Crypto is a space race
Buying into something better
Last week’s commentary on some of the recent output of industry data yielded several worthwhile results. For one, Simon Carless described my critique as “corkingly aggressive” which I’m now considering as a tagline for the newsletter.
Next, a whole host of industry researchers from different firms reached out and expressed their dissatisfaction with current practices. It seems that the job itself is hard enough as it is and most analysts are just as tired of poor practices as everyone else. It presents an opportunity to fix some of this.
Last but not least, I have to give props to BITkraft and Naavik who both reached out to have a broader discussion on industry data. You see, that is how it is done. You establish a dialogue, share notes, review, and improve your hypotheses. So, FWIW, I feel that we’re on our way back to sobriety.
That sobriety will also come in handy when the crypto hype reaches its inevitable crescendo. As I get sucked deeper into the rabbit hole, an uncomfortably familiar feeling creeps up. I’m reminded of the passionate but youthful exuberance that welcomed my generation right out of college back in 1999.
At the start of the ye olde internet, the allure of technology that uprooted the existing system was irresistible. The promise of golden mountains had everyone behaving stupidly. The absence of pre-existing skills allowed especially younger, newly-admitted members of the workforce to advance quickly. And limitless funding paid for everything. I recall being served beers at my desk after 5 pm. The dot-com bust that mercilessly followed has become very small in our rearview mirror.
It is entirely understandable.
A poorly managed pandemic has kept us all at home to stare directly into the bleak realization that an enormous part of the world is either unable or unwilling to contribute to the greater good. That is our zeitgeist.
It is also one of humanity’s greatest ability to persist through even the darkest times and continue to believe in itself. Periods of widespread misery often trigger an explosion in creative energy and new thinking. We owe the Renaissance and its many advancements in art, philosophy, politics, and economy in no small part to the drab and inhumane Middle Ages. The fallout of World War I set the stage for the explosion in prosperity that followed in the Roaring Twenties. The Space Race that started in the 1950s and ran all the way though the Cold War gave us a vast new world to explore.
Crypto is no different.
Who wouldn’t want something new and hopeful to pursue instead? The mounting exuberance around blockchain technology and the verve with which especially a younger generation seems to grab hold of it has the makings of another boom cycle.
Among other things, it explains how Axie Infinity managed to hit $2 billion in NFT sales. According to Dappradar, the play-to-earn title is single-handedly responsible for the vast bulk, 83 percent, of game-related NFT volume, with over 615,000 traders have bought or sold non-fungible tokens for a total of 4.9 million transactions at an average value of $420. We also learned this week that Dapper Labs skyrocketed higher still, raising another $250 million round led by Coatue, at a $7.6 billion valuation. And there was the $680 million funding round for Sorare led by Softbank at a $4.3 billion valuation. Mon Dieu.
The excitement in people’s faces as conferences start to return to a somewhat normal in-person format is palpable. Many have been locked in their tiny first apartment after college waiting for their professional adult life to start. I can’t even imagine what it is like to apply for, and land (!), a job over a series of Zoom calls.
As I’ve been venturing into blockchain over the past months, it has become increasingly clear that we’re at the beginning of a new cycle. What I initially failed to realize is that to that crypto-currency and blockchain protocols are first and foremost social in nature. If you don’t put any faith in a digital, trustless system to reliably tally transactions between humans, it won’t work. Conversely, looking at the mechanics of the technology itself is to miss the point entirely. It is the belief in others that makes it sing.
And so we face a decision. Yes, the loud and youthful new may seem naive and unfamiliar. But what if we are indeed presented with the manifestation of an aspiration, a hope of something better?
Let's light this candle.
On to this week’s update.
NEWS
Apple extends ban hammer on Epic for possible five more years
Citing the game maker’s “duplicitous conduct” and the court’s validation of the earlier decision to ostracize Fortnite, Apple sent a glib notice saying it won’t reinstate the game until the last word was in. According to Sweeney, the ban will “be until the exhaustion of all court appeals, which could be as long as a 5-year process.” Apple is well within its rights, of course. But it simultaneously seems to be making an example out of Epic, warning other would-be defectors to think again.
Activision Blizzard faces further scrutiny
Following the lawsuit from the California Department of Fair Employment and Housing, the publisher is now under investigation by the Securities and Exchange Commission on its treatment of complaints of sexual misconduct and workplace discrimination. The SEC has had subpoenaed senior executives including CEO Bobby Kotick.
The probes are seemingly well-deserved. This is no way to work. Even so, it strikes me as somewhat opportunistic that policy makers suddenly find themselves so interested in gaming companies and decided to flex the whole arm of the law. Shitty corporate culture has been ubiquitous in gaming since forever. I suppose the 2018 revelations of sexism at Riot Games didn’t warrant the same political probing. A firm that treats its employees poorly needs to be held accountable. But so, too, should we look for consistency and sustained attention from policymakers outside of election cycles.
What happened to Nexon?
Since May when it was trading at $34.25 a share, South Korean game maker Nexon has tumbled to $15. Following its botched sale in 2019 at a valuation of $10 billion, life’s been hard. It is only to blame for some of the damage. The affinity for gaming in the Chinese government, it has become clear in recent months, is at an all-time low as it has been issuing increasingly stricter regulations and limitations. Like Tencent and others, Nexon has suffered accordingly. Compared to the same period last year, Nexon reported a drop in revenue from $481 million (36% of total) to $358 million (27%) for the first six months of this year. China continues to frustrate Nexon by delaying the release of Dungeon & Fighter on mobile.
Next, it made some poor bets. In April, Nexon purchased $100 million worth of bitcoin to diversify its $5 billion in cash and equivalents held in JP¥, US$ and KRW. It did so, unfortunately, at the peak of the craze and paid over $58,000 per bitcoin which has since dropped to around $40,000 today.
Finally, it already indicated that Q3 will be considerably softer due to “revenue decreases in The Kingdom of the Winds: Yeon, V4 and KartRider Rush+, all of which had strong performances in Q3 2020.” Unlike Nexon’s earlier success, it new titles, promising as they are, now compete in a frantic, saturated marketplace. Naturally that puts investors on edge.
Can it turns this around? With a fading IP catalogue and strained areas to grow, Nexon needs a solid win. After literally leading the transition into digital gaming and formulating novel revenue models that contributed to interactive entertainment becoming mainstream, it find itself relegated to the sidelines. Here is where the truly innovative firms separate themselves from the ones that jockey a spreadsheet to avoid risk at the cost of creativity. The first showing of Project Magnum is promising. The glossy, high fashion PvE shooter may just be what Nexon needs. It is scheduled to launch on both PS5 and PC, although no dates have been released, suggesting that Nexon is in good company and putting together a strong next run.
Stakes are always high in entertainment, and the welfare of a firm depends by and large on the success of its output. Despite a few humbling months, Nexon may manage to reinvent itself just yet. (h/t @Serkantoto)
Wizards looking at a cool billion
One of the big responsibilities held by CEO is talking to the market. It sends a credible signal to everyone about what a company is up to and plays an important role in getting investors’ attention. In one such ‘fireside’ in which a financial analyst gently interviews a business leader, we learned quite a bit about Wizards of the Coast (Wizards) this week.
Wizards is publisher of some of the best-known fantasy franchises in the industry: Dungeons & Dragons, and Magic: the Gathering. First established in 1990 and later acquired by Hasbro ten years later for $325 million, today Wizards accounts for all of the toymaker’s relevant initiatives in digital and physical gaming and about one-fifth of total earnings. Following four consecutive years of over +25 percent growth, Wizards mostly recent reported $816 million in revenue, representing roughly 86 percent of Hasbro’s total $909 million gaming division. What gets investors excited is the “mid-40s% margin” it reported.
It tells you a few things. First, all those old nerdy games like D&D and M:tG are some real evergreens. I mean dang. Back in 2005 I first visited Wizards as part of a study on 30 years of D&D. (I was twelve.) Today both franchises are not just going strong, but expanding. Strong, well-managed intellectual property lasts forever.
Second, Wizards was one of the few things that Hasbro did manage to get right. Following a shopping spree in the late 90s, the firm found it was flying too close to the sun and unable to maintain the necessary managerial control over its growing portfolio of gaming assets. Explosive growth, whether the result of a spike in demand or an aggressive acquisition binge, puts enormous stress on an organization. Both creatives and business managers find it difficult to coordinate effectively, and bureaucracy can quickly become ca-ray zee. In the midst of all that self-inflicted turbulence, Wizards managed to stay its course.
You may ask yourself: Joost, why are you simping Wizards so hard?
Wizards (but also Games Workshop!) offers some of the richest case studies in the leisure industry. Here is a firm that managed to thrive following digitalization, even when its entire business model seemed predicated on a seemingly outdated format of physical trading card sales and figurines. I believe that Wizards, and by proxy Hasbro, is undervalued.
As I’ve discussed previously, digitalization in entertainment has resulted in a change in the guard. Companies that led the industry even just a few years ago now stand in the shadow of newcomers. That makes it extra exciting when a legacy firm manages to reinvent itself.
A close connection with its player base is one key component to Wizards success. For all the fanfare we’ve seen from Riot and Activision Blizzard around esports, it was really Wizards that wrote. the. book. The lead designer for M:tG, Mark Rosewater, realized that in order for the game to be successful, they’d need to encourage and cultivate an active player base.
“[Wizards] was not just selling a game, but rather an entire experience. What good is a game if there’s no one to play with?”
Harnessing an engaged player community, as one case study called it, proved key to long term success.
A change in its release schedule was another. Making it easier for newcomers to roll into the game by only needing the most recent subset allowed the game to keep its momentum and improve. It found itself well-positioned during the pandemic and managed to stave off the thesis that last year’s “COVID winners” would end up being this year’s “reopening losers,” as one Wall Street analyst phrased it.
Wizards has little to fear. During his fireside, CEO Chris Cocks stated that the company’s primary market channel are the 8,000 or so privately-owned hobby and game stories frequented by about 70 million consumers worldwide. Pre-pandemic, this retail network hosted over 1.2 million events involving 12 million players. As to whether consumers will come back, the average life-cycle lasts about seven years.
That’s not a bad things to tell the market indeed.
MONEY, MONEY, NUMBERS
StreamElements raised $100 million to build out its creator tools. Synchronized viewing is perhaps the most powerful manifestation in video content. Witnessing momentous occurrences (e.g., your team winning at the Euro Cup) and being able to share that with others is awesome and a leg up from the SVOD format found at YouTube and Netflix. Link
Continuing its ceaseless expansion Stillfront acquired Middle Eastern card game app Jawaker for $205 million. An increasing number of firms are looking at the MENA region for further market expansion. The multiples tell you as much: Stillfront is paying out 74 percent in cash and the remainder in newly issued shares, indicating a 8.9x multiple on 2021’s anticipated earnings. That is not bad for a game that has generated $7 million since its release on iOS and totals 1.8 million downloads.
1047 Games raised $100 million. After reporting 13 million downloads of Splitgate, a sci-fi shooter game everyone on my Discord can’t shut up about, developer 1047 Games is now worth $1.5 billion. Describing itself as “Halo-meets-Portal” it is especially the cross-platform play (Xbox-PlayStation-PC) aspect that has everyone excited. Those sure are some big numbers for a game that is only 25 percent finished.
And speaking of cross-play, Elodie Games raised $32.5 million in a round led by Galaxy Interactive and Andreessen Horowitz. The objective is to make “deep co-op gameplay, endlessly engaging content, and uncompromised cross-play.” That sounds pretty bland so presumably there is something magical happening that the world has yet to experience. Link
And here’s a company you’ve never heard of: Mobile Premier League raised $150 million at a $2.3 billion valuation for mobile esports. With 75 million users in India and Indonesia, the company is now bringing its array of archetypical titles -- Fruit Chop, Spider Solitaire -- to western markets. It entered the US in July and is hoping to reach 300,000 players by EY21. The big draw for players is the ability to earn real money playing bubble shooters and similar titles. Looks like my mother-in-law has her work cut out for her. Link
PLAY/PASS
Play. Check out the stones on the Apple employee who leaked Tim Cook’s memo about how employees who leak memos do not belong at Apple.