Today is day 2️⃣1️⃣ of my 30 day writing challenge.
Yesterday, I wrote about the history and brilliance of Sequoia Capital, arguably one of the strongest venture capital firms to ever exist in tech. The company recently announced it would be splitting up into three entities primarily because of portfolio company clashes. The split is based on the different regions they are active in:
Sequoia Capital (U.S. & Europe) led by Roelof Botha
HongShan (China) led by Neil Shen
Peak XV (India & Southeast Asia) led by Shailendra Singh
Check out the full post here: "Picture yourself investing in Atari, Apple, Google, & Nvidia"
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For today's post, I decided to do some research into the gaming industry. Honestly, I've never been a gamer. Yep. Not Pokemon or Call of Duty or Fortnite or Madden. Nada. My only gaming credential is that I played a decent amount of Runescape when I was in elementary school.
However, it would be foolish of me to think that just because I was never hooked on games, there's no future in them. If anything, after doing only a few hours worth of reading, I'm so amazed by the growth of the industry that I almost want to go out and buy a PS5...or uhhh....wait....maybe an xBox?
I had no idea that the global video game industry generated ~$350 billion just in 2022!
And what's crazier is that:
The global revenue in the video games segment of the media market was forecast to continuously increase between 2023 and 2027 by in total 136.8 billion U.S. dollars (+34.53 percent). According to this forecast in 2027, the revenue will have increased for the fourth consecutive year to 533 billion U.S. dollars.
This post is by no means a primer or complete rundown of gaming. I just scratched the surface today. Primarily, I wanted to dive deeper into how gaming even started. The origin story of the PC is commonly told but not many people know the beginnings of gaming. I learned a decent amount and my guess is that even if you are an active gamer, there's probably some cool things below you didn't know (unless you were an avid technologist in the bay area in the 1970s) 👀
Father of Video Games
In 1972, Ralph Baer developed the first ever home gaming console known as the "Brown Box". This marked a new era in the world of entertainment. Now, it was possible to pass time on things other than listening to the radio and watching television. This breakthrough paved the way for games to finally move out of the arcades and into the living rooms.
What shocked me was that Baer was so ahead of his time that he actually first had the idea for the integration of gaming and television back in 1951...almost 20 years before the brown box launch.
In 1966, Baer had an epiphany while waiting at a bus stop. He remembered how, as a new graduate in 1951, he had proposed to the television company that employed him that they should build games into their brand of television sets to differentiate them from those of their competitors. The proposal was rejected, but, fifteen years later, Baer realized that the idea still had merit. By the 1960s, millions of Americans had invested in televisions for their homes, which meant that there was already a large potential market for a product that would allow them to interact with their television sets.
Baer ended up licensing the Brown Box to Magnavox, a US-based consumer electronics company, which then released the device as the Magnavox Odyssey. Although it didn't end up becoming a major hit and pull in the masses to gaming, it was the first crucial step that set the stage for the gaming revolution.
Atari, pong, & an expensive lawsuit
Atari Inc. was founded in 1972 by Nolan Bushnell and Ted Dabney, two innovators who had previously collaborated on an arcade game called Computer Space. The name "Atari" was chosen for its significance in the game Go, the strategy board game Bushnell was obsessed with.
In 1972, the same year the Magnavox Odyssey was released, Atari launched Pong. The game was a super simple, yet addictive table tennis themed arcade game (I'm sure many of you have played it or have stumbled onto a modern PC/mobile version). Pong ended up becoming an instant hit and was one of the first games to really bring the mainstream audience into the nascent gaming ecosystem. After Pong, Atari became one of the leading players in the gaming industry.
Don Valentine, founder of Sequoia Capital, made one of his first investments in Atari. It was his first exit after Warner Communications acquired Atari in 1976 and put his firm on the map.
Shortly after the release of Pong in 1972, Magnavox filed a lawsuit against Atari. Magnavox claimed that Pong had violated the patent for the Magnavox Odyssey because they had simply copied the Odyssey console. Magnavox said that Bushnell had access to a demonstration of the Odyssey before its release at a trade show in California. They ended up winning the case and as part of the settlement Atari became a licensee of Magnavox - meaning Atari could continue to sell Pong but had to pay royalties to Magnavox. The royalties have accumulated to over hundreds of millions of dollars!
The Golden Age of Arcade Games
From the late 1970s to 1983, all anyone could talk about in the gaming industry was the explosion of arcade games. They quickly became a cultural phenomenon and started showing up in bars and restaurants, used in movies, and even influenced music of the time.
The primary advancement was the complexity of the games. Pong started out as a simple back and forth concept, but by the mid 80s, games such as Pac-Man, Space Invaders, and Donkey Kong had all launched. The graphics also significantly improved and sound effects/music also became essential parts of the game.
During this time, there was also a huge shift towards the gaming communities that formed. High scores, competition, and leaderboards all became a crucial part of the arcade culture. Naturally, the momentum we're seeing with e-sports and the rising trend of gaming professionals are all downstream of the early OGs who dominated arcade games.
The Gang of Four
This was one of the most interesting tidbits I learned while going through the early days of gaming. Ben Thompson gives a pretty good breakdown of what happened in his Microsoft/Activision antitrust case post. Here's the tl;dr version:
Atari marketing team puts out a report of all the games Atari sold in 1978 and the percentage of sales each game had contributed to the company's overall profits.
Four of the top game designers, David Crane, Larry Kaplan, Alan Miller, and Bob Whitehead, realized that their games were responsible for 60% of the total sales! That amounted to $60 million in profit but each were only getting paid $22k.
They went to the CEO asking for some sort of royalty program and instead got called "towel designers" that think they're not replaceable.
The gang of four thought the "video game industry should function more like the book, music, or film industries, where the creative talent behind a project got a larger share of the profits based on its success"
This pissed off the game designers especially since the musicians were getting royalties on their songs. The four of them ended up forming...Activision!!
The formation of Activision was crucial as it marked the first company in the space focused on third party game development. Back then, everyone was focused on building a console. If you didn't have a console, it didn't make sense to design a game.
Gaming Crash of 1983
The video game crash of 1983, sometimes called the Atari Shock, was a massive recession in the video game industry that lasted from 1983 to 1985. The main factors leading to the crash were:
Market Saturation: The early 1980s saw a ton new consoles entering the market after Pong went viral. Also, there was a flood of games that were quickly and poorly designed that were rushed to market in order to beat out competition. This overabundance of games made it difficult for any one game or console to stand out, and consumers began to lose trust in the quality of everything that was being offered.
Competition from Home Computers: The decreasing price of home computers in the early 1980s made them an attractive alternative to game consoles. Games were just games but computers also had processing and programming capabilities.
Loss of Publishing Control: With the rise of third-party developers after the launch of Activision, there was no quality control for the games being released.
Gaming sales tanked from $3.2 billion to $100 million in two years!
The key takeaway from the video game crash was that it resulted in a power shift from American game developers to Japanese companies such as Nintendo and Sega.
The crash eventually ended when the Nintendo Entertainment System (NES) launched. Nintendo had learned from the previous industry failures and shipped the product under strict controls. And then, Super Mario Bros. launched in September 1985 and became an absolute hit (as we all know now).
That's all for today's post! Learning about the first decade of the gaming industry was super helpful to understand the context of many trends and problems we're seeing today. It's clear how important is it to understand the pros and cons of the centralized Nintendo model as well as the importance of the third party developer ecosystem.
Some things to note in terms of the future of gaming (I'll deep dive into these in another post):
Mobile is seriously on the rise! It generated $250 billion last year
Blockchain and on-chain gaming is starting to gain heat as gas (transaction) costs go down. This changes the way we think of gaming universes and interoperability.
Cloud gaming market growth rate last year was 62.5%
VR gaming is projected to reach $3.2 billion in 2024
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