The solve for all Epic's woes
Fortnite is leaving money on the table while Rocket League players revolt.
Epic is having an epically rough month. After a heartbreaking round of layoffs, the company’s Psyonix studio, makers of the super-awesome Rocket League, announced that they were closing the game’s secondary skin trading. In a completely un-ironic twist, vocal gamers—many of whom profess to hate web3—vocally lashed out against the loss of trading. Trading was a way to get rid of redundant skins, get coveted ones you couldn’t buy anymore, and were also required for some game achievements. The reasoning was opaque, and gamers didn’t buy it.
On the Fortnite front, the game isn’t raking in cash quite like it used to. Epic claimed, in partial argument for the layoffs, that engagement was shifting toward UEFN “islands,” which are lower margin for the company. Not sure I believe that argument, but here we are. Sounds more like wishful thinking for a company that increasingly wants to take on Roblox.
Across all of these lamentations, however, is a pretty elegant solution: web3. While I’ll always espouse the creative possibilities of games and ecosystems built using web3, as a technology, web3 also allows developers to rid themselves of certain challenges and, of course, opens new lines of business in addition to giving gamers the control they want. Sounds pretty win-win-win in my mind. In each of Epic’s big categories with recent pain points, the blockchain could offer ways for the company to unlock new revenue for waning products, simultaneously give gamers what they want, and further incentivize and power UEFN.
Fortnite is leaving money on the table
Fortnite is massive, its success cannot be understated as a cultural touchstone, and also it’s in need of help. Fortnite is one of those very few titles that has the scale and cache to pull off being a game that is only monetized through cosmetics (or the battle pass, a subscription which just unlocks cosmetics). The game features a constantly rotating store of skins, many of which are licensed content from some of the planet’s biggest brands and media IPs, like Star Wars, Nike, and Marvel.
The way the store works, and indeed the way many of these licensed deals are contractually structured, is that the skin will be live for two weeks and that’s it. The number of copies that can be sold during this time is unlimited, but once the period is over, that’s the only amount that will ever be available. Which means that if you didn’t have any money in your gaming allowance or were on vacation, you might miss your favorite character’s skin forever. No one can trade, sell, or otherwise offer you that skin through any legitimate means.
This is a set-up that undercuts everyone:
Players miss out either accessing skins they covet or recouping the spend on items they’d otherwise sell; if they’re desperate enough, they’re also forced to the shady grey market for account sales
Epic closes the door to incremental secondary sales revenue
The licensors also miss out on secondary sales revenue and the ability to leverage the audience of their fandom outside the closed ecosystem of the game
Luddites suggest that secondary trading is totally doable in web2. They’re right. But they’re also insane if they think that’s a feasible lift. Powering peer to peer trading using private servers is a beast of an effort. When the blockchain handles this, the onus shifts. Dealing with payouts to users for their sold goods is also a tremendous legal headache, potentially requiring the company to get money transmitter licenses, a process that is unique in every state and country. Sounds horrible. And not typically required with the blockchain. And, hey, all of this is even easier if you’re able to spin up a marketplace in a minute.
So, if it went this route, web3 would solve logistical and legal hurdles for Epic.
This is the “why not” icing on the cake of a scheme that should also be financially rewarding to Epic. Because the skins’ purchasability shuts off after two weeks, you have built-in scarcity. This could mean that some skins, particularly from recognized IP, become more valuable after the initial sales close. A Darth Vader outfit that sold for $10 could be worth $100 a year later, and, if the company took a 10% royalty cut, the secondary trade would garner a 2x reward on the same item for Fortnite.
But, even with items that follow a more expected path (i.e. the value diminishes after the primary sale), Epic would still be in a position of reaping additional revenue, help put liquidity in the pockets of their biggest buyers, and engage users who may not have the spend for brand new skins but do have allowance for items that are $2 or $3. Higher conversion rate, more happy players, more money.
Silly argument number two: by opening a secondary market, Fortnite would undercut primary sales since users know they’d be able to buy the skins more cheaply afterward. Fortnite is a fashion house. It sells digital air in the shape of pickaxes and clothes to seventeen-year-olds. Gamers are posturing in a digital fantasy world. We’re not exactly talking about staples for survival. Looking at the fashion industry, used clothes retailer The RealReal brought in nearly $500M in gross sales in just the last 3 months of 2022. Did that mean that Gucci was out that revenue? No. In reality, aftermarket sales introduce a whole new segment of consumers to Gucci clothes and could mean they have new retail buyers in the future. [I won’t entertain arguments that clothes physically deteriorate while digital items don’t. Go to the RealReal and tell me that a human wore any of those items more than once. They’re brand new.]
Instead of losing topline revenue from those players who will always buy into the hype and need to have the latest fashions, Fortnite would unlock a new category of player—my kind of player— who says that $15 is an absurd amount to pay for digital fashion that they’ll get bored of in a week, but $3 for last season’s skin they think is really cool would be a no-brainer.
Web3 makes this all financially, technologically, and legally feasible.
Rocket League savior
Poor Rocket League. It’s one of the smartest and most unique games out there, but shutting off peer-to-peer trading was not a winning decision. The studio has said this move is aimed at bringing item shop policies in line with Epic. Epic “We’re suing Apple for the right of publishers and users to circumvent onerous store policies” Epic? This wasn’t policy, it was a technical and legal burden-driven decision which imperils the game and users alike.
The studio also claimed that the decision might open up certain items to exist in other Epic games. Sure sounds a lot like interoperability to me, something that the chain makes significantly more effortless than the tedious connection of silo-ed private servers (see the 5 steps to connect our dotSwoosh and Fortnite accounts vs the one-step Connect Wallet).
UEFN growth engine
And speaking of Fortnite’s supposed growth through user-generated content islands, nothing about this gets easier with web2. More creators, more islands, more user-generated items, more players spending time and money in other servers. More accounting headaches, more infrastructure. More problems.
Many titles are looking to web3 to power their user generated content ecosystems (like Krafton’s upcoming metaverse) because of its transparency and ability to link infinitely expanding universes like the one that UEFN enables. To them, it’s a tool that solves an accounting and data reporting problem. While Epic’s current revenue schema for creators is engagement- rather than sale-based, the company will only take on Roblox once it allows for third parties to create sellable items and stores and creators get a cut. (Again, an island might have relatively little engagement coming from a small, but core and high-spending audience in which revenue-based incentives would be better than volume of users and playtime.)
Web3 lets Epic do this more easily. Paying out creators instantly for items rather than a complicated—and completely opaque—revenue waterfall that means Epic is holding millions of dollars of other people’s money, has to onboard their banks, and has to establish accounting and data tracking dashboards. The chain negates these headaches.
The hybrid approach
Taking web2 games as massive as Fortnite and flipping the switch to web3 is not necessarily easy. The demand of hundreds of millions of items being minted into users’ wallets would be unmanageable for many chains, as would the bandwidth required to support the number of actions happening in the game at any moment, though new layer 2 and even 3 chains help with this, in addition to the requirement for an amazing relayer. But it’s also not the only path, especially in the near term.
We know that secondary trading is something most players don’t engage with, in web2 or web3. Which means that Epic doesn’t need to enable it for all of their users tomorrow, but could instead leverage the chain for those users across Fortnite or Rocket League that do want to enjoy the benefits of trading. At Animoca, my platform developed a similar hybrid approach: users that wanted to mint an item on-chain for any given reason (token-gated experiences run by others, increased liquidity, immutability) could do so, while preserving the ability for that item to work in the game. For example, if I minted an item on-chain, it would continue to be viewable and playable in the web2 game so long as it stayed in the wallet associated with my account. If I sold the item and it left my wallet, it would also leave my web2 account.
While this requires some additional technical and user lift, it’s a nice middle step for massive titles that don’t want to deal with either the player sentiment of web3 as it stands right now or the challenge of shifting all of its items at once.
My guess is that, short of Psyonix turning trading back on for Rocket League tomorrow, this kind of step would continue to offer traders the abilities they want, offload the legal and technical hurdles from the studio, and kickstart a new layer of engagement and revenue for Epic.
Despite the misguided pushback from some gamers and some developers against web3, the undercurrent from both segments suggests that there is a ballooning need for the kinds of technical, legal, creative, and financial benefits that the blockchain offers. While it may take a Fortnite more than two weeks [see what I did there?] to jump on the web3 ship to innovation, it’s undeniable that the industry, and Epic in particular, stand to gain considerably from what this new technology allows.
[H/t to David Kim, whose convo with me about all this sparked this piece.]