2024 Big Ideas: AI-First Games That Never End with Jonathan Lai

1. 0:00 – 1:39

   Big Ideas in Tech 2024

   1. SSSteph Smith0:00

      Precision delivery of medicine, entertainment franchise games absolutely exploding, small modular reactors and the nuclear renaissance, plus AI moving into very complex workflows. Now, these were just a few of the major tech innovations that partners at a16z predicted last year. And our partners are back, and we just dropped our list of over 40 plus big ideas for 2024. A compilation of critical advancements across all our verticals, from smart energy grids, to crime-detecting computer vision, to democratizing miracle drugs like GLP-1s, or even AI moving from black box to clear box. You can find the full list of 40 plus builder-worthy pursuits at a16z.com/bigideas2024, or you can click the link in our description below. But on deck today, you will hear directly from one of our partners as we dive even more deeply into their big idea. What's the why now? What opportunities and what challenges are on the horizon? And how can you get involved? Let's dive in. As a reminder, the content here is for informational purposes only. It should not be taken as legal, business, tax, or investment advice, or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any a16z fund. Please note that a16z and its affiliates may also maintain investments in the companies discussed in this podcast. For more details, including a link to our investments, please see a16z.com/disclosures.

   2. JLJonathan Lai1:35

      [upbeat music]

2. 1:39 – 3:15

   Big Idea: AI-First Games That Never End

   1. JLJonathan Lai1:40

      Hi, everyone. I'm Jonathan Lai. I'm a General Partner on a16z Games, and my big idea for 2024 is AI-First Games That Never End. So in 2024, I believe we'll see the first cohort of AI-first games from creators that leverage large language models to enable novel game systems and mechanics. And while much of the early discourse on generative AI in games is focused on how AI can make game creators more efficient, I actually believe the largest opportunity long term is in leveraging AI to reinvent the nature of the games themselves. Um, so creating never-ending games that engage and retain users for a very, very long time. Um, a couple of examples of this, uh, generative agents powered by large language models can create incredibly lifelike companions and emergent social behavior, um, turbocharging games that heavily utilize non-player characters or, or NPCs. Um, personalized character builders and narrative systems will enable every player to have a fully unique and personalized playthrough of their favorite game. Um, and then the game worlds themselves can no longer-- w- will no longer be rendered, but actually generated at runtime using neural networks. And new player onboarding itself is poised to be reinvented. Um, and then my idea is that every game is potentially-- will potentially be redesigned around an AI copilot with the mantra of good alone, great with AI, and best with friends.

3. 3:15 – 5:15

   Generative AI in gaming and AI native games

   1. SSSteph Smith3:15

      Jonathan, you mentioned several opportunities, or even you could say fundamental shifts in game development from never-ending worlds, to convincing NPCs, to personalized real-time rendering. I wanna know which of these upgrades you are already seeing built perhaps, and also which you're most excited about.

   2. JLJonathan Lai3:33

      Yeah. So we generally think of the AI revolution in games as happening in two waves. The first wave is building the same game, but faster and higher quality with AI tools and infrastructure to empower game developers. And the exciting thing is that this first wave is already happening right now. It's not a theory, it's reality. So we surveyed 230 game studios earlier this year, um, and it turns out that 87% of them are already using generative AI tools. And so some of the products that they named include ChatGPT, Midjourney, Eleven Labs, KD- Kaden, Adobe Firefly, GitHub Copilot, et cetera. And the majority of these students rated... Sorry, the majority of these studios rated the impact of these tools as transformational, which is pretty incredible.

   3. SSSteph Smith4:20

      Mm-hmm.

   4. JLJonathan Lai4:21

      S- the second wave, uh, which we consider even more exciting, is building entirely new sets of AI native games that are uniquely enabled by AI. And those are the examples I write about in my big idea for 2024. And so dynamic worlds that can be generated in real time based upon a player's actions, you know, lifelike AI companions, never-ending sort of choose your own adventure games. We're still very early in seeing what those new AI native game, game experiences might be like. [clears throat] And so you've seen a couple of prototypes, some, some interesting sort of proof of concepts, but in general, the, the playing field is wide open, and that's the exciting thing. Um, for the folks that do get it right, like these are, these are the ideas that can potentially create entirely new genres that captivate, you know, hundreds of millions of people, and that's what we're incredibly excited about looking out into 2024.

4. 5:15 – 7:26

   Introducing generative agents as game companions

   1. SSSteph Smith5:15

      Yeah. I think, I think what you're picturing is, is really important because what you're saying is, is we're not just incrementally optimizing existing games, you're really describing a fully new game environment, fully new way of thinking about games. And I love this mantra that you included, which is good alone, great with AI, and best with friends. Can you elaborate on what that means and maybe how it shifts or has the potential to shift the way that people currently think about both building games and also playing games?

   2. JLJonathan Lai5:47

      So many of the biggest games in the world today, you think about Fortnite, Call of Duty, League of Legends, they utilize AI primarily for onboarding and practice.

   3. SSSteph Smith5:56

      Mm-hmm.

   4. JLJonathan Lai5:56

      And so before you play against real human opponents, you might play against AI bots And they enable you to practice, build confidence, learn all the controls, get your hand-eye coordination down. And so it's sort of a warm-up before you jump into, like, the real game, quote unquote. I think one of the promises of generative agents is in elevating agents, like the AI agents, from a warm-up into the core game itself. And so one example of that that I find fascinating is this concept of an AI companion for every game. So let's say at the beginning of the game, like you're starting Call of Duty, for example, you know, you might customize your character, and let's say you also customize an AI companion that you can bring with you into the game. And this companion can play the entire game with you, right? Like either as a, um, on, on the same team or against you if needed. And it might comment on the experience. It understands the world around it. It keeps you company, um, when your friends aren't there to play with you. It learns from all of your preferences over time and helps you out, and generally tries its best to make sure that you have a great time. And so such an agent wouldn't replace playing with humans, but it would certainly be better than playing by yourself. And so that's what I mean by designing games that are good alone. They can be played single player. They can also be played with an AI, and it's great with AI. Uh, but of course, it's best if you have human friends to play with.

   5. SSSteph Smith7:20

      And those different modalities can be mixed and matched, right, depending on the game and depending on the time.

   6. JLJonathan Lai7:25

      Yes.

5. 7:26 – 11:04

   Does the gaming community want hyper personalization?

   1. SSSteph Smith7:26

      What gives you the confidence, though, that these are the type of games, when we're talking about the inclusion of AI becoming hyper personalized potentially, what gives you the confidence that those are the type of games that people want? And I'm asking that as it relates specifically to community and the fact that games really are these communal, uh, interactive environments where people have somewhat of a shared reality. And so if everything is hyper personalized, I'm curious to know your perspective about how that shifts people's ability to build community. And what are you seeing in terms of, you mentioned some of this is already being implemented, what are you seeing that gives you the indication that this hyper personalization or inclusion of AI is something that people really want?

   2. JLJonathan Lai8:10

      Mm-hmm. So the interesting thing about, um, games is that, uh, the games industry has actually embraced AI for decades. And so in a way, the technology, the, the latest expression of the technology, large language models, is new, but the consumer behavior, the patterns around it, are actually, um, already existed. And so that, that's what gives me confidence that there's demand for some of these, um, new types of gameplay that we talk about. So take AI companions, for example. Um, it might sound like a crazy idea at first blush, but so many iconic games today already have AI companions that are pre-scripted, and they don't use large language models, but players have still developed deep, deep attachments with them. A great example is the Halo franchise. There's an AI companion in that game called Cortana, and she talks to Master Chief, comments on what he's doing, basically like is a, is a chip that rides in his helmet and, and she tells him where to go next when he's lost, and is there from the beginning to the end of, like, almost every Halo game. And there are millions of people all over the world, um, that adore Cortana, write fan fiction about, you know, Cortana and the Halo universe, um, to the point where I, I believe Microsoft has integrated Cortana into its, like, core Windows search function. Um, and in another game, a favorite of mine, The Last of Us, which is a famous Naughty Dog franchise that was recently turned into an HBO show, you play as Joel, but then you have Ellie as an AI companion, and she follows you around for basically the entire game. She adapts to your behavior. If you're sneaking somewhere, she'll also sneak with you. If you're just in a firefight, she helps you out in combat situations. And she has a fully fleshed out personality that you learn more about over the course of the game. Um, and so from that perspective, AI companions have already existed and are very, very popular, right? And so the idea of just turbocharging this with large language models to make them more lifelike and enable them to have a wider range of expression and behavior, I think is gonna be very well accepted by players. On hyper personalization, which is the, um, the question that you were asking around, um, storytelling and, and how that works with communities, I'm optimistic based on the fact that evalu- that personalization already happens to a large degree in games. And so, uh, role-playing games like Baldur's Gate 3 have incredibly detailed character builders where you can customize everything from your skin color, to the highlights in your hair, to the tattoos on your face. And people spend hours customizing their avatars, right? Like, there are entire YouTube channels dedicated to how to create the most, like, lifelike or the most badass, um, character for, for each of these games. And let's not forget that a huge portion of the revenue in games like Fortnite and League of Legends comes from selling skins, which are, you know, personalized virtual clothing for how your character might look in game.

6. 11:04 – 16:08

   New entrants vs the incumbents

   1. JLJonathan Lai11:04

      One of the oldest RPGs of all time is Dungeons & Dragons, which by definition is a personalized adventure that is told by a human narrator, a, a dungeon master, a game master, who basically crafts an improv adventure with you and your group of friends, right? And so these are just two examples of, um, you know, personalization in games and an AI companion in games, but I'm, I'm optimistic that players have already embraced many of the concepts that generative AI is turbocharging. And so from that perspective, we're not in- we're not inventing entirely new consumer behavior. We're just making it easier for players to do what they already want.

   2. SSSteph Smith11:41

      Yeah, absolutely. And you mentioned a few, you could say age-old games, Halo, Dungeons & Dragons. They've been around for quite some time. Do you see this new technology, or as you said, a technology that has been ingrained in games for also, um, some time, do you see that really benefiting the incumbents who already have these large player bases? Or do you see this kind of fundamental shift where you're gonna see completely new winners in this completely new era? How do you think about maybe some of the new entrants versus the incumbents and, and who really wins?

   3. JLJonathan Lai12:12

      Mm-hmm. So I think the incumbents, let's call them sort of the, the big AAA game developers and publishers Um, they are already going deep into the Wave One AI tools and infrastructure, um, that I spoke about. And so I think almost all of them are using ChatGPT, Midjourney, Adobe Firefly, um, a bunch of these, uh, software tools earlier. And I think they will benefit hugely from them as it-- as they'll enable them to make higher quality games faster, get more shots on goal and, and so on. I am skeptical, however, that the largest developers will be the ones that create incredibly innovative AI native games of the sort that we, we spoke about as, as the Wave Two games. Um, and there are many reasons, but one of them is that if you're a large developer, your business revolves around IP. So you typically have a few key franchises, you know, Halo, Dungeons & Dragons, World of Warcraft, Call of Duty, and your business revolves around launching sequels to those franchises every few years. And so you don't actually need to take that much risk in, in shipping these sequels. And in most cases, the players themselves actually aren't looking for something too different. Um, like the next Call of Duty title is like comfort food. You know exactly what you're going to get, and that's why you enjoy it.

   4. SSSteph Smith13:28

      [chuckles] Yeah.

   5. JLJonathan Lai13:29

      Um, so I think the business model of these large incumbents, I think, doesn't support taking too much risk. Um, so I think that's one reason. And second, I posit that the first generation of these AI native games might end up actually looking really silly, um, to traditional game developers, and so they might not actually take them seriously at first. Um, and so take mobile games, for example, which was, um, uh, the last sort of major sort of paradigm shift in games. The winners in mobile games were largely new companies, uh, Supercell, King, Zynga, and not the PC console incumbents, right? It wasn't Electronic Arts or Activision or Microsoft. Um, and I bet a large reason for this was that if you were an executive producer at Activision and you looked at a game like Candy Crush, in the beginning you probably thought, "Hey, this is like really silly," right? Like, graphics are really bad. Like, you know, there, there's no multiplayer on this thing, right? Like, um, it's a really, really simple puzzle game, and so how, how can this possibly be good, right? Like, how many people will play this thing? Um, but what, what I think they underestimated is that with each new paradigm of games, a new set of players also comes into the ecosystem. So the folks that played Candy Crush were, for the most part, older women, and it was an entirely different demographic from the young men that played Call of Duty, for example, right? Um, but the net effect was that it expanded the total pie for games. Like the gaming pie increased, and over the course of that it created several valuable companies. Um, another more recent example is, um, take a product like Character AI, where you have millions of people that chat with like their favorite sort of AI, um, characters. I would guess that the majority of the users of Character AI don't describe it as a game. But you could, you could squint and say, "Hey, like this is a consumer experience that is just as engaging as playing a game." Um, but it's probably not on the radar of any of the traditional game developers, the incumbents that we just talked about, right? And so yeah. So I think in, in that same vein, I think the, um, the most innovative AI native experiences are, are, are more likely to be created by startups and teams that are just getting going and are bringing that fresh perspective as opposed to, um, uh, coming at it with, um, uh, with a lot of history and, and baggage around existing IP that they need to shepherd.

   6. SSSteph Smith15:55

      Yeah. I mean, I think that's such a good point about just the things that are emerging that people just would not even describe as a game, but if you really think about it, are not so different fundamentally from, from games.

7. 16:08 – 21:03

   How business models and cost structures are evolving

   1. SSSteph Smith16:08

      Maybe super quickly, can we touch on the business model? Because as these things fundamentally-- fundamentally take new shapes and forms, so too do the things that people are willing to pay for. But also when we think about AI, the cost structure is a little bit different too, right? If you're rendering things in real time, that has a, a real inherent cost to it. And so maybe you could just speak quickly to how you might see the business models evolving, just like we, we saw with mobile. And then also, um, yeah, like maybe things that developers should keep in mind if they are building these new games and are considering completely new business models.

   2. JLJonathan Lai16:45

      Yeah. So one of the challenges is that games as a business model have trended towards, uh, two models. So one is free to play, where the majority of users, actually around ninety to ninety-five percent on average play a game for free, and then the minority, five to ten percent actually monetize. And so the free users entertain the monetizing users, and so they pay with their time e-even if they don't spend money. And so some of the biggest games in the world, like League of Legends, like Fortnite, um, are, are free-to-play games. But then, but then the second business model is a premium, uh, game. And so a game that is just sold for, you know, twenty, thirty, forty, fifty bucks. You pay, you pay for that game up front, and then you never spend again basically after that. The challenge is that, um, with an AI game, if you have a game that's running a large language model in the cloud, the influence cost of serving users dynamically generated worlds or tasks would probably make either of these models unprofitable right off the bat, right? Um-

   3. SSSteph Smith17:44

      Yeah

   4. JLJonathan Lai17:44

      ... because you're monetizing your user right up front for fifty or sixty bucks, and then you're not, you know, in a premium game sale, and then you're not getting any more revenue going forward. Or in a free-to-play model, like ninety percent of the users are actually just a cost, right? Because they're, they're not actually spending any money in the game. Um, my guess is that, um, companies like Midjourney or charac- like, like Character AI have been able to address this with a subscription model. And so basically every power user pays for their own sort of like influence cost, so to speak. And we could see that subscription model also become the default business model for AI games. But I think the gamers will be okay with it as long as they perceive that the value is there. Um, and as an interesting sort of, um, side point, subscriptions have actually become more popular in games over the last sort of I call it five years with the rise of services like Xbox Game Pass, Apple Arcade, and even in inside individual games like Fortnite, they now have season subscriptions like the, like the Battle Pass where you play for a certain period of time, and you subscribe upfront, and it unlocks sort of perks over the course of the season. Um, yeah, so I, I... So my guess is that subscriptions become more popular for, for AI games.

   5. SSSteph Smith19:00

      Yeah, absolutely. One just q- super quick follow-up question there is if people are more linked to their game play, as in the time that they're spending in game as it relates to inference, do you think that creates a negative feedback loop? Whereas right now you can kind of, like, you choose to play a game, and you can play it for quite some time and really get ingrained in it, and you could say obsessed or addicted to it, um, without additional cost. Do you see a, a kind of adverse relationship there where all of a sudden if my inference is linearly tied to cost, that I may not be as likely to, you know, uh, get as deeply involved in a game?

   6. JLJonathan Lai19:42

      Yeah. No, I think that's, that's a great point that games will need to design around. Um, I think the good news is that that same trade-off of time versus money also currently exists in free-to-play games.

   7. SSSteph Smith19:54

      Mm-hmm.

   8. JLJonathan Lai19:54

      So, um, uh, if you recall the early days of, um, Facebook games, um, take for example FarmVille, like the, like the Zynga games.

   9. SSSteph Smith20:03

      Yes.

   10. JLJonathan Lai20:03

       Uh, they actually attempted to gate the amount of time that you spent in the game behind an energy meter.

   11. SSSteph Smith20:09

       Mm-hmm. Yeah.

   12. JLJonathan Lai20:09

       And so every day you would get, call it, 20 energy, and every action in the game would cost, like, two or three energy. And if... when your energy was, was gone, you, you could either take a break and then come back and play again tomorrow. That's, that's how the term appointment gaming came about. Or you could monetize, and you could actually spend to refill your energy meter, and that, that means that enables you to keep going with it. And so you can imagine a similar thing happening with, with AI games where, um, you have some measure of the inference cost for players, and that's approximated by a virtual currency inside the game. Um, and so, uh, I think it's just something that, that game developers will need to design around, but I think that paradigm of like, hey, let's balance time versus money, I think already, already exists-

   13. SSSteph Smith20:54

       Yeah

   14. JLJonathan Lai20:54

       ... right? Yeah.

   15. SSSteph Smith20:56

       Yeah. That's a great point, and you're bringing me back 'cause I spent far too much time playing FarmVille-

   16. JLJonathan Lai21:00

       [laughs]

   17. SSSteph Smith21:00

       ... back in the day. Um, but to close out,

8. 21:03 – 23:41

   Advice for game builders in 2024

   1. SSSteph Smith21:03

      clearly there's opportunity on the table, and I think it's, it really does feel like there is this, this new era potentially of games and, and that's exciting. So with that opportunity, where would you start if, you know, you're a builder in the ecosystem? What would you be looking at in 2024?

   2. JLJonathan Lai21:21

      Yeah. It's, it's very exciting. Um, I would, uh, I would suggest that if you are excited about games, take your favorite game genre, whether it's a sports game, like an MMO, even chess or poker or Dungeons & Dragons, and try to reimagine on first principles what it could look like if you were to introduce generative AI into the core gameplay loop. And then see if you can hack together a prototype or team up with friends to hack, hack something together. Um, and then come on over and show it to us. Like, we, we love playing crazy games and, and wild ideas. And, um, the, the reality of the games industry is that some of the best games got started by solo developers or, um, as mods and passion projects that are built by small teams. You know, Dota, like PUBG, like, um, Counter-Strike. Like, some of the most iconic games were built by very, very small teams. And then, um, I think, uh, an, an even more exciting thing is that anytime you have a new paradigm shift, like we talked about mobile, um, early on, I think the playing field advantage goes to new teams, the folks that are coming in-

   3. SSSteph Smith22:28

      Yeah

   4. JLJonathan Lai22:28

      ... with a fresh perspective. Um, and, uh, my guess is that, um, uh, the AI game teams that get it right might actually end up looking very different from the traditional game developers of today, right? And if you get it right, I think the potential is you can disrupt a $200 billion market in the fastest growing category of media today. So it's very exciting and, um, we'd love to, uh, we'd love to talk to you.

   5. SSSteph Smith22:54

      All right. I hope you enjoyed this big idea. We do have a lot more on the way, including programmable medicine that's taking a page out of the reusable rocket playbook, anime going mainstream, and whether the consumer AI battleground may be moving from model to UX. Plus, if you wanna see our full list of 40 plus big ideas right now, you can head on over to a16z.com/bigideas2024. It's time to build. [upbeat music]

Episode duration: 23:41