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FaZed and confused
The $19 million sell-off of esports collective FaZe Clan suggests a failure to launch for competitive gaming
The SuperJoost Playlist is a weekly take on gaming, tech, and entertainment by business professor and author, Joost van Dreunen.
We’ve entered the awkward quiet period right before a cacophony of earnings.
It presents a great opportunity both to preview what’s ahead and a chance to play Exploding Kittens.
My six-year-old nephew is in town this week and he loves to absolutely destroy grownups with this ridiculous card game. He lets out a tiny cackle whenever he manages to outsmart me and all I can say is that it’s adorable.
Standing on the ferry together headed toward downtown Manhattan he points at all the buildings, wondering which one was the tallest. He’s in New York for the first time and I’m watching this mess of a city unfold in his eyes. I can’t imagine what it is like to take it all in for the first time.
The coming earnings season will similarly test to see the world with a fresh perspective. In some cases what was true a few quarters ago, in some cases isn’t any more (see: Faze Clan’s acquisition).
Investors and large publishers disproportionally focus on risk mitigation and make bets on proven franchises to ensure success. Existing franchises and IP-based titles are driving momentum, says Data.ai, accounting for six out of the top 10 breakout games by consumer spend. But creative firms continue to dream up novel, innovative ways to play.
Electronic Arts, for instance, has to deliver on expectations after its almost 30-year partnership with FIFA came to an end. Early indicators suggest a soft physical sales, but investors are also finally letting go of physical sales as a primary success metric in favor of digital. Most likely the title’s success will be compared to FIFA 22, but a higher price point and expanded console install base since last year will mitigate results.
Similarly, Roblox has been pushing its creator economy and reported a strong launch on the PlayStation with 10 million downloads in its first week. The expectation among Wall Street analysts is that Roblox is slowly but surely driving revenue growth by expanding its user base. Look for mentions of revenue diversification and a push into immersive advertising as an emergent source of income.
And Take-Two Interactive will be expected to respond to “slippage” in its mobile portfolio. Titles like Toon Blast, Empires & Puzzles, Golf Rival, and Harry Potter: Puzzles & Spells are reportedly underperforming. Analysts also worry about a weaker launch for NBA 2K24. Perhaps it can stave off criticism, now that GTA 6 is in the works. Take-Two has reiterated its 2025 outlook for record net bookings above $8 billion, and the next few earnings cycles will focus on any additional details around the firm’s biggest franchise.
Finally, Embracer faces scrutiny on a host of health indicators. After its fall from grace, the publisher announced plans last quarter to reorganize and evaluate its portfolio of studios and IPs. Investors are eager for updates on efforts to optimize operations, including any divestments of non-core assets. Embracer owns an impressive catalogue of intellectual property, including (in alphabetical order): Borderlands, Dead Island, Deus Ex, Duke Nukem, The Hobbit, Homeworld, The Lord of the Rings, Metro, Payday, Remnant, Saints Row, Satisfactory, South Park, Tomb Raider, Valheim, and Warhammer. Executing on such potential while growing revenue and improving margins will be top priority for shareholders.
Looking over the tallest buildings in New York, my shrimp-sized buddy has no idea how its landscape has changed over the years.
On to this week’s update.
BIG READ: FaZed and confused
If FaZe Clan can’t even do it, does esports have a chance to deliver on its promise?
Initially hailed as the first gaming organization to reach a $1 billion valuation, FaZe Clan ended up selling for a mere $18.5 million after falling short on its lofty expectations. Naturally the acquisition by GameSquare is presented as a coming-of-age moment for competitive gaming. But why then does it feel like esports suffers from a failure to launch?
FaZe Clan’s new owner, GameSquare, describes itself as “a vertically integrated, digital media, entertainment and technology company that connects global brands with gaming and youth culture audiences,” already owns an esports division known as Complexity. (Disclaimer: I was previously an advisor to Game Engine & Media, one of the two firms that merged to become the current iteration of GameSquare.) It hopes to expand its reach and offering with the acquisition of FaZe Clan.
Esports, the commercialization of competitive gaming, has been on the cusp of becoming a breakthrough form of entertainment for almost two decades. Years ago I used to report on the category as a natural marketing catalyst for, especially, free-to-play titles. For example, League of Legends, expanded its offering beyond game play by adding large-scale tournaments and a world championship. Its opening ceremony easily rivals that of any conventional sports event.
Despite its glitz and persistent media coverage, esports has yet to mature.
In the case of FaZe Clan, failing to capitalize is partially its own fault. The mostly-male squad has delivered repeatedly on skeptics’ expectations of rampant misogyny. It couldn’t even keep the one girl that joined its team. Growing out of its awkward teenage phase and into something resembling an adult operation still eludes the esports brand. Unfortunately, that doesn’t pass the vibe check with large advertisers who worry about brand safety.
Similarly, FaZe Clan’s promise around its IPO was as naive as its investors. Based on the broad diversification of its various revenue streams, it proposed to build enough lift and leave esports altogether. In its exuberance, FaZe planned on building income from subscriptions, gambling, virtual dining concepts, something broadly defined as “metaverse”, and non-fungible tokens. Its prospectus reads like a bingo card of buzzwords drafted from a wild fantasy of expanding its $38 million in 2020 revenues into $651 million by 2025.
At the time, there was no shortage of optimism. Industry observers and a host of questionable research outlets forecasted typical up-and-to-the-right growth. According to one Forbes article, esports was to reach $1.6 billion in total revenues by 2023. However, the combined income of all major publicly-traded esports organizations totaled $248 million in 2022.
Internal turmoil, opportunism, and unpredictable revenue means esports has remained a highly speculative investment. Understandably, shareholders struggle to see the value of publicly traded esports stocks especially in the face of extreme price swings. For example, FaZe Holdings saw a brief surge to $20 in August 2022 but within two weeks had fallen back below $10. Similarly, Simplicity's price ranged from $9.50 to $2.10 over the 2 year period, a 4.5x difference.
Another explanation why FaZe Clan and esports more generally haven’t matured more is platform opportunism. In June, Twitch updated its guidelines around branded content, disallowing logos bigger than 3 percent of screen size and banning “burned-in” video, display, and audio ads.
It further restricts streamers’ ability to generate income, despite esports viewership on Twitch and YouTube reaching a new high of 651 million hours in 23Q1, up +15 percent compared to a year ago. Twitch continues to dominate and accounts for almost two-thirds (62%) of the overall market, followed by YouTube (30%). And esports content makes up 30 percent of esports viewership on YouTube, “almost double that of its share of regular game live-streaming,” according to Stream Hatchet. Despite these growing numbers, platforms are finding new and innovative ways to line their own pockets without providing much support to talent.
Since then Twitch has announced it will allow casting to other platforms, following heavy competition from newcomers like TikTok and Kick, which have been drawing away talent. But esports streamers have also started to create the type of content that would appeal to mainstream audience and sponsors. Instead of competitive play, teams started to push into non-esports content to attract advertisers. In 22Q3, audiences watched 385 million hours of content across the ten largest esports organizations, roughly two-thirds of which had nothing to do with competitive gaming.
A few organizations read the tea leaves and got out. In 2022, MTG sold ESL Gaming to Savvy Gaming Group for $875 million, ending a 7-year run in esports after acquiring ESL in 2016 and merging it with DreamHack in 2021. The sale generated a 2.5x return on investment for MTG, though Savvy's Saudi ownership has raised concerns despite claims of independence.
It leads me to a different perspective on esports and, FWIW, FaZe Holdings. Rather than succumbing to hubris and naiveté, large-scale capital investors, platforms, and publishers have taken advantage of competitive gaming. Between them, no individual player or streamer really stood a chance against the seduction of money, fame, and power. But then, that’s also what it means to grow up. Its youthful recalcitrance may be esports’ only and most important legacy yet.
MONEY, MONEY, NUMBERS
Microsoft's gaming division Xbox grew to $5.8 billion, up +9 percent y/y, delivering its best first quarter results in its history. The recent release of Starfield attracted over 11 million players to date and prompted the highest number of new Game Pass subscriptions in a single day ever. It also reported +13 percent growth in content and services but Xbox hardware revenue declined 7 percent y/y. On a title-level, Minecraft surpassed 300 million copies sold to date, Microsoft touted 2023 as Xbox's strongest first-party lineup yet with titles like Call of Duty: Modern Warfare 3 and Forza Motorsport still to come. One notable observation by the Verge was the omission of a specific target for Game Pass subscriber growth for Satya Nadella's performance incentive. Finally, Microsoft just announced a reorg of its leadership following the completion of ABK/MSFT. Sarah Bond, whom I picked as the head of Kotick’s empire will instead become the head of Xbox.
Wizards, Hasbro’s gaming division, reported $424 million for the quarter. It was up 40 percent q/q and outperformed Wall Street expectations, which averaged around $390 million. Major contributors were Magic: the Gathering (+20%), Baldur’s Gate III, and Monopoly Go! The latter two adding $63 million in revenue. Hasbro is still preparing to sell eOne. After having paid $4 billion for the company four years ago, will sell it for $500 million ($375 million in cash and the remainder in production financing loans by Lionsgate. The deal is expected to close by the end of the year and Hasbro will use the proceeds to pay down $400 million of debt.
🎙️ Talks & Presentations
One of my portfolio companies, Niko Partners, is organizing a free event in Palo Alto together with Tencent and you should attend. Several of their analysts will be presenting a deep dive into the Asian and MENA video game markets. Sign-up details here.
The announcement for my annual industry update at SXSW just went live, titled All About Games. Data, Trends, and What's Next for 2024. I’m also looking forward to hearing one of the few female CEOs, AMD Chair and CEO Lisa Su, and the conversation with an old and new favorite, Chuck D and Lady London.
Next week I’ll be in Aarhus, Denmark, for a keynote at THIS 2023, titled Bigger Means Different — The New Video Games Landscape and Opportunities for Success. Europe is ramping up its investment in gaming and I look forward to the conversation on how to design for the future.
Play. In lieu of releasing Dune 2 on October 20th as planned, labor strikes pushed its date back to March next year. In the meantime, I’ll have to contend with this LEGO Ornithopter.
Play. CCP Games offers its perspective on why to integrate blockchain technology with online game play. In typical Icelandic fashion it lacks the ridiculousness we hear elsewhere. Worth a read.