Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Mitch: I want to give you guys just a pre-recording compliment. I forget what it's called, there's a name for it. Basically, it's where you're reading something in the newspaper about something that you were a part of. You go, people don't know anything, this is so damn stupid. Then you turn the page, there's something about foreign affairs, and you're like, wow, super interesting. The thing you know about, you don't apply that same logic to the second thing.

I have to say, I have so much trust in your podcast because the stuff that you do that I was a part of, and there are many things you've done that you don't know that I was a part of, that I was part of, you guys were so good. It's so accurate. It is really remarkable. Somehow you're able to tell a story that is actually as close to true as true exists.

David: The secret is we don't have people on the show. This is not going to be that.

Ben: Welcome to this special episode of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert.

David: I'm David Rosenthal.

Ben: We are your hosts. After our deep dives into Nintendo and Sega, we wanted to do something special to cap off our gaming extravaganza. We wanted that something to be a special with guests who are actually in the belly of the beast of the gaming industry. Fortunately, we knew just the people.

Today, our conversation is with Mitch Lasky and Blake Robbins. Mitch is perhaps the best games investor of all time, generating literally billions of dollars of returns from early investments in Riot Games, Discord, and Thatgamecompany, not to mention Snapchat. Mitch was also an executive vice president at both EA and Activision, and took his own gaming company, JAMDAT, public in 2004. Mitch, of course, was a partner at Benchmark in the Fab Five era that we chronicled on our Benchmark episode.

David: Actually, we stole that line from Mitch when we were talking to him in the research, and that's how he referred to it.

Ben: We are joined by Mitch and Blake Robbins, Benchmark's current principal who has also come up on previous episodes. Blake is one of the best thinkers in the world on the gaming landscape today. Mitch and Blake just launched an incredible podcast called Gamecraft that chronicles the history of the gaming industry from the business perspective.

David: One of the things, if you're listening to this on the audio feed, we did a full video on this. It's up on YouTube. You can find it on our website or there. We did it at Benchmark's Woodside office. It turns out, they have another triangle table. We have now recorded Acquired episodes at both of the famous Benchmark dinner tables.

Ben: Listeners, as you know, we have an interview show called ACQ2. We've had back to back killer discussions with the CEOs of Retool and AngelList, AngelList in particular was very mind expanding for me on how to leverage AI to get huge, huge leverage in your business, specifically on the operation side of the house. I think Avlok is one of the best thinkers about how to apply AI to turn something that looks more a services business historically into a true tech venture scale opportunity. You can find ACQ2 in any podcasting app.

Join the slack. There's an incredible discussion of gaming history going on right there right now, including a bunch of episode follow ups, where David and I are learning from you all in real time, acquired.fm/slack. Without further ado, this show is not investment advice. David and I may have positions in the companies we discuss.

David: As may our guests and of course, their firm, Benchmark Capital, today.

Ben: Yes. This show is for informational and entertainment purposes only.

David: I think an appropriate place to start might be, what inspired the two of you to go talk about this and create Gamecraft, create this podcast?

Mitch: I think after I retired from Benchmark a couple of years ago, retired from active investing, obviously, the glide path out of venture is a long glide path. I'm still involved to this day. But after I retired from frontline investing, I really started to think about ways that I could be useful and helpful in the video game business, whether that was doing boards without compensation, whether it was helping young entrepreneurs, or mentoring younger venture capitalists. I thought, maybe I should just write a book.

I was very much inspired by a book that I think you know as well, The Genius of the System by Thomas Schatz. That book is a remarkable book in my opinion because it really takes the business side of the film business back from the 20s to the 50s, really elevates the business side of the business, and shows how a lot of what we understood to be the creative part of the business really was a collaboration between creative people and business people.

I've always had that same sense of the video game business. I thought it might be fun to do something in that vein, where we showed what was happening on the business side and how it was informing what was happening on the creative side.

Ben: I think the common narrative is, video games are something created by creative geniuses, a Miyamoto type person, and then the business models rearranged around the creative vision having consumers that flocked to it. I think, already, you're introducing this interesting wedge of, actually, there are very clear business models that guide where the water of creativity can flow. That has been, for the last 50 years, what has defined the video game industry, not the other way around.

Mitch: Yes, and not to take anything away from people like Mr. Miyamoto, who I have infinite respect for. He's a legend. He's a God amongst video game designers. I have had the great pleasure in my career of working with some incredible designers. They are the leaders of the industry in many ways, but they are constrained quite a bit by the business models in which they operate.

Just to give you an example, in the packaged goods era, your goal was to sell a disc, and then get somebody to come back a year later and buy another disc. That's a business model choice. Therefore, what you're going to put on that disk is going to be informed by that business model. It's got to have a degree of planned obsolescence to it because if it doesn't, if you just bought one game and played it forever, that's the end of the video game business.

David: That's how you get Final Fantasy 14.

Blake: Think about how many FIFAs or Call of Duties there's been at this point. It's still firing on all cylinders, despite the business models, which we'll talk about rotating right underneath them. Those still thrive even to this day.

David: I think one of the super cool things for me, and the reason why Gamecraft, I think, has been listened to by far more people than just in the games industry, is that this dynamic applies to a lot of industries. When we did our LVMH episode, the whole time, I was thinking that it's the same dynamic in any creative industry. If you want to achieve success, either as a creator and have people use and appreciate your work, or on the business side, you have to work together. You can't be at odds.

Mitch: Yeah, it's interesting. Actually, I really admired that LVMH episode. There was a part in your Nintendo episode that reminded me of the LVMH episode as well because those of us who had worked as competitors to Nintendo in the console business, and I did for a part of my career when I was running the studios at Activision, they had this...

David: It's interesting you consider yourself a competitor to Nintendo. We'll come back to that.

Mitch: There's limited shelf space in Best Buy. They were very much a competitor for that shelf space on the software side, in particular. For example, if they had a new Metroid skew, a new Zelda, or whatever, they were very clever about only releasing a limited amount of inventory for Black Friday.

The parents would go because that was on the kids' Christmas list, they would go to buy the disc, they would be sold out, and panic would ensue. Two weeks before Christmas or a week before Christmas, they would suddenly flood the shelves with all of the inventory that was available. Everybody was back to the stores. It was genius, but it's something that only they could do because they had that luxury good kind of vibe.

Ben: To bring it back, you didn't write a book.

Mitch: I wrote about a 200-page manuscript. The idea, and those of you who haven't listened to Gamecraft who are listening to this podcast, it's basically eight episodes, but they're topical episodes. We basically retell the same story from 1990 roughly until the present, but we look at them through eight different lenses.

I thought that was kind of an interesting and unique approach because all the other histories of the video game business are very chronological and very like, and then this happened, and then this happened. While ours doesn't have a bit of that, and then this happened, and then this happened, hopefully it's a little bit more interesting than that.

I finished it. I sent it to some friends of mine. They read it. They said, this is great, but nobody reads books. I was like, well, that's unfortunate, but I don't really know what to do with it. I said, I could do it as an audio book. I could read it as a monologue. I don't know what to do with it.

I had a fateful dinner in Boston with Malcolm Gladwell. I'm an investor in Pushkin, which is his podcasting company with Michael Lewis. Michael and Malcolm are both acquaintances of mine. Malcolm was like, dude, you really have to do this as a podcast.

David: Did he try to get you to do it as part of Pushkin?

Mitch: I did submit it to Pushkin. They rejected me. He got me to rewrite it essentially as a dialogue. At the same time, I got to meet Blake on Twitter, oddly. That's where we met. I was admiring his thinking. He was tweeting about the games industry.

There's so precious little, good public commentary on the games industry, and I was attracted to it. I asked him, do you want to do this with me? Do you want to be my interlocutor on this one? He foolishly agreed.

Blake: It's funny because Mitch and I knew each other briefly before I joined here. I remember I was just down in the office here one day. I had asked Mitch if he was willing to meet because before he joined, you're like, okay, is Mitch actually still active? Is he not?

Ben: LinkedIn says partner. What does that mean?

Blake: Is he actually retired? What is it?

David: The term for the Uncles. Yeah, you're an uncle.

Blake: Yeah. Mitch never retired. He still hangs out here all the time. I convinced him to meet with me, and we were just chatting. Throughout the course of those conversations, it just became clear that we were having so much fun just riffing on all this. I was learning so much.

I thought I knew a lot about the games industry, and Mitch's vantage point is so unique and rare. The moment that he shared the manuscripts with me, I was like, oh, my gosh, this is amazing. I was the perfect target audience for that. I think it became really clear over time, oh, this would be a really fun podcast to do.

Mitch: It was really useful as well because there is a generational component to the dialogue because we really are starting when I started in the business in the 90s. We're ending when he's running the business, basically, in the 2020s. I thought that there was some nice symmetry to that, actually, to have it be multi generational.

Blake: Mitch entered the industry right when I was born. He's telling these stories of all the games that he's worked on. Those are literally the games that I played, the games they published, and all this stuff. I'm like, this is insane.

David: Mitch, when you were on the business executive side, did you have a sense of how much the work of the industry was impacting this whole generation?

Mitch: It was a boiled frog type situation for me because when I entered the industry, my first gig really was in the formation of Disney Interactive, which was in the very, very early 90s. This was right around the time Bobby was taking over Activision. Basically financed by Steve Wynn, Bobby was buying Activision.

Ben: I forgot Steve Wynn financed it.

Mitch: Yeah. I don't know if you guys have done an Activision episode.

Ben: Way back before we have done the research.

Mitch: Basically, Bobby crashed the Cattlemen's Ball without an invite, and basically did it so that he could buttonhole Steve Wynn and get him to put the money up for the act to buy Activision out of bankruptcy. It was a genius steal because they renegotiated all the debt into equity in the new entity. Bobby was a brilliant, brilliant executive, even back then.

When I was working at Disney, and then subsequently, in my startup at Activision, this was still the geeky era of the serious video game business. Obviously, Nintendo had brought the console business back in 1985, but we were really only five, seven years into that. It was still a fairly recent phenomenon.

David: It was a corner in the toys industry, as we've talked about.

Mitch: And dominated by the Japanese too in general. There were a few. Obviously, Electronic Arts had gotten started, Interplay existed, and there were a couple of others.

David: But there were PC publishers, though.

Mitch: Yeah. Primarily, PC publishers. That said, no, I had no real idea of what the impact was because I thought I was making games for myself and other nerds like me.

Ben: The notion of casual gaming hadn't really hit its stride yet. I think one of my big takeaways from Gamecraft is that gaming is not for teenage boys. Gaming is an innately human activity that now we see in full bore. I flew down here this morning from Seattle, and the amount of Candy Crush going on around me on the plane. Gaming is a human activity. During the era you're describing, it really hadn't fully permeated yet, absent maybe Snake on some early mobile phones.

Mitch: Not even. If you think about it, probably 1996 was Barbie's fashion designer and some Hasbro games like Yahtzee, The Game of Life, and other things like that, that they basically did very lame digital versions of. That was the beginning of the casual game revolution, really.

It happened very quickly. Those titles did incredibly well, but the mainstream video game industry always viewed them, and frankly, to this day, still views a lot of what's happening in the casual game industry. It's not like the real games business.

As we know, because we now know what the numbers look like, it's most of the video game business. Probably more than 50% of the video game business these days would be considered casual gaming by 1990 standards.

Blake: It's interesting because those people who are playing Candy Crush still might not even identify as gamers.

Ben: I'm sure they don't.

David: I'm sure they don't.

Blake: When we talk about the games industry, it's so all encompassing at this point that it does include the Candy Crush, but also includes consoles and the hardcore PC games. There's a little bit of, how do you even frame what is gaming? I think for us, a lot of the podcast was walking through how that has evolved.

Mitch: When I did my second startup, JAMDAT, which ultimately was the successful one, the one that went public, we would be on the road, me and Michael Marchetti, my chief financial officer. We checked into a hotel, and they asked for a business card. We'd hand him the business card and they'd go, oh, I'm playing your bowling game. It was literally late night people on the desk at a hotel or train operators.

We would just meet these random people all over the place. A little girl sat down on a barge in Hawaii next to me, whipped out a phone, and started playing one of my games. That was when I really understood the ubiquity of gaming in that human sense that you described.

Ben: We're going back and forth before recording here on big takeaways from Gamecraft, and this is one of them. This feels like a huge beat to me. What are some of the other big beats for those who haven't listened yet?

Mitch: Just a very quick review of what the eight episodes are. They're free to play, which was one of the real revolutionary business model changes in the industry. It's the equivalent of the film business having television introduced, where you went from a very formal go-buy-a-ticket-and-sit-in-the-theater to coming into your home.

David: Or even probably more apt professional sports when television was introduced. It was only the upstart NFL that embraced it instead of fighting it.

Mitch: I think that it was a revolution of that import. I think we're still feeling the reverberations of it to this day, the impact of free-to-play and how it's changed, how people consume games, how they play games, and how games are made, because it requires a very different kind of game in order to be susceptible to a free-to-play mechanic than the old school stuff, everything onto a disk and hope that it's worth 60 hours for $60. That's one of the episodes.

We do an episode on the change in publishing from packaged goods at retail business to an online distribution business. Really, the rise of Steam would be indicative of that particular part of it. We do an episode on game economies and how they've evolved from their very, very earliest stages to these incredibly sophisticated, and now even Web3 enabled economies of our era.

Blake: One of my favorite episodes is the Forever Games, which is really around this idea of with the shift to free-to-play, can a game actually be there forever? What do those play patterns look like? Mitch has these amazing guidelines or just rules of making things about it.

Ben: Going into listening to Gamecraft, I had this high level idea that there's more durability in the video game industry now than there used to be. It used to be very hits-driven. I think a lot of people still believe, or a lot of investors look at the category as very hits driven.

There are two different and very distinct reasons why there's more durability now. One is this concept of Forever Games. The other is the concept of—Mitch, I think you coined this term of platform based publishers. Can you talk a little bit about each of those, how they fuel each other, and how they're different, but how they both provide durability in the industry?

Mitch: Sure. I think the Forever Games are part of a continuum. There was durability in the early video game business. It was just not the games themselves that were durable. Either the franchises were durable. You look at FIFA. I started playing FIFA on Trip Hawkins' 3DO back in 1993. I've been playing every year continuously for the last 30 years.

If you think about it, that's a 30-year persistent play pattern, very much concurrent with what we've described in the Forever Games episode with some of these long duration play patterns. It's just that they packaged it very differently. You were playing the same game, but you just have to go buy it again and again and again and again and again.

You look at the Nintendo portfolio, which you guys have done a really good job of exploring. You look at the continuity of their brands. where they've been able to bring the same characters and the same kinds of play patterns back again and again as they shift from NES to SNES, to Cube, to Dreamcast, to whatever. That is, in a sense, of durability.

David: To my mind, one of the most genius things about Miyamoto is that he came up with two to three really good stories. They tell that story over and over and over. Every Mario game is the same story. Every Zelda game is the same story.

Mitch: Absolutely. They're fine because as the graphics get better, as their ability to tell that story improves, and is richer and deeper, then you can go back and explore that story again. It has a hero's journey quality to it, where you don't feel like you're seeing the same story again. It feels new and old at the same time.

Blake: I think Grand Theft Auto is probably one of the best examples of it. I think Grand Theft Auto 5 was probably released eight or nine years ago. It still is a tough game on Steam. Everyone still plays it, which is amazing. But when they do an update, it's to the new generations. It really blows your mind, but very similar play pattern, very similar story overall.

Mitch: To your point about the platform-based publishing, I think that's really been more of the way that the online distributors have created competitive advantage against their packaged goods rivals and how they built very similar businesses to a lot of the businesses that we've seen emerge and disrupt incumbent industries across the internet space. Uber and the taxi industry or Airbnb and the hotel industry, where you aggregate demand on an online platform, and then you utilize that demand to leverage the supply side of whatever industry that you're entering.

I think if you look at Steam, Steam shares many of those attributes. I think that move was essentially perfected by Tencent, with QQ and the things that they did leveraging their messaging platform in the games business. That's been the kill shot for platform-based publishing in the industry. Essentially, it's more about how you use the internet in a jiu jitsu-like way to massively disrupt the packaged goods industry, which was up until that point, up until maybe 2003 or 2004. Absolutely dominant.

In fact, to your surprise, Blake, when we were discussing some of the games in the early 2000s, you were like, oh, my God, that game was actually on a disk. It was surprising to him to remember that some of these games that he grew up with as downloads originated as packaged goods.

Ben: The craziest thing is Steam was on a disk.

Mitch: Yes.

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David: Yeah. Vijaye's story is amazing. Before founding Statsig, he spent 10 years at Facebook, where he led the development of their mobile app ad product, which went on to become a huge part of the Facebook Business. He also had a first row seat to all of Facebook's incredible product engineering tools that let them continuously experiment and roll out features to billions of users around the world.

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David: Yes. Statsig lets you test them with different user groups and get statistically accurate reporting.

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David: It's so awesome. Statsig is also, it turns out, a great platform for rolling out and testing AI product features. Anyone who's used Notion's awesome, integrated generative AI features and watched how fast Notion has evolved that feature over the past couple months, all of that was managed on Statsig.

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David: You can click the link in the show notes or go over to statsig.com to get started. When you do, just tell them you heard about them from Ben and David on Acquired.

Ben: Can you share how Steam got started?

Mitch: Sure. The Valve team, Gabe Newell in particular and his partner, Mike Harrington, envisioned that they needed an updater, essentially, for their software because they were releasing these games like Half-Life 2 and CSGO. They wanted to be able to affect the competitive balance after they released them to fix bugs, to validate licenses, because piracy in this era was still a real thing.

Ben: And anytime you're selling box software, it's going to be a big thing.

Mitch: It's absolutely the case. They thought, hey, we could build this thing, basically, that would function as a software updater for our products. We'll put it on the disk, you'll be going up, log in, and then it'll download patches and whatever rebalancing for your game, et cetera. They went around to the rest of the industry. They went to even their old employers at Microsoft. They were early Microsoft employees, I think among the first 25 or so employees at Microsoft. They had good connections there.

They asked if Microsoft would be willing to build this tool for them. They said, no, so they built it themselves. Very incrementally, after they released it originally with Half-Life in the box, as you say, and it just auto installed when you installed the game. Very incrementally, over the next decade, they just kept adding features, community, an app store, mods, all of these various features, and just ate the games industry. Now it's an $8 billion a year business. It's just a remarkable, remarkable company.

David: Completely privately held.

Mitch: Yup.

Ben: Is Steam itself an $8 billion or Valve all up?

Blake: I think it's Valve overall. When you think about actually the strategy that happened there, which is really the essence, and we talked about this in episode two of Gamecraft, where it's actually releasing the game like what we're talking about with Half-Life. It's like this sneaky route of, oh, wait. I don't know how intentional it actually was in hindsight, but they've ended up building this platform and they're like, oh, wait, now all these other developers want to use this.

Now, it is the go-to place and a lot of people have followed. You have Activision having their own launcher. You have EA as their launchers. They all have launchers, and they all are still really pushed by the market to launch on Steam as well.

Mitch: We had breakfast with Phil Spencer, the head of Microsoft games yesterday. We were talking about Steam. Phil was like, I put my games on Steam. This is Microsoft, which has the most market power of any company, maybe apart from Nintendo and Sony, to roll their own. He's putting games on Steam. You fish where the fish are.

Blake: I think there's a new iteration of that. The latest attempt of being a platform-based publisher would actually probably be Epic, which Epic has Fortnite, it does incredibly well. They've launched that on their own launcher. Now they've been spending the past couple of years really trying to build up the Epic game store. From my vantage point, it hasn't made nearly enough of a dent relative to Steam.

David: That's one of the things I wanted to ask you guys about, which is, where are we in the business model journey of the platform-based publisher? It almost feels like the rest of the internet. The platforms are starting to ossify. Is that fair, or are there still opportunities?

Mitch: You're saying gaming is not us?

David: No, the gaming is. You've got Steam. You've got, obviously, the consoles. You've got Microsoft. Epic is trying, and Tencent has done the best, but who could conceivably break in? Or do we need a new paradigm?

Mitch: I think the next one to go is going to be Nintendo. If you're looking for a reason to invest in Nintendo as a company, I think they're about to crack that nut and enter the app store business in a meaningful way. They have the lowest third-party revenue per active user by an incredible amount, like hundreds of dollars to $25, versus the rest of their console competitors. They're waiting for that lead to boil off there, I think. That's on the conventional platform-based publishing site.

I want to return to your original question, which I think is very interesting. I agree with you. I think that Game Pass from Microsoft is an interesting harbinger of maybe the end of the road for the platform-based publisher, or at least the end of this road for the platform-based publisher, where they had historically aggregated the users in an attempt to collapse the supply side. Aggregate demand to collapse supply.

He's now filled with Game Pass aggregating supply again. When you look at the Activision deal, the $69 billion acquisition of Activision, basically, Netflix, Apple, or one of these other companies, buying exclusive content. Now I use the term exclusive somewhat guardedly because this is currently in the European Commission as a hot button issue.

David: Clearly, this is Microsoft's strategy, and they're doing this.

Mitch: Absolutely. They're now back to aggregating supply in order to have enough viable IP on the platform, such that you will continue to subscribe.

David: Which is really interesting. Just speaking for me personally, as a gamer, that is an incredibly compelling value prop of, I don't have a gaming PC, I don't really want to go make a gaming PC. I don't really want to go deep in the Valve ecosystem, I don't want to go deep in the Epic Games ecosystem. Microsoft is offering this really easy all-you-can-eat option to me.

Mitch: And streamable in a lot of ways. With the new xCloud platform, and I was a pioneering investor in this with Gaikai back in the day, it wasn't really economically viable. But now with scale, Moore's law and all these other things, and bandwidth improvements, we can now really do it well. With a device like a Steam Deck or something like that, you're able to really avoid going down that path of building your own gaming PC.

Ben: It is interesting that we're finally in the cloud gaming era. This has been the dream for so long. Of course, there's this TikTok and computing to thin clients, thick clients, thin clients, thick clients. But the whole thin client thing never really made its way to gaming.

I remember I worked at Microsoft in 2012. I was at our annual meeting in the old KeyArena. I watched a demo of cloud gaming on a Windows phone with an Xbox controller. I remember Steve Ballmer coming out and being like, next year is the year we're shipping this, it's finally happening. Here we are a decade later, and now it's finally happening.

David: Tesla full self-driving, this year it's happening.

Ben: My question to both of you on this is, business models are inherently intertwined with new technology waves. How does cloud gaming change the business model of the games industry?

Mitch: I think there's one thing that's interesting about the cloud model. One of my theses on why it didn't work back when I first tried it with Gaikai, when OnLive was out as a competitor, and some of these others...

David: That was the early 2010s.

Mitch: Early 2010s. It was a mismatch between the user and the technological opportunity. You could stream these games without owning a gaming PC, but all the games that were really viable to stream were the kinds of games that gamers who already own a damn PC wanted to play. You look at Stadia from Google. If you walk the floor of GDC in the launch year of Stadia, they were showing Assassin's Creed and these other really high fidelity...

David: Everybody already had this.

Mitch: If you were going to play that game, you had a PlayStation, an Xbox, or you had a gaming PC that was capable of playing it. I think with the real expansion of the audience in that intervening decade, you now have actually the question that David brought up, which is he doesn't want to own one of these devices, and yet he wants to play those games. I think that didn't really exist so much as a market back in the early days of streaming.

Ben: You think it's demand driven?

Mitch: I do. I do think, however, that the audience has expanded really in the last 12-15 years and this next generation of kids who've grown up on Fortnite, who've grown up on harder core games, but are still casual in their self-identification, who don't think of themselves as being core gamers. I think that's the real opportunity for cloud gaming.

Blake: If you think about all these people that are playing or used to play Fortnite on mobile, it's like, oh, that's just what I expect at this point. There is a natural evolution that maybe will happen, which is the number of people that have grown up playing games on mobile and just being like, of course, I want to play Assassin's Creed on mobile, whatever that might be. I still think it's one of those things, again, that for multiplayer, for those pieces, it might take a little bit more time. But surely, for the single player stuff, it's quite magic right now.

I want to bring it back a little bit to your question, David, around like the platform-based publisher stuff and where those might fall. Mitch was involved with Riot. Riot is another spin of what that looks like today. In theory, they could become an actual publisher of third-party games at some point, but instead they've decided to aggregate all the demands.

It's a social network, there are friends and all of that within their own universe. They continue to publish their own games incredibly well. You have Teamfight Tactics through their launcher, and you have Valorant through their launcher, and those have worked exceptionally well. It really begs the question, if you're a game today that is just launching on Steam, and you're a venture-backed company, what does that mean? Is that enough to really endure and build a real business?

Mitch: It's really interesting because it's a different approach to the platform-based publisher because you're really aggregating that demand for yourself.

David: Right. It's like a Nintendo version of a platform-based publisher.

Mitch: You've got this audience there that's pre-qualified, where you've got their credit cards, hundreds of millions of users. You just use it as a way to lower your customer acquisition cost effectively to zero for the next products that you launch in the pipeline. It just gives you tremendous competitive advantage.

Ben: This is the bull case on the Switch that we've been talking about, which is, at some point, Nintendo has to wake up. I assume it will be with the Switch line and say, wait a minute, we shouldn't come out with a completely new console and have to re-aggregate our whole fan base again.

We should iterate the Switch and make it super backwards compatible, and bring that 100-plus million person install base with us across all the hardware we release in the future so that we can make this incredibly compelling thing to third-party developers, Mitch, as you're talking about, their app store opportunity, but also preserve this ridiculously durable first-party revenue thing that we've had, especially for the last six years with the Switch, but basically through Nintendo's whole life, once their consoles get to scale.

Mitch: Absolutely. I think we will learn a lot about what their strategy is going to look like for the next decade in the next 90 days. I think if they do come to market with a non backwards compatible device, it's back to the Awada era. It's back to, we're a hardware company, and we have proprietary software, which helps us sell hardware, and it's back to the toy. If they come out with a fully backward compatible switch, an open app store, and they really try and improve that position of third-party revenue on an active user basis, that's the new Nintendo. That's the Nintendo that's going to play the modern industry.

David: That is so compelling, at least for me as a consumer, if they do that. A game like Hades, an incredible game, indie game, the Switch is by far the best platform to play that on. I've sat there for years staring at my Switch being like, Nintendo, why do you not embrace this dynamic?

Blake: I think you can see publicly in the way that they're going with Microsoft against Sony. Who knows what this actually looks like in the next 90 days? Everything we can tell of how they're siding with Microsoft and embracing openness, gives a clue of maybe how this [inaudible 00:37:24].

David: Yeah. You mentioned that a little bit on the Gamecraft series of Nintendo siding with Microsoft. Let's talk a little more about that.

Mitch: Sure. We don't talk about it that much on the series, just because I'm avoidant of talking about the console business and whatever. Let me just try and explain why. The console business has been essentially the same business since 1985, really since 1975. It's to sell a box, sell some physical hardware for that box, grudgingly allow it to be played online, and grudgingly allow communication between users. I don't find that interesting from a business model perspective.

I'm interested in revolutionary business models, and Gamecraft is really about that. It's about how these revolutionary business models up-ended the industry. Frankly, there haven't been a lot of those in the console business. Now, there have been a lot of interesting developments.

You guys explore the story of Nintendo. It's a fascinating story, but it's a human story. Particularly your first episode where you go way back, and you just talk about everybody. Who's everybody else's son-in-law? It's an intensely human story in that regard.

David: I feel like Nintendo, in my mind, did have one revolutionary idea that they have just run with for the past 40 years, which was make incredible games and get people who are capable of making incredible games, either in-house or make sure they publish on the platform. I don't think anybody else realized that at the time.

Mitch: I think that's right. I think Blake put it really well when he was convincing me to do the episode. He said, look, the console, when it entered the market, was a revolutionary business model. Because at the time, the arcade was the dominant way, and it was a quarter drop. In some sense, it was almost like the equivalent of free-to-play because instead of having to pay every time you wanted to touch the controls, now you had the thing in your living room, and you could play whenever you want.

Blake: If you're talking about the $60 for 60 hours of gameplay, that's literally the equation you were doing at the arcade. You're like, I'm putting 25¢ in for a minute.

David: In the arcades, it was $6 for six minutes of gameplay.

Blake: Exactly.

Mitch: I accept that.

Blake: We really ended that episode to bring this full circle around cross platform, which is the latest evolution of where the console business has been, where you had Microsoft and actually Nintendo embracing, and Fortnite was really the catalyst of this, to let them be able to play across these different platforms of up until this point, up to Fortnite. If you had an Xbox, you couldn't play with your friend who had a PlayStation or a Switch. Really, Nintendo and Microsoft went to war against Sony.

Mitch: As Phil said in our conversation yesterday, Sony's perspective was, if you want to play with your friends, get them to buy a PlayStation.

Ben: All these different business strategies are about figuring out, in what way can you leverage an asset to get people to do something that eventually generates profit for you? The way Sony was looking at it was, you want to play with your friends, so we're going to use that as the carrot stick, whatever you want to call it, to get you to buy our console, which we actually don't make money on, to get you to buy our games, which we do make money on. God it's like hop, hop, hop, hop. Nintendo and Microsoft ended up being quite odd bedfellows having completely the opposite strategy.

Mitch: You could be cynical about it. You could say that that is the result of the fact that Sony has dominant market share. If you were the dominant market share player, you might not be so embracing of openness, either, because you had a competitive advantage. I think it's going to come back to bite them in the ass over time.

David: It's interesting. At one point, I think in the series, you guys say that with your investor hats on, it would be really weird if an entrepreneur approached you today and said, I'm going to build a game for a console. But everything we're talking about, if the era of cross play really comes to bear, that might change things. Would you agree?

If it truly is that you could build a forever game with cross play across console, PC, mobile, as part of our Nintendo research, we talked to the CEO of a very large venture-backed gaming company that is not on the Switch right now, that is working very hard to come on the Switch for this very reason.

Mitch: I will say, yes, it is now viable. I would not counsel any of my portfolio companies to launch on the console because the hoops that you have to jump through for approvals, for manufacturing, et cetera just in general, are dire. They are not the kind of thing that I would put in front of a company that was struggling to find product market fit. That said, I have greenlit a switch skew at that game company for Sky. That has now come to market, and it is really meaningful. We have a PlayStation 5 skew as well.

For an established product, where it's already found product market fit on another platform, on a more open platform, sure, finding that adjunct as Fortnite disclosed in the Apple lawsuit, the cross play players monetized the new whales. They were monetizing it at multiples of what the non cross play players were playing. Why not take advantage of that as a startup?

Blake: It turns out that, actually, there are different moments in console, where console really was the packaged good, and then at some point, the package good business for the games. At some point, free to play games were able to thrive. You have the Fortnite actually do really well. If free-to-play games are really driven by social or playing with your friends, which Fortnite was, you need to have it on console as well.

Mitch: Think about it demographically. If you've got a game on the console, for example, we were talking about this with one of our co-workers about FIFA Ultimate Team, which you may be familiar with, which is a playing card add-on to the underlying FIFA skew, where you can buy card packs, open them, and then you can play with those players that you get in the card pack in the sim. That is a massive business. It is greater than a billion dollar a year business selling literally bits. It is a 99% gross margin. It's the most astonishing business.

This person was saying, look at the attach rates for FIFA Ultimate Team. Can't we accomplish those with a free-to-play game? We were like, whoa, slow down, you understand that you're selling a $20 add-on to somebody who's already paid $60 for the game and $500 for the console. The willingness to pay of that user, it cannot be compared to getting somebody from zero to one on a free-to-play game to put their credit card in for the first time to buy a virtual good on a free-to-play game. I think that nuance is lost on a lot of people when they look at the industry.

David: That's the great pot of gold with the consoles. You've got these highly committed user bases with all their credit card information stored. You've got easy payment rails, easy distribution. It's like the dynamic of iPhone versus Android, but a whole another level. Literally, you can look at it in the data with Fortnite. It's even better than iPhone monetization.

Ben: It's also exactly what we talked about on the Peloton episode, where Peloton, despite all the problems, has possibly the most incredible consumer subscription business at least from their first five, eight years of customers, because they selected into buying a $2000 exercise bike. Of course, I'm not going to cancel a monthly subscription.

Blake: I think this is part of why Epic actually felt comfortable going to war with Apple. If you look during those filings, so much of their revenue is actually coming from PlayStation and console. That, to me, is just like, okay, the mobile gamers were not the same value as the console and PC players.

Ben: One question before we leave platform-based publishers that I've been thinking about, but I don't have a clear answer is, when does a company have the right to leverage their relationship with customers into becoming a publisher? QQ is a chat app. How the heck did they become successful in being the Tencent we know today, the most powerful video game distribution on the planet? Whereas you look at Facebook has made 11 different runs at gaming and is not Steam, is not Tencent. Why does sometimes a company have the right to leverage that relationship to be a publisher and other times not?

Mitch: I would rephrase. My opinion is that, why QQ was successful was that they didn't just decide that they're going to be a platform-based publisher. They embraced being a platform based publisher. They went out and did deals. They own 49% of Epic. They owned 51% of Riot, now 100% of Riot.

They were one of the financiers of resort in the games business for triple A titles. They aggregated third-party products as a pathway into China because you needed a local partner because of government regulation in order to publish in China, and they just ran with that. They just embrace that.

Instead of Facebook or some of these other American platforms that have treated games as a bad smell over in the corner that they weren't too crazy about, okay, yeah, the Zynga thing they flirted with briefly, but ultimately, that didn't go that well. They decided, now we're just going to become a customer acquisition vehicle for the games industry.

Frankly, it's been a very lucrative piece of their business. But they really embraced it, Tencent,  and invested deeply in it. I think that's the difference. They were credible as a platform based publisher, where Facebook never was.

Blake: Tencent and QQ had the games. They were committed, and they were so intentional. When Mitch and I have talked about when we look at investing in a studio, for example, it's actually, how intentional are they at the beginning in setting out that you are going to try and become a platform-based publisher? Even just saying I'm going to launch my game on Steam as a new company, maybe it's just showing your ambition of what you want to build.

I think that when you're talking about Facebook, I talked about this part, a lot of the executives in the Valley are just not gamers. They're like, oh, we can maybe launch a game thing. But they're dipping their foot in the water versus actually really looking into it.

David: Look at Google and Stadia.

Ben: You're saying, just because David and I have a bunch of people listening to podcasts, we can't just decide like, all right, we're now Acquired games. You're all going to start playing games, and we're turning on the network.

David: We'd have to be Gamecraft to do that.

Mitch: Even then, it's difficult. We tried this Discord. We tried to start a game store. This was obviously my failure because I pushed them very hard toward becoming a platform-based publisher, because I thought, hey, man, this is a great way to leverage this audience. They already self-identify primarily as gamers. This was earlier on before the Discord audience broadened to becoming the Bloomberg of crypto, and now basically the launch area for pretty much every AI chat bot.

In those days, it was very gamer centric. It seemed very logical to me that you could try and leverage that intentionally into the games business, and it didn't work. It doesn't always work. Jason is as deep of a gamer as you could get.

David: Discord was a failed game company, right?

Mitch: I invested in that failed game company. I invested in it as a game company.

David: I'm just trying to blame them, not you.

Mitch: No, it was me. Even with the best of intentions, it can be a difficult proposition.

Blake: This goes full circle to your earlier question, David. Are the Giants already just set on the platform-based publisher side? It's really to be determined because Discord attempts it. You have Epic really trying to do it. Everything brute forcing that they possibly can to make it happen, and it doesn't seem like it's sticking at all. There is a little bit of a question of what does it mean to actually try and build one today, and is it even possible?

Ben: For our second sponsor, we have another one of our favorite companies, PitchBook, the data you need to dive deeper. I've been diving into PitchBook's platform on the companies we are covering, but I want to talk today about a new feature of PitchBook's data platform that they call the Exit Predictor.

If you log into PitchBook, and you do a query for companies tagged as gaming, you will see 7000 privately held companies. I can then sort by fields like success probability and exit probability. It literally gives you a percentage for every single company.

David: This is cool.

Ben: The new feature is based on a machine learning model trained on 46,000 data points from PitchBook's proprietary data set. It's pretty wild. At the top of this list are companies you'd expect like Epic Games, Niantic, and one of Mitch's investments, Thatgamecompany. High probability of success, 97%-99%, likely to produce what PitchBook defines as a successful exit for investors.

The more interesting data, as you can imagine, is the meat of that distribution. If you're an investor looking to invest in a growth stage company, for example, it can be quite interesting to see what PitchBook has in that field, whether it's 30% or 70%. An interesting and useful data point, especially as you're looking to narrow down your set as you're prospecting for companies to invest in. Get access to all the best company data at pitchbook.com/acquired.

Basically, every VC and PE firm I know has a PitchBook account. If you aren't using it, you really are at a competitive disadvantage these days. If you do sign up for PitchBook, go to pitchbook.com/acquired. You will see on that landing page, they are currently offering a free week trial that is coming up soon. You'll get that free trial just by going through the link in the show notes. When you sign up, just tell them you heard about them from Ben and David at Acquired.

David: Thank you, PitchBook.

What do you think about one of your other investments, Thatgamecompany? Is Thatgamecompany a platform-based publisher, is it just a really, really great modern studio, or is it something else?

Mitch: It's a great question. I think that the intention is for it to be a platform-based publisher. Game 2 is already in development as the beginnings of thinking about not only Game 3, but a way to stitch the games together in a more persistent and coherent way and with more continuity. I think Jenova, he wouldn't phrase it in that way. He wouldn't call it a platform-based publisher, he'd call it a digital theme park.

David: Which is Nintendo-like.

Mitch: Which is Nintendo-like in a way. Now Nintendo has a legit physical theme park to go along with their virtual theme park. I do think it is in that same vein. I would call it a platform-based publisher.

Similarly, I think the greatest disagreement I had with the founders at Riot was when we sat down and I was like, okay, great, we got to hit. Now we're going to leverage this audience into another hit, into a third-party game, or into a licensed intellectual property. They were like, chill, man, we want to be Blizzard, we want to make a game every five years. I'm like, I don't want to fund a studio.

Ben: Also, Blizzard, as you pointed out on Gamecraft, only an independent company that had to figure out its funding for three years. The rest of its history, it's had Daddy Warbucks somewhere figuring out how to do it.

Mitch: Absolutely. I was wrong because they just took their time to become a platform-based publisher.

Blake: It took up 10 years, but they did it.

Mitch: I'm not that patient, but there was an opportunity to start doing it after three years. I think their strategy was triple down on League of Legends, let's make sure that we could get it to all corners of the globe, and that we can really build a billion dollar plus annual revenue base and the eSports component, the Worlds and all these other things, and then we'll go and release Valorant, Tactics, and some of these other things. Okay, fine, but ultimately, they got to the place I wanted them to go. It just took them seven years longer.

Blake: I think it'd be interesting if you're willing to share, Mitch, of what Jenova actually pitched for Thatgamecompany back in the day. I've talked to Peter, I've talked to other people, and they still remember that pitch being just an amazing, amazing pitch. At the time, it still was like, for you to invest in a studio. That would have been a big ask or a big leap of faith. My understanding is he just crushed it on the pitch.

David: This is great, too because I bet a lot of people listening will be like, what are you guys talking about? What is that game company? Are you referring to a specific thing or?

Mitch: No, it's a little confusing. It's not my favorite name for a game company, although it's indicative. I want to actually go take a pause just because I don't like funding studios. I wrote about this. I think you reminded me of this because you found it in some internet archive somewhere. I blogged about this 15 years ago.

Blake: Yeah, I think it's 2011 or something like that. It's amazing. Mitch has probably removed all of his blog posts at this point. I think it was Investing in Content, and he's like, I don't invest in content.

Mitch: I don't invest in content, even though I've done more content deals than anyone else in the Valley. What I meant by that is that I invest in businesses, not in studios. Those businesses have to have a strategy that transcends. I want to make a game and put it on Steam, or I want to make a mobile game and put it in the app store. I'm really interested in that strategy more than I'm interested necessarily.

Content is a means to an end, but the end can't be, oh, then we're going to go make another game and put it on Steam or put it in the app store. The end has to be something better. It has to be something more durable. It has to be something more value aggregating. I've had this philosophy since the very beginning. I've tried to use it to be very disciplined about it.

Jenova Chen approached us. I had met him in the early 2000s when he was a graduate student at USC. He was making games there. I was working at Electronic Arts, and I had the license for Spore, which was Will Wright's creature evolution game after SimCity. I was doing the mobile version of that.

Jenova had made this game called Flow that was basically this game, where little creatures ate bigger creatures and evolved based on what they ate. It was just this unbelievably cool thing. I wanted to bring him in and build this mobile version of Spore with me. Of course, he was way too clever for that and said, no. But I kept up with him, we hung out, and then he went off into the Sony ecosystem and built Journey.

Journey is this amazing meditation on death, where you're playing a single player adventure game and you're climbing a mountain, enduring all this hardship, and it's got all this crazy multiplayer play, where you don't know who you're playing with, but you have these deep emotional relationships with the people. He's just an unbelievable game maker.

Ben: And the art for that game is just beautiful. You screenshot any frame, and you can put it up above a fireplace.

Mitch: It's extraordinary. He came to me and said, hey, I'm leaving the Sony thing, I want to start over, I want to make a game for the masses, can you help me? I was like, yeah, I can, but let's pitch the partnership. He came in, and he did this pitch to the partnership, where he basically talked the whole time. He didn't talk about the game he wanted to make at all. He just talked about emotions and how the video game business was so stunted because it was only serving this incredibly narrow band of the human emotional spectrum of anger, of violence, of envy, of accumulation.

There were all these other emotions that were being explored in music, in art, in poetry, and in the movie business. We should do that in the video game business. He finished his thing, he walked out, and I literally ducked because I thought that the blast radius from my partner is saying, what can you do in bringing this into the partnership?

David: It's like, we're a capital firm, and we're funding happily.

Mitch: Kevin Harvey turned to me and said, chase that guy out in the parking lot and give him a term sheet. He was like, we are in business to fund people like that. I still get goosebumps saying it now because that's how I felt, but I was too afraid to say it in the partnership meeting because I didn't have enough juice to do it.

David: That must have been relatively early in your career at Benchmark.

Mitch: It was, really, because I've been working on that thing forever. It was probably within the first couple of years that I was at Benchmark.

Ben: Before Snap, before Discord, before Riot?

Mitch: Right around the same time as Snap.

Ben: Okay.

Mitch: Right after Riot.

Ben: But Snap, you didn't know it was going to be Snap yet.

Mitch: Snap was still pretty small at that time.

Blake: Peter tells you exactly the same story, by the way, on our team. When he talks about the range of emotions that he was going to cover and how underserved it was, it was just magical. This moment of, oh, my gosh, this person is a genius. In a lot of ways, Jenova is just an exception to the rule. Even still, he is on the path to build something much bigger than just content.

Mitch: I'm a very small contributor to the success of it, but what I did help him understand was that he can't make Journey again. If he makes Journey, again, he's going to get the same result that he got from Journey, which is, he's going to get a console-like, indie developer result. I really helped him understand how to build a forever game. He rose to the occasion and just built an amazing forever game. It was the number four grossing game in China by revenue.

Ben: What is the game called?

Mitch: It's called Sky. We're talking about hundreds of millions of dollars in revenue. He does it with a tiny team, so it's ludicrously profitable. I think it's got greater than 30% net income margins.

Ben: Would you fund, at this point, the concept of Sky, even if there wasn't a broader platform-based publisher strategy around it? Is that a good enough investment? Let me make an even sharper example. If you got the pitch for Riot Games, and it was literally just League of Legends, and it was going to be a League of Legends sized impact on the world, is that interesting as a venture fundable opportunity.

Mitch: I have the great benefit at the moment of not being a venture capitalist in the firm, but having a lot of dough. I am in a position where I can make these investments personally, so the answer is yes. In fact, Blake and I have made some of these investments in things that maybe would have shaded into the studio realm in my previous life. However, I would not have done them at Benchmark.

Ben: If I'm hearing you, right, it's because it's just difficult to accrue enough power over the ecosystem to have flexibility in your business, to have pricing power, to be able to negotiate effectively with everyone else you need to to reach your customers.

Mitch: Yeah, distribution is king.

David: Which is so funny. Everybody says content is king, distribution barriers have been removed, and anybody can make a game, but it's today. In 2023, distribution is king.

Mitch: If you don't have distribution leverage of some sort, I'll invest against any credible distribution leverage. But if you don't have that distribution leverage, it's very difficult. It's very difficult to aggregate enough value to justify the venture investment.

Blake: You should just assume, every venture-backed studio is an amazing game. It just should be one of the best games ever.

David: It's never been a better time to be a gamer.

Blake: Yeah, it should be an amazing, amazing game. Like we know with apps and software, having a great app, unless it is truly top one app in that category, people will never even know it exists. I think that a lot of people that are building studios today are much more in the camp of I'm going to build the best game ever, and people will come. I think if we've learned anything over the years, unless it is truly the exception, they won't come.

Mitch: I think part of the pitch that Riot made to me that made me convinced that it had a distribution advantage and made me willing to invest in it, was the way they understood the existing audience for Defense of the Ancients, which was a game that was a mod of Warcraft 3. They were going to turn it into a standalone product with it and relaunch it online with its own characters and own IP.

You could see that as a studio bet on a certain level, but they had identified this enormous pool of users who were playing Defense of the Ancients. There was this crazy pent-up demand for exactly what they were going to do because modding Defense of the Ancients and running it as a user, you to find an out-of-print copy of Warcraft 3, and go through all of these machinations to...

David: The Riot team did some pretty awesome growth hacks in the early days, right?

Mitch: We bought the websites. We bought the Defense of the Ancients websites and just turned their editorial to League of Legends.

David: All the fan content on the internet.

Blake: It still sits on Reddit, by the way. I forgot what the name of it is.

David: This is even better than the Airbnb-Craigslist growth hack. It's one to one.

Mitch: You could call it a growth hack, I call it a customer acquisition advantage. It gets you out of the junk pile of throwing a game up on Steam and praying. That was enough because I knew if I could leverage that, it would give me enough of a profit advantage that I could reinvest, maintain that customer acquisition advantage, and build a platform-based publisher out of it. That's how I roll.

Ben: Blake, what were you saying about the Reddit thread?

Blake: I was just saying, on the Reddit thread, if you search it, I forgot what the name of the website is that they bought. It's all these people who were playing Defense of the Ancients and they're like, what the hell happened, what was going on?

It was the top post of the Dota subreddit at the time. It's like, what happened? Who are these people? What are they buying? What happened? They killed this. And they all just move over.

Ben: It's like, Dota is still over there. The forums are all pointing to this very similar game with different IP.

David: If you want to discuss something, you have to discuss this.

Ben: I will say it's incredible how there was a thing with clear product market fit that was unloved, unmaintained, and hard to discover. In our world of podcasting, that was Apple Podcasts and the small team at Apple that was looking after it. They didn't turn it into a real business. There wasn't a prioritization at the company.

As a podcaster, it was always hard to get in touch with someone or be like, can I get editorial on this thing? I don't even know. It's this weird black box. It's basically just like a directory, where it's a key value store, on the left side, they have a URL, and on the right side, it just points to my RSS feed. Then Spotify comes along and just like, oh, well, we have tons of users, we're just going to expose this right on the main feed.

So much of our growth in the last year or two years has come from Spotify, specifically because more people are listening to podcasts on Spotify. There's some cannibalization, but there's an enormous amount of brand new markets because it's easy to find.

Mitch: As a total neophyte to this world, we have both been just gobsmacked by what percentage of our users are coming from Spotify. I would never have predicted how big of an audience was on Spotify because it just didn't occur to me that Spotify had done that well in podcasting, until we started releasing these episodes, and we're like, wow, more than 50% of our audience is coming from Spotify.

David: If you'd made Gamecraft two years ago, that would not be the case.

Mitch: It's actually really weird.

David: It's wild.

Ben: There's this really interesting opportunity in capitalism, where sometimes there's clear product market fit, there's clear heat around a use case, and yet there's still a massive economic opportunity for some new company to come in and say, oh, that thing, we're going to be the best in the world with that now.

Mitch: By the way, it happens again and again in the video game business. For example, the survival genre, which started with Arma Mods, DayZ, and H1N1, and evolved into PUBG and then into Fortnite. But these were dead genres. These were super geeky, hardcore weirdnesses. Tarkov, which now is a dominant play pattern in the MOBA shooter industry.

Blake: Basically, these genres emerged. It gives product market fit. Then they realized, oh, wait, if we just make this maybe more casual, we change the business model, or whatever it might be, they expand the overall audience.

One of the most famous examples right now, Fortnite comes from PUBG and stole that whole reign, is actually Fall Guys, which Fortnite or Epic bought. Fall Guys was this amazing party game that they couldn't publish on iOS because of the Apple lawsuits. They never built a mobile game for it.

These three guys in Finland made basically the same exact game and pushed it on mobile. It's called Stumble Guys. It's one of the number one apps for the entire year, number one games for the entire year, and gets acquired by Scopely. Mitch was showing me the other day, the biggest game in China is this game called Eggy Party on mobile. That is actually, literally, just a Fall Guys clone.

Mitch: It really is. It is remarkable. You could argue, World of Warcraft was this. You started with Ultima Online, EverQuest, and these things.

David: They weren't ambitious enough.

Mitch: Yeah, they weren't ambitious enough. They didn't reach out enough. They were very content to serve that core 500,000 users. The joke at Activision back in the late 90s, early 2000s, when I was working there was there was a herd of 500,000 users who just migrated from one MMO to another, but the audience never grew. Then boom, World of Warcraft basically does this. They find the product market fit, just embrace it, and blow it out. Seventeen years later, it's still a number one product.

David: I want to pick up on something Mitch said a minute ago about how you roll. I think it also might be relevant far beyond games and some of your investing beyond games, too. You said you'd look for something that can have a distribution advantage up front. Game differential profits versus your competitors and then reinvest. Let's take a game. Once the game starts to work, how do you think about the reinvesting piece like that's the customer acquisition piece? What's that calculus for you?

Mitch: I resist as long as possible going paid, although sometimes you're so profitable that you can and not really mess your margins up too much. I think once you start down the paid path for customer acquisition, it's a slippery slope, and it's a very difficult thing to come back from because you become almost an addict to it. You're so reliant on it that you start to twist your mental model to believe that you're in this lifetime value return on investment thing that is unhealthy, I think .

What I do love is doubling down on the organic stuff. In the Thatgamecompany case, it's like, okay, we got this thing crashing on mobile, let's look at some other platforms where a similar user could be aggregated, whether it's Switch, whether it's casual PlayStation, et cetera, and let's go after those. Apple wanted us in the arcade. We couldn't do it because we want it to be cross platform. They wanted exclusives. It's also what you say no to during that. It would have been easy to say, okay, hey, there's a couple million dollars of minimum [inaudible 01:10:17].

David: But you're not going to expand your audience, by the way.

Mitch: Not going to expand the audience. It's making those kinds of key choices that continue to reinforce the competitive advantage.

Blake: I think there's another piece of this, especially for free-to-play games, where live operations, keeping the events fresh, adding new cosmetics in the game like League of Legends, is actually where most of the reinvestment probably goes, versus any of the marketing. It's, let's keep this game fresh because in a lot of ways, when you launch a game like League of Legends, that's just the starting line. There's still a 10-year journey of keeping this game alive and fresh. That's where a lot of the reinvestment goes in these studios.

David: How does the level and capital intensity of reinvestment in fresh content for forever games compare to the old world of building new package games for a studio or a publisher?

Mitch: It is fast becoming an annual amount, equivalent to what an annual amount during production was. I don't know if that makes any sense. Let's say that you're spending $50 million to build a game. Let's say it took you three years. You're spending roughly $15 million a year. I think you can expect to spend as much or more on an annual basis than you were spending in development in live ops.

Blake: That can cover anything from the support side of this when people report toxic users. But really, you see it a lot in the events of, oh, I need to make new skins, or I need a new champion in League of Legends. When you think about League of Legends, so much of that game is actually run balancing. You're investing all this time in QA testing, balancing, and making sure things don't break.

Riot updates League of Legends every two weeks. Every two weeks, they're putting out new content. They're balancing everything. That's pretty much the entire P&L of that game. At this point, it's just keeping it fresh.

David: Plus story content, too. People have realized the IPs for this have become incredibly valuable.

Mitch: Absolutely.

Ben: Where are we in the eSports journey in terms of that being a reinforcing marketing strategy? I asked Blake.

Mitch: You asked Blake for a good reason because we're going to get a very different answer if you asked me.

Ben: I want both your perspectives.

Blake: Actually, I think we'll be closer than you think.

David: Blake, you helped start the 100Thieves eSports team.

Blake: Yes.

David: You thought it was a good idea at some point?

Blake: I actually think for 100Thieves, which is an eSports organization, it has three pillars of it, which is content and immediate side, it has an apparel side, which is also a thriving business, and then the eSports side. The view was always, which is probably similar to Mitch's, eSports is marketing.

The view was, how do you start a brand in gaming? It was let's try and we'll go and get a spot in League of Legends, which was franchising at the time, that will legitimize the brand, and then hopefully, that eventually figures itself out and becomes sustainable. It will be great marketing and distribution for legitimizing a new brand in the gaming space.

I think there are all sorts of nuances around League of Legends eSports and Counter Strike eSports. Really, when you say the word eSports, and this is probably the real struggle of it, it's quite literally just saying, what do you think of sports and owning a sports team? It's like, every single sport actually has its own pros and cons to it.

There are certain leagues that maybe accrue more value than not, but for the most part, they really are a marketing engine. They can be a marketing engine for your organization if you have set it up that way. But for the most part, it's a marketing engine for the game itself and keeping it fresh.

Ben: That's actually what I'm more curious about. David took it to the enterprise value of eSports organizations.

Mitch: That's less interesting because it's an obvious failure. It is. With all due respect, there are some, yours, Team Liquid. There's a few of them that have transcended, that are now brands in and of themselves of a certain sort, and can sell merch and other stuff like that. They compete in the League of Legends Worlds, get a lot of exposure, sell skins, and all that other stuff.

Ben: A hundred million viewers on that.

Mitch: Even those are struggling financially. Those are still not great businesses, but they're viable businesses. Ultimately, all of this is accruing benefit to the League of Legends, to the Overwatches, to the CSGOs of the world, because that's really what it's functioning as.

Basically, you're getting 30 million people to watch League of Legends streams during the Worlds, and those people are gonna go play more League of Legends, buy skins, and whatever. When the Chinese team won Worlds, the Riot guys were throwing confetti because when the Chinese win, it's a $150 million revenue opportunity in terms of increased unexpected sales of skins.

Blake: When I think about why I was excited, or why I actually still am excited about eSports, is video games, especially a free-to-play game like League of Legends, it feels different than soccer or basketball. In basketball, I know at a very young age, I'm not going to go pro. I don't have any real way to even play with people of similar skill level as me in my neighborhood.

I think when I play League of Legends, there's a clear sign of progression. Actually, I just think the average person probably feels like it's more achievable. If I hadn't been in hours, I could go pro in League of Legends. An average person might actually say that.

Mitch: More like golf or tennis, maybe, in a team sport?

Blake: Yeah. So much of the skill just feels more obtainable? Because you're seeing another kid in a town who's making money, you're like, that could be me if my parents just let me play.

David: It's way better than golf and tennis because the barriers to entry are so much lower. You don't need the money. You can have a lot of money if you're going to play golf or tennis.

Blake: Yeah, and you're immediately queueing up against the best in the world.

Mitch: I'm just thinking about it in terms of participatory with a smooth continuity to pro.

Blake: One of my favorite examples is there's a streamer named Tfue in Fortnite. He got famous because he ended up in the same lobby as Ninja. He just absolutely styled Ninja on a stream. His name was twitch.tv/tfue.

David: Truly, any given Sunday for everybody.

Blake: Yeah. Imagine just being able to go and play pickup basketball with LeBron when you do that because he'd risk getting hurt and all this stuff, whereas Ninja is playing all day. If you style him, there's a real chance for you to get famous. That part, there is just a difference of like, the dream is obtainable. That is so compelling to me.

Mitch: In that way. I think it's very similar to what we saw during the poker boom, where people were playing online. You could play on into the World Series of Poker from those online games. I think that's an interesting analog.

Blake: Yeah. Actually, Valorant, for example, just recently released this semi pro mode, where you have a team and actually let you run tournaments. Eventually, if your team gets high enough up the ladder, they will play essentially the World Cup. I think that it is just so amazing to sell that dream. It's not even just selling, it's real that there is going to be someone's life changed if they get discovered.

David: Back to the earlier conversation about reinvesting in the game over time, what an incredibly leveraged way for successful forever games. The ROI on investing lots of capital in your eSports ecosystem is going to be very high.

Mitch: Very high if it works.

Blake: There are a lot of different approaches for what it's worth. If you look at Counter Strike and Valve, they just don't really care.

Mitch: It's more like golf. It's more like the PGA where they sanctioned events, as opposed to basically owning the league.

Blake: They'll cosign four tournaments a year, they'll call the Majors, but there are hundreds of tournaments that happen outside of that. As a team, you choose which ones you go to.

Actually, the real reason why the eSports boom happened from an investment standpoint, is you finally had the publishers like League of Legends stepping in and saying, no, we're going to try and run this like a sports league, where teams are able to buy a franchise spot. This should be the equivalent of a token similar to an MLS team. There's a lot of things. But really, it goes into, can this accrue value? I think that's really a different dynamic.

Mitch: I spent five years talking to the existing sports owners who had terrible FOMO from dumping money into these things. Some of them took my advice, some of them didn't, and ended up with some really dead assets. That was Bobby's strategy. That was the League of Legends' strategy.

Ben: Bobby got people so whipped up.

Mitch: Whipped up because he was basically like, look, this is the next NFL, get in now where you can buy in for tens of millions of dollars, as opposed to tens of billions.

Ben: This is the Overwatch League.

Mitch: Indeed, yes.

Blake: By the way, I think even me at that time was telling people, that's probably not the wisest thing, especially when you think about that it's not even a forever game. That was a game that's a $60 packaged good. That's trying to be an eSport.

My brain just broke at that moment. I'm like, okay, at least let's think about the incentives here of how we're going to align this. It's a completely different business model and game overall. At least in League of Legends, the incentive is still to keep this game alive hopefully forever, and that could accrue differently than something like an Overwatch League.

David: Now it is time to tell you about another one of our favorite Acquired companies, Vouch, the insurance of tech. Vouch is the fastest way to get business insurance for your startup when you're getting started and the right way to ensure your company as you scale. This season, we're doing something really fun with vouch. We're doing actual client case studies with them.

Today, we're going to talk about Seek, which is a generative AI company founded by Sarah Nagy, an astrophysicist turned data scientist. One thing that always annoyed her when she was leading data teams was non data scientists colleagues would reach out to her team for a whole bunch of simple one-off reports that they needed, but would take focus away. Then ChatGPT came out, and Sarah realized that it could write SQL and Python scripts on its own, and aha. She was like, generative AI can be my team member that answers all the one-off requests, so she left and started Seek.

After she raised an angel round, her first priority was enabling revenue. Of course, she called another great friend of the show, Vanta, to get SOC 2 compliance certified.

Ben: This Acquired cinematic universe is blowing my mind.

David: I know, it's amazing. This is so great. Through working with Vanta, she realized she also needed business insurance. Vanta, of course, sent her over to Vouch. Vanta evaluated everyone in the insurance space, and only Vouch really can do the best job for startups and tech companies. Sarah clicked over from Vanta to Vouch and had her basic business insurance done in minutes.

Fast forward, Seek is now scaling rapidly and has multiple Fortune 100 clients. Vouch is scaling right there with them. They added directors and officers insurance to protect her execs and board, then they added errors and omissions insurance coverage to protect Seek from mistakes and customer disputes, which, hey, guess what, in generative AI, that's a real risk, and it's different from other companies.

Vouch, being the insurance of tech, is the only business insurance provider that can really understand all of these new frontiers like generative AI that are happening real time in our industry and put the right coverages in place. They anticipate risks and can underwrite effectively when nobody else can or will. Companies like Seek can get the insurance they need, and just like with Vanta, enable revenue with Vouch.

You can learn more about Seek at seek.ai. When it's time for your startup to get the best insurance that you need, you can save 10% on your first policy with Vouch just by going to vouch.us/acquired or telling them that Ben and David sent you.

Ben: Thanks, Vouch.

David: We were talking a minute ago about gaming in many corners of the internet and investing. There are things that have lots of usage, but have not attracted a lot of capital, attention, or care. Perhaps we could talk about the opposite of that with Web3 and crypto over the past few years, specifically Web3 and crypto gaming. You end game craft, to my mind, on a hopeful note about that. Would you agree? How are you feeling about it?

Mitch: I do, and I have been incredibly skeptical. I'm primarily skeptical because it's a character flaw of mine that I am part of the original tribe. I'm part of that OG gaming tribe. Maybe slightly younger than the real OGs like Bing and Trip, but still part of that generation.

I still am very protective of the video game business because it was this kind of nerds paradise back in that day. I'm always resistant to tourism. I'm always resistant to people coming in from outside and claiming it as their own. It's a character flaw because I should be the big tent, and I'm just not.

David: At the same time, Riot was that. They've never made a game before.

Mitch: They never made a game before, but man, those kids were so down. They were super hardcore. I would have adopted them. They deserve to be in the tribe. They've embraced the tribe.

A lot of the early Web3 gaming content came from crypto people slumming in games, who had no idea what they were doing, who made really crappy games that were really just an opportunity to mint and launch NFTs and participate in an NFT marketplace that had some lightweight game mode that was associated with it. There's a bunch of those out there, and I don't want to go through chapter and verse, but they're hideous.

This new crop that we're starting to see now, and I just actually invested in one, oddly enough, just recently, is Supercell, the Finish game company. I made a joint angel investment in a deal that has a component of this. You saw EVE Online just raised 40 million led by Andreessen Horowitz to make a crypto-enabled version of Eve.

Ben: I didn't realize that. Eve is like a long running 15-year, 20-year Icelandic gaming company.

Mitch: Yes, indeed. Now you're seeing game people who've had a chance to digest the technology, see if they can find an organic use for it, and start to bring the product to market. That gives me a bit of hope maybe because it aligns with my narrow view of the games business, but maybe also because we're going to get good games out of it that don't seem like scams.

Ben: For our audience who's not been paying attention to Web3, how is it mechanically different from traditional game business models, or even, let's just say the current most popular free-to-play business model of gaming, what new things does blockchain unlock?

Mitch: The good news is not that much. I honestly believe this. I think the best of them adhere very closely to the conventional models. They use the crypto component, really, almost to maybe improve or enhance an older game.

For example, if you've been playing for a while, and you're bored with just grinding on the underlying free-to-play progression mechanic, there's another severe where you could play, where you could take your character minted as an NFT. It gives you certain benefits in the underlying game, but it gives you status in the status competition that you and the other very advanced players are engaged in.

At some point, if you've been playing World of Warcraft for 15 years, you're not running around killing chickens for gold. You're playing a very different kind of game. You're playing a social game. I think there are aspects of that that can be enhanced and enabled with the Web3 technologies that actually are additive to the gameplay. I think that's exciting to me.

Ben: What's an example?

Mitch: I'm not going to tell you.

David: You could imagine EVE with this.

Mitch: Yeah, EVE is a good example. They're going to have a token. That token is going to be useful in the game in a way that's not pay-to-win, which is the death of a free-to-play game. Blake is almost a religious fanatic around pay-to-win.

David: Why do people pay to win then?

Mitch: Because it works. It works in the short term.

Blake: I was talking about this with someone at Supercell recently. I think Clash Royale, if you play that game, has some real pay-to-win mechanics. It's softer, where you could probably spend 100 hours playing that game completely free-to-play, and it's balanced and great. But once you hit a certain point, it's like, oh, you hit a wall, it's going to take a while to grind out here.

Either spend or you're going to be playing this game eight times longer than the person who you're playing against. I think that's one way that you see it. You typically see that more on mobile. But if competitive integrity isn't the goal of your game from a multiplayer standpoint, then it's way easier to do more pay-to-win stuff.

Mitch: Fair enough.

Ben: When social status is a key component of the game, that's when pay-to-win is the worst thing you can do.

Mitch: Leaderboards. In progressive status.

Blake: Yes. If your rank meant something in League of Legends, which it does, if there was a way for you to buy the highest rank, that game would break. It just simply would break.

Ben: Wait, let's go back to the token notion. What is the token and EVE Online? Okay, great. Now there's this crypto element, what can I do with it?

Mitch: Hilmar hasn't released the design yet. Because he pitched Blake and I, I'm a little uncomfortable about discussing it. Let's just say, abstractly, it functions in a way like a store value almost like a super currency, where you will have the token as well as an in-game currency. The token isn't necessary, and the token can be acquired through play, but it has some interesting properties that are acquired through ownership.

You're incentivized to buy it because it provides you with certain benefits in the game that don't necessarily make it competitively unbalanced, but that open up areas of gameplay that might be close to you if you didn't own it. Very clever, by the way. Blake and I have looked at a bunch of these things, most of them are absolute crap. This one is really well thought out.

Blake: He has one of the best framings that I've ever heard around, which is EVE Online. Originally, he's like, this is Rome. You have broken sewage, no paved roads, and all this stuff. He's like, Web3 and building with crypto rails actually makes it look closer to New York City. He's like, we'll still keep Rome, and that version of the game will still be here, but now we can build it with the right pipes and do this the right way.

He still has Italians that moved to New York. He's like, it might take a bit, but they still move over to New York. I just think that's the right way to think about it. There are very different cities, and people like them for their own reasons. In a New York example, he just thinks there's a lot more you can do with the game.

Mitch: EVE is fundamentally an economic simulation. Even though it has a veneer of being a space combat thing, fundamentally, 80% of the gameplay is economic, mining, trading, manufacturing, et cetera.

Blake: It is the perfect vehicle. If this game doesn't work, it'll be actually very telling of the current.

Ben: Because if it works anywhere, it should work here.

Mitch: Exactly.

Blake: Yeah, it is a perfect application. There's a real question of, is this game still a viable game that people want to play in 2023? That's maybe a different question, but is the perfect vehicle for Web3.

Ben: I asked these questions because my skepticism has come from all these egalitarian notions of, in the Web2 world, it's awful, because you have to pay the gaming company for the items. But in Web3, you can actually own your own loot, then you can trade that around, and not everyone has to go back to the store to buy the thing, you can buy it peer to peer. In my head, I'm always like, that sounds nice, but why would a gaming company ever enable peer to peer sales when their whole business model is having them buy the goods from you?

Mitch: Because they can hopefully increase the size of the pie, incentivize you to trade at a much greater volume, and harvest transaction costs. Look at Roblox. Roblox doesn't have a Web3 component, or at least not yet. But man, it's got a very viable peer to peer economy in it. Roblox is the most highly taxed app store on earth because you get paid as a developer in Roblox.

David: Right: Roblox isn't Web3, but it might as well be. It might be the most successful "Web3 application" out there.

Mitch: Absolutely. I think the last time I calculated the total tax, the gross tax was somewhere close to 60% or 57%.

Blake: The last I heard is 55%-60%.

Ben: Because it just keeps compounding every time Roblox moves between parties.

Mitch: Like Twitch, YouTube gaming, and other things, where there was this incredible feedback loop. We talked about this a bit in our user generated content episode in Gamecraft. Minecraft, for example, where they just crossed the one trillion view mark on YouTube of Minecraft related videos.

You know what, the company that made that, Mojang, didn't make any of those videos. They were 100% made by the community, and yet that community was highly incentivized because they had an economic incentive, because they became famous, they became rich by becoming Minecraft streamers, by becoming Minecraft YouTubers. The same thing is happening inside of Roblox in a certain way. I think the dream of the Web3 space is that this can be more broad than even that.

Blake: A lot of people don't look at Steam and view it like an OpenSea or one of these marketplaces. In Team Fortress 2 and in Counter Strike, they introduced these virtual goods, and they're literally just cosmetic. When you open a loot box, you get the skin, and those skins have real value because it costs $2 to open up that crate. You might have just got something that's super rare.

In the public market that is hosted on Steam, where they take 10%, they are double dipping and triple dipping on the content that they primary issued, and they're getting all the secondary sale of just recycling through of, oh, you got a knife, I want a knife skin that's $400 is what does go for on that market.

Valve is actually the closest to probably Web3 being just open. They actually let you take these things off, and you can transact for US dollars if you want to. They'll eventually shut down that site maybe, but it's there. People use these accounts. People spin up Steam accounts as escrow services. They're bots, and there are sites that just literally will transact for US dollars. I think there's a lot to study there.

One thing that Mitch and I always talk about is, there is a speculator problem in a Web3 example, where if you truly were looking at contracts, and you want to buy, in theory, when speculators contract going to be bigger over time, I should just buy all these skins in open market, and that just raises the price. It's what we saw in crypto, where the people who are owning these NFTs were never even playing the game, and you just priced out your average user. That's one unsolved or to be determined problem.

Mitch: Blake and I have talked about this. We call it the Bitcoin pizza problem. You have the person who spent three bitcoins back in the early days on a pizza. Those three Bitcoins, in today's dollars, are worth $75,000. You feel like a fool because you spent that currency. When we're looking at Web3 related deals, solving that problem, like incentivizing you so that you don't feel like an idiot for utilizing the token, is a key factor in these games.

I think it was one of the things that got me over the hump on the Hilmar's new EVE game, Awakening, because he actually had a really interesting solution to that problem. We've seen so precious few good solutions to that problem.

Ben: It's a double solve because when something goes up a lot in value, there's a problem because you don't want to spend it. The goal of creating any economy is dynamism to create a lot of transactions and turnover, then there's the second problem of speculation. When things go up a lot in value, it encourages a lot of people to speculate, brings in the wrong people, makes the game not fun, messes up the incentives for everyone. If it doesn't have that problem, then you solve two issues.

Mitch: Yes.

Blake: It's really tricky. I don't think anyone has solved it yet, but we're certainly finally starting to see some people have theories around how to solve that. It will be really interesting to see it play out because if you can solve it, then there's no reason why these things shouldn't exist in games moving forward.

David: When we were going back and forth on what to talk about on this episode, Mitch, I think it was you in our shared doc here, had quite a few thoughts that you wanted to add on to our Nintendo episode. Specifically, I thought the most interesting was around our assertion that the NES was the first consumer device with a GPU architecture.

Mitch: Right, your PPU discussion.

David: Right. Tell us what we got wrong.

Mitch: I don't think you got it wrong, necessarily. I'm fascinated by the history of this company, this Utah-based company called Evans & Sutherland. I was really just teasing you guys because this felt like such an Acquired mini episode, because these guys were like the Fairchild Semiconductor of computer graphics. You guys talked a little bit about this in the Atari context.

Ben: The U of U mafia of computer graphics, Alan Kay, Ed Catmull, and Nolan Bushnell.

Mitch: What you get wrong about that is that Nolan was 10 years senior to the rest of those guys. Nolan went through as an electrical engineering student. Evans and Sutherland came in and formed the computer graphics practice at the University of Utah.

Nolan had already graduated, but they got Catmull, Alan Kay. Catmull goes to Pixar. Alan Kay basically goes everywhere. He's part of the Apple user interface thing. He starts the Atari research groups that basically invent virtual reality. He's pollinating flowers all over the computer business.

Ben: He's credited with "The best way to predict the future is to invent it."

Mitch: Yes. An incredibly important figure. You have John Warnock who goes on to found Adobe. It's one of the most important companies in the computer graphics business.

David: He was the other guy on the Nintendo episode that we were trying to think of.

Mitch: Jim Clark was a student of Evans & Sutherland. All of these credible people came through the University of Utah computer graphics program. The professor's then spun out with an absolute bucket of DARPA money and started this company that basically started to build in the late 1970s, early 1980s, the first commercial flight simulators. With very high fidelity flight simulation, of course, flight simulators required the kinds of advanced graphics that just weren't available on desktops, even in the workstations of those days.

This is pre-Silicon Graphics, this is pre any of that stuff. They had developed a bunch of proprietary silicon during those days and ultimately ended up in the supercomputer business later on in the 1980s. Ultimately, in the 1990s, they were in the console business. They helped develop Ridge Racer for Namco, the very advanced racing sim.

David: You put this in the notes, and I was like, what?

Mitch: It comes back full circle to the video game business. I just find that whole episode incredibly fascinating. It's so interesting to think about all of those people coming through that same program and what it must have been like. Evans & Sutherland had a big impact in the games community because former employees there started up a bunch of games companies. Again, one of those incredibly seminal in the true sense of that word, technology companies.

Ben: There was another thing we brought up on the Nintendo episode where I'm curious for both of your fact check on. I was shocked to learn that the gaming industry has always been larger than TV and Hollywood if you include the total coin drop in arcades. I always just thought this was this new phenomenon of like, wow, video games have become so much a part of the fabric of our society. Our research was basically like, I think it's always been true.

Mitch: It could be. I don't know as much about what they count when they count the Hollywood revenues or the music industry revenues, whether it's ticket prices or what. I think regardless, the really interesting fact is how big the arcade business was. If you go back and look, people do these really clever little graphical drawings, where they show how we got from early games business to the 180 billion of today, and they show sectors by market share as they ebbed and flowed. The thing that always stands out when you look at it is just not only how big the arcade business was, but how long it persisted.

Blake: You think about Sega. When we were researching for the Console Castles episode, it was so clear that these console manufacturers really were wrestling with, do we risk it? Do we risk our business? In a lot of ways, it's probably why Sega isn't what it was or isn't Nintendo. They were trying to protect.

Ben: They're literally making billions of dollars in revenue in the 70s. Of course, you're not going to stop doing that.

Mitch: Yup. I grew up in that era. I was one of those Rugrats who camped out with a handful of quarters in a videogame arcade. I remember that. They were important social loci for kids in those days.

David: I'm curious for both of you. Maybe let's start with Mitch because you're talking about it. What was your entrance into video games before you got into the business side of things?

Mitch: Spacewar at a Woolworths in Fort Lauderdale, Florida, where I was miserably consigned to grow up.

Ben: Did you have a PDP-1? How did you get access to Spacewar?

Mitch: It was the console successor to it. They took that idea, and they made a box out of it, basically. Only a few of them, but somehow one of them ended up not the PDP version that you guys talked about in your episode, but it was a cabinet version of it that was propagated in somehow this Woolworths in a Walgreens, I can't remember what, in Fort Lauderdale. A mall had one of them outside of it. That was literally the first video game I ever played. Then Robotron and those kinds of games were my GM growing up.

David: Would you have been in the Atari 2600 era?

Mitch: Yeah, except that we were Apple 2 family. My dad was one of these guys who loved technology, but couldn't understand how any of it worked. He would buy this stuff, and then my brother and I would inherit it. My brother ends up at the MIT Media Lab, then goes to Hollywood, and invents video assist, essentially, in Hollywood. Both of us ended up turning techno geeks.

Ben: What's a video assist?

Mitch: In the old days with film cameras, the only person who could see what was being shot was the cinematographer who literally looked through the eyepiece. Now if you go on a film set, there's a video village, where the producers, God forbid, can come and watch what's being shot in real time. That technology transition basically involved this intermediate step called video assist, which was my brother's thesis at the MIT Media Lab in the late 80s.

Ben: You always see George Lucas in Tunisia shooting in the desert in 76 when they were shooting A New Hope. They've got the tent, they've got video monitors. Everyone's pointing, they're watching dailies. It's a campout.

Mitch: Yup. Again, we would inherit these technologies, whether they were early video cameras, or whether they were computers in the case of the Apple 2s. We would screw around with them and try to figure out how to make them work. Of course, because we were children, most of the time we turned them into games.

Ben: What was your first dedicated gaming machine?

Mitch: I wasn't an early console adapter. The first dedicated gaming machine I owned wasn't until I was in law school in 1987. My wife is a game designer and worked at Activision for 15 years, but was a lawyer also, and we were in law school together, but we just basically played video games all the time. We bought a Commodore Amiga, which was a very famous device inside the video game business, but largely unknown by most people. It was an incredible device.

Ben: This is after the Commodore 64.

Mitch: Yeah. I would call that my first dedicated gaming device.

Ben: Blake, what was your first gaming experience?

Blake: My brother is three years older than me. He was always into games. He loved Nintendo more than anyone. I was always the meme of just being player two. It was so bad growing up. We would play N64. We had an NES, and I think that's really the first console that we had.

I remember just being stuck playing the crappy other characters. It was bad. We played Sonic and I'd be Tails. I just remember hating the experience. It became really clear that my brother just loves single player narrative type creative games.

When the Xbox came out, I was like, oh, I can finally get something that my brother's not going to take all the time with. I got an Xbox. Really, Halo is the thing that changed my life. I was like, what is this? This is amazing. Really, when the Xbox 360 came out, Xbox Live just really took off.

David: Xbox Live, you talked about it a little bit in the Console Castles episode.

Mitch: Only just because of what an incredible business proposition it was, because you had a captive audience who really wanted a community, who really wanted multiplayer play. Basically, they said, yeah, there's one way to do it, you can pay us $5 a month.

Blake: I talked about the number of people that actually upgraded. The number of people that wanted to get online services for their game that had to pay Xbox in addition to their console that they're buying is just insane. I forgot what it actually ends up being, but it's certainly billions of dollars in revenue even today.

David: They weren't your ISP. They weren't giving you the internet. It was just right to get online with the Xbox.

Blake: Yeah, they controlled that hardware. I just remember playing Call of Duty online for the first time and being like, oh, my gosh, my life has changed. My parents wouldn't buy me a gaming PC because they just knew I'd be a total degenerate. They were probably right. I now have a gaming PC, and I'm a total degenerate, so I get it. I loved just Call of Duty and all of the competitive games, really.

Mitch: We missed, my wife and I, the console era really in a lot of ways because we went from PC during that entire era, basically. The first consoles, really, that would have been viable, the 2600 and stuff, we missed because they came out right as we were graduating from high school, and we were more in the arcades. Then we went straight to the computer.

I remember we were playing some of the early EA games like Starflight on a Compaq portable that had an RCA out, that we could plug into television. We were playing it. That was our monitor to play, but with a Compaq portable. It was a 30-pound sewing machine type.

David: I remember those old boxes. For the mouse, they had a trackball mouse.

Mitch: Yeah. We bought our first console, actually, when she was interviewing for the job at Activision. I was at Disney.

David: She got into the games business first.

Mitch: Yeah. She needed to play MechWarrior in 2047. I forgot what it was.

Ben: I played that on a Mac.

Mitch: Yeah. We had to buy an SNES so she could study the Activision games before she went in for her interview. She got hired and worked there for 15 years.

David: Wow. How did she decide to transition her career from lawyer to game developer?

Mitch: When we were in law school together, we wrote a game together. I programmed and she designed.

Ben: No way.

Mitch: We just knew that was our calling. We practiced law for a couple of years, but neither of us were totally into it. She actually was a district attorney in the hardcore games unit in LA. She had a much sexier job than me who was just representing Atari games against Nintendo.

David: Wow. This is wild. Both of you decided that it was economically better. I don't want to say decided. You went to law school rather than go into making games. Is it because you thought there was no money in making games?

Mitch: It's just one of those things where you don't know that it's possible. I think that it's true, and you find this to be the case in Hollywood quite a bit. Kids who've grown up in Kansas or whatever, they'll say when they're interviewed, why didn't you choose this profession? Why didn't you go do something else first?

They were like, I didn't know you could do this for a living. I didn't know you could do this for a living. It just seemed so out of touch. But slowly but surely, partly it was through the Atari Games-Nintendo lawsuit, where I had to go around and take depositions of all of these early box console guys who made cabinets.

The electrical scientific instruments department at UC Santa Barbara was where Nolan was hiring all of his top engineers because those guys knew how to make multiplexers. Remember, these box consoles, they were making what we would now think of as software and hardware.

David: Yeah, there was no software.

Mitch: There was no software. I went around and interviewed these guys. I was like, these people are so cool. What am I doing? There's another world out there. I left and went to Disney.

Blake: I think it's funny. You mentioned the kid in Kansas has no idea this is even possible. I always joke that I had a double life. I played video games, and I still play video games probably way too much. It wasn't even until I entered venture capital that I realized, oh, you could invest in games. That's a thing? I learned about Mitch, Bing, and all these people. I'm like, I didn't even think that's possible. Even after I ended up in venture capital, I didn't even realize that was a thing.

Mitch: That's today. Imagine the games business in the late 80s.

David: This is another great thread. Even so, you said, I play games way too much. There's this stigma around this industry still. Why is there this stigma?

Blake: I definitely just objectively played too many games.

Ben: The statement too much requires...

Mitch: It's a moral judgment.

Ben: Yes. It requires some standard by which someone has to hold themselves.

David: Let's remove it from playing games. I think a lot of people in the business world think of the video game industry as whatever, that's for kids, or that's not real business.

Mitch: You, I think, addressed this quite well in the first Nintendo episode when you talk about the roots of this business in the toy business. Even Nintendo making the glove for the Magnavox Odyssey, if I'm remembering that correctly.

David: The light gun.

Mitch: The light gun, yes, indeed. That was real. It persisted long into the 90s that it was still considered part of the toy business. Hasbro made a run at Activision, a little known fact, in the late 90s when I was running the studios there. I remember going to Toy Fair in New York, which was a trip back in those days.

We actually went to the Hasbro pre-Toy Fair in Boca Raton, Florida, of all places. They'd taken over a hotel. In every ballroom in the hotel, one of the brands was showing their steps that Super Soaker was in one room, Nerf was in another room, or whatever, and you just went from room to room to see all the toys. The deal never ended up getting done.

Really, in those days, it wasn't that much of a stretch to think of the video game business as basically being really pertinent to the toy business. Now we think of it more as pertinent to Hollywood. You look at The Last of Us or things like that, where now we're supplying IP to serious drama and whatever, but that wasn't always the case.

Blake: I think there's also the subtle shift of games becoming really social. There was maybe hanging out with your friends, they would come over, and you'd have a little LAN party, or you'd play Mario Party, whatever it was.

Obviously, games today now, I play League of Legends with my friends online. I actually probably haven't seen some of those people in person in years, but I still play with him all the time. I know what they're up to. It's the equivalent of playing golf on some level of like, oh, I'm catching up. The games itself are a way to facilitate.

Mitch: I also see that the content itself and our choices early on in the business was somewhat self-limiting in the sense that we made a lot of really violent stuff. We made a lot of games that, to Jehova's point, perhaps didn't explore all of the spectrum of human emotion.

As a result, I think it was easy for moralists to look at it and say, oh, this is a deviant activity, much the same way that comic books were viewed maybe in the 1940s, certain kinds of independent film, sexually explicit content, or whatever has been viewed historically. Whereas maybe those things change over time as they get more mainstreamed or whatever. I think that had something to do with it as well.

Ben: It is interesting that you say, this is how I hang out with my friends, Blake, because you wouldn't say I hang out with my friends way too much, but you say, I play video games too much. There's nothing wrong with being social, and there's nothing wrong with having fun and enjoying your life. Why is it that there's something wrong with playing video games with your friends?

Blake: Maybe it's just the games I play that they're really competitive. They make me very upset and feel very tilted after I play those games. It's more of that feeling.

Mitch: It isn't the case with my family. My wife just played Elden Ring through and finished it. Those of you who do not know what I'm talking about, to finish Elden Ring, not only you have to be hardcore, but you have to spend 100 hours or more.

David: I finished Elden Ring with a one-year-old. I'm still married.

Mitch: When she finished, she was like, okay, now I got to play this as a different character. She played it again. Finished it. We started watching Craig Mazin's The Last of Us on HBO and she was like, oh, I haven't played these games. She sat down and played one and two, back to back all the way through. This is the family I live in, where I'm the non gamer.

David: What's your drug of choice here, FIFA?

Mitch: It has historically been FIFA. I had a son who grew up to be a very, very accomplished soccer player before becoming a musician. He and I played a lot of FIFA together, which was our dad-son bonding stuff, and then he became too good and ended up making a career out of it.

David: It's like the backyard basketball trope.

Mitch: Exactly, where your son turns out to be LeBron. I've always also been a real-time strategy enthusiast and grew up in the era of Command and Conquer, Starcraft, and Warcraft. I'm currently playing Age of Empires 4 pretty obsessively.

Ben: A way that we wanted to bring this episode home is, you guys recorded Gamecraft in full, before getting any input from the outside world. Acquired basically only ever has one episode in the can. When we release it, we get feedback, and we incorporate it into the next episode. I'm sure you've gotten a flood of feedback since releasing the whole series. Is there any mailbag or things people have brought up, where you might want to address things from the series?

Mitch: Yeah. Broadly, it was a bit scary because we did release eight episodes pretty much just back to back to back. As you said, they were all in the can when we released the first episode. I've just been incredibly surprised by how universally positive the feedback has been. I think there really wasn't much like it on the market in terms of deeply researched, very much, I think, inspired by what you guys have demonstrated.

There is an audience for this kind of well-prepared, intellectually rigorous exploration of a niche industry that most people wouldn't consider interesting, but you can make interesting. I think that was partly our goal when we started. We did have some inspiration from you. If you guys hadn't existed, we probably wouldn't have done it.

David: Sounds like Malcolm Gladwell helped a little bit, too.

Mitch: He just told me not to write a book, which I think he's been on for a while, that podcasts are the future. I think he's done a couple episodes with Bill Simmons who calls himself the pod father.

Ben: He is.

David: It's true. We've been asked many times. We've thought about writing a book many times. It never pencils, like it's never a good decision, which is sad, but it's just the reality today.

Blake: I'll just echo what Mitch has said, which is the feedback has just been amazing. The most common feedback or the mailbag stuff is just, you lead us right to the current time, and they're like, what are you talking about?

Mitch: Let's talk about that because we have gotten that as a question. This is a brave new world. I think one of the things that's fun about AI in games is that we've had AI in games.

David: It started in games.

Mitch: Exactly. I remember Dany Berry when she was making M.U.L.E in the old EA days. She was basically like, oh, I would make the characters behave randomly because they seemed more intelligent. Every once in a while, I would get my NPCs to make mistakes.

People were like, oh my God, they're alive, because that just seemed so human compared to the computer-like behavior. It started there. It evolved all the way to the very sophisticated computer and probably in AI.

David: There was at least a five-year period, I think, where Microsoft's AI was called Cortana after Cortana from Halo.

Mitch: Obviously, every rock you turnover in Silicon Valley these days is an AI pitch.

Ben: Yeah, we're at Benchmark, and I can see 15 founders lining up outside.

David: Literally, the parking lot was full. We have to drive around to the town hall park.

Mitch: We get asked a lot about where we see the technology being applied. I think there's a train of thought that has been advanced that, oh, wow, this is really going to democratize the game industry in a way, where now, like you're seeing with Midjourney, for example, where you can just describe a piece of art and it magically appears. People will be able to describe a game and it'll magically appear. I don't subscribe to that.

Again, maybe it's just my narrow mindedness, but I do believe that making games is really hard. I think making a coherent narratively satisfying journey in a game context, in an interactive context is not necessarily going to fall to AI early. That may be one of the later things that happens. But in the interim, there is going to be some really cool stuff to happen.

We were talking about this with some senior executives in the video game industry recently. I think we agreed that there were going to be four really interesting areas of investment early on. I think one is an art pipeline, clearly, because just the amount of money that's spent on art in video games is mind boggling. It's just staggering because when you think about it, it's like you're making an MMO, you got a town, one of many, there are buildings in the town. Every building has a table, every building has a chair, every building has a piece of art on the wall.

David: Every character has clothing.

Mitch: Has clothing. Every rug has a different pattern, whatever, or it gets monotonous.

Ben: Every event themes these things for Halloween, Christmas, and New Year's.

Mitch: Hopefully, you guys played Breath of the Wild, absolutely magnificent. It is a magnificent achievement. When you're playing it, think about what it took to make it. Every one of those characters, the dialogue, all of that stuff.

I think it's not going to replace the need to design those things, but it may replace the need to hire an artist to go and bang out 30 different variations of a chair, for example. Art pipeline feels like a no brainer.

Blake: That's the lowest hanging fruit, I think. Right now, we're in the 2D phase of that. Will we have a 3D phase? Yes.

Mitch: Absolutely. For sure, you will. Number two, I think, is quality assurance and balancing because we can now train an AI to play these things. We were talking to a senior executive who has done so. It reported back that the AI can now describe an activity as fun.

Ben: That has been a hot topic of debate in the video games industry forever to define fun. Even AI who can tell us if something is fun or not, when I don't think there is a consensus view on what fun means.

Mitch: True. I have my own theory of fun, which I talk about quite a bit. To have an AI that could describe their experience of playing the game in those terms is extraordinary. I think that's going to be really cool.

Balancing is really hard because balancing is essentially an arbitrage activity. You're trying to find little advantages that the game engine, the spreadsheet, if you will, of the game allows. For example, I'm playing Age of Empires. The Chinese cavalry, under certain circumstances, has an advantage that I can exploit in an arbitrage-like way. Finding counters to those or whatever is a really interesting potential use of artificial intelligence that we haven't explored really very much. I think that's going to be really cool.

Ben: It's to bring in the thing that at least three of us have mentioned as a pillar of our life to bring in Halo. When dual wielding first came out in Halo 2, it was so overpowered. It was one of these things that took a whole new disk shipping to fix the fact that all you should ever do is run around dual wielding, fully charged, and then running to your enemy. If we can do that, of course through playtesting, and it gets fixed quickly now, that's one thing, but AI can catch that way earlier.

Mitch: Absolutely, and find potentially new ones that we hadn't even thought of. As we move into this era of more and more sophisticated game economies, being able to play out those game theory scenarios, where we're hoarding various resources and what that does to the economy, et cetera.

Blake: You had a funny line yesterday. You just write the prompt of Get Rich to someone on this bot. You're like, what does the button do? That was not at all what we were thinking of how they're going to break the economy.

Mitch: I think those things are going to be really, really exciting. The one I'm particularly excited about is live ops because we're spending boatloads of money on live ops, it's really hard, and it's a very delicate thing, because you've got a game that's already working. You don't want to make those kinds of nerfs and buffs that rip out the competitive balance on the one hand, but you want to continue to introduce new content into the game.

I think that's really interesting. Also just adding a sense of dynamism to that. Let's say if we were all playing together, it understands what our capabilities are, what our characters are, like edit designs, quests, that are challenging to us but accomplishable or whatever. You can have a real-time quest system or narrative system that you could build into a live game that would be really exciting.

The last one, which is particularly interesting, also is an adjunct of that. It's analogous to that, which is live DMing for Dungeon Master-like experience.

The Dungeon Master is a role. If you've ever played Dungeons and Dragons with your friends, somebody's got to play that role, and it's a very difficult role to play. You are a storyteller. One of your players enters a tavern, you've got to figure out a non-player character to interact with the tavern wench or whatever to interact with that character. That requires storytelling and narrative.

If you could have an AI assistant that could supply you with narrative in the background and  help you tell that story, I think that's super exciting. I think there's going to be a lot of interesting things that are going to happen in that space, particularly now where we're in the middle of a massive Dungeons and Dragons Renaissance.

Blake: There's also this inherent tension within the games industry. If you are maybe an incumbent studio, are you comfortable using AI arts and doing asset generation? What does that mean maybe as an innovator's dilemma type scenario?

A working theory that I have is that the UGC platforms like the Fortnite creatives, the Core, or the Robloxes of the world, might actually be the ones that accrued the most value in this AI asset generation time. If you can spin up these 3D assets, and you're letting the users go and do that, that should be just a really more obvious way that this evolves than having your artists push back and be like, hey, don't use my art style. That's going to be a whole other story.

David: It certainly seems, from mostly outside, that a problem in the games industry right now is the amount of resources and capital required to make a great game. Would you agree with that, that it stifles innovation?

Mitch: Again, as a former studio boss, I would say yes and no. In one sense, yes because it doesn't fully democratize the ability to make games. We're getting there. It's better than it used to be. It used to be that you had to write your own engine in order to make a game work. You couldn't make games, unless you're John Carmack or unless you're Tim Sweeney.

That's no longer the case. Now you can go and license Tim Sweeney's engine, the Unreal Engine, and you can build a game on top of that. That's already somewhat democratized it. In the old days, we used to create bitmaps by hand to try and wrap around 3D characters. Now, you've got incredible tech tools and technology, Maya, advanced Photoshop tools, and all these other things that are just capable of accelerating that process. They're a little bit expensive, but they're accessible to individuals in a way that you used to.

When I started in the business, you needed literally a Silicon Graphics workstation. In fact, when I started, companies were being valued on the number of Silicon Graphics workstations that they had available to them.

David: You talked about this in the series. It's crazy.

Mitch: It was crazy. It was true. Rocket Science games, go look them up. They were literally valued in their series A on the basis of the number of Silicon Graphics workstations they have.

David: That feels like an arbitrage.

Mitch: I think that that democratization, on the one hand, is fantastic. We've seen things where that has happened like YouTube. Let's take that as an example, where all kinds of interesting new content that we never expected before. If I had told you 15 years ago that unboxing videos were going to be a billion dollar business on YouTube, you'd be like, get out of here. It's like, unboxing videos? Come on, man. But they are.

These are new narrative experiences that we would never have really found valuable, so I think there's great value in that. I'm a big proponent of that. On the other hand, not everybody is good at this. That's also something you see on YouTube, which is there are thousands and thousands of videos you don't get fed to you in the algorithm, which suck. That's going to be the same in the video game business.

Blake: I think that's right. We still haven't fully reached maybe the iPhone moment for your camera, but we're getting there. There is this parallel track within games that we know modding is such a key part of innovation in how these games evolve and new genres are created, that we're getting so close to those moments of, with UGC getting better, and you can have the random kid maybe come up with a new genre or a new game, it looks like a mod or whatever it is, but it might just be in Fortnite creative or Roblox.

David: The old Hiroshi Yamauchi maxim, "There are a handful of Shigeru Miyamotos in the world that can make games like that, and we want them all making games for Nintendo." is probably still true.

Mitch: It's absolutely true.

Blake: Spielberg is still amazing, right? Spielberg didn't get any worse in this current time.

David: Right, but the window for that, say it's one in a million. The denominator of the number of millions is artificially limited right now.

Mitch: Yes. You think about how Carmack and Romero got into the position they got into and all the luck and serendipity that was involved, same with Miyamoto. He's been there since 77.

David: He was hired to design the arcade cabinets.

Mitch: The guy who trained him that you talked about in that first episode, who himself was plucked off into the assembly line. I think that's the part where hopefully, we can be a little more efficient about how we find those Miyamotos.

David: On that note, I want to close with a pitch to you, guys, which I've texted you about, but I want them now to make it live in public. I really think you should continue the Gamecraft podcast. Not that you need to, but I do think, hopefully, you've seen this in the reaction to it. I think this can be a really good galvanizing force for people to take this industry more seriously, invest in this industry, and most importantly, enter it, like making games to become entrepreneurs.

Mitch: I agree. I'm feeling a bit of that pressure. When I started this, I think the other thing that I learned from Malcolm and from Michael Lewis was, I said, should I do it as a weekly? They said, no, that's a job. They said, you should do it as a special project.

I think what we're trying to figure out right now is how we keep it a special project and not turn it into a job, but still make it meaningful to the audience. I think we have some ideas. I think we'll be back later this year with some fresh content.

One of the benefits of being old is I've met everyone in the video game business over the last 30 years. Some of them even like me. Hopefully, we can start bringing some guests who can help us tell some of these stories because I certainly know my path through the video game business, and Blake knows his path through the video game business, but there are many paths to the video game business. I think that's the part that excites me.

Ben: Everyone should definitely check out the Gamecraft podcast. Where else can people find you on the internet?

Mitch: I'm at @mitchlasky on Twitter.

Blake: I'm @blakeir on Twitter.

Ben: Mitch, you don't tweet that much. But Blake, you're an excellent follower.

David: When Mitch does tweet, though, it's great.

Blake: You turn on the notifications for Mitch because once a week, you'll just get a notification, and you just know it's spicy, so I recommend it.

Ben: Awesome. Thanks so much, guys.

Mitch: Thank you. This was a pleasure.

Ben: All right, David, that was awesome. Really pumped we get to do that with Mitch and Blake.

David: It's so great. I'm those guys.

Ben: Listeners, we appreciate you joining us. For those on the video show, it was fun to feel like you were actually in the room, especially with the wide angle camera this time capturing what the table actually looked like. We got a lot of feedback on the first Benchmark episode that we talked about this cool shape, and you couldn't actually see it, so we made sure you'd get that. We do want to say a huge thank you to our sponsors, Statsig, PitchBook, and Vouch.

David: Also, huge thank you to Mitch, to Blake, and to Benchmark for hosting us and doing this together.

Ben: If you want to hang out with us more, come check out ACQ2. It's where all of our interviews are happening with founders and investors. Basically, all of our interviews going forward, we're going to be putting over on ACQ2, which is really becoming known as the Acquired interview show.

Lastly, if you want to become an LP, you should. Help us pick future episodes. We'll be doing the next one in a month or two as we kick off the next season, so be sure to go to acquired.fm/lp if you want to come deeper into the acquired kitchen.

All right, that's all we got. Talk about the episode in Slack if you want, acquired.fm/slack. With that, listeners, we'll see you next time.

David: We'll see you next time.