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Konvoy Ventures is a thesis driven venture capital firm focused on the video gaming industry. We invest in infrastructure technology, tools, and platforms.

Owning the Entire Ecosystem

We believe there will be a shift back to hardware-driven strategies

Owning the Medium

The battle for consumer attention grows more contentious by the day. Trends are drastically changing and tech companies are being forced to evolve their strategies through internal pivots, new initiatives, and acquisitions. Within the consumer space, owning the end user is critical for effective monetization as this creates opportunities for flywheel mechanics across products. Consider how Amazon’s Twitch leverages Amazon Prime to upsell its users, or how YouTube enables Google to optimize its ads business.

While recent trends in gaming have focused on winning through software, we believe there will be a shift back to hardware-driven strategies. This will be led, pioneered, and won by the largest corporations in gaming and tech (small startups will not win this space). Top tech companies invest heavily in their hardware divisions. Owning the wedge that brings customers into a company’s broader ecosystem is lucrative; for example, Apple with the iPhone and the App Store or Sony with the Playstation and Playstation Plus.

Gaming Is Driving Hardware Decisions

Younger generations spend a significant amount of time gaming, north of 10 hours on average for both Gen Z and Millennials. Gaming allows for a wide variety of content consumption and interactive social experiences, which has fostered the hypergrowth of games (especially in recent years with pandemic lockdowns). A core driver of gaming’s growth is financial accessibility, which is one of the key reasons why console manufacturers have found such success this past decade. Console gaming is simultaneously more affordable than PC Gaming while delivering a much better gaming experience than the tiny screens of mobile phones.

The current console leaders (Microsoft, Sony, and Nintendo) have owned the market for decades. Owning the hardware allows them to control the ecosystems in which gamers spend time and ensures they benefit from the entire economy. Games, marketplaces, and gamers’ relationships are all managed by console providers through these ecosystems which creates a sticky relationship between the player and the console manufacturer.

However, the market positions of these console providers are not as secure as they used to be. Today, there are new market entrants (some with software-only offerings), potential antitrust regulation on the horizon (University of Missouri School of Law), and consumer pressure for more open ecosystems. Some of the more recent entrants include Google and Amazon, two of the biggest players in video game streaming and video-on-demand services (VODs), as well as Valve, already a market leader in game distribution.

Google: Google has a well-known graveyard of failed initiatives and acquisitions, but they have continued to invest in building internal products or acquiring existing offerings to establish themselves in non-core verticals. In 2019 Google launched Stadia, a cloud gaming offering to compete with consoles on game distribution, only to announce its upcoming shutdown in January 2023 late last month (The Verge). This comes almost a year after shutting down their internal game development studios (Kotaku).

Though this initial foray with Stadia may not have been successful, it is not the end of their efforts in the space. Less than a month after disclosing Stadia’s closure, Google announced “the world’s first laptops built for cloud gaming” which will support all cloud gaming platforms (Google). Over the last few years, major players have been investing in cloud gaming platforms (Amazon’s Luna, Microsoft’s xCloud, Playstation’s PSNow, Nvidia’s GeForce NOW, among others). By cutting their losses with Stadia, Google will be able to tap into these more successful platforms and user bases. The latest Chromebooks will come with support for xCloud, GeForce NOW, and Luna.

Amazon: Amazon has taken a less traditional approach by focusing on a standalone software application for its cloud gaming service, Luna. The entire service is available through the Amazon webpage (Luna). While you can buy a controller compatible with the service (Amazon), there is no other first-party hardware. In the long run, this still could potentially complete the same goal of manufacturing a console. At the end of the day, Amazon wants users in its ecosystem, which is also why they acquired Twitch.

Valve: Valve is a leader in PC game distribution but has in recent years seen the benefits in owning hardware. What started in VR with the Valve Index has now moved into traditional game consoles with the Steam Deck, a fully mobile mini-computer with integrated controls, screen, and the ability to play high-end PC games locally. The major benefit that Valve has over Google and Amazon is their existing content distribution platform, Steam, which comes embedded on the device. The latter two have tried to invest in content without much success while Valve has spent decades becoming the most trusted and valuable PC game distribution platform.

Because the Steam Deck is mobile, Valve can now expand outside of its traditional PC game audience while still benefiting from the library of content Steam manages. When users leverage Steam on a PC, Valve only owns the distribution platform. With Steam Deck, Valve owns the entire operating system and ecosystem its users are spending time in.

Takeaway: As attention shifts, companies need to find ways to bring users back into their ecosystem, and software is not the only solution. When you own the hardware in which a consumer spends their time, it is far easier to monetize that relationship. When a company solely provides software, there are lower switching costs for consumers and lower barriers to entry for competitors. We believe that this is going to be a significant trend as major tech companies continue moving into gaming. Expect more hardware, even if they are thin clients.