A beta test for incoming management
To offset the stress that comes with another earnings season combined with the end of the spring semester, I’ve been playing World War Z: Aftermath. It’s the delicious team-based zombie shooter that one requires when there’s too much to do.
Two quick notes.
First, I’m playing this on Stadia, a service that I have repeatedly shat on because, well, its offering is meh. But this one they got right. The multiplayer is smooth and I’m pleasantly distracted by the hordes coming to eat my face.
Second, if you’ve seen the movie, you’ll recall the pyramids of zombies frantically climbing over walls and obstacles. It's not very believable, obviously. A friend once explained to me: that being dead should be an impediment, not an improvement. Even so, lobbing a grenade in their midst only to see their already-dead bodies fly is immensely satisfying. It presents the perfect antidote for a period in which every ‘i’ requires a dot.
Do yourself a favor: this spring, find your own special zombie horde.
On to this week’s update.
BIG READ: Overwatched out
The beta release on April 26 of the long-awaited sequel, Overwatch 2, which runs through May 17, comes at a vulnerable time for Activision Blizzard.
The initial release of Overwatch back in 2016 was inspiring. Its environments, aesthetic choices, and a more inclusive set of characters all spoke to a much broader, creative vision. The keynote at DICE in 2017 by Jeff Kaplan had me hook, line, and sinker. (Elon raved about it, too, btw.) Needless to say, Overwatch has always been held to really high standards.
Perhaps it is not surprising that after a string of delays expectations had reached unrealistic levels and subsequently the reviews for Overwatch 2 were not great. Some argued that the franchise had become stale in the absence of content updates and new characters and that the new edition “may have gone too safe at the start.” Others felt that rather than a sequel, the new beta is really an extensive update to the existing game.
What makes the stakes higher is that the beta drops at a time when its publisher could use a win. At corporate, the stack of problems keeps growing. Just yesterday New York City announced it is suing Activision Blizzard. Specifically, the New York City Employees’ Retirement System, a pension fund for its teachers, police, and firefighters, holds a combined 2.4 million shares in Activision Blizzard for a total value of $191 million, which is down 32% from $252 million at the end of Q1 a year ago. They’re upset because they believe Activision Blizzard rushed to sell to Microsoft late last year in an effort to "escape liability for their egregious breaches of fiduciary duty." It has been a rough 2022 for North America’s biggest publisher. A strong release of Overwatch 2 would go a long way.
Let’s see what we watch
A check-in with live-streaming numbers gives a few standout observations about the sequel and its maker. As a matter of background, watching and playing video games are increasingly intertwined. Audiences tune in to live streaming platforms to see what’s new, what’s cool, and what’s worth their time and money. Across Twitch, YouTube, and Facebook, the first-person shooter genre is currently the most popular with a combined six billion viewing hours in 2021, or roughly the equivalent of 8,625 lifetimes.
Activision Blizzard absolutely dominates the first-person shooter category in live streaming. Of the top 15 titles, the firm publishes six of them for a total of 1.6 billion viewed hours in 2021. By far the most-watched release in the franchise is Call of Duty: Warzone, its free-to-play battle arena style game with 1.1 billion hours. The only other title that draws more viewers is Tencent’s VALORANT, which is, as you may have guessed, also free-to-play.
Of course, these titles each offer their own flavor and draw a different crowd. But despite its best efforts to launch a beautifully designed shooter, combined with a professional competitive league, Overwatch never really achieved the success it could have been.
Historically it has been an absolute boon to switch from premium to free-to-play. The poster child of this transition is Team Fortress 2 by Valve. When it went free to play in 2011 its audience size exploded and increased its revenue twelve-fold. The implication is that if Activision Blizzard was going to breathe new life into Overwatch, releasing it as a free-to-play title, and not running a temporary free trial. It would seem like an obvious decision that could have a more positive impact on the franchise than the currently revealed changes to the game.
Second, Overwatch 2 doesn’t seem to be designed with live streaming in mind. A key component that doesn’t sit well with players and viewers is the change in the number of tanks on each team. Tanks, as the name suggests, can take the most damage and as a result, often operate as the spearhead or leader in a squad. With Overwatch 2 the maximum number of tanks has been reduced from two to one. That means that wait times have gone up considerably as this is also one of the more popular character types.
Based on my own experience over the last week, the current wait times in the beta version regularly go up to anywhere between 3 and 8 minutes between sessions. Yawn. As a player, that really takes me out of the groove. As a spectator, I’m suddenly waking up from watching an intense battle and finding myself staring at a timer while a streamer is desperately trying to keep my attention. Streaming is a lot like juggling: no one wants to see your idle hands. Adding an excruciatingly long timer between play sessions goes against everything that makes watching a first-person shooter live stream fun.
The implications for the proposed acquisition by Microsoft are the third observation: I really hope Overwatch 2 wasn’t supposed to be some last hurrah before Activision Blizzard gets assimilated. Because it isn’t. Or at least it isn’t shaping up that way.
However, Microsoft is clearly looking to dominate the category. Its own Halo Infinite is a great shooter that offers some innovative new gameplay (oh, grappling hook, where have you been all my life?). But it comes in at the bottom of the list with a paltry 47 million viewing hours last year. With the Activision Blizzard purchase, Microsoft instantly becomes the category leader and accomplishes what it could not previously. Its acquisition of Mixer and subsequent spending on celebrity streamers proved a road to nowhere. But with Activision Blizzard under its ownership, Microsoft suddenly becomes the most popular player in the shooter category in live streaming.
That strengthens the tech firm in at least two critical ways. First, it gives it a massive audience that it can leverage for its proposed move into in-game advertising. Second, it puts more distance between itself and rival Sony. Despite maintaining the lead in terms of the install base of its PlayStation and the number of subscribers for its revamped service, the Japanese rival finds itself in a position of having to catch up to a quickly changing market. In terms of live streaming, Sony’s recently acquired Bungie dangles at the bottom of the list with what is probably one of the best all-around shooter titles in the industry, Destiny 2.
The success of the sequel is arguably a mere pawn in the industry’s chess game. Even so, there is hope for fans. The current beta may not deliver on everyone’s expectations, but post-acquisition I expect a more dramatic reboot.
Provided that Microsoft gets the green light from the FTC (the board at Activision Blizzard has already agreed on accepting the deal), the roadmap is pretty transparent. Microsoft will focus most immediately on the biggest franchises to further cement its position in digital gaming and its array of services. Among them, Call of Duty is demonstrably more valuable.
Regular readers will recall that I’ve previously discussed how post-acquisition, an acquiring firm will dedicate most of its resources to maximizing the return on established IP. In this case that leaves Overwatch as an odd one out, allowing Microsoft to take more risk and, hopefully, make some much-needed changes. One playbook it may use is that of Halo Infinite. After many delays for its own prized franchise, Microsoft released a premium single-player campaign but not until after it first launched a free-to-play multiplayer component. The former is costly and caters to a different audience. The latter appeals to a much larger audience and still generates income with micro-transactions and add-ons.
Currently, the Overwatch franchise is well-established but lacks the audience base it deserves. Based on the beta, Overwatch 2 beta emphasizes frippery over addressing its more structural problems. Perhaps a change in management is what both the publisher and franchise need.
Ex-Nintendo boss bullish on blockchain
In an on-stage interview at SXSW, Reggie Fils-Aimé, the former president and CEO of Nintendo America, expressed his enthusiasm for blockchain.
“I'm a believer in blockchain. […] I think it's a really compelling technology."
Does that mean he’s lost his mind in retirement? No. Does it mean blockchain gaming is inevitable because Fils-Aime knows something we don’t? Also no. But it does add a bit of much-needed nuance to the broader conversation about what interactive entertainment could, and perhaps should, look like when designed around novel technologies like a decentralized ledger and digital currencies.
Lego plans to triple its software engineering headcount
After a recent $1 billion investment in Epic via its investment arm, Kirkby, the Danish brick-maker is in full swing to adopt digitalization. According to its chief digital officer, Atul Bhardwaj, the firm is planning, among other things, to start building its own games. By the end of 2023, Lego aims to triple its current number of software engineers to 1,800.
Since its near-collapse in 2003, Lego has exclusively outsourced software development to third-party developers. That has served it well through a combination of building a desirable toy brand and maintaining a firm grip on the company’s values. Despite cross-licensing its blocks and minifigs across a range of IP like Star Wars, Indiana Jones, Batman, and Harry Potter, the brickmaker has managed to stray true to a value of one of its founders, Ole Kirk Christiansen, namely to “never let war seem like child’s play.”
It raises the question of why now. After two decades of successfully outsourcing game development, it seems that a festering sense of FOMO around Minecraft is finally surfacing in a splurge on internal digital capabilities. The recent investment in Epic Games, which launched its vastly improved Unreal Engine 5 around the same time, suggests we’ll be treated soon to a build-it-yourself Lego-verse. In addition, the Lego Group has been making a mint throughout the pandemic. Revenues in 2021 were up +27% and profitability jumped +33% y/y. It employed 21,000 people across its various factories and theme parks.
One precursor comes to mind: Disney. After maintaining an ailing internal development division for three decades, Disney launched a sandbox action game that featured every character from its Pixar stable, including a few of my personal favorites like The Incredibles, Cars, The Avengers, Guardians of the Galaxy, Star Wars, and Finding Dory. However, by 2015 Disney eventually gave up and discontinued Disney Infinity. The blog post announcing the game’s cancellation has been removed since, but according to Kotaku, the franchise wasn’t making enough money. That seems unfathomable given the IP’s value. More likely senior management initially gave the green light but then cut the project once it noticed the “higher costs at our console games business driven by Disney Infinity [in combination with] a decrease in sales of console games was due to lower unit sales of catalog titles.”
Let’s hope Lego builds it smarter than that.
MONEY, MONEY, NUMBERS
Wordle brings in “unprecedented tens of millions” of new subscribers to The New York Times. The strategy to leverage a viral word game to chummy up with would-be subs seemed to have succeeded phenomenally and drove the “best quarter ever for net subscriber additions” for its games group. Old media are new again.
Activision Blizzard came in with soft numbers during its 22Q1 earnings. Its total net bookings were down -28% y/y, from $2.07 billion to $1.48 billion, and its operating income dropped +40% to $479 million. Overall player activity had decreased, too, from 435 million monthly active users in 21Q1 to 372 million in 22Q1. I remember when Kotick bragged about reaching 500 million players across all its franchises. Its Call of Duty franchise is reporting fewer players than a year ago, but its mobile division, King Digital, held down the fort with 250 million MAUs (a minor -3% decrease y/y). Its hopes are now pegged on Blizzard which is expected to release Diablo Immortal on June 2, 2022, and claims that over 30 million people have pre-registered for the game.
Modern Times Group reported $138 million in 22Q1 revenue. According to its earnings, 70% of revenue came from mobile, compared to 21% from browsers, and 9% from others. Notably, its top three titles only generate 44% of total revenues.
Rovio reported $89 million in revenues, a +27% increase y/y and well above the $85 million consensus. It claimed 7.3 million daily active users in 22Q1 (+74% y/y) and 3.6 million across its top 5 titles (+16% y/y). It currently relies on 522,000 unique payers across all its games, the bulk of which (464,000) come from its top 5 games. The average revenue per daily active user is $0.13 across all titles and $0.22 among its top 5.
Microsoft reported $3.74 billion in gaming revenue, a +6% increase y/y. Its hardware sales were up +14% y/y while its content and service increased +4%. It reported that over 10 million people have streamed games through its Xbox Cloud Gaming service.
Netflix plans to have close to 50 titles on offer by EOY 2022. After the stock market took it to the cleaners, the video streaming giant is going hard after interactive and is scheduled to triple the number of games, including those based on its own IP before the end of this year. BTW, I’ve been playing the Exploding Kittens card game with my family and it’s hilarious.
Embracer Group acquired three of Square Enix’s studios and associated IP for $300 million. Totaling 1,100 employees in eight locations, the acquisition makes it clear that the Japanese publisher is going to focus more on its domestic and nearby regions. Its corporate philosophy to “spread happiness across the globe by providing unforgettable experience” apparently no longer includes Canada. With the purchase, Embracer gains Tomb Raider, Deus Ex, Thief, Legacy of Kain, and more than 50 back-catalog games.
Play. Bungie’s immediate support for “reproductive choice and liberty” in response to this week’s news around a leaked memo to overturn abortion rights. It’s time for game makers to stand for something.
Pass. Nintendo has delayed the Mario movie to April 2023. Thank you, Mario, but our movie releases in another year.
[Updated 050622: Corrected minor typos. Whoops.]