More on Video Games, from a Disruptive Innovation Perspective

I have been reading Christensen’s theories on disruption. Some key themes of disruption are: 1) making a technology cheaper and more accessible, and 2) solving a problem that’s previously under-treated, or addresses a slightly different audience. Competing against non-consumption is a key theme as well.

So disruption is about creating value and diffusing it throughout society. You want things to be both cheaper and available to more people.

This also echoes “Crossing the Chasm”, where a technology leaps across the exclusive purview of early adopters and visionaries, and into the mainstream.

Disruption typically requires three things that are internally consistent and reinforce each other:

• An enabling technology
• A new business model
• A new value network (value chain) of disruptive players. Creating this often requires one strong company to vertically integrate the value chain and force industry changes.

From an investment perspective, picking winners means spotting industry trend changes, understanding the technologies and new business models that enable these changes, and then investing in a company that is part of the new value network of disruptors.

For practice, I'm trying to think through the video game landscape and apply these concepts. 

Video games - changes I’m observing

Two changes come to mind immediately:

• First, the value proposition and target audience of video games is changing, from teenage and college dudes in the basement shooting strangers, to a more inclusive (both adults and children, male and female) social experience.
• Second, costs have gone down dramatically. The proliferation of simple, low cost mobile games means people are conditioned to only paying a few dollars for games, if at all.

These fit the themes of disruption – a broader audience, lower cost access, and address problems that were previously unsolved (social needs instead of pure adrenaline rush).

The next questions are "what's technologies and business models fit with these changes", and "who's part of the disrupting value chain?"

(Apologies - the next couple sections are a bit messy because it's a bit of brainstorming)

Enabling Technologies and New Business Models

1. Enabling technologies- 

Internet is an obvious enabler that allows players to go online and shoot at random strangers, or team up with friends and strategize. This increased the social component of video games.

Network technologies continue to evolve. First, with CDNs (Fortnite uses Akamai), and now with full streaming (Google Stadia).

Another one I can think of is Nvidia’s ray-tracing chips. This seems to me a complementary technology for CDNs, where the ray-tracing capability can be done not at huge data centers, not at consumer’s homes, but at more remote (“edge” if you will) locations within CDNs.

2. Business Models

Free to Play (F2P) a revenue model that’s here to stay. This could be F2P with advertising, or F2P with microtransactions (loot boxes, battle passes, skins…etc).

Distribution is another obvious one. We went from buying game at physical retail stores, to downloading games at home, to now full on streaming.

Fortnite is potentially pioneering a whole new business model. With unique in game events like concerts, Fortnite real value could be as a “gamified” online gathering place that monetizes by selling tickets to events.

Value Networks - who’s part of the disruptive chain?

Now it's time to find parts of the value chain that benefits from these enabling technologies and (relatively new) business models. 

Let’s go from upstream to downstream.

• Hardware.  As mentioned earlier NVDA’s ray tracing chips could be used to bring top quality to mass market.
• Consoles are being disrupted by F2P model as well as streaming, so makers like Nintendo, Sony, and Microsoft will have to rely on their game development skills.

• Game Developers and Publishers.  
• Developers that grew up with low cost mobile games will fit well with the F2P paradigm. Zynga and ATVI’s King are examples. 
• Publishers with strong experience in online multi-player games have advantage.

• Streaming networks like Twitch, communication apps like Discord, or even Reddit amplify the social value of playing video games.

How to invest – Tencent and ATVI

Unfortunately much of this is uninvestible. I'd love to invest in Epic Games, or Twitch, but they are owned by Tencent and Amazon, respectively. Both are so big that the impact of Fortnite/Twitch would be negligible. 

I do like Tencent itself though. The company is integrated along games, social, and payments. That’s three competencies that define the future video game world. No wonder they saw the potential of Fortnite before it happened! They also have a stake in Garena’s Free Fire.

Activision Blizzard (ATVI) is one that I have a small position in. Their games like Overwatch will be disrupted by F2P model, but they do have the resources to overcome disruption if management tread wisely.

Fending off disruption requires disrupting yourself, and separate the new business into an autonomous entity. ATVI (like EA) already does that. Activision is a different studio from Blizzard, which is separate from King. King is quite familiar with F2P model. So I do think ATVI has the skills to thrive in the new world. But we’ll see.