Hi everyone — welcome to another issue of Naavik Digest. If you missed our last one, be sure to check out our dive into why Hollywood’s current labor dispute is relevant to the nascent subscription gaming market, and what the industry should learn from film and TV. In this issue, we’re discussing Apple’s most recent legal victory in its long-running antitrust feud with Epic Games and the current state of App Store policy. 

We're also excited to announce that Naavik will be attending this year's Gamescom later this month. Naavik Co-founder Abhimanyu Kumar and Consulting Partner Jordan Phang will be in Cologne, Germany, on August 23rd (Day 1) and available to discuss consulting relationships, content contributions, Naavik's new Open Gaming Research Initiative, and new team additions. They'll also be free if you just want to catch up and hear what Naavik has been up to lately. Submit a meeting request by clicking on the link below, and we look forward to seeing you at the business area!

#1 Surviving The Apocalypse: Strategy/Card Genre Report

By Jordan Phang (Naavik Consulting Partner) and Abhimanyu Kumar (Naavik Co-founder)

App Games
Source: Naavik

This is a preview of a genre report written as part of Naavik’s Open Gaming Research Initiative. The full report can be read here.

In the overall landscape of mobile F2P genres, Strategy Games and Card Battlers have come to be known as heavily reliant on both highly targeted user acquisition and whale-driven IAP monetisation. These two elements are highly intertwined when it comes to defining the genres’ growth over the past decade. 

The growth cycle is simple: Targeted UA allows Strategy/Card game developers to acquire potentially high value players for their games → some of these newly acquired players turn into big spenders (or “whales”) that generate high ROI on the incurred targeted UA spend → the game developers reinvest these profits to target and acquire even more potentially high value players.

When this cycle continues across multiple games from multiple developers for multiple years, the industry gets the second biggest mobile F2P genre by revenue. In 2022, Strategy and Card game revenue hit $11 billion (RPG had $18 billion) in IAP revenue, and contributed to ~20% of mobile F2P gaming’s market size.

That said, the past three years haven’t been the most typical for the Strategy/Card genre and mobile F2P more broadly. Everything was hunky-dory until:

  1. 2020: COVID hit → resulting in the COVID boom for the entirety of gaming
  2. 2021: IDFA deprecated, global inflation started, and portions of the world opened up post-COVID → resulting in an uncertain UA environment, downward pressure on consumers’ disposable income, and the post-COVID decline across gaming
  3. 2022: Global inflation fluctuated, the post-IDFA impact continued, and more portions of the world continued to open up → mobile F2P gaming saw its first-ever YoY market dip

In other words, the last three years have been anything but normal, and therefore immediate and sequential comps for a 2023 analysis for mobile F2P genres are less than ideal. Therefore, we’ll need to look at long-term trends most of the time, but also zoom into some short-term data when fitting.

Before we showcase how each of the abovementioned macro factors are playing out today, it is important to recognize how crucial targeted UA has been to fueling mobile F2P’s massive growth over the past decade. The graph below showcases how mobile F2P IAP revenues have grown since January 2015, through the COVID boom period, and up until Apple deprecated the IDFA. Interestingly, this happened around the same time the market started experiencing the post-COVID decline, and global inflation rates started to grow (and eventually drop).

App Graph
Source: data.ai, Naavik

#2 The App Store Always Wins

By Nick Statt, Naavik Managing Editor

Source: Macworld

Apple was handed yet another victory in its long-running legal feud with Epic Games last week, this one from the U.S. Supreme Court itself. While it didn’t get a definitive judgment in the Fortnite antitrust case that’s been winding its way through the courts as part of a lengthy appeals process, Apple still benefited from another delay to the requirement that it change anti-steering rules governing iOS apps in the U.S,

Epic v. Apple, two years later. To recap, Apple was overwhelmingly victorious in the 2021 antitrust case over Fortnite’s removal from the App Store. 

  • But Judge Yvonne Gonzalez Rogers did rule that Apple’s anti-steering rules — which prohibit developers from using buttons or links to direct customers to make purchases on the web — violated California’s Unfair Competition Law. 
  • Both Apple and Epic have been appealing her decision, each trying to gain an inch over the other. Apple has so far remained unscathed, meaning it hasn’t been forced by the courts to abide by Judge Rogers’ ruling. 
  • Now, the case is now at the doorstep of the Supreme Court, which may ultimately decide (or decline) to hear Apple’s appeal. 
  • In the meantime, Justice Elena Kagan declined Epic’s request to remove a delay imposed by the San Francisco-based 9th U.S. Circuit Court of Appeals. In other words, it’s business as usual for the App Store while Apple prepares a petition for the Supreme Court to take up its case. 

Apple reigns supreme. If Apple eventually prevails, it will cement the App Store’s dominance over digital commerce — and in turn, the mobile gaming industry — on the iPhone, which remains the most lucrative platform of the most revenue-generating segment of the global games market. 

  • So far, Apple has steamrolled Epic in its legal bouts, and there’s no reason to believe the iPhone maker won’t be similarly victorious in this final stage of the fight. 
  • It’s hard to gauge whether this is an ultimately bad, or simply a neutral, outcome for game developers. Without Apple, there would be no iPhone, App Store, or mobile gaming industry as we know it today, though one could argue a mobile game market would have flourished on Android or another OS in the absence of Apple’s platform and the strict policies that govern it.
  • Still, Apple has shown how willing it is to fiercely defend its 30% cut of all digital transactions, the vast majority of which consists of in-app purchases in mobile games. Apple made more than $78 billion in services revenue last year, and the company captures about two-thirds of all spending on mobile gaming worldwide, a figure that totaled more than $92 billion last year. 
  •  It’s clear why Apple is adamantly against alternative app stores, side loading of apps, and even something as seemingly minor as a button or a link inside an app directing a customer to an alternative payment system on the web. Every inch Apple gives up to developers may result in millions, or even billions, in revenue it uses to help fund its massive hardware and software ecosystem. 
  • Should developers want more of the pie, and how should they fight to get it? Epic clearly saw antitrust law as its avenue to try and change the App Store’s policies, as fruitless as the quest has ultimately proved. 
  • But at this point, it’s starting to look like the status quo on iOS will never change in a way that hurts Apple’s bottom line, and the company has shown a willingness to go as far as the Supreme Court to keep its revenues intact. 

Change is happening, albeit slowly. While Apple has defended its business model and App Store policies in the U.S., it has not fared as well overseas. In particular, the European Union’s more aggressive stance on antitrust may fundamentally alter iOS. 

  • The EU’s Digital Markets Act (DMA), which is now in effect, forces digital “gatekeepers” to give customers the option to "choose between different software applications from different distribution channels [...] should be prohibited as unfair." 
  • Though Apple had yet to be legally deemed a gatekeeper under DMA rules (though the designation was made official in July), Bloomberg reported late last year that the company was taking measures to comply by allowing sideloading. Apple said nothing of the change during June’s WWDC, but it may not be able to avoid mentioning it alongside the introduction of iOS 17 next month — unless it plans on fighting the EU. 
  • If Apple does allow sideloading for EU customers, Epic could bring Fortnite back to iOS for European players, complete with its own in-app payment system that bypasses Apple’s 30% cut. If the U.S. ever adopts similar antitrust measures, it might tip the scales enough that Apple might change policies worldwide instead of only in isolated markets where the law is no longer on its side. 
  • Apple has made a number of other concessions over the past few years, mostly aimed at appeasing European regulators. Yet virtually every App Store policy change since 2021 has not included game developers and is instead aimed at appeasing distributors of music, ebooks, and other media. 

The anti-steering rules Apple and Epic are fighting over in front of the Supreme Court may seem a trivial matter for the broader game industry. After all, very few developers likely want to compete with Apple’s built-in payment system, and even fewer are likely eager to create separate versions of their games to be sideloaded onto iOS if Apple is ever forced to allow alternative app installation outside the EU. 

But Epic’s fight, and Apple’s multicontinent legal maneuvering, is yet more proof the App Store is performing better than it ever has, and there’s little reason to believe it won’t remain the dominant revenue-generator for mobile games well into the future. Whether more game developers decide to speak up and fight alongside Epic is beside the point. The App Store is an iron fortress for Apple, and its defenses are only getting stronger. 

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#3 Gaming Market Update: August 4th – August 11th

By Mario Stefanidis, CFA, Naavik Contributor

App Data
  • For the week ending August 11th, 2023: The average return for gaming companies tracked by Naavik with a market capitalization exceeding $500 million was -2.3%. The S&P 500 returned -0.3% and the Nasdaq-100 returned -1.6%. Full access to the Naavik Gaming Company universe is available here
  • AppLovin (NASDAQ: APP) surged +24% after the company reported Q2 FY2023 earnings showing quarterly net income of $80 million, its highest-ever GAAP profitability. Analysts had expected a more modest net income of $30 million. Revenue declined 3% from a year prior but was also better than expected. AppLovin also issued a revenue forecast for Q3 of $780 million to $800 million, significantly higher than consensus estimates of around $740 million. The company attributes the positive results to the success of advertising algorithm AppDiscovery. 
  • Roblox (NYSE: RBLX) plunged -20.4% after the gaming platform reported lackluster Q2 FY2023 results. While Roblox saw a 25% increase in average DAUs to 65.5 million from a year prior, this actually marked a decrease from Q1 where 66.1 million DAUs were reported. This is only the second quarter since 2020 that this metric declined on a quarterly basis. Bookings of $781 million were just 1% higher than the previous quarter, and its net loss of -$282 million was $14 million wider than Q1. The company also added that it forecasts losses for the “foreseeable future.”
  • Square Enix (TYO: 9684) fell -14.3% after its Q1 FY2024 results missed the mark on soft Final Fantasy XVI sales. Although the company recorded a 14% year-on-year increase in revenue, its profits plummeted by approximately 65%. Square Enix President Takashi Kiryu pointed out that the slow adoption of the PS5 contributed to the game's disappointing sales figures (FFXVI is a PS5 timed exclusive). Despite these setbacks, Final Fantasy XVI managed to sell 3 million copies within its first week of its release in June, paralleling the launch sales of Final Fantasy VII Remake. You can access more in-depth coverage of Square Enix’s financial results here.

Notable Venture Financing Deals

App Mobile Games
Source: Monetizr
  • Monetizr, a Latvian in-game advertising platform for mobile gaming, raised $4 million in venture funding. The round was led by Change Ventures, which also led the company’s $2.1 million seed round last October. Other investors included Techstars, Ludus Ventures, and angel investors such as Ari Paparo and Jared Schrieber. The investment will be used to bolster Monetizr's U.S. sales team and to set up development hubs in Europe. Monetizr’s programmatic advertising platform allows brands to connect with consumers by integrating “brand stories into the actual games,” according to company CEO Andris Merkulovs. This boosts engagement versus static ads and offers anonymous consumer behavioral insights, which have grown in importance as digital privacy regulations tighten. Monetizr was previously a mobile game developer, before pivoting toward player-centric monetization in 2020.
    • Monetizr is born out of a post-IDFA world where free-to-play mobile game developers have struggled to monetize products with an ad-focused model rather than one predicated on microtransactions. Boosting click-through rates is one way to make advertising more appealing for developers, as it had been when CPM rates were lucrative due to laser-pointed targeting. On the surface, with the examples Monetizr showcased, an interactive Tide advertisement in a standard freemium title is not “deeply integrated” as the brand itself is still detached from the core gameplay experience. Clicking away to watch a Tide video that can earn in-game currency may work in a hypercasual game, but the strategy may be more difficult on a more narrative title unless the integration truly becomes deep.
  • Seattle and Los Angeles-based Windup Minds recently secured $1.6 million in pre-seed funding. The founding five-member team previously worked for companies like Oculus, Electronic Arts, Magic Leap, and Bungie. CEO Bernard Yee previously was an executive producer for Oculus from 2014 to 2021, and subsequently an AR Technical Product Manager for Meta until November 2022. Windup Minds’ goal is to to develop virtual pet games for VR and XR platforms, using the technology to make virtual pets feel as tangible as real creatures. It also plans to integrate generative AI into its development, which would allow these pets to learn in a realistic manner. In the future, the company is considering extending development to mobile devices, but for now it’s focused on Meta Quest headsets and possibly Sony’s PlayStation VR2. 

Notable Strategic Investments

App Cfx.re
Source: Sports Illustrated
  • Take-Two Interactive subsidiary Rockstar Games purchased Cfx.re, the creators of popular multiplayer mods for Grand Theft Auto Online and Red Dead Redemption 2. The mod creator is particularly known for FiveM, its mod which supported the exclusive GTA Online NoPixel servers. NoPixel sparked renewed interest in the game years after its launch, when Twitch’s largest streamer xQc began streaming role-playing content on the platform in 2019. The acquisition signifies a notable policy shift for Rockstar, as its earlier stance had been to ban modders and even sue modder groups. Rockstar even attempted to shut down FiveM shortly after its launch in 2015 by claiming the service was made to “facilitate piracy.” The developer also may be paving the way for officially supporting roleplaying in GTA 6, which is expected to release in late 2024. Rockstar is likely exploring ways to monetize the roleplaying community, which for years operated outside of formal oversight from the game’s parent company. 
  • Telltale Games acquired Flavourworks, the U.K. studio behind interactive film video game Erica. Mobile-first studio Flavourworks uses its patented engine and toolkit TouchVideo within its games, which allows players to interact with characters and objects in unique ways. This move is geared toward amplifying Telltale's narrative gaming capabilities in delivering cinematic tales for new platforms and wider audiences. CEO Jamie Ottilie, who has run the company since its 2019 revival, emphasized that the acquisition was influenced by a rising demand for deeper interactions with IP and the need for multidevice accessibility. Telltale had previously struggled with mobile, one of many missteps that led to its bankruptcy in 2018. But this acquisition is aimed at revitalizing that segment for the business, considering it now accounts for the majority of the game market. 

Notable Studio Updates & Partnerships 

App Devolver
Source: Devolver Digital
  • Devolver Digital announced that five of its upcoming games, including the anticipated multi-platform action-adventure game The Plucky Squire, were being delayed from 2023 to 2024. This announcement was made during a tongue-in-cheek showcase from the publisher called the Devolver Delayed Showcase. It also confirmed that five games and two DLCs were still on track for release in 2023. Devolver Digital first warned investors on August 3rd that profitability this year would be affected by game delays and weak sales, causing shares (LON: DEVO) to fall by more than 20%. The company’s market capitalization has fallen nearly 90% since its November 2021 IPO, from £695 million to £70 million as of August 11th, 2023. Its current valuation implies a negative enterprise value, meaning its market cap is lower than its net cash position. At IPO, Devolver was the largest American company to trade on the London Stock Exchange. Since then, the company has faced steep losses as back catalog sales have struggled. The company has also not published a hit title since October 2021’s Inscryption, whose high early sales boosted its valuation before its IPO.
  • Embracer Group shut down its home-grown studio Campfire Cabal, which it created just 11 months ago. This move was due to Embracer’s restructuring efforts and not financial performance at the studio, according to a post from Campfire’s Creative Director Jonas Wæveron LinkedIn. Wæver said the studio remains committed to staying together despite the loss of financial backing from its parent, though team members were encouraged to begin seeking opportunities elsewhere. Campfire was focused on creating turn-based RPGs, given its founders’ pedigree in developing the Expeditions series, which included Conquistador, Viking, and Rome. 
  • Acid Wizard Studio, the developers of multi-platform survival horror game Darkwood, announced an indefinite hiatus from game development. The studio shared a statement on Twitter where they said they had not been “able to create a work environment that would not be destructive to [their] personal lives.” As such, it will not be developing a sequel for Darkwood, nor continuing development of its turn-based sports game Soccer Kids, which was released on Steam in June as a free alpha. Darkwood was well received, and ranked No. 76 on Metacritic’s “Top 100 PC Games of 2017” list. The game was ported to eighth generation consoles in 2019, and PlayStation 5 and Xbox Series X/S in 2022. 

You can view our entire job board — all of the open roles, as well as the ability to post new roles — below. We've made the job board free for a limited period, so as to help the industry during this period of layoffs. Every job post garners ~50K impressions over the 45-day time period.

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