Gaming: Big Things Have Small Beginnings
APRIL 6TH, 2016
Ready Player One ...
Many revolutionary technologies were born in garages and dorm rooms. Famous examples include the PC, the web, social platforms, and most open source software. Thus, one trend identifier when looking for potential new breakthrough technologies, is to look at what the smartest people are working on in their free time. Historically, these present-day hobbies seed future mass technologies. Said another way, what the smartest people do on their weekends now, everyone else will be doing during the week ten years from now.
Another way to identify breakthrough technologies, is to focus on things that are growing rapidly, but widely dismissed as toys. This is one of the main insights of Clay Christensen’s “disruptive technology” theory. Typically, these technologies gain rapid adoption within a niche market, then add utility/features, via rapid technological advancement and cost reduction of external input and infrastructure components. The 'toy' technology leverages these advanced inputs/infrastructure components to provide ever increasing levels of user utility. Historical examples of technologies that have followed this diffusion curve include electric lighting, telephones, personal computers, and many others.
Both methods of trend identification point to the sector I want to discuss today- gaming. Even if you have no interest in video games, if you are interested in technology (and the trend identifiers outlined above) you should be interested gaming. Some of the smartest people in all of technology spend massive amounts of free time developing/playing video games and video game platforms (particularly Virtual Reality gaming). Today, these technologies are generally viewed by the mainstream as 'toys'.
Gaming technology itself is rapidly advancing, and will likely outpace the utility requirements of gamers in the near future. Historically, when a technology (leveraging ever advancing input / infrastructure tech) adds features and functionality, the technology begins to make mass market inroads. This is because the additional utility appeals to more segments of the broader population, and, at the same time, network effects take hold as more and more mass market consumers adopt the technology. Gaming technology, VR technology in particular, seems to be approaching this utility threshold. The technology behind the latest consumer VR displays (particularly the HTC Vive and Oculus Rift), offers utility far beyond gaming applications, and the platforms are begging to see adoption beyond the gaming market.
In addition to technology advancements, the gaming sector has also created exciting new business models. Many of these business models are possible due to extremely high levels of consumer engagement. One example of an innovative business model is the monetization of digital assets, or 'cyber goods'. These are mostly cosmetic goods, like new outfits for game characters or new assets to utilize in game play. League of Legends is estimated to have made over $1B last year selling digital cosmetic items.
Another new business model pioneered in the gaming sector is digital events revenue, i.e. revenue generated by live gaming events and tournaments. These events are streamed online, creating advertising revenue, but also sell tickets to spectators who watch the events live, in person. Over 32M people tuned into the League of Legends championship this year, more than double the number of people who watched the 2015 MLB World Series, and more than double the number of people who watched the 2014 NBA Finals.
In addition to event broadcasts, gaming has spawned entirely new broadcasting platforms, like Twitch, where users can watch and interact live-time with popular gamers. Twitch has 100m+ users, and the average user spends 1hr 46min per day on the platform. My Fund recently invested in a social VR platform called VRChat. Many of VRChat's users are gamers, and tune in on a weekly basis to a live talkshows (Gunter's Universe), and those same users regularly attend live standup comedy events, as well as other social events broadcast from VRChat.
To summarize- many of today's smartest technologists are working in the gaming sector, and (I believe) many of the gaming technologies currently viewed as toys, have the potential to become much more. In particular, many of the VR hardware and software platforms exhibit significant potential to evolve into mass market technologies within the next ten years. This potential is the result of the utility inherent in the various VR platforms. As these technologies evolve along their diffusion curves, they will leverage advanced/inexpensive input and infrastructure technologies, increasing user utility, and generating additional mass market appeal. As the mass markets adopt these technologies, network effects begin to appear, and mass market adoption increases. In addition to the utility and diffusion curve momentum outlined above, the startups in this sector have the advantage of being able to leverage the innovative business models tried and tested by today's game industry. It's going to be an exciting number of years for the gaming sector, and the VR sector in particular. I'm excited to see how it all evolves, and I'm excited to invest in some innovative enterprising entrepreneurs along the way!
