[Software] Services, not software, are the future of game enterprise tech

[_Happy boy]

 

Over the last few years, venture investor interest in the game industry has skyrocketed. The industry is no longer just about video games; as cross-media experiences like Fortnite have shown, game developers are embracing multiple forms of entertainment at once.

Game technologies like the Unreal Engine that power these experiences are supplementing traditional film, television and enterprise production tools, seeing extensive use in high-profile, high-budget shows like Disney’s The Mandalorian.

A common investment thesis among VC and PE funds interested in the space is that there are opportunities for enabling game technologies that resemble other enterprise software solutions, like Autodesk.

However, video games as an industry has not produced a publicly traded tech product whose profit opportunity is seat-based software licensing. Rather, Unity, Epic, and others who provide tools (such as Amazon and Microsoft) have shown that game technology businesses drive  services, platforms, and content which offer the potential for greater returns than enterprise software licensing.

Let’s step back for a moment and understand the opportunities for investors in games. Game investments typically fall into one of four funnels:

Content/publishing, which is where most of the value in the industry lies, now and in the future
Community platforms such as Twitch or Discord
Store and distribution mechanisms such as the Epic Game Store, Steam or the App Store
Enabling technologies such as Unity and Unreal Engine
Game content like Roblox or Pokémon Go have the potential to become something investors are very interested in, recurring revenue platforms. However, the content must be compelling and successful to become a platform. As such, content is a hit-based business that many software investors traditionally eschew.

Community platforms are a business that many startups attempt but few achieve, outside of those tied to hit content. Community platforms independent of content, such as Discord, have yet to find profitable business models — though they can get massive user numbers.

And distribution is difficult for startups to break into; big tech companies (Apple, Google), po[CENSORED]r storefronts (Steam, Amazon) and console makers (Microsoft, Sony, Nintendo) dominate this space.

So many investors have recently set their sights on the fourth business, enabling technologies that start with games but can spread beyond games. These investors, quite rationally, are looking to apply their general expertise in enterprise software toward game tech, assuming that enterprise software and games are similar.

The key assumption taking place here is that game tech follows standard technology growth models: highly scalable software that can produce recurring returns as usage increases, such as with non-game software developers like Adobe or Autodesk.

The industry, however, has proven largely resistant to the creation of a wide ecosystem for startups in game tech software. It is worth analyzing the historical context.

For much of the video game industry’s existence, game technologies were built by the lead programmer and an internal studio team, and considered part of a developer’s competitive advantage. Early Atari games didn’t credit their programmers for fear that their talent would be snatched away.

In the 1990s and early 2000s we saw a cadre of middleware developers build solutions (lighting, occlusion, sound, physics) for developers working on their own engines (or as plugins to up and coming Unity and Unreal), but none of these firms (e.g., Umbra3D, Havok, Simplygon, FMOD) have reached Adobe or Autodesk scale. And most are now gone or have been absorbed into other companies; Umbra3D was just acquired by Amazon.

This may be because there are not many game developers relative to the number of companies who need general enterprise software. Games are highly specialized software, and while the technology powering them is now becoming more ubiquitous in people’s daily lives, for much of the industry’s existence the technologies required were relegated to bit parts of a niche entertainment business.

As time passed, most of the value that was in middleware became absorbed into the professional game engines such as Unity and Unreal, along with recent open-source solutions such as Godot. This eliminated the dozens of companies comprising the game middleware market as we knew it, starting around 2010 and accelerating to the point where nearly all middleware solutions are sourced from four firms (Unity/Unreal/Amazon/Microsoft) in 2021.