Amazon's celestial arcade
Cloud gaming is starting to become a scourge to the industry.
Last week Amazon announced the shape and size of its long-awaited bid on cloud gaming: Luna. Its name suggests we are looking at Amazon’s moonshot to disrupt the games industry.
For one, they tried the same thing over a decade ago. Back in 2009 it launched a subscription-based casual gaming service for $6/month. In a single swoop Amazon sought to do away with an entire industry segment of small and medium-sized game makers who were still selling downloadable titles for $10 a pop. It didn’t work, obviously, because the service has been long gone. But Bezos’ go-to strategy to undercut prices did disrupt the overall ecosystem. The combination of an increasingly crowded marketplace and Amazon’s classic ‘your margin is my opportunity’ resulted in the decimation of what game companies could charge.
But this time will be different!
According to Shannon Liao, a CNN Business gaming journalist, Amazon stated the following:
That doesn’t sound different at all.
What I’m getting at is that cloud gaming is starting to become a scourge to the industry. The perpetual promise of a celestial arcade that will beam amazing games down to us wherever we are is intoxicating. But with a growing number of half-baked offerings in an increasingly crowded sea of subscriptions, we have to ask whether Amazon and its ilk is planning to add value or merely seeking rent.
At a high level, the industry remains heavily divided on whether or not the Netflix model will work at all for games. Here’s one analyst claiming video games are ready. And here’s another saying it will never be.
With some exception, it all feels very much like an initiative that sprung from someone’s clever spreadsheet rather than a passion for innovative interactive content. One reporter writes how Amazon Luna “isn’t solving cloud gaming's biggest problems.”
More to the point is the anticipation of Amazon acquiring some type of high-end IP. Following Microsoft’s $7.5bn purchase of Zenimax Media, we have entered the next stage in industry consolidation. Microsoft has been moving away from being the center of the living room to instead attract consumers to its Game Pass ecosystem. And Sony’s string of acquisitions and ambition toward offering the highest possible content quality is a clear inoculation against tech invaders.
That leaves Amazon (and Google) with the question what to buy.
Succinctly, the newcomers have not yet seen enough success in the market to write the type of checks necessary to differentiate on content. Sure enough, Amazon’s market cap grew $35 billion in the last three days, which would be more than enough to purchase all of Electronic Arts, for instance. But I don’t think Mr Bezos is about to drop six times more on gaming than he spent on video last year. (The same goes for Google: I’m sure Mr Pichai will want to see a bit more consumer enthusiasm for Stadia before he commits to the $20 billion he’d need to buy Take-Two.) Other candidates include Ubisoft, which has been saying yes to everyone since it broke up with Vivendi, and CD Projekt Red, which holds the promise of delivering the next big IP but is unlikely to sign away its day in the sun so close before the launch of Cyberpunk 2077.
And so the cynic in me is expecting cloud gaming to become the latest iteration of a large scale effort where consumers are just a financial servomechanism. I’ve written before about how recurrent revenue fetches a higher multiple on Wall Street: instead of relying on, for instance, the sale of a console every few years and an average attach rate of 2.4 games a year, ongoing services-based revenue is much more predictable. CFOs like that and so do investors, especially in a hit-driven industry like games.
It raises the question whether cloud gaming truly meets a consumer demand, or if it merely serves the needs of a few powerful companies as they invest billions in an effort to establish the long-term mitigation of financial risk. It works great for Amazon, but I’m not sure anyone has asked consumers about what they want.
The optimist in me continues, perhaps falsely, to be excited about the ubiquity and availability of interactive entertainment. Of all the artforms, games are the most engaging. Precisely because we have to make an effort (e.g., role-play a character, learn the rules, make decisions, practice, build an online community, etc.) it is the most rewarding. We do not simply observe or identify a character overcoming obstacles. We become them: the vast availability of content and the novel ways to play enriches us socially and culturally.
What will determine the outcome is the commitment from each of the different contenders over the next few years. Firms that invest in great IP, establish a healthy ecosystem of content creators, and seek to tailor their services to demonstrably meet consumer needs will be more likely to build long term success. We’ve seen this before. After Atari murdered a growing but crowded games industry riddled with low-quality content in the 1980s, Nintendo brought it back to life by focusing on quality and rebuilding consumer expectations.
But, if cloud gaming means we are mostly greeted by a buffet of mediocrity and undifferentiated, confusing offerings, it is clear that no decision-makers really cared enough and instead let corporate interests take priority. So far, Big Tech has not yet shown us that they’re capable of developing hit titles, establishing strong partnerships with companies that can, or solving any of the consumer issues around discovery and privacy.
Moonshots, as I understand them, means radical thinking and trying a lot harder than this.
On to this week’s update.
Alibaba sets up games division
Obviously the smaller, Asian equivalent to Amazon is not an entertainment firm by origin. And so we have to consider the broader scope here: Alibaba’s gaming ambitions emerge from having to attract and entertain audiences just prior to sending them off to their online store front. To this end, it’s been investing in influencers both in Asia and Europe to help push its wares. The announcement is the culmination of several efforts including a $120MM investment in Kabam and the acquisitions of UC mobile, 9Games, and EJoy. It’s soap-selling companies making daytime television all over again.
Roblox’ plan to go public
An obvious acquirer would have been Microsoft, after having acquiring Minecraft. But my guess is that Roblox got a bit too rich even for Mr. Nadella. Valued at $4bn just recently when A16Z dropped $150MM into it, Roblox’ alleged IPO is now hovering at a valuation around $8bn. That’s still reasonable as the value of content, especially in a desirable niche that targets kids, has increased. It reminds me of Tencent acquiring Supercell for $8.6bn back in 2016, but even that one had not one but several billion dollar franchises at the time. Recently, Roblox generated well over $200MM a month during the early height of the pandemic, or almost three times as much as it did a year earlier.
A quick thanks: One Up
Shoutout to everyone that supported me on this project: on October 6th my book, One Up, came out. I’m humbled and extremely grateful for everyone who bought a copy. Thank you.
Epic buys SuperAwesome to make the internet safer for kids
There’s always two ways in which markets become more efficient: one is through regulation and another through innovation. The former isn’t really very popular, of course, although often necessary. When EA single-handedly made loot boxes a bad thing, regulators correctly, and quickly, responded with measures. The latter is generally preferred. And so far many of the major tech firms have been largely MIA.
Digital platform holders can and should do better, but don’t. So to me, Epic’s acquisition of SuperAwesome is a welcome one. Succinctly, it provides necessary tech that allows parents control over their children’s use of the internet and games.
While this may not strike many as all that exciting, it is. As a parent I’m happy to see more people giving a sh!t about my kid’s 7-year old brain. I first met its CEO, Dylan Collins, years ago and he struck me as the right man for the job. After selling a software startup to Activision in 2007 and Jolt Online, an online browser game aggregator, to GameStop in 2009, SuperAwesome is his biggest accomplishment yet.
As an analyst, it tells me that Epic’s plan for world domination is moving forward without delay. Given Sweeney’s commitment to creating healthier ecosystems, this is a great fit. Epic is clearly targeting a younger audience and intends to play a role in how brands and other media firms access SuperAwesome’s 500 million kids. It dovetails well with Epic’s acquisition of HouseParty, and the invariably young audience for Fortnite. Congrats, Dylan!
RIGHT QUICK TIDBITS
Rovio’s CEO, Kati Levoranta, is leaving at the end of the year. Rovio is trading at $5.82/share compared to $3.99 a year ago.
Bloomberg gave Magic Leap a thrashing.
Finbro firm Piper Sandler found that video games represent 10% of total teen wallet share and that 63% expect to purchase a NextGen console.
Zynga completed its 80% acquisition of Istanbul hyper-casual game maker Rollic.
Former Rockstar Leslie Benzies raised $40MM for new studio Build a Rocket Boy. Something tells me we’ll be seeing a few more of these.
Sumo Group has acquired Pipeworks for $100MM.
ESL and DreamHack are merging to form ESL Gaming.
Pass. CD Projekt Red breaks promise of no crunch time. I understand the pride behind the project, but that only makes it worse when it turns out your mouth is writing checks your ass can’t cash.
Play. Whatever precog anticipated the need to make the new Xbox consoles seamlessly compatible with IKEA furniture is a goddamn genius.