New Year, big deal
The wicked never said they wanted rest
The past few weeks have been a blur of sleep training a 5-month old, watching my crypto portfolio sink like a stone, inflation reaching new dizzying heights, and the freezing 17F (-8C) Brooklyn weather. Oh, right, and Covid, year 3.
To all of which I say: Nice try, 2022. But you can’t discourage me that easily.
It is perhaps a false sense of security or a stoic survival mechanism that renders one hopeful and excited in the face of disillusionment. But I can already see that it’s going to be a great year.
First, the industry that forms the bedrock of my career started with a bang when Take-Two announced its $13 billion acquisition of Zynga. It set a new high at almost twice the valuation of the previous record of MSFT/Zenimax. (More on this below.) Sure enough, 2021 was riddled with acquisitions, SPAC-tivity, and IPOs. But those were hardly a surprise. The market was reeling with cash, eager new investors, and non-endemics desperate to get into gaming.
What’s going to be exciting in the year to come is watching who’s will survive when inflation pushes up the price of capital and all these aspirational, supposedly disruptive game makers will actually have to develop, you know, something fun. My expectation is that the industry underdogs will do better when financial momentum starts to ebb.
The recent cooling of crypto is more than a great time to buy the proverbial dip and the second source of my excitement. Ethereum dropped from a high of $4,868 in November to $2,929 a few days ago. Bitcoin went from $69,000 to $42,576. What a ride.
Investors have been going wild. According to InvestGame, which tracks deals activity, blockchain game companies raised over $1 billion across 16 deals. The cumulative deal value over the first three quarters of the year was $1.6 billion. Among the biggest raises were Sorare’s Series B ($680m), Dapper Labs’s Series B+ ($250m), and Forte’s Series A ($185m).
We’ve arrived, in effect, at the part in the course where true visionaries capable of execution will break away from the rest of the peleton that is merely great at raising capital.
Blockchain games have had a hell of a great year. But it’s important to remember that it was merely their first year. Starting a business is easy enough. You leave your corporate job, you spend a bunch of money on getting your own office, pick out cool wallpaper and a snazzy computer, and find yourself confidently cradled in one of those cliched beanbags.
Then, year two hits. After the honeymoon phase comes a hairy period characterized by things breaking and your vision flickering. What was an exciting first inning is followed by dealing with increased competition, catastrophic product failures, rising customer acquisition costs, bossy platform holders, and a host of other sobering realizations that will make you question why you started a business in the first place. Did I mention taxes?
What’s happening is that firms are building war chests to insulate themselves against the inevitable period of all-out competition. Raising more money means a greater chance of survival. Perhaps that sucks for you. But it is exciting for everyone else to watch the Blockchain Squid Games as startups struggle to make it to the next round.
Finally, games represent the nexus for the future of, well, everybody. The last few years have been a warmup to what’s to come. From music labels to metaverse builders, all agree that the future means we have to level up, get in the game, ready player one, select your character, play by the new rules, or it will be game over. (Will someone *please* disrupt the White Paper Industrial Complex. FFS.)
National governments are no longer wondering if but how they can get in on the action. Large cities are trying to figure out how to attract talent and rev the local game dev community. To that end, the Mayor’s Office in New York City’s published the “2021 NYC Digital Games Industry Economic Impact Study,” which found that the digital games industry had created $2 billion in economic value, and 7,600 jobs that paid $762 million in wages.
It tells me that 2022 will our next BIG year. That’s enough for me to get excited.
On to this week’s update.
NEWS
Take-Two acquires Zynga for $13 billion
Having only just cooled from the $7.5 billion MSFT/Zenimax Media acquisition last November, the games industry posted a new ATH this week when Take-Two announced its take-over of Zynga to the tune of $12.7 billion. Funded with a combination of two-thirds stock ($6.36 per share) and one-third cash ($3.50 per share), Take-Two offered a +64% premium over Zynga’s last week’s close.
What a way to start the year.
It’s no secret that the industry has started to consolidate further in the wake of its success during the pandemic and fueled by cheap capital. Just a few weeks ago, Embracer acquired board game maker Asmodee for $3 billion, to name another sizeable transaction. A few months earlier Take-Two had made a $963 million offer for Codemasters, only to have Electronic Arts swoop in with a $1.2 billion offer to retain its dominance in the sports video game category.
Despite its size, the deal is relatively straightforward. First, beyond the obvious presence of cheap capital and continued consolidation across the industry, it’s a shrewd decision by Zelnick to reposition Take-Two as a game publisher that can cater to the full breadth of the market. As Activision Blizzard struggles to retain talent and seeks to counteract the acid reflux of its toxic work culture that has soured investor sentiment, Take-Two emerges as an unencumbered, healthier alternative that’s on the way up.
Second, from a business perspective, it bolsters Take-Two’s presence in mobile which will jump from 12 percent of total earnings to 50 percent post-acquisition. The marriage of the different portfolios expands its talent pool, especially considering Zynga’s most recent purchases (e.g., Rollic), and makes Take-Two a more mainstream-focused entertainment company. More importantly, it offers insulation from major disruptions in the tech landscape and strengthens its negotiating position with ever-larger platform holders like Apple and others.
Third and finally, it’s also no secret that Zelnick is fiercely ambitious. I expect him to use Take-Two’s momentum as a springboard to establish himself as a next-gen media mogul across entertainment categories. I’ve met him a few times and he’s impressive. Specifically, he is fiercely ambitious, intimidatingly fit, and fiscally conservative. This is not a tired executive looking to ride out the remaining years of his tenure deciding which real-world sports team to purchase. When everyone looks toward the next buzzword from the future, he pursues value in the present. He acquired Grand Theft Auto for $11 million, after all. The TTWO/ZNGA deal is borne from a sober perspective that differs from the current mania around unproven novelties. It showcases that instead of investing in things that have yet to materialize there is plenty of value in existing companies and IP. Call it Rockstar economics.
BIG READ: The games industry is broken. Blockchain can help. (1/2)
As part of my thinking about the tension between blockchain technology and game developers, I’ve started to take stock of the different business elements. In part 1, I’ll discuss the supply side and how blockchain can make a beneficial contribution.
To recap, in record time we’ve arrived at a point where the discussion around NFTs in gaming has gone completely stale. Expertly polarized by our web 2 social channels, there’s a noticeable lack of nuance in debating whether and how emerging technologies present a new creative and commercial space for entertainment. You are either a maximalist crypto bro, who believes the future would be here already if it weren’t for a few meddlesome creatives, or you find yourself a mansplaining game dev overwhelmed by a for-profit motivation.
My fellow Dutchman Rami Ismail’s exposé on why NFTs aren’t a natural fit for contemporary game design and property relationships is an exception to an otherwise largely superficial conversation on the relationship between web 3 technology and interactive entertainment.
The games industry has several deeply-rooted issues. For one, conventional organizations and infrastructure have largely failed many of the people in the industry that do most of the work. Also, information asymmetries and a general culture of secrecy around production processes and access to capital have disadvantaged creative workers and present an obstacle to innovation. Despite the industry’s growth, it is still very difficult to learn about the industry. In my experience, students continue to struggle to find an entrypoint, regardless of whether they are creatives or looking to work on the business. And the assetization of the games industry means that consumers will forever pay rent to access their favorite games and accompanying social fabric without ever obtaining ownership and voting rights. That seems unfair.
In broad terms, blockchain’s appeal for existing issues emerges from the delayed, or sometimes even absent, accommodations of the industry’s principal revenue model shifting from discrete, physical products to intangible, service-based experiences. But if a transition to and adoption of blockchain technology, web 3, and the metaverse are going to deliver on their respective promises, they’ll necessarily have to address deeper issues. Fortunately, there are many. Several key areas in the production and distribution of games that are in need of an overhaul: (1) metadata, (2) payment, (3) unionization, and (4) marketing.
Metadata
Let’s start with an easy one. The creation of a universally accessible and permanently available ledger of creator credits, genre nuances, and subsequently greater transparency would be immensely helpful. The digitalization of entertainment has resulted in a vast increase in the available quantity of content. Consequently, the millions of apps, games, songs, videos, etc., present an overwhelming and poorly structured inventory that is difficult to navigate. Recommendation engines, competitive intelligence, genre comparisons, and, of course, content innovation all benefit from greater transparency.
Attributing metadata to individual pieces of content can be structured in a similar vein as open-source development where individual contributors are compensated according to their input and effort. One precursor was the Internet Games Database (IGDB), which contains a detailed dataset on thousands of titles. The freely available API is a key resource. However, since its acquisition by Twitch in 2019, the dataset is now under Amazon’s control. That presents a long-term risk and an argument for the decentralized control of critical industry information.
Payment
The automated attribution and compensation across large heterarchical production structures will potentially benefit more, especially smaller, industry participants. Large scale projects are generally the result of a great number of people working together. Rather than relying on the talent of a single individual at the center, blockchain technology makes it easier to allocate payouts more efficiently across a large group of creatives.
More generally, in 2022, the persistent idea of a solitary creative genius in game design is finally starting to dissipate. Originally started as a marketing tactic by people such as EA founder Trip Hawkins, it casts software developers in the same light as musicians and poets. That’s not unique to games and, in fact, common mythology. People like Steve Jobs and Elon Musk are similarly credited with ideas and inventions that they couldn’t possibly have accomplished alone.
The games industry is transitioning from a star to a studio system, to borrow a term from the film business. Contemporary game design is vastly more complex than it was three decades ago and involves a myriad of specialized skillsets. Firms like Valve and Supercell have released enormously successful franchises by avoiding a centralized, hierarchical organizational structure in favor of one that is flat and peer-reviewed.
Solitary geniuses or auteurs do have a place in the industry in that they may attract investment dollars or supercharge a title’s marketing effort. But operationally it is precisely the type of org structure that results in the various problems the industry faces today. The existing model of paying creative workers a salary and potential bonus if certain sales targets are met can be replaced by allocating an a priori percentage of the proceeds to different contributors to a project. Being strapped for cash early on in the process doesn’t necessarily mean having to surrender large parts of ownership to investors who claim large margins towards a project’s completion.
Unionization
If 2021 has shown us anything it is that the games industry lacks a union. That’s too bad and the lack of safeguards prevents more people from joining the industry. A fair distribution of voting rights among people involved in specific projects would safeguard their financial and creative interests.
The conventional gaming industry does not have a union, unlike, for instance, movie and television production. The absence severely limits job security, exacerbates already poor treatment of talent, and contributes to widespread toxic work culture. Blockchain technology is not a catch-all solution but it does offer an opportunity to strengthen worker protections by attributing voting rights and associated resource allocations to people directly involved in specific creative projects and organizations.
Two drivers behind the need for the games industry to unionize and offer worker protection are (1) the globalization of the industry which means labor competes in an international market, and (2) the continued growth of and subsequent investment in the industry as it seeks to attract talent. Only by offering fair participation in payouts and worker protection will it be able to sustain its momentum. Such a union would likely be a global institution and blockchain technology better facilitates the maintenance of a worldwide ledger of participants, contributions, and compensation.
Marketing
An evolution from pre-orders and soft launches, NFT airdrops facilitate early signaling and reduce demand uncertainty. To generate buzz around the imminent release of a new title, game makers have started to offer novelty in-game items in exchange for specific user commitments. Those include joining a Discord server, re-tweeting a scripted message, providing personal information, or connecting a wallet. This amounts to a demand-side preview and quantitative measure of excitement, or lack thereof. A great benefit of this tactic is that creative outfits no longer have to rely on intermediaries to gauge initial demand. A specialty retailer like GameStop, for example, plays an important role in a publisher’s decision to further invest and release new content as it provides information on pre-orders and comparable sales. This information is generally out of reach for small and medium-sized developers which thereby confront a more heavily skewed risk profile compared to larger game makers. Disintermediation of early market signals benefits developers by allowing them to better manage risk and content rollout.
These are some of my initial thoughts on how blockchain technology can potentially ameliorate existing issues in the games industry. I’m always curious to hear feedback, of course. So far, I’m of the opinion that outright dismissing novel technology is naive, especially if there’s still so much left unfinished.
In the next installment, I’ll review the potential problems and inefficiencies found on the games industry’s demand side.
PLAY/PASS
Pass. Reddit’s co-founder predicting we’ll only be playing play-to-earn games five years from now. Hush now.
Play. Kyle Orland’s deft write-up on everyone’s new favorite game Wordle and IP.