Unity Tumbles and Terra Implodes

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Hi Everyone, and welcome back to another issue of Naavik Digest! There was a slight error in our announcement regarding GamerSpeak in the previous issue of Naavik Digest. If you’d like to read more about our new partnership with the team, feel free to review our official statement here.

Also, since it was a heavy news week, we're trying out a slightly new format this time around - a collection of mini analyses! So let's jump in...

Roundtable: Return of the Fortnite

In this Metacast episode, Abhimanyu Kumar, Matt Dion and Anil Das-Gupta, join your host Maria Gillies to discuss:

Fortnite Returns to iOS via Xbox Cloud Streaming
China’s Underage Streaming Regulations
EVE Online Roadmap
Stopping the comparison of Web3 Games to Free-to-Play

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Weekly News Highlights

It was a tough week for Unity. Shares fell nearly 40% after the company reported earnings, with shares now down 80% from all-time highs. Results weren’t bad — Create Solutions are accelerating, the number of $100k+ customer have been steadily increasing, and the dollar-based net expansion rate remains 135% — but guidance for future growth was subpar. In short, a large customer fed Unity’s ad algorithm bad data, which led to worse outputs, slowing Operate Solutions growth (mainly ads). Because this needs to be rebuilt, it will cost the business over $100M before being fully fixed. If there’s a silver lining it’s that this headwind isn’t existential.

EA and FIFA go separate ways. After a three-decade partnership, 325 million copies sold, and well over $20B in cumulative sales, FIFA decided not to renew its licensing agreement with EA. FIFA wanted to double the $150M in annual licensing revenue it received from EA (almost 20% of its annual revenue!), but there was no consensus reached. So what’s next? For starters, EA won’t easily let go and the company will introduce EA Sports FC in 2023 (backed by agreements with players and teams around the world), looking to retain as much market share as possible. FIFA will release its competing game in 2024 (and perhaps look to other licensing beyond then) spurring more competition and potentially brand confusion.

Sony plans to ramp up PS5 production. Console makers have been hit by chip shortages, which has slowed production; but Sony looks to be turning a corner. After quarter in which Sony only delivered 2M PS5 units (an 8M run-rate), it raised its fiscal year goal to 18M units, signaling major acceleration (as long as COVID doesn’t affect manufacturing). And, of course, additional PS5 sales should translate into more software and services sales, too. Somewhat tangential, but this is occurring at the same time Xbox delayed its two main AAA games of the year (Starfield and Redfall) to next year, which could limit Game Pass growth.

COVID-whiplash hits Roblox. Similar to Unity, Roblox shares fell post-earnings and are down nearly 80% from its highs. The culprit is a 3% year-over-year decline in quarterly bookings (plus a 8-10% decline in April). This is partially driven by tough COVID-related comps and partially by a lack of focus on monetization (compared to user growth and platform innovation). Importantly, this is now changing! Management announced it is putting greater focus on improving monetization per hour spent in three ways: 1) improved search and discovery (better matching of monetizable content with the best audiences), 2) advertising (sponsored search results + native ads), and 3) building a superior UGC-driven marketplace. Shares might be down, but Roblox’s trajectory as a platform is still positive.

The Terra blockchain ecosystem imploded. In short, UST, the third largest stablecoin, was financially attacked, which, paired with flawed tokenomics, caused a “bank run” that turbocharged a major de-pegging (trades at $0.16 when it should be at $1.00). Due to a swapping mechanic with LUNA, the governance token of Terra (and previously a top 10 cryptocurrency by market cap), UST’s failure also drove the hyperinflation and collapse of LUNA. The attack broke the token design, destroyed billions in value, and sent ripple effects across the crypto world. Notably, it also means that projects (including gaming) will look to get off of Terra or avoid it moving forward. It’s extremely unfortunate, especially for those with money on the line, but it provides a lesson in financial complexity and experimental technology.

🎮 In Other News…

💸 Funding & Acquisitions:

Earnings: Sony | Unity | Roblox | Playtika | Ubisoft | AppLovin | Konami | Zynga | EA | Nintendo | Sega | Square Enix | Remedy | Krafton
Flow Launched a $750M ecosystem fund. Link
Irreverent Labs raised $40M in a round led by a16z. Link
Animoca and FTX led a $25M private token sale in C2X on Terra (prior to the price crash). Link
Branch.gg raised $12.5M to build a web3 browser game. Link
StartPlaying raised a $6.5M round led by a16z. Link
Sizzle.gg raised $5M. Link
Licensing marketplace Layer announced a $3.9M round. Link
Lootlocker raised $2.1M for its backend-as-service platform. Link

📊 Business:

FIFA end its partnership with EA. Link
Sorare partnered with the MLB for its baseball vertical. Link
Top 10 gaming companies by revenue. Link

🕹️ Culture & Games:

Smash.gg is rebranding to start.gg, a move that reflects Microsoft’s growing ambitions for the platform. Link
EA plans a Lord of the Rings mobile game. Link
Xbox delays Starfield and Redfall. Link

👾 Miscellaneous Musings: