The video game industry is heading for massive upheaval, and nobody is safe

Matt Weinberger

Dec 27, 2018, 19:27 IST

The video game industry is heading for massive upheaval, and nobody is safe

Getty Images/Mike Coppola

When Epic brought "Fortnite" to Android, it kicked off a discussion about app store economics.

"Fortnite" creators Epic Games spent 2018 challenging the way that Google, Apple, and the market-leading Steam games store do business.
It's a sign of things to come, as the Epic Games Store and fellow upstart Discord both challenge Steam's dominance, in a battle that could have ramifications for the entire app store economy.
Meanwhile, Microsoft, Google, and Electronic Arts are working on game streaming, something that could undermine the very notion of a dedicated video games console.
And Microsoft is pushing Xbox Game Pass, a $10/month service that has the potential to change the economics of the video game business - threading a needle between free-to-play and traditional game purchases.
Ultimately, all of this adds up to one key takeaway: In the video game industry, no incumbent is safe, and everything seems increasingly up for grabs.

Far and away, the biggest video game of the year was "Fortnite," which has become a major piece of mainstream pop culture - and a revenue-generating juggernaut - in its own right.

An underrated aspect of the "Fortnite" phenomenon, however, is all the ways in which its developer, Epic Games, has been using its success as a lever to subtly but firmly shift the power dynamics of the video game industry.

When Epic decided to skip Google Play, and offer "Fortnite" directly to Android users, it was sending a clear message about what it thinks of the fact that Google takes 30% of every transaction - a model that's been the standard for every platform, more or less, since Apple first launched the App Store in 2009.

And Epic is apparently living its principles, too: Just recently, it launched the Epic Games Store, a PC storefront that offers developers a full 90% of their revenues. Discord, a popular gaming voice chat service, also joined this push with a similar model, ultimately putting pressure on leading PC games store Steam to change its revenue split, too.

All of this is happening against the backdrop of a major R&D push at the big tech companies to totally shake up the dynamics of the video game industry from the bottom up. This year, Google's Project Stream, currently in beta testing, aims to bring console-quality games to any phone or computer via the web browser; Microsoft has its own Project xCloud, with similar aims. Mega-published Electronic Arts has its own streaming ambitions, too.

Ubisoft

Google used the graphics-rich "Assassin's Creed Odyssey" to beta test its Project Stream service.

Speaking of Microsoft, this year it doubled down on Xbox Game Pass, an all-you-can-eat buffet of Xbox games for $10 a month. The idea, Microsoft's Phil Spencer told Business Insider this year, is to build towards a new business model for video games, threading the needle between free-to-play titles like "Fortnite" and the traditional $50-$60 price tag for a new game.

Individually, these are interesting developments. Taken all together, it paints an astonishing picture: Literally, every facet of the video game business is facing upheaval. And every single incumbent platform, from the digital game storefronts all the way down to the humble video game console itself, suddenly seems way more vulnerable than it did even a year ago.

Store wars

Steam, originally launched in 2003, is the most popular PC games store on the planet, and likely the biggest single digital games store, period. The success of steam has made proprietor Valve Software, best known as the developer of the "Half-Life" series and esports smash "Dota2," arguably the single most important company in the business.

Recently, though, Steam has come under scrutiny. Last year, Steam was criticized for having perhaps too much power in the industry, achieving something that critics declared something close to a monopoly - essentially locking developers into whatever revenue split it cared to offer.

Earlier this year, Steam courted controversy, as well, after a game casting players as a school shooter was approved for sale on its digital storefront. In the wake of the uproar, Valve actually took an unexpectedly drastic measure: It decided that it would open the floodgates and allow literally any game to be sold on Steam, unless it contained illegal content or, in its words, was "straight up trolling." Critics took it as an abdication of responsibility for the platform.

Isaac Brekken/Invision/AP

Gabe 'gaben' Newell, president and co-founder of Valve Software, circa 2013.

All of this just added fuel to the fire of a debate that has been ongoing in Silicon Valley and beyond for a while: Why, some have asked, should developers accept that the major stores - including Apple's and Google's - take a 30% cut, when it doesn't always seem like those same stores have developers' best interests at heart?

So it's no surprise that Epic Games, flush with investment capital, and fresh from the success of "Fortnite," decided that the time was right to strike at Steam, even as it dissed Google on Android. For its part, Discord, recently valued at over $2 billion, had seen massive success in developing a voice-and-text chat service that lots of gamers liked better than Steam's built-in tools, giving the startup its own leverage into the games market.

To be sure, both companies have their work cut out for them: Attracting developers away from the mighty Steam is going to be no small task, tantamount to asking them to cut out their most proven audiences. Still, those more favorable terms of business is already proving attractive, as Epic especially has locked in several exclusive titles, like the anticipated "Hades" from Supergiant Games.

If these upstart gaming stores find success with giving developers a bigger piece of the pie, you can be certain that you'll be hearing a much more public airing of grievances about Apple, Google, and anybody else who takes a big cut of store revenues. And more directly, Steam, which once seemed like it had a perpetual stranglehold on the PC gaming industry, suddenly looks very vulnerable, indeed.

The video game console is vulnerable, too

The dedicated video game console has been a mainstay of the industry for decades. While the business is definitely cyclical, it's weathered would-be crises - like the advent of the smartphone boom - and kept on trucking.

Now, Sony and Microsoft are working on the next generations of PlayStation and Xbox, respectively. But the stars are aligning to, perhaps, make this the last generation of traditional video game consoles.

The surest signs yet come from Google and Microsoft, which are both gearing up to offer their own cloud-based gaming services. Essentially, these services would do the hard work of actually rendering the game in their own, massively powerful data centers. Then, the video gets streamed to your device. When you move the controller, the signal goes back up to the cloud, starting the cycle over.

Kevork Djansezian/Getty Images

Microsoft Executive VP of Gaming Phil Spencer has been spearheading the Xbox Game Pass push.

This has several implications. First off, it means that any device, regardless of computing horsepower, can theoretically run any game - after all, it's Google's or Microsoft's cloud that needs to have the cutting-edge graphics hardware, not your phone, tablet, or computer. Google has been testing it with the graphics-rich "Assassin's Creed Odyssey," and by all accounts, it works a treat. Just open a Google Chrome browser window and get playing.

All of which implies that future blockbuster-quality video games could be playable from your phone, on the go, anywhere. It's been tried before, sure - notably the failed OnLive service and Sony's own PlayStation Now - but the incoming rise of ultra-speed 5G wireless internet could make it more feasible, even as "Fortnite" proves that more people, especially the younger crowd, will embrace the smartphone as a gaming platform...for the right game.

And while the video game console might stick around, it could mutate: A console would no longer need to pack a ton of computing horsepower into a package that costs hundreds of dollars; it could theoretically be a smaller, cheaper package that mostly exists to provide a link to the cloud. Again, this has been tried before to little effect, notably with the Sony PlayStation TV, but times have changed and the market has evolved.

Finally, this brings us back to Microsoft and the Xbox Game Pass.

It's not hard to imagine a world where the Project xCloud gaming cloud service and the Xbox Game Pass dovetail: Imagine a world where you pay $50-$100 for a console and $10 a month for games, and get every (or, at least, most) big-ticket new release. It's a world that might not be so far away, given that Microsoft is already experimenting with providing the Xbox and Game Pass for a monthly fee. It could be that new model that Microsoft has been looking for.

So, to recap...

To lay it all out:

The PC gaming industry is in a time of upheaval, in a battle for a better revenue sharing model that could have ramifications for Apple and Google, too. As a result, Steam, once thought unimpeachable, is under unforeseen pressure, as "Fortnite" developer Epic Games pushes its leverage hard.

Video game streaming is looking increasingly ready for prime time, in a move that could bring big-budget gaming to the smartphone in your pocket. This could mean that the next generation of Xbox and PlayStation will be the last to resemble what we currently think of as a video game console.

And the very business model of games could be subject to a shakeup, as Microsoft's Xbox Game Pass points the way towards a new way to pay for video games.

It all means that nothing is certain, and just about every aspect of the business is in flux, as we enter 2019.

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