Player spend is down, except in web3
How blockchain-based games could solve a monetization slump in traditional titles
Konvoy, a VC firm with a particular focus on gaming, recently published a piece on the monetization (or, rather, under-monetization) of gamers. According to their data, 2022 represented the first time in the last eight years that revenue per gamer contracted, from a high of $61 in 2021 to $59 in 2022. Over the past four years, however, the market added 400M new players. It’s safe to assume that a lot of this growth has been 1) younger and 2) in markets with less expendable income. So it’s not surprising that the average price per user (ARPU) of the games industry would be slightly less, particularly down from 2021, a year in which the pandemic hangover continued to keep many people indoors and playing.
But the Konvoy team goes a bit further with this statement:
“The industry has now found itself in a conundrum: the gamer has been trained to expect too much for free.”
That, of course, is a great irony if we look back about a decade when physical and premium games still ruled the world. Back then, the average gamer, if asked, preferred the idea of plunking down $60 upfront for a title. At the time, the concept of free-to-play was still slowly making its way over from Asia, and many western players thought that it was just a crash grab and a scam. Sound familiar? Free-to-play games, however, particularly through the expansive distribution of mobile, paved the way for players (and therefore, consumers at large) to expect free everything. Not just, as Konvoy points out, in gaming (Twitch, Discord, etc. are all free), but the MO in gaming cemented the freemium model for nearly everything in the digital age.
As Konvoy mentions, the growth in gamers and the market overall is outpacing the growth of ARPU. I.e. the solve is not simply more players nad more content, but better-monetized players in better content. So what’s the gaming industry to do?
With free-to-play, there are a few ways of improving monetization:
Conversion rate: increase the number of people who are just playing but not paying to spending users
ARPPU: once they spend, increase the amount they’re willing to spend
Retention: Keep players around and spending longer over the lifecycle of a game, etc.
Ads: If you can’t beat ‘em, advertise to them
Ads are notoriously poor revenue drivers in games unless you have an insane scale of users, so we’ll leave that one to the side for the moment.
Game designers have spent the last decade perfecting the monetization models for free-to-play games, sometimes with mechanics that have veered into regulated (read: gambling) territory. But clearly, we’re reaching a cap. What Konvoy’s data appear to show is a mix of:
an existing audience getting fatigued by the same old models
new audiences being underserved by the existing model
a gobsmackingly-massive upside for even the most incremental increase in gaming monetization ($10s of billions)
What do we do? You guessed it: enter web3.
The potential for mass-market web3 titles is here. Any developer can deploy web3 into a game and any gamer can access it. Yes, web3 game economies need some consideration to avoid arbitrage opportunities and keep value stored with the developer. But web3 titles also don’t need complex new economies, and many will adhere to typical gamer segmentation. And at present we’re talking less about value within a game than value across the gaming ecosystem.
What we’re quickly learning, however—particularly when it comes to apples to apples comparisons between web2 and web3 versions of the same game—is that the blockchain is allowing for the kinds of metrics improvements that Konvoy has suggested are needed.
Here are some incredible stats from Sequence client Boomland:
Compared to the web2 version of the same title, Hunters On-Chain sees 4.5x higher D30 retention, 7.2x higher ARPU, and whales turn into super-whales.
Let’s go back to our monetization levers up top:
ARRPU: ✅Higher
Retention: ✅Higher
So two of the three options for “making more money from players” see not only higher stats, but substantially higher. Because, yes, we’re also talking about differences in MAU. Traditionally, as MAU goes up, conversion and ARPPU tend to come down. But with web3-based games, we’re starting off with supercharged stats: KPIs that can take a beating from an influx of new users and still come out on top. As these titles scale and ARPPU and retention fall, they’re likely falling to levels that are still above the average web2 title. The fact that whales—often the drivers of 50-90% of a game’s revenue anyway—become uber-whales is also something to not overlook.
What’s driving this? A few things. While a more monied early adopter web3 crowd can be pointed at for some titles, it’s less so in the case of Boomland’s titles, which allow (thanks to Sequence), for web2-feeling onboarding, payments, and play. More likely, it’s benefits of secondary sales and other perks of the blockchain that are at play.
But there’s one metric that Boomland didn’t call out: conversion rate. This was one that Konvoy also didn’t reference. Conversion rate is perhaps one of the more mysterious metrics in gaming because it requires extremely privileged looks into a game’s performance, and tends to be game—rather than industry—specific; i.e. many players will convert to something, at some time, in some game, but very few (like 2%) will convert at anytime in a single game. But optimizing the percentage of your audience that cares to give you money is often just as—if not more—important than the number of dollars you can eke out of them. In fact, retention itself is meaningless without conversion: hanging onto a $0 player for longer isn’t that enticing (beyond their benefit as fodder for paying players in match making, network effects, etc.).
As Konvoy points out, it could be that the very ethos of gaming has shifted as more players who have never experienced premium tiles come into the market. Players who simply never never expect to spend. And conversion or monetization gates are also one of the more difficult things to master in game design. Item pricing, for example, is relatively battle tested and easier to compare apples to apples. But deciding when and how your game asks players to spend is highly nuanced. Is it just for them to buy cosmetics to show off to fellow players, is it a powerup that is maybe gives players an unfair advantage, or is it an item that merely accelerates your ability to get to the next level? Those decision points, if designed incorrectly, can make for vehement player backlash or unbalanced games.
But the nature of web3 gaming can soften the blow for payment gateways, particularly for players who would otherwise be unwilling to spend in a game, and can also mitigate some issues around price sensitivity for new audiences. Why? Secondary sales.
Again, secondary trading is something that many—perhaps most—players won’t engage with. But there are a few ways that ownership and trading can increase conversion rate substantially in gaming’s future:
Lowering barriers to entry: As I’ve said before, a $10 cosmetic in Fortnite is abhorrent to me, so I’ve never bought a single one. But if I could scoop up a couple cool skins on the secondary market for $2-$3 a pop, I would. And because players typically forget their own spending, I probably would’ve spent far more than $10. Not only does that secondary sale net royalty revenue for the company,
Psychological placation: sinking money into something you can theoretically recoup at least some of the value of makes someone more likely to spend.
Increasing allowance: This is particularly important for these younger “everything should be free” audiences, whose primary source of game spending money is parents. If grandma gives you a birthday check for $10, you might convert once and buy an in-game item in Game A. But if you can sell that item for $5, you might convert again for an item that costs $5. In this way, we’re increasing the number of conversion points for a player. And because web3 allows for interoperable liquidity, you might not want to buy anything else in Game A, but you can extract the value and buy something in Game B.
In web3, the nature of some early games actually meant that everyone was a converted player (because you had to hold a certain NFT to access the game, perhaps). But as new titles that more closely resemble traditional free-to-play games come to market, conversion rate will matter again, and the edge that web3 offers to enticing players to go from non-spending to spending will be a boon to the market.
Of course, the blockchain doesn’t negate the need for solid game design and considered economies, but it’s becoming increasingly clear that web3 titles harness perks to player monetization that may be more adaptable to the new influx of users and their expectations, while also modernizing the spending patterns of existing players.