One Bad Apple Could Ruin the Future of Tech

Hey, everybody, and welcome to the post-election world. Shot? It’s just as uncertain and hectic as the pre-election world. Chaser? You’ve survived this many days of 2020...you can power through the last of it. Let’s do this.

This week, we’re tackling the gaming industry, and not just because everything feels like a simulation these days. By some estimates, the global gaming industry could be worth $257 billion by 2025. But in gaming as in life, everything is in flux—the industry is in the midst of a massive shift in business models, multiple technological revolutions, and the fight of a lifetime against streamers for our attention.

And that’s just the beginning.

On Tuesday, you’ll hear from Larry Hryb, director of programming for Xbox Live. He’ll give staggering context for just how much time we spend gaming (read: an insane amount) and what that means for the future profitability of the industry. 

On Thursday, you’ll hear from Ethan Kurzweil, a futurist, gaming expert, and partner at Bessemer. Our conversation starts with a deep dive on metaverses and the alternate realities gaming creates; it ends by illustrating how gaming influences tech everywhere, from food delivery apps to airport check-in.

My gaming experience prior to recording these episodes consisted of a couple turns at Guitar Hero to impress my middle school crush. By the time I finished recording, I was ready to bet it all on gaming—perhaps the last frontier in our attention economy. Let’s get into it.

One Bad Apple Could Ruin the Future of Tech

Sometimes asking “are we exclusive” is tough. But when you know, you know. And starting decades back, the gaming industry knew—exclusivity was inevitable.

Companies from Nintendo to Sony have long used platform exclusivity to drive sales. The gist: Certain game titles are only available on certain consoles—for example, if you want to play Halo, you need an Xbox. Engineered exclusivity meant that hardware and software sales could grow in lockstep, ensuring a cushiony bottom line for gaming incumbents with captive audiences. 

But we’re entering a new era. Increasingly, the gaming industry is going all-in on cloud-based gaming that enables us to transition seamlessly from high fidelity console gaming to high-ish fidelity mobile gaming.

It’s part of the industry’s inescapable strategic shift to meet customers where they are...and where they are is increasingly not in the basement in front of a console and plasma screen:

• By 2023, about 3 billion people, or 39% of the world, will become gamers, according to reporting from the Brew’s Jamie Wilde. 
• That many people mean more kinds of gamers playing on more kinds of devices, and the door to the cloud swings wide open.

“We want as many people to play our games as possible,” Larry Hryb told me. “That's the end. That's all that matters.”

It’s an attitude Xbox shares with its competitors: People are mobile, so gaming needs to be mobile, too. Proof? The console gaming market is expected to grow at the slowest rate since 2015 this year, even with the hotly anticipated releases of new consoles from Microsoft’s Xbox and Sony’s PlayStation.

“If you're going into business in 2020 just to sell a console, just to sell plastic? I don't really don't think that that's the long game. You've got to sell games and the services that people want to absorb wherever they are,” Larry said. “That's the future.”

This upends the expectation of platform exclusivity. Cloud gaming means playing what you want where you want. When you sub a smartphone for a console, everything could change.

The ensuing scale-back of platform exclusivity is a win-win-win:

• Winner 1: the Microsofts of the world. The recurring streaming subscriptions that enable cloud gaming are a reliable, high-margin form of income that allow tech companies to diversify their revenue away from the sale of consoles (which are expensive to get to market).
• Winner 2: the developers. They get more creative freedom to build games that come to life on any platform.
• Winner 3: the gamers. They’ll be unshackled from an outdated business model that rarely serves their best interests—they’ve long been expected to fork over $400+ every couple of years to update their consoles.

But...if it sounds too good to be true, it is. Platform exclusivity isn’t actually going away, it’s just changing shape. And that shape is an Apple with a bite taken from the side.

Just as the gaming industry is trading platform exclusivity for cloud-based gaming for all, Apple is stepping in as the new arbiter of exclusivity in mobile gaming, an invaluable corner of the industry. 

• Invaluable = mobile games constituted 60% of revenue for the global video game market last year.

By ruling its App Store with an iron fist, Apple is excluding some of the best innovation the gaming industry has to offer. Time and again, Apple has smacked developers and publishers with enormous fees for App Store listing, which in turn sends those developers and publishers into the open arms of other operating systems. 

It’s like Xbox and PlayStation all over again, but with fewer cords. Apple is the sentry for over 100 million iPhone users in the U.S. alone, and it only lets game makers in for a hefty price.

We’re watching a prime example play out in real-time—Apple vs. Fortnite maker Epic Games.

• This summer, Epic CEO Tim Sweeney started calling Apple’s App Store a monopoly (it famously takes a 30% cut of in-app purchases).
• In August, Apple removed Fortnite from the App Store after Epic broke Apple’s rules by offering a direct payment option for its in-game currency.
• Epic then sued Apple, alleging anti-competitive practices. 

It’s one example of many—even Facebook’s recently launched cloud gaming isn’t available on Apple because of App Store terms and conditions.

So Apple needs to improve its relationship with publishers and developers. There are two reasons change is necessary—one is logical, the other moral.

The logical: Apple needs services revenue to buoy waning hardware sales. Reducing the cut it takes from in-app purchases like those made in games might result in a short-term reduction in revenue, but think of the long-term—we’ve spent more time on Fortnite than human ancestry has been on the Earth. There’s plenty of money to be made on Apple’s behalf.

The moral: By limiting gaming’s reach, Apple is actively mitigating the next-gen tech gaming brings to the table. Because, although we consistently look to the Googles and Apples among us for hints at what will change the world next, cutting-edge tech comes to life in gaming first. Ethan Kurzweil will explain on Thursday.

The bottom line: Reducing platform exclusivity also reduces friction for gamers and potential gamers. If Apple or any other tech gatekeeper wants to benefit from the continued gangbusters performance of the gaming industry, they need to create a more hospitable environment for developers, publishers, and gamers themselves.

Listen now.