Barbarians at the gate

Big Tech’s bark still worse than bite

The SuperJoost Playlist is a weekly take on gaming, tech, and entertainment by business professor and author, Joost van Dreunen.

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All of Brooklyn is in back-to-school mode so let’s keep things brief.

This week my favorite thing was Shawn Layden’s candor (see below). A friend and industry royalty, Shawn provided some sobering commentary on the assumed disruption that large tech firms are going to unleash on the games industry. Since leaving PlayStation, he’s been increasingly more outspoken. Of everyone out there with an opinion on what was, is, and might be in gaming, he is capable of offering a unique perspective. My choice quote:

“I’m hoping gaming will be the first industry where we disrupt ourselves."

Elsewhere, another type of royalty took an interest in gaming. The Queen of the Netherlands, Maxima, visited perhaps the best-known Dutch games studio, Guerilla Games, for a tour and to bring more visibility to the sector. She strikes me more as an avid Candy Crush player than a Horizon Zero Dawn completionist. But can you imagine the boost to the Dutch game scene if Maxima were a die-hard Call of Duty player? She could take on Prince Mohammed, chair of Saudi Arabia’s Public Investment Fund, for some real-life royal battle royale.

On to this week’s update.

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BIG READ: Barbarians at the gate

Former PlayStation studio boss, Shawn Layden, did not mince words when describing the mounting push into gaming by large tech firms.

During a fireside, he described Amazon, Apple, Google, and Netflix as an existential threat. These “barbarians at the gate” are looking to claim a piece of the growing games business and, if successful, may change the way the industry operates.

Layden pointed to the music and film business as evidence of how heavily subsidized content and ubiquitous distribution may impact existing power structures and pricing models.

"Right now we see all the big players going, 'Oh, gaming? It's bringing in billions of dollars a year? I want a piece of that.'"

While I share his perspective, I think Layden gives these non-endemics too much credit.

For one, breaking into gaming requires focus. If anyone knows, it’s Layden, since Sony managed to become the top dog in interactive entertainment where others barely made a dent. Rather than relying on its internal teams that were adjacent to gaming, Sony committed itself and built it from scratch. Large tech firms, on the other hand, all have significant other activities to claim their attention. That makes establishing a credible games division and supporting the ecosystem a lot harder.

Irrespective of the amount of money and available infrastructure, games are living things. Unlike the commodified nature of a film, TV series, or music album, which can all be purchased, marketed, distributed, and sold, interactive entertainment is a costly, ongoing effort. You may be able to roll into Hollywood and throw checks around, but that same content acquisition strategy does not work in interactive. That makes it prone to deprioritization to more conventional business models.

Amazon, for instance, is putting both feet into its ad business, which grew +22 percent y/y to $10.7 billion in 23Q3, making it bigger than its subscription services. Revenue from its online stores is flat, mostly growing low single digits, each quarter and hovers around $53 billion quarterly (with a seasonal spike around the holidays of course). Amazon’s prominence everywhere else means it has no other option than to find new sources of income and its burgeoning ads business is its fastest horse. It means, however, that its efforts in gaming—Twitch, Lumberyard, and Luna—will remain on the back burner because they require greater effort and capital expenditure (e.g., to acquire first-party content). Instead of taking a chance on gaming, Amazon will prioritize growing an ads business around its existing ecosystem of online retail and user analytics.

It is part of the reason why I’ve previously argued that the ABK/MSFT acquisition will improve competition. Despite the knee-jerk reaction to the industry’s largest transaction ever and increased attention to vertical integration among antitrust watchdogs, it is the expansion of the games market in terms of audience size, revenue, and distribution models that makes it harder for newcomers. Big Tech is highly unlikely to claim share without committing themselves to gaming both in terms of time and resources. Something that Google proved itself unable to justify despite being first to market with the greatest of ambitions, only to eventually look for the exit.

A second reason is that Big Tech has made its bed. When Apple changed its policies on how advertisers target Apple users, it did so to disadvantage other large firms within its ecosystem (and protect consumers a little, too). As a result, it also made mobile game publishing a zero-sum business. Long gone are the days of cheap new users downloading your game.

Instead, publishers have to spend an increasing amount of money to acquire new users. You have to wonder, for instance, how much money Scopely spent on making Monopoly GO! the billion-dollar success it is. That makes the pool of participants small. Somewhere between the growing costs of marketing and the unwillingness to allow alternative payment methods, Apple is becoming the top of an ecosystem-wide funnel. Game makers will take a loss on mobile to drive players elsewhere where they can monetize them more profitably.

The robustness of the existing games industry is a third reason why disruption may not be quite so imminent.

It has historically embraced novel business models by developing and adapting existing games to new technological affordances. An emphasis on multiplayer online games means steady revenue streams for major franchises and the knowledge that players won’t abandon a title overnight. Popular intellectual property today like FIFA, Call of Duty, Grand Theft Auto, Roblox, Fortnite, and League of Legends all successfully lock audiences into their ecosystem where they stay to play and hang out with their friends.

Over the past decade, platform holders have gained market power at the expense of game publishers. In 2012, platforms held a combined 39% market share in consumer spending which increased to 57% by 2021. Regardless of the conversation about whether that’s good for publishers (Layden pointed out that “consolidation can be an enemy of creativity”), an industry with strong incumbent platform holders is going to prove to be quite the challenge for any aspiring newcomers.

By comparison, the music and film industry have a rich history of demonizing novel innovative business models until it is too late. Instead of incorporating, say, digital distribution, movie theaters scared audiences with “You wouldn’t download a car.” Music industry executives spent their time suing Napster, allowing Steve Jobs ample opportunity to claim market share with his terrible iTunes software and normalize a $0.99 price point for songs.

Incumbents in interactive aren’t idly sitting to the side, however. Microsoft has proven itself willing to go the distance by offering to acquire Activision Blizzard and future-proof its business by moving it into the cloud.

Similarly, Sony has been deploying its own media-focused strategy to offset its lack of infrastructure and multiplayer gameplay. A series of acquisitions point toward the ambition of the Japanese device manufacturer to become a media empire. Over the past few years, it bought Insomniac Games for $229 million, invested a $400 million stake in Chinese live-streaming service Bilibili, increased its position in Epic Games to $200 million, bought Bungie for $3.6 billion, and acquired Crunchyroll for $1.2 billion.

And Nintendo has never cared about who is or isn’t entering the market. Never mind that this is the OG console maker that singlehandedly brought the industry back to life in the 1980s. It has stayed its own course ever since. Nintendo’s recent expansion into theme parks and the blockbuster success of the Super Mario Movie are strategic areas where Big Tech couldn’t possibly follow. Sure enough, there are rumors that Apple may be buying Disney, but that would have no bearing on its interactive entertainment.

The continued clamoring that Big Tech is coming should surprise no one. The lack of focus, existing commitments, and competitive strength of incumbents will make interactive entertainment much harder to colonize.

Layden is right to point out that Big Tech has the potential to upset the games industry. They are rich barbarians, certainly. But for all their alleged techno-wizardry they’re still just throwing rocks.

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PLAY/PASS

Pass. A favorite adage that “startups die of suicide, not murder” appropriately describes the collapse of Gala Games as its founders are now suing each other to the tune of $130 million.

Play. After first convincing hundreds of millions of people to go outside and play with others with Pokémon Go, we are now encouraged to improve our self-care and prioritize rest with Pokémon Sleep.