How AI Will Revolutionize the $187B Gaming Industry ft. Moritz Baier-Lentz

How did you go from Diablo 2 to venture capital? That seems like a pretty big leap.

Look, there's significant societal and technological tailwinds in gaming. You just don't have in any other media categories. Like I want to be backing 5 billion, 10 billion $50 billion companies. To get to that scale, you need to be doing something fundamentally new and getting it right.

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Hey, welcome to the Next Week podcast. I'm Matt Wolf. I'm here with Nathan Land and we've got another amazing episode for you today. Today we're actually talking about this area that's sort of this crossover passion of both me and Nathan. Right. Both of us are gamers in our downtime. Both of us love AI and play around with AI in our downtime. And today we're going to kind of talk about that crossover between AI and gaming.

Most people don't realize gaming is already the largest form of entertainment. Right. Like it's bigger than movies, it's bigger than music. Most people, especially in business, they don't really realize that with AI it's going to be even more intense. That like you're going to have these new experiences that were never even possible before.

Yeah.

So right now, you know, games cost a fortune to make. You have huge teams develop them. Sometimes they take five or six, seven years to make. You don't know if it's actually going to be a successful game. And also the games are quite limited. Like you're hearing from gamers that they're kind of tired of all the restrictions on the games and what's possible and what's not. It feels like with, with AI you're soon going to have where you can make like AAA games in like one to two years. That, that, that allow gamers to do things that was never possible for like for example, there's a game recently came out, Baldur's Gate 3, one of the top selling games in the last two years. Massive story, massive world. That's why people love it. But the story is not that great. You know, it's kind of repetitive and yeah, you can change things, but you start to Go in this, this, you know, one direction that you can go. And there's going to be a lot of games like that where now you can have, you know, you can make your own story. Like, oh, I want to be. I want to be a dark elf king who was betrayed by my brother or whatever. Like, let's start the story like that way and we're going to start it in the underworld or whatever. There's going to be so many new experiences or like, you know, like, imagine like, you know, Grand Theft Auto, but when you get to the end of the world, it starts generating the world kind of like how Minecraft works, but like way higher fidelity. Like, okay, now I'm like, I went from New York and now I'm driving down and I went to Buffalo and I went to, you know, went to, you know, Michigan, whatever, right? Like, all, all that stuff's eventually going to be possible and some of it's going to be possible in the next few years. So I think as that happens, you know, gaming is going to become bigger than movies. It's already bigger than movies. But like, it's. I think movies can be a small industry compared to gaming in its ultimate form, which is going to be a nature.

I think we're about to see this. Well, we're already seeing this monumental shift, right? We're seeing this shift where it's easier to develop the games, it's easier to, to create the worlds inside of the game because it's being more enabled by AI. There's so much more that game studios can do because of AI right now. And so I think we're going to this world that's really, really exciting. And it's so fascinating to me because the topic of gaming and AI is such a contentious topic that I never realized would be a contentious topic. Right. I tell a story later on in this episode about how I put out a YouTube video about the overlap of AI in gaming. And like, half the people in the comments were talking about how much they hated the idea of AI and gaming crossover. And the other half we're talking about how inspired they were because now maybe they could one day create their own game because of the empowering abilities that I create. And it's so exciting to me what AI is enabling people to do with gaming. But I never thought it would be as divisive of topic as it actually seems to be.

Like, I think a lot of this with AI, it's, it's, it's similar where like the gamers want one thing and I think they're going to love some of these AI powered games. But obviously for the developers that, you know, could mean they lose their job, it could mean that they lose power over the kind of games they can push out, you know, because like when you have like, you know, you're probably have more games, kind of like how not you made Minecraft, you're going to have more stuff like that where like one developer makes an amazing sandbox world that people can play in and that really changes the, you know, the power dynamics.

Stardew Valley. Stardew Valley is another example of that. Right. Where it was one person who created one of the most popular games on Steam. It's, it's, it's crazy.

Yeah.

AI only is going to empower more people to do that. And, and we've got the perfect guest to talk about today about these exact topics. He is a gamer, he's a venture capitalist, he, he knows all about AI and what's going on in the AI world. He is literally. We probably couldn't find a better person to talk about this exact conversation with us today. We've got Moritz Byerlintz on the show. He's a partner over at Lightspeed Ventures and he heads up the gaming department over there. So again, the perfect guest for this exact topic and I can't wait to share it with you. So let's just jump on over and share the conversation we had with Moritz.

Moritz, thanks for joining us.

Well, glad to be here.

Well, let's get into your backstory a little bit. I know you've got a background in gaming. Like Nathan just said, you played Diablo 2. Let's dig into it. How did you go from Diablo 2 to venture capital? That seems like a pretty big leap.

My gaming exposure did Indeed start about 20 years ago as a professional player. My parents and my brother all had dropped out of high school and so the ask for me was to please finish high school. I thought that was well doable while also playing a bunch of video games, but fell in love with Diablo 2 pretty early. Pretty much at the same time when we got connected to the Internet, which was arguably late around 2001. So we were always Y2K ready and I loved it. I was playing for the fun. It probably was about six to eight hours a day for like six or seven years. I peaked at the global number one ranking in the built in ladder twice in 2003 in softcore, then 2004 in hardcore. But I first ventured into what was arguably the least gaming thing one could do, which is join Goldman Sachs in New York as an investment banker in a suit and a tie. Initially focused on enterprise IT, M&A and IPOs. And two years into that Goldman job came back to gaming. Looked at it, thought it was fascinating. $150 billion industry at the time that had not seen a single down year since 1997. But at the same time there was no partner who was dedicating their focus professionally to covering gaming holistically beyond just the occasional deal that we had done up till that point. And so I thought it would be a great idea to start a gaming practice. This was not a Goldman specific thing. I don't think any bank or consulting company for that matter had a gaming practice at the time. Started that in 2016, ran it for four years. Timing was great. I think they've had a blast all through today, including big recent transactions like Microsoft, Activision, take to Zynga. So four years of gaming banking. Then joined Very Small Bitcraft in 2020. This was a gaming specialist VC firm. We had about 50 million under management. We scaled that in three years from 2020 to 23 to almost a billion in assets under management. And then for the last two years I've been working with Lightspeed. Joined them late 22 as a partner, but also leading the firm's gaming and interactive media practice where we invest from a $7 billion fund into studios, platforms and tech all around. Gaming, interactive media, AR. VR, anything digital and virtual worlds.

I've got to ask, how, like, what does a Diablo 2 player make? Like, how much can someone earn back then? Obviously it's different now.

Back then.

It is different now. I think most, most of the money made today would be attracting eyeballs. There was this time in between where the thesis was you can do it with winning esports tournaments. That's what all the initial esports teams were formed based. I mean, they all migrated to basically becoming creator companies now. There was no twitch back then. There was even barely any esports back then. I think Carlos Strike was the only esport at the time that was regularly hosting tournaments for prize money. So the only way really at that time to make money was selling digital goods. As far as I'm concerned in Diablo 2 and also a handful of others which Nathan knows well.

I do want to talk a little bit about the sort of crossover of AI and gaming. And there's really sort of two sides to that coin, right? There's the development of the games which more and more are using AI to develop the games. But then there's also AI in the games like the NPCs and things like that. So let's, let's start on like the development side because I've made a few videos on my YouTube channel about gaming and AI and how, look, I can, I can now create my own really, really simple basic game using Claude or GPT4 and go back and forth and get it to write the code for me. And I put that video up and I'd say the comments were like 50, 50, right? It was like half the people were like, oh great, now we're just going to get flooded with BS games that, that suck because people could slap them together. And then the other half were like, oh, this is so empowering. I can create the game that I always imagined making. And it was just like, it was so much more divisive than I thought it was going to be when I made the video, because I was just making the video to have fun. But I'm curious, like, what are your sort of thoughts on that area?

Yeah, on a high level, and maybe this is cliche, but as an investor I'm pretty excited about it. I think this is a great time for founders. I think it's also a great time for investors because it's very rare to have a paradigm shift in your fall into your active investing period unless you're at it for 10, 20 years. I compare this to the introduction of the Internet or the introduction of the mobile phone. I think it really will drive change and it's already showing value. This is where really very much differs from web3 by the way too, which is a lot of the value so far seems to be proven. And a philosophical debate in nature versus yeah, AI can't do many things and AI can do many things poorly, but already can do a lot of things pretty good and it's only going to get better. So clearly there's already some value and I think also clearly it's going to be increasing value going forward. And the cab on it, I don't know where the cap is, so let's just say that, right? It's going to be an interesting journey to find that out and then to kind of like segment it. You can either change the way games are built, you can change how the sausage is made, or you can change the game and the player experience itself. The sausage, I guess players primarily care about the sausage, not the sausage making. So this is a developer conversation, the development process, obviously. And I think there's natural negativity from that community, as would be from any professional domain where they feel their Jobs are at risk or even changing. I think it's a natural human reaction to be worried or to at least feel uncomfortable because it means you might have to reskill. It means you might be obsolete. Right. And so it's also, I think it's easy to dismiss all the negative commentary because it has real implications for real people. And I think that's where a lot of this is coming from.

I feel like if, if like the only value that you bring to the development process of a game is physically writing the code, then you know, you can kind of go anywhere and write code for anything. I feel like game design is so much more complex than most people give it credit for. Like I can go and code up a game, it'll be a horrible game because A, I'm not a good storyteller, B, I'm not good at creating, you know, these addictive game loops that keep people wanting to come back over and over again. You know, maybe I'm not great at the graphic design. Like there's so much more that goes into the game than just the code. So to me it just feels like if the only thing you're bringing to the development of that game is the code itself. Well, I mean, maybe do better in other areas. That might be harsh, but that's kind of how I feel about it.

Yeah, I think this may be a little bit harsh. There's a lot of game specific coding. You know, there are game engineers and you can't just swap in a SaaS software engineer. But then obviously there are other disciplines in making a great game, notably design, which when we say design and gaming, that has not per se something to do with art. That is really, I think you should think of it as designing the fun. And then there is art, I think from the art domain specifically with a lot of generative AI now used in concept art, prototyping, 2D including 3D as well. But really mostly I think on the 2D side still, I mean those concerns and worries are, are pretty real on the commentary of flooding the market with stuff. I mean we've seen that in other media categories too. We're also flooding the Internet with text and people on Instagram are flooding it with photos that most people don't really care about. And then we have YouTube for, for video and TikTok obviously too. And so it would be a natural extension of everything we've learned over the course of the last couple of years. Call it what like 20ish years that after figuring out the, and putting into creators hands the ability to create and share and remix text, then images, then videos that games which are interactive videos if you want. So you know, would be the next logical frontier. And I think by and large the same ideas should hold. I think there's always going to be a place for high quality games designed by professionals alongside more fun creator clunky content. And we're already seeing that unfold with Roblox to some extent. But there's also Netflix while there's TikTok. Right. So I think it's a beautiful thing to enable creators with these tools and that's probably the part to get excited about. As an investor I care a lot more about our studios really driving home these novel, previously impossible experiences. So I care a little bit less about the sausage making process and more about the sausage because I want to be backing 5 billion, 10 billion, $50 billion companies to get to that scale. You need to be doing something fundamentally new and getting it right. And so using AI in the development process will probably increase your speed, iteration and all of that kind of stuff. But to get to those valuations you really need to nail delivering something when people look at it. AI, NPCs, agentic simulations are examples on that front because we've seen it in mobile. This was the last paradigm shift in gaming where it wasn't EA or Activision Blizzard who ported existing experience onto the new mobile phone. It was those studios that built natively for new reality that were really embracing what the touchscreen can do. And that also figured out the fact that now gaming is not a dedicated sit down session playing for an hour or two, but it is getting back in for a minute while waiting in line at the dmv. And that makes a difference.

I feel like there's a huge unmet need right now in terms of what gamers want in games and what developers are actually making. Like you said, I know if you saw the recent like Wukong that just came out, the Chinese games kind of like the, they're saying it's like the Chinese God of war and it's like top two on Steam ever. And there is a divide now and like where a lot of the developers, you know, gamers are saying that developers are too woke and so they're, you know, starting to not buy, not buying their games. Right? And that's a huge thing in the gaming community right now, like from the gamers themselves, that's what they're saying. And then they're like, Wukong's not woke and it's a great game, love it. And so I think you're gonna see more and more of that where there's all these gamers who are actually wanting more hardcore, maybe violent games that maybe the developers are kind of shying away from now and also kind of pushing their own politics into the games. And I think now that you'll be able to make better games with smaller teams, you know, you'll see different kind of games come out like actually the. The games that the gamers actually want. So I think the gamers are going to be really happy about this, but obviously the developers are not going to be as happy that they don't have that much control over the market. What they could do.

I'd love to see a woke GTA 6. That'll be interesting.

Yeah. Excuse me, sir, do you mind if I hop in?

Yeah.

The other argument along similar lines that I hear come up quite a bit is how soft the American game development scene has gotten. Meanwhile you have kind of like 996 mentality in China. And it shows in games.

They're not just recent examples. But even Mihoyo for example was able to do something that had a significant impact in the Western gaming world too. And I think to some extent making games is a bit of a grind, even with all the AI help you can get. And China shows that they can grind.

Yeah. I really think we're pretty far off from AI being able to basically do the entire game design process. I think AI can help with the coding right now, but I still think we're a ways off from AI being able to completely generate a game that people really want to play. But saying that I think let's talk about the actual sausage, let's move on from the making of the sausage and talk about the sausage itself. What are some of the things that excite you that you're seeing bubble up with AI and actual gameplay? I know NPCs is one of the more obvious things, NPCs with large language models. So every conversation is different. But what are some of the other interesting things that might bubble up from that?

Yeah, and I think when people say AI NPCs and had my fair exposure in the space with in world AI.

It'S not these like one on one isolated endless conversations that you can have almost like as a side quest so you play the game and then if you want to talk to this character forever about whatever you can do that. That's pretty lame, I think. And that's not really, you know, that's the. That's one use case that's been shown. But the stuff that gets me excited and it will change what games are if done right, this will change genres and how we inter just like mobile brought. I mean it's more than half of the gaming. Tam, I think the same thing's going to happen here again. Imagine for example, a photorealistic version of Manhattan. I mean, I think there is this Great Unreal Engine 5 video where you can fly through and it looks gorgeous, but also you can only watch that for about a minute until you get bored because it's just like, okay, then I might as well just go to Manhattan and see the real thing. But we're really good at creating these hyper realistic, visually stunning worlds. It's also easy to point out how much we've gotten comfortable with how stupid and just logically limiting these worlds are. It's almost just like, oh yeah, obviously you can't do that because that's a game, right? Yeah, it's all kind of predefined and it's just like, okay, but why really? And usually the answer is because it would be a pain in the butt to code all that. And that's why we've come to closure with these artificial limitations.

So imagine filling that photorealistic Manhattan with 2 million New Yorkers with hopes and dreams and aspirations and background stories and now it still looks great as it did before. And you walk up to the, I don't know, Halal card guy and you order something and just ranting at you and you're trying to find out why he's so pissed and it's like, well, he didn't want to move to New York and he's only here because his daughter wanted to study at Juilliard and whatever and you can just go wild with it. And then you log off, you come back two days later, shit's on fire, you're like, what, what? What happened while I was logged off? Well, the stuff lives and breathes while you're not there and some gang fight started. So now you're trying to see if you can be part of that, right? So that's like GTA on steroids. I think it's going to get pretty wild because what I just laid out, you can see the light at the end of the tunnel to get that done. It works in isolation and it works in small pieces, but no one's really putting hasn't put it together partly for compute costs and other reasons, but I mean usually when you see the light at the end of the tunnel, it's going to be there in full bloom, like within like five to 10 years. And that's how we need to nail as investors and running funds that have a lifetime of 10 to 12 years that say we need to nail the future and how it looks in eight years. And so do I think Gen AI in games and Gen AI in media might be the dominating force in eight years. Yeah, I mean, at least there's a really good chance that that's the case. Right. This is early stage venture capital. We're supposed to be wrong most of the time. This one could work out quite nicely. The one thing that we can't afford is to not be exposed if it does work out. So we can afford to play this card and it go to waste, but we can't afford to just sit here and not credibly and meaningfully get exposure.

Well, along those same lines, I mean, when it comes to what you decide to invest in, like what sort of criteria are you looking for? Like what are some of the things.

We have a gaming specific subsite for the Lightspeed website actually@gaming.lsvp.com and the whole thing is very much how I view the world and how I want to be seen by founders. The whole subsite is basically a reverse pitch to extraordinary founders and, and I use that word extraordinary quite a bit. We take as a firm pride in pulling the trigger rather rarely hiring people with significant depth and authenticity in their domains, enabling them, you know, to a large extent to almost autonomously call their one to two shots a year. And that's not a lot, but we can deploy quite meaningful capital into things. We, we like. We have a, I think we have 20 companies where we have something like $200 million exposed. And so if looking at it's something like a thousand to two thousand things a year makes you want to be a part of it. And those instances feel just very different from everything else. And sometimes it's one year or two year or three years sometimes I think some partners have done zero investments in a given year and basically just admitted there's nothing that they found they loved that year. I think for me, I like the early stage more than growth stage. I look at both gaming and interactive media, but I just love working with truly exceptional people. And my bar is basically would I work for or with these people? And I think my bar for that is excruciatingly high. And so I felt like that once this year and I want to feel like that usually twice a year. But we'll see how the rest of the Year unfolds.

What was the one thing that made you feel that way this year?

Yeah, so Kid was an investment where we co led the series A with Andreessen and it's a super interesting platform play in gaming. They solved this worldwide quite scaled issue of age appropriate experiences for kids and teens.

And it's not just a feel good investment. And obviously I had my first daughter in April and people were making fun of me because I was doing the whole deal while I was supposed to be on parental leave and my excuse was that it was parenting related.

And then you invest in kid.

Yeah, exactly.

Yeah.

And so the important fact to point out here around this topic is that I think publishers have paid something crazy like 2 1/2 or 3 billion in fines in the last three years for violating this stuff. And so you're almost going around to the legal teams and sell this stuff as an insurance, like, hey, would you want to continue to be on the hook for like hundreds of millions of fines or do you want to pay us a couple of million to take that off your chest and build that infrastructure and integrate with your game? And so the traction that these guys are seeing, and by the way, it's such a beautiful example of the most two important slides and first slides in the pitch deck usually being problem and solution. This is a real problem and it's a real smart solution without wanting to go farther into it. But this is a combination between team tech and also the way this was set up legally for why this is so compelling. But.

This was the third round within less than a year of founding the company. And I've never seen this much commercial traction in an early stage gaming platform since doing the VC job in late 2019.

Is this using AI at all for analysis or anything like that, or is it totally a non AI startup?

I think just as much as a company that would now put AI somewhere on their website, but it's not front and center for them, at least for the time being. There are some applications that we have discussed, but right now this, I would say it's not front and center.

So when you're looking at companies, are you looking more at like the product they're selling? Are you looking at the people? I mean, obviously it's a combo of both, but like in order of importance, would you ever like invest in a person knowing maybe the project's not right, but this person's got something?

I would never invest in the other way around, where I think the product absolutely needs to get built, or makes a ton of sense or super interesting. But I don't think the founder is extraordinary. I think that's a trap.

If I've learned one thing in four years, that is a trap. I definitely focus more on team and founders than on product but ideally both are great. And I think if you're investing in 2 out of 2000 then I think.

You can rightfully ask for 10 out of 10 on both fronts. But a lot of my investments are pre revenue so especially on the studio side and the type of studio bets I like to take. And I think studio investing in game studios as a VC discipline is really hard. And I also, I mean I might bite my tongue on this in a couple of years, but I think most people are doing it terribly wrong.

It's very hard to find things that really lend themselves to venture style returns. We manage $7 billion family of funds. Our LPs want 4x their money or more. So let's say 28 back to get to that. If we own let's say 5 to 10% at point of time in exit on average because some of these are growth positions where you can't get to 15% because you're coming in late. You know we have to invest our 7 billion in things that will grow 250 to $500 billion in exit value. And we only have about 30 check writers. So you know, in the 500 billion case like about 20 billion on that of that is on me. So finding like two three, $1 billion companies, you're basically not carrying your weight by an order of magnitude. So what does a 5, 10, $20 billion game studio look like? I think these are big bold swings. They need to be built like platforms. They need to be built with your own IP and probably transmedia upside cross platform. They need to be managed with LiveOps as games as a service similar to the model that League of Legends and others pioneered. But it's actually almost certainly not enough to just have a cool game. You need to build like a 20 year empire.

Yeah, that seems so hard to do. Right? Even speaking of League of Legends, I mean that's one thing I've noticed too is like you don't see as many games allowing you to create custom games or create custom mods for the games. Right. Like League of Legends came from Dota, from Warcraft 3. Right. And balloons and all the tower defense came from Warcraft 3. And you don't really have that kind of thing happening anymore. I think Blizzard hated that. Right. Like we're like all these other games come out using their mods on their game. So I wonder if we'll see more of that with AI. I wonder if we'll get to a spot where you can make a game and you can make it easier for people to mod that game using AI. Right. And then that could become a spin off property that maybe the parent company still owns majority of or something like that.

Or just let AI go wild on existing games, change the parameters around and maybe end up with something that's fun. I think there's probably a way to automatically feed levels of fun into the objective function and so it kind of knows what is more likely to be fun. Yeah, it's going to be a wild world ahead. I think it totally makes sense. I think this will be more player driven creation. I think it will be more AI driven creation and it's going to be this beautiful storm of human and machine creativity to get to things that will just blow people's minds. And maybe we always have to polish it a little bit and then build it professionally. And we've seen that pattern a lot with mods becoming whole games. But maybe not. It's really hard to say. It really is hard to say because it's almost like holding an iPhone for the first time in 2007 and predicting, you know, Angry Birds and like in game monetization. It's no one, no single person would have been able to do that at that point in time. Let's face it. Seriously, no one would have been able to draw that future 10 years out. Why would it be the case this time? I think you'll be right enough by finding the most extraordinary people going on these early stage adventures. And why team also matters more than product is the product that gets pitched in the beginning is not the thing that gets sold or goes public. There's always two, three detours in between. Right? And there's this famous collection of Silicon Valley like seed stage pitch decks of Airbnb and Uber and like, and like, yeah, you can squint a little bit and it looks like it looks today, but some of them not at all. And it's always going to be like that because the future is unpredictable. But I think it is predictable that the best people will build the most valuable things. I feel pretty strongly about that. At least that's been the case historically. Now finding them and convincing them to work with you, that's what I focus most of my energy.

I think YouTube actually started as a dating website, didn't it? I'm pretty sure people put like their.

Personal profile so many of these examples is that right?

That's just one example that comes to mind. People used to put like their post like they would put their personals on there where they would sit there and be like, I like long walks on the beach and you know, I love my dogs and all that kind of stuff. They put videos to try to find dates on there. And that's I think one of the original use cases of it. But are there, are there any game studios right now that are like really, really under the radar that you feel like could, could bubble up and become something?

Yeah, there's a few. So this, you know, games investing as a VC discipline is still relatively nascent and so those AAA projects that have the legs to go all the way to what I described, most of them are still pre launch. Two companies I invested in during my Bitcraft days that I think stand out are Theorycraft. They just announced Supervive. So this I think is a project worth watching. Another one that's much more under the radar is Raid Base, which was started by the former lead designer who created Valorant at Riot Games. And then I think to call out the two that I've invested in on behalf of Lightspeed over the last two years. League of Legends creators. No, he was the first executive producer at League of Legends, Steven Snow. And then Michael Chow was also an executive producer at Riot Games at the time, but on Wild Rift. So the mobile version of League of legends. Those two started a company in late 2022 and they've scaled it up to an exceptional team. There's nothing public about the game yet, but the prototype is pretty awesome. And then a studio that I personally love a lot aware even the series, a prototype I think was blowing people's minds. And that's been now what, a year and a half ago or so. So again like I get, I have the privilege to look a little bit behind the scenes and that's the project I'm also very excited about is Gardens. Project names to be determined for most of these companies with the exception of Theorycraft, who made a pick with Supervive. But look, it almost feels to me it's so easy to look at this stuff and say like, oh, and will all of them work out? Or like, you know, it's so silly to back these projects. And I've actually gone through all the data and looked at the success rates for AAA projects once they receive a certain amount of funding and actually much better than a lot of early stage investing disciplines. Now this is looking at them inside publishers, right? Because we don't have enough data points for standalone companies, but man, I think it's easy to.

Shoot at others. But from everything I see and my gut feeling and just looking at a lot of these prototypes of games and a lot of them are built in tandem with their audience and already doing really scaled playtesting. So it's not just like me try to be the tastemaker of the gaming industry.

I think there could be a couple of multibillion dollar bangers from this era 2020 to today. And so as we see it would be enough to get one of them right. But I actually think the hit rate's got to be a lot higher.

And gaming's already bigger than movies now, right?

Gaming is 185 billion industry. That's just a content side of it that does not include any hardware sales like PlayStation and doesn't include esports, doesn't include Twitch, doesn't include Discord or any of that. So just the content. PC console, mobile content is 185 billion. It's larger than linear TV, it's larger than music, film and on demand combined. So on demand including Apple, Netflix. Yeah, and it's also off all of these media categories. It's the only one that's I think now back on a solid growth trajectory in like, you know, scraping the high single digits while a lot of the others are in decline, including I think even on demand.

Yeah, I'm sure, I'm sure Covid helped with that a bit. I know gaming just went wild when everybody got locked down.

But you also see the negative effect of it, which is fading tailwinds from the COVID era and probably over investing during the COVID area. And again, this stuff is hard to get right. In hindsight, it's 2020. But it's also funny to me where gaming shrank 2% last year and everyone loses their mind and everyone's like, this is it, you know, gaming's. Gaming's done, it's minus 2%. You should really look at the chart a few decades back. It's just straight up and to the right. So I'm sorry it didn't grow 10% in that one particular year. Coming off significant growth in the years prior. Will there.

Look, there's significant societal and technological tailwinds in gaming. You just don't have in any other media categories.

What do you think benefits most from these technological. Not just AI, but also 3D advances. We've already reached peak fidelity everywhere else. We haven't reached it in games. Videos are literally perfect, right? I mean you can capture reality and then just put it on a screen. It's literally perfect. And I think the same you could say about music and text. You can't quite say that about games. Like games look really good, but they don't look hyper photorealistic, indistinguishable from reality. They don't. So they're going to get there and then all these AI things because they are interactive and because they're social, man, there's going to be so much crazy stuff going on in games. Or call them interactive media, for better or worse. And also, everyone who grows up today is a gamer. When I was playing like I was a nerd. And now look at middle schools. I mean if you're not playing, if you're good at Fortnite, you're the cool kid, right? I wish I would have been the cool kid.

It's crazy. Well, and even with, I mean now I am.

There was a flip there where all the nerds became cool.

Yeah, I like to think.

Well, there's also like another progression that I'd love to hear your thoughts on too. Right. Because we will probably get to a point, right, where games are like photorealistic. You can play them in 8K, they're indistinguishable from reality. But then the even next phase beyond that is, you know, VR, AR, the sort of various environmental stuff. What are your thoughts there? Do you think that's going to be as big for gaming as, you know, it seems like VR kind of goes in waves as far as like interest. VR gets really exciting and then people stop talking about it and it gets really exciting and then people stop talking about it. Do you think that is the future of gaming?

So I'll say yes. But then as with everything else, getting the timing right is super critical. So do I think that head worn devices or something of that nature probably AR more so than VR will replace traditional screens possibly completely? Yes. I think.

It'D be quite sad not to see that happen over the next 20 years. I would kind of expect that. And then after that you get BCI as the ultimate frontier. But that really seems to be further out. And I'm not sure that's going to happen in our lifetime. Well, it depends on the advances in longevity. I guess lifetime is relative too. But VR might actually never be a mainstream technology. I think.

It'S too high friction because it's already pretty good. And every time I have all the VR headsets and most of them are just collecting dust. It's sad because it's just easier for me to jump into a game of Rocket League and have fun instantly versus every time I'm using it. I really like it, but also I just don't see myself getting to it. Now, if I had fully working AR glasses that can get to the fidelity of screens, like why would you use traditional screens? Why would you carry around this weird monolith in your pocket that is your mobile phone? But for ar, there are real challenges in optics and physics that right now we don't have great answers for. And it always feels like it's five to 10 years out. And at least for me, it's felt like that for the last five years. So we're not really moving. And if you talk to people who really spend a lot of time in the space. And there are also so many examples of former AR VR founders who for their next thing specifically did not go into xr.

Brandon Arib is one example, the founder, former founder and CEO. I guess Palmer Lucky is kind of the odd one out, although hand drills certainly is something else. But there are now renewed XR ambitions there.

Yeah, John Carmack got burned out on it as well.

Right? John Carmack. Nate Mitchell actually just released a video game called Spectre Divide, which is coming into alpha soon. So that's one of the 2020, 21 wave.

He was also co founder and the chief product officer of Oculus. And so I think the more time people spend with it, the more time they realize it's not a near term reality. But again, I think if you ask any of them, will XR replace traditional screens? Ultimately, I think all of them would say yes.

But that's not how investing works.

Because we need you to be kind of done and scaled in eight years. And so for xr, we monitor the install basis. It's also really hard if you come to me and you want to build a VR video game, that's cool and I love it as a consumer. And yeah, people need to be doing that to help also keep the interest in XRP up. But as an investor, it's just tough to argue that this is backable with I think right now an active install base below 10 million users. Right. Even if you get to all of them, how are you going to build a $10 billion company? It's not possible. It's just not.

Yeah, it seems like it's so hard to get people to change how they're interacting with entertainment. They can use a screen, of course, but putting on a headset is a totally different thing. And it seems like the low hanging fruit is more. How can we, how can you improve the existing experiences with AI and stuff like, like I want to see Baldur's Gate 3 balers Gate 4 where I'm using AI to generate a, a new storyline or, or like you said, you know, a game where, you know, you're generating a world and filling it up with characters who live on after you're, you know, you stop using it, you come back and they're still doing stuff. I mean, that's the kind of stuff that I think people are going to get super addicted to.

To some extent.

Everyone was focused on XR being the next platform shift of sorts. And what's happening instead is that the platform shift we got instead was AI. And platform shift is not a clean term for it. But the other interesting way I think also to think about augmented reality is actually not anywhere saying visually augmented reality, right? And so with this whole class of AI enabled hardware devices like this is actually an area where we spend time in and where others have pivoted from XR too, which is. Well, it would make sense to have a sensing device probably on your head in the glasses form factor that sees the world like you do. That doesn't necessarily give you a visual overlay to interact with it because that can happen through earplugs and voice, but helps you make sense of the world. And the Ray Ban glasses are a good example. Brilliant Labs has released Frame, which is a very lightweight AR glass with a super rudimentary display. But the power really is the AI agent that lives in. And there's a few other, I mean, we all know also the projects that went kind of boom and bust. And yeah, it's really hard to get this stuff. It's a new platform, so it's really hard to nail. But that's something that light at the end of the tunnel is like there's already an incoming train in your face. That stuff's going to work really, really great in the next year or two or three. So that's certainly fair game for a VC firm. And so we're spending a lot of time on that thesis. And that is augmented reality. If I wear them and I see you next time. And it tells me, oh, remember Nathan, you did the podcast together on August 21st. He was kind of a dick when he asked that question.

So which one?

Why don't you get back still coming in the future. Just a second. Again, this is another prediction.

So that's cool and that's very useful. And I think a lot of people will like and wear that.

Very cool. Well, this has been super, super fun. I mean, it's not often that we get to talk about both AI and gaming, which I know both me and Nathan are super passionate about both of them. So it's been awesome to talk with somebody that has the same sort of overlapping passion. So been super, super fun. We couldn't thank you enough for joining us and really appreciate it.

Thank you, guys.