Tuesday 23 Jul 2024
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This article first appeared in Digital Edge, The Edge Malaysia Weekly on January 8, 2024 - January 14, 2024

Web3 had a rough time when cryptocurrencies like Bitcoin and Ethereum took a dive last year. Despite the uncertainty, gaming firms are embracing Web3 tech in their intellectual property (IP), anticipating its impact on sports and gaming through innovative value creation and ownership and participation opportunities for players, fans and creators.

Cryptocurrency, being inherently volatile, is susceptible to systemic problems that in the past have triggered market downturns, such as the collapse of the Futures Exchange (FTX) in 2022. Given the reliance of Web3 protocols on cryptocurrencies, the resulting crypto crash has led to a decline in Web3 investments. Web3 is a decentralised internet that leverages blockchain technology. In gaming, Web3 offers secure ownership of in-game assets, enabling player-driven economies and fostering novel ways of value creation and participation.

The collaboration between Japanese gaming giant Square Enix — the creator of the critically and commercially successful Final Fantasy — and blockchain platform Polygon in launching a Web3 gaming experience titled Symbiogenesis in February last year exemplifies the potential and interest rising within the blockchain gaming sector.

(Photo by Shahrill Basri/The Edge)

The metamorphosis to Web3 marks a new age for Malaysia’s gaming sector in capitalising on emerging opportunities. A case in point is the recent memorandum of understanding signed between Acxyn, the first Malaysia-based Web3 company and IP tokenisation platform, and Malaysia Digital Economy Corporation (MDEC).

So, what exactly does it mean to tokenise game IP? Simply put, game IP tokenisation is a tailored strategy and a smart contract made for game IP and the rights associated with it.

“We try to understand the income rights and the underlying assets and then we provide the legal framework that essentially transcribes the IP for Web2 to Web3,” says John Schneider, chief economist of Acxyn.

This transformation empowers game developers and investors with access to game IP and the associated income rights, governed by Acxyn. The goal is to establish a transparent framework, treating IP as an innovative investment.

Tokenised assets will create an investable, transparent and secure framework within Web3. This introduces new monetisation avenues for game developers’ IP, from royalties to transaction fees.

Once the assets are on the blockchain, it opens up access to new types of fundraising and a different way to go public with their game creations, which guarantees more transparency and more security for investors.

The market capitalisation of Web3 is currently estimated at US$27.5 billion (RM127 billion) and it is predicted to reach US$81.5 billion by 2030, according to METAV.RS in its Web3 Market Statistics for 2022-2023. According to the Dapp Industry Report 2022, Web3 games have reportedly accounted for almost half of overall blockchain activity, with an average of 1.15 million daily unique active wallets and 7.4 billion in transaction count.

Game developers can tokenise game currencies and items as well, which provides more ways for them to source liquidity and to structure income innovation within their games. It also opens up the possibility for different types of cross game collaboration with other studios.

Tokenisation is about creating a digital representation of the IP that can be traded, invested in, interacted with and monetised while maintaining ownership and governance rights for the game developers, says Schneider.

In regard to plagiarism of content, it is essential to address those issues through proper legal channels. Copyright enforcement, patents, trademark guidelines and permissible commercial uses will need to be relied on to distinguish fan-created content from the original IP.

(Photo by Shahrill Basri/The Edge)

Community-based IP valuation

The uniqueness of game IP tokenisation lies in the community-based evaluation. Essentially, with game IP being tokenised and existing in a transparent blockchain network, it provides investors with more investment security through the game data collected.

Schneider set up Acxyn in Malaysia as he thinks that Malaysia stands as a land of opportunity driven by a youthful, digitally native demographic. He believes that the  talent and ambition within the local gaming industry has the potential to leave a mark on the global stage in the fields of technology and gaming.

“The country’s strategic centrality within Southeast Asia further enhances its allure, providing an advantageous vantage point for establishing and propelling disruptive businesses,” says Schneider. 

Acxyn has built a pipeline to understand the origins of the value of its game IP. It involves a pipeline of data where all the data a game generates is tapped to provide a clear understanding of what makes a good IP.

“When the game IP goes into fundraising, we are actually providing and backing up our valuation of the game IP with transparent and auditable data,” explains Schneider.

The price for the game IP will be determined on the secondary market, where investors trade them. The value is set by what buyers are willing to pay and what sellers are willing to accept, showing the demand and supply dynamics in action.

“However, if there are clear indicators that an IP right is worth more than it is currently trading for in the market, we will take that into consideration when commercialising that IP in a more enterprise institutional offering,” stresses Schneider.

The Acxyn-MDEC partnership will facilitate blockchain technology incorporated into business models for game IP. The digital income stream of those businesses will be used to assess the economic value of game IP in Malaysia in a transparent and auditable environment.

The strategy of tokenising game IP targets investors looking at business potential and gamers who simply want to enjoy and engage with a well-designed and entertaining game.

Success in the realm of game IP is achievable irrespective of financial constraints when the design excellence, immersive gameplay experience, unique attributes of the game IP and the overall setting or environment are skilfully crafted. In essence, the intrinsic qualities and creativity of the game can transcend financial limitations, contributing to its potential success.

“These game creators are artists; they need support when it comes to how [their IP rights] are commercialised and how economic interactions [or] transactions are created around the IP,” says Schneider.

(Photo by Virtuos)

Game development and talent support

Great IP is not built in a day — it is a long process, especially in game creation. Game creation and IP creation are time-consuming, involving iterative testing to attain optimal performance.

“In development, games usually take five to eight years to build, with thousands of people working on the project. The budget for those projects is humongous and that is for teams that already have the experience,” says Mohan Low, director of digital creative content at MDEC.

As a result of the Covid-19 pandemic, the Malaysian gaming landscape has seen a big spike in demand and engagement. It has increased sales, with the gaming landscape becoming a very investor-friendly environment, and projects and funds pouring into the system.

Malaysia’s video game market is projected to reach US$588 million, with an estimated 16.2 million players by 2027, according to Low.

However, Low is urging for more private funding to be poured into the ecosystem as the government can only do so much in funding large-scale high-quality AAA projects. He also stresses the need for game companies to prove their capability for optimal results in the investment process. AAA games is a classification used for high-budget, high-profile games that are typically produced and distributed by large, well-known publishers.

“The issue with private funding is that most venture capital (VC) [firms] and private equity (PE) don’t understand these businesses enough to invest,” laments Low.

In the last couple of years, specific VC firms have emerged but game companies need to be ambitious enough to want to take the risk of accepting VC investments to expand further from their existing stable cash flow, says Low.

Game companies will also have to realise that there will be commitments and governance to grow in a certain direction, especially for smaller game companies, when it comes to private funding. Meanwhile, investors will need to invest in games while also taking into account the lengthy process that goes into creating game IP.

Mufizal Mokhtar, general manager of Virtuos KL, highlights the challenge of keeping up with trends in game development, emphasising that, “a lot of game development is a marathon rather than a sprint”. Virtuos is one of the largest content creators of video games and movies globally.

Much like a sprint in a race, trends are rapid and dynamic, which poses a challenge to game creation. As game development takes years, trends underscore the importance of foresight and strategic planning to ensure that the developed game IP remains not only relevant but also thoughtfully crafted when presented to its consumers.

While game companies can aim to be trendsetters, it is not an easy task as the creator must have a lot of brand power. Malaysia, in particular, has a relatively young industry that lacks strong brands that can be trendsetters, says Mufizal.

MDEC has been championing investments in IP, specifically in the animation industry, for the past 15 years with successful examples such as Monsta, Didi and Friends and Boboiboy.

Validation programmes such as the Digital Content Creators Challenge (DC3) programme, previously known as the Intellectual Property Creators Challenge (IPCC), will further assist content creator development and production. This programme is strategically synchronised with MDEC’s increased investment in games and the deployment of IP.

“Although Malaysia has created great game IP such as Gigabash by Passion Republic Games, which is going to last for the next 20 to 30 years, [the country will] need more of that,” says Mufizal.

In the dynamic realm of game IP creation, the alchemy of raw talent alone is insufficient; it is the crucible of experiences that transforms creative potential into a potent force for successful game IP. Raw talent, much like a precious gem in its uncut form, requires honing, upskilling and development to reveal its true potential.

“It takes a lot more than raw talent. [Talent] needs to be honed and refined continuously through upskilling, while IP creators of successful IP [need to be encouraged to] birth more successful IP,” says Mufizal, emphasising that there are no shortcuts or magic solutions to creating a successful IP.

Rather, it is what is trending in new technologies and art styles, which combine to create a successful game IP.

Commercialisation of game IP

Developing a game with the primary focus of delivering an exceptional gaming experience necessitates the simultaneous consideration of its commercial viability too.

“As a game studio game developer, you’re actually building a business and you’re always thinking about how to maximise the commercial potential gain [for the success of the game],” says Schneider.

Acxyn aims to enhance the business model and value proposition of gaming, rather than fundamentally change the way games are created. Maintaining the source of inspiration and creativity behind the game IP is as important as finding the right balance in incorporating disruptive technologies for commercial success.

“There have been companies that have attempted to integrate with Web3 successfully. And one might argue that companies like Axie Infinity, which was generating US$4 billion in revenue, have been very successful at it,” points out Schneider.

However, Axie faced a significant setback during the crypto downturn of 2022, drawing criticism for its lacklustre gameplay. Critics highlighted that the primary incentive to engage with the game seemed to be financial rather than intrinsic enjoyment.

Game companies as business owners need to secure a sustainable business model. With the whole gaming industry still in the integration phase for Web3, Acxyn believes that the future of gaming will involve incorporating technologies such as Web3.

Low concurs. He predicts that the demand for gaming technologies, talent and services will shoot through the roof in the next couple of years due to increasing demand for virtual spaces run by game engines.

“With most companies venturing into the metaverse narrative and having to keep up with current technological demands, creating their own virtual spaces for their businesses are ever so important. Hence, running a virtual space would require game engines that exist in mobile apps and web pages,” says Low.

And, naturally, when games are successful, there is interest in using video games as a source of income. So, game players are going to be naturally curious to find out how these games are being developed, adds Mufizal.

The symbiotic relationship between game players and game developers where the players become developers as their curiosity in game development and what makes a successful game increases will drive a positive outlook for the gaming landscape despite the economic slowdown.

Looking to the future

Acxyn sets itself apart by incorporating an artificial intelligence (AI)-driven data stream in understanding the value of game IP. Its success will depend on separating out the general IP rights that are investor-worthy with a sustainable business model.

“The ability to understand the current kind of economic momentum [of game companies] as well as their future momentum is really going to set us apart,” says Schneider.

The liquidity of IP on blockchain will be backed up and unchained by the use of smart contracts with the compliant Web2 to Web3 framework.

“Unchain means freeing the IP assets from the traditional and restrictive method of trading, allowing for more direct and efficient transactions,” says Jason Loh, CEO of Acxyn. Investor interest will play a significant role in determining the IP value and asset backing of these tokens, a common trend in many companies within this space.

Acxyn is currently in the process of commercialising parts of its product suite, projecting to start earning revenue by early 2024. It is raising US$500,000 in order to optimise the commercial rollout of its product, which will then lead to the scale-up of its operations to expand its marketing efforts. By 2027, it aims to have 100 IP rights, with around US$20 million on its platform.

“How we envision it is that we are going to emulate all gaming developers. When they graduate and proceed to develop a Web3 game, automatically, they will already be very familiar with our platform,” says Loh.

As the game IP industry, valued at US$190 billion, continues to stand out as the most robust entertainment market globally, Acxyn recognises and capitalises on favourable trends that are reshaping the landscape. 

These trends include the reduction of barriers to entry for new game IP creators, AI-driven efficiency in development processes, and a connected demographic with access to cutting-edge technologies like cloud computing, streaming and blockchain.

“In pursuit of its market projection, Acxyn strategically positions itself to leverage these trends. The company aims to achieve a substantial market share by implementing innovative technologies and fostering collaborations within its ecosystem,” says Loh.

The Asia Pacific University of Technology & Innovation (APU) entered into a strategic partnership with Acxyn in November 2023. The collaboration aims to advance game development education, providing students with the knowledge and skills needed to thrive in the evolving world of Web3 gaming.

Education plays a crucial role in the integration of Web3 technology in the gaming industry. Acxyn will be educating aspiring game developers about the technology that they can then apply in their games to enhance player experience, as shown recently with a game design workshop titled “Monetisation Using Web3 for Game Creators” on Nov 7, 2023, at APU’s campus.

“I think we can start exploring co-development opportunities from the AAA game angles. And the goal is, in the next two to three years, we should have a co-­development project come out of Malaysia,” says MDEC’s Low.

With the efforts of building up the funding ecosystem underway, co-development projects will further expose local Malaysian talents to high levels of technological sophistication, which is part of the journey to creating successful games and game IP with Web3 technology.

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