Sweeney's utopia

This puritan perspective is admirable and well out of reach for the rest of us.

I'm starting to understand Mario.

He toils and tries, cascading goombas and fireballs for miles on end. But he never quite achieves his goal. Each time he plunges Bowser into a river of fire, only to find himself at the beginning of a new level.

For me, too, it seems 2020 has started with a string of endings and a void that follows. Exactly 10 years ago this week I started SuperData fulltime. And like my video game hero, my cycle now abruptly resets.

Thank you Mario! But the princess is in another castle.

On to this week’s update.

NEWS

Easy for you to say, Mr. Sweeney

I agree that there's been a surge in predatory monetization tactics in the games business that belies its origins and, as Sweeney puts it, transforms the video games industry into something that resembles its greasy comb over cousin, the gambling industry. Nevertheless, the puritan perspective we received from Epic's CEO who spoke at DICE this week is reserved only for those creative firms that have unparalleled success. The combination of the Fortnite fortune and the $1.3bn of Tencent money makes it entirely affordable for Mr. Sweeney to go against the grain. I don't recall him being as vocal on this before. He may have been, but I didn't see it, and that's likely because he previously wasn't invited to come speak in the absence of a big blockbuster success. It's a wonderful ideal, nevertheless, just like his suggestion that platforms need to play nice and not exclude each other. But no amount of Fortnite money is going to deter Apple, Google, or Facebook from wanting to own the world. Link

Atari to invade the hotel space

In what is undoubtedly considered to become a ‘Game Mecca’, the recent announcement of an Atari hotel opening up in Arizona is but the first in a string of Atari-themed hotels. The NY Times quickly connected the dots with the growing number of esports stadiums popping up all over and the immanent Super Mario theme parks. I’ll give points for Atari still going at it despite having left making games (remember Dungeons & Dragons Online?) and while nostalgia has served platform manufacturers like Nintendo well with its NES Classic, it may not be a powerful enough force to make me visit Phoenix, Arizona. Leveraging intellectual property is much like science: your strategy team was so preoccupied with whether or not they could, they didn’t stop to think if they should. (Yes, that’s from Jurassic Park). Link

BTS, the video game

If that headline caught your attention, chances are 75% that you work at SuperData. During last December’s Secret Santa, Korean pop group BTS took center stage, which immediately explains to me how the group’s owner Big Hit reported $500MM in revenues for 2019. What makes this group unique is having managed to establish a foothold in North America. Will BTS, like MapleStory and esports, be the next Korean export product young Americans cannot live without? It looks so. Big Hit intends to build out its success in gaming as well: its current BTS World (which is basically football manager type game for a k-pop band) is rated 4.9/5. Seems high but ok. Nevertheless, the group’s only and biggest business risk is an oldie but a goodie: BTS’ group members face mandatory military service in Korea. Link

BIG READ: Let’s talk about Apple Arcade

After stumbling across the Apple Super Bowl and seeing how the marketing team took over apple.com and had game characters crawling all over its primary website, Apple seems to remain committed to making Arcade a success.

Is it though?

Since the initial launch of its Arcade service (from which, I should add, I have since unsubscribed), it is not entirely clear how Apple intends to move forward.

I’ve covered the push into subscription and value-add services by the major tech firms extensively. Succinctly and almost unanimously, the emergence of recurrent revenue services is a product of the higher valuations it garners on Wall street rather than meeting a critical mass of consumer demand. Apple reported $46bn in Services revenue in 2019, or 18% of total and ip +16% y/y. Services revenue has twice the margin (64%) compared to its Products business.

The challenge is two-fold. First, free-to-play mobile gaming is already making Apple billions. A strong push into subscription-based or premium gaming means cannibalizing an otherwise thriving business. Unlike other platforms, there is no meaningful exclusive content in Apple’s ecosystem. That seems like a loss and likely the result of Apple’s inability to value blockbuster content in the same way that, for instance, Sony does. Imagine a triple A release akin to Last of Us or Cyberpunk 2077 or GTA V simultaneously across all Apple devices. Better still, imagine those same titles with a healthy ongoing stream of recurrent revenue.

Since Apple hasn’t performed this trick in more obvious categories like music and movies, it’s highly likely that it capped its willingness to invest in games before even understanding its market potential. Seems to me that if Apple wants to build out its services revenue like it says it does, it would have an easier time doubling its gaming revenue than investing in a content arms race with Netflix and others for terrible television programs.

Second, its services portfolio is growing, but it’s not very strong. It’s having a hard time charging money for Apple News. Apparently, no one wants to pay for it. And despite all of its resources and clout, Spotify continues to run circles around Apple in music services. Worldwide, Spotify has 271MM users of which 124MM are paying subscribers, and it recently welcomed Taylor Swift back to its catalogue. Apple Music counts 60MM. Not bad, certainly, but remarkable given that the bulk of Spotify listeners are active on mobile (you know, iPhones).

Tim Cook would likely argue that growing a healthy stream of services revenue takes time. And he’d be right, of course. But at some point Apple is going to have to confront its obvious aversion to complementary assets if it wants to 5x the category.

Not even a $5.6MM Super Bowl ad is going to change that.

YouTube paid an alleged $160MM for OWL's esports rights

As inflated headlines go, here's a new classic. For one, it's a THREE-year deal, which makes it really $50MM annually. Next, it's for all three franchises: Overwatch, Call of Duty, and Hearthstone. The original article does point out that ATVI previously sold two years of OWL to Twitch for $90MM, suggesting that the value of these properties haven't really appreciated at all. Third, after we learned that YouTube generates $15bn annually, you really have to wonder if Google is bending over backwards here or, as it looks to me, scooped up a nice content bundle from the US' largest incumbent publisher for a very reasonable price. If nothing else, it puts a dent in on League of Legends. Put differently, the big headline belies the obvious absence of growth in media rights revenue in the esports category. Fanboys be damned.

EA mobile stumbling

Despite the otherwise rosey earnings, it seems odd to me that EA’s mobile division is down -6% compared to the same quarter last year at $134MM. The overall mobile market is doing well, so how come one of the largest publishers in the world can’t capture more value? Worse, before the iPhone changed everything, EA basically dominated the nascent mobile games market. During the Q&A it danced around the topic by saying it’s excited about rolling out Apex Legends Mobile in China, but even when it does, it’s going to be a late market entrant at best. Combine this with a general lack of a strong title line up and the silence around its cloud gaming strategy (the word ‘cloud’ appears once in the entire transcript), it makes you wonder how future-proof EA really is. Link

What's Sony's play with the PlayStation5?

We've heard a lot from Google and Microsoft lately around cloud gaming. And Nintendo has been doing well both on mobile and with the sale of its Switch Lite. So it is a bit surprising then to hear from the incumbent console maker that it hasn't quite figured out yet what it plans to charge for its new device. What gives? One theory is that it'll do a general announcement in March/April as per usual, and then follow it up with a tiered offering right before the holiday season. Following Microsoft's example, Sony should strongly consider having different bundles available at different price points at launch. Because charging $450 at launch will be fatal.

PLAY/PASS

Pass. Warcraft Reforged. Most concerning is the all-inclusive claim to any user-generated content by ATVI’s legal team. Here’s a good write-up. The best thing here is the speed with which Blizzard offered refunds.

Play. The IRS quietly deleted the guideline that virtual currency should be taxed. In their words: "Transacting in virtual currencies as part of a game that do not leave the game environment (virtual currencies that are not convertible) would not require a taxpayer to indicate this on their tax return." Link