Safe haven no more
Is the current boost in game consumption a structural shift, or temporary?
Head’s up: economists predict we’re about to see a downshift in games. Here’s why.
After everyone found each other online and had extra time to play instead of commuting, gaming activity went up in a big way. For weeks now we’ve been fed strongly excited headlines about how the games industry is a ‘safe haven’ from everything that’s going on.
But let’s not get confused. Spending on games comes from people’s discretionary time and money. There’s a few indicators that tell us it’s about to turn. For one, Verizon reported that
“gaming is down 10% week over week and down 45% since its peak.”
It suggests that we’re past the initial highpoint. Similarly, across Asia there’s a noticeable difference in live stream viewership in places where there’s a hard versus a soft lockdown. People are watching and playing because there’s literally nothing else to do, and that will be ending soon.
Next, the Bureau of Economic Analysis reported a 7.6 percent drop in personal spending, the biggest decline since 1980, and a 4.8 percent decrease in GDP. Ouch. It’s about to get rough out there. Or, as one economist phrased it:
“What’s coming is going to make the 2008 financial crisis look like a flesh wound.”
The games industry’s ascent to becoming mainstream means that it is also more vulnerable to shifts in broader consumer behavior. A decade ago demand among fringe audiences was comparatively price inelastic, and for dedicated consumer groups, spending on games had a high priority. That has changed with its rise to popularity. Meanwhile, novel revenue models like advertising and subscription are still in their infancy compared to their long term potential. I’m expecting the different earnings reports coming out in the next two weeks to tell a different story, of course, as we’ll first get to see some new high water marks. Next week all CEOs will answer the same question: Is the current boost in game consumption a structural shift, or temporary?
Get ready.
On to this week’s update.
NEWS
Travis Scott rocks Fortnite
Right now, Fortnite is perfect. It is hugely popular and using its ample financial resources to explore and experiment with new forms of entertainment. Its cross-pollination of music and games is very exciting, and the numbers indicate Epic is on to something. In an obvious comparison to Marshmello’s performance, which 11 million people attended, Travis Scott did even better with 12.3 million concurrents (and 28 million uniques across all five events).
Well if you like it so much, why don’t you marry it, I hear you say. Not so fast.
Audience size isn’t what matters here. The Astronomical event shows how much Epic’s thinking has evolved. Where Marshmello was really just a forward through the rearview mirror version of a virtual DJ playing on a stage in front of a crowd, Astronomical offered a larger-than-life artist floating through space in some odd odyssey to nowhere. The strategic risk here is that the current momentum is a combination of novelty and not much else to do. Audiences have been very captive, indeed, the last few weeks. And every time Fortnite does anything, really, it’s front page news. So I’m not quite yet convinced that this is the shape of things to come.
In addition, despite his vocal criticism of the current market landscape and the role of platforms, Epic basically capitulated to the 30% cut that the Google Play Store charges. It’s pragmatic, certainly, and also comes at a time when Fortnite isn’t adding new players as quickly. Among teens the title has been slipping by -26% y/y, and Twitch viewership has been declining for a while now (19Q3: -22%; 19Q4: -14%; 20Q1: -13%), despite the launch of Chapter 2 in December and Season 2 in February. Despite his vision of a better world, Mr. Sweeney seems to be coming to the sobering conclusion that platform economics are real.
Nevertheless, Epic games is trying to break conventional barriers of entertainment and interactivity. It’s currently raising another $500 million to realize its vision. And earlier this week it reveled its Party Royale hub, where you get to hang out without playing the game. Will we be seeing more artists leveraging Fortnite and similar multi-user online universes to showcase and promote their work? Is gaming a marketing channel now?
That is really ambitious. This could be love.
Artist relief, but what about games?
We’ve been inundated with headlines about how well everyone in the games industry is doing as a result of the Covid-19 lockdown. Perhaps that explains why video games are missing from this initiative to provide financial support to artists. Unless we are to understand the $120bn business of video games fits between podcasts and VR, and is now called ‘interactive media’. A friend in need, indeed. Link
Are we there yet, with Google cloud gaming?
Stadia bragged about having EA’s top franchises coming available soon. It is starting to look more like it, and Google is clearly building this road. It also decided to make its service available for free, which is nice, but seeing +400% player count on Destiny 2 isn’t much of a metric. With lots of people sitting at home, many have undoubtedly tried the service for all of 10 minutes. Let’s see some retention!
The cynic in me (sorry) says that Stadia still does not have the internal support yet that it really needs to succeed or to convince us that Google is really serious about games. While watching the YouTube video after the live presentation, every single ad was for Sony. Either Google feels extremely confident about its ability to compete in the space against the current reigning platform holder or, more likely, no one bothered to check. I’ve also heard a new conspiracy theory this week: Google bought a whole bunch of GPUs a few years back when prices were low, and after crypto mining collapsed pulled the trigger on Stadia to offload its surplus.
Nevertheless, it is confusing that EA is now piping its franchises through someone else’s cloud platform after initially acquiring its own cloud infrastructure. Does this mean that Project Atlas is postponed?
Virtual reality takes a hit
The news of Magic Leap, the VR industry’s golden child (cough *Quibi* cough), laying off people, it is clear that things aren’t going as planned. As predicted a while back, VR will first and foremost be a B2B type business, because there is zero chance of a sufficient consumer base. And now there’s a battery warning. Meanwhile team SuperData has lowered its XR market forecast citing a drop in supply in 20Q1. Facebook, on the other hand, reported a +80% increase y/y in Q1 non-advertising revenue driven by its Oculus sales. But even Zuckerberg admits that they're having a tough time keeping up with demand. That really throws a monkey wrench in the VR workout I had scheduled to drop this coronaweight.
Brawl Stars going to China
The Chinese game regulator State Administration of Press and Publication (SAPP) has approved Brawlstars and the game is to go live in June. Given the size of the Chinese mobile market and parent Tencent’s marketing muscle, will this be the fourth billion-dollar franchise for Supercell?
Cool game of the week: Prisme7
Check out this highbrow mashup between Journey and France's most prominent contemporary art museum Centre Pompidou. Link
MONEY, MONEY, NUMBERS
Rovio (ROVIO) reported 20Q1 earnings of €66.6MM (-6% y/y). It has cut back on user acquisition spending to €13MM (down from €23MM in 19Q1) and managed to keep its existing user base steady. The firm’s emphasis is now squarely on Angry Birds Dream Blast and Sugar Blast, and has 10 (ten) new games in development. Link
Microsoft (MSFT) reported flat gaming revenue in 20Q1, and slightly down (-1%) y/y at $2.4bn. Hardware discounting offset an increase in content and services revenue, resulting in Xbox up +2% y/y. It also revealed having 10MM subscribers for its Game Pass subscription, which I'm told is currently the only viable subscription-type service for game devs out there because it provides visibility. There are now 90MM monthly active users for Xbox Live, and "hundreds of thousands" of MAU beta users for xCloud.
Macarthur Fortune Holding acquired Jagex for $530MM from Fukong Interactive. Link