Game Development, Economics, and the Future of Work
Have you heard of Roblox before? It’s okay if you haven’t. I’ve been out of the loop with video games, but recent material on game development has brought me back in.
Roblox isn’t even a game, it’s a game development platform, and it’s a great example of what’s now possible for low-code or no-code businesses. Perhaps the only evidence needed to demonstrate Roblox’s success is the fact that “kids under 13 spend more time in Roblox than on YouTube, Netflix and Facebook combined.”
How about another company, Epic Games, creator of Fortnite, and their standoff with Apple earlier this year. Epic Games created the Unreal Engine, which is the development platform that many third parties use to create games. It’s free to use and Epic Games takes a small royalty of all game sales. Conversely, Apple has a standard of charging a 30% royalty for in-app revenue for all apps in their App Store. That’s a topic for another day.
Roblox and Epic Games are reducing the ideal size of a firm. To see why, we need to look to the work of Robert Coase.
One of my favorite episodes of the Joe Rogan Experience featured the venture capitalist Naval. He mentioned the work of economist Robert Coase, who’s best known for his theories on transaction costs and externalities. Let’s take a closer look at transaction costs and how they determine the size of a firm.
Say you’re an entrepreneur running a single-person business. When you begin to expand, you have two choices. You can (1) contract out additional work or (2) hire employees. How do you decide between the two? The answer is comparing internal and external costs. If hiring employees and conducting work internally is cheaper than externally contracting work, your business will grow until the costs are in equilibrium. That is how Coase developed his theory for optimal company size in “The Nature of the Firm.”
As you can imagine, there are many large firms in existence. However, as Naval described, there are currently many startups that are lowering the external costs for firms. The result is a shaving away of large firm functions. That’s how we got companies like AirBnB. It’s also how we got Roblox and Epic Games. The Unreal Engine, for example, lowers the cost for developing games. Developers no longer had to build their own game engines.
Something similar is happening with work itself. Massive amounts of high-quality work will be available in the near future in the gig economy. The pandemic sped up the process of completely democratizing not only where but when we work.
Working on your own time used to be extremely difficult. You’d have to be at an office, factory, etc during regular operating hours. Now, companies are taking advantage of different work schedules by having people pass off work to others halfway across the world when they go to sleep. You can also drive an Uber any time of the day.
Thinking back, why do salaries even exist? Among several reasons, two that stand out to me are availability and predictability. Many companies don’t require you to perform the same amount of work per hour, but they pay a standard hourly rate. By doing so, the company knows that (1) you will be there to work and (2) you will be paid a specific amount regardless of quality/quantity of work. Contracted out work may be cheaper, but there will be periods where costs skyrocket. In theory, employees benefit from steady income, and employers benefit from the availability of employees as well as predictable costs.
However, with the rise of the gig economy, relative costs are shifting. Moving forward, we will see new equilibria in firm size along with the rise of more platforms like Roblox and the Unreal Engine.