The new face of industry events
Apple making friends, Dota 2 on Netflix, and Roblox' big day.
I just finished recording my talk for SxSW Online.
With E3 going fully virtual, online events are officially the norm now. All the cool kids are doing it. Nintendo Direct gave us almost an hour of announcements. And Blizzard broke some new ground by hosting its annual convention online for free. There, at least, the overall production values were pretty good and managed to capture some of the enthusiasm. What would have been great in all of these events, however, is setting up a string of demo servers so we could all have a go ourselves. We have the technology.
A particularly nice touch was Twitch muting Metallica’s live concert and playing elevator music instead. The musical collective has long been one of the most outspoken critics against streaming but apparently didn’t plan for any of that applying to them.
Ha.
Now, a year into this mess, I can barely remember the last conference I attended. Professionally, that does make things harder. For the same reason you can judge how much your employer cares about you based on the toilet paper they provide, industry events provide a peek into a firm’s thinking, if you know where to look.
It’s industry analyst basics, really. To see a publisher’s plan for the year, all you need to do is look at the relative placement of its different titles on the convention floor. At events like E3, GDC, or Gamescom the presence and makeup of different firms serves as an annual check-in with the gaming microcosm. Conferences are expensive and charge by the square foot. Game companies will almost unilaterally throw their weight behind the title most likely to succeed. It is their marketing spend that gives them away.
A second metric is the number of people a firm would send out. I recall during Gamescom in Cologne a few years ago I accidentally managed to be one of five poor suckers staying at the same hotel as 400 Twitch employees. I almost drowned in a sea of purple hoodies. On the other end of the spectrum you’ll find whatever startup just got funded hosting a lavish party at some ridiculous location to ‘build their brand’. Everyone loves free food but chances are slim that you’ll see them again next year.
The virtualization of the industry is an improvement in some ways, too. I, for one, won’t miss having to dodge the crowds around the Staples Center. It is exciting to see all the fans go squeee, but some of us are working and trying to get to the next meeting. The transactional activity that takes place during a conference—like business meetings, demos, and announcements—are far more efficient when held online. No need to wait for a never-ending stream of taxis or managing a dinner reservation.
The SxSW team had shipped a kit full of equipment which I set up on my kitchen counter. It works, I guess. After full year of panels, presentations, lectures, and podcasts, it still feels odd to cheerfully talk into the cold dead eye of a camera.
I miss you.
On to this week’s update.
NEWS
Apple keeps making friends everywhere
In its campaign against Epic Games, Apple possibly just woke another sleeping dog. To make its case against Epic, Apple is requesting detailed sales data on 436 titles. Valve said no.
Specifically, Apple demanded that Valve identifies “every version and all digital content or items for each of these games on Steam” from 2015 to present, and give them “dates on sale, plus every price and price change,” “gross revenues for each game version and item, broken down individually,” and “All of Valve’s revenues related to these versions, content and items.”
Whoa, Tim. This comes from a firm that (1) has repeatedly proven itself to be unconcerned with the informational needs of its partners and complementors, and (2) generates roughly 55x more revenue ($275 billion in 2020) than Valve (~$4 billion). Smells like a bully to me, especially since Valve isn’t active in mobile but Apple claims it needs its information in an all-mobile lawsuit.
Valve’s retort is that the request is an unreasonable burden: “Apple could use public information on Steam to complete this task itself, but wants Valve to do it.” To get this done, it seems, Apple will have to come up with a new plan. Think different.
Roblox’ IPO set for March 10
I’m pretty bullish on this one but not because all the finbros out there are seeing dollar signs. What excites me is the beginning of a new era in user-generated content. I expect Roblox’ numbers to be strong next month, as the company has plenty of growth ahead of it still. More than that, the firm will more than likely make a novel revenue model like UGC commonplace. A more diverse revenue mix is going to be good for the industry and great for consumers.
GameStop’s CFO has had enough
What a mess. After finding itself at the center of that whole short squeeze situation, we now learn that two of its shareholders have been campaigning to turn the company around. The >100% short interest ratio didn’t come out of nowhere, obviously. The retailer’s leadership proved tone-deaf, clung to the corporate jet while cutting jobs, and sold off its own personal shares while telling everyone else to get on board. Over the course of a 7-year period, GameStop’s board of directors sold off $300 million of their own personal shares while simultaneously using shareholder capital to repurchase almost $2 billion in shares.
Here’s the scathing 85-slide deck that will likely form the basis for a slew case studies to come. No wonder that GameStop's CFO is leaving.
The Polish games industry is blossoming
One of the things I enjoy most about cultural industries in Europe is their vast mosaic of different content types and categories. The Fins come up with wildly different games than the French. It provides a shorthand in terms of style and strength. So, too, are the Polish formulating their own.
Sure enough, there are the obvious titles like This War of Mine, Superhot, The Medium, and, of course, The Witcher III prove that its game dev scene is thriving. They make up a growing catalogue of highly regarded titles that draw an international audience. And just recently we learned that The Mediumrecouped its investment on its first day. It’s unfortunate that its leader, CD Projekt Red, continues to find itself having to deal with things that aren’t related to game development, like, getting h4x0red. But even that doesn’t seem to stop them. Another sign of healthy growth is the emergence of adjacent categories like live-streaming are finding their way onto a global stage. One outfit, inSTREAMLY, raised funding in June last year to connect brands with audiences. In all of these industries it generally makes more sense to have creatives and audiences that are culturally close together. As P
It’s a notable turnaround from even just a few years ago when Poland played a more passive role in the industry as a place to outsource software development. That’s likely the result of a healthy economy: between 2015 to 2019, Polish GDP grew from €430 billion to €529 billion, and unemployment dropped from 9.7% to 5.2%. Throughout the period, its population remained at the same level of 38 million. Parallels with Finland and others start to emerge: could it be that one of the non-EFIGS is proving itself to be an international powerhouse in gaming? We’ll see. But perhaps one of the positives outcomes from this pandemic is that it has helped Poland find its own voice.
Netflix rolls out new series based on Valve’s DOTA 2
I've been watching this with interest how the games industry is having another go playing movies. Last week Warner Bros. dropped a new Mortal Kombat trailer that matches the level of gore we know and love so dearly from the game. And now there’s DOTA: Dragon's Blood, a cartoon adaptation based on Valve’s DOTA 2 MOBA title that will be available on Netflix next month.
It’s the result of two forces moving toward each other. On the one hand there are television and film production studios waking up to the fact that the audiences have acquired a taste for content that goes well beyond the conventional Hollywood IP spectrum. Many of the existing narratives have become flat (although Disney's MCU and Star Wars spin offs are an exception here), and audiences are hungry for more complex relationships between characters. Did I mention the TV adaptation of The Last of Us?
An escalating struggle between streaming platforms has resulted in bigger budgets being thrown around and financing all manner of content expansions. After watching both seasons of Castlevania on Netflix, I have to admit that these peripherally related binge-able series do indeed broaden the narrative universe and can be very satisfying.
On the other hand game companies have come to realize that they sit on IP that is loved by millions but simultaneously tends to lack a strong lore. To establish and cultivate a strong emotional connection between players and their avatars, audiences need to either be able to customize them or be really into their backstory. Ideally, both. A few years back Riot Games did exactly that when it launched a bunch of comic books and videos around its various champions to establish a deep lore.
Oh, and cartoons aren’t for kids anymore. The Japanese have obviously known this for decades. But slowly western outfits are realizing all those kids that grew up watching Dragon Ball Z now want to watch something that meets their aesthetic preferences and matches their emotional maturity. It will pay dividends, of course. Unless you’re simping too hard to curry favor with Hollywood.
MONEY, MONEY, NUMBERS
We’ve arrived at the end of earnings season and I owe you a write-up on the highlights.
Deep breath.
Hasbro reported $5.5 billion in earnings, up +16% y/y
The reason I follow the largest toy maker in the world is two-fold: (1) presumably, as digital and online play increases in popularity, its offline equivalent should, too. And if it doesn’t, which turns out to be the case, then the growth in online play serves as a catalyst. (You see the same in music and sports for that matter.)
And (2) Wizards of the Coast is an absolute gem of a game company. As a subsidiary it doesn’t make headlines as often as it would if it were independent. But it owns some of the strongest IP in the industry and continues to evolve and adapt. According to Wall Street Magic the Gathering generates about $500MM/year (Hasbro doesn’t break out revenues), and earlier in the year competitor tabletop fantasy game maker Games Workshop reported +26% revenue growth. But different from Games Workshop’s Warhammer 40K, Wizards’ Magic: the Gathering lends itself much better for online play. If it can figure out how to leverage live streaming more effectively, it will serve as a digital catalyst to its existing tournaments. Link
Sony’s gaming division reported $7.9 billion in earnings
Several of you pointed out that I completely botched my entry on Sony previously, so I’m having another go. It managed to accomplish two remarkable feats: digital content now accounts for 64% of total revenue, followed by $2.4 billion for console and peripherals sales. Physical games totaled $0.49 billion (sad trumpet). That means that a decade after everyone claimed that console gaming, and therefore Sony, were DOOOMED. Turns out that the category is alive and well. More so, Sony also managed to break through the usual dip in profitability that follows the release of a new device. Instead of waiting for PlayStation owners to slowly buy their 2.x titles a year until they’d reach profitability, Sony’s array of services (e.g., PlayStation Plus, Now, etc.) pushes the new device immediately into the black. What doesn’t kill you, makes you stronger. Happy now, Rob?
Take-Two’s 2020 revenues were up +16% at $3.1 billion
Zelnick’s favorite term, recurrent spending, was +30% and represented 58% of total bookings, led by NBA 2K (+67%) and GTA Online and its Cayo Perico Heist (+28% y/y). Red Dead Redemption 2 posted a record number of new players in December (yeeha). On the cost side R&D expenses were up +29% at $296 million, and marketing costs were up +17% at $458 million. One wonders.
As a side note, I’ve been receiving explanations from investors looking to short the stock because of (1) the recently botched Codemasters acquisition, (2) the repetition that the publisher is working on “93 titles” which we already knew, and (3) the continued silence on GTA 6 release date which is likely to fall in 2023.
Ubisoft reported its strongest quarter ever with €1,001 million in bookings
Remarkably, the company went back in time and managed to sell more via physical channels (€413 million, +295% y/y) than digital (€370MM, +98% y/y). That’s weird, especially considering how promiscuous it has been with its Ubisoft+ subscription program and sitting taking a front row seat with Stadia, Luna, and pretty much any platform that will pay them. It suggests that the initial platform payments were larger than the anticipated subsequent digital sales. Its franchises appear healthy: Valhalla was its "biggest launch" in the franchise's history based on consumer spending, Watch Dogs Legion ranked #4 among the top titles on next gen consoles, and Just Dance 2021 was the best-selling game across the franchise over the last 6 years. Even so, Ubisoft decided to push Riders of the Republic and the Prince of Persia: The Sands of Time remake, postpone the Rainbow Six: Siege Six Invitational, and also delay the successful The Division 2: Warlords of New York expansion.
Zynga appeared confident with $2 billion in 2020 revenues, up + 49% y/y
When Glu Mobile soon to be part of EA, my guess is that someone is going to scoop up Zynga soon, too. It lacks organic growth and marketing costs are only going up and are at $685 million (+47% y/y). But at a valuation of $11 billion, the right conglomerate could scoop it up and drive traffic to its library of titles. Notably, the firm dismissed the looming IDFA changes by calling it merely a “short-lived” drag on ad revenue and expecting to quickly formulate “workarounds" to mitigate the impact. Overall ad revenue reached $306 million, up +12% y/y.
PLAY/PASS
Play. Happy 35th birthday to The Legend of Zelda!
Pass. Daft Punk disbanded. Good for them. Bad for the rest of us, because, damn, what an institution. 😢
Play. With 502,397 concurrents last weekend, Valheim is everyone’s favorite new Viking-themed PvE survival game. It is the 4th most played title on Steam because (1) it does away with the usual unforgiving economics of building structures and harvesting resources, and (2) offers a deep combat system. Can’t wait to see that first death metal concert in the Viking Metaverse!