Self-regulation, creativity, and the gubment
ESRB observations, baby's first SxSW talk, and Roblox' debut.
Last week I managed to get the president of the ESRB to speak in my class. I first met Patricia Vance two years ago and had been eager to get her perspective on the industry and how it has changed.
What drove my curiosity was how a self-regulatory body like the ESRB has managed to navigate the recent changes in the industry. Central here is the observation that ‘everyone’s a gamer now.’ Video game makers today cater to a much, much larger and more diverse audience. We’ve seen spectacular growth in consumer spending, counter-cyclical growth during the pandemic, and the resulting financial success on the stock market over the past several years.
But all that prosperity attracts a lot of attention.
Now that games no longer reside on the fringes, regulators are taking a fresh, hard look at gaming. And for good reason. Video games are a larger part of the economy. In fact, in 2019 the games industry contributed $90 billion to the US economy, supported 429,000 jobs, and generated $12.6 billion in taxes.
There is a massive shift taking place in the way audiences like to consume entertainment, and we’re only in the first inning. Digitalization has presented a clear challenge to every industry, and there is a demonstrable transfer of talent and wealth toward gaming.
Speaking of money, regulators have been loosening the rules around gambling and sports betting on a state level to recover some of the missed income from the past year. An important part of why recently IPO’d firms like Skillz (see below) and DraftKings are doing so well is the anticipation of a loosening in regulations which is expected to oxygenate the segment.
Even so, earlier this year the FTC set the tone with its position on “unlawful surveillance, dark patterns, and facilitation of fraud” in a case against TapJoy. What it was really talking about, of course, was the stranglehold that large platform holders have over the games industry, and their ability to control who succeeds and who does not. The brilliant Lina Khan is expected to be nominated for the open position on the FTC and bring her superstar status to a new generation of antitrust policy to confront Apple, Facebook, Amazon, and Google. I have no doubt that gaming will be a constant case in point to illustrate malicious practice.
Next, like brands, politicians are also discovering how to leverage interactive entertainment and adjacent categories to reach especially younger audiences. For all of Biden’s grandstanding on video games, he did have his own little island in Animal Crossing: New Horizons like an actual, normal human. And even if he’s not a fan, I’m happy to wait until AOC becomes president; she’s an absolute genius at making the most of novel channels and platforms to build her base.
Gaming also sits at the center of a lot of a global trade conversation. The smoldering trade conflict between China and the US is unlikely to be resolved any time soon. However, several of China’s biggest firms are building a foothold in the North American market. Tencent, for one, has been actively building not one but three triple A studios in the hopes of gaining more goodwill and market share.
Another motivation is the explosive success of Roblox’ direct listing (see below). Among other things it means that the firm now has everyone’s eyes on it as “two-thirds of all U.S. kids between 9 and 12 years old” play it. Granted, the pandemic has relaxed a lot of house-rules everywhere because as a parent it is heartbreaking to see your munchkins miss their friends and finding an acceptable solution in having them play and build in an online environment. Here, too, do regulators have a clear path to action, just like it does with toys, comic books, and cartoons.
Two more novel phenomena that are likely to draw government attention. Loot boxes have quickly become infamous due to EA’s obvious money grab manoeuvre. Estimated to be worth $20.3 billion by 2025E, this singular monetization tactic has drawn the ire of a host of governments around the world and has single handedly replaced the anxiety around antisocial behavior. And the outright frenzy around NFTs is likely to add fuel to the fire. Unregulated, ungoverned, and, most importantly, untaxed transactions have and will always be absolutely suspicious in the eyes of government.
One of Patricia’s most illuminating observations was that the role of government in gaming is likely to expand significantly in the years to come, and how the industry can, could, and should respond. As video game makers collectively assume their new role as a relevant cultural industry with substantial economic weight, they must not forget about how we got here. Despite their competitive differences, the large players have always maintained a proud tradition of coming together on major issues and committing themselves to reviews and ratings rather than fending for themselves. To safe-guard its creativity in the decades to come, it is critical that it carries forward its tradition of self-regulation.
On to this week’s update.
🎙 I’m speaking at SxSW Online this coming Saturday
I’m equal parts excited and bummed because I had never been to one but would have really loved to see everyone in Austin and melt minds directly with everyone there. But the SxSW crew did an excellent job and even arranged one of those bougie Clubhouse events.
This talk is geared to creative audiences and decision makers in entertainment and tech. I’ll talk about the trends, the major players, and predictions around live streaming, user-generated content, advertisers entering the space, and Big Tech’s impact on the global games’ economy.
Saturday at 1:30 pm EST. BYO coffee.
Come hang out and let’s talk some games!
NEWS
Roblox’ stock market debut a success
Last week’s direct listing was an important milestone. An overnight success that has been 16 years in the making, Roblox is now, seemingly suddenly, one of the most prominent game companies in the world with a valuation of $38 billion.
Second, it is likely to become the event we’ll look back on years from now as the moment the concept of user generated content entered the popular imagination. Suddenly parents, politicians, investors, and journalists everywhere have started to understand the practice of playing with the game.
But most important is the promise of change. Never mind that millions of kids have been having a blast all this time, but that only now that the dollars are so many grownup society has taken an interest. If the vision of a Web 3.0 world of decentralized data networks, edge computing, and artificial intelligence is going to happen, it will need netizens. Microsoft understood this when it greenlit the Minecraft acquisition: you don’t plant trees so that future generations might find shade; you plant it together. The more agency we afford ourselves, the richer, creatively and commercially, we’ll all be in the long run. Roblox is one of the toys that will teach us how to navigate what comes next.
Discord tripled revenue to $130 million y/y
Sarah Needleman at the WSJ had an excellent article on the blossoming online community platform. By offering subscriptions it managed to grow revenue to $130 million and double its user base to 140 million. Average revenue increased +45% from $0.64 to $0.93 per monthly active user.
Blade files for bankruptcy, then for investment
The French cloud gaming company has hit a predictable ceiling. In trying to compete with the big incumbents, it raised a lot of capital but, unfortunately, now finds itself in bankruptcy court both in the United States and France. Blade is naively unperturbed, however, writing on its blog that its debt had been holding it back.
Overall, it is a pity, of course, because having more than just the usual suspects building the cloud future would oxygenate the market. It raises the question whether the cloud will go the same way as telecom infrastructure and be broken up after it first consolidates into a handful of all-powerful providers.
US consumers bought over a million consoles in February
According to what I could cobble together from different Wall Street research sources, the PlayStation 5 sold just under 300,000 units last month, compared to 135,000 for the Xbox Series X, and well over 600,000 units for the Switch. Damn, Nintendo. Analysts are surprised to note that the Series X is selling below expectations and that consumers prefer the no-disc Series S instead.
MONEY, MONEY, NUMBERS
Theorycraft Games raises $38 million. With the market as flush as it is, it seems anyone who’s worked anywhere is starting a venture. This week former Riot Games veterans received their starting capital led by NetEase. Griffin Gaming Partners, NEA, BitKraft Ventures, Griffin Gaming Partners, and SISU Game Ventures also participated. The plan is to develop a community-driven PvP game that’s playable across platforms. Link
Sea Limited reported $3.2 billion (+80% y/y) in games revenue. Its digital entertainment division Garena counts 73 million paying players (+120% y/y) and Free Fire continues to remain among the top grossing titles in LatAm, SEA, and India. The company’s success has been nothing short of spectacular and a clear cut example of how the success of a single hit title can impact an organization's circumstance: revenues have doubled over the last year which has resulted in a quadrupling of its share price.
Skillz reported first earnings as a public company, trading up +14%. Revenue total $68 million in 20Q4, up +95% compared to the $35 million in 19Q4. Standout figures are (1) its 2.4 million MAUs at 2.4 million and (2) the +121% increase in monthly paying users with a 16% conversion rate.
TinyBuild went public on the LSE with a $474 million valuation. Best known for its Hello Neighbor games, the Seattle-based company traded up +27% on its first day. It recently acquired no fewer than six studios and has 23 projects in development.
[Q: What is this table? Every week I plan to provide an overview of the different companies mentioned in this newsletter. I’m constantly learning and also enjoy having some of these basic figures side-by-side for comparison. Feedback welcome.]
PLAY/PASS
Play. This one GTA5 Online fan who reduced loading times by 70%. Here’s the technical analysis and solution in all its glorious detail. Rockstar paid him a cool $10,000. Nice.
Pass. The greatest thing that ever happen to art is terrible for the environment. Well that’s not so great then, is it?