor, well, how do you find a parking spot at this place? You know, it's so competitive and the walls get higher, that I think to call it saturated is probably [...], but it's maturing [...], moving into these different stages of the game where you see Apple, for instance, meddling with IDFA, so they're very much aware of the element and the value of the marketing component, which tells you that it's just a much tougher market to be in, which is in my mind, mature enough.

Sciple: Right, the business model innovation is now in the past, and we're now optimizing those business model innovations.

Dreunen: I think that continues to be the case. I think business model innovation is still at the same level. I think it's the conditions under which or the demands of the markets are now different, whereas previously people would get their phone, they never had a smartphone before, and they would figure out how to swipe by way of playing angry birds, because that's what the game teaches you to do. And so, that's exciting. But so, now we all know how, and now we know what's out there. And so, it really comes down to, like, what are the other features and benefits to me as a consumer? And you know, we haven't seen that much innovation there. So, I think the innovation on the device itself has, kind of, slowed down, whereas that first iPhone came out, it blew everybody away, you must remember this too, but that was like, there's a before and after the iPhone release. But since then, it's been incremental improvements. It's like, OK, we have a slightly better camera and we get this face recognition; that's all very cool, but it was never on the same level as, like, that first iPhone or the first few iterations of the iPhone. And so, now it's down to content, and that's a very different area to innovate in. And Apple needs to facilitate an ecosystem better, because it cannot control all the components anymore of that.

Sciple: Yeah, we'll see how things develop in this battle between Apple and Epic. I want to transition now, we started off talking about mobile gaming and how that's really changed the industry to this Game-as-a-Service model that you discuss in the book. You discuss in that, leading up to 2008, you defined the game market as this games as a product phenomenon. Is that era over or has it just changed?

Dreunen: So, by and large, it's going to be replaced during this generation of the hardware for the console hardware. So, let me rephrase that, the era of games as a product is ending, but it will never completely die. So, the reason I say that is because it's still a healthy business to go to GameStop (NYSE:GME) and Best Buy and Walmart to buy games. You see that Microsoft recently did a partnership with GameStop and spiked its share price to $15 almost after it was down to $280 back in March. And I've been for years working on this case study thinking, like, when is GameStop going to peter out, and so, it just won't go away. And even if GameStop gets acquired or somebody buys the franchise or whatever, and rolls it out as its own storefront, you know, consistently we will still see people trying to get together.

In fact, my expectation for the retail component is that we're going to see an increasing integration of, like, retail sales, whether that's consoles and games or merchandise in the form of, like, e-sports jerseys in your favorite team, as well as events and other things, it's going to be this amalgamation of stuff that you do; sort of, like game temples, if you want to call them that, where you just go to spend time with others in the same way that Tower Records, back in the day, wasn't just a distribution point, it's like, you would hang out with the other cool kids, you'd meet artist and everybody would sort of be cooler than cool.

So, retail and games as a product will sustain itself for a long time, because that's how people operate, they are physical people, we want to hang out with other people and share those things with other people. However, the efficiency of digital distribution and digital dissemination and the revenue models that come with it and the accessibility of those revenue models, that's going to be 80% of the business soon enough. So, if you draw a line and you look at the full game downloads on consoles and compare it to unit sales month-in month-out over the last six years, you see that it's been about 12% in 2014 and now we're coming up on 45%. So, you can expect that in the next few years, and particularly in the current upcoming generation, the ninth generation of the hardware console cycle, you end up with a moment where it's going to reverse. And so, suddenly then we'll see digital being the biggest revenue driver and revenue stream in the console space.

Sciple: Yeah. So, you mentioned GameStop, I did want to ask about that briefly. As you mentioned, we're in this new console cycle, GameStop has historically been the biggest specialty retailer in the video game space. David Gardner, Motley Fool Co-Founder, has a thing he likes to use called the snap test, right? If you snap your finger and this company disappeared overnight, would people notice? And you talk about this evolution of the games industry to more of a services-based model, moving away from this product model, does GameStop still pass that snap test for you?

Dreunen: So, that's a really good question. So, you know, if it was gone, would anybody care? But I think there would still be gamers out there that really -- you know, you have to understand that the fundamental basis is, you get the same audiences that still go to the movie theaters, which of course, in a COVID circumstance is now not the most convincing argument to make. But you end up with games, specialty games retailers are not just good because they're better than Walmart, they're better because there is used game sales, there is a lot of knowledge in the clerks, and so there's a lot of merit still to the GameStop offering. You know, when mom and dad buy something for Joey during holidays, you know, to my mom every device was a Nintendo, and so how do you navigate the space? Well, so, that's what those stories are still for, right, every mall will have one. Because if you go to the regular retailers, like, they don't care. You know, try to buy a TV at Target, the expertise of the staff isn't there or even the interest, for that matter. And so, I think for those reasons you're still going to have a need for specialty retailers, but you have to ask yourself the question, does it need to be at the scale of 6,000 retail outlets worldwide? And I think that that's going to be both in terms of traffic, but also just the overhead of retail and real estate, it's going to be murder on their books. And so, they're just going to have to reduce their footprint long-term.

Sciple: Yeah, I think +5,000 stores globally, I don't think anyone can foresee a world where that happens. And you talk about in the book, and maybe you want to bring this up, maybe why GameStop ended up with that strategy, both GameStop and Nexon, you use that as case studies about how businesses in the past went out of their way to try to be within biking distance of as many customers as possible.

Dreunen: Yes, that's right. So, GameStop has traditionally done well because they're just foot traffic. And so you see everything that they do, you can relate back to this one question, like, what's best for foot traffic, what drives traffic to the stores? And they've never deviated from that. So, in the early '80s and then right around the time that they spun off from Barnes & Noble, it was really all about building the brand and building just economies of scale saying, we're going to buy electronics boutiques and all of bunch of other firms and just make this, sort of, Frankenstein monster retail. And then they figured it out. You know, of course, they kind of suffered when we had sort of a little softer couple of generations on the console side, and of course, digital strategies by publishers are allowing themselves to renegotiate their position with this retailer. So, it's been a very tough model for them all the time.

But all of their decisions go back to how many people can they get into the store, because once they come to the store, I can start converting them to spending, and that's what the loyalty card is for, that's what Game Informer, the magazine, is for. Game Informer, this magazine that they give out for free basically, that one is almost 100% of the gaming magazine circulation in both the U.S. and the U.K. nowadays. So, they're really aggressive about getting to the store and come talk to us.

And it's one of the few stores, when you enter, the clerks will address you right away, they'll come right at you. If you compare that to, say, what Nexon did with MapleStory. So, this is a free-to-play game on PC, it was a download but you could get it off the browser back in the day. They figured out that their biggest clientele was young kids, the BMX age if you will. And so, they did not want to have them drive to some kind of place to buy the prepaid cards. Because children, like minors at the time, so the larger context was, credit cards, at the time of MapleStory, were raising the minimum age from 18 to 21, and so it was very difficult to monetize younger audiences, because they don't have credit cards, and even, I guess, ostensible adults they wouldn't have credit card. So, to get them to monetize, they would have prepaid cards, so they could take all of their pocket money and buy a $5, $10 MapleStory card. So, to do that they would have to go to the store or they would ask mom and dad, can you drive me to go to this place. And so, they figured out that doing a deal with 7-Eleven was much more successful for them, because kids could reach those places on their own. So, that's when you start to see that relationship where retail then plays a critical part of monetizing audiences that conventionally, for traditional publishers, in this case, of course, the domestic ones in the U.S., compared to Nexon, which is from South Korea, you know, they never thought of any of this.

Sciple: Are those concerns still relevant today, making sure you have access to prepaid cards and things like that so kids can go buy them, or have customers become more accustomed to buying things online such that that's less of a concern today?

Dreunen: It's less of a concern, and the reason is, if I wear the market research hat for a second, I would say gamers are the canary in the coalmine for many, many behaviors on the internet. So, when we studied payment preferences for gamers back in 2012, that case study of the MapleStory and Nexon really sits in the middle of that, we realized that all of the behaviors that you see among this tech-savvy early adopter audience that is not afraid to, like, throw $5 at some game to buy a digital hat. But all of those behaviors are five years later more commonplace among the mainstream consumer base. And so, gamers are the canary to, sort of, early mover on a lot of things.

And so, today you see a lot of those things in place that didn't exist back then. I like that gamers are some sort of vanguard or avant-garde to consumer base. And so, over time you start to see consumptive patterns of behavioral patterns or how they learn about stuff, things like live streaming, you know, it's a big deal now, but it's been a big deal with gamers for long. Like, something like Twitch, it used to be gamer TV. And so, it starts to become more mainstream and now we have music events, the music industry is opening up with concerts, like, Travis Scott and Marshmello, of course. And so, all those consumer bases in music are several years behind on what we saw earlier among gamers.

Sciple: Yeah. So, one great example about that, about how gamers were kind of in the vanguard, as we transition to PC games briefly, is Valve's Steam, very early 2000s, pioneering this digital purchasing model. Can you talk about the significance of that platform for the growth of PC games?

Dreunen: Oh, yes. So, PC gaming had basically lost to the console. That was the opinion shared by most of the executives in the industry. So, in many ways you know after the industry collapsed in the '80s, we then start to see this resurgence, this sort of renaissance, because Nintendo is just rebuilding the console business. And then to the point where eventually it's model of, like, having everybody pay in, so that they can collectively market the device and build and grow the user base, all the publishers were onboard, like, this is great, I only have to make one -- iPhone, you have to deal with one set of hardware specifications, and it's a walled garden, so piracy is no-brainer, there's none of those issue. So, a lot of the content creators, as their budgets started to increase and started to spend more money, they wanted to lower risk. And consoles were just the best solution for that.

So, the reverse of that is, of course, PC has a lot of different hardware specifications and digital distribution was always regarded as like this scary thing, in the same way that music and film regarded digital distribution with skepticism saying, that only leads to piracy, you wouldn't download a car, right, but here we are downloading a lot of stuff. For those reasons, I think, the PC market has always been, sort of, this ignored component. It was only 5% of total revenue in the early 2000s.

And here then in 2003 comes Valve, first with its own games. So, the two founders are these Microsoft millionaires, so they have no budget and they have nothing but time to do what they want. And they postpone, postpone and then eventually release Half-Life, a huge hit, you know, it redefines what it means to play a first-person shooter game, i.e., immersive narrative, like, you're addressed directly, it's a real story with twist-and-turns all the stuff. The people loved it.

In 2003, Valve came around and they brought out this brilliant title. And to really keep that going and to send out iterations they start to then distribute some of the content digitally. So, they come out with this thing called Steam. And it was originally just meant so that they could update their own titles over time, right. So, at this point they have Half-Life but they also have Counter-Strike and they're working on Team Fortress. They figured out that online playing is a big deal for people, and it allows you to forge the ability to then send updates down the pipe rather than having to work around this gold master [finished game release candidate] every time, you can just do iterative design and add levels and add features, and it's much more interesting thing.

But rather than doing it only for their own titles, which is what you see in the more [...] organized things like, EA, Origin or Battle.net for Activision. You know, they said, well, we're going to be a platform for everybody else, and that very quickly led to, like, this audience of 15 million people actively creating and downloading content on the Steam platform. And it dramatically changed how people came to regard PCs, right? So, after it had been this big deal and then became very small after losing to the council, in so many words, it then, that business, this whole renaissance, where today, I think, it's around $35 billion/year, so it roughly comes down to, like, a third of the market, which is remarkable for basically a dying category.

Sciple: One of the things you talk about in the book a little bit is the importance of this modding community, you look at Counter-Strike, one of the most popular games when it comes to competitive sports, that sort of thing, and that started as a mod from Half-Life.

Dreunen: That's correct. So, Counter-Strike, as I recall it, back in 2000 was this very clunky, sort of, add-on. So, Half-Life was the source code. Valve distributed the source code so that others could make stuff for it, and that then eventually turned into Counter-Strike, which is really five against five, rather than having a single-player shooter campaign, it was five terrorist, five counter-terrorists, and whoever is last standing wins. And all these different maps, and then, of course, it came all down to speed and, sort of, customizations of the weapons and how you would, sort of, navigate the map as effectively as possible. And then, of course, also how souped-up is your PC, do you have, like, 60 frames a second or is it like more than that or less than that?

And it was a clear spin-off of just a fundamental code, but the users took the code and made it something new. I think that was one of the first real large-scale commercial successes of user-generated contents that we see becoming more prevalent today.

Sciple: Yeah. One of those areas I think about when I was -- so, I'm 27, when I was in high school Minecraft was in beta, and I remember playing Minecraft on the PC, and now it's the biggest game on the planet or at least was for a while, this idea that these game styles get developed on PC and then break out into the overall market, like Minecraft did.

Dreunen: You know, World of Warcraft, back in the day, was a big deal, it had like 15 million subscribers at the time. That wasn't just like a bunch of oddball people playing it, it became mainstream. And so, it was really a precursor. And so, naturally, as things become that big and that accessible, people started to mess about with it, it's easy to say there's a really rich history of, I'm sure you know this. So, really, in fact, what Gabe Newell did with Valve and with things like Counter-Strike by recruiting all these superusers to become partial developers, or contribute to the game in some way, he got that model from Doom, from id Software, which created Doom back in the '90s, and they put it out through shareware long before the internet was this issue as it was now.

And so that people would create all these additional levels and these, sort of, customizations to the fundamental Doom game and then that allowed it to become this much bigger thing as well. And so, Gabe Newell basically just copy-and-pasted that idea of saying like, well, we should give all the people a chance to build it, because I can hire 100 brilliant people to build it, but I could never recruit 100,000 people worldwide and have them do it on their own. But it comes from that audience, from that huge group of people, it's so much more refined and so much more interesting in some way.

So, it's a really interesting way to, kind of, look at innovation in the industry, like the open nature of PC has really allowed a lot of innovation to kind of bleed into other areas as well.

Sciple: Yeah, you talk about how the PC has influenced the overall market. We're seeing now all these platforms converge into one, we've seen with Fortnite this emergency of cross-platform gaming. How significant is that shift to where gaming is going into the future?

Dreunen: Yeah. So, cross-play is I think critical to the next period in the games industry, in that the success of things like a PUBG or a Fortnite that we've seen over the last few years, that's cool. And so, that was interesting. And it was interesting particularly because Fortnite was the one that broke the barrier. So, they convinced all of the walled garden proprietors to play nice together so that you would have no problem as a PlayStation player to play with someone on Switch or play with someone on the iPhone, everybody was happy, one big kumbaya game experience.

And if you think about it, it's still ridiculous that if I'm an AT&T subscriber and I can't call you on your Verizon phone, that's nonsense. So, I think for the true network effects to kind of take hold and to really give us the benefit of all this technology, it's like, well, whatever device you're using, cool, if you want to tinker on your PC or if you're just cool sitting on the couch with your tablet, have at it, but isn't it cool that you can play, we can, sort of, in a synchronous way all experience and share this content, as opposed to you're over there doing this and I'm over there in my own server. And I think that that's a big innovation compared to, say, World of Warcraft, which would still put people in servers, like, you would have 2,000 people per shard or whatever. So, nowadays it's a much more asynchronous and simultaneous experience that because of the disappearance of the separation between these platforms, you end up with just that much more enthusiasm from the consumer base. So, I think it's critical to the success in the next 10 years.

Sciple: It raises the question again, like I asked earlier about the Epic and Apple fight which is, why now, right? There's been this incentive for a long time to have as big of a pool as possible. What's driving the shift today?

Dreunen: It's a good question. So, Apple is proving itself to be very reluctant to share. And so, they say, well, we want to protect the consumer and we don't want any, like, nonsense in the App Store and we want to make sure that the content is up to par with the Apple, it doesn't exist, but the Apple value set. And so, when, in fact, of course, they're consumer electronics companies, they necessarily cannot be compatible with everything. We just lost the charger for the new iPhone, we have to buy that separately, so their business is always about dividing and conquering things. It's just inscribed in the business model of a company like Apple.

Which is why I think it was significant that, for instance, Sony played nice with Fortnite, because Sony is also a consumer electronics company, but they realized, like, we got to get in on this otherwise we're going to be left on our own. We'll never get the critical mass to be relevant after this. And so, Apple is now, kind of, dealing with, on the one hand, of course, its own business interests of sectioning off its audience and they don't want anybody else mucking about, but at the same time it is now growing so large that both content creators and consumers are saying, well, what's our share of this platform, where do we sit? And I think it's a question of critical mass, I think it's a question of competitive availability of content, there's lots of substitutes. And the fact that it's going to be an ongoing conversation among leadership on the creative side saying, well, you have Spotify and Netflix and companies like Epic, all kind of pushing up on that boundary, and Apple is kind of, in my mind at least, you know, while they're legally correct, you have to wonder if they have the moral high ground in all of it.

Sciple: Yeah. So, you talk about Epic, this company challenging Apple, one of the biggest tech companies in the world, at the same time you're seeing other big tech companies, like Google [Alphabet] and Facebook, try to get involved in the gaming industry. Last year, Google rolled out their Stadia game streaming service. We're recording this on October 26th, today Facebook announced their game streaming service. What's the role of big tech in the games market moving forward?

Dreunen: So, big tech has figured this out. So, big tech suddenly wakes up. So, I'll give credit where it's due, Google and Amazon (NASDAQ:AMZN) and Facebook and Apple, have all contributed in a significant way to the ecosystem in their own way according to their own strengths and characteristics. What I think is different now is that they're trying to really push out the incumbents in a way. So, you see Amazon Luna, you see Google Stadia, they're promising these new technologies as a sign to, like, hey, look, we're hip and trendy too, we can also appeal to this gamer demographic, this is the supervisor we want to go after, but it also has benefits to our revenue stream.

And I'm not entirely sure that, you know, their intentions -- so, while I believe that their intentions are correct, I think their strategy is a little upside-down, by which, I really mean that if you look at each of their approaches, and then Facebook, as you mentioned, coming out today, it is of course ad-based and that's, sort of, an inevitability there, and they're figuring out how to make that work. But Amazon and Google are very clearly looking to subscribe you and then, of course, get you to do unit sales.

What they're effectively doing is, in the same way that they've done in every other category, they're going to aggressively subsidize content, so that you'll sign up for it, which means that it'll be very hard for other companies to maintain price points on other platforms. So, it lowers the value of content in the same way that we've seen it with books, and the newspapers, and video, and music. At the same time, what they're going to end up doing is create this avalanche of just this deluge of new content coming into the space, and so it's going to be a much more opaque universe as opposed to a neatly organized set of companies that are really leaning in.

What that means, I think, for the consumers, is really simply put, we're going to have a lot of discovery issues, and that's, of course, where they want to make their money, they want you to spend money with them so that you can advertise correctly. Google wants you to pay them to navigate and reach your consumer base, and so it goes. I think Amazon is doing the same thing, they're going to basically tease out, instead of, you know, going to like a Microsoft, where you would say, OK, we're going to launch this and we're going to get these services, Amazon is going to tease all those services separately and charge you. And this is going to cost you more as a content creator, so that's not super interesting, but that's how they're going to run their business.

And it's going to be fundamentally, I think, really more of a function of big tech moving toward recurrent revenue bundles rather than having transaction-based revenue that you know. And I think because of that, that sort of need to diversify and look for more steady, predictable income streams is much more something that works for them, but not necessarily for consumers, like, I haven't seen consumers really asking for this. So, you have to wonder, sure enough, they want to pursue a creative agenda that is honorable and exciting. I think Amazon Prime does a great job with video. I think there's a lot to say for Google's role in music and discovery there, but are we looking at big tech trying to solve a consumer problem or is this really just to, kind of, increase their own share price value by getting a higher multiple for recurring revenue than anything else. And so that's where I still have a lot of questions.

Sciple: Well, we've seen so far that Stadia has had a relatively tepid response. Do you think they'll be successful in getting these audiences?

Dreunen: Right now, no. I think that Stadia is a -- I always have to say this, but so, personally, as a consumer, as an individual, I think Stadia is pretty good, I like it. They were out of the gate quick, they have good enough stuff, I've been playing Doom Eternal, I played some Red Dead 2, it's there. Even perhaps I spend a little bit more money, and I'm willing to take a chance. But I like it overall, it seems to be working fine. I have a fast connection here, so it's no problem. What I think that's missing is the fanfare and you see now with Sony and Microsoft coming out, like, they have these big offerings, these exciting new devices, this big hubbub. And so, my anxiety as an analyst around what Stadia is doing, for instance, is that they're promising us the moon and they're going to deliver us just a hand of dust.

And so, you know, the same thing we saw with Facebook when it acquired Oculus. Big fanfare, we're going to go in VR and here's the growth curve about how social media and technology is going to be this big deal. Cool, but where is that at now, like, really, after all that? And so, it kind of feels like they acquired and they sort of like, you know, backed themselves into these technologies and these categories just to kind of have a horse in the race and to kind of make a bunch of noise about it, but they end up promising more than they can deliver. Right, they are writing checks, they're asking cash.

And so, you end up, sort of, wondering like, you know what, is this going to be good for the consumer base and the creative ecosystem or is this just a facetious effort? And so, I am not convinced as an analyst that Stadia is going to do well just yet.

Sciple: Okay. Another area where big tech plays in video games is Amazon's ownership of Twitch. We've seen Twitch just grow massively this year. How important is this platform for marketing of video games and just for the video game culture, in general?

Dreunen: It's a critical component now. So, Amazon got lucky, I think, with Twitch. I don't think that they thought it through very well. And you see that, sort of, in the way that that's still poorly integrated internally and they haven't really given it the oomph that Amazon should be doing, right? I mean, you spent billions of dollars content on video, like, well, what about Twitch, that one seems to be working. So, I think that they bought a bunch of components and they couldn't quite make them rhyme, so they bought Double Helix, and then built Amazon Game Studios, and they bought Lumberyard, and they tried to integrate the whole thing. And I'm not sure that Amazon is set up for it.

Nevertheless, Twitch is just this light that won't go out, whereas Microsoft came in with Mixer and it came and it went, and everybody knew it from an early stage, but once they bought Beam, you see everybody, sort of, leaning backwards, going like, right, right. And of course, then they end up selling it to Facebook recently, which is not to discredit Microsoft, but they kind of had to have an asset, but it's just they couldn't make it work, I think, because Twitch was already so successful.

From a content perspective, we see for instance EA spending, really, it's time, it's so telling. So, on one hand you have the executive team backing Anthem, their big new IP a few years ago, and big fanfare, lots of marketing dollars behind it. And then there's Apex Legends, this free-to-play game, it's like, well, we'll have them, kind of, run their own show. You have this huge difference between sizes in terms of budget and expectations. And then Apex Legends on its own does the same number of sales in dollar value, as this big Anthem that they're releasing. It had everything to do within the effective use of the Twitch ecosystem where they, of course, recruited PewDiePie, the Ninjas of the world to play the game, and everybody was happy and it was very exciting. And then after the money ran out, they kept playing it because it was fun. And so, they managed, very effectively, to use live streaming as a way to market their games. So, that's the new thing now. You have to have some kind of distributed model, some kind of, you know, these are the disc jockeys from the early music industry, the early radio, where the tastemakers and gatekeepers are now blue-haired people on the internet with a camera.

And so, that's where Twitch is still very relevant. And you see this not just with Amazon, you see it also in Asia where Tencent recently then merged Huya and DouYu, the two largest live streaming platforms in the Asian region, basically to outperform, of course, Bilibili, but they now own two-thirds of that market, and it's going to be a very clear channel to promote content and get people to buy stuff and engage them over and over again. And so, Twitch sits in that same bucket, and YouTube is a close second in some ways, but that's really it.

So, if you can control the marketing channels, that's an incredibly powerful position to be in.

Sciple: You know, one of the things I've thought about Twitch, so one of the stories that's come out in the past couple of weeks is AOC, Alexandria Ocasio-Cortez, played among us on Twitch, got an audience of over 300,000. Makes me think about, in 2008, when the Obama campaign embraced Facebook and that really signaled this inflection point in social media coming to the mainstream. Do you think things like this, I mean, we talk about Animal Crossing, the Biden campaign as an island on Animal Crossing, do you think this idea of politicians embracing video games really signals how mainstream this industry has become?

Dreunen: I think politicians have big budgets once every four years, and that they're highly motivated to try anything and everything to get in front of people. And in this case, I think it behooves them to activate the younger generation. Which is, effectively, unlike brands, the big ones of the world, which are much more conservative, they much rather go with conventional marketing efforts like sports and traditional sports whereas live streaming, gaming in general or even esports, those are all categories that I think have a lot of promise to them. But it's only when politicians have to just try all of it, which is what they're doing. I mean, it's not just gaming, they're trying all -- if people would be still going to movies theaters, they would have spots in the movie theater, right, they don't care, they're totally -- but you see how, for instance, an AOC does really well on social media and she's very likable online, she's sort of like witty and sharp, whereas, you know, I see some of the incumbent politicians, they would have a really hard time shining in a Twitch universe. So, I think the novelty of the medium lends itself really as part of the narrative that these politicians want to present saying, we're new, and we're changed and we're trying to make the world a better place and all that.

And so, gaming is going to be a big part of that, because it is an emerging category. It's something that's been rather really new, and everyone is a gamer now. So, to talk to everyone, you got to play too. It's the best way to be -- right?

And we saw this decades ago, you'd have politicians playing football and soccer and it humanizes these people. But at the same time, it's also a great way to relate to them.

Sciple: So, you're saying that AOC playing among us in 2020 is like Bill Clinton playing the saxophone in the 1990s?

Dreunen: Absolutely, absolutely, absolutely. If you can hold your own, I mean, imagine this thought, but if you can hold your own in Among Us or in Fall Guys or any of the big title games nowadays, if you can show some real street cred in terms of gaming and your ability, that's the equivalent of, like, throwing a fastball during the opening match of the season or if you could throw down in some kind of dance contest. That's the side that people want to see. And so, it makes you -- you know, you'll see the gamer mindset going like, that's our politician now, they represent us, because they are like us, speak the same language. And so, I think what has been largely unexplored is the cultural significance of play as an instinct.

You know, we know it from sports, and we know it from chess, and we know it from centuries ago, but the video games have always been regarded, sort of, in the back. As it's moved from the fringes of the entertainment industry to the center and become more mainstream, you know, this is a way for people to relate to each other, like, that's what Among Us is about, right, we're connecting with each other and having these meaningful exchanges, which seem trivial and all that. But ask any 80-year-old politician what it's like for them to play monopoly with their grandchildren, and you'll know exactly who's wearing the pants in that household and who sits where. Because it clearly tells you the nature of relationships between people, and I think that that's what makes them excited.

Sciple: So, as we talk about this growth, how games have become mainstream. Certainly, it's an area where there's lots of opportunity going into the future, we're an investing show, so for investors, what are some metrics that folks should be paying attention to in this industry, what should we be tracking from an investing point-of-view?

Dreunen: That's a really good question. So, I think the industry, as it's moving away from a product-based business where you have unit sales and average selling price, is a very easy equation. The future of any entertainment will be how many people do you reach and how long you get to have them, how long will they stay with you. And so, it's a much more fluid metric. I think long-term we'll be looking at what's your overall monthly active user base, what's your conversion to spending and then how much do they spend overall.

You will see, for instance, that in the mobile space you'll have mobile games that have the most people playing but they convert very, very poorly. And so, as an investor, it's like, OK, well, is that exciting, is it exciting for you to have reach or is it exciting for you as an investor to have revenue? And so, those are the metrics for the digital age. And I think as we move forward toward a more advertising base, it's really about longevity and engagement, so can we keep people in the ecosystem longer, and how do we do that?

So, we're back, for instance, to more traditional metrics in the same way that the telecom company looks at it saying, what does it cost to acquire a new user for AT&T, Verizon, T-Mobile or whatever, and then how long can we keep them, and what's the value of that? And then you can just equate from that. So, I think those are some of the fundamentals as the industry shifts. But at the end of the day, you see now the economics, as they become more mainstream, they are also much more beholden to hit-driven and very quick rapid exchanges where we had these peaks of, like, World of Warcraft and a bunch. You know, every generation has a game that would just pull all these new players, and nowadays you have things that follow each other much more rapidly where, you know, Fall Guys was a big deal until Among Us came around. And you know what? I bet you, two months from now we're having this conversation and it's going to be a whole nother game and Among Us will be in the rearview mirror.

So, it's not just about reaching in the short-term, it's also the longevity of the experience and the lifecycle of your customer growth.

Sciple: Right now, we're on the cusp of this new console cycle, you've got the new Xbox and the new PlayStation coming out. Xbox and PlayStation pushing toward these subscription models, the Game Pass model. What do you foresee playing out here in this new console cycle? The last time around Microsoft really got caught flatfooted.

Dreunen: Yeah. Well, that's because Microsoft, their prices are, like, $599, and you had to get the Connect. And I don't think anybody was waiting to have a Connect in their house per se. It's a wonderful device, I would have thought at the time, the sentiment was a little negative on data protection and privacy and, like, why would I have like an eyeball of some corporation in my house, right? And I think they made a few missteps there.

What we see now, I believe that for the coming generation, you have on one hand the PlayStation and really the Xbox, so those are the two conversations, whereas traditionally we would talk about like, you know, the console wars and how these two titans are clashing. And for all intents and purposes, two generations ago it was really an equal game between the PlayStation 3 and the Xbox 360. The current generation, the PlayStation 4 and the Xbox One, Microsoft is second runner-up by a ratio of 2:1. So, if you want to express it in war terms, then Microsoft lost the console wars in the eighth generation, but they still have an 57 million installed base, so they're doing fine, they're printing their own money, they're good.

For the next one up, it's really about the innovation that they can offer, right? And so, you see now Microsoft getting entirely out of that console war by saying we're going to be platform agnostic, we're going to give you the Game Pass, you can play all the stuff and you can have a good time with that, and at the same time it also prevents us from having to, kind of, compete head-on with, like, a Sony, which is a formidable competitor, in that they have great studio is great content. The customer is bifurcating, they're each going their own way. I think that makes it so that, whereas in the traditional sense they are competing, but I think less now. And so, I don't think it's entirely fair to talk about who's going to be a winner. I think that they will each do really well in their own rights, but they have very different challenges ahead of them.

So, PlayStation needs to sell lots of units, and they will sell many units. I would not be surprised if they get the same number of installs five, six years in as we see in the current generation. So, I don't think a 100 million installs is unachievable for PlayStation, I think that they'll actually make that number.

For Microsoft, it will be a lot less. But I think that what they are really trying to do is make the device cheaper and move to multiple platforms. So, I can play their games on my iPad too or my Android devices and it's no problem. So, they're going into more of a reach model where they want to have hundreds of millions of people playing and spending money in their services rather than necessarily buying their hardware where I think the hardware is really just for subsets of their user base, whereas for PlayStation, it's the entirety of the user base.

Sciple: Is it fair to say that PlayStation is going after more of a dedicated gamer market, whereas Microsoft is going for a more casual gamer?

Dreunen: I think that's fair. I think if you look at the content offering, and the overall marketing messaging, Microsoft is much more about gaming for everyone, and they have a wide variety of different categories available. And you could, of course, kind of, pick-and-choose and say, like, well, is it as highbrow as we see elsewhere? It's like, kind of-kind of, maybe not, but I think it's really the tailoring of the offers and the inclusiveness of the offerings, right? And the same way that you see that, sort of, for a video streaming service, it's like there's plenty of stuff there, there's something for everyone. $15 for a Game Pass is no-brainer, you know, an Xbox Live subscription. They're not asking for lots of money, and I think particularly what's clever this time around, and what I think will prove to be an innovation to the business model is offering the devices under the same circumstances as cellphone manufacturers that sell smartphones. It's $20/month and it gets you the device and a subscription for your content and you can go nuts, have fun, and then for 24 months you pay me. As opposed to going to the store and spending $500 and $60 for games, it's a very different proposition. So, that's their approach there.

PlayStation has always differentiated itself with much more of the mindset of like a company that makes movies and makes music, which of course they also do. But I think they've copied-and-pasted that blueprint saying, we're going to buy the best studios, we're going to buy spectacular content, we're going to have God of War, we're going to have Last Of Us Part II, and it's going to be these fantastic epics that you cannot not -- you must play those, but it caters to a very different audience. And I think for that reason, I think, we're seeing Microsoft and Sony, sort of, bifurcating and going their own direction. We're seeing something that happened with Nintendo too, when they said we're going, kind of, low-tech with the Wii and we're going to just cater to everyone; I think that was a very big surprise for a lot of people, it was accessible to a lot of people to have fun with it, but that proved to be one of its biggest successes in its history. And so, we may very well be looking at one of Microsoft's biggest successes coming up. But Sony is going to lead the charge, absolutely.

Sciple: Yeah. So, we're running a little bit long, I've got three more questions and then I'll let you go. So, from an investing point-of-view, you're someone who advises companies in this space. When you look at this industry today, what segments, sectors or companies are you most excited about today?

Dreunen: So, I'm always excited about the areas where there's some novelty, but particularly novelty that's built on, like decades of preexisting behavior that just didn't quite make it yet. And so, one of the things that I'll always be skeptical of is VR. Just to give you an example, but we've been talking about VR for decades, right, the Virtual Boy, and then all these other directions. Virtual reality is this perfect ecology, because like the emerging markets of Brazil, it's always going to be in the future, it will always be that, it will always be emerging. And so, it's perfect, we can invest in that until we're, like, 80 years old and we'll probably never see it in any of our lifetime. So, I'm skeptical of that, what I like is the closer to things like that really are prescribed in human behavior. Rather than having big tech firms or big content creators or platform companies come up with some new gizmo and saying, this is going to be the new thing, I think what we're really looking at is, you know, people taking more charge of their own content. And so, I think in the context of the IPO of a company like Roblox and the investment that we see in this space that is focused on making it possible for users to participate in the creation of the world that they're in. I think that's a really important part.

So, digitization and the emergence of microtransactions really had a lot to do with people wanting to look a certain way, present themselves a certain way, they want to have a cool outfit, funny dances, all the stuff. And so that's the way -- you can sell against that, and that was also a big part of the success of Tencent in its early days, the ability to, sort of, socially distinguish yourself by purchasing these assets. I think that that's been what's been driving the current growth. For the future, I think we're going to see the next thing after that, which is, my kid has no problem going into Minecraft and spending hours building some elaborate universe, the only thing missing is then for me to put it online and charge $5 to the next guy, right? So, the monetization or freely sharing of user-generated content and how that contributed, changes games, I think that content creators and IP owners are still struggling with that. And whoever finds the answer to that I think is going to be very successful. So, I would look for those types of things. But it's always been right around the corner, and I believe that we're going to start seeing it in the next few years in a big way.

Sciple: That makes a lot of sense. I mean, you saw this year with Animal Crossing, that's a big part of that, you customize your island and all those sorts of things, and that's been one of the most successful games this year, and obviously, Roblox is in a similar category. So, when we talk about games today, there's lots of this conversation about huge changes for gaming's, we're going to have game streaming or VR, as you mentioned, or all these sorts of things. What aspects of video games do you think are going to be the same 10 years from now as they are today?

Dreunen: 10 years from now; I think games have always been about the social aspect, at least for me. And I say this not just in a personal sense, but also as an academic researcher and as an analyst. Like, wherever you see other people do stuff, it's because there's this critical mass. But when you walk around in New York, you see two types of restaurants, there's restaurants that are packed with a line outside, and the restaurants that are empty. And then nobody wants to go sit in an empty restaurant. So, in gaming the equivalent there would be like, well, I bought an Xbox, because all of my friends have Xboxes, and so that's why I live in this universe now and they play these games. And I grew up with Halo and not something else because of these reasons.

So, I think what's going to continue to determine things is like, how people interact and, sort of, the social layer will tell you and will indicate to you what's going to happen. And so, whatever we can do to facilitate that. You know, it's going to be the same as people wanting to play with other people. And so, however, we can give that more rise, that's cool, but that's always going to be part of it, and whoever deviates from that -- and, I think, we could talk about walled gardens in consumer electronics, all that stuff, but if you start preventing that from happening, if you're going to make it impossible for people to share or to do this, then it's going to be a harder time. And so, that would be a deviation. You must facilitate the social aspect of it at all times. And so, that's always been the case, and I think we're going to continue to see that.

And of course, the fundamentals. So, blockbuster titles always run the show, will never go away. I think the Long Tail [distribution theory] was a wonderful dream but that's not going to happen, I think what we're going to see is just massive hits after massive hits coming out perhaps at a faster pace, but the industry will still be very much geared toward two or three rather successful companies and that's it. So, a lot of the economics will stay the same even as the technological foundation shifts over time.

Sciple: That makes sense, makes me think about how we're seeing movies, lots of reruns and that sort of thing, that same dynamic in this, kind of, interactive entertainment category. On the other side of things, what's your biggest question about games going forward and over the next 10 years?

Dreunen: There's a few. So I guess, an industry question is this question of advertising, how is that going to happen? So, I think it's always been part of it, it's always been sort of on the fringes, but when is that going to take center stage? And so, I kind of postulated, you know, think about this, in the final chapter of the book too. But it's a question of, like, when is this going to work out, when is this going to be so big that P&G and all these other companies are going to just kind of open up their wallets in a big way and say, we now own things in the same way that [...] companies created Soap series for us, right? And you see the U.S. military sponsoring swathes of Hollywood production. You know, when are those types of industries going to really, truly invest their full budgets in games? And we've seen some [...] there, some predecessors in the form of, like, the U.S. Army had like a recruiting game, sort of, a synthetic universe where you could play a soldier and, sort of, the recruitment process of a soldier. So, we've seen some of those instances before.

But my question really is, when are we going to start seeing these really big billion-dollar businesses putting their full weight behind some of this? And how is that going to affect the creative output of this industry? In the same way that it's very easy for us to say, well, clearly in China they're trying to make movies, and therefore real estate businesses are, you know, either making them say things or preventing them from saying things in these movies. And clearly, in India, there are certain cultural parameters that make it so that certain things are wildly popular and some things are totally not. And so, when we look at the games industry now, as it rises to its true size, these large billion-dollar businesses are going to affect what rolls out of it, and I'm very curious to see what that will look like.

Sciple: We'll be watching the industry, and hope to have you back on maybe sometime in the future to talk about, a reminder to everyone, the name of the book is One Up: Creativity, Competition, and the Global Business of Video Games.

Joost, thanks so much for joining us on the podcast.

Dreunen: Thanks for having me, Nick, I appreciate it. Thank you.

Sciple: As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against the stocks discussed, so don't buy or sell anything based solely on what you hear.

Thanks to Taylor Harris for mixing the show. For Joost van Dreunen, I'm Nick Sciple, thanks for listening and Fool on!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.