Business of Esports TV: No VR for Facebook

(Livestream 137)

In this segment, we discuss Facebook’s failed attempts at keeping VR partners.

The Business Of Esports brings you news, debates, and all the information you need to know about the gaming sector, the world’s fastest-growing market. With Paul “The Profit” Dawalibi leading the charge, and a variety of special guests, BoE TV is the only place to find insider information on the esports industry!

Check out the full livestream here:

Paul Dawalibi 8:39
Interesting story here. And the headline here is abrupt exit of first VR gaming partner lands Facebook’s huge investments in a soup. Now what this is referring to is this was a new story we actually didn’t cover last week. But Facebook last week announced that they were going to start testing, putting advertising in games in their in their Oculus ecosystem. So if if you play a game on your Oculus headset, Oculus, which is owned by Facebook, that Facebook was going to start inserting ads into those games. And and they had framed this as positive for the developers because it was a way to help developers monetize their game, because obviously, some of the revenue from that advertising was going to be shared with developers. And one of the first sort of examples that they showed was this game called Blaston it’s a title from Resolution Games. And people revolted start started posting one star reviews of the game. And and Facebook now has essentially I don’t know if they I don’t know, Facebook has backtracked. But basically Blaston who was one of the launch partners has said, We want nothing to do with this. We’re not allowing sort of any Facebook advertising in our game. I’m curious a what you guys think of this first move by Facebook? And second of all, if you think because of the pressure we’ve seen in the last week, will they backtrack on this?

Jimmy Baratta 10:23
I don’t think it’s any surprise that users don’t want to see ads. But like, I don’t know why that’s relevant. If on Facebook, I’m just I would just say shove it down their throats by Facebook premium, you know, if you want to avoid the ad experience, and like, this is where we’re headed, this is going to be the norm now. So I love it. I think I did a lot of work with developers that were looking at clever ways to integrate ads more into their video games, we’ve seen a lot of meaningful activations in the past as well, which perhaps they were done tactfully or, or something where it was better received. Um, but if I’m Facebook here, I don’t think I let that sway me, I think you lean into it. And I again, you know, I’m typically a defect I typically defend the user experience here. But I it’s just such a natural, natural thing to do, right, you’re walking around, you’re driving around fortnight, and there’s a actual billboard of a company, instead of like a digital fortnight slurp juice or something. So I want I personally want to see more ads and video games. And we spoke last week about the high retention rate that ads had on Twitch. And we that was a yougov statistic that we pulled, it was very impressive. And so you know, listen, if you want, if you want these sponsors to get involved here in a bigger way, if you want eSports to go mainstream, there’s got to be given take. So I’m gonna just make a bullish argument.

Paul Dawalibi 11:42
How does Facebook actually do it, though, if you get this kind of backlash, Jimmy, right, like, cuz, Blaston, I would argue the game here is kind of a victim, right?

Jimmy Baratta 11:52
They’re definitely the victim. And it’s sad because they’re the guinea pig. And I think that if they didn’t know that they were going to be victimized, or if they were going to receive that, that they were probably improperly counseled or poorly prepared for this, I think the first few are going to be victimized. But again, it’s kind of like, well, I don’t want to draw an unfair analogy. But I just think when you enter a new space, there are going to be learning curves. And there’s going to be just trying to learn not just the learning curve, but rather, you’re creating something, you’re creating this new balance of power, this new ecosystem. And again, if they didn’t know that that was going to happen. It’s kind of obvious, right? Like users don’t like ads, they don’t want to be pitched to. I think over time, as things get more, like we were talking about in the podcast without giving too much away over time, as things become more familiar, you know, these brands understand the space better, they get involved in bigger, more involved, or excuse me, they get in, they get more involved. And so William Trump, and I

William Collis 12:52
know, Jeff, you go, but I I have a hot take. I think he’s just a bit more fundamental. But I want to hear Jeff, are you sure? Okay, I’m gonna go. So I think there’s a little bit more fundamental thing going on here, which is because like, I haven’t really come to mainstream gaming, and I sort of agree with you, Jimmy, it’s a big opportunity area. Like, why shouldn’t if I’m playing a game set in the real world, why isn’t that an opportunity to show real world branding? Like, look at product placement, movies and TV? Right? Like, that’s a whole industry. And we don’t think it’s weird that they’re drinking real sodas in a sitcom. Right. But that’s also placement, you know? So like, I think, like, but there’s sort of a reason why it hasn’t come to games. And sort of what I think is going on here is a collision of business models, right? Like Facebook is all ads. That’s what it knows, right? So it’s trying to insert that business model into another medium that actually doesn’t natively like that doesn’t take that business model that hasn’t yet figured out how to ingest that. I think it’s actually interesting, because it could be a force for good in the sense that if anybody knows how to make ads, monetizable its Facebook. Great. It could also be a force for intense sort of, it could be real a detriment to the experience, because conversely, for ads to be meaningful, they have to be obtrusive, right? Like, if you’re not noticing an ad, like like, what, like, it’s not really a very good ad, you know what I mean? So there’s this real I think line that might get solved. Paradoxically, at the forefront of gaming and VR. The gaming itself hasn’t been solved just because of who’s owning these VR platforms.

Paul Dawalibi 14:33
Jeff, we’re gonna

Jeff Cohen 14:35
I mean, I think you guys both made made good points. I mean, that the interesting thing to me is that it feels like this story was wildly predictable, in the sense of it was wildly predictable, that when Facebook bought Oculus back in, I think 2014 they were eventually going to put at like, that’s how Facebook monetizes like this was going to happen eventually. And then it was wildly predictable that once they put adds into Oculus. This was going to be a problem like I think I even wrote about it. In our in our weekly sort of newsletter that we put out 3g, like last week, I’d said, this is going to create a problem. I didn’t think it would be within six days. But it should have been pretty obvious that people will have a problem with ads, people have a problem. It’s funny people. Actually, when you dig into the data, like with free to play mobile games, people actually don’t have that much of a problem with ads, they think they have a problem with ads. But the reason why it works in free to play mobile games is because the games are free, right? So you give people target either targeted ads or rewarded ads. And, and some of them, when you dig down to the core of it, they actually don’t mind it, because rather than spend money, they use advertising to get currency. And it’s a good way to put advertising into games. The difference with free to play mobile games is that they are free to play. When you’re buying a I don’t know, I forget how much an Oculus costs. And then you’re buying game, you the last thing you want is an advertisement in that when you are getting nothing for it, and you’re spending all this money to be part of the ecosystem. Which leads me to believe that I think the most interesting part of this story is not that they put ads in because we knew that would happen eventually. It’s not that people got pissed that they put ads in because we kind of knew that that would be the case. It’s more of a Why? Why did Facebook choose to do this now? Like, Oculus is such a and we know that Facebook has these massive grand plans for Oculus and for VR. You know, Mark Zuckerberg has been pretty open talking about how he thinks VR is the next mobile. It’s the next big platform, you know, you had the internet, then you had the mobile revolution, VR AR that’s the next revolution. If you believe that you’re a company as big as Facebook, and is profitable is Facebook, why choose to harm the user, the user funnel and the user experience by putting ads in when you’re so early in that, you know, life cycle or ecosa of the ecosystem? Like why do that now? And that’s, that’s what as an investor is, like, makes me interested? Great. Some sort of reason why.

William Collis 17:11
Great point. But then I mean, is it is it just as simple, Jeff, is, how long ago did that Oculus acquisition take place was?

Jeff Cohen 17:17
Like, yeah, like

Paul Dawalibi 17:19
1010 years? Yeah,

William Collis 17:20
it’s like a long time, right? Could it just be as simple as even well funded? patient? You know, arguably, and this is, I think, fair to say strategically minded companies like Facebook, have a limit to their patients. And the reality is VR is not a volume play today, let’s be honest, right? Like, it’s not VR is getting there. But it’s not it’s not on the same token as say, you know, PC or console, right isn’t on the same page. And could it just be they ran out of patience, it’s not making enough money, we have to perform, it’s gonna like, we’re not seeing the growth to believe we’re gonna wait on this. Okay, we got to get more from the garden users. And probably I suspect one thing they know about the current users, this is a total guests. But this would be a fun thing to ask you about, actually, if you’re looking for you got data at some point. But um, I would bet VR users are very, very highly motivated and sticky, right? Because they paid a ton of money for an expensive product. And they’re an early adopter of it, right? Even today, you’re still sort of an early adopter of VR. And if that’s the case, then you probably say, well, a little bit of friction, it’s not going to drive these people away. They’re not a mobile customer where they can go and download another like, literally, like they’re on our platform, they bought our hardware they’re locked in, you know, I wonder if it’s that sort of logic that

Jeff Cohen 18:30
gets, it seems like you’re probably right. I mean, that’s kind of like the, you know, the awesomes razor explanation is that, hey, we bought this seven years ago, it’s, you know, we’re bleeding money, like, let’s just figure out what we can get from it. You know, what’s our playbook, we put ads and things, we monetize it, boom, like, that’s what we do. We’re Facebook. Let’s do that playbook, but it seems so short sighted.

William Collis 18:52
Okay, now there’s

Jeff Cohen 18:54
no money, we need to monetize this asset.

William Collis 18:56
It does have to do with what’s going on with Facebook and Apple right now. Right? with like, could it all have could it could it because another explanation here. And this is a scarier explanation for Facebook as you could look at, okay. They think their core business model might be really threatened here because of privacy activations on iPhones and Apple devices. Right? Okay. Maybe that threat is worse than we realize. And so they’re willing to even jeopardize the next generation of investment for them, because they’re so worried about short term revenue impacts.

Jeff Cohen 19:30
It’s possible. It’s possible.

Paul Dawalibi 19:32
I don’t think anyone I don’t think anyone at Facebook though, could have modeled out any scenario where even if the advertising was welcomed with open arms, where some hit to their core business is made up by VR ad revenue, right, like,

William Collis 19:45
Yeah, but it doesn’t have to get passed out that way. It could be like, Guys, it’s gonna be a tough year. We need all divisions to hit a, you know, 30% revenue growth spike.

Jimmy Baratta 19:55
Right? Yeah. I just want to let you know, we’re all throwing out guesses. I just want to throw out one more. And you know, anyone that works with engineers kind of knows how they think and how they go about problem solving. Right. All right. So help me I don’t think it’s a rough play. I think this is a data play. I think they’re trying it on a small title. They’re they’re seeing not not the public opinion in the backlash. There’s, they’re testing the users that were actually playing this game. And if they actually did capture their attention, so that they can then optimize it, rerelease it address some public concern, but then do it in a much bigger way across all their titles. So I think this was, you know, I’ve worked with a lot of devs. And engineers, they always dip their pinky toe in first, then they take six months to fix it. And then they come back and do it again, with like, two toes. Right? And then maybe they go back to square one.

Paul Dawalibi 20:41
Yeah, this is McDonald’s releasing their new sandwich at like two locations in the middle of nowhere. Wisconsin, right. Like, that’s kind of

Jimmy Baratta 20:48
Yeah,

Paul Dawalibi 20:49
I think I think Jimmy’s sort of onto something there. I just want to read this comment. Christian says, I feel like it was Facebook’s plan all along. Data and advertising is their business. Yes. And no like is my feeling on that in the sense that I truly think Zuckerberg saw, like does see VR as the future of social media also, like I think there’s some recognition that it’s bigger than just data, and bigger than just advertising. The question is, what is their patient’s level at a quote from a corporate standpoint, to see that vision through that that’s Christian where you might be right and where I think you guys all agree. I just want to mention, Jeff, you mentioned the the newsletter, where you commented on this, I’ll just link to where people can sign up for it. It’s a, it’s an eg newsletter, called the esports. Push, it’s separate from The Business of Esports newsletter, which you guys can should sign up to it comes out daily, you can sign up directly through our website. But go check out the esports push as well. Can I just offer one solution on this guy’s because I think someone has solved this problem already. Sure. And that’s, and that’s Amazon. Amazon has already solved this problem. And William, I think you framed the problem really, really eloquently, which was, it’s two business models colliding. Right. And, and Amazon solved this, I think in a very simple and creative way. If you go by, I don’t have one like on my desk at the moment, but I have one somewhere like if you go by their tablet, right, their fire tablet, there are two options when you go and pick the size tablet you want. There’s the one with ads, and the one without ads. So the one without ads costs like 150 bucks. And the one with ads costs like I don’t know, I don’t even remember $125. So you save a bit of money. But what Amazon gets to do if you buy the with ads, one is they get to push advertising to the lock screen and the and the you know, the sleep screen and the whole bit. So when you’re not using it, it’s showing you an ad, why not do the same with Oculus? Here’s your $400 no ad model. And here’s your $365 with ad model.

William Collis 23:01
Yeah, I mean, you’re sort of right, like an Amazon. I mean, Amazon’s a good company to hold up as an example here, because I think they’re like the best in the business right now. Right? So generally, if Amazon’s doing it, you can do it, too. It’s probably not that bad of an idea. The differences I think, you know, like, it’s, there’s something that feels a little bit more fundamental here for me, because my suspicion is Amazon is doing an ad model as a way to access lower price points. Like, yes, it’s an added bit like if you think of Amazon’s core, like their core idea is efficiency, low cost, right? Like that’s the core appeal of Amazon and why it’s gotten so big. It’s, you get the stuff really quickly, and you got it cheaply. I mean, Amazon is honestly one of the cheaper places to shop today for many, many things, right? I mean, it’s there are cheaper places to go. But they’ve eliminated so much cost from the system. And that goes all the way back to I think the original inside of Amazon being a bookseller and his idea being there’s all those wasted fixed costs in bookstores that we can eliminate, right? So I think they’re doing that because they want your readers to be more excessively priced. I don’t think that’s really what’s going on, though, here. Because I like on the Facebook sites, I think Facebook genuinely needs ads for their business structure to work. Like and I think it’s worse if you assume VR is the future of social because that means ads or have socialism monetized so you have to have ads in VR, then it’s just a matter of when and what lumps you’re gonna take to get him in there. So you know, and I fundamentally believe, like, if you even see it in the pricing, and the difference between the Kindle models, right? If ads were the business model, there would be one price point, right? There would be just the model with ads, or worse, there’d be a massive differential. So it’s like $500 for no ad model, you know, but like, the pricing is it suggests what’s going on here, which is it’s a discount factor. It’s not an actual incremental revenue stream, at least how it’s being perceived. So it’s a good idea, but I don’t know Fit fundamentally accomplishes what Facebook needs to accomplish because they have to solve a bigger problem here than Amazon did.

Paul Dawalibi 25:07
That’s true. It’s a good point, although it does also solve the the like, we need to get millions more headsets out there. Like because you need some critical mass for the ad model well be effect out you’re

William Collis 25:20
bringing the thing I really, I’m surprised by which is yes, your suggestion makes ton of sense for a different reason, which is you need to get the cost down on this product. Like, and actually, you might even take this full circle and say, okay, maybe we’re misread the whole thing. Maybe they’re trying to get ads in to get the cost down on the product, because it is the future and they know price is a barrier to adoption for the future. Like I bet they do studies. Why don’t you game in VR? And I bet you one of the number one reasons is is too expensive. I’m not I don’t have $400.

Paul Dawalibi 25:49
I guess it’s true, but it’s like it’s no more expensive than an Xbox. So it’s like to me, I don’t know, I never buy the price argument with VR that much. I

William Collis 25:59
don’t know we could we could have a nice,

Paul Dawalibi 26:00
but I don’t want to go down that rabbit hole. It’s a

Jeff Cohen 26:03
chicken and an egg. Right. There’s no games that people really want. There’s no killer app. So it’s pricing and killer app.

Paul Dawalibi 26:09
Ramsey says isn’t the difference here immersion? Wouldn’t ads kill the fundamental value proposition of VR? is I mean, it’s a good point, I think yes. And no, it’s Yes. Yeah, I agree. Right? Because we have ads in the real world, right. And the real world does immersive as it gets. But you walk around and you’re bombarded with advertising.

Jeff Cohen 26:30
Also, like you still have loading screens in VR, so there’s ways to do it, where it’s like, it’s quote, unquote, killing the immersion. But it’s like, you’re not in immersion yet. Like, the loading screen when you load in can still have an ad

Paul Dawalibi 26:41
for the immersion though, right?

Jeff Cohen 26:44
It could not if you haven’t gotten into the game, it’s like you’re either gonna be

Paul Dawalibi 26:46
no but meaning there are scenarios where you put ads that would kill the

Jeff Cohen 26:52
parents is not wrong, right? It’s not right. Yeah. It’s like, the middle of the game. It was like, here’s a 32nd break for like your sponsor, like,

William Collis 26:59
yeah, and you’re

Jeff Cohen 27:01
fighting against a wild orc. And then it’s like, pause, like coca cola? Have you heard?

William Collis 27:09
Really outright now? That he is sort of right? That like, I don’t think I’d say this, like, like, when I put on a VR headset, it feels a little like going underwater. Does anyone else think that that like, like, there’s just a level of like, wrap of your senses that you do get pulled deeper in it? Like, that’s actually one of the reasons why sometimes I don’t like like, that’s actually always in my estimate, I don’t like VR is like, I don’t like literally don’t really know what’s happening around me. You know what I mean? Like, I get it, like, right off period,

Jeff Cohen 27:43
like when I’m doing the podcast, I feel the same way. That’s why I don’t wear headphones.

William Collis 27:46
That’s right, you just got you just so in the zone, you just go in there is bringing the juice, but like, so it is an interesting point that like, you know, there, it’s definitely true that the more immersive the medium, the more breaking that immersion is painful, right? Like is, like, it is true that maybe ads in VR have a more fundamental problem, which is like you picked a highly immersive medium to inject a painful, you know, like out of body experience into.

Jimmy Baratta 28:13
So so that brings me to just I know Paul probably wants to move us on I want to leave us with or not leave us. But I want to just address that with two points. One is I think someone decided as you’re going in VR, they’re going to be in VR, it’s a matter of to William’s point, how do you do that in a way that’s well received. And that doesn’t break the immersion to which I want to draw attention to outside of VR is looking at NBA touquet. And other sports based games on like Xbox and console to K when your players are tired. There’s a Gatorade logo next to them that lets you know that they need a breath right? When you’re playing on the court. There are Adidas banners and in FIFA to Adidas, whatever banners around the pitch that you can see like just like your if you’re at a stadium, traditional brands. And I just think that these games have done such a wonderful job integrating ads in a way that doesn’t that actually is part of the real world experience, right that you don’t even recognize that you’re being advertised to. So I think the question to William’s point is really, how are they going to do it in VR, that doesn’t break the immersion that doesn’t change the illusion where you you still feel like you’re in VR. So

Paul Dawalibi 29:18
it’s it’s I don’t think anyone is as figured this out yet, right for VR, because I don’t think people have even figured it out for non VR gaming.