This piece says the gaming industry's real edge isn't tech but business model innovation—like Nintendo's strict platform rules or Apple's free-to-play with in-app purchases. Author Joost van Dreunen is bullish on Nintendo (immune to market cycles, Switch a hit) and Epic Games (Fortnite free-to-play, Unreal Engine used for filming), but warns GameStop (used to thrive on used games, but missed the digital shift, risks bankruptcy or Amazon buyout).
This report focuses on value creation in the gaming industry. Its core argument is that within the gaming value chain, platform operators (such as Steam and Epic) and publishers (such as Tencent and Activision Blizzard) capture the largest share of profits, while physical retailers like GameStop are
Joost van Dreunen (NYU Stern professor, co-founder of SuperData Research, and game industry investor) discusses with host Patrick O'Shaughnessy the history, current state, and future of value creation in the gaming industry. Core thesis: The strongest competitive moat in the gaming industry is not technology, but business model innovation—from Nintendo's third-party platform model to Apple's free-to-play plus in-app purchase model, every value explosion has stemmed from a redesign of the business model, not a hardware breakthrough.
Joost van Dreunen argues that the true starting point of the modern gaming industry was Nintendo's entry into the market in 1985, which created the prototype for the "platform + third-party content" business model.
In 1983, the North American gaming market collapsed due to oversupply—plummeting from $2 billion to $200 million. Nintendo entered the market against the tide and rebuilt the ecosystem with a strict set of rules: content creators could release a maximum of five games per platform, a two-year exclusivity period, a requirement to purchase 30,000 units for marketing, and payment of licensing fees to Nintendo. The core of this mechanism was artificially constraining supply to ensure quality, a stark contrast to the chaos of the Atari era, where "anyone could make anything and sell everything."
"From the early days, because the industry was under pressure from a previous bad economic model, it set very high standards in production, development, and marketing. This became the blueprint for how everything operated later." (Meaning: Nintendo drafted the standard operating procedures for the gaming industry in the 1980s.)
Nintendo also innovated the "razor-and-blades" business model: selling hardware at a loss and profiting from software. This required the platform holder to continuously provide high-quality content to expand the installed base, creating a virtuous cycle.
Joost argues that GameStop’s success stemmed from three differentiating advantages: knowledgeable staff, user insight, and the used-game economy.
Joost points out that GameStop’s management suffered from severe “mental inertia,” unable to acknowledge the fundamental shift toward digitalization.
Management described digitalization as “prepaid game cards”—merely another item to sell in stores. Joost likens this to the decline of Tower Records: “CDs came, and it held on for a while; iTunes and Napster ultimately killed it because the owner refused to acknowledge the change.”
GameStop’s struggles were not caused by COVID-19, but the pandemic “ultimately exposed its weaknesses.” Joost has predicted for the past five years that GameStop would either go bankrupt or be acquired by Amazon.
Joost describes the evolution of PC, console, and mobile platforms: from 95% console dominance, to a PC resurgence driven by Steam, and finally to a mobile explosion triggered by Apple's free-to-play model.
| Platform | 2021 Software Revenue (Estimated) | Market Share Ratio |
|---|---|---|
| Mobile | ~$85B | 4 |
| PC | ~$35B | 2 |
| Console | ~$20B | 1 |
Key turning points:
Joost argues that the free-to-play model is completely perpendicular to the traditional "Hollywood-style" AAA blockbuster economic model, leading to a collective misjudgment by traditional publishers.
A traditional AAA title like Grand Theft Auto V had a development and marketing cost of $260 million and generated $1 billion in revenue within three days of release. This "big investment, big return" mindset led traditional publishers like Take-Two and EA to look down on mobile free-to-play games — "these 99-cent or free games on small screens meant nothing to them."
Joost draws an analogy to the impact of television on Hollywood: early filmmakers dismissed TV as "low-resolution, black-and-white garbage," yet today everyone is vying for Netflix's investment.
The key innovation of the free-to-play model is: selling not the game, but "vanity" — primarily cosmetics and decorative items (e.g., Valve's Team Fortress 2 saw a surge in revenue after switching from a $30 price tag to free, by selling "silly hats"). Users can choose not to spend money, but those who do pay gain an enhanced experience rather than an unbeatable advantage.
Joost points out that the core contradiction facing the free-to-play model is: rising customer acquisition costs force designers to set more aggressive "bottlenecks" to encourage spending, which harms the user experience.
"As customer acquisition costs rise, I would instruct designers to set more aggressive bottlenecks to encourage spending... This starts to squeeze users, and of course, it becomes off-putting." This "squeeze" model gives traditional publishers ammunition for criticism: "Look, they only care about making money. This isn't art or culture; it's squeezing money out of grandmothers' pockets."
The real solution lies in network effects and social layers — as seen in League of Legends, which never aggressively pushes microtransactions but instead builds a community, esports, and shared experiences. When a game evolves from "something in a box" to "a social experience both online and offline," the true value of free-to-play is unlocked.
Joost compares the shift in value distribution between the traditional product model and the modern digital model.
Under the traditional product model ($60 game):
| Role | Revenue Share | Function |
|---|---|---|
| Developer | 20% | Creativity, programming, art |
| Publisher | 40% | Capital, legal, HR, channel relationships |
| Platform (e.g., Nintendo) | 15% | Hardware, licensing fees |
| Distributor | 5% | Logistics |
| Retailer (e.g., GameStop) | 20% | Storefront, marketing, second-hand sales |
Publishers captured twice the developer's share because they bore capital risk and owned channel relationships—developers had to cede most of the value in exchange for funding and market access.
Joost argues that today's winners are companies that own IP and capital, while the geographic center of gravity has shifted from Japan → the United States → China.
Two platform-level players worth watching:
Joost identifies four business model innovation directions for future value creation in the gaming industry:
| Direction | Core Logic | Representative Examples |
|---|---|---|
| Subscription Model | Consumers gain access to a content buffet, while companies secure predictable recurring revenue (higher valuation) | Xbox Game Pass (16-17 million subscribers), EA Play, Ubisoft+ |
| Advertising/Indirect Revenue | Monetize the large number of free-to-play users who never pay through ads; advertisers are eager to reach younger consumers | Traditional TV ad budgets ($70 billion in the U.S.) are seeking entry points into gaming |
| User-Generated Content (UGC) | Allow users to create content themselves, reducing development costs and extending user retention | Roblox, Minecraft — "Traditional creative companies cannot produce as many digital assets as their user base" |
| Crypto/Digital Assets | In-game virtual items hold real value (e.g., the Black Lotus card from Magic: The Gathering is worth thousands of dollars); blockchain enables a trading system free from international tax and exchange rate constraints | A direction for 2-5 years from now |
Joost's cautious stance on Roblox: "Valued at $30 billion, but losing $200 million annually. I hope they succeed, but it would be more convincing if they were already profitable."
Joost believes that the most valuable lesson the gaming industry offers other sectors is not technology, but culture—"check your ego at the door."
"The gaming industry has always been the quiet kid in the room culturally, tinkering away in the corner. It has retained much of that character. Tim Sweeney (founder of Epic) looks like a programmer who has spent 20 years in a windowless office—wearing overalls, carrying a big backpack, with a nerdy demeanor. That guy is a billionaire and has been doing this since childhood."
Joost suggests that other entertainment industries (music, film) learn from this "low-key genius" culture: do not chase 50 minutes of fame; focus on solving problems and building cool experiences. From an investment perspective, this culture is more profitable in the long run.
| Position | Guest Stance | Key Data |
|---|---|---|
| Nintendo | Bullish ("immune to market cycles") | Wii 140M units → Wii U 14M units → Switch massive success |
| GameStop | Risk warning ("has been predicted to go bankrupt or be acquired by Amazon for the past 5 years") | Used games account for 25% of annual revenue; the same game is resold an average of 6 times |
| Valve/Steam | Neutral (historical innovator) | Launched Steam in 2004; Team Fortress 2 switched from $30 to free-to-play, then saw a surge in revenue from selling cosmetic items |
| Epic Games | Bullish (platform ecosystem) | Fortnite is free-to-play; Unreal Engine used in the production of The Mandalorian |
| Roblox | Bullish but cautious ("valued at $29.5B but loses $200M annually") | Series H valuation at $29.5B; UGC model |
| Tencent | Bullish (capital + IP penetration) | Acquired Supercell, Riot Games |
| Take-Two Interactive | Neutral (representative of traditional publishers) | Grand Theft Auto V cost $260M to develop, generated $1B in revenue in 3 days; stock price rose from $9 to $200+ |
| Apple | Bullish (business model innovator) | Opened up the free-to-play model in 2009, leading to a mobile gaming boom |
| Twitch | Bullish (social viewing) | Acquired by Amazon for ~$1B (2013/14) |
| Discord | Bullish (social connection) | Most recent valuation at $7B |
| miHoYo | Bullish (new entrant) | Genshin Impact is free-to-play, mobile, open-world |
| Supercell | Neutral (acquired by Tencent) | Pioneer of the free-to-play model |
| Riot Games | Neutral (acquired by Tencent) | League of Legends — does not aggressively push microtransactions, relies on community and esports |
1. Nintendo created the "platform blueprint" for the gaming industry (Joost van Dreunen) — By artificially constraining supply (a maximum of 5 games per platform, 2-year exclusivity periods, licensing fees) to ensure quality, it reversed the 1983 market crash. This mechanism remains the template for platform economics to this day.
2. GameStop's used-game economy is both its deepest moat and its biggest blind spot (Joost van Dreunen) — The same game is resold an average of 6 times, contributing 25% of revenue; but management interprets digitalization as "selling prepaid cards" and cannot acknowledge the fundamental shift, much like Tower Records ignoring iTunes.
3. The free-to-play model is not "pricing a game at $0," but "giving the choice to the user" (Joost van Dreunen) — After Valve's Team Fortress 2 switched from $30 to free, revenue surged by selling "silly hats." The key is not being free, but letting users decide when and why to pay.
4. Traditional publishers' disdain for free-to-play mirrors Hollywood's early contempt for television (Joost van Dreunen) — "Low resolution, black-and-white, garbage" → now everyone scrambles for Netflix investment. This "perpendicular" thinking allowed new entrants (Tencent, Supercell) to capture the greatest value.
5. The strongest competitive moat in the gaming industry is the business model, not technology (Joost van Dreunen) — The iPhone's success was not hardware, but the business model of free-to-play plus in-app purchases. Investors should focus on "business model innovation" rather than "new devices."
6. Four future investment directions: subscription, advertising, UGC, crypto assets (Joost van Dreunen) — Subscriptions provide predictable revenue (higher valuations); advertising reaches young consumers ($70 billion in traditional TV budgets shifting); UGC lets users create content (Roblox model); crypto assets create digital economies unbound by national borders (2-5 years).
7. "Pioneers get arrows in their backs, settlers get rich" (Joost van Dreunen) — PUBG created the "battle royale" genre but charged $30; Epic captured the market with Fortnite's free-to-play + cartoon style + smoother experience. Investors should focus on "who enters a proven category at the right time with a better business model."
8. The most transferable lesson from the gaming industry: leave your ego at the door (Joost van Dreunen) — Tim Sweeney (Epic founder) wears coveralls, carries a big backpack, and looks like a nerd, but he is a billionaire with a vision to change the world. Other entertainment industries should learn this "humble genius" culture, focusing on solving problems rather than chasing fame.