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Michael Pachter, currently at Wedbush Securities, has been an analyst on video games for decades, and he is never shy about sharing his opinions on what has become a $137.9 billion business, according to market researcher Newzoo.
While he’s pretty loud, he’s also astute when it comes to his observations about games and the inner workings of big game companies such as Sony, Microsoft, Nintendo, Electronic Arts, and Activision Blizzard. I did a fireside chat with Pachter at the recent Video Game Bar Association event in Los Angeles.
We talked about disruption coming in the competition between the core game companies and the big platform owners like Amazon, Google, Facebook, and Apple. We talked about the opportunities in cloud gaming and subscriptions. We touched on blockchain and cryptocurrency and their effect on games. And we chatted about the hype around esports and where the true opportunities lie. And I shared my own opinions too.
Here’s an edited transcript of our interview. And FYI, we’ll have a breakfast about cloud gaming at E3 on June 14. Ping me on Twitter at deantak if you are interested in attending.
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Audience: What’s the biggest disruption you see in the next two years of the game industry?
Michael Pachter: Two years is maybe early, but this is happening, 100 percent happening. The CPU in this thing is faster than a PS2, by a lot. Probably close to a PS3. If I had an iPhone X, if I wasn’t so cheap, it would be faster than a PS3. GPUs aren’t there yet, but any laptop or desktop kicks the crap out of a PS4 or Xbox One. All these devices we’re getting in our homes, like Google Home and Apple HomePod and Apple TV, anything that Alexa can talk to, those are going to have GPUs. The Echo Show already does. Which means we don’t need consoles.
That’s pretty disruptive. Obviously you can buy an Echo Show for $229 or whatever they cost, or you can buy an Xbox One for $249. You’re not saving that much. But if you’re a kid you can talk your mom into why you need an Alexa-enabled device because you want to know what the weather is in Chile that day or whatever.
Amazon has sold something like 20 million Echos so far. Apple’s got about 40 million Apple TVs. Google obviously is all over it. I would say in two years, you’ll have 100 million of those devices out there. If those companies tell you, “Hey, by the way, want to play Call of Duty? Just download it to your device and we’ll send you a controller to play it,” that will expand the addressable market for games exponentially.
I’d say it’s probably five to seven years of migration, but the game market becomes anybody with a PC or a laptop playing on their television like it’s a console with a controller. That just removes the console purchase as a barrier to entry. You want to be selling software into that. That’s a software developer’s win.
Think of this like the movie industry in the ‘40s, where the only place you could see a movie was a theater. It took 65 or 70 years for television, VCR, VHS tapes, DVD, pay-per-view, on demand, then streaming. But you get all these windows now for a movie. They don’t talk box office at studios anymore. They talk ultimate, because they think about all the ways people see a movie. That’s what we’re going to be talking about for games. That’s disruptive.
You’ll hear about this in two years. In 2020, somebody is rolling it out, whether it’s Amazon—Amazon is so far ahead of everybody on this, as they’re ahead of everybody else on everything. This matters to them. They’re going to make it happen.
GamesBeat: I’d say the same thing, except I’d put it in terms of the intentional game companies versus the accidental game companies. Sony, Microsoft, and Nintendo I see going to war with Google, Apple, Amazon, and Facebook. If those guys, the bigger guys, ever really wake up to the opportunity that they have in games, then I think they could come in and crush Sony and Nintendo. Microsoft has a nice cash cushion that protects it against potentially anti-competitive behavior. But those big guys coming in and giving away stuff for free could be very disruptive.
Pachter: Microsoft’s moving in this direction with Xbox Anywhere, Windows 10. If you have Windows 10 and you buy a game on your Xbox, it’s on your desktop. They’re way ahead. They know this is coming. They’re trying to figure out how to participate. They have a cloud business to defend, but they also have a cloud business that will allow this to happen.
It’s Amazon or them, I think. I don’t think Apple has the first clue what they’re doing. Google is doing too many things. Amazon is focused. They must have 500 people working in their games division. They’re on it. It’s all part of the Alexa ecosystem. I think Amazon wins. But I agree. Microsoft is going to make a run at it as well. It’ll probably be multiple players.
You just want to be Activision. You don’t care where people get Call of Duty. It’s just like Disney doesn’t really care if I see Black Panther in the theater or I buy the DVD or I watch it on pay-per-view. Even if I watch it on commercial television, I’ll buy more Black Panther merchandise. They’re all over it.
Audience: But ultimately Disney does care if you watch Black Panther on Netflix, or whatever they create for their subscription model. If we extrapolate from there, how are the people in this room that are making triple-A content going to be able to actually make money when you flip to a subscription model?
Pachter: Something you learn in your first year of business school—it’s a topic that made no sense in business school and makes perfect sense now. Linear programming. It’s coming up with multiple revenue streams and figuring out how to maximize profit if you have all these different revenue streams. The movie studios are masterful at it. That’s why we have Windows. That’s what’s going to happen to game companies.
The game companies are going to figure out—is there a Netflix window for a game? Is that where they want to do it? Maybe they won’t make as much. This is why commercial television broadcast of movies doesn’t happen day and date with theatrical release. It happens 14 years later. You have cable channels that get it early. You have HBO getting it after a year. The game companies will have to learn and figure this out, but they’ll maximize profit.
The point is that there is a person someplace – let’s say some 40-year-old Italian guy – who has a job and a wife and three kids, and he doesn’t have a console because his wife would kill him if he brought one home, and he loves FIFA. That’s the only game he would play. If he could buy FIFA and sneak it in and play an hour a week, he’d pay the 50 euro for FIFA. You’re going to deliver that to him.
GamesBeat: Do you see the Nvidia Shield as that box, as it is now? Or some version of that?
Pachter: Honestly, when they took my headphone jack away, these bastards—I bought the little docking station because it has a headphone jack. I work from home and I use a headset. I look at that thing and I think, if it was just this thick instead of that thick, it would have a GPU and it would be plugged in all the time. So yes, my phone can be the CPU and the docking station can be the GPU, and this thing could Bluetooth to my TV, instantly. I think this is what’s going to win, ultimately.
The problem with GPUs is that an Xbox GPU is about as thick as my phone with an extra battery pack. It would absorb this battery in about three minutes, and it would burn a hole in my pocket. But if you look at an Echo, why is that thing crosshatched and vented? Because it looks cool? No, because there’s something in there. I’ve never seen a teardown of it, but there’s something in there.
GamesBeat: So we’re going to have this battle of the docks, then?
Pachter: Yeah, of course. Because I am that old, I got my first real console, an NES, in 1985. I got my first PC in 1986. My NES was $300. My computer was $3,300. I remember that. I was making $100,000 and it was still a massive expenditure. It really mattered to me when I bought it. I had to have a console if I wanted to play games.
I have 19 CPU/GPU combinations in my home right now. I counted. Not counting the TVs. Real fast CPUs. We have four phones, six laptops, four tablets – my kids had to have Apple and Android — and a desktop. All those things will play games. It’s just stupid for consumers to have to buy consoles. They will, because they’re loyal, but when Apple tells them to play games with Apple, the Apple fanatics will do it that way.
Audience: Shifting back to the present, is there anything that’s trending big right now that you think is overhyped and likely to turn downward?
Pachter: Overhyped, ahead of itself, esports. It’s real and it’s going to be big. It’ll be bigger than it is now. But the hype on esports is that somehow the sport—the sport is Overwatch. Esports is like saying sports, and then we talk about soccer and baseball. Esports is just talking about the whole thing. Overwatch is just a sport. The sport isn’t the broadcast medium. The sport licenses that out.
If you analogize to the NFL, the NFL does have the NFL Network, but they license to CBS, ABC, NBC, and Fox. They do that because everybody pays them, in the aggregate, billions of dollars a year to show that product. For Bobby Kotick to say he’s going to build his own network, that’s idiotic. He’ll say it, but he’s not going to do it.
To sell franchises, $20 million for the first batch and now they’re talking $30-60 million–what do you get? Is Overwatch going to be a thing in five years? Maybe. Probably not. Is the NFL going to be a thing? Probably. Soccer’s going to last forever. Why bet on a sport that might be women’s curling? Interesting only if you understand how curling works. I think esports is ridiculously overhyped right now, because it’s all anybody wants to talk about.
GamesBeat: It’s like all the attention shifted from VR.
Pachter: Right. VR is overhyped, by the way.
Audience: How about VR esports?
GamesBeat: We have VR esports.
Pachter: The trick with esports, to make it work, is to come up with a game that people who don’t play the game can watch and understand. I’m not sure that NFL football, in real life, is that sport, but we all watch it because our parents watched it. It’s cultural here. But it’s hard to follow. Overwatch is impossible to follow if you’ve never played it. League of Legends is harder, much harder. DOTA, much harder. I think, of all the esports, the one that’s most fun to watch is Counter-Strike. You get it. Blue dots kill red dots.
GamesBeat: That’s why Turner put it on TV. They concluded it was easier to follow than anything else.
Pachter: I truly think esports will arrive when somebody comes up with a new game that’s built bottom-up for viewers and is fun to watch. That will happen. Also, our kids are much more likely to watch it than we are. Their kids, even more likely than them. If my grandchildren grow up with my kids watching esports, yes, then it’ll become a thing.
Last night I was talking to some friends about the NFL. Pete Rozelle became the commissioner of the NFL in 1960 when he was 34 years old. We had a big talk about that. Why? Because the NFL wasn’t a thing. Nobody cared in 1960. The first Super Bowl was 1967. Nobody cared. Esports is about where the NFL was in 1960. Let’s get a Super Bowl. Let’s build an audience. I went to the first Super Bowl in Los Angeles. The stadium wasn’t full. It didn’t sell out. We went on free tickets. It’s not like that anymore. Esports is seven years before the first Super Bowl.
GamesBeat: Esports is commanding a third of the attention, maybe. I’m writing stories every week, every couple of days on esports. It’s only right now—revenues are one percent of the total worldwide game business.
Pachter: If that.
Audience: What do we see as far as demographics for game markets?
Pachter: Remember that the game ecosystem is divided up into console games that are analogous to feature-length films – they cost a shit-ton to make and you pay for them – and then the next batch of games is, let’s say, free-to-play games that have an objective. League of Legends, World of Tanks. That’s more like TV. You have to keep it going for a long time. Then the biggest bucket is free-to-play mobile games that are much more like YouTube videos. The joke in the mobile games business is you have to be able to start a session when you get in line at Starbucks and be done by the time you get to the cash register. They’re three-minute experiences.
The audience for those is billions and billions of people. One of the reasons Fortnite is so popular is because it’s free. It’s free and it’s T-rated. Once you know it’s T-rated–if you kill someone in Fortnite they don’t really die. They’re out. There’s no blood. Even if you hit them in a head with an axe, they’re just out. It’s pretty stupid. But parents let their kids play it.
The market is everybody. I was watching the Red Sox play the Yankees over the weekend. They were talking about how David Price missed a start because he has carpal tunnel syndrome from playing Fortnite. Tim Kurkjian, who’s 61, younger than me, says, “I’ve never played a video game in my life!” I thought, “God, how many more years will we still hear that?” In about 10 years, he’ll be dead. Then there is nobody left who hasn’t played a video game. In 50 years everybody’s going to play video games.
My wife, who calls every game I play “that fucking game,” because she doesn’t know what any of them are—my wife is addicted to Candy Crush. She’s level 1500 or something. She plays it every day, multiple times a day. She spends money. My wife went from “that fucking game” to she’s a gamer.
Audience: You’re saying it’s ubiquitous.
GamesBeat: The average age is 38, right?
Pachter: Right, but including all these mobile gamers. The thing is, the guys who grew up as teenagers playing Call of Duty in 2006 and 2007, now they’re in their 20s. They’re still playing. In 10 years they’ll be in their 30s, still playing. I don’t think that goes away. They’ll get jobs and have demanding lives – kids, spouses, all that stuff – and that’s why going off console is going to save them. But they’re going to be playing games. I think the demographic is awesome.
GamesBeat: Demographics are part of the argument around why esports is getting so much attention now. It’s attractive. There are 165 million viewers for esports in 2018, and that’s projected by Newzoo to go to 550 million in three years.
Pachter: That’s crazy.
GamesBeat: The millennials have dropped out of TV, right? They’re watching something, though. They’re watching their favorite games being played. For the longest time the knock against esports was that it’s never fun to watch someone else play a game. It’s more fun to play the game yourself. But then Twitch came along and changed all of that. 100-million-plus people watch each other play games every month.
With esports, then, all of the traditional sports owners are diving in and investing here. I don’t know if you think Ballmer’s $2 billion purchase of the Los Angeles Clippers was a smart move, or maybe the last move of its kind. Robert Kraft, the Patriots owner, the Mets owners, the 76ers owners, they’ve all made investments in esports teams. They’re expecting that this audience of hundreds of millions of people is going to monetize. The problem, I think, with the NBA now—say the NBA can monetize their fans at three to five times what the esports fans are monetizing at in a given year. The esports fan spends $3-5, while the NBA fan spends $15-75. That’s the difference you see in the size of the industry.
But the owners are saying, “Look at these hundreds of millions of people. We think we’ll learn how to monetize them.” Whether it’s merchandise or other sorts of things. That’s the hype argument behind esports, why its rise is inevitable and why so many hundreds of millions or billions of dollars are going to be invested here. Not only into teams, but into platforms to serve the games, and venues as well. There are venues being built in Las Vegas right now just for esports.
Pachter: You guys know the sports model, which is the leagues are exempt from anti-trust. They’re co-ops. The owners split up the television contract. I don’t know that you get that in esports. I don’t know if it’s possible. Activision’s kind of doing it. But Activision, the league, says, “We’re going to keep half of the profit and give half to the owners.” There’s something wrong with that. The NFL, other than Roger Goodell getting his $50 million, doesn’t keep any money when it’s over. FIFA doesn’t keep any money when it’s over. They have plenty, but it gets paid out.
I don’t know how an individual company suckers these supposedly bright billionaires into investing when they’re not getting to keep all the fruits of their labor. I actually think we’re going to see anti-trust suits when players decide to switch teams. That’s going to happen. They have a contract now, but what happens when the contract is up? Do they have the right to perpetuity? That’d be an interesting legal case, but I think they’re going to lose, Curt Flood be damned.
Audience: I don’t know if I’ve formulated my view on this completely, but I think there’s a big difference between esports, if we think about it as somebody owning an IP portfolio that has taken a lot of time and effort and creative and R&D to develop, and then sports like baseball and soccer—I’m sure a lot of time and effort originally went into formulating how those games work. But depending on the sport it was years ago.
Pachter: Yeah, they’re all public domain. But the NFL itself is not public domain. The organization is not public domain.
Audience: But the big difference I see is that the owner of an IP portfolio gets to create that product. Creating the game itself, making it better, seeing it involved is something that we, particularly as lawyers, have to grapple with. Maybe the answer is, as it evolves, it might be that the community gets to influence how that rev share works out.
But intellectually—I represented Sterling, which bought the New York Excelsior team for the Overwatch League. Intellectually I understood where Activision Blizzard was coming from. This is something they own. It’s their IP. They’re creating this new thing for the community. It might evolve over time. But I think it’s an interesting dilemma, to encourage creativity but at the same time allow the sport to evolve.
Pachter: Everything you say is right. I posed the question, “Will Overwatch be a thing in five years?” That’s the problem. If you sell an esports team and you tell the owner, “You have the right to any Activision IP forever,” that’s valuable. I trust Activision Blizzard to come up with something to replace Overwatch if it fades. But if you buy an Overwatch League team, what kind of a moron are you? How long until there’s a game that’s better? Next week? I don’t get why they’re buying these teams.
GamesBeat: There’s a way to invest, though, where you cushion yourself against that problem, right? If you’re the venue owner and you build an arena for esports, one week it’s H1Z1, and the next week it’s Fortnite, and the next week it’s PUBG. The owner is going to fill those seats regardless of which game is hot or not.
Pachter: This is why I think the sports analogy is the right one. I truly think, if you were to take all the esports that exist and then compare them to real sports—League of Legends is like soccer. About half the audience cares about League of Legends. One step down from that is probably all the Valve properties – Counter-Strike, DOTA, and Team Fortress. That’s probably 20 percent of all audiences. And then all of the Activision properties – Call of Duty and Overwatch primarily, with some StarCraft. That’s probably 15 percent. The other 15 percent is everything else. It’s women’s ice hockey and bicycle racing. You realize that each of those as a sport has a tiny audience.
When we hear the 165 million number from Newzoo, 80 million of them are watching League of Legends. Activision doesn’t own any of that. So why isn’t League of Legends selling franchises? Maybe they will. But like I said, I think that for the sport, for Activision to say, “We are FIFA, we’re the NFL, we’re going to dominate,” that’s remarkably arrogant.
Audience: We’ll see if this becomes the equivalent of real-world sports, which it might. We don’t know. In my mind – this is my personal view – it has to evolve, and maybe it will become what the NFL looks like now. It’s just not there yet.
Pachter: I’d say 10 years. It’s going to happen.
Audience: I have a 13-year-old son. I was going to take him on a trip, and I asked him, “If you had your choice, where in the world would you like to go?” He said, “I want to see the finals of the Overwatch League in Los Angeles.” We live the fact that there is a generation where that’s the same as watching Steph Curry play for the Warriors.
Pachter: It is for those people, certainly.
GamesBeat: The money in sports related to media is very interesting. What’s the money in games related to media right now? All the money is going to game companies. Until you had YouTube and Twitch coming along, there was no value that anybody else was getting from games. But now you have those, and people are making money independent of the game companies. That’s an interesting sea change.
It makes me feel good that a lot of people are going to create their own work for jobs that didn’t exist a generation ago, because they’re somehow fans of games. They’re getting paid to play games in some way. YouTubers, Twitch live streamers, cosplayers, esports athletes, attorneys and videographers for esports teams, all these people are in jobs that didn’t exist a generation ago. That’s fun.
Audience: Could you comment on the effect of GDPR on the industry, if it will have any?
Pachter: I guess they’re required to comply. [laughter] So they’ll comply. I don’t know that there’s much private data—the publishers probably have none. Maybe Activision has some through battle.net. But publishers honestly I don’t even think know the device. It really comes down to the console manufacturers. They know who downloads stuff, who logs on, who’s playing what game. It’s easy to protect that. I don’t think they do anything with that data anyway. I imagine they would if they were smart enough to figure out what to do.
Amazon is at bigger risk, because Amazon will advertise to you while you’re playing a game. They’ll say, “Hey, here’s a new pot or pan. Are you out of trash bags? Do you need some more?” That’s kind of scary. But I don’t think compliance, for the guys who aren’t using data now, is going to be very hard. They’ll comply, and they’ll develop their use of data in compliance.
I think GDPR ends up becoming de facto the rule around the world, because if you’re going to comply there you might as well comply here. I don’t know how onerous it is on U.S. use of data, but it doesn’t seem like it’s greatly troubling. Facebook is going to do the same thing everywhere, and if Facebook can do it, Microsoft and Sony can figure out how to do it. Data breach is a bigger issue. Sony’s had hacks before. I’m surprised Microsoft hasn’t had a hack yet, but you know there are guys trying it.
GamesBeat: I did a story this week about how DDoS attacks are still happening, because attackers are commandeering IoT devices. There’s 20 to 100 times more devices that you can marshal for $10 or something like that to attack somebody now.
Audience: I work at a mobile game company, and we have a lot of advertising-based games. GDPR is going to have a big effect on that whole system.
Pachter: I guess you do, because you know who the person is through the device.
Audience: Right. A lot of the industry is based on behavioral advertising and using personal data, and now there’s additional consents and additional barriers.
Pachter: I have to say, I’m blown away. I literally, today, activated Facebook and Twitter on my laptop. I did it yesterday too. Today I had to sign in to each. Blew me away. On the same laptop. I didn’t cut off the connection. They must have updated something, and they’re making me do this every time. I had to check a couple of boxes. I’m not sure what I checked, but I’m sure I gave permission for something. [laughs] I’ve been noticing that a lot, though, on Facebook and on tons of apps on my phone.
We were joking when Klout shut down this past week. When Klout announced it was shutting down, something like 10 million people went to check their Klout score before it disappeared. Immediately, when I went to Klout, it asked me for all these permissions to use my data. I’m like, “Fuck you, no,” and I just deleted it. I haven’t been on it in two years. It reminded me that even they’re doing it. I think that’s the way out. Just getting people to opt in. If they want to play your game, they’ll opt in, if it’s free.
Audience: I don’t know if you saw the Supreme Court striking down PASPA this morning. What do you think as far as the impact it might have on games?
Pachter: Skillz is doing skill-based gaming, which is obviously different. Betting on the chance outcome—ultimately I think that esports gets much more interesting if you can bet. I’ll defer to you guys’ judgment, but I assume each state has to legalize it, and states can still make it illegal. I don’t know what our state is going to do. I can guess what the great state of Texas will do. You can’t carry a beer out of a restaurant, but you can carry a gun in and out. I would think you won’t get very many states legalizing sports betting, but you’ll probably get the tax-hungry ones. If you get sports betting, esports betting will be a lot of fun. That’ll bring a lot of interest.
GamesBeat: I’ve heard the statistic that illegal sports betting is $150 billion a year in the U.S. alone. The whole game industry worldwide is $138 billion. Rahul Sood is pretty happy today. He’s the founder of Unikrn. It’s a company that combined esports betting and cryptocurrency. He’s got all his buzzwords covered. But it’s all legal for him now.
Audience: What’s your thought on Robot Cache and this distribution model of allowing resales?
Pachter: I think that they came up with an elegant and ridiculously simple solution to a problem that was insurmountable by cutting the publishers in on a resale of a digital copy. I think the publishers are interested. I don’t think that the seller is going to be pissed if he only gets 50 percent of the value and the publisher gets a chunk and Robot Cache gets five percent.
Publishers are going to put limitations on it. You might not be able to sell a digital copy in some launch window for a game. But they’ll probably let you do it a year later. I think it’s super smart.
GamesBeat: It was smart of them to give the publishers a say as well. Steam really pisses some game companies off, just by setting any price it wants for a sale.
Audience: The idea of reselling a game without any degradation in quality is an interesting model. How does a resold game fare against a new game in the same market when there’s absolutely no difference?
Pachter: If the publisher gets a big cut, I think they’ll be less concerned. I think they get it. Microsoft’s Game Pass came up before. Game Pass isn’t Microsoft trying to make money from 10 bucks a month. Game Pass is Microsoft trying to get publishers to rotate games through, so there’s a value proposition for the consumer, and the idea is—I don’t know if they have this game. But if you can get Red Dead Redemption from 2010 in Game Pass for the three months before Red Dead 2 comes out, is that consumer more likely to buy Red Dead 2? The answer is yes. Microsoft knows that and Take-Two knows that, so they need to agree on some kind of revenue split to get the old game in there. But it really works.
I have to say, I play a ton of games, but I don’t play every game. I’ve never played an Elder Scrolls game. If there was an Elder Scrolls game in a subscription I was paying for, I’d try it. That’s the whole beauty of these plans. They’re trying to get gamers more engaged. I think the same is true of used games. If you get someone to try two versions ago and they like it, they’re more likely to buy the current version at full price.
Audience: What’s your sense, collectively, on whether the pressure to regulate loot boxes is here to stay? Some people will put forward the theory that what we’re seeing now is momentum that was generated by a few very controversial implementations that have since been changed, and what you’re seeing come out of Belgium and the Netherlands is just a natural conclusion of an investigation that started back in the wake of that controversy. Will we continue to see movement, either abroad or here in the U.S., or will it just peter out?
Pachter: There are three alternative outcomes for what’s going on with proposed regulation and legislation. Either the publishers comply and get rid of loot boxes, which I think is a low-probability outcome, or they fight, which I think is a high-probability outcome, or they withdraw from those countries and let the consumer bitch and moan, which I think is the most likely outcome.
If you withdraw from Belgium and tell your Belgian fans, “Sorry, your idiot elected officials have bounced us out of here and we’ll go to jail if we market our game, but here’s a link to a French website and you can play the game in Flemish there,” I think that consumer backlash will just defeat this. My bias—this stuff isn’t gambling. It’s just the wrong outcome. I get how, if you pay for something and you have a chance of winning something of value, that’s gambling. The thing you win, by the terms of service, has no value.
I was talking to Joseph Olin outside about how I wish I’d kept my 1978 Porsche 911S, because I sold it for $12,000 in 1990 and it’s worth $60,000 now. But it’s not worth $60,000 now. It’s worth $8,000 now. There’s just some idiot who might be willing to pay $60,000. Who cares if a skin is hard to get and a collector wants it? It has no intrinsic value. They’re going to win. They’ll absolutely win these things if they litigate. But again, do you want to go through the pain, or do you just want to modify the model?
Why are there loot boxes? Because consumers are stupid and they’ll spend thousands of dollars trying to get that hard-to-get thing. If you put it up for sale for $500 they won’t buy it. I mean, I actually think the Chinese solution – posting the odds of getting each item – is the right way to do it. This thing has a 1-in-250 chance in the loot box, or you can buy it for $250. Then people realize, I have to buy 250 loot boxes for $600 to get it? Then they’ll just buy it.
GamesBeat: It’s like putting the calorie counts on the menu at McDonald’s. I still buy it, though.
Pachter: In the U.S., there’s very low probability anybody passes legislation to regulate loot boxes. The guys in Hawaii are just fucking morons. They’re morons. They should not only resign, but they should kill themselves. They’re so idiotic. Seriously. They’re such morons. One of the two idiot legislators said—I forget the studio. But they said something like, “EA shut down my favorite studio in 2005 and I’ve hated them ever since.” He said that on the record. We’re going to legislate against loot boxes? What an asshole.
By the way, their solution was, loot boxes are gambling. Gambling is illegal under Hawaii law. Therefore you can’t buy a loot box until you’re 21. Does that mean you can gamble when you’re 21 in Hawaii as well? There’s no chance that law is upheld. They’re not going to get it passed, because somebody in that legislature actually went to law school. Somebody in their staff is going to look at that Hawaii law. They’re idiots. I don’t think any of that stuff happens.
GamesBeat: An interesting thing that’s going to happen, though, is that blockchain comes in and it gives you uniquely identifiable loot. One of a kind loot. Now that value is going to go skyrocketing, right?
Pachter: But why is it valuable? Because somebody wants it.
Audience: The difference there, though, is that if you tie in virtual currency or cryptocurrency to these loot boxes, it does have value now. You have the ability to take it out of the system.
GamesBeat: With Unikrn they have their Unikoin Gold, which is available in countries where it’s legal. And then they have the Unikoin Silver, which is just a virtual currency that can’t be cashed out. They just change that for each country.
Pachter: I don’t know what’s going to happen. I just know that the publishers are pretty resourceful. They’re going to come up with a way to make more money. The consumer is really stupid and they’re going to keep paying for this stuff.
I still think the most brilliant pricing mechanism I’ve ever seen is Fortnite. They create skins that have a limited life. If you don’t buy a skin by the end of the week, it’s gone forever. They charge 20 bucks. Brilliant. People are like, “Oh my God, I didn’t buy that last week and it’s gone! I’d better get the next one.” 20 bucks for a skin. Everybody emulates that, I think. If the publishers can find a way to make more money and eliminate chance, sure. They’d all rather make more money, is the certainty.
Audience: You say that in-game items don’t have any value because the terms of service say they don’t. But isn’t the nature of currency generally that it only has value because people believe in this?
Pachter: Because of the full faith and credit of the U.S. government. I’m far from an expert at gambling law. I’m good at gambling, but I’m far from an expert at the law. I should say I’m good at losing at gambling, but I gamble. I think most statutes say that you have to have the ability to reduce the item to cash. You have to be able to sell it to somebody. If you can’t ever transfer it, then it has intrinsic value to you, because you want it, but if you can’t sell it, it doesn’t have value.
I know the Ninth Circuit in Washington said coins that you win have value because it extends your gameplay. I think that’s a tortured result. But Washington state law kind of read that way, so maybe? I think if you win a skin in Fortnite and you can’t sell it to anybody, it has no value.
GamesBeat: EA’s CEO also said in his earnings call that they cooperate with the regulators who will go and shut down the illegal trading that is happening somewhere. They actively help defeat illegal trade.
Pachter: The trading all started in World of Warcraft with gold farmers. The gold farmers would get cool things and then arrange to meet you in the game. They’d drop it at your fee and you’d pick it up, but you had to pay them before they dropped it. Of course, Blizzard took steps to ban those accounts. They eliminated every single one that they got complaints about. It happens. But again, it doesn’t have value if you can’t sell it. It may have value to you, but if no one can buy it from you, no one can pay you for it, I don’t think it has value.
That’s my tax lawyer speaking. If you find treasure that can’t be sold, who cares what you think it’s worth? If you find a photo of your great-grandma from 1890, huge value to you, but no value to anybody else.
GamesBeat: The interesting thing in the past six months or so is that everybody has become aware that loot boxes can become a PR problem. If you look at the Harry Potter game that just came out on mobile, you go into your first big fight with something, and then at some point it stops the gameplay and says, “Do you want to buy some gems?” If you don’t want to buy some gems right now, you have to wait eight hours before you can finish the battle. It’s pretty egregious. It’s not illegal, but it’s creating a PR problem for that game.
Audience: To be fair, it’s more like eight minutes, not eight hours.
Audience: What you’re saying about the PR issue, it’s also a market opportunity. I’m reminded a little bit of the Blockbuster business model, charging people late fees, and people hated it, so they went to court. If you fight something in a court of law, you can still lose in the court of public opinion. It creates an opportunity for a Netflix or some other company to come in and say, “We’re not going to do this the way they’re doing it.” I feel like there has to be a sea change in the way developers respond and market their games. Monetization structures are going to be more up-front.
Pachter: I really do think you’re going to see a lot of emulation of Fortnite. Aside from the $20 vanishing skins, Fortnite has a Game Pass for $10. It’s a 10-week pass. You have 100 different tasks to complete, and some of them are super easy. You get a coin for each one. If you just do that, you get $10 to buy the next Game Pass, so it’s worth doing. You get three skins, three gliders, three weapons, and three backpacks. Then they’ll mix up the stuff you win, so people will get random, really hard-to-get things.
I’m interested to see if legislators say that’s a game of chance, because you get your $10 back. You can play Game Pass forever by spending $10 once. It’s super smart. People are going to see that somebody has that hard-to-get skin, and more people will sign up for the Game Pass. Epic told me 12 weeks ago that the one that started 12 weeks ago, they sold 5 million Game Passes the first day. $50 million in a day? That’s a good business model. I think a lot of publishers are going to copy that and move to cosmetics so nobody complains about pay-to-win.
Audience: You mentioned disclosure earlier. Assuming it’s not gambling, and in the U.S. it probably is not, there’s still two issues, which are the disclosure issue you touched on and the alleged addiction issue. On the disclosure, it seems like the problem for a lot of the companies who are monetizing loot boxes very well is there are no fixed odds. How do you disclose that? Do you have to change to using a true RNG? And on the second issue, addiction, it’s interesting that the Netherlands said there’s a perception of addiction, but no evidence it’s actually happening. Any thoughts from a business perspective on how to deal with those two issues?
Pachter: Addiction is real and we know it. It’s intuitively obvious that all of us—I don’t think it’s a kid thing. All of us get addicted. Just look at Netflix and binge-watching. You stay up an extra hour because you want to watch one more episode. I don’t know that you ever overcome that. I think it’s a legitimate thing to regulate. But I think it’s a parental obligation to control what your kids do.
As far as disclosure, it’s really easy to come up with odds. They should just do that. They should just say, “One of every 250 loot boxes has this weapon or character,” and let people decide if it’s worth it. It’s not how they’re doing it now, but they all could. They’re doing it in China. Overwatch is doing it. Everybody can do it. I don’t think that’s onerous. I just wonder what happens to consumer behavior. It’s like the lottery. Do people play the lottery less when they know the odds?
Audience: What do you think is going to be the most important thing that comes out of E3?
Pachter: Nothing from the hardware guys. Other than maybe a bundle with PSVR and PlayStation 4. Plenty of games. But I don’t think—Wal-Mart Canada has already blown that, so we’ve already seen most of them. Activision probably will announce the next round of Overwatch League owners. The most lasting thing is going to be the Fortnite celebrity pro tournament, I think. That’s the night of my party. They’re doing it from 10 to 2 in the morning. I think we’ll be amazed at how many celebrities show up to play in that thing. It’s crazy. Roseanne plays Fortnite. Reese Witherspoon plays Fortnite.
GamesBeat: I’m curious if somebody comes up with a Fallout Shelter marketing bonanza again. Something that launches there and is immediately available.
Pachter: That game is Warcraft Mobile. But Blizzard will never announce anything at E3. It’ll be at Blizzcon. That’s the Blizzard game that will knock everybody out. But there’s nothing big. It’s just a good event to draw a lot of media attention to the industry.
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