Hi everyone. After a couple light news weeks, company updates are now hitting like a tsunami! We couldn’t write about everything, unfortunately, but we picked four notable topics. The rest you can read more about through the “In Other News” section. Also, as a quick reminder, if you leverage our referral program you can join our Discord community (2 referrals), and we’ll kick off our first exclusive Q&A in approximately a month (5 referrals). Don’t miss out!

Now, here’s your weekly roundup and analysis of what’s happening in the video game industry…

#1: Activision Blizzard Unlocks Upside

Call of Duty

On Thursday, Activision Blizzard delivered standout earnings results, pretty handily beating expectations. Over fiscal year 2020, the company grew net bookings 32%, operating income 70% (at a 39% margin), and earnings per share (EPS) 45%. The company now has $5.2 billion in net cash, raised its dividend 15%, and authorized a new $4 billion share repurchase program. Not bad for a business that many have deemed as big & stodgy!

If you look under the hood, Blizzard grew revenue and operating income 11% and 49% (mainly driven by WoW’s Shadowlands expansion), respectively, and King delivered 7% growth in revenue and 16% growth in operating income (driven by heavy customer acquisition, rising advertising revenue, and higher in-game spending). We could dig deeper into this, but let’s focus on what matters most.

I (Aaron, here) have been saying this for a while, but Call of Duty’s (CoD) shift from an annual game to a multi-game/platform ecosystem is a big deal and has been underestimated. It’s a structural shift that unlocks meaningful upside if executed well. Last year 250 million people played CoD — across Premium, Warzone, and CoD: Mobile — which tripled from 2018. CoD’s overall net bookings doubled year-over-year, and despite waning COVID-tailwinds, management expects continued growth. This is impressive.

Let’s be clear: not every franchise will rock the world like CoD, but applying the same ecosystem-driven structural shift to other key franchises will unlock additional upside. A key part of this is prioritizing mobile (and there are several mobile games in the works), but it’s also about self-reinforcing behaviors across free-to-play and premium experiences. Learn more with our framework for how to transition a business from console to mobile.

Management also expects 2022 to deliver another “step-change” in financial performance. This is likely driven by new launches like Diablo IV and Overwatch 2, but ecosystem tailwinds will likely persist, too. Mobile games like Diablo Immortal and Crash Bandicoot: On the Run are next steps, but I'm particularly curious about what the long-term plan with World of Warcraft will be. Expect a couple smaller franchises to transcend the $1 billion mark in the next 2-3 years, as a result.

Anyway, this positive tone isn’t to say Activision Blizzard is perfect. It’s not. Cultural tensions persist, and games like Overwatch and Hearthstone aren’t in amazing shape. These are real risks. From a business strategy perspective, I’m not overly concerned, but there’s room for improvement and it’s worth keeping an eye on.

All in all, Activision’s strategy has been underestimated for a while, and I think people are now catching on. This is a team that’s good at creating value, and despite whatever road bumps emerge, I don’t see that stopping.

#2: Unity Grows But Battles Expectations


Activision was the notable outperformer of the week, so now let’s take a look at the notable underperformer — Unity. Let’s begin with the big picture.

There’s no doubt that Unity is one of the most relevant and well positioned businesses in the gaming industry. 71% of the top 1,000 mobile games are made with Unity, and 2.7 billion people interact with Unity-based content each month (+63% YoY). Very few companies in any industry can claim such high market share, especially at that level of scale. It’s respectable. Learn more in our Unity business breakdown.

And, frankly, the company’s results are quite solid as well:

  • Total (full year) revenue increased 43% to $772 million.

  • Create Solutions (full year) revenue increased 37% to $231 million.

  • Operate Solutions (full year) revenue increased 61% to $471 million.

  • Strategic Partnerships / Other (full year) revenue decreased 12% to $70 million.

  • Customers with >$100k of revenue grew 32% to 793 (13% outsider of gaming)

  • The dollar-based net expansion rate clocked in at 138%.

  • Non-GAAP operating margin was -9%, but free cash flow was slightly positive.

This is good business. Unity is winning over new customers and taking market share by offering reasonably priced create solutions and a large collection of operate solutions. It’s successfully upselling existing customers, entrenching them deeper in its ecosystem. And it’s heavily reinvesting — launching recent new things like the Game Growth Program, MatchMaker, and a Snap partnership — to ensure it can continue this trajectory for many years. Not every new solution will be a game changer (most won’t), but it all adds up.

So what’s the issue? Expectations. Nothing is fundamentally wrong about the business, but decelerating growth (management is guiding for 23-26% revenue growth next year) and lower margins (this was the first quarter since 2019 when operating margins declined) make it difficult to justify a 45-50x revenue multiple. Management is likely sandbagging a bit, but we’ve been warning of decelerating growth in 2021 since the IPO, primarily as a result of more difficult post-COVID comps.

However, let’s not miss the forest for the trees. Unity is still very well positioned in the gaming industry, and there’s plenty more it can offer over time. We’ll see what affect the IDFA deprecation has this year, but I’m not overly concerned. Importantly, management is still projecting a long-term target of 30% annualized revenue growth. For this to happen, they obviously need to continue crushing it in gaming, but they also need to find more upside in other industries. I’m still unsure exactly how this happens — other industries don’t offer the same revenue-share upside that in-game advertising does — but there’s meaningful untapped potential. If “steady” 30% growth can realistically be achieved, then compounding will push Unity into one of the most important tech companies in the world. It will be a fun story to follow.

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#3: Embracer Continues Its Acquisition Spree

Embracer Acquisitions

On Wednesday, Embracer Group announced the acquisition of Gearbox Entertainment, its largest deal to date. The deal is worth up to ~$1..4 billion — $363 million upfront and the rest via 4-6 year earnouts that depend on key metrics (more details here). For context, Gearbox has delivered $124 million in revenue Q1-Q3 at 40% EBIT margins. The company was 100% founder-owned, has been profitable for 22 years, and now has 500+ employees.

With those results, strong IP like Borderlands, and a publishing arm, it’s easy to see how it’s a meaningful deal for Embracer. Plus, on the same day, Embracer also announced two additional acquisitions: Easybrain and Aspyr. Including these 3 deals, Embracer is now (impressive stats alert!) -

    • 64 internal development studios strong

    • Owns 244 IPs

    • Has a total of 193 projects in development (~40% announced)

    • Has a group headcount of 5,700

Nearly all of this has been acquired in recent years. Remember, as a function of heavy deal-making, Embracer’s stock has climbed close to +2,600% since its 2016 IPO and nearly tripled in the past year alone. Embracer’s capital allocation strategy + decentralized operating model has clearly worked so far. Plus, the company’s post-acquisition cash + access to debt position will be ~$1.2B. That combined with how they create flexibility by not having to pay too much upfront means they’ll have plenty of ammo left to deploy for further deals. There’s no reason to think Embracer will slow down; if anything, it’ll make larger deals in order to move the needle at its ever-larger size.

Many compare Embracer to Stillfront (which we previously analyzed), though doing so is semi-faulty because — despite financial/operational similarities — Embracer’s M&A strategy is mainly rooted in PC/Console versus mobile for Stillfront. And focusing on different platforms means focusing on different underlying business models.

Embracer Group Revenue Share by Platform

I (Manyu, here) is key to understanding why Embracer is acquiring so aggressively and whether that poses any risk. With PC/Console, not only do the games need to be top quality at launch, but they also won’t have the same revenue long tails as GaaS-driven mobile games. Therefore, Embracer needs to sustain a massive new project pipeline so that the risk of high PC/Console project development time and budgets is balanced out. The number of pipeline projects has now increased to 193 (vs 54 in Q1 2018). That said, much of the pipeline is unproven, which makes it tough to grasp what long-term organic growth will be.

Embracer might also have access to more M&A targets because there appear to be fewer big players chasing PC/Console consolidation compared to mobile. Given how most acquisitions generally underperform, good acquisitions typically should unlock a 1+1=3 benefit. It’s tough to make a case for strong synergies with any of Embracer’s deals, but joining Embracer means access to capital that allows studios to take bigger creative bets than they would’ve been able to otherwise. This was a key selling point for Randy Pitchford, who has been averse to M&A since he started Gearbox, and it’s likely the case for other acquisitions too.

It’s also worth making a distinction between how synergies function across a group of mobile studios versus a PC/Console one. For example, in the former, technology layers can be shared; however, this might be harder for the latter and maybe not even required. Embracer’s current setup can still allow for sharing development best practices between studios, so lacking synergies isn’t necessarily a deal-breaker. It just means Embracer needs to be careful with the valuations at which it buys studios.

Growth by acquisition — especially when organic growth is questionable — is a tough treadmill to stay on. In order to move the needle, it requires ever-larger deals and the ability to stay financially prudent. As deals get larger, the risk of overpaying and underdelivering has greater potential consequences. Interestingly enough, one way to counter this risk is to start building out the GaaS business vertical, and the DECA and Easybrain acquisitions could signal that start. There’s little evidence to think Embracer’s business will unravel or majorly decelerate as it scales, but it’s worth keeping a close eye on.

#4: AppLovin Acquires Adjust

AppLovin Adjust

US-based ad-network-turned-publisher AppLovin announced on Wednesday that it is acquiring German marketing measurement company Adjust, reportedly for $1 billion. On one hand, it's a logical continuation to AppLovin's foray into the mobile app value chain; on the other hand, it's an unexpected marriage. AppLovin has a reputation for secretive publishing deals, charismatic salespeople, and admittedly, growing its business successfully with fearless acquisitions. Adjust, on the other hand, is known for its sharp focus into marketing measurement tech backed by quality German engineering.

Understandably, much of the buzz around the merger has been about what this means for marketing measurement. Which data will Adjust share with AppLovin? Will AppLovin the publisher gain an unfair advantage with its access to Adjust’s third party data? Does that data even result in an enduring advantage as both Apple and Google are transitioning away from persistent identifiers?

Adjust representatives have spent the last week convincing partners nothing will change, echoing the public statements by the two companies. They may truly mean it. Abusing their position in the current ecosystem is a blatantly short-term move for AppLovin. As the success of marketing measurement companies rests on their reputation, this would destroy Adjust's existing business and thus any information advantage in a heartbeat.

Moreover, ahead of their IPO, it’s in AppLovin’s best interest to build up their reputation, and we’re already seeing the grown-up AppLovin in action. A year ago, detective work was still needed to find out the connection between Matchington Mansion's Chinese developer Magic Tavern, Cayman Islands-based publisher Firecraft, and AppLovin. By now, most AppLovin-affiliated companies are duly listed on the company's website.

Instead of a short-term data play, AppLovin's move into marketing measurement can be seen as the next step in their continued vertical integration. AppLovin started as an ad network and successfully expanded into mediation (MAX), publishing (Lion Studios) and content (Firecraft, PeopleFun, MZ among others) in the past five years. Getting into marketing measurement is a continuation of this and a definite power move to challenge big self-attributing networks such as Google and Facebook. AppLovin is not the only company holding a position in varied parts of the value chain. In addition to the aforementioned duopoly, the ubiquitous tech giants Apple and Amazon have clear interests in mobile ads, distribution, and content, as do China-based ByteDance and Tencent.

Finally, let’s take an alternative perspective: Adjust’s point of view. Both Apple and Google are preparing for a future without persistent mobile device identifiers. Mobile attribution is built on top of Apple's IDFA and Google's GAID, both set to deprecate sooner or later, with the platform owners looking towards in-house attribution solutions. Taking this into account, it might just be the perfect timing for a company such as Adjust to get acquired.

All in all, AppLovin acquiring Adjust is a textbook Silicon Valley move in a journey to the next order of magnitude in valuation. It’s easy to forget that not that many years ago AppLovin was still an aspiring ad network. After a series of bold moves, AppLovin has reached a point where it's not outlandish to claim that it now has everything in place to move towards the final and most lucrative part of the value chain: challenging Google and Apple in app distribution. It's not a bad position to be at ahead of its IPO. (written by Miikka Ahonen)

🎮 In Other News…

  • Microsoft’s earnings showcased strong growth in its gaming business, especially for services. Link

  • Similarly, Sony’s earnings release hints at record-breaking PlayStation results. Link

  • Nintendo’s company results continue to show momentum. Link

  • Electronic Arts delivered strong Q3 results. Link

  • Google Stadia is shutting down its internal development studios. Link

  • Stillfront acquires Moonfrog Labs and enter India. Link

  • Square Enix announced its Q3 results, as well. Link

  • Google Explores Alternative to Apple’s New Anti-Tracking Feature. Link

  • Nexters Global, which owns Hero Wars, will go public via a SPAC. Link

  • Social casino company Playstudios is also planning on going public via a SPAC. Link

  • Game+ launches mobile app for skill-based gaming competitions (Skillz competitor). Link

  • NFL and Skillz Sign Multi-Year Gaming Agreement. Link

  • Anzu.io raises $9 million for in-game ad platform. Link

  • Nerd Street Gamers raises $11.5 million for digital esports platform. Link

  • Candivore raises $12 million to boost Match Masters puzzle game. Link

🖥 Content Worth Consuming

Apple, Its Control Over the iPhone, The Internet, And The Metaverse. (Matthew Ball) “It may feel unfair to force Apple to loosen the controls that led it to such unprecedented success and adoption. Yet problems arising from Apple’s controls are becoming larger every day, as is the company’s unprecedented strength. The future of the global economy is digital and virtual. Broad prosperity depends on platforms that compete to create value for developers and users, and that give birth to new platforms that do the same. Apple is not meeting the moment. The defenses it provides for the controls it demands are not convincing. They neither demonstrate that its policies primarily benefit customers, nor that these benefits outweigh their downsides or anti-competitive side-effects.” Link

2021 Predictions #7 The Next Big Shooter is... (Deconstructor of Fun) “When it comes to competitive shooters that monetize through the cosmetics driven economy, the gold rush, in our opinion, ended in 2019. But when it comes to the shooter category in general, we believe that there are ways to succeed in the market because and due to the three reasons below.” Link

Services, not software, are the future of game enterprise tech. (GamesBeat) “For investors looking to enter the game technology space, look for businesses transitioning from licensed products into services for content development that scale with the success of the product, not the number of developers being licensed to. One mega game can generate more service revenue than a thousand small games. Successful game tech companies will look less like Autodesk and more like Snowflake with a content focus; services businesses that can survive competition with the tech titans, but that scale by the growth of content (that may be developed internally like Epic or by their customers like Unity).” Link

From bear to bull: How Oculus Quest 2 is changing the game for VR. (Oculus Blog) “I firmly believe that our strong foundation in gaming will facilitate broader use cases over time. We’ve already seen that with the success of fitness apps like Supernatural and FitXR, growing interest in social experiences like Facebook Horizon, and the transformative potential of VR for work. From education and the arts to industries as wide-ranging as automotive, retail, healthcare, and beyond, VR truly is changing the game.” Link

Bilibili grew one of China’s biggest esports businesses. Now it has to wrangle with Tencent. (Protocol) “After a few years, Bilibili had become not just the country's leading anime community, but its leading video platform, a kind of YouTube for China. Since then, it has diversified, hosting all kinds of entertainment content: lifestyle vlogs, documentaries, movies — and gaming. Now, after a $4 billion IPO on the Nasdaq in 2018 and an upcoming $2 billion secondary listing in Hong Kong, Bilibili is flush with cash, and its component pieces are beginning to form a closed circle, allowing different products and services to feed traffic and revenue to each other. In other words, it's on the cusp of being something not just big, but huge — large enough to threaten Tencent at the apex of Chinese entertainment technology and trigger the tech giant's defensive instincts.” Link

Thanks for reading, and see you next week! As always, if you have feedback let us know here.

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