Apple’s passive aggression
Irreverent response to digital market rules draws developer backlash
The SuperJoost Playlist is a weekly take on gaming, tech, and entertainment by business professor and author, Joost van Dreunen.
Inefficiency is underrated.
Last weekend the soon-to-be 11-year-old and I went on another camping trip. It is an exercise in doing things in the least effective way. We whittle walking sticks, build a (poorly constructed) shelter out of branches, do some wall climbing, and, finally, archery. Within moments of arriving on last weekend’s trip, the kid managed to cover himself in mud and lose his coat. But he also made a new friend and roasted the life out of a few marshmallows.
This week’s announcements similarly provided a few notable signs of how effective we’ll be this coming year.
The good: the first few earnings reports show a strong ending of 2023. EA came in slightly ahead of expectations (see below) and Microsoft was keen to share the merits of its biggest acquisition. However, with a soft year ahead, publicly traded game makers are increasing their dividend payouts and share buybacks to incentivize shareholders to stick around. As expected, we’ll be seeing a lot of franchise build-outs. Sony’s State of Play All was promising and, as you’d expect, most of the really, really cool titles are slated for 2025. All eyes are on the future.
The bad: total layoffs in the games industry have already reached 5,700 within January alone. That’s roughly half of last year’s 10,500 reported layoffs. It’s not looking pretty for the foreseeable future, either. Even if we agree that not all layoffs are the same, it has become difficult to not also make cuts and instead having to explain to investors why your organization is so efficient. Unless, of course, you are Nintendo.
“If we reduce the number of employees for better short-term financial results, employee morale will decrease. I sincerely doubt employees who fear that they may be laid off will be able to develop software titles that could impress people around the world.” — Sowatu Iwara
The ugly: Apple is stonewalling regulators and app makers (see below). Its proposal addressing new EU regulations, which implement alternate distribution methods but require a per-download fee, has drawn strong criticism from developers and regulators who see it as an unfair maintenance of the company's dominance rather than a move toward greater innovation and competition. To deliberately impose inefficiencies on an entire platform economy goes against the original vision for Apple. The firm prides itself on its tightly controlled supply chain management and the elegance of its user experiences. But its behavior is that of an agitated landlord.
Without fail, when I wake up after that second night in a twin-sized bunk bed, I’m reminded that surrendering my usual comforts helps keep me grounded and reconnect.
Anything worth doing is worth doing badly.
On to this week’s update.
BIG READ: Apple’s passive aggression
In response to the European Union’s new requirements under its Digital Markets Act (DMA), Apple issued a proposal with changes to its App Store.
No one is happy.
Succinctly, developers of iOS apps have two main options under the new regulations: (1) remain exclusively in Apple’s App Store under the current rules, including using its payment system and paying its 30% commission on sales, or (2) opt into the new terms of the DMA which allow for alternate distribution methods and payment processing but also require paying Apple a per-download “Core Technology Fee”, which amounts to €0.50 per user per app per year after 1 million downloads. Call it Apple’s Unity moment.
Since mobile gaming accounts for half of all consumer revenue in interactive entertainment, whatever happens next will have a direct impact on some of the industry’s largest participants. Spotify, the music streaming service, has already expressed its dismay, calling the Core Technology Fee, “extortion, plain and simple.” Similarly, Epic Games CEO, Tim Sweeney called it “malicious compliance”.
The EU’s DMA addresses a much longer-standing debate in the games industry around platform fees. Historically, video game platforms have charged royalty fees to publishers since the 1980s. Nintendo's NES started with cartridge royalties of around 10-20 percent to subsidize expensive manufacturing. As platforms moved to CDs, these declined to roughly 15 percent once optical media became cheaper.
When Apple launched the iOS App Store in 2008, it established the now standard 30% platform fee for digital app distribution. This was welcomed by many publishers who had previously faced significant material and retail channel costs often amounting to over 50% of game revenue. The convenience and expanded reach of mobile app stores justified the high royalty rate which became an industry norm.
However, as the mobile ecosystem matured, some developers started to push back on the 30% fee which seemed increasingly arbitrary rather than based on value provided. Large companies like Epic Games, Spotify, and Microsoft/Activision-Blizzard have been vocal critics. The EU's DMA represents the peak of this regulatory backlash to date.
Marketing for mobile games has also become incredibly costly. In some cases, even the most popular titles leveraging well-known intellectual property find themselves handing the lion’s share of revenues to Apple (e.g., 30% app store fee plus up to 50% of monthly earnings spent on user acquisition). Rather than encouraging innovation and competition, recent changes to the mobile gaming ecosystem benefit ad tech firms over pure-play game makers. The name of the game is user acquisition, and developing innovative content much less so.
Three examples come to mind.
First, at a high level, the success of firms like AppLovin tells you everything you need to know. Following the introduction of its AXON 2.0 software in 23Q3, AppLovin’s Software Platform delivered 65 percent revenue growth and 72 percent profit margins, reflecting strong demand for its user acquisition and monetization tools.
Second, after generating €45 million in revenue in 2022, France-based hyper casual game maker, TapNation, raised €15 million this past December in new venture funding. Its first purchase was Turkey-based user acquisition firm UAHero for an undisclosed amount to bolster audience targeting, acquisition campaign optimization, and monetization.
And just last week, in anticipation of further marketing expenditure in mobile marketing, UK-based credit asset manager, Fasanara, acquired a majority stake in US-based Pollen VC, which provides loans to mobile game makers for user acquisition.
Apple has defended itself by pointing out the fact that other gaming platforms like those operated by Microsoft, Sony, and Nintendo fall outside of the EU’s scrutiny. But here’s where Apple forgets that it is the fourth-largest game company in the world, operates the largest ecosystem and does not make its own games. Where conventional platform holders offer consumers a mix of first- and third-party content, and make dedicated investments in their ecosystems, Apple has so proven itself to focus largely on maximizing its earnings. It has a documented habit of changing the rules in its own favor. Naturally, that should concern regulators.
As a final note, Apple has only proposed these changes in response to the DMA requirements. It does not mean that the EU will accept them as sufficient. In fact, it is currently still unclear what will pass muster and will satisfy the EU’s drive to protect consumers.
It is almost as if a large ecosystem operator is deliberately keeping its constituents in the dark about key policy changes.
Turns out, Apple doesn’t like that either.
NEWS
Combative Senate hearing shows room for improved dialogue on games
In response to a growing concern around the impact of social media on America’s youth, the US Senate’s Judiciary Committee arranged a hearing with the CEOs from Meta, X, TikTok, Snap, and Discord.
As a parent, I am fully committed to a better and safer online experience for my own and everyone else’s kids. Especially considering how popular online and social experiences have become for interactive entertainment, the dialogue between the games industry can and needs to be better.
Unfortunately, politicians continue to prefer issues that polarize much like the algorithms they seek to squash. The effort, for instance, to come up with a solution around extremism in online games is well-funded. It should be, of course. But lacking from regulation around video games is a deeper understanding of less obvious issues. Toxicity is a rampant issue, too, for instance. But little is done to create workgroups or subsidies to ameliorate the situation. The same applies to representation, diversity, and unionization. Instead, we have press conferences around loot boxes. It is idiotic to me that a $300 billion industry doesn’t have a healthier dialogue with governments around the world in the same way that more conventional culture industries have.
My rudimentary analysis (using ClaudAI) of the entire 4-hour transcript tells me that Zuckerberg was the obvious guest of honor. He fielded by far the most questions. In terms of total speaking time, the five CEOs spoke for about 35 minutes in total compared to 124 minutes across all Senators.
Hearing here refers to senators hearing themselves talk.
The questioning of TikTok CEO Shou Chew was rather uncomfortable to watch as Senator Cotton constantly interrupted answers to his own questions and sought to chastise more than converse. And I’m not even addressing the loaded questions about Mr. Chew’s citizenship, political affiliations, and thoughts on world leaders. Combative questioning and grandstanding is political theater, sure, and also deeply unproductive. But at least several of them got their soundbites in for this year’s election cycle.
In his opening statement, Jason Citron provided an overview of Discord. The self-proclaimed communications platform is used by over 150 million monthly active users, with over 60% between ages 13 and 24. He emphasized Discord's commitment to online safety, noting their largest acquisition was a company using AI to identify and remove bad actors, and that unlike some platforms, Discord does not use end-to-end encryption so they can investigate concerning content. Discord scans uploaded images to detect and block child sexual abuse material has built tools to help young users report unwelcome conversations, and shares technology with other platforms to detect new forms of this illegal content. It is no matter of bias when I say that Discord at least seems willing and committed to improving the situation.
Missing from the conversation today were firms like Roblox and Epic Games. I know Tim Sweeney has enough to do, but both host millions of people online, including a large portion of minors. When hearings are hostile, however, are political leaders helping to reconcile a difference and address an urgent need, or are we foreclosing on an important conversation by prioritizing their own short-term political goals?
MONEY, MONEY, NUMBERS
Electronic Arts reported $2.37 billion in net bookings, up 1 percent y/y. Live service revenue was $1.71 billion, up +3 percent y/y from $1.66 billion, and now represents three-quarters (73 percent) of EA’s income on a TTM basis. Its biggest franchises led the way: EA Sports FC was up +7 percent and Madden NFL +5 percent y/y. Looks like freeing itself from FIFA was the right move. Its upcoming release slate is less crowded than it’s been. Beyond its typical annual releases—EA Sports FC, Madden NFL, NHL, and F1—management expects the Summer release of EA SPORTS College Football to cater to “an incredible amount of pent-up demand.”
In recent years, game publishers have subtly shifted how they define their success and performance. Among them is Electronic Arts’ claim that it reaches “700 million people across its gaming network.” About half of that audience interacts with their sports franchises.
Increasingly, the video game experience takes place outside of actual gameplay and has moved to adjacent entertainment categories like live-streaming and online communities. Because 2024 is shaping up to be overall weaker than last year, Wall Street analysts look to the future for higher returns on large releases. Electronic Arts’ answer to a softer year is an expansion into non-gaming activities. Going beyond just play, EA CEO, Andrew Wilson, players spend about 90 minutes playing and then
“leave that game experience where they've been deeply connected with their core friend unit, and they go and they talk about that experience on another platform. And then they go and create content about that experience on yet another platform, and then finally go and watch that content on another platform."
Finally, I expect EA to double down on leveraging strong intellectual property and partnerships. Its recent cross-over event between faltering Apex Legends and Final Fantasy VII Rebirth delivered “ two of [its] highest net bookings days over the fiscal year.”
PLAY/PASS
Play. Talofa Games raised $6.3 million from investors to build on the success of its multiplayer exercise game Run Legends. Where’s the media coverage for video games that help people get in shape, I ask you.
Play. Bundled content, especially gaming, is keeping newspapers like the New York Times afloat amidst industry layoffs.