What Games like Fortnite are Teaching us about Economics
Everyone knows that video games are big business, but not everyone realizes just how big and influential the medium has become. In 2018, video game revenues hit $43 billion, surpassing the projected revenues for both the box office ($41.7 billion) and online streaming ($28.8 billion).
But it’s not just their ability to generate profits that makes video games stand out. Gone are the days when they came in the form of a humble product that you’d purchase at a store. A cartridge or a disk of some sort. Today video games are a lot more than this. They are virtual spaces, social networks, marketplaces, economic communities.
Today games don’t just generate revenues for the companies that own them. They do that too, of course, but they also create fanatical interest that spills out onto other platforms like YouTube and Twitch. Games have their own media nowadays, their own celebrity analysts and sports stars.
They also feature digital items that players value enough to pay real money for and there’s a booming market, both legal and illicit, in these items.
Fortnite, which is currently the biggest online game in the world, generated between $2.4 – $3 billion in 2018 from a total of 200 million users. Just this year, it has gone from 200 million to 250 million users.
If Fortnite were a country, it would be 165th by GDP, between Bhutan and Central African Republic. If its 250 million users could be considered citizens, it would be 5th in terms of population. Between Pakistan and Indonesia. And that’s just Fortnite.
Academics are into them
One of the first academics to observe video games starting to mimic the dynamics of real world economies was Edward Castronova, who in 2001 published a paper titled: Virtual Worlds: A First-Hand Account of Market and Society on the Cyberian Frontier.
In the paper he discusses the economic activity of the game EverQuest. Released in 1999, EverQuest was one of the first massively-multiplayer online roleplaying games in 3D to achieve commercial success. It’s one of the grandparents of whatever online game the younger members of your family are currently obsessed with. Let’s have a look at Castronova’s description of Norrath, EverQuest’s virtual world:
“About 12,000 people call it their permanent home, although some 60,000 are present there at any given time. The nominal hourly wage is about $3.42 per hour, and the labors of the people produce a GNP per capita somewhere between that of Russia and Bulgaria. A unit of Norrath’s currency is traded on exchange markets at $0.0107, higher than the Yen and the Lira… Perhaps the most interesting thing about the new world is its location. Norrath is a virtual world that exists entirely on 40 computers in San Diego.”
Castronova’s prescient paper opened up an entire field of study. He alerted the world that there was something very interesting, economically speaking, in online games and virtual worlds that warranted further study. He was also one of the early commentators on their social importance.
“One does not study the labor market because work is holy and ethical; one does it because the conditions of work mean a great deal to a large number of ordinary people. By the same reasoning, economists and other social scientists will become more interested in Norrath and similar virtual worlds as they realize that such places have begun to mean a great deal to large numbers of ordinary people.”
Economists are working with them
Cut to 2012. Before Yanis Varoufakis achieved notoriety as Greece’s beleaguered finance minister, he was economist-in-residence at Valve when it was one of the most profitable companies per employee in the entire Unites States. He was hired due to his expertise and outspoken views on the European currency union.
Valve brought him in because they wanted to link the economies of two of their games together on their Steam gaming platform and allow users to freely trade in-game items with each other. Who better than Varoufakis for the job?
Varoufakis wasn’t the first or the only economist to work with a video game company, he was just the one destined to become the most famous. The first was Icelandic economist Eyjólfur Guðmundsson, who in 2007 was hired by CCP Games to oversee the economy of its EVE Online game.
EVE Online is another seminal massively-multiplayer online roleplaying game. Renowned for its complexity, players are able to explore thousands of worlds, specialize in in-game professions and interact with each other in a wide variety of ways, from trade to piracy. In a 2010 interview Guðmundsson explained how managing EVE Online is similar to a real world economy.
“Basic supply and demand, all of those basic principles apply with any virtual world just like in the real world because we are dealing with real people… we have a universe of 330,000 people, that is participating in a player-driven economy and when it gets to this size, it has basically all the same characteristics as any other small-scale economy in our modern world.”
Quid pro quo
Obviously the academics aren’t into it for the love of gaming, they’re also getting something out of the deal. Both Varoufakis and Guðmundsson have discussed the fact that in real-world economics there’s often a shortage of reliable data, whereas virtual economies log everything that takes place, every law and regulation, every transaction and change in price. As a virtual economist all the data you could ever want is right at your fingertips. In many ways it’s an economist’s dream gig.
Varoufakis was even able to challenge some deeply held assumptions about equilibria during his time at Valve. While studying arbitrage opportunities in the Team Fortress 2 marketplace for digital items, Varoufakis was not only able to show that there were indeed arbitrage opportunities (no surprise there) but that these opportunities didn’t spontaneously iron themselves out as the conventional theories would expect them to.
In other words, markets may not be as efficient as we believe them to be and economies don’t tend towards equilibria excepting occasional deviations. This is an assumption that we have been laboring under since at least the last crisis and the implications of it being wrong and Varoufakis being right are far-reaching.
There are some interesting tensions between the creators, the economists and the users themselves. The desires of the owners are simple enough. They want these worlds to keep growing and keep attracting new users who spend more time and money there.
The economists don’t seem to be particularly avid gamers themselves, but rather see them as a fertile testing ground for economic ideas. While Varoufakis was able to conduct some interesting studies at Valve, Guðmundsson is on the record as saying that he was reluctant to run theoretically interesting experiments while at EVE Online because “the players would be upset.”
It’s the users, however, that the whole enterprise rests on. Without them there is no virtual world. Without the capital that they bring with them and the economic activity that they generate when inside these worlds, neither the developers, not the economists would have jobs. Remind you of anything? It’s the same basic conflict that you get between capital, managers and labor.
The users fall into a variety of groups, each finding different kinds of utility in all the time and money they spend to participate in these worlds. But one thing unites them, and that’s their passion for these places.
As Castronova puts it when describing the players of EverQuest in the early 2000s:
“Some 60,000 people visit Norrath in any given hour, paying for the privilege, around the clock, every day, year-round. Nearly a third of the adults among them – perhaps some 93,000 people out of Norrath's 400,000 person user base – spend more time in Norrath in a typical week than they do working for pay.”
So when an update renders what they enjoyed about a world obsolete, or when they are forbidden from trading the items they’ve earned by the companies claiming that they are their intellectual property, or when the games are discontinued altogether, users mourn the loss of places that were real to them in ways that the creators and economists simply don’t understand. Reality hits home and what they thought was their world is revealed to be someone else’s.
The crypto connection
If ever an industry were ripe for disruption, it’s online video gaming and the disruptor is certainly crypto. What, after all, is crypto’s promise? That these data structures can belong to everyone and no-one at the same time, that they can’t be tampered with, and that they can’t be taken down.
In many ways the tensions between players and developers are similar to the tensions between Facebook and its own users, or Central banks and citizens.
All the value in Facebook is generated by the user content and yet Facebook controls the whole show. People put their faith in the value of national currencies, despite not being backed by anything, only to have central banks increasing the money supply and diluting its value.
In virtual worlds the situation is even worse because it includes both of the above. Not only do the digital items that gamers value so much belong to the games companies, but so does the world itself. They can make more or remove existing items at will, and the same goes for any in-game currency like Fortnite V-bucks. Furthermore, if their business decisions are unsound or their product just gets old, entire worlds can be discontinued.
What’s the problem here? It’s scarcity, or lack thereof. Things are valuable because not everyone can have them at the same time. In the digital world things are only as scarce as the database that says they are. Except on the blockchain. This was one of blockchain’s biggest innovations. Digital scarcity.
On a blockchain like Ethereum, skins, trophies and other in-game items can be tokenized and thus made digitally scarce assets in their own right. These assets can exist whether the game does or not. They can also possibly be carried over into other game worlds. This is easy enough to do and would allow the value of these new digital assets to float freely without the central intervention of a games company or its shareholders.
In fact, one of the funny bits of crypto lore going around is that Vitalik Buterin, the founder of Ethereum, actually created it partly because of similar shenanigans that affected his World of Warcraft avatar.
“I happily played World of Warcraft during 2007-2010, but one day Blizzard removed the damage component from my beloved warlock’s Siphon Life spell. I cried myself to sleep, and on that day I realized what horrors centralized services can bring.”
If you want to take things even further, entire virtual worlds will eventually be hosted on blockchains and be run by the community. It’s just a matter of someone coming up with a Fortnite-killer and allowing it to run in a decentralized manner.
Back to Fortnite
This is all well and good, however, if the Fortnite trend is anything to go by, then digital scarcity and ownership over their videogame labors may not really be what the kids are after.
Fortnite has managed to take over the world of online gaming while being simpler than any of the other games we have discussed throughout this article. 100-player battle royals that go on ad infinitum, with a tentative plot that allows the company to routinely change the world these battles take place in.
A company store that monopolizes the sale of in-game digital items that cannot be traded, do not have any in-game value other than the benefits of conspicuous consumption and are churned out and purchased for their novelty alone.
Why would Epic Games, the company behind Fortnite decentralize anything when it’s already doing roaring business? The answer is that it won’t, until it has to.
Earlier this year it was announced that Epic Games was partnering with The Abyss, a blockchain gaming distribution platform. This would open up Epic’s Unreal Engine to developers of blockchain games. While many took this as a sign that Fortnite would be joining the blockchain revolution, it wasn’t. It’s just a tiny first step towards bringing some of the benefits of blockchain to online gaming.
When something is already working, people are reluctant to change the formula. That’s why it took Facebook so long to show an interest in crypto with its own Libra coin. The same should be expected in the gaming world. Only when a game that properly utilizes the benefits of blockchain comes along, goes viral and raises the bar, will we see everyone running around to catch up. But it’s a trend for us to keep an eye on, especially as investors.
Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.