Unfinished & Unstable: How SaaS Changed Video Games

In 2011, legendary Silicon Valley investor Marc  Andressen published his most famous essay that software is eating the world. His assertion was  that despite the dot com bubble in the 1990’s, software would permeate all industries from  agriculture to defense as online services and there would be a new wave of high-growth,  high-margin, defensible software businesses. Fast forward 10 years and Marc’s  thesis has held true.

The way software is developed,  distributed, consumed, priced, and sold has radically transformed in  the past decade. Historically, software was self-hosted - sold in stores, distributed  in CDs, positioned as a lifetime purchase, stored locally, and restricted to  a single computer for offline use. Stability was valued above all else. 

Updates were rare and risky. Today, it’s the opposite - modern software is  consumed as an online service, generally in the form of web or mobile applications. Digital  distribution has become king - for anything that can’t be accessed through a browser or app  store, it can be downloaded.

License keys and activation codes are virtual. Software is  now meant to be used on multiple devices. Most of all, modern software is about rapid  continuous improvement.

Speed is the priority even at the expense of stability. Updates are constant  and new features are regularly introduced. You can see software as a service in nearly  every facet of modern life.

Look at Photoshop, a strictly licensed, single device, offline  product sold on CDs as a one-and-done purchase for $700 in the 2000’s. Nowadays, you can only  get Photoshop as a $9. 99 monthly service through Adobe Creative Cloud.

Instead of building an  iTunes library of $10 music albums or $30 movies, you can pay $9. 99 a month for a service  like Netflix or Spotify. Software as a service has become equally popular  with enterprises.

Salesforce, Quickbooks Online, Snowflake, JIRA Cloud, and MongoDB are all leading  B2B SaaS products. None of this is really news. SaaS is a well-known phenomenon fueled by its  unparalleled value creation and value capture.

When software is delivered as a service,  consumers aren’t locked into long-term commitments or risking hundreds of dollars  upfront. You swipe a credit card for a few bucks, try out the service, and stop paying whenever  you feel you’re not getting value. For consumers, SaaS is affordable, convenient, and flexible.

For  companies, SaaS allows them to monetize faster, ship code quickly, push updates  after launch, and iterate. Most important of all, SaaS is good business.  Facebook’s gross margin hovers at 80%, Microsoft is 70%, Google’s is 60%, and Adobe  sits at 90% gross margin.

Adobe makes more money with its $9. 99 a month Creative Cloud SaaS  than they did selling $700 Photoshop licenses in the 2000’s. When investors see margins like these,  they can’t resist jumping in.

This has led to the flywheel effect of venture capital, startups, and  IPOs that’s been fueling tech for the past decade and funding software engineering jobs where 20  year olds make six figures upon graduation. But what most people missing is that while  software-as-a-service is becoming more popular, the standards and quality of the  software itself has been declining. SaaS is so prevalent that the culture of startups  and SaaS are intertwined.

The “ship fast, fail fast” attitude has meant that SaaS products often  launch way before they’re ready with severe bugs and broken functionality. Although companies try  to ride through the initial backlash with fast follow improvements and future updates, they  often don’t live up to their promise. SaaS products have also become ruthlessly monetized,  meaning that companies will paywall anything they can to get users to spend more - even if that  feature is essential to using the service.

As Marc Andressen predicted, industries all over  have embraced software as a service. But there is one particular industry that has taken advantage  of the declining standards to deliver aggressively monetized yet progressively worse, unfinished,  buggy SaaS products for maximum profit year after year after year. That is the gaming industry.

In the old days, people would line up at Gamestop or Target to get their hands on video games. For  $60, you’d get the game on a CD in a nice case. You could spend some more and preorder  the video game to get special goodies.

A few months later, you could drop $15-20 for some  downloadable content. Back then, the purpose of DLC was to extend a game’s lifespan. After launch,  if the game sells, the studio goes back into R&D, players wait a few years, the sequel gets  announced at E3, pre-orders go live, players line up again at Gamestop, rinse and repeat.

Back  then, consumers knew what they were getting for $60, a 8-40 hour single player campaign and  maybe split screen coop and multiplayer. The traditional video game business model centered  around this one-time $60 monetization. Make a good game, build up a fanbase, and the more sequels  you release, the more money you’ll make.

But video games are moonshots. Making a good  video game is hard. A good video game also doesn’t always sell.

To develop a game, you  invest millions of dollars every year for 2-5 years in continuous R&D. If you get to launch,  you’ll need to spend millions more on marketing. You do all this with no guarantee that in the  end, the video game you produce will sell.

In the early 2010’s, excluding indie games,  video game development budgets were anywhere from $5M to $50M. If you include advertising  and marketing, the total cost for producing a video game could be $30M-300M. Like movies, your  ROI is completely unknown until you launch.

The only safe investments are the proven  triple AAA franchises like Call of Duty, Grand Theft Auto, and Mario where customers drop  money on sequels and DLC without hesitation. Since the early 2000’s, publishers like  Activision, EA, Ubisoft, and Sega spend millions every year looking for the next blockbuster  franchise. To this day, Call of Duty, FIFA, Madden, Assassin’s Creed, Yakuza, Need for Speed,  NBA 2K, Battlefield to this day pump out a sequel every year or two.

But franchises don’t always  last. The once best-selling Guitar Hero and Tony Hawk series ended up being milked to death  by their publishers. Sequels were launched so frequently that quality declined, players  lost interest, and the IP became worthless.

Because of the moonshot nature and one-time  monetization model, innovation was crucial to the gaming industry. Just like venture  capitalists looking for the next hot startup, video game publishers took a scattershot  approach to find the next Call of Duty or Halo. In the late 2000’s, publishers were  constantly bringing new IPs to market, funding up-and-coming studios, and  encouraging risk-taking and creative freedom in hopes of fostering  the next blockbuster game.

Video games back then were made under  the waterfall software development model. Under waterfall, you set a deadline years  into the future, plan out all the R&D to support that deadline, and do design, art,  programming, and testing in linear phases. You assess regularly to see if things are  still on track.

The objective for Waterfall is rigorous planning and slow, incremental,  stable software development. With waterfall, it wasn’t uncommon for game launches  to be delayed but the end product released was still stable and complete. Modern video games are nothing like the offline single-player centric video games of the past. 

The most popular video games today - Fortnite, Apex Legends, Warzone, Rust, PUBG, TFT,  League of Legends just to name a few are all software-as-a-service. The gaming  industry refers to SaaS games as “live services”. Apex, Fortnite, Warzone, and League are  leading examples of free-to-play live services.

GTA Online, Red Dead Online, Escape from  Tarkov, or PUBG are popular SaaS titles where you still have to pay upfront to play. DLC has become the primary monetization model for modern video games. Microtransactions and loot  boxes are present in just about every video game to the point that not having them is considered  big news.

And unlike traditional video games which have fixed lifespans, modern live service  games are meant to last forever. Just like SaaS products in other industries, these games release  a relentless stream of updates and content to keep players engaged and spending. Compared to the past  where players would spend $10-30 one-time for maps or expansions, DLC nowadays is a never-ending  spree of $10 season passes, $20 skins, and in-game cosmetics that can cost hundreds of  dollars.

Even the latest Battlefront, Battlefield, and Halo games operate like a SaaS. At the same time, the quality of modern video games has declined. Fallout, Cyberpunk,  Anthem, No Man’s Sky, Battlefield, and Halo Infinite are all recent examples of just how  far standards have dropped.

Launching buggy, unfinished SaaS games and then promising to fix  it later is now standard industry practice. Modern games are made with a mix of waterfall and  agile software development models. Under agile, development is broken down into 2-week sprints  to promote faster, frequent delivery of software, breaking up deliverables into small  bite-sized tasks, and flexibility to defer work to the future.

As long as something  is being shipped, no matter how small, it’s considered a win. Almost every SaaS product  in every industry is developed under agile. Under waterfall and traditional single player  video games of the past, it would be a death sentence to knowingly ship an incomplete or buggy  game.

Studios would rather delay the launch than launch a poor product. But with today’s games  and digital distribution, delays are rare. Modern games launch even if the product is  incomplete or unstable.

Under agile and SaaS, this hasty output is permitted under the  guise that improvements will come and everything will get better in the future. SaaS has transformed not only how video games are developed and monetized, but also the surrounding  ecosystem and industry priorities. The creativity, risk-taking, anticipation of E3, the stream of  new titles every year, and constantly emerging studios are all relics of the past.

Nowadays,  few studios are being funded, few new IPs are coming to market, E3 carries little importance,  developers talk directly to their consumers, publishers are putting themselves up  for sale, and every game this generation seems to be a live service multiplayer  with microtransactions. In this episode, we’ll look at 3  different gaming companies and see how their strategies and business models  have evolved over time with SaaS. First is CD Projekt Red, the Polish company behind  the bestselling Witcher video game franchise.

While the industry has rotated to SaaS,  multiplayer, and microtransactions, CD Projekt Red has resisted those trends.  They’re a deeply traditional studio who focuses exclusively on single player RPGs,  openly rejects pumping out sequels for profit, and insists that they will only launch games  when they’re ready. CD Projekt Red’s belief is that if you take the time and effort to make a  great game, the quality will speak for itself, and the game will sell even years after  launch.

No microtransactions needed. CD Project Red’s financials give a real-world  look at how successful but also how volatile the traditional video game business can be.  In 2011, CD Projekt Red launched Witcher 2.

The game was a critical success, winning 50  awards and putting CD Projekt Red on the map as a promising young studio. But video game sales  only accounted for 30% of the company’s revenue that year. The company made most of its money  back then as a distributor of movies in Poland.

After launching Witcher 2, CD Projekt Red went  into waterfall development for Witcher 3. Witcher 2 continued to sell after launch but  in declining amounts. Video game sales dropped 50% from $10M to $5M a year after Witcher  2’s console launch but then rebounded 30% the year after.

CD Projekt Red’s top-line also  declined over the next 2 years as the studio launched no new games and was heads-down on  Witcher 3. Between 2012 and 2014, Witcher 2 brought in $23 million dollars. For a game that  cost $10 million dollars to make, that’s a 130% return on investment with an annualized ROI of  13% over 3 years of R&D and 4 years of sales.

In 2015, CD Projekt Red released Witcher 3.  The game was a monster success at launch and is considered as one of the best video games ever  made. In its first 6 weeks, six million copies of Witcher 3 had been sold.

In comparison, it  took the Witcher 2 two years to sell 2. 5 million copies. By the end of 2015, over 20 million  copies of Witcher 3 had been sold.

CD Projekt Red had struck gold. The company went  from $30M in 2014 to $177M in 2015 with Witcher 3, a 600% increase in revenue. Witcher 3 sales  accounted for 87% of the CD Projekt Red’s revenue that year.

Net income grew by 760%, going  from $1M in net income in 2014 to $76M in 2015. CD Projekt Red’s profit margin went from 5% to  over 40%. Witcher 3 elevated CD Projekt Red from a small up and coming studio to one of Europe’s  most respected and valued gaming companies.

It cost $81 million dollars to make Witcher  3. In its first year, Witcher 3 had already paid off its development cost with a 90% return on  investment and an annualized ROI of 17% over 3. 5 years of R&D and just 7 months of sales.

Witcher 3 continues to sell to this day. Its success validates CD Projekt Red’s philosophy that  good games, no matter how many years after launch, do indeed sell. There has been a post-launch  decline in revenue but it’s a gradual descent.

Witcher 3 sales have dropped 30% every  year after 2015. The legacy of Witcher 3 lives on as the title recently surpassed 50  million copies sold and has become one of the 10 best selling video games of all time. From Witcher 3’s performance, we can understand why publishers like Activision, EA, Ubisoft  are all hunting for the next blockbuster game.

You’ll always miss more than you hit. But  when you do hit, your revenue skyrockets by hundreds of millions of dollars, your profit  exponentially increases, and your valuation goes up by a few billion. All it takes is just one  game.

And you can easily snowball that success into annual sequels to keep money flowing. But  that wasn’t CD Projekt Red’s approach. However, just because you made a good game  doesn’t mean your next game will be good.

CD Projekt Red snowballed the success of Witcher  3 into hype for its next game, Cyberpunk 2077. Cyberpunk 2077 had been in development for  8 years and was considered one of the most anticipated games of all time. Led by John  Wick and the reputation of Witcher 3, gamers were expecting greatness even after numerous  delays.

The company promised a single player game more immersive and dynamic than Witcher 3  and a SaaS multiplayer with microtransactions. Fast forward to Cyberpunk 2077’s launch and  the game was nothing short of a disaster. In response, CD Projekt Red turned  Cyberpunk 2077’s single player into a SaaS, continuously pushing out hotfixes, updates,  patches, and new content to make the game playable.

Beyond the game-breaking bugs,  refunds, public apology, broken promises, unfinished state, and bait-and-switch marketing,  Cyberpunk 2077 was still a commercial success. CD Projekt Red’s revenue quadrupled  from $116M in 2019 to $486M in 2020 with Cyberpunk’s launch. Net income increased six  times from $40M to $255M in the same timeframe.

Despite its disastrous launch and costing $300M  over 8 years of development, Cyberpunk 2077 still made out with a positive ROI in its debut. But there have been consequences. In 2021, CD Projekt Red’s revenue and video game sales dropped  over 60% just one year after Cyberpunk’s launch.

This 60% drop is a much faster plunge than  forecasted and double the decline of Witcher 3’s sales one year after its launch.  Consumer trust was clearly lost. After some soul searching, CD Projekt Red  announced they were canceling Cyberpunk’s live service multiplayer, committing  to agile development over waterfall, and taking time to figure out the right blend of  offline and online experiences.

With Cyberpunk, CD Projket Red tried to deliver a traditional $60  single-player offline game with the dynamic scope of a live service. Simultaneously, they were  building a live service with microtransactions on top of that unstable single player game  without any SaaS expertise or experience. CD Projekt Red’s rise and fall is a demonstration  of how volatile the traditional video game business can be.

All it takes is one game  to take you to the moon and one game to crash you back down. When you only launch one  game every 5 or so years like CD Projekt Red, it intensifies the risk on an-already risky coin  flip. The longer you spend in development, the more pressure and the greater the stakes become. 

It’s admirable how much CD Projekt Red believes in tradition. But if you’re only shipping 2 games  every 10 years, you have to get at least 1 right to sustain the company. If you get both of them  wrong, bankruptcy is right around the corner.

There are other companies similar to CD Projekt  Red, who have enjoyed historical success with the traditional video game business but  have fully pivoted to live services and microtransactions in recent years to keep up  with the industry. But SaaS is no silver bullet. This is the story of Square Enix.

Square Enix is a Japanese publisher who owns iconic franchises like Final Fantasy,  Kingdom Hearts, Drgon Quest, Tomb Raider, Deus Ex, Hitman, and Just Cause. With IPs  like these, Square Enix’s expertise with the traditional video game business and single player  RPGs runs much deeper than CD Projekt Red. In 2013, Square Enix had a disastrous year  with a $100M loss.

They launched three major titles that year with Sleeping Dogs, Hitman  Absolution, and Tomb Raider. Even though all three games were received favorably and  were developed as console-first titles, each significantly underperformed in sales. Square  Enix ended up having to eat its own margins and incentivize retailers with rebates, discounts,  and price protection in order to improve sales.

Square Enix’s CEO resigned and new leadership took  over as part of a massive management reform. Square Enix’s new leadership offered a thoughtful  reflection to investors. To quote their year end report, “The financial results in this fiscal  year reflect an intrinsic problem within the game business model.

Under the model of selling  packaged games, the timing by which we may offer a game to customers is limited to the  release of the product. Profit opportunities are non-existent during the game’s development.  Although we are making efforts to streamline our development process, game development  requires increasingly long time periods as the performance of game consoles improves.

I  believe the problem is not a one-time event…we face the structural issues of an inflexible  earnings model and long-term, large-scale development resulting in a low rate of investment  turnover. It is extremely important for us to enable a transition from a disc-based earnings  model to a more flexible one. This will define the future of how we pursue game development.

” Square Enix recognized the risks of continuing to operate the traditional video game  business and saw the need to evolve. In 2014, Square Enix’s top-line and video game revenue  had recovered thanks to continued MMO growth and better-than-expected sales of remastered Final  Fantasy X, Thief, and a full-price re-release of Tomb Raider. In 2015, Square Enix had a quiet  year and intentionally kept a low profile.

The company was hard at work preparing what  it believed to be an unbeatable lineup of triple AAA sequels that would make 2016 the  most successful year in company history. Square Enix hit the market with all its best  IPs in 2016. The blockbuster lineup included Rise of Tomb Raider, Just Cause 3, Deus Ex  Mankind Divided, Hitman, Final Fantasy XV, and Drgon Quest Builders.

The  company’s revenue grew by 30% and video game sales skyrocketed by 42% going  from $860M in 2015 to 1. 2 billion dollars in 2016. With the exception of Just Cause 3, all  titles were critically acclaimed with solid sales debuts.

Square Enix’s net income  doubled from $75M in 2015 to $153M in 2016. Square Enix’s revenue continued to grow in 2017  based on the sustained sales from its blockbuster lineup. Total revenue grew 20% from 1.

6 billion in  2016 to 1. 9 billion in 2017, largely driven by the 25% growth in video game sales. Even though the  numbers were going up, behind closed doors, the blockbuster lineup was actually underperforming  and Square Enix was not happy.

Nearly all games in the lineup had some  form of SaaS and microtransactions built-in. Hitman was released as a live service, meaning  consumers paid full price for the game but there were only a few levels to play at launch. The  studio explained that additional levels would be released as DLC over time in episodes so that  their developers could take player feedback and refine future levels under agile.

This landed  poorly with consumers and ultimately, Hitman failed to sell. In 2017, a year after launch,  Square Enix gave up on the Hitman entirely, sold off the studio and franchise rights,  and wrote down a $43 million loss. While no numbers have ever been shared, the studio  came out in 2021 to say that Hitman needed another 4 years of sales at its current pace to break  even.

So all in all, 4 years of development and 9 years of sales for an ROI of 0. Deus Ex Mankind Divided launched as a full-priced single player game alongside Breach, a separate  free-to-play live service. Both games were filled with microtransactions.

Its single player  campaign was widely criticized for selling in-game upgrades and virtual currency. Breach  as a live service incurred greater backlash, selling pay-to-win items and in-game cosmetics for  a game where players couldn’t even see each other. Later it was revealed that Square Enix had forced  the studio to implement microtransactions and SaaS into the game with little notice  and support.

Despite critical acclaim, Mankind Divided failed to sell while Breach died  at launch as a live service with no player base. Mankind Divided had been in development for 5 and  a half years and cost $55 million dollars to make. Square Enix estimated it needed to  sell 3 million copies to break even.

As of today, Mankind Divided has reportedly  only sold 2 million copies. So 5 and half years of development, 6 years of sales, and  Mankind Divided is still at a loss. Just Cause 3 and Rise of the Tomb Raider  were the only games out of the lineup to live up to sales expectations.

Square  Enix dropped Hitman, paused Deus Ex, and gave Tomb Raider and Just Cause franchises  the green light to proceed with sequels. To Square Enix’s leadership, the commercial  failure of its blockbuster lineup validated everything they had been saying since 2013.  The company could no longer keep launching these expensive flops nor could it continue taking  half measures implementing microtransactions and live services.

If Square Enix was to succeed,  the company had to go all-in on SaaS. In 2017 at the peak of the MCU, Square Enix  signed a massive license agreement with Marvel. The company tasked its most trusted development  studios, Eidos Montreal and Crystal Dynamics 3 years and a blank check to build the next big  live service game based on the Avengers.

In the interim, Square Enix launched Just  Cause 4 and Shadow of the Tomb Raider, sequels from the remaining few  franchises that it could trust to sell. Unfortunately, for Square Enix, what it thought  were safe investments turned out to be flops. In 2018, Square Enix’s overall revenue declined  3% and video game sales dropped 4% despite the launch of both games.

Leadership called out Just  Cause 4’s disappointing sales as the main reason for the company’s struggles. On the other hand,  Shadow of the Tomb Raider was one of the most expensive games ever produced with a budget of  $135 million dollars over 3 years of development. Yet the game received a lukewarm reception and is  widely regarded as the weakest installment in the reboot trilogy both in quality and sales.

Square Enix continued to commercially stagnante from 2017 to 2020. In 2021, Marvel’s  Avengers was finally released as a full-priced live service game that Square Enix hoped would be  the money-printing SaaS that would make up for all the flops of the past 5 years. Unfortunately,  the game was a dud.

Marvel’s Avengers at launch was hammered by players and critics for  being repetitive, buggy, lacking content, and boring. Square Enix released free DLC every  quarter, adding new characters and missions, as part of the SaaS playbook to keep users  engaged. But players weren’t sticking around.

2 months after its launch, the Steam player  count for the game had declined by 96% to 1,000, even dropping as low as 500 on some days. Square Enix’s revenue in 2021 grew 28% and video game sales spiked by 40% thanks to strong initial  sales from Marvel’s Avengers. But once the dust settled and word spread, consumers were unwilling  to spend $60 on another unfinished live service and existing players had no interest buying $20  skins for a dying game.

Marvel’s Avengers cost an estimated $170-190 million across 3 years of  development. With only 3 million copies sold to date, Square Enix’s leadership admitted that  once again, another big game had underperformed. In its latest earnings, Square Enix wrote  down $105 million dollars in losses directly associated with Marvel’s Avengers.

SaaS, even  if you go all-in, is not a silver bullet. While EA and Activision are infamous for their  microtransactions and ruthless monetization, there is one company that has consistently  and quietly outperformed both of these giants when it comes to SaaS. That company is Take-Two  Interactive who owns Rockstar Games and 2K.

Take-Two portfolio features triple AAA franchises  like Bioshock, Borderlands, NBA 2K, Max Payne, XCOM, Red Dead, and Grand Theft Auto. Rockstar  Games is a renowned studio who follows the traditional “less is more” development philosophy.  Like CD Projekt Red, Rockstar only launches a handful of games every decade.

The studio took 8  years to release a sequel to Red Dead Redemption and 5 years between GTA 4 and GTA 5. But the  difference between Rockstar and CD Projekt Red is that Rockstar consistently hits home runs. GTA V on launch broke industry records in 2013.

To this day, the game maintains its record as the  fastest-selling entertainment product in history, earning $1 billion in its first 3 days.  With a development budget of $265 million, GTA V achieved profit and a 280% ROI in just 72  hours on the market. By 2018, GTA V had made $6 billion dollars.

And as of 2022, 160 million  copies of GTA V have been sold worldwide. Five years later in 2018, the studio hit another  home run. Read Dead Redemption 2’s launch set records as the second fastest-selling  entertainment product in history, earning $725 million in 3 days.

The game reportedly cost  $400-500 million dollars to make over 8 years of development. Even with this price tag, Red Dead  Redemption 2 made profit in just 72 hours. When we look at Take Two’s business performance,  what’s wild is that the company is actually hitting new heights every year in revenue and  income 4 years after Read Dead Redemption 2 and 8 years after GTA V.

Instead of the natural  drop-off in sales after a game’s launch, Take-Two makes more money each year than  before. While EA and Activision’s revenue also increases every year, it’s important to  keep in mind that to keep up their growth, they invest signficiantl more in R&D and release  more games annually than Take Two every year. In 2013, Take Two’s revenue grew over 100% with  the launch of GTA V.

But the company kept its foot on the gas pedal, using its middle class  franchises like Max Payne, XCOM, NBA 2K, and Borderlands to experiment with microtransactions  and SaaS. Borderlands 2 offered a season pass at launch and released 16 different types of DLC over  2 years. NBA 2K13 was the first game in franchise history to offer virtual currency.

Despite  the lukewarm consumer reception, the company quickly noted the value of microtransactions  as high-margin revenue. By the end of the year, every Take-Two game, including BioShock  Infinite, launched with a season pass. In 2014, Take Two came up with an official term  called “recurrent consumer spending” in which they separated microtransactions and DLC sales into one  bucket and full game sales in another.

By 2016, every Take-Two game launched with not only a  season pass and at a minimum 1 year of DLC. Recurrent customer spending grew on average  60% every year from 2014 to 2017. In 4 years, microtransactions and DLC sales went from  being a tiny piece of the pie at 11% to almost half of the Take Two’s overall revenue.

Longtail monetization became the focus. Make $60 upfront and look to make another $60 through  post-launch DLC. What’s unique is that Take Two actively encouraged its studios to meaningfully  tailor DLC and microtransactions to the game and not simply copy-paste proven industry tactics  like loot boxes or card packs.

Take a listen to this refreshingly thoughtful commentary fromTake  Two’s CEO on DLC and microtransactions. [Our goal is not to constantly build monetization.  Naturally we need to get paid appropriately so we can share the proceeds with our talented  colleagues and create a return for our investors, it's our job to do both.

We care about all of  our constituents. So we're not a charitable organization or for-profit organization.  Obviously, you wouldn't be on the call, if we weren't.

But monetization isn't a problem  for this organization. When we put out the best entertainment on earth, people show up for it. If  we give them something that's incredibly valuable, they pay for it.

We take it as axiomatic that  the nature of an experience is the intersection of the quality of the experience and whether you  feel you receive value for that experience. If you go to a phenomenal restaurant and have  an incredible meal, but the bill it should have cost, you're not going back. Even if you can  afford it, even if your price in elastic, you're not going back, it just doesn't feel good. 

So we need to make sure that we always deliver more than what we charge. And that's the goal  of our company and that's the goal of all of our labels. With all that said, with increased  engagement, comes increased monetization.

So you can always invest more over time. And you  can obviously do that in a game where you've got a robust micro transaction model. But what  you can't do is you can't change the nature of the game.

That would be suicide because the  reason you have a hit is because people like the way it is. So if you get to know audience  going and you change the nature of the game, purely with the motivation of creating economic  -- of extracting economic value from the consumer, you run the risk of screwing up the franchise. And  again, that's not something that we would do.

] In 2019, the company’s revenue exploded once again  by 50% with the launch of Red Dead Redemption 2. Read Dead Online and GTA Online, live services  that had been widely criticized at their launch for being buggy, repetitive, and half-baked,  were now picking up steam. The consistent flow of free annual updates, co-op missions, and  game modes to both Red Dead Online and GTA Online were paying off and players were returning  in massive numbers.

By 2020, Take Two crossed the 3 billion dollars in annual revenue, fueled by  record concurrent consumer spending in NBA 2K, GTA Online, and Read Dead Online. In 2021,  microtransaction and DLC sales grew by 50% from 1. 3 billion to 2.

1 billion dollars in  a single year. This was the first time in history concurrent consumer spending surpassed  full game sales, making up 62% of the company’s total revenue. Once again, GTA Online hit a record  number of active players and microtransaction sales along with better-than-expected  performance from Red Dead Online.

Critics may say it’s not SaaS, but  microtransactions that have transformed Take-Two. But I think that abstraction downplays what  the company has accomplished over the years. What Take Two has done is modernized its legacy  single player titles like GTA V and Red Dead Redemption into thriving live services with high  engagement.

They then monetized that engagement with microtransactions. For all the other games  that don’t work as live services like Borderland, XCOM, and Bioshock, Take Two says, hey, let’s  commit to season passes and DLC but don’t just shoehorn it in. Let’s integrate it in as  thoughtfully and meaningfully as possible.

If all you need to do to make money is  to introduce microtransactions or make the game a live service, then Square Enix and CD  Projekt Red would be in much better places today. Take Two’s lesson for the industry is a powerful  one. Microtransactions are how you monetize software as a service, but it’s not something you  can mindlessly throw in and expect results.

At the same time, just like not every product should be  a SaaS, not every game works as a live service. SaaS is a format that has to be strategically  applied and a muscle that requires continuous dedication year after year after year.