December 14, 2022 • 17 mins
We are in the first wave of web3 games, and some believe that games don't have network effects built into their development or long-term strategy. In this episode, listen to NFX partner Gigi Levy-Weiss as he dives into the world of defensibility within the gaming industry, sharing the 4 layers of network effects, the future of virtual goods, and a case study on Steam - the leading platform for video game development.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
You're listening to episode 10 on networkeffects and gaming from the network effects
master class Pete on the NFX podcast.
We're in the 1st wave of web 3 James, and a lotof people believe that game companies don't
have network effects.
But in this episode, NFX partner, GigiLevy-Weiss James you on a deep dive into the
world of defensibility within the gamingindustry.
Sharing the 4 layers of network effects and aneven closer look into Steam, a case study on
(00:22):
the leading platform for video gamedevelopment, So let's jump in.
We were looking to build, the best venture fundout there that's gonna serve Silicon Valley and
Israel.
We're trying to think what is it that we wantto focus on?
And James started talking about the studieshe's been doing with network effect and how we
(00:42):
figured out that network effects companies arethe best ones that are coming out of Silicon
Valley.
What I immediately shared is that alsoobserving Israel could see that the best
companies coming out of Israel were alsonetwork effects companies.
And so we looked at each other and we said, whydon't we try to create a venture fund that's
going to focus on these businesses.
That led us to complete a study that I thinkJames started before we started NFX, eventually
(01:06):
trying to understand what percent of the valuein tech comes from network effects versus what
percent of value and tech comes from nonnetwork effects businesses.
And what we could see is that while only around20 to 30 percent of companies had network
effects in them, like, of all the businessplans we were getting, all the decks we were
getting, only 20 to 30% had network effects inthem.
When you look at the successes, Morgan than 70%of the value created in tech after the
(01:31):
beginning of the internet era came from networkeffects companies.
And so if it's 20% of the companies, And it's70% of the value is probably a better business
to focus on network effect, which is why wedecided not just to focus on it, but also call
our fund and effects.
One of the things that people often mistake isthinking that game companies don't have network
(01:56):
effects.
What people think is that a game is a game andyou play it, and that's about it.
And it's really not about effects, and itcouldn't be farther from truth.
And so what I thought I'll do today is start bytelling you about the actual network effects in
James, and there's quite a few of them.
The first thing is the direct multiplayernetwork effect, which is basically a normal
(02:20):
typical network effect, which means that themore users that are participating in the game
the more value all the users that are alreadypart of the game is getting.
And, of course, the more value the new userthat's coming in is getting from the entire
community that's already playing there.
This is pretty common, and it's pretty true formost James, but it's very true for multiplayer
(02:44):
games.
And multiplayer games could be everything froma poker game all the way to Fortnite or Call of
Duty or any other major game.
And so when we want to play these games, wewant to play against other.
We want to be matched.
We often call this thing liquidity.
And so if we don't have enough players that wecan actually play with, then the game loses its
(03:06):
value.
But even if we have, let's say, that we'refifty people, and we have fifty people that
wanna play.
If these fifty people are all gonna bedifferent levels, it's really not gonna be fun
for everybody.
And so we now need to match fifty people thatare around the same quality of play, which
means that for us to be able to do that and doit on the right geography.
So there's no latency between the differentpeople that are far one from the other.
(03:29):
And if we'd wanna do it even in the samelanguage, sometimes, we require more and more
and more and more games.
And so the more people that are actuallyparticipating in the game, the better the game
can be.
That's the very first and basic network effectsof games, liquidity.
However, that's not enough.
The next layer basically is being able to playagainst people that you actually know.
(03:51):
And so in this particular case, if you wannaplay Fortnite now and you wanna play in the
squad with your friends, then the fact that youcan play with actual people that you know
creates an even stronger network effect joiningforces with people or playing against people
that you really know create even strongerdefensibility for the game, which is why many
games are trying to get more users to be ableto play with each other rather than just play
(04:15):
with strangers.
But even that's not enough when it comes to thenetwork element of the game's network effect,
because there's many of these James.
There's something called Klands.
And what these Klands do is that they takegroups of Pete.
Sometimes people that know each other, butoften people that actually don't know each
other.
And you put them in this organization calledthe Klan.
(04:36):
And what the Klan does is it basically gets youtasks that you need to do on behalf of the
Klan, it gives you benefit for participating inthe Flint.
It gives you mission that you need to do not asan visual gamer, but as the clan.
And then the because of that participating inthe clan actually creates a much stronger
feeling of belonging a much stronger networkeffect, which gets people to stay much longer
(04:59):
in the game.
Generally speaking, in games, users that becomepart of the clan, retain dramatically longer
and spend more money than those that don'tbecome part of the clan because they're
belonging because the network element is muchstronger for them.
And so the first thing is the actual networkthat's being built in the game at the high
level liquidity and then personal network withthe people that you know or a personal network
(05:25):
with the people that you partner with in aclan.
That's the first layer.
Once you have that clan or the friends that youactually, play with, there is what's called the
personal utility network effect because now youneed to coordinate with these people.
You need to coordinate when you're gonna play.
You need to coordinate when you're gonnastrike.
You need to coordinate what you're gonna do.
So suddenly we have now a messenger inside thegame.
(05:47):
We have now tools to actually communicate witheach other over voice, over video, over text,
These coordination elements are personalutility network.
They're very similar to a Facebook Messenger ora WhatsApp that are personal utility.
And basically, the more you use the personalutility, the stronger and more defensible the
game becomes, because you're now dependent onthe game for that communication.
(06:10):
And so layer number 1 is the network.
Layer number 2 is the personal utility, buteven that's not enough.
The next thing we have in games, we have amarketplace.
Marketplaces are basically at 2 differentlayers.
The first and basic layer, which we're gonnatalk about a bit later, is the actual App Store
network effect.
Which is the place where you find game whereyou discover games.
(06:32):
And that is that exists on the iOS platformthat exists on Google.
It's called Google Play and Android.
It's called Steam, and we're gonna talk aboutSteamabit later.
And this is the first layer of marketplace ingames.
But the second layer is a marketplace that'sdedicated for every game.
In this marketplace, what's generally happeningis that people can actually exchange things
(06:54):
like their virtual goods or skins Morgananything that they acquired or won in the game,
that element of trading and marketplacebasically makes the game much better for them
and, of course, increases the defensibility ofthe game.
It's very interesting to say that basicallywhat we so in web 3 gaming over the last couple
of years is the enhancement of that marketplaceelement as what the NFTs do They allow people
(07:20):
to actually trade their virtual goods of thegame, not just within the game, but anywhere
they want.
And so basically creating a more globalmarketplace that enhances the value that you
can get out of your game goods.
The last network effect of games is thebandwagon effect that we all see when we ask
kids what game they wanna play.
And so like any other bandwagon network effect,what's happening is that as people start
(07:44):
playing a game beyond all the core networkeffect that we discussed, the next thing that
happens is that people start talking aboutplaying the game.
And so you hear from your friend that this isthe game they play.
You hear from your friend that this is thecoolest thing that's happening there right now.
You hear from your friend that this is betterthan other games, and then you jump in.
And so the combination of the network networkeffect especially when it comes becomes
(08:10):
personal, especially when it becomes with otherpeople to collaborate with, in a clan.
Coupled with the personal utility of the toolsthe game gives you to actually communicate with
the people that you collaborate with, And thenthe marketplace on top of it and the bandwagon
network effects make the top games superdefensible.
(08:30):
And I think that what people generally miss isthat many of these top games have not been
around for a month or 2 or even half a year.
We're talking about the James that are the topcharts for 10, 12, 15 years.
And the reason that's the case is because ofthe network effect It's not that there aren't
other good games out there.
It's that the network effect of these top gamesmakes them so defensible that they actually
(08:54):
stay on the top charts for many, many, manyyears.
And that's why we truly believe that when wefind the best game companies, they can create
not just amazing businesses that grow veryfast, but also super defensible business.
Thanks for network effects.
I wanted to talk about specific examples ofnetwork effects and games.
(09:18):
And while not specifically a game, the whatwould want to talk about is team, which is a
platform for game distribution over PC.
So if you think about it in history, when youwanted to buy a game, you literally had to go
to store games where packaged goods that youwent to a store and bought and then put them in
your computer and started playing them.
(09:39):
And over the years, as the Internet emerged,game developers initially wanted to start
updating their games.
It was not even about sending them at thebeginning.
It was about updating the games once you boughtit.
And a company called Devolve started this appthat was called Steam that was supposed to
allow them to update their games after youacquired them.
Over time, they started selling games over thisplatform rather than just update games.
(10:04):
And today, it is the number one platform fordistributing games or Pete with over a
120,000,000 users every year and revenues northof $30,000,000,000.
So this is literally the number one gamedistribution channel for games over PC.
Steam is actually the equivalent of the AppStore on iPhone devices or Google Play on
(10:27):
Android devices with maybe one big difference,which makes it a lot Morgan, impressive, which
is clearly does not come bundled with Pete,meaning that to get to these 120,000,000 users,
Volve the creator of steam had to be in aposition that people actually wanted to
download and install steam on a 120,000,000computers, which is super impressive.
(10:50):
So let's try to analyze the network effects ofsteam at what makes it so successful now for
more than 15 years.
So the first thing that steam is used for isessentially a marketplace.
Right?
This is a marketplace between game developersthat are putting their games on this
marketplace that users can find them and userswho wanna play games and use team as a
(11:11):
discovery channel for games.
This has been the first use case of Steam andwhere Steam started growing.
Steam basically allows for discovery of all thePC games, all the major PC games, for all the
PC gamers in the world, and that's thebeginning of its strength.
But that's not enough because what seemed madeto become more defensible was to create 2
(11:32):
additional layers of marketplace on top of theinitial developer to players marketplace.
That are making it so defensible.
The first layer is the UGC layer, usergenerated content.
So what's team said is the following thing.
If we're only gonna allow developers to sellgames to users, we're gonna have maybe a lot of
(11:54):
supply, but it's still gonna be limited supply.
Is it gonna be limited?
Because there's a limited number of developersthat can actually launch games and sell them on
steam.
What if we then allowed users to start creatingversions of the game called mods or items for
the James?
In a special place called the Steam workshop,and then we allow these users to distribute
(12:17):
what they've built to all the players.
So now on the demand side, we still have allthe all the players.
But in the supply side, we don't have just gamedevelopers We also have all the very engaged
users that wanna create content for the gamesthey love.
That makes the marketplace a lot stronger.
And if you think about it, if tomorrow a newplatform emerges.
(12:41):
And now all the developers wanna sell theirgame also on the other platform, If that other
platform doesn't get all these unique featuresthat the users generated, it will never be as
exciting.
It will never be as rewarding.
As getting the game on Steam.
And so by adding that second layer of amarketplace, on top of the first marketplace
(13:01):
layer, Steam became a lot more defensible.
But even that's not enough.
Because what's team did later is add also a 3rdlayer of marketplace, which is between the
users themselves for the virtual goods in thegame.
So what Tim did is that they said if you own avirtual good in one of the games, the ownership
of that virtual goods is gonna be stored on thesteam servers so that now if you wanna sell
(13:27):
that virtual good to somebody else, you can doit using Steam, then actually get real money
for the virtual good that you won or that youbought in the past.
Again, if you think about what's gonna happenwhen a new marketplace emerges, maybe, to sell
the same games, if you now can't move yourvirtual goods that are stored on the steam
servers, into that other marketplace, why wouldyou ever want to use the game consume the game
(13:52):
on that other marketplace?
And so basically by adding 2 additional layers,user generated content layer, and a marketplace
layer for virtual goods, steam took advantageof the strongest marketplace network affects
the feasibility they could get to make surethat even when a new marketplace emerges, is
not gonna be really beneficial for the users toget their game in another marketplace, but
(14:17):
that's not enough.
Because one of the thing that SCIM gave thegame developers is the entire layer of
identity.
So rather than you having to create youridentity in every game you play from scratch,
You have your steam identity.
And your steam identity basically allows you tolog in into these games and play them very
fast.
(14:38):
Which, of course, is great, but that's not thestrength of it.
The reason the strength of it is that you cantake now your social graph, your network from
one game to another.
So when you have a friend on Steam, maybe afriend that you knew Morgan, and maybe a friend
that you got to know in one of the James.
When you go to play the next game, you're gonnabe able to find that friend also in the other
game or invite that friend to the other game.
(15:00):
And so now we're taking the network effect ofactually having a personal network over laying
it over the marketplace and creating a v evenmuch, much stronger network effect that makes
steam so powerful.
If you add on top of it, the fact that steam bydesign also has the bandwagon network effect,
(15:20):
because it basically shows you which games areplayed by most so that you can see which games
are the most popular.
You can see which games your friends areplaying.
So that it can direct everybody to play thesame games and get that bandwagon effect that
makes it even stronger.
The combination of these network effectsbasically makes teams so strong that it can
(15:41):
command a 30% rake on all transactions that arehappening on the platform.
And when you think about it, for a$30,000,000,000 business with 30% rate, you
could assume that there's gonna be lots ofother competitors.
Well, the reality is that there are verylittle.
The reason that they're so little is becausethe strength and defensibility of Steam's
network effect using the marketplace 3 layers,the personal network that we mentioned, and the
(16:09):
band rigor effect make it so hard to competewith that there have been very little attempts
to go against it.
Flint literally in the last few years, we'veseen Epic The publisher of Fortnite tried to
come up with their own store.
They now have more than 50,000,000 users,thanks to Fortnite.
But what they're starting to discover is thatit's gonna be super difficult to move
(16:31):
additional developers to their own store simplybecause of the additional layers of network
effect this team added over the years.
For epic to succeed, they will need to be ableto replicate these network effects and make
their own marketplace as strong and powered bythe same network the team have created over the
years.
This is a great example how a very simplebusiness that started just as a normal
(16:56):
marketplace between developers and players canbecome such a defensible, long lasting, huge,
strong business.
Thanks to very smart implementations ofadditional layers of network effect making it
more and more and more defensible.
Stay tuned to the NFX podcast as we'll post 1episode per week until we complete the course.
(17:18):
You can also watch this entire master classonline atnfx.com/masterclass, where you can log
in, track your progress, and watch full videos,retranscripts, and find other related
Materials.
Thanks for listening to the NFX podcast.
You're listening to episode 10 on networkeffects and gaming from the network effects
master class Pete on the NFX podcast.
We're in the 1st wave of web 3 James, and a lotof people believe that game companies don't
have network effects.
But in this episode, NFX partner, GigiLevy-Weiss James you on a deep dive into the
world of defensibility within the gamingindustry.
Sharing the 4 layers of network effects and aneven closer look into Steam, a case study on
(00:22):
the leading platform for video gamedevelopment, So let's jump in.
We were looking to build, the best venture fundout there that's gonna serve Silicon Valley and
Israel.
We're trying to think what is it that we wantto focus on?
And James started talking about the studieshe's been doing with network effect and how we
(00:42):
figured out that network effects companies arethe best ones that are coming out of Silicon
Valley.
What I immediately shared is that alsoobserving Israel could see that the best
companies coming out of Israel were alsonetwork effects companies.
And so we looked at each other and we said, whydon't we try to create a venture fund that's
going to focus on these businesses.
That led us to complete a study that I thinkJames started before we started NFX, eventually
(01:06):
trying to understand what percent of the valuein tech comes from network effects versus what
percent of value and tech comes from nonnetwork effects businesses.
And what we could see is that while only around20 to 30 percent of companies had network
effects in them, like, of all the businessplans we were getting, all the decks we were
getting, only 20 to 30% had network effects inthem.
When you look at the successes, Morgan than 70%of the value created in tech after the
(01:31):
beginning of the internet era came from networkeffects companies.
And so if it's 20% of the companies, And it's70% of the value is probably a better business
to focus on network effect, which is why wedecided not just to focus on it, but also call
our fund and effects.
One of the things that people often mistake isthinking that game companies don't have network
(01:56):
effects.
What people think is that a game is a game andyou play it, and that's about it.
And it's really not about effects, and itcouldn't be farther from truth.
And so what I thought I'll do today is start bytelling you about the actual network effects in
James, and there's quite a few of them.
The first thing is the direct multiplayernetwork effect, which is basically a normal
(02:20):
typical network effect, which means that themore users that are participating in the game
the more value all the users that are alreadypart of the game is getting.
And, of course, the more value the new userthat's coming in is getting from the entire
community that's already playing there.
This is pretty common, and it's pretty true formost James, but it's very true for multiplayer
(02:44):
games.
And multiplayer games could be everything froma poker game all the way to Fortnite or Call of
Duty or any other major game.
And so when we want to play these games, wewant to play against other.
We want to be matched.
We often call this thing liquidity.
And so if we don't have enough players that wecan actually play with, then the game loses its
(03:06):
value.
But even if we have, let's say, that we'refifty people, and we have fifty people that
wanna play.
If these fifty people are all gonna bedifferent levels, it's really not gonna be fun
for everybody.
And so we now need to match fifty people thatare around the same quality of play, which
means that for us to be able to do that and doit on the right geography.
So there's no latency between the differentpeople that are far one from the other.
(03:29):
And if we'd wanna do it even in the samelanguage, sometimes, we require more and more
and more and more games.
And so the more people that are actuallyparticipating in the game, the better the game
can be.
That's the very first and basic network effectsof games, liquidity.
However, that's not enough.
The next layer basically is being able to playagainst people that you actually know.
(03:51):
And so in this particular case, if you wannaplay Fortnite now and you wanna play in the
squad with your friends, then the fact that youcan play with actual people that you know
creates an even stronger network effect joiningforces with people or playing against people
that you really know create even strongerdefensibility for the game, which is why many
games are trying to get more users to be ableto play with each other rather than just play
(04:15):
with strangers.
But even that's not enough when it comes to thenetwork element of the game's network effect,
because there's many of these James.
There's something called Klands.
And what these Klands do is that they takegroups of Pete.
Sometimes people that know each other, butoften people that actually don't know each
other.
And you put them in this organization calledthe Klan.
(04:36):
And what the Klan does is it basically gets youtasks that you need to do on behalf of the
Klan, it gives you benefit for participating inthe Flint.
It gives you mission that you need to do not asan visual gamer, but as the clan.
And then the because of that participating inthe clan actually creates a much stronger
feeling of belonging a much stronger networkeffect, which gets people to stay much longer
(04:59):
in the game.
Generally speaking, in games, users that becomepart of the clan, retain dramatically longer
and spend more money than those that don'tbecome part of the clan because they're
belonging because the network element is muchstronger for them.
And so the first thing is the actual networkthat's being built in the game at the high
level liquidity and then personal network withthe people that you know or a personal network
(05:25):
with the people that you partner with in aclan.
That's the first layer.
Once you have that clan or the friends that youactually, play with, there is what's called the
personal utility network effect because now youneed to coordinate with these people.
You need to coordinate when you're gonna play.
You need to coordinate when you're gonnastrike.
You need to coordinate what you're gonna do.
So suddenly we have now a messenger inside thegame.
(05:47):
We have now tools to actually communicate witheach other over voice, over video, over text,
These coordination elements are personalutility network.
They're very similar to a Facebook Messenger ora WhatsApp that are personal utility.
And basically, the more you use the personalutility, the stronger and more defensible the
game becomes, because you're now dependent onthe game for that communication.
(06:10):
And so layer number 1 is the network.
Layer number 2 is the personal utility, buteven that's not enough.
The next thing we have in games, we have amarketplace.
Marketplaces are basically at 2 differentlayers.
The first and basic layer, which we're gonnatalk about a bit later, is the actual App Store
network effect.
Which is the place where you find game whereyou discover games.
(06:32):
And that is that exists on the iOS platformthat exists on Google.
It's called Google Play and Android.
It's called Steam, and we're gonna talk aboutSteamabit later.
And this is the first layer of marketplace ingames.
But the second layer is a marketplace that'sdedicated for every game.
In this marketplace, what's generally happeningis that people can actually exchange things
(06:54):
like their virtual goods or skins Morgananything that they acquired or won in the game,
that element of trading and marketplacebasically makes the game much better for them
and, of course, increases the defensibility ofthe game.
It's very interesting to say that basicallywhat we so in web 3 gaming over the last couple
of years is the enhancement of that marketplaceelement as what the NFTs do They allow people
(07:20):
to actually trade their virtual goods of thegame, not just within the game, but anywhere
they want.
And so basically creating a more globalmarketplace that enhances the value that you
can get out of your game goods.
The last network effect of games is thebandwagon effect that we all see when we ask
kids what game they wanna play.
And so like any other bandwagon network effect,what's happening is that as people start
(07:44):
playing a game beyond all the core networkeffect that we discussed, the next thing that
happens is that people start talking aboutplaying the game.
And so you hear from your friend that this isthe game they play.
You hear from your friend that this is thecoolest thing that's happening there right now.
You hear from your friend that this is betterthan other games, and then you jump in.
And so the combination of the network networkeffect especially when it comes becomes
(08:10):
personal, especially when it becomes with otherpeople to collaborate with, in a clan.
Coupled with the personal utility of the toolsthe game gives you to actually communicate with
the people that you collaborate with, And thenthe marketplace on top of it and the bandwagon
network effects make the top games superdefensible.
(08:30):
And I think that what people generally miss isthat many of these top games have not been
around for a month or 2 or even half a year.
We're talking about the James that are the topcharts for 10, 12, 15 years.
And the reason that's the case is because ofthe network effect It's not that there aren't
other good games out there.
It's that the network effect of these top gamesmakes them so defensible that they actually
(08:54):
stay on the top charts for many, many, manyyears.
And that's why we truly believe that when wefind the best game companies, they can create
not just amazing businesses that grow veryfast, but also super defensible business.
Thanks for network effects.
I wanted to talk about specific examples ofnetwork effects and games.
(09:18):
And while not specifically a game, the whatwould want to talk about is team, which is a
platform for game distribution over PC.
So if you think about it in history, when youwanted to buy a game, you literally had to go
to store games where packaged goods that youwent to a store and bought and then put them in
your computer and started playing them.
(09:39):
And over the years, as the Internet emerged,game developers initially wanted to start
updating their games.
It was not even about sending them at thebeginning.
It was about updating the games once you boughtit.
And a company called Devolve started this appthat was called Steam that was supposed to
allow them to update their games after youacquired them.
Over time, they started selling games over thisplatform rather than just update games.
(10:04):
And today, it is the number one platform fordistributing games or Pete with over a
120,000,000 users every year and revenues northof $30,000,000,000.
So this is literally the number one gamedistribution channel for games over PC.
Steam is actually the equivalent of the AppStore on iPhone devices or Google Play on
(10:27):
Android devices with maybe one big difference,which makes it a lot Morgan, impressive, which
is clearly does not come bundled with Pete,meaning that to get to these 120,000,000 users,
Volve the creator of steam had to be in aposition that people actually wanted to
download and install steam on a 120,000,000computers, which is super impressive.
(10:50):
So let's try to analyze the network effects ofsteam at what makes it so successful now for
more than 15 years.
So the first thing that steam is used for isessentially a marketplace.
Right?
This is a marketplace between game developersthat are putting their games on this
marketplace that users can find them and userswho wanna play games and use team as a
(11:11):
discovery channel for games.
This has been the first use case of Steam andwhere Steam started growing.
Steam basically allows for discovery of all thePC games, all the major PC games, for all the
PC gamers in the world, and that's thebeginning of its strength.
But that's not enough because what seemed madeto become more defensible was to create 2
(11:32):
additional layers of marketplace on top of theinitial developer to players marketplace.
That are making it so defensible.
The first layer is the UGC layer, usergenerated content.
So what's team said is the following thing.
If we're only gonna allow developers to sellgames to users, we're gonna have maybe a lot of
(11:54):
supply, but it's still gonna be limited supply.
Is it gonna be limited?
Because there's a limited number of developersthat can actually launch games and sell them on
steam.
What if we then allowed users to start creatingversions of the game called mods or items for
the James?
In a special place called the Steam workshop,and then we allow these users to distribute
(12:17):
what they've built to all the players.
So now on the demand side, we still have allthe all the players.
But in the supply side, we don't have just gamedevelopers We also have all the very engaged
users that wanna create content for the gamesthey love.
That makes the marketplace a lot stronger.
And if you think about it, if tomorrow a newplatform emerges.
(12:41):
And now all the developers wanna sell theirgame also on the other platform, If that other
platform doesn't get all these unique featuresthat the users generated, it will never be as
exciting.
It will never be as rewarding.
As getting the game on Steam.
And so by adding that second layer of amarketplace, on top of the first marketplace
(13:01):
layer, Steam became a lot more defensible.
But even that's not enough.
Because what's team did later is add also a 3rdlayer of marketplace, which is between the
users themselves for the virtual goods in thegame.
So what Tim did is that they said if you own avirtual good in one of the games, the ownership
of that virtual goods is gonna be stored on thesteam servers so that now if you wanna sell
(13:27):
that virtual good to somebody else, you can doit using Steam, then actually get real money
for the virtual good that you won or that youbought in the past.
Again, if you think about what's gonna happenwhen a new marketplace emerges, maybe, to sell
the same games, if you now can't move yourvirtual goods that are stored on the steam
servers, into that other marketplace, why wouldyou ever want to use the game consume the game
(13:52):
on that other marketplace?
And so basically by adding 2 additional layers,user generated content layer, and a marketplace
layer for virtual goods, steam took advantageof the strongest marketplace network affects
the feasibility they could get to make surethat even when a new marketplace emerges, is
not gonna be really beneficial for the users toget their game in another marketplace, but
(14:17):
that's not enough.
Because one of the thing that SCIM gave thegame developers is the entire layer of
identity.
So rather than you having to create youridentity in every game you play from scratch,
You have your steam identity.
And your steam identity basically allows you tolog in into these games and play them very
fast.
(14:38):
Which, of course, is great, but that's not thestrength of it.
The reason the strength of it is that you cantake now your social graph, your network from
one game to another.
So when you have a friend on Steam, maybe afriend that you knew Morgan, and maybe a friend
that you got to know in one of the James.
When you go to play the next game, you're gonnabe able to find that friend also in the other
game or invite that friend to the other game.
(15:00):
And so now we're taking the network effect ofactually having a personal network over laying
it over the marketplace and creating a v evenmuch, much stronger network effect that makes
steam so powerful.
If you add on top of it, the fact that steam bydesign also has the bandwagon network effect,
(15:20):
because it basically shows you which games areplayed by most so that you can see which games
are the most popular.
You can see which games your friends areplaying.
So that it can direct everybody to play thesame games and get that bandwagon effect that
makes it even stronger.
The combination of these network effectsbasically makes teams so strong that it can
(15:41):
command a 30% rake on all transactions that arehappening on the platform.
And when you think about it, for a$30,000,000,000 business with 30% rate, you
could assume that there's gonna be lots ofother competitors.
Well, the reality is that there are verylittle.
The reason that they're so little is becausethe strength and defensibility of Steam's
network effect using the marketplace 3 layers,the personal network that we mentioned, and the
(16:09):
band rigor effect make it so hard to competewith that there have been very little attempts
to go against it.
Flint literally in the last few years, we'veseen Epic The publisher of Fortnite tried to
come up with their own store.
They now have more than 50,000,000 users,thanks to Fortnite.
But what they're starting to discover is thatit's gonna be super difficult to move
(16:31):
additional developers to their own store simplybecause of the additional layers of network
effect this team added over the years.
For epic to succeed, they will need to be ableto replicate these network effects and make
their own marketplace as strong and powered bythe same network the team have created over the
years.
This is a great example how a very simplebusiness that started just as a normal
(16:56):
marketplace between developers and players canbecome such a defensible, long lasting, huge,
strong business.
Thanks to very smart implementations ofadditional layers of network effect making it
more and more and more defensible.
Stay tuned to the NFX podcast as we'll post 1episode per week until we complete the course.
(17:18):
You can also watch this entire master classonline atnfx.com/masterclass, where you can log
in, track your progress, and watch full videos,retranscripts, and find other related
Materials.
Thanks for listening to the NFX podcast.
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