Pod Insights a16z Podcast What's Next in Gaming About this episode John Riccitiello, CEO of the game software development company Unity Technologies, discusses the rise of esports and streaming, the potential of cloud gaming, and far-reaching applications for game technology.
Transcript 0:00 Speaker 00 The content here is for informational purposes only, should not be taken as legal, business, tax, or investment advice, or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any A16Z fund. For more details, please see A16Z.com/disclosures.
0:17 Speaker 01 Hi, and welcome to the A16Z Podcast. Today's episode is about the evolution of video game technology into a global phenomenon that extends far beyond entertainment. In this fireside chat, John Ricatello, CEO of the game software development company Unity Technologies, is interviewed by A16Z general partner Andrew Chen on the rise of esports and streaming, the potential of cloud gaming, and the far-reaching applications for game technology. This conversation originally took place at our most recent innovation conference, the A16Z Summit, and was also released on YouTube, if you'd like to watch it there.
0:51 Speaker 02 One of the really interesting things about Unity's early formation story is that a lot of its success started with adoption by indie developers and very small studios that's now scaled into AAA studios.
1:07 Speaker 03 Unity was originally a couple dozen people. We were the pipsqueak on the block, but a lot of indies found our tool super easy, and they could do prototyping and building content. If you fast forward, we've invested an enormous amount in technology. A couple dozen engineers have become 1,700 engineers, and that engineering power shows in products like Mario Kart Tour, Pokemon Go, Honor of Kings of Call of Duty.
1:30 Speaker 02 Many of the games that you mentioned are on mobile, but also desktop and console. The startups that we often meet at Andreessen Horowitz come in pitching cross-platform, multi-platform from day one. Talk about how you think that'll affect the industry over time.
1:45 Speaker 03 It used to be you played a game on your PlayStation or Xbox, or PC, or Mac, or iOS, or Android. What we're starting to see is games that are played from all those devices. That's increasingly an important aspect of the game industry, and they can consequently attract larger and larger audiences. At best, there's only a couple hundred million people in the world that will touch a console on a given generation, but mobile is well north of 2 billion. And when you combine those audiences, you get the people that pay the most to participate with the largest possible audience.
2:17 Speaker 02 It's really a massive expansion of the addressable market to be able to play a single game across all of these different platforms.
2:23 Speaker 03 It is. These markets are big. There are more players in the world than there are TV watchers or music listeners on a regular basis.
2:29 Speaker 02 Through your time in the game industry, what has been the set of most impactful changes that are driving it forward?
2:35 Speaker 03 I'd say the first is the scaling of the industry driven by technology. A decade or two ago, all games were 2D because you couldn't power a 3D game. You couldn't do online gaming. You couldn't connect to another live player. And for the most part, you were strapped to a device parked under your TV or a large desktop PC. That's not true any longer. Networks work better than they've ever worked before. 2D became 3D. What was non-interactive became interactive. Non-social became social. The second thing that has changed so much is that the underlying technology allows games to be real-time.
3:15 Speaker 03 If you try to create a picture in a traditional tool from an Adobe or an Autodesk or Pixar's Renderman, it might take an hour a day or a week to produce that frame based on the input. When you're playing a video game, you're creating a frame that's never been seen by another human being on this planet in the 60th of a second. When you're going to make something that's going to be interactive, it's got to have a system for rendering pixels on a big screen. It's got to have a system for animation. It's got to have a system for processing sound. It's got to have a system for bouncing light around. It's got to have a system for basic UI and UX. What Unity does is we create an underlying technology base
3:57 Speaker 03 that allows all of those things to happen instantly and easily so you can focus on the content. We composite the code. For over thirty platforms, from Oculus to HoloLens, Xbox to PC to Mac. And that vastly accelerates the speed with which one can produce and lowers the cost.
4:16 Speaker 02 The other big change that's happened in the games industry is you have Fortnite, League of Legends, Minecraft, that are really operated as services.
4:26 Speaker 03 The games and experiences got better and they got bigger. If you take a look at the television industry, whether it's Game of Thrones or Breaking Bad, there's more innovation unrestrained by ninety minutes you can see in a cinema because they're not constrained by packaging. And in the game industry, we're not quite at the point where we've left behind all physical media, but we're close. Increasingly, that's a silly and inefficient way to deliver content.
4:51 Speaker 02 In fact, games as a service approach unlocks the ability to build multiplayer experiences, to build social experiences. You're thinking about these products as your social network, right? It's the way that you're hanging out with with your friends.
5:04 Speaker 03 I totally agree, and I actually think the reason the game industry kept growing at that twenty, twenty-five, thirty, thirty-five percent compound growth rate is it was different than the other media for exactly the reasons you mentioned. It's different every time you play it. It's interactive while it's linear, so you're getting a much more compelling experience. You're playing against other live players, not just against AI. Humans are a much more interesting opponent than the AI that can be driven into the game by some designer. And they're social. More than any other media, gaming takes advantage of the most important technologies available to reach and retain an audience.
5:39 Speaker 02 The top games franchises are now thinking a lot about esports. We're gonna have teams, we're gonna have leagues, just like traditional sports.
5:46 Speaker 03 I believe the single largest category on YouTube is watching people play video games. Amazon's got a massive business on Twitch, which is allowing you to watch other people play video games. It is a massive medium that in time will rival television, which is completely crazy from any historical perspective. A lot of people want to talk about investing in esports and drawing an analogy to investing in, I don't know, the NFL or the NBA. And I do think the analogy is a tortured one. No one actually owns the NBA, Major League Baseball, the NFL, soccer. There's a bunch of individual team owners and they work together under sanction from the government
6:29 Speaker 03 to break down some of the anti-competitive rules that would otherwise preclude them from cooperating with one another. They have an exemption in the United States from Congress to create leagues where they can collaborate, compete, cooperate. What's different about esports is Tencent or Riot owns League of Legends. 100% every last share owned by one company. Activision owns all of Call of Duty or Overwatch. Electronic Arts owns all of the FIFA franchise and Epic owns all of Fortnite. And so ultimately, the economics of esports is different because it's not an aggregation of teams that make the league. It's the league that owns the teams.
7:11 Speaker 03 And in this case, the league is Activision, Electronic Arts, Riot, Take-Two, Bethesda, and they completely control how the economic outcomes are going to end up. It's not an unfettered competitive marketplace. It's one controlled by an individual capitalist that thinks esports is a marketing program.
7:29 Speaker 02 Right. It's fascinating, the recent deal that Ninja got from the Mixer. Huge amount of money, much, much higher than any esports player. It'd be the equivalent of if Harlem Globetrotter player were better paid than any NBA player.
7:43 Speaker 03 One of these look at YouTube subscribers. There are individual gamers with over 100 million subscribers. Two-thirds to three-quarters of what Netflix have in that of subscribers. So there's no question that there's something about the celebrity here that is monetizing better than what Brad Pitt gets in Hollywood.
8:03 Speaker 02 Absolutely. How does Unity think about emerging game markets and the international market? What do you think we can learn from them?
8:11 Speaker 03 So if you go back 15, 18 years ago, China had a very successful business in CD and floppy gaming, so physical media. And piracy completely destroyed the industry. A similar thing happened in Korea. These markets fell apart because there was no ability to protect intellectual property rights. What rose like a phoenix from the ashes was digital online gaming where you couldn't really pirate it. It was in a server and it required an authentication key and it required a number of technologies to access it. And Korea and China today are two of the three largest markets in the world for games, US being the third.
8:52 Speaker 03 They are staggering multimillion dollar businesses with high growth rates, but they're all digital. And with the rise of digital gaming and the technology innovation in Korea and China, some amazing businesses have grown up. Tencent is arguably in the same league with a Facebook, a Google, a Microsoft, or an Apple in terms of market cap and market impact. They're basically the Netflix of games of China. They started as a gaming platform, they're way more than that now. So they've metastasized in a positive way. And they're reaching beyond China in many ways. Some of the most important developers that are outside of the United States rival the biggest in the US. Exxon, dual headquartered in Korea and Japan, NetEase in China.
9:35 Speaker 03 Today, if you looked at the gaming industry for surging influence, you'd have to include China, you'd have to include Korea, you'd still include Japan, Northern Western Europe, and the United States. Then you've got markets like India where there's a lot of developers, not a lot of consumption yet. The market's now truly a global phenomenon.
9:53 Speaker 02 A lot of what people are so excited about now with Fortnite's free-to-play model and being cross-platform and building these core experiences on the mobile app, these are all ideas that were pioneered in Asia. And people were not even sure that it could be executed this way in the United States.
10:08 Speaker 03 I can't think of many industries that has as much innovation coming from as many different places. Exxon, the company you mentioned, probably does the best job of husbanding the value of players, looking at the long-term lifetime value of an individual player. NetEase's got some of the most important games in the world. Tencent created some admixture of if Netflix was a gaming platform and you were to marry it to a social network, then that's what you have in China. And that may be the future in some significant way in the West. But you've still got the most important AAA graphic compelling content coming out of two west coast company, Electronic Arts and Activision, and an east coast company called Take-Two.
10:52 Speaker 02 You've talked about this Netflix analogy a couple of times. One of the really interesting things that we're starting to see in the market is Epic Games kicked off a new store to download games directly. Valve has the Steam store to download games there. You also have Stadia. You're starting to see a lot of folks trying to buy exclusives. One of the things that we've seen with Netflix, Hulu and Amazon is how much money they've put into content. Do you think that these dollars are here to stay in the games industry? Or is this something that is a little blip as people are trying to bootstrap their store strategies?
11:29 Speaker 03 I think I'd frame the question a little bit differently. The app store model where you pay to download something runs directly into conflict with the notion we talked about earlier, which is those multi-platform games. So the idea that a game would be everywhere as opposed to captive on an individual download site like Steam or the Epic Store. First, the music industry has transformed fundamentally around Spotify, Pandora and other music services. The labels on a relative basis have lost a lot of value and the consumer relationship is with a platform company. Clearly in the film industry, television and theatrical content, there's a lot of money being spent by people like Netflix and Disney and Amazon and Apple that are trying to create
12:12 Speaker 03 a direct relationship to the consumer and disintermediate the producer of the content. And at least in music and in film, there's the old expression, content is king, but distribution is god. There's this notion that the distribution layer is more valuable. A lot of people believe that the game industry will end up in a somewhat similar way in time. What we don't know is Tencent going to figure out how to get global. Is someone like Google going to invest enough to become the Netflix of games in the West? Will companies like Electronic Arts and Activision and Bethesda and Take-Two, Western strongholds for content, will they build that direct-to-consumer relationship?
12:54 Speaker 03 There's no question there's an enormous amount of value in that direct consumer relationship. The skirmish is massive and the world's largest companies are chasing it pretty hard.
13:03 Speaker 02 So Google, Microsoft and Amazon now have various plays within games and Microsoft and Google are putting a ton of money into cloud gaming.
13:11 Speaker 03 Is there Netflix subscribers out there? Most of you, right? So when you got Netflix, did it really cross your mind? Or did it matter to you that it was streaming versus downloading? Maybe not. So when Netflix streams something to you, they use a technology called a codec, compression, decompression algorithm. They can shrink a movie down to a much, much, much smaller footprint. So they can send it compressed on a pipe and then decompress it in your home. And they can buffer in front of that, meaning they can delay it for a quarter of a second, half a second. So it can work well over a network to very smooth experience. And they can do that because they can look a frame in advance, 10 frames in advance, 100 frames in advance, 1,000 frames in advance,
13:53 Speaker 03 and reduce the size of the frame that would need to move because they know what's coming. In a game, you don't know what's coming. So you can't delay it half a second, a quarter of a second, or even a tenth of a second. Because if I shot you and you don't fall over, that's a problem. If I'm racing around the corner and I pass you and you don't know it, that's a problem. And so the first observation I would make is a lot of game types, first-person shooters like Call of Duty, the consumer would notice anything north of maybe 30 milliseconds. That's not a lot of time. You can measure the latency on your network. And there aren't, I'd say in this room, maybe 10 of you would have a consistent network connection that is faster than 30 milliseconds.
14:38 Speaker 03 So the gaming industry can't do streaming exclusively as easily as the movie and music industry because you can't compress it to the same degree and because latency is a controlling factor. So what I expect to happen in gaming won't be the big streaming solution, but people are going to end up with different solutions depending on the content type. And it'll live behind a brand like a Google or a Microsoft or a Sony or a Netflix. And sometimes they'll stream it. And sometimes it'll be a local application on a device that's in your home. If you play Candy Crush, why would a network bear the cost of a single-player game being delivered at a penny a minute when you can play it for free on your device
15:21 Speaker 03 and the only thing you're burning is your fingers on the screen? My sense is the gaming industry will form differently around the distribution mechanism because of performance issues, cost issues, and because some things don't work. You're going to end up with edge of networks, you're going to have central cloud, you're going to have on-device, you're going to see a blend of things come together.
15:42 Speaker 02 To your point, not only are we going to need technology evolution, but people are going to have to innovate on the content as well. 10 years from now, if cloud gaming works, it'll be this whole new genres that are unlocked.
15:53 Speaker 03 Novelists for years have been describing a world where you have a valid life in a digital world. And we've seen every possible indication that's in fact happening. And games are the most compelling place to do that. You can have a permanent house and a piece of digital real estate that feels like home. For a lot of your children, if not some of you here, their digital handle around gaming provides them a level of social status that is actually both exciting and a little bit scary. They're important in that world. Now, look, a lot of you have got an important job, you are what you are at work, go home and you're a dad, you're a mom, you're a brother, you're a sister, you're a child. You have a different social structure that you adapt into, and all the esteem that you
16:38 Speaker 03 have in the office is blown away by kids that say daddy. Right? Well, in the digital world, people have valid, legitimate purchase upon which they sit and live, and that's getting ever more important. Gaming is perhaps the most important media for that to take place because they are what they decide to be in that world. And increasingly, people are living in that space.
17:03 Speaker 02 Right. We spent a lot of today's conversation on games, but you're also doing quite a lot outside of games.
17:09 Speaker 03 We're beginning to penetrate architecture and engineering and the auto-design world and aerospace and other markets where they need extremely high-fidelity tools. So we can take things that might have taken hours or days to render and do it in a sixteenth of a second. Things that were a solo experience as a social experience, things that don't move do move. And that's driven by the ever increasing power of multi-core CPUs, multi-core GPUs, faster network times, faster internet, more bandwidth and things like 5G and other technologies. As those things mature, industry after industry is going to shift to realtime 3D for content creation and dissemination. It astonishes me that most car configurators in the world today,
17:51 Speaker 03 by way of example, they take the 12 colors, they make the car and they drive it into a warehouse. They take hundreds of photographs and when you go through the selection, you're picking the one photo from the angle they took it that's based on that description. That's an insanely inefficient thing to do. And to render them photorealistic is better, faster, cheaper, and more options available to it. And that's a cloud service. We recently released a product called Unity Reflect. It allows you to look through your Android or iOS device for someone on a construction site to hold it up. And the architect that might be in a head office 100 or 1,000 miles away to see what he or she sees in the BIM data. Is the pipe really where they say it is? Do I need to move it?
18:33 Speaker 03 And it dramatically shortens the cycle from something that involved marking up a piece of paper and dropping it in a tube to go to the bottom of a construction site, to be couriered or flown to another location, to solving these problems in realtime in the moment, which saves an enormous amount of money. And we're now working with auto industry, aerospace industry, so many industries. We're going to move from traditional tools to more advanced tools. Not only is it better, faster, cheaper, but you can apply the new data algorithms around AI and machine learning to these models and vastly improve the outcomes. We're revolutionizing how they create and distribute content.
19:13 Speaker 02 What are you the most excited about in the technology landscape? There's obviously a ton happening in AI. There's a ton still happening in AR, VR. There's blockchain. There's a lot of new things around the horizon. What excites you the most?
19:24 Speaker 03 So one is a whole bunch of consumer experiences. They're going to change because of realtime 3D. Look, I don't want to make a prediction for Netflix, but I am certain within the next two to three years, you'll be able to freeze the frame, put on a set of VR or AR glasses or look through your phone and walk into the scene and go anywhere. Let's say they produced a Godfather movie and it's in 1960 New York. The traffic will be there, the shop keeps will be there. You'll be able to wander around that world and interact, not just by yourself, but with your friends and their friends. And it can be while the film is taking place or freezing it, just looking at the way it looks right now, we're completely independent of the film. The world will be real. And that is true of industry after industry.
20:09 Speaker 03 There's no question, if you use a car configurator the way I've described, you're going to design the car, you're sitting there and you'll look around, you'll see everything around you exactly as it is. And you go home and hold your phone up and see the car in your garage and decide if that's the one you like. And so we're reaching a new place in the world today where we're going to conjure up anything that is real or non-real and mix it together in ways that defy imagination. All right. Thank you, John.
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