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The 1980s was the golden age of arcades as virtual games like Space Invaders and Pac-Man captured the attention of millions in the US. In a few short years, arcades skyrocketed to a multi-billion dollar market as gaming evolved from pinball machines into new virtual sides scrollers, cockpit shooters, and beat them ups. Customers sought out these novel experiences, and arcades became a lucrative turnkey business. As having just one of these machines back then meant guaranteed income. Developers like Sega, Namco, Atari, and Capcom competed to dominate this fast growing market into the9s, adding elements like 3D graphics, light guns, competitive play, and force feedback steering for differentiation.
The more elaborate the hardware, the more immersive the experience, and the greater the premium that developers could charge for these machines. The market encountered year-over-year volatility as not every game was a hit and genres fell in and out of fashion. But since the 2000s, the market has been in a steady decline and arcades have been disappearing across the US. Customers have shifted their spend to home consoles and handheld devices, which outclass arcades in convenience, value, and entertainment. Gaming has become more accessible, diverse, and forgiving, as developers no longer need to design games to milk quarters out of players, and to generate ROI for venue operators. Through the '90s, arcades were essential establishments for
children and adults alike. Nowadays, the few still hanging on rely on selling alcohol and nostalgia to make ends meet. On paper, the broader physical entertainment industry seems doomed. Retail has been trending down since 2010, and the only sustainable businesses are the bigname roller coasters and theme parks. Why bother going to an arcade when you can get a cheaper, comfier experience on your couch at home? If we look beyond the numbers, arcades aren't going extinct. Market transformation takes time, and what's happening now is a changing of the guard. There's a new generation of companies that have shed the opportunistic turnkey business of the past and are building original
entertainment experiences not replicable by any console or PC. In this modern NBA original, we're diving into the futuristic business of arcades from the macro to micro. Starting with the biggest arcade in Chuck-E-Cheese and Dave and Busters all the way to two independents in New York City who have made very different bets on the future of physical and digital entertainment. What does the future hold in business? Ask nine experts and you'll get 10 answers. Analysts will tell you that inflation is up this month and then down in the next. Could someone please invent a crystal ball? Until then, over 40,000 businesses have futurep proofed their
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download the CFO's guide to AI and machine learning at netswuite.com/modernba. The guide is free to you at netswuite.com/modernba. When it's just for fun and just for kids, you know what they say. Chuck. Just three decades ago, there was no bigger name than Chuck-E-Cheese, which started in the 70s as a chain of family pizza restaurants that just so happened to have some arcade machines and animatronics for kids. But by the '90s, it had lost market share to Pizza Hut, Domino's, and Papa John's, who were untouchable in menu innovation, franchising, and economies of scale.
Unable to compete on food or locations, Chuck-E-Cheese suffered through consecutive years of decline. To turn things around, the company pivoted by embracing the fast growing arcade market. Every location was proactively remodeled to feature a playroom full of coin and token operated machines that would spit out tickets that could later be exchanged for prizes. The new strategy was family entertainment and the target customer was 2 to 12 year olds. Games were the draw and mediocre pizza and cake were the fuel to keep kids playing and spending. With this new formula, the company reversed its decline and surged a record earnings in the mid200s. As designed, food and beverage contributed less over time, and
the Playroom became the bread winner. When we look at the gross margins, it makes sense why the company would build their business on entertainment rather than food. The arcade games were all turnkey self-service assets without any variable costs like labor or ingredients. This shift in spend led to record profits as Chuck-E-Cheese nearly tripled its margins in a single decade despite adding over 100 new locations. To fund expansion, they needed cash flow. So, the majority of locations had to be run by corporate. As a result, franchise fees and royalties have been insignificant through the lifetime of the company. But revenue slowed to a standstill starting in the mid200s.
The same thing happened with the bottom line as margins dropped from double digits to single digits. The average Chuck-E-Cheese has grossed less and less every year. Despite the spending shift towards higher margin arcade games, fewer and fewer families were coming back to the mouse. Chuck-E-Cheese had positioned itself as the ultimate kids arcade. Yet, there were now better options than ever. The PS2 came out in 2000, the Gamecube in 2001, the DS and PSP in 2004, and then finally the Wii, Xbox 360, and PS3 in 2006. Since the food was nothing special and Americans were more budget conscious exiting the Great Recession, Chuck-E-Cheese could no longer compete, especially as consoles
provided a much better deal with infinite playtime for a one-time cost. They leaned into birthdays and sweep stakes to give people a regular reason to visit and to pre-book sales rather than to simply wait for customers to walk in. Yet, it was clear that the leaders who had been steering Chuck-E-Cheese since the 80s were now out of their depth. In a Hail Mary, the board poached Topgolf CEO Tom Leverton to modernize the mouse. Topgolf blended social and physical entertainment, resonated with the younger generations, and was everywhere. In the 2010s, Tom was given a blank check, and he renovated stores into a theoretically more desirable destination for kids and parents. Playrooms got laser mazes, fun
houses, and bumper cars. Arcade games were rotated once a year rather than every 3 to four, and adults could now munch on sandwiches, wraps, and specialty pizzas. They even rolled out a lunch buffet, dropped tokens and swipe cards in exchange for bands, tried to get staff to become part of the experience rather than just supervise customers, updated the mouse mascot, and pushed value, selling games limited by time rather than by the dollar. Tom plowed $400 million across 5 years, and yet customer retention dropped to even lower lows under his reign. Now modernized and diversified, Chuck-E-Cheese was uncompetitive in every category. The only reason revenue briefly went up was because Tom blew
another $100 million into buying Peter Piper, a regional pizza arcade chain, which inflated the top line. Unsurprisingly, Peter Piper has suffered the same core problems of retention and product. After 6 years of same store sales decline and almost half a billion dollars worth of bad decisions, Tom fled off to private equity. Chuck-E-Cheese declared bankruptcy during CO. And while the company has emerged from insolveny, it's difficult to imagine how the future will be any better to the mouse. Then there was Dave and Busters who targeted adults. The parallels between these two chains are so great that it's impossible not to see the industrywide disruption.
Instead of banking on kids tossing quarters and munching pizza to turn a buck, Dave and Busters bet on the proven unit economics of beer and burgers. They position themselves as an arcade and no stakes casino as much as a late night restaurant and bar for locals and tourists. Yet, the stores were designed to be mega complexes and were significantly larger compared to Chuck-E-Cheese. With fewer locations and heavier construction costs, growth was slow through the '90s. Food and beverage led the way in revenue, and the long-term goal was to shift more towards the higher margin entertainment business. Yet, profit margins remained low year-over-year as Dave Busters was stretched thin, offering something for everyone. Like the mouse, customer
retention was the core issue. People need an occasion to visit these places. And when the product isn't bestin-class, the business lacks pricing power and becomes overly dependent on opportunistic walk-ins. Revenue started to decline in the late 2000s. To reverse the trend, the company staked everything in 2010 on a new pillar beyond food and games. Sports, on paper, would solve the issue of retention, as Dave and Busters would be the place to catch a game with 100in TVs and 40 different displays. Dave and Busters was now a sports bar just as much as an arcade and late night restaurant. And the combination worked.
Customers could slam beer, pound wings, play exclusives, and watch games all at the same time. There was more to do, more space to work with, and greater food and drink options compared to the average bar. And since the arcade games were so high margin with little overhead, they used free games to lure customers in and then push food and beverage as the crossell. The pivot to sports was compelling enough to turn around sales and retention dramatically improved. Yet, same store sales began slipping once again in 2018, long before co Dave and Busters had the same problem as Chuck-E-Cheese as occasion-based businesses. Unless there's a birthday, a corporate outing, or the Super Bowl, usage is low at every other time. The
biggest hurdle is getting customers to make repeat visits. These businesses only work as a sum of their parts. When evaluated separately, the food is not going to beat a restaurant. The games are not going to beat a dedicated arcade, and the drinks are not going to match those of a real bar. Once the novelty of whatever new product wears off, all these chains end up falling back on value and deals to grab whatever low-hanging dollars that are available. To this effect, Dave and Busters has experimented with running ghost kitchens to generate income from their restaurants. DNB has swapped out its legacy leadership for New Blood and Chris Morris, the former CFO of Chuck-E-Cheese. They're now reinventing
themselves once again in this new decade. Since taking over in 2022, Chris has bet the farm on evolving the arcade business from traditional enclosed two-person play into open social games where eight people play against each other in person rather than against a computer. The idea is that these organic interactions, banter, and reactions will outlast any hardware, IP, or in-game mechanic. They're hoping it's an experience that video games can't replicate and is also immersive enough to get people off the couch. It's too early to say if this will work, but innovation has to start somewhere.
Beyond the big chains, there are other emerging venue operators who have made similar bets. Out of New York City is OS, who has built their business on community. Rather than trying to peel people away from the games that they love, OS's worldview is to provide them with the space to connect with the elements that exist outside of the screen. Our first theory was really that social entertainment is such a fundamental industry and such a fundamental thing going forwards. People my age, I'm in my late mid to late 30s. Our socializing was normally around a bar, normally around alcohol. That's just how our generation grew up. Let's go to the pub if it was in the UK. Let's go to a dive bar, whatever it might be.
I think as society has developed, as our interests have developed, people want to be entertained more when they're socializing. And I think for a couple of reasons. I think firstly, alcohol doesn't play as prominent a part in our culture anymore, which I think is probably healthy. But some members of groups won't drink, don't drink, but you don't want to stop socializing together. So, what do you want to do? You want to go axe throwing? You want to go um shuffle board? You want to do things, activities that are still all-encompassing to everyone and no matter that status. I also think what's happened, especially post pandemic, the cost of living is kind of outrageous right now. So, people aren't going out
as often as they were 10 years ago. When you were going out four, five, six times a week in New York City, you could go to your local. But now, if you're only going out once or twice a week because that's the disposable income, you want it to really mean something. You may want to drink or you may want a bite to eat, but you also want to play some video games, you want to see friends you haven't seen in a while, you want to socialize, you want to play board games. So these multi-level venues and it really started with the likes of a Topgolf was the really famous one right Topgolf is one of the original concepts in this world. So it's nothing we've invented nothing new but what we've done
is taken gaming as the pillar of that social entertainment. Our second theory is we as a people are creating more and more digital relationships. We meet people on Reddit forums. We follow each other on Instagram. We meet in Discord or we play online games together and we may have never met in person. That's what I would call a traditional digital relationship. Now, while the world has gone more digital, I still think that people want a physical touch point to justify or authenticate that digital relationship. What I mean by that is if you go to a convention like Comic-Con, you want to meet your friends. You want that one moment where you all meet up in person. That's really what OS was all
about. You have people who come here that play games with the same teammates three, four or five times a week, but one of those they'll choose to do it in person because they want to do it with a beer or with a soda, with a bite to eat, with a hug, with a handshake, whatever it might be. Even though you're gaming all week with your friends, once a week, you're going to come here and just do it in person because it just makes it real. OS is equal parts cyber cafe, esports venue, lounge, and streamer room. While arcades in their historical form have disappeared, various businesses have emerged over the decade to fill the void like escape rooms and VR rentals. But to
Samare, they all suffer from the same issue of being one and done. Community to him is the only thing that really lasts in a world where hardware and software are advancing at a record pace. I think there's four key buckets of what we're seeing out there. I think there's the internet cafe. PC banks in somewhere like Korea. We call them more like internet cafes that are gaming related. Sure, banks of PCs and we have that. You can see in the background a land center. That is part of our culture. But a lot of these places you go in, you pay by the hour, you game, you leave, right? Then there's the bars that have themes
around gaming. You mentioned Barcade. Personally a big fan of it, but you're there to have a drink and there just happens to be the activity. Then there's the ones that are very specific tech focused VR venues, VR worlds. That's where they're trying to introduce a technology that isn't accessible to people. That's their selling point. Hey, no one has a VR rig at home. Come try this amazing one in our venue. And then there's us. I don't see any of those previous three as competitors because what we believe we are is a community space. Like we're here as a platform for groups to get together, to mingle, to find a home, to meet friends, which I love happens here. The amount of people
that like create relationships and friendships here. We haven't focused on the gaming part. In fact, I'm not going to lie, our PCs are good, but you some people probably have a better PC at home. It's not like the most high-tech PC that you could never try in your life because people aren't coming here for the latest technology. They're coming here for community. They're coming here for camaraderie. They're coming here for a safe space in New York City. And that's the craft, right? Gaming is just what we do here. One of many things we do here. We do live music. We've done comedy. We do movie nights. It's just all parts of actually creating a space for nerd culture, for people that are
into this kind of stuff to just hang out in a safe environment. And that's what I think is missing in some of these other places like, you know, VR spaces. We've seen them come and go in New York City because you only really can do it once. It's also an individual experience. They really haven't cracked multiplayer VR yet. So, I don't really want to go with my friends to all take turns and not socialize together. So, there's a couple of things missing there. But, I think if you can build a venue around community, that's where I think there's strength and there's growth. We're coming up to 5 years of being open, but this concept is about seven or eight years in our heads. New York City is the greatest teacher in the world
because you stop innovating for one month in hospitality in New York and you disappear. OS has four revenue streams: food and beverage, events, admissions, and sponsorship. While arcades historically opened in suburban shopping plazas and strip malls, OS is unorthodox in that they're in an urban environment. However, the saturation of food options and dining standards in Manhattan are so high that Samare found its tiny kitchen unable to maintain sensible unit economics. Yet, at the same time, he couldn't have visitors leaving to eat. Nowadays, they partner with nearby restaurants to provide and deliver food to guests. While food and beverage combined contributes 35 to 40% for Dave
and Busters and Chuck-e-Cheese's annual revenue, OS gets 33% of its revenue from drinks alone, and 90% of drink sales are alcoholic. 28% of revenue comes from events where people come and rent out the space for birthday parties or corporate outings. Day passes and monthly memberships contribute 25% of revenue. Brands will occasionally sponsor the venue during tournaments and sponsorships make up 14% of annual revenue. OS grosses on average $175,000 a month for an annual run rate of $2.1 million. Their operating margin sits at 13% but fundamentals only tell half the story. Innovation in physical entertainment moves so slowly because of the capital requirements. It takes millions of dollars to build and maintain spaces like these. Real estate
is the ultimate prerequisite and OS is only possible because of venture capital. The seed round that Samare raised gives him the privilege to test his thesis in the real world and to figure out the business model along the way. His initial plan was to cater to everyone, but there's been little appetite for vintage gaming and arcade cabinets. Everyone's only been asking for more gaming PCs. As events and drinks have become a bigger part of the business, he's moved the bar and lounge to the front. Any element, right? Hospitality, restaurants, bars, retail, it doesn't matter. You pay rent and you pay a lot in New York City and you need to make sure you're recouping it. We started that way. You know, our initial model was actually hourly. We went down
the internet cafe route. You created an account, you put hours on your PC, and you went and sat down. And the theory was, how many PCs can we cram in this space? What we realized is it wasn't cool. It didn't give enough space for people to socialize, to meet each other. It didn't give space for events, for networking, for community groups. So, we had to pivot pretty quickly and learned that was a mistake. And we, yes, we threw out completely this revenue per square foot concept. In fact, our day passes are $25. For $25, you can play anything in this space from 12 to 12. That is not a financially viable model, right? That's not how we make our business. But by doing that, we fill
this space, right? We have 8,000 plus people through the door every month. People that have found a place that they feel like they belong. Now, what happens from that is you attract events, you attract sponsors, you attract brands. They didn't want to come to a venue with a 100 PCs stacked together with no soul and no character. They want to come somewhere that's alive that people care about that people have a relationship with. And that's really it. It's like I don't ever want OS to be the forward- facing brand. I don't want it to be in the public eye. I want the people here to be what OS means. It makes it hard cuz it's it's so hard to get across what OS is until you set foot in the doors
cuz you need to see people and you need to feel it. But I think that's what's happened when we moved away from revenue per square foot. We put less pressure on commercializing our guests and more pressure on commercializing brands, which trust me, I feel a lot hell of a lot better asking for money from a big brand than I do from someone spending what little disposable income they have coming to socialize. Here at full efficiency, OS by Sam's projections should be able to achieve 20% operating margins. His biggest challenge is marketing and trying to explain the concept of OS to a generation that's not used to prioritizing in-person interactions.
I think the biggest thing with all of that is that's led by your customers, not by you. Like just cuz I'm the CEO and it's me and my co-founders concept doesn't actually mean that we're the experts because I'm not the person spending money in here, right? They're the experts. Like if we want them to keep coming back, you just have to talk to them. And with that, we've also built relationships with that consumer. We came to realize that the financial isn't what we should be chasing. One of our regulars who's actually a deaf guest, he was one of our members, he came three, four times a week and then he had to move to Alaska and he was actually teaching our team sign language. A huge
relationship with him and we were all so upset when he left. He moved back to New York and he had no way of telling us. And the first day he came in, our team, like all our staff were like celebrating, so happy that he was back and he's now a regular again, which is fantastic. He went away for six months, came back, and nothing changed. We have another couple whose wedding was literally last summer that met here, right? They met out of two social groups that interacted here, and then they got married last summer. Those moments are what we chase because it makes us realize that people have a deeper connection to the venue than just a customer company relationship. If you get that right, then the financials will
follow. It's a tough thing to say cuz sometimes it takes time and you got to take losses to get there. And we were fortunate enough that we have investors that supported us during COVID during these periods that allowed us to take those hits. So, it's easy for me to sit here and say that, but ultimately like those micro moments are when you realize you're building community and you're doing the right thing, and that's when you realize you're developing the right way. In an industry ruled by venture capitalists, private equity, and chains, there's little room left for bootstrapped independence. It takes deep pockets to get anything off the ground.
Yet, two blocks away from the Empire State Building is the Game of Thrones, a weekly pop-up that's pushing the boundary in terms of tech and experience. 40 players get divided up into teams of four. Each player gets a buzzer and button. Everyone works together to answer questions ranging from pop culture trivia to reaction, and the show is run by a live host. Gabe and Dave are the brains behind 1,000 Boxes. They're tinkers and inventors in the classic sense. The two of them have fabricated every bit of hardware and written every line of software themselves from their studio in Brooklyn. There's no investors. Every penny comes out of their own pockets.
And their journey into the arcade industry is one they never intended. In 2014, we started to do these interactive experience projects largely for the experiential marketing scene that was really blowing up at the time. Suddenly, it was more than just, hey, we're going to do a video campaign or maybe some print material. Brands were saying we wanted to bring people into a space and have them see something that no one had ever done before. There's a brand story that they want to tell the combination of arts and data in some unique way and they can get a video and a photo of their customers in a space that looks really unique and then they can tell that brand story. So the experiential
side of it, the installation side was really a vehicle for that PR stunt. So to do the brand work allowed us to build really exciting multi- channelannel sound projects, immersive lighting projects, projection mapping projects. A lot of the concepts that we would get asked to do, someone would say, "Hey, can you design something that you've never designed before, which was exciting for us because we had all these creative ideas and we really wanted to push the medium and see what was possible. But then to crunch for three or four months and do everything from spatial design to the electronics work to the software development and then the animation design. All of those things had to go into it. And for that to only
be seen by a handful of people for one event for one day and then for it to all come down, it just felt like we were really spinning our wheels. We started to think, man, could we do this in a way that isn't just for one event, but actually we build one project that can actually go to lots of different places. But it also became possible for new entertainment experiences to start to exist. And the Van Go experience was sort of one of the largest ones to really pop off in that space. Regardless of if you were into tech art or even Van Go, it was just something that people went to, which was crazy. Like I don't know. I don't think anything else had that kind of power for people buying
tickets to it. But then it turned into like there were five different competing companies that were making the Van Go immersive experience. And the reason that was possible was because Van Go's work is all in the public domain. Nobody has the copyright ownership to the Van Go experience anymore. I think that was all in 2018 2019 when that really started to happen. And when we went to see Van Go, we were pretty disappointed. You know, we really were sort of wanting more because we knew what was possible. What we saw there was a space that had projectors on the walls, but it was mostly just the video that was kind of projected all around you and you'd
sit back and watch an animated slideshow of Van Go's work happen. When you look at places like Team Lab that's really popular in Tokyo, those places are trying to create scenes. They're trying to create an environment, something that has water or lighting or technology, projections, LEDs. So for us, we saw people are excited about immersive projects. The public is excited about it. The public is willing to pay for tickets. This isn't just a free popup thing that a brand paid for. This is something I want to go because I'm in a new city or I want to do something fun with my friends. And we started to think, how can we design something that attracts those audiences, the people that want to get immersed and interact?
We were always very interested in you as a visitor being swept away and you'd have something to do that whole time instead of just get your photo or instead of just watch something. A lot of these experiences, someone's going to just walk up and do the thing, and once they've done the thing, they kind of are ready to move on, and you never really get to go deeper with them. They don't get to have a relationship with what you designed. But if we could keep them there and keep them engaged, we could continue to iterate on what the interactions are, and they could really learn how this piece works and make more memories and have more emotions with it over a longer period of time. It was me
and Gabe and then a very close friend of ours, Josh Knap, who uh for a very long time worked for the Jimmy Fallon show. He was a writer producer there. So, anytime you see Jimmy playing a funny game with a celebrity in that time, Josh is the one writing that. He's just like a general games freak in a lot of ways and makes crossword puzzles for the New York Times and other types of games. We really felt, man, if we could combine what we do with immersive experience design with what you do with game show design, we could make something really exciting and special. And then when the pandemic hit, that was really when we were like, well, our work has dried up.
We don't have anything else to do. So, like, let's make this a reality. Let's do it. While arcade chains were all built by hospitality veterans, Gabe and Dave represent a new generation who grew up going to arcades and playing video games themselves. You guys will be playing at the table. You can follow me. I can show you over here. If you put a piano or a guitar out in the middle of a room and say, "Hey, come play this." No one's going to do it. Like, I play guitar pretty well. I play piano pretty well. And in public, I'm not just going to go up to a piano and play in front of a bunch of people. So, like, you can't expect like a non-m musician or like someone who hasn't
played music much to do that. You like design something a little bit more abstract. You make it light up in really nice ways and you make it so that people just want to get their hands on it with the physical design and then you're over that hurdle and people are doing it. We have these podiums with these really simple hand buzzers. The podium animates in really cool ways when you're winning. We animate across all the podiums. So when you first walk into the room, it's kind of like this awe moment. And then you're not afraid of the tech. Like that's the biggest part. Like don't be afraid of the tech. Don't be thinking
about the tech. Just be thinking about the game. The controller design was something we really thought about a lot. We originally were kind of making it too complicated. We thought, "Oh, we could have accelerometers, so it's motion controlled." And then we were like, "Oh, we should have a dial so you can twist and turn and that would let people move characters around on screen." And the more we started to go down that path, the more instructions that you'd have to have and the harder it might be and more intimidating it might be for someone, especially if they're not a gamer or something. And we were just at the last minute like, we should just make this a single button. Everyone can press a
button. If you've ever gotten on an elevator, you can play our game. All right, everybody. Hello. Welcome to game 10,00. Let's go. That's correct. Took me a minute, but you know, here we got there. Next. The live host is important because we're talking about getting a bunch of people together to play something. And we get asked quite a lot by our potential partners, can we just make it on rails, meaning there's a voice over something and the game just goes on its own. And we're really allergic to that because what you lose is all like the special magical
moments that happen while people are playing together. You can't predict those. And like you can't have a computer be like, "Oh, something really funny just happened, so pause and highlight it, but a person can do that." That's correct. There we go. Next one. Some people might be really great at trivia, but they're not necessarily games people. And some people might be neither. And we wanted to have games that could really attract and entertain everybody. So, the show is composed of a lot of little mini games. and the balance of those can sort of speak to different people's skill sets. So within the course of a show, it really feels like no matter where you came from and what your skill level is,
everyone's going to have at least one winning moment. And for us, that's the mark of success. The other thing that we thought a lot about were escape rooms. That people loved going to escape rooms for a period of time and I would go to a couple and it always felt like there was one or two people that were really excited about solving the escape room. like checking under every book and every six people being like, I don't care that much about this. And then it was two people sort of directing everybody else to do it. And that's the other thing that we're really excited about is that for an hour straight, you've got 32 people who are all actively participating in this thing. And that what's happening on screen and the
results of what's happening are direct reaction to what you did. A Thousand Boxes is the kind of interactive social game that Dave and Busters these days is betting the farm on. Gabe and Dave's customers are not players, but rather arcade owners and venue operators. Yet, despite the industry disruption, arcade owners haven't really evolved their mindset. They're still only looking for proven attractions that generate the greatest profit per play. Meanwhile, game makers like Gabe and Dave are focused on creating the most engaging original games possible. As a result, the challenge is not product, but instead market. How do you price and sell a game that's so different from anything that's come before? The design
of this thing is that it's a live experience and people are always coming back. So, we wanted to make sure that it would always feel fresh, that this could be something that people could do and then say, "Wow, yeah, I want to bring more friends and want to come and do this more." So knowing that we wanted to keep the content always updated was always part of the process, was always part of the product design, which is why we have this ongoing licensing fee structure where we're promising to update the content and add new games over time and also have an totally included technical service package as well. This is all custom electronics, so like custom printed circuit boards. This
is like the main brain inside of each of the podiums. So it keeps track of the button tabs and also the timing. All the controllers, all the hand buzzers are the exact same. So in the show it's like red, green, blue, yellow. Um, but the controllers themselves, it doesn't matter which podium they're connected to or which position they're at. They're just they just go in and then that brain inside of there senses that it's in there and colors it the right color. Um, and then it's just quick disconnect. So if somebody is having a problem, it's as quick as that and then they're back. That's a big part of our maintenance contract. We fully cover everything. If something does happen, they can just switch it out really quickly and then
they can mail the handbuzzer back to us. We'll mail them a new one. And then as far as software goes, we've written all the software ourselves. We have remote access to all of our media servers across the country. So we can push out updates to all the apps. So the software I use to develop the game engine is called Touch Designer which is typically used for large scale live visual work for festivals and concerts. Um but we built a game engine inside of that framework. Um and the way that the programming is largely done is by patching these operators together, these nodes, and then by plugging them into one another you can create different logic and it's very graphicsoriented.
Um and then we layered on top um a scripting layer with Python that allows for the control of the state of the game. All of the interactions that we have coming from the buttons are coming in over the network. So we have OSC devices in each one of the controllers. So all of the messages from the button presses come in through the networking here. And then the LEDs in the podiums, they all get controlled at the LED stage here. So we have a pixel map of all the LEDs in each of the podiums and then as the show is getting uh played then we can animate the lights on the podiums themselves and then this is the um touch screen for the host. So we can um just hit next and then that will immediately
launch into the game itself. We sort of have two different strategies for fees based on who the partner is. So one of them is just flat fee. So you pay an upfront fee to get the equipment and you get us to be there to install it and to train you and to trade your staff and then there's an ongoing licensing fee that is flat as well. So if the venue is projecting to do really well and sell a lot of drinks then they know what their fee is to us every month and if they make way more than that then they keep the upside. If they don't and if they don't run the show that much for whatever reason they still pay us the flat fee. So the other model is a little bit more on like the movie theater model
where we would be like the studio that produced the film and we're going to get say 50% or 60% of ticket sales and then all the rest of the sales are kept by the venue. 1,000 boxes is not a single cost like the turnkey arcade cabinets of the 80s and '90s, but instead it's priced like a software as a service. There's a onetime down payment of $85,000 and a monthly fee of $15,000. These rates include training, support, shipping, and installation. And because Gabe and Dave wear all the hats, selling a thousand boxes has been just as much of a journey as it was building it. It was a bit of a surprise to us, honestly.
We thought that, especially once we won this big award at IPO, we won the best new product there. We sort of just thought that orders were going to be rolling in and we would just be filling those orders. But it turns out that because of the scale of what we've designed, our partners need to typically either renovate a space or make space in their current place. And that tends to take a lot longer than even what they say is going to take. A lot of the places we're talking to, they're entertainment spaces and they may already have some concept of what they want to invest in, what they want to buy. And our arcade is a great example. they can go out, buy a collection of arcade cabinets, put them in, and then
they'll just turn them on and people will walk up, put quarters in, and they'll make money. That concept is really tried and true. What we've made is something that's really a different type of experience. We have a group of people that are all playing together, and it's more of an event. When people come, they're going to interact with each other and with strangers in a way that hasn't really been possible before. for that many people to be looking at the same screen at the same time and playing together. It offers something new and different, which is really cool, but the venues and the entertainment space just isn't yet prepared for it. So, there's a bit of progress that we
have to make with thinking about, hey, where would this go inside of your space? Some of the people that we're talking to don't think about it as it's 24 people at the same time or it's 32 people at the same time. They kind of tend to compare it to like an arcade cabinet where one person or two people might be at it at a time. And that's what they're thinking about in terms of like a fee structure. And we really have to kind of re-educate them on like, well, this is how much this costs. This is how many people you can have at any given time. You can be selling them drinks the whole time. You can rent this out for corporate team booking events.
You know, there's all these revenue streams that like an arcade cabinet does not offer, but Thousand Boxes does. While not every arcade owner is down with a Thousand Boxes, there are some who resonate with what Gabe and Dave have built. Even Dave and Busters was initially sold on the idea of a Thousand Boxes as the core attraction for their new futuristic stores. Yet, a change in leadership at Dave and Busters last minute led to the deal falling apart. There is a visible contrast between the VCbacked BTOC OS and the bootstrapped B2B 1000 boxes in stakes and timelines. Gabe and Dave don't enjoy the same leeway as Samare does as everything for them must turn a profit on day one and
there are limits to experimentation. We just want to see people play boxes because every time there's an audience that comes in and checks it out, it's really fun and exciting. So the more people that play it, the more excited we are. the operator, especially if it's part of a larger offering that they have, a larger venue space, they're not just thinking about boxes. They can't, you know, they're thinking about their whole space and all the ecosystem of attractions that they have. And they're thinking about how to get people just in the doors in general. Even though we might have ideas on how we think we can drive more people to boxes and the best way to do that, that might not really reflect the other constraints
that they have that we're not really aware of. It's a little bit of the double-edged sword of like a licensing model where, you know, like we're not operators and we don't have those skills. The main hiccup to a Thousand Boxes is that the game requires a 30ft LED wall in place, which is an additional separate investment between $40,000 to $60,000. There are currently two active installations of a,000 boxes in the world, one in New York City and one in Dallas. They gross $27,500 every month from the monthly licensing payments for an annual run rate of $330,000. Since they manufacture everything themselves from their Brooklyn studio, their profit margins on hardware installation sit at 20% after travel and
labor. Then on monthly licensing fees, their profit margins sit at 90%, similar to that of a SAS. The combined profit margin of a,000 boxes as it exists today sits at 55%. Gabe and Dave don't own or operate the space in Midtown Manhattan, where a Thousand Boxes currently runs once a week. The game is in the hands of the venue owners who set up and tear down the game for some additional income on the days that the space doesn't get rented out. Because 1,000 boxes is not a daily attraction, there's not a lot of data. What Gabe and Dave do have are projections on potential earnings if one was to build food, drink, and other
games around theirs. But venue operators want guarantees, not projections. Gabe and Dave found themselves at a crossroads where a thousand boxes is too good to be shoved in a corner, but also lacks the ecosystem to reach its true potential. The game could easily be the centerpiece for a Dave and Busters, or it could be the foundation for the next Dave and Busters. 60 or 70% of them just want you to tell them what to do. Like, they don't want to think too hard about how to sell it, how to market it. They would rather just have a recipe and then they'll do whatever you tell them. And then I think there's probably, you know, some percentage that are going to be going above and beyond and figuring out
issues and saying, "Hey, not enough people are coming in the door. How do we get more people in the door without asking us how to do that?" Previous to this project, we thought more people than not would just be motivated on making more revenue themselves and problem solving on their own. But I think what we're seeing is more people are just like, "If we buy this, we need you to tell us exactly what to do, exactly how to sell it." So, the past couple of years have really just been showing us, wow, yeah, like we have something that really does work and that it can attract all different types of audiences. Whether you came from the Lower East Side or Harlem or New Jersey or whatever, New York is the perfect
melting pot to test this with a huge variety of audiences. But there is this other side outside of the experience that we don't really have control over. That was part of the relationship that we have as a lensur with our lenses. They're the ones who operate and sell it. And because of that, there's a lot of things that just haven't been fully baked yet. How do you keep them around so that you maybe have them come and play and then once they're finished, they stick around and they buy some drinks and some food, you know, in the same space? And that the space could have things other than thousand boxes.
It could just be a place for people to come and have a casual night of playing games and maybe they'll play boxes, but maybe they'll just hang out and watch because it's really fun to watch as well. Like there's a whole side to this that we think we're kind of at the point now where we understand enough about the product that we can take this next step to make a fully baked experience in the coming year. Our goal is to have it permanent in New York City cuz right now in New York City it runs limited just on the weekends. We're already growing it by bringing it to existing entertainment spaces. But we know that if we were able to take what we understand about immersive experience design and spatial
design and interior design and fill out a whole space dedicated to Thousand Boxes, it could be really, really special. And that would be the fully realized version of what we've created. That's always in our minds. I just don't know if that is the right move efficiencywise, you know, like it doesn't it we're not people with a whole bunch of money to go spend on real estate. Um, we, you know, I used to run a bar, but I haven't run a bar in 30 years. Um, so I have like some experience there. I think we're always kind of pushing and pulling on like, are we the right people to take that risk and do it all ourselves? Because the upside is fully that we would figure it out 100%. And then we'd be able to tell everybody else
how to do it. But then the risky part is that, you know, we'd probably have to take another five years to get all that figured out, go into a bunch of debt. Is that all worth it? or is it better just to find the right partner who already knows how to run a venue, how to run a bar, all the like has all the expertise in food and bev and is looking for something like we already have? I think that's kind of what we're going back and forth with right now on Yeah, the recipe does feel like we do what we do really good. We're experienced designers. We understand how to bring people in and have blow their minds. But if we can pair with an operations person, a food and be person,
and then also have the investor on board who can help say, "Yeah, this is like this is an investment I want to make to see this come to life." That's the recipe that we need. Yeah. The one thing that Game and Dave can't afford to do is to wait. There are only a handful of people in the world that have the go to market expertise that they're looking for, and they're not going to suddenly appear through the front door. Arcade owners want a proven playbook to replicate. Yet, it's not realistic to expect that they would ever be able to crack the sales for a game as cutting edge as a thousand boxes. Licensing has been a tough slog, and being bootstrapped is no longer an asset at this stage. Their goal now is to open
their own concept and location dedicated to 1,000 boxes, where they'll have full control over sales, marketing, and operations. And to do that, they need investors to be able to break ground into a hightraic, high visibility location, whether that's Las Vegas, Philadelphia, or Manhattan. There's no right answer, and the difference of each path is many zeros. If they stick with licensing, their ceiling will remain as it exists today in the thousands. But if they're able to turn a thousand boxes from a game into a concept, the payoff is in the millions. The arcade business is a modern-day example of an invisible evolution of an industry and a case where venture capital may truly be necessary. Innovation is not a giant
wave that sweeps in overnight, but instead the culmination of many droplets over time. At the surface level, the numbers indicate that arcades are going extinct and that everyone in the future is going to stay at home playing games on their consoles. But if we dive deeper, we can see the potential futures from businesses of all shapes and sizes. Whether that's the ever broadening Dave and Busters, the community first OS, or the one-of-a-kind experience of a thousand boxes.
