Amazon's crucible

Virtual Business, Games + Ads, Earnings part 3.

It could not have been named more appropriately.

Crucible: "a situation of severe trial, or in which different elements interact, leading to the creation of something new."

Yeah, or not.

There is likely to be some initial debate around Amazon’s investment into game development. As the Dutch says, a “child’s hand is easily filled,” meaning it takes only something small to make children happy. But it’s going to take more than rolling out a single game after a string of investments, acquisitions, and delays. So, what does Crucible tell us about Amazon foray into games?

Certainly, it’s been several years now since it acquired several assets from which it planned to build its own gaming division. As I’ve discussed previously here and , I’ve seen some really talented people join Amazon to this end, only to leave it again a few years later. More so, having kept Twitch, its prime gaming asset today, separate from the rest of the Amazon multiverse including its back-end infrastructure suggests that games continue to be a separate animal. It has justifiably raised the question whether Amazon is really all that serious about games.

Now seeing Crucible I think it is.

Creative content is a result of an organization’s culture and how it cultivates talent. To that end, Crucible is a really well-executed newcomer that is free and offers a lot of depth. Basically a mashup of Overwatch and Fortnite, it is clearly designed around Amazon’s longer term strategy for gaming.

For one, why release a shooter game in an already crowded category? That really only makes sense for firms that can afford to invest long term. Making its own video game content is consistent with Amazon’s comparable efforts around TV series and film production. In the same way that it has figured out to manufacture store brand goods like batteries and clothing, it also has extended this logic to media content. Over the past years it has been pursuing an agenda of vertical integration where it cuts out the distributor in the middle, and supplies directly to consumers. Its current talks with AMC, for instance, is an example of this. Since video games are a growth market and one of the largest entertainment businesses globally, it makes sense for Amazon to eek its way into gaming and build its own, vertically integrated gaming offering over time.

Next, it’s important to remember that Amazon doesn’t really play catchup but rather deliberately moves slower than everyone else. Game play elements for Crucible clearly evidence this: the amount of playable content and character upgrades is almost overwhelming. It tells you that Amazon is planning to have people play for a long time.

It was also much later to market than Netflix to get into televised content. In the case of gaming, Amazon already owns the most popular live streaming platform, Twitch, which means that it’s been ahead of the curve compared to YouTube, for instance. Consequently, the upfront costs for consumers are spectacularly low assuming that Amazon’s proprietary content will be free as part of their existing Prime accounts. I’m skeptical that Amazon’s first foray into game publishing is going to blow critics away, but the recent success of Riot’s Valorent proves how powerful Twitch is as a promotional platform.

So, does Amazon have a chance against Microsoft and others? Absolutely. It has the necessary resources and access to capital to pursue video games for years. It has started to share more detail on its plans around cloud gaming. And a large part of the industry already relies on Amazon AWS infrastructure, and is increasingly reliant on Twitch to help market new titles.

What Amazon misses is a strong, platform exclusive title that will compete on equal footing with franchises like Halo and The Last of Us. The release of a free-to-play shooter like Crucible helps, but it won’t immediately establish Amazon alongside incumbent platform holders. To that end, Amazon may even acquire a major publisher. Consider that the total value of a top-tiered company like Electronic Arts is $34 billion. EA performs well and has rights to a lot of strong sports and entertainment brands. Since the market drop in March, Amazon has gained 8x EAs in market value. If Jeff Bezos is truly serious about gaming, his options are wide open.

So does one title make for a full-blown entry into gaming? No. It's a nice validation for all the people that have worked so hard on making this happen. And certainly we can make some inferences from Amazon's broader approach to entertainment. Chances are that the success of this one title will go all the way up the food chain as part of the decision-making process if more gets funded, or if first party game development is too rich for even Bezos' blood.

It’s shaping up to be a very interesting year in gaming with the shift in perception due to Covid-19 and the upcoming releases of both new console hardware and cloud services. A few more of these and we might indeed be looking at the creation of something new.

On to this week’s update.

NEWS

Advertising is coming

Is it though? Despite a decline in advertising prices in 20Q1 that resulted in lower ad revenue for firms like Zynga, which have been steadily growing this income source, there’s an inevitable marriage between game makers and advertisers in the works. Titles like Pokémon GO and Fortnite have successfully penetrated the mainstream, and even the most conservative media exec has a rudimentary understanding of the medium’s potential. Advertisers have started courting game makers. Sure enough, we’ve already seen some promising experiments around esports and, to a much larger degree, live streaming. More generally, we are at the start of a massive shift in the games industry where for the first time in its history, ad revenue is going to play a significant role. Here’s a recent panel talk and a podcast.

Apple acquires NextVR. Now what?

We already knew it was going to, but now we’re learning that the price Apple paid (~$100MM) was less than what NextVR raised. That puts mainstream VR in the way that those clever Apple designers would do it further into the future. But it likely gives them some cool parts to play with. Notice also what a different approach Apple takes to VR compared to Facebook which can’t stop talking about it despite having no expertise in consumer electronics. Link

PlayStation Now doubles its subscriber count

According to Sony, the PS Now services has 2.2MM subscribers (end of April 2020), which is a remarkable jump from just 1MM in October last year. Clearly Sony has been beefing up its cloud gaming offering. As the incumbent with the most experience in this upcoming model, it has lowered pricing and added a bunch of content to build up a more robust user base as rival services like Stadia and xCloud present themselves. Link

Oculus could present a major opportunity for cloud gaming, says Facebook

No it won’t. For the simple reason that it asks consumers to do two new things. First, it’s asking people to put on and get comfortable with its headset. Granted, the device is improving rapidly. But it’s still new hardware and, oh, Facebook has no pre-existing experience with any of that. In its corporate strategy deck, Sony, which does have experience with this, conspicuously left out any news around its PSVR, but then opened up to the Financial Times about how concerts are going to drive VR adoption. Regardless, I have no reason to assume Facebook will do this better. Second, cloud gaming is also a new offering. Sure enough, Facebook acquired PlayGiga for $78MM. But where’s the content? What’s the unique offering? Becoming a meaningful gaming platform needs more. Asking audiences to take it at its word as it becomes a cloud gaming provider is a stretch. It can’t even do news right and that content is produced by literally everyone else. It feels like Facebook is chasing a losing hand here. Link

Working from home is a feature, not a bug

The NYU Game Center ploughs forward, full steam. This year’s showcase line-up looks every bit as exciting than its analogue counterpart. Don’t miss it.

AppLovin acquires Machine Zone

Known for Game of War: Fire Age, Mobile Strike, and hiring a supermodel to promote its games during the Super Bowl 50, Machine now joins the AppLovin “global mobile gaming ecosystem.” I’ve never cared for Machine Zone’s games, but who cares about that when its underlying platform infrastructure can operate the entire public transportation system for the country of New Zealand. Or can it? Likely AppLovin is going to copy and paste some of MZ's tech for the rest of its string of studios, which include Redemption Games, PeopleFun, Belka Games, Clipwire Games, Firecraft Studios, and Geewa. Link

MONEY, MONEY, NUMBERS

Embracer Group reported $334MM in games sales for 2019 (year ending April 2020) which presented a +30% increase y/y from $256MM. That represents just under two-third (61%) of its total business and, notably, offset its losses in its “Partner Publishing/Film business unit, which declined -23% from $279MM to $215MM y/y. Embracer has been buying assets throughout Europe and seems intent on consolidating the European games market considering it raised another $172MM in April. The company’s current market value is around $3.7bn, or roughly half that of Zynga ($7.6bn) and Ubisoft ($8.2bn). Link

NetEase generated $2.4bn in 20Q1, up +18.3% y/y. Its games group accounted for most of this with $1.9bn in revenues, a +14% increase y/y. NetEase relies largely on its Fantasy Westward franchise and on licensing other IP. The expectation is that the company will continue to do well as several key franchises like Diablo Immortal are released in China. Link

SEA reported $512.4MM in games revenue, up +30% y/y from $393MM. The main driver was its success of Garena Free Fire, which racked up 80MM peak daily actives. Not bad. Garena operates in Indonesia, Taiwan, Vietnam, Thailand, the Philippines, Malaysia and Singapore accounts for about 52% of total revenues. The rest comes from e-commerce activity under Shopee and digital financial services (payment). Link