Fortnite’s Digital Goods Are Key to the Future of Global Trade - BLOOMBERG

JANUARY 11, 2019

Huge multiplayer games are true economic exchanges, but persuading governments to let data flow freely may be the ultimate battle royale.

By Shawn Donnan




Last summer, after months of waiting, Chinese internet users finally got access to the online game Fortnite. So YouTube star Alastair Aiken, aka “Ali-A,” did what many of his more than 15 million largely teenage followers around the world fantasized about. He navigated around firewalls and language barriers and logged on to a desolate corner of the Fortniteuniverse in China. “This is all a crazy experiment,” declared the Brit in a video streamed from his home. One of the world’s highest-paid professional online gamers, he was setting out to battle unwitting new rivals in a far-off land. “Obviously, China have had games for ages, so it’s not like they are going to be utterly terrible or trash at Fortnite,” he said as he launched into his first Chinese firefight. “But …”

With that, Ali-A was engaging in a very 21st century act of globalization. As Fortnite morphed from popular video game into a full-fledged worldwide cultural phenomenon last year—with professional athletes mimicking its victory dances and pop stars cozying up to top players—it generated a lively (and lucrative, for YouTube stars) exchange in tips and tricks. One frequently discussed strategy in online videos and chat rooms amounted to digital arbitrage. American and European players could log on to Fortnite servers in Asia or Brazil to take on less-experienced users and rack up wins and teenage street cred. “Its (sic) just, impossible for me to win bcuz you guys are so good,” vented one Asian player, frustrated at continually being matched against more experienced adversaries.

The U.S. and China may be locked in a trade war, but Fortnite itself is a product of Sino-American cooperation. Epic Games Inc., the North Carolina-based studio behind the title, is 40 percent owned by China’s Tencent Holdings Ltd., one of the world’s largest social media companies. That Fortnite is free to play and has more than 200 million registered users worldwide is thanks in large part to the $330 million investment that Tencent made in 2012.

“The digital economy is everywhere, and much of it is international without our even knowing it”

Discussions about globalization—and its costs and benefits—often focus on physical goods such as steel beams, cars, or soybeans. The reality is that the integration of economies is increasingly a digital one that happens in invisible daily bursts—like the sessions in which far-flung armies of Fortnite players face off against each other on an imaginary island. “The digital economy is everywhere, and much of it is international without our even knowing it,” says Anupam Chander, a law professor and expert on digital trade at Georgetown University.

If we don’t always fully appreciate the scale of what’s going on, it’s because much of digital trade is not being captured in official statistics, says Susan Lund of the McKinsey Global Institute, the consultant’s in-house think tank. In a report, Lund and her co-authors documented an explosion in global data flows that they argued generated $2.8 trillion in economic output in 2014 alone and was doing more to benefit the world economy than the stalling international trade in physical goods.

In some cases, the World Trade Organization pointed out in a report last year, the rapid propagation of digital technologies has contributed to a false picture of globalization in retreat as shipping containers filled with hardcovers and DVDs are replaced by e-book downloads and streaming music.

While Fortnite is notionally free to play, its maker booked billions of dollars in revenue last year from purchases of limited-edition “skins” and “battle packs” that allow players to customize their avatars. These types of transactions, however, are often not logged properly in economic data. If a player in China or Germany buys an outfit or weapon designed in North Carolina, he is effectively importing a digital good from the U.S.—and helping to support a high-paying job in America.

Global Trade in Digitally Deliverable Services




Data: UNCTAD, McKinsey Global Institute analysis

There are less esoteric examples. Lund, for instance, cites the work of Hal Varian, Google’s chief economist: If the value of the Apple or Android operating systems loaded onto smartphones produced in China and other Asian hubs were counted as an American export to those countries, Varian argues, the U.S.’s $500 billion annual goods and services deficit would be reduced by $120 billion overnight.

Governments are engaged in a well-documented struggle to retool policy for the digital age, whether drafting rules for safeguarding electronic health records stored in the cloud or determining if exports of artificial intelligence software need to be restricted on national security grounds. The results can seem both counterproductive and counterintuitive.

For example, the European Union now portrays itself as a champion of free trade. Yet, viewed through the lens of business, its General Data Protection Regulation, which took effect last year, represents a major barrier to cross-border commerce. The law’s stringent requirements for how companies handle and store personal data constitute a burdensome—and expensive—hurdle for companies seeking to do business in Europe, according to critics.

In contrast, the new version of Nafta negotiated last year by President Trump, an avowed protectionist, contains the most pro-business digital provisions of any trade deal, say experts such as Georgetown’s Chander. The accord, which is due to go to Congress for a vote this year, enshrines the right of data to flow freely across North America and bans any requirements by governments that even sensitive data be stored on domestic servers, something countries including Australia, Indonesia, and Russia have pushed for in recent years.

In China, where the government exerts innumerable controls over what sites and content its citizens can access online, Tencent and Epic Games have struggled to secure approval for a full rollout of Fortnite because of what the government says are concerns over internet addiction.

The Great Firewall of China has few defenders outside the country, but in the West there are some who make the case that governments should be building speed bumps to slow the pace of change. This would give industries and workers more time to adapt and avoid the sort of mass dislocations that automation and globalization caused in manufacturing in decades past. In The Globotics Upheaval, a book out this month, author Richard Baldwin argues that the U.S. and other wealthy economies are unprepared for the loss of well-paying jobs that will come from the digitally fueled globalization of services already under way—or the “mighty backlash” that will follow.

Baldwin is a long-standing defender of globalization. Yet he advocates “sheltering” by governments to protect middle-class architects, accountants, and other white-collar workers in developed countries. Those workers, he says, aren’t ready to cope with the rapid disruption coming either directly from artificial intelligence or savvy competitors in the developing world who can use the internet and tools such as Google Translate to bid for work in the U.S. without going through the expense of opening a local office.

The new wave of globalization, Baldwin argues, is bringing even bigger productivity gains and economic benefits than the earlier wave of integration did. His big concern, though, is that white-collar workers who lose their jobs could join blue-collar brethren still bitter about the deindustrialization brought about by the last wave, with major political consequences. “That,” Baldwin says, “could be a social revolution.” The effect of that would last far longer than even the craze over Fortnite and leave far deeper scars on the world economy.

BOTTOM LINE - The online game Fortnite is actually a kind of global economic exchange, but governments are unprepared to account for digital goods as imports or exports.


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