Background

Seven years ago, I stood in front of an audience of game developers in Austin, Texas and described the inner workings of how Chinese gold farmers were utilizing their games to generate hundreds of millions of dollars in revenue per year, of which the developers weren’t making a cent of. I predicted that gaming giants like Blizzard and Sony would be selling their own virtual gold in the years to come. The feedback I received was that would never happen, as paying for any form of advantage in a video game was unethical. Gold farmers were the scum of the earth. My talk and subsequent interviews helped me become one of the most hated individuals in the gaming industry.

But, alas, I was right. Getting more gold in WoW now is simple: just fork out $20 cash and buy yourself a token. Blizzard turned to the dark side. Other developers went down the same path.

I was able to make this prediction back in 2010 because I had been living in China for several years and working in the gold farming industry myself. As a lifelong hardcore gamer, it was fairly evident to me that time = money was just as valid in a virtual world as it was in the real world. There were gamers out there who wanted to play at a high level but couldn’t, because they didn’t have enough time to invest in the game. On the other end of the spectrum, there has never been a shortage (especially when you think at a global scale) of people out there with too much time on their hands who would love to generate a bit of extra cash for themselves. Hence, third party virtual game currency markets were an inevitability.

F2P Gaming — seriously a super Chinese business model that has taken over the West

Knowing that the end of gold farming as a profitable business model was near, I started looking for new opportunities. F2P (free-to-play) games had long been popular in China. With a lack of copyright laws in the country and rampant software pirating, the concept of selling a boxed game for a set amount of money just didn’t work, and the genius idea of giving away a game for free while selling potions, items, and equipment inside of that game was born.

That year, I co-founded Reality Squared Games (R2Games), a publisher of Chinese-developed, free-to-play browser games in Western markets. Our critics were many, with Chinese game developers feeling their games weren’t up to American standards, and Americans remaining completely oblivious to the market potential of F2P.

In 2012, I spoke again, this time at a Game Developer’s Conference in Europe. My speech was entitled: $100,000 Whales — An Introduction to Chinese Browser Game Design. I talked about the psychological design of Chinese F2P games, (leaderboards, in-game events, server rolling, etc.) and the phenomenon of players spending tens or even hundreds of thousands of dollars on games with graphics that looked like this:

Again, Western developers found this hard to believe. During the speech, I previewed an upcoming game we were getting ready to publish – a simple, flash-based RPG that could be played in any web browser. Wartune launched the next month, later going on to gross hundreds of millions of dollars.

It goes without saying that the trend towards free-to-play has been unstoppable over the past several years, and it’s rare to see any top games, especially on mobile, that aren’t free-to-play. It didn’t take long for Western game developers to realize what their Eastern counterparts had long-since understood, that the most profitable business model out there, is free.

Free-to-play gaming is, without a doubt, a very Eastern business model that went on to take over the Western gaming market. This is something that, as Americans, we are not quite used to seeing, but I feel is going to start happening more and more.

In my personal opinion, as an American who has been living in China for over a decade, China is more advanced in the realm of the mobile internet than the US.

I’m not going to expand in this particular post about all of the ways this is happening and the reasoning behind it (although I may in later posts), but I do want to point out what I feel is going to be (and already, in some ways, is) the next big type of Chinese-invented product to flourish in the West:

LIVE VIDEO STREAMING — gamified, with a virtual gifting business model.

Live video streaming is nothing new in China. Platforms like 9158 (originally a PC client-based video streaming product) have been around for over a decade now. YY, a Chinese company listed on NASDAQ, had been the dominant player in the space up until the past couple of years.

Chinese live streaming products are famous for featuring guys and girls in their late teens to early twenties singing, telling jokes, and flirting with users in their streams. In a country whose low to mid-tier cities lack quality affordable entertainment options, hanging out and watching a live stream is a good cheap way of entertaining oneself.

The Chinese live streaming business model is simple:

1. Users send virtual gifts to their favorite streamers, which cost real money ($0.01-$1,000 or more a gift).
2. The streamer gets a cut of all revenue generated from virtual gifts (usually 30–50%).
3. Sending gifts is gamified, and the more gifts you send, the higher your level.
4. Being a high level on a live streaming platform is like walking into a club in a custom name-brand suit with a Tourbillon watch and sitting down at the expensive table. Everyone knows you’re the shit (or so you hope).

For example: a user buys a $10 virtual car for the streamer. A super-cool animation of what appears to be a Porsche flashes on the screen and lets the streamer (and everyone else in the room) know who sent the gift. The streamer will thank that user, and pocket $3–4 dollars in cash. Who knows, maybe he/she might add your social and start chatting with you? (Nah just kidding, you probably need to send at least a yacht for that…)

As in F2P gaming, there are real-time leaderboards everywhere. Top streamer of the day, top streamer of the week, top contributor of the week, as well as contribution boards for every streamer (it’s easier for a streamer to remember you if you’re one of their top 10).

Additionally, just like guilds may battle in online games, live stream operators frequently hold contests and competitions in-app, often pitting streamers against each other to see who can receive the most amount of gifts in a set amount of time, with massive rewards going to the winners.

The rise of mobile streaming…

It is only over the past two years, however, with the rise of essentially ubiquitous smart phone usage and 4G coverage that live streaming has taken on a life of its own.

When live streaming was limited to the PC (which, by the way, was not a household item in China), the barrier of entry to streaming content online was very high. One needed a desktop computer, specialized sound card, microphone, web cam, software, and the knowledge to get all of that gear setup in order to stream. Live streaming platforms required users to apply and be verified to become a streamer, usually disqualifying those who were not hot, talented, or funny enough. Online payments were far-from-advanced and, without Paypal or credit cards, it was nearly impossible for users to pay or get paid.

Mobile changed all of that. All you have to do is:

1. Open your app
2. Press the stream button
3. Beam your pretty face to the world

Your iPhone already has a high-quality microphone and camera built in, and 4G pretty much allows for you to stream from anywhere to anywhere without lag. Payment is instant through the app store, WeChat Pay, or Alipay. Worried about your appearance? No problem! Pretty much every live streaming app on the market will airbrush your face in real time so you look fucking awesome. Wrinkles, zits, scars no more! Have stage fright? Don’t know what to say? Practice by talking to the robots in the room before real users join in.

It didn’t take long for the space to explode in China, with several unicorns emerging in the space, such as Inke, Douyu, and Huajiao. (Slightly) more traditional mobile social and content platforms such as Momo and Kuaishou, who already had solid 8-figure DAUs, saw their revenue and profits explode once they implemented live streaming into their app. Momo’s 2016 Q4 revenue jumped up over 500% YoY thanks to the addition of live streaming, and they are now making over $80MM USD in profit per quarter, primarily through virtual live streaming gifts.

There has been a wave of new influencers rising out of nowhere, with countless numbers of live stream broadcasters making hundreds of thousands to millions of dollars a year. These are the new influencers of China.

Could this work in the West though?

Sending virtual roses to strangers on the internet singing in their bedrooms? Hah! That’s something that may work in China, but would never work in America. Right?

… right?

That’s something I heard from both American and Chinese friends last year when we started doing more research on the space. Nobody thought this could work in the West — it hadn’t worked during the PC generation, so why would it work on mobile?

In reality, by 2015, Meerkat and Periscope had proven that there was a market for mobile live streaming in the West. These products were technologically innovative and gained quick traction with users. Unfortunately, they never really wrapped their fingers around how to operate or monetize a streaming service, (and Meerkat got dicked by Twitter), and Chinese companies or companies with knowledge of the China market saw an opportunity to pounce, leading to the emergence of platforms such as Livestar, Live.me (by Cheetah Mobile ), Live.ly (by Musical.ly), etc.

It turns out that we, as human beings, are more alike then we may think. People tend to like making friends, regardless if they’re in a third-tier city in China or the middle of Los Angeles. With live streaming being a real-time communications technology, what you see is what you get, and the social aspect of streaming can be a truly unique experience.

When it comes to sending virtual gifts, we knew long ago that virtual status has real-world value, and the Chinese business model is showing to work just fine in the West. Revenue made from virtual gifts has allowed many streamers to pursue their talents and passions, whether that may be music, dance, art, or comedy.

While YouTube influencers have always relied on advertising revenue to make their livings, it is all about the virtual gifts for live streamers. The feedback loop on the quality of content is much faster in a live stream then a YouTube video, and whether through user chat comments or gifting, a streamer knows immediately how well their fan base likes the content they are producing.

While I don’t think live streaming itself is going to overtake traditional social media or text-based communications (just like Facetime never killed texting), you’ll be hard-pressed in the future to find any online social platform without it. And without virtual gifting, it’s just not as much fun.

Shameless Plug:

Check out Livestar in the app store (iOS / Android). We’re iterating on our product as fast as we can, and appreciate any feedback we can get.

I’ll be using this blog to write more about business, technology, gaming, social media, and China in the future.

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