The cards hold the future
Some things change; others stay the same
The bleak midwinter is an ideal time to reconnect.
And we should. Because judging by the somber tone of talking to friends across the industry this week, February is doing what it does every year: depress the hell out of people.
This year is special because we’re treated to seasonal affective disorder with a side of financial anxiety. Early financial reporting shows a lot of red figures: several of the big publishers came in below earnings estimates, and Sony and Nintendo saw revenue drop compared to last year. More so, existing supply chain issues haven’t really been resolved, even as we enter the second half of Q1, oil prices are up which means there’s less disposable income for all, and inflation looms as 10-year treasury bills are creeping back up to 2.5%.
Hang in there. It’s going to be alright.
There’s good news, too. Overall activity for January was up. Steam’s average peak concurrent increased +8% month-over-month, Twitch’s average concurrent viewer numbers were up +16%. It suggests that, at least for now, many of us have job security.
Also, after decades of making the same game over and over, Game Freak has finally developed a brand new title.
ICYMI, Pokémon Red, Green, Blue, Yellow, Gold, Silver, Crystal, Ruby, Sapphire, FireRed, LeafGreen, Emerald, Diamond, Pearl, Platinum, HeartGold, SoulSilver, Black, White, Black 2, White 2, X, Y, Omega Ruby, Alpha Sapphire, Sun, Moon, Ultra Sun, Ultra Moon, Let's Go, Pikachu!, Let's Go, Eevee!, Sword, Shield, The Isle of Armor, The Crown Tundra, Brilliant Diamond, Shining Pearl are all the same game.
With the release of Pokémon Legends: Arceus, we finally have a second Pokémon game. It’s a bit wordy at first and the dialogue stays stuck on the tarmac, but once the open-world roaming begins, gameplay takes flight. Wandering around while throwing pokéballs at critters is deeply satisfying. It’s a chill Breath of the Wild meets Pokémon combo and exactly what the doctor ordered. No wonder Arceus was the best-selling title in France, Australia, and New Zealand. I expect it the same in the US once NPD reports this week.
The future is looking up, too. I’m excited about the upcoming conference season. It’s exciting to see that the details for my SXSW talk are now online. I plan to be eating all of the BBQ. Hit me up and let’s hang out!
On to this week’s update.
🎙 Podcast: Game Industry Mega Deals
Check out this conversation I had with Mike Sepso from Vindex and Eric Peckman who runs Monetizing Media. We discussed the recent string of mergers and what it could mean for the industry. Link
BIG READ: The future is in the cards
A decade ago, I was trying to explain the concept of microtransactions and virtual items to a game publisher.
It did not go well.
Seeing as digital game sales, and especially full game downloads, represented less than 5% of total income, most gaming execs felt they didn’t have the necessary evidence to justify a wholesome transition to a new revenue model. To them, it was additive income. Today that transition is obvious. And, probably because we now know that it is possible to miss the boat completely, we resort to magical thinking. But Facebook did miss the shift to mobile and spent years trying to catch up. No wonder then that it is spending tens of billions a year going whole hog for VR.
So often do we mistake the emergence of a novel technology as a split with everything that came before. Sure enough, the iPhone was super-cool when it first came out. But there was also a pre-existing market for feature phones. Millions of people already couldn’t live without their Motorola Razr or Nokia before Steve Jobs hit us with “one more thing.”
Novel technology, or even just the next generation, doesn’t emerge in a vacuum. Audiences had been enjoying role-playing games for years before the first massively multiplayer online titles came to market. World of Warcraft built its success on the legwork that Sony’s EverQuest had put in. Similarly, it was PlayerUnknown Battlegrounds that introduced the category of Battle Royale to gaming. But it was Epic Games’ Fortnite that helped it penetrate the mainstream. Novel gameplay mechanics and the emerging revenue models that come with them initially find only gradual adoption, and then spread more quickly.
One piece of evidence that the current shift toward web 3 and its related innovations may prove to be true is found in good old-fashioned collectible card games.
The cards never lie
Simply put, a healthy market for physical card games and other collectibles (e.g., comic books) hints at the shape and size of the future for digital collectibles.
Succinctly, in 2021, the market for collectible games totaled $2.9 billion in North America, including hobby board games, non-collectible miniature games, hobby card and dice games, and roleplaying games. Since 2014 consumer spending has grown +216%, and +43% in 2021 alone. And, according to a 2018 study, the learning digital collectible card games played in the United States are Hearthstone (50%), Magic: the Gathering (40%), Pokémon (37%), Yu-Gi-Oh! (29%), The Elder Scrolls: Legends (27%), and Gwent: The Witcher Card Game (23%).
Similarly, spending on comic books and graphic novels reached $2.1 billion in 2021 in North America, with a +65% year-over-year increase, driven by the pandemic and the popularization of the category among young adults. According to a 2019 survey among 2,205 adults, almost half (45%) of people aged 18 to 44 say they are comic book fans.
Finally, there’s been plenty of market activity among game makers in this segment. In January 2022, Fanatics acquired baseball card publisher Topps for an estimated $500 million. And, for one of the world’s largest toymakers, the math was simple. Hasbro’s gaming division, Wizards, reported $1.2 billion in revenues for 2021, up +42% year-over-year, which undoubtedly contributed to Chris Cocks, Wizards’ CEO, getting the top job at Hasbro.
My argument here is that the desire to collect and own rare items is a common and thriving activity, and the categories that potentially appeal to gamers are expanding.
It’s important to challenge some of these figures, however. The growth in collectibles coincides, quite remarkably, with a period in which people can’t go anywhere, sit on a bunch of unspent disposable money, and are generally bored out of their minds. But is this enough swallows to evidence a summer? Maybe not just yet.
In this recent white paper titled “Trading Cards Are Cool Again,” the author, Josh Luber, makes a connection between the rise in collectible cards and the rise in popularity of cryptocurrency. Evidenced by the price of the combined top 50 collectible cards, the CL50, he draws a correlation with the price of Bitcoin.
Newcomers to crypto eagerly started trading in cards. As the value of Bitcoin grew throughout 2020, so, too, did the CL50. According to Luber: “It was widely assumed among hobby observers that crypto was draining money (specifically young, new-buyer money) from the card market.”
But different from the existing traders who have a lower cost basis, the newbies overwhelmed the market with their frenzy. Shortly after Bitcoin started to go down in price in 21Q2, the value of the CL50 did, too. Luber argues that the drop, and subsequent crash in the card market, “is a function of individuals having money tied up in two new markets which are both falling at the same time.”
Whatever the case, any investor or game designer may do well to remember that a sudden influx of capital can create a lot of market volatility. What has served the digital games market well is its focus on building long-term, sustainable experiences.
Despite the frenzy, trading card game developers spotted the opportunity of blockchain early on. First-movers like Gods Unchained and Splinterlands have been rolling out the first credible versions of what a blockchain-enabled TCG could look like. (BTW, Nicolas Vereecke from team Naavik recently did a podcast on the state of the blockchain TCG market.)
There are plenty of challenges ahead of course. Another related one is the imminent problem of having to actively recruit new players. Collectible card games thrive where there are lots of people playing and trading. However, the organic growth as a result of the sudden momentum in crypto last year is obviously going to die down. More than a few consumers will feel a bit burned now that their Shiba Inu holdings aren’t growing to a Lambo payday. They’ll be less willing to spend money on other things.
In the short term that means having to switch to active user acquisition, which changes the financial formula. You can expect a growing number of increasingly desperate blockchain gaming startups to start showering potential players with NFT drops and free in-game currency. But above all else, it’ll show us which games manage to retain players and value.
After the industry begrudgingly transitioned to digital distribution and new monetization models, it is now the source of their greatest success. Just this week Take-Two reported its earnings and boasted that 88% of its net bookings are delivered digitally (see below). They were wise, of course, to walk slowly rather than run themselves into oblivion by haphazardly adopting a new digital business model. Instead, they looked at what was in the cards for them.
NEWS
All eyes on Animoca’s $5.4 billion valuation
Following its most recent raise of $360 million, the firm’s worth is up significantly from $2.2 billion last year. That puts it in the same range as CD Projekt Red ($4.5 billion) and Ubisoft ($7.1 billion). The latter, by the way, just announced it partnered with one of Animoca’s better-known investments, The Sandbox, to bring its well-known franchise Rabbids into the metaverse. Despite the crypto winter, blockchain and crypto maximalists remain eager to fund whatever consumer application is going to drive mainstream adoption. Animoca sits at the center of that activity and aims to build network effects throughout the NFT ecosystem. For a great breakdown of its budding empire, check out this write-up by team Naavik.
International Olympic Committee gets into NFTs
As an organization riddled with scandals around bribes and other inappropriate payments, the IOC took, oh let’s see, seven years to recognize competitive gaming. But, amazingly, when non-fungible tokens showed up and launching a mobile game promised to bring in cash, the IOC was able to adopt it faster than you can say “human rights.”
IN MEMORIAM: Todd Gitlin
The news of one of my former professor’s passing came last Saturday.
Todd Gitlin was of immeasurable influence during the formative years of my academic career. Stoic and prolific, to me he was the pinnacle of a contemporary media critic. Especially his writing on the socialization of popular culture and how the people that work in media and entertainment determine what the rest of society talks about was instrumental to my own.
Despite his deep roots in mass media theory, he was one of the few teachers that provided me with the necessary breathing room to formulate my theories about video games, a form of discourse that most others struggled to take seriously. His encouragement then continues to inform the work that I do today.
He will be missed.
MONEY, MONEY, NUMBERS
Activision Blizzard comes up short with $2.48 billion. In an already overall crappy year, ATVI reported well below its guidance of $2.78 billion and a consensus of $2.82 billion. A noticeable culprit was Call of Duty: Vanguard which saw declining y/y sales due to lower premium sales and less interest for Call of Duty: Warzone. The Chinese version of Call of Duty: Mobile, finally, offset some of the declines and surpassed $1 billion in global revenue in 2021.
Blizzard announced its plan to release a new mobile title in the Warcraft franchises sometime this year and seemed happy that Hearthstone’s earnings were up due to new content releases. King Digital reported over $1 billion in annual sales and broke a new record of +20% y/y growth for Candy Crush. It was the top-grossing game franchise in North American app stores for the 18th consecutive quarter (dang). New content proved an important driver of growth for both Candy Crush and King’s ads business, which grew +60% y/y.
Finally, Kotick’s sudden cancelation of his scheduled earnings call wasn’t uncommon and likely the result of soon-to-be owner Microsoft wanting to control the narrative. Allowing Kotick a victory lap and curtain call with analysts while ATVI is in disarray and expecting regulatory scrutiny would likely create extra work that no one wants.
Take-Two reports $866 million in earnings. Despite the surge in attention following the confirmation that it is working on GTA 6, the consensus among Wall Street analysts had anticipated $880 million in earnings (versus guidance of $850 million), resulting in a measured response and calling Take-Two’s results “mixed.”
Its recurrent consumer spending was up +2% to $489 million and represented 57% of its total net bookings. The biggest contributors were NBA 2K. The September release of NBA 2K22 sold over 8 million units and was up 3 million units q/q.
The runners-up were GTA Online (which has sold 160 million to date), Top Eleven (from its recent acquisition of Nordeus), Two Dots which posted a record booking. The results of especially that last one are consistent with the write-up I did last week where I argued that subsidiaries tend to do better post-acquisition because of the mothership’s existing industry relationships and efficiencies. Finally, RDR2 has sold 43 million units to date, up 4 million q/q. Take-Two noted that 88% of its net bookings are now delivered digitally (up from 82% a year ago).
EA delivers record results with $2.8 billion in net bookings. Exceeding both consensus ($2.66 billion) and guidance ($2.63 billion), EA’s income grew +7.4% y/y. Its sports portfolio was the main driver and grew +10% y/y. Its best performing titles were FIFA22, Madden NFL 22, and Apex Legends. For the latter, monthly active player counts were up +30% y/y, reached well over 100 million, and is expected to bring in more than $1 billion annually soon. EA boasts an aggregated player base of 540 million unique player accounts across all of its 18 games and 25 live services. Approximately one-third are active monthly.
However, Battlefield 2042 proved disappointing, which EA blamed on having to work from home. That makes it literally the only publisher that has so far used that as an excuse.
Zynga’s bookings reached $727 million. Just slightly beating a market consensus of $720 million, it well blew past its guidance of $715 million. Overall bookings were up +4% y/y, driven largely (and notably) by a +45% y/y increase in advertising revenue. It’s something I’ve spent quite some time on previously and remains an important category to watch, especially as Zynga integrates with Take-Two. The current interpretation is that since advertisers are no longer able to use Facebook, due to Apple’s IDFA changes, they go directly to the publishers. Ad bookings offset a -5% y/y decline in Zynga’s online revenues, despite a noted +3% y/y increase in average daily active users to 37 million. Mobile average bookings per mobile DAU fell -1% y/y.
PLAY/PASS
Pass. The mishandling of complaints of harassment and violations by the IGDA. Hopefully its exposure results in accountability and change.
Play. Kirby can now eat whole cars. Introducing: Carby!
Will probably unsubscribe unless there is some serious reduction in the Web3 content.