Transition writ large
How the coming console generation will differ from the last.
Quick update: I’ve officially left Nielsen. And, yes, I’m staying in the games business. But now as an advisor and investor.
For now, I’m full time growing a beard and part time learning to drive (finally). At home I’m making up for lost time, and I will also keep teaching. Oh, and The Book should be out in August, so that’s exciting.
❤️ I will miss my crew very much, of course. It's been an honor working with each of you. We’ve had a fantastic run, and I’m extremely proud of everyone and the work we’ve done. It has been the absolute highlight of my career.
Thank you.
On to this week’s update.
NEWS
Riot Games starts its second act with Valorent
One of Tencent’s biggest pearls now faces the question of how to move forward. Riot built its success on a single title, League of Legends, and represents roughly 1/10th of the Tencent game publishing empire. Capturing lightning in a bottle twice is what it’s really about in entertainment. To this end, Riot previously announced not one but a string of new projects. Why take only one shot on goal, when you have the money to fire off a barrage? So this week we saw some detail on its new shooter, Valorant. The gameplay footage looks promising, and basically emulates Overwatch. It is also obvious that Riot has a highly skilled talent pool. Culturally, however, the firm has historically been zealous about its LoL franchise and has focused the time and attention of all these people on a single game. Yes, there have been other projects, like the collectible card game that’s been in development for nine years but that never really saw the light of day. Working on a string of new projects could be a welcome breath of fresh air. Many have undoubtedly dreamed up interesting game play mechanics in different genres for years.
All this does not free me of the sensation that it feels forced. Is this a worthwhile expansion for the fans, or a carefully crafted strategic decision because LoL’s monthly numbers aren’t as strong as before? You have to ask why Riot didn't do this sooner, especially when it was at its peak. In conventional blockbuster-based entertainment businesses, the moment you have a hit on your hands, you start thinking about the next album, movie, song, or performance to ensure continuity and establish a legacy.
LoL certainly has its own legacy. But it’s only one game and Riot is seeking to instantly remedy its singular reliance by pushing out multiple projects at once. My question here is why are they so public about it? You don’t hear very much from another of Tencent’s money printing game makers, Supercell, until they’re certain it will be another billion dollar hit.
The public nature of these announcements suggests that in the mind of Riot’s current leadership, success in a creative industry is merely a function of access to vast capital resources. Combined with Tencent’s marketing muscle a strategy emerges that emphasizes scale and volume rather than a cohesive fictional universe that is carefully crafted over time and emerges from a deliberate company culture. Do consumers really want a LoL/Overwatch clone? Last time I checked, Overwatch wasn’t exactly doubling its monthly active player base. And, there’s the risk of people leaving, too. If you were a designer or producer at Riot with a vision for a shooter game or RPG, would you stay and build if for your employer, or go raise a few million based on your credentials and pursue your own success?
The true test here, then, is not whether Riot can release another game that is demonstrably successful. Instead it has taken on the challenge of establishing a creative environment from which multiple efforts will spring and relenting its laserfocus on a single title. That seems much, much harder to me than making a LoL-inspiring trading card game or shooter. Link
Coronavirus special: Hand sanitizer recipe
After I unsuccessfully looked for hand sanitizer both on- and off-line, I concluded that it made more sense to figure out how to make it myself. Several people asked me for this so here goes.
There's two recipes: (1) take two parts rubbing alcohol (91%) and one part aloe vera gel. Mix. Apply externally only. (2) Vodka. Apply externally to sanitize and internally to taste.
BIG READ: How the coming console generation will differ from the last
The games industry is going through a transition year. So, in response to the growing number of requests around what’s going to happen in the console space this year, I’ve put together a few thoughts on where I believe this segment is headed.
From the top, the hardest question to answer for hardware manufacturers is how they plan to address the much more diversified audience for interactive entertainment. For years it has been an arms race around better graphics and processing power. But as we can already discern from Microsoft’s $20/month Xbox and Sony’s struggle to come up with appropriate pricing, mainstream audiences are now front and center to the success of legacy platform makers. Each is formulating their own strategy.
The biggest concern among legacy platforms is how to cater to a consumer base that is no longer as homogeneous as it has historically been. The success of services like Xbox Game Pass indicate that there is appetite for buffet-style gaming in combination with micro-transactions because it affords consumers access to a wider array of content and having to make a smaller financial commitment. That is a radical deviation from the traditional business of serialized “bro” content. It will take time for platform holders to establish their own unique offering.
Next, traditional console manufacturers now compete with a broader range of available substitutes in the form of high-quality mobile gaming and the abundance of content on PC, and services (e.g., streaming video). Call of Duty Mobile is not, nor will it ever be, the same as the CoD experience on console. But what if it’s good enough? Activision reaches more consumers with this cross-platform approach that may be totally happy to just play the mobile version and abandon the $60 console version. The interests of third-party publishers are starting to differ from those of console makers.
The console business is changing and will soon likely resemble the model we find in mobile. Just like handset manufacturers, console makers can no longer offer just a single device for the entire market. We’ve already seen as much in the current generation. Price points for the devices have to come down, even if it costs more today to build them, and there has to be ample bundled content at launch. All of which costs money and reduces the pool of contenders.
And then there is also the role of digital distribution. Microsoft already released a digital-only device, and Sony is expanding its digital services to generate subscription revenue. How well equipped will console makers be in 2020 to move away from the comparatively high risk of the physical games business and, instead, embrace digital services and content distribution? So far, Nintendo’s answer has been to expand its footprint by releasing different tiers and branded devices, and finally accessing the Chinese market. Meanwhile CD Projekt Red sees its valuation skyrocket on the success of a Netflix show based on the Witcher. Where’s Mario?
Different from the generational transitions before is that during the current period of fluidity we can expect a string of newcomers trying to crash the party and existing partnerships to erode as content creators look to disintermediate through vertical integration.
Recent market entrants like Google Stadia have not made the strongest of impressions. But it is clear that it is open season on the console games business among tech firms. Facebook has similarly acquired a cloud gaming firm. Mobile carriers like T-Mobile and Verizon have been investing in cloud gaming and related services to “get into gaming.” And Amazon’s quiet absence suggests that team Bezos is going to announce itself once every other player has shown its hand.
Simultaneously we can expect more major publishers trying to build their own platforms and distribution points. The current transition period affords the industry leaders to reduce their exposure to traditional retailers and platform holders and gain direct access to consumers instead. We already know that EA is trying exactly that after buying GameFly’s streaming division. And there are consistent rumors of an abandoned cloud streaming project that’s looking to be sold to a major label.
There are three considerations here that may negatively affect the industry and put especially the console business in a negative spiral.
Over the past 18 months we have been observing the initial tremors of what may become a full-fledged earthquake. The chaos that took place in China’s regulatory environment around mobile game approvals is by no means an isolated circumstance but part of a much broader effort to constrict access to its consumer market. It means that only a few major firms will be able to get through to the world’s largest gamer audience, which, in turn, greatly increases the industry’s risk profile. More recently the growing tensions around the US/China trade agreements started to negatively affect console makers and the free flow of their goods and services between countries. If that wasn’t enough, the growing concern around the Coronavirus exposes how fragile the console industry is during this transition period as large hardware manufacturers suffer volatility in currency exchanges, high-profile participants drop out of trade shows, and it becomes more difficult to effectively manage one’s supply chain during a major release year.
Certainly, there's been reports on how millions of people being on lockdown is driving success for some. In the two countries with the biggest outbreaks of the coronavirus, analysts are observing consumers spending more time on their phones than usual. Following the period after Chinese New Year, which generally shows a peak in usage, play time historically drops off. But this year, according to the FT/AppAnnie, “downloads of apps in the first two weeks of February jumped 40 per cent compared with the average for the whole of 2019.” Basically Wall street is looking at the coronavirus as a driver of user acquisition, as Chinese colleges have delayed the start of the new school year and people spend more time at home. In South Korea, Nexon is similarly benefitting. According to the chief strategist at Mizuho Securities, people are “hibernating” at home. Firms like Tencent, NetEase and Nexon currently benefit from this but the question is: for how long?
[As a fair warning, the cynic in me is going to soon argue that the mounting sentiment and growing fears around the coronavirus is precursor to a broader economic malaise in games. I believe that the coronavirus will be the spark that lights a blaze of product cancellations, the lowering of earning expectations, and will become a popular scapegoat for market corrections that were going to happen anyway.]
Next, the supply side has been swimming in cash. With so many billion-dollar firms looking to claim a piece of the console and cloud business, there is an abundance of project financing available. It emulates the same influx of capital we observe in the streaming video business where Amazon, Netflix, HBO, Apple and others are paying a lot of money for top-shelf content that distinguishes their platform offering. (BTW, here’s a recent article on how this has negatively affected creatives in this market.) It results in an inflated sense of financial security while money is abundant and will likely decimate much of the industry once the money moves on. It’s happened before.
Finally, the rash of online and digital services that compete for subscription dollars amounts to an opaque marketplace that is difficult for consumers to navigate. Several times before have we seen what happens when too many firms compete over audience with commodified, non-differentiated offerings. Those markets collapse because consumers simply lose interest. Despite the zeal that we all bring to this business and the blood, sweat, and tears that go into making great games, this industry’s output is ultimately limited to what consumers spend with their disposable income.
Among the obvious next questions is whether or not indirect revenue models will soon be viable. Now that games are mainstream, won’t it make sense for advertisers to join the conversation and play a more prevalent role in the development and publishing of interactive content? Certainly, the enthusiasm behind esports indicates that we’re headed in that direction. Maybe. Creatives active in the console business aren’t exactly thrilled about the idea, and there remains a lack of effective communication between the ad folks and the games people. Most of the legacy business insists on being so different and so unique that they don’t need ad revenue and will consequently refuse to work with brands and marketers. All that accomplishes is that it creates an opportunity for mobile game makers to claim a bigger share of the overall audience.
Put differently, if companies in console gaming don’t find a way to work more closely with advertisers, the segment’s growth will inevitably suffer. In the coming years console gaming may experience what happened to Hollywood when broadcast TV showed up.
Transition writ large.
Roblox raises series G (!) at $4bn valuation
Hey everyone, Andreesen Horowitz (a16z) just discovered that games are “bigger than movies and music combined.” Anyway, what excites me is that a16z valued Roblox at $4bn. That is a really big number. Many of us will recall that Microsoft acquired Minecraft’s dev Mojang for $2.5bn back in 2014. It raises the question of what justifies the higher valuation. Succinctly, like Fortnite and the vision of Epic Games CEO Sweeney that online games are ultimately a social platform (a view I share, btw), Roblox is expected to become the go-to online network for kids and teenagers. It currently boasts 115MM monthly active users, which is roughly >3x growth from just a few years ago.
The expectation is that Roblox will generate over $1bn in revenue in 2020E (it got close to that number last year), across all of its activities. It has a strong presence online via YouTube (6th most viewed title in 2019 with 69 billion views) and offline at retail. Among the three platforms, console is by far the smallest component for the Roblox audience and much of its recent growth has come from PC (2x) and Mobile (5x).
The logical path forward is an acquisition by Google, for instance, or Microsoft, or perhaps a major toy company. I doubt that a bid by Tencent will go down well in the current market environment despite its existing strategic partnership. I imagine that especially Google is currently evaluating its current success with Stadia, and trying to decide on whether to double down by spending more: Roblox would go a long way toward acquiring popular exclusive content across the Google-vers.
The only existential threats here are some type of malicious pollution of the game environment since it’s mostly underage players, or from a broader market trend as audiences cycle out and move onto the next big thing. And then there’s regulation, of course. Link
Stop "doing games" please
After having long vilified gamers as awkward social outcasts that dwell in poorly lit basements, we're now treated to what only can be described as a Neo-dystopian hellscape that casts people who enjoy playing video games as pacified bed-ridden consumption receptacles. As if. Unless you put some wheels under it, add a smart-fridge, and throw in some astronaut-grade diapers, I am not even interested. This is half-baked.
PLAY/PASS
Pass. This partnership between Nintendo and Levi's. Of all the potential brand collaborations, we're getting Mario jeans? Really?
Play. This call for articles proposals on immersive play edited by Celia Pearce & Nick Fortugno: Well Played: Playable Theatre. Link
Pass. The blistering lack of diversity of the European Esports Federation. What year is this? If this is how competitive gaming will be governed and represented, it's dead already. 🤦🏻♂️
