Welcome to Master the Meta, the #1 newsletter about the business of video games.

Hi everyone,

No major updates this week. Here’s your weekly roundup and analysis of what’s happening in the video game industry…

#1: 97.5% of iOS Developers Are Smiling (But Not Tim Sweeney)

Christmas came early for small developers around the world. You’ve probably heard by now that Apple recently announced the App Store Small Business Program, reducing App Store commission to 15 percent for small businesses earning up to $1 million per year. The program will launch on January 1st 2021.

This is an amazing asymmetric risk-reward move for Apple and a win for the majority of developers worldwide. According to Sensor Tower, the program will benefit 97.5% of App Store developers, while only affecting less than 5% of the App Store’s revenue. So while the vast majority of developers in the App Store ecosystem will be getting a 21% bump on the top line, Apple only loses a few percent.

On the PR side, the optics of supporting the small guys is crucial for Apple, and it’s likely part of laying the groundwork for their upcoming trial with Epic next May. While correlation doesn’t equal causation, developers all around the world could thank Epic’s CEO Tim Sweeney for constantly pushing the line with Apple. Ironically, Epic cares more about Apple loosening control than simply lowering the rate for certain developers, so even if public perception shifts more favorably to Apple essentially nothing in Epic’s argument changes.

This is also not the first time the App Store has done a price cut. Back in 2016, the App Store reduced the subscription commission to 15% for subscriptions that are maintained for over a year. While the effect of the subscription commission reduction doesn’t impact as many developers as this week’s Small Business Program, it can offer us a glimpse of the future. For context, here’s the commission comparison of Apple’s App Store with other marketplaces as of July 2020:

Naturally, the question on everyone’s mind now is whether Google Play will follow suit with a price cut for small developers. I think a similar 15% cut (or even more) is extremely likely for Google Play for two reasons: 1) Google Play followed suit with a similar 15% cut to subscriptions in 2017, one year after App Store’s cut. 2) Regulators scrutiny with big tech and digital monopolistic behavior is trending in US and EU. If Google Play does not do a price cut, they would be first in line to face the music. And in this case, Google would much prefer to go second. (written by Owen Soh)

#2: Sea Limited’s Seamingly Limitless Growth (forgive me)

Sea Limited — a Southeast Asian-based gaming and e-commerce leader — continues to execute incredibly well. As a whole, third quarter revenue roughly doubled over the past year, but let’s narrow in on Garena, the company’s “digital entertainment” arm. Digital Entertainment bookings skyrocketed 110% year-over-year to $945 million and adjusted EBITDA leaped 120% to $585 million (a 62% margin). This was possible as a result of 572 million quarterly active users (+78%) and 65.3 million (+124%) quarterly paying users. Garena Free Fire, the massively popular mobile battle royale, continues to be the key driver. Garena is working on other games — like publishing League of Legends and Call of Duty: Mobile in SE Asia — but Free Fire continues to steal the spotlight.

In fact, according to Sensor Tower, Free Fire remained the highest grossing mobile game in SE Asia and Latin America last quarter. What stands out to me is the sequential growth. At a time when many gaming companies are struggling to hit the same engagement highs they were at peak quarantine, Garena has been easily breaking new records. Over the past quarter (which also represented the game’s 3-year anniversary), Garena added 70 million quarterly active players and 15 million quarterly paying users. This is primarily due to ongoing content updates, plus new social and community features. For example, Free Fire continues to create playable characters based on celebrities, exclusive in-game hit songs, they just added a social training ground area where 25% of players hang out every day, and the esports community continues to thrive. Management is optimistic there’s much more runway left.

Despite incredible results, I suspect Free Fire remains understudied when it comes to how they execute on mobile live ops and content updates. This team is world class. That said, it’s important to keep in mind what really matters here. Garena would be valuable as a standalone business, but it’s more valuable as a part of Sea Limited. Why? Because the hundreds of millions of dollars in profits Garena provides is directly reinvested to scale Shopee, the company’s e-commerce platform. What matters most for Sea Limited is whether Shopee hits escape velocity and dominates e-commerce in SE Asia, and that’s only possible because of the internal cash flow Garena provides. As such, it’s critical that Free Fire continues to crush it, but that doesn’t seem to be a problem. The business is set up well for ongoing success.

#3: Embracer’s Endless Appetite

Embracer Group, a Swedish-based gaming company with 190+ owned franchises under its wing, had a drop-the-mic moment this week. On the heels of second quarter results, the company announced the acquisition of 13 companies. That doesn’t happen every day!

These are all relatively small studios (plus a PR firm), which collectively add 19 new IPs, 767 new developers, and $100-120 million in expected EBIT next fiscal year — all for a maximum purchase price of $440 million (about ~$230 million upfront, mostly cash). On the surface, that’s great financial engineering (buy for a low multiple of EBIT, while trading publicly at a higher multiple), and they’re all getting tucked in as independent studios within larger operating groups (like THQ Nordic and DECA Games).

For broader context, since Embracer IPO’d in 2016, the company has spent nearly $1.5 billion on 25 acquisitions to transform its business. In four short years, the company has grown from 1 to 6 verticals (like game development, indie publishing, traditional publishing, etc.), from 4 to 58 studios, and from 372 to 5,697 employees. In the process, the company’s share price has risen 17x as a result, so the strategy has clearly added value. And it’s unsurprising that when you look at the latest results sales are up 89% and operating cash flow is clocking in at a 33.8% margin. I suppose cash flow generating businesses that can be acquired at low multiples are a hell of a corporate drug. Of course, organic growth remains a priority, and even though operations are decentralized (much like at Stillfront, which we covered in a deep dive), Embracer still expects its studios to uncover growth opportunities and only publish when games are fully ready.

Going forward, it looks like we should expect more of the same, if not larger acquisitions. According to management, Embracer has a substantial watchlist, has been engaging with 100+ entrepreneurs in the past quarter, and believes Embracer’s model of high autonomy remains an attractive characteristic for luring talent. I think this rollup model can work at even greater scale — we’ve seen successful companies in various industries create value through ongoing M&A — but buying most everything in sight can be dangerous. If accelerating M&A results in a lower average quality of deals, then it could create organic growth and cash flow problems down the road. I’m not convinced Embracer is prioritizing quality over quantity, but I also see little evidence that their model that created so much value will break anytime soon. It’s a fascinating company to watch.

#4: Wading Through the Skillz Hype

There’s a lot of hype around Skillz these days. For the uninitiated, Skillz is a platform that theoretically allows any skill-based mobile game to convert itself into an esport with real money winnings. In August, we even broke down how the success of Blackout Blitz, a mobile Skillz-based bingo game, spurred its studio to raise more money. If you look at Skillz high-level results — also the first quarterly results as a public (SPAC’d) company — most everything looks great. Yes, net losses widened, but revenue growth of 92%, gross margins of 95%, and gross marketplace volume (GMV) growth of 76% makes it look like Skillz is really onto something. Maybe they are, but I still find myself with more questions than answers.

First, I’ve heard some complaints through the grapevine about Skillz leadership and how many developers simply couldn’t find success with the platform. These are anecdotes, not data, but it still makes me wonder. Second, there remains a PR stench that’s hard to shake. Not useful PR-y statements like “the first mobile esports platform to go public” and “gaming has eclipsed movies, music, and books” are whatever, but other things irk me. For example, in the company’s initial investor presentation they try to showcase how “healthy and growing” their developer ecosystem is:

The problem is that even if this chart is technically true, it likely caused people to miss the forest for the trees. Do the math. Assume there are now 40 games with >$1 million of annualized GMV. Already, 40 out of hundreds of total games on Skillz is a tiny percentage — but note the emphasis on GMV. If we adjust this for the better metric, revenue (of which Skillz has a ~15% cut), it’s almost guaranteed that the number of games with >$1 million of revenue for Skillz is far less than 40. And for a company with a $200+ million revenue run rate that means there’s extremely high concentration. And what some may call the Pareto principle (80/20 rule) at play, I see a platform that’s so far only enabled outsized success in very narrow niche (card and bingo games). Herein lies a huge opportunity, but this is also the #1 risk. Can Skillz truly turn into a platform that enables outsized success in a growing number of genres? I don’t know, but it’s the question more people should be asking, because as great as Skillz’ growth is now the answer to this question is a top determinant of future growth. We’re intrigued by Skillz’ cool concept but unsure how big of a deal it really is. Let us know what you think!

🎮 In Other News…

• Roblox published their S-1, the document that details the business in preparation of going public. We’ll share more takeaways soon. Link

• NetEase’s third quarter was strengthened by multiple mobile game releases in China. Link

• Kevin Lin, co-founder and COO of Twitch, departs. Link

• Thunderful Group prepares to IPO. Link

• Nvidia launched its mobile web app version of GeForce NOW. Users can play games like Fortnite via Safari. Link

• Similarly, Stadia plans to bypass Apple’s App Store by launching through a web app. Link

• Epic Games acquires real-time animation firm Hyprsense. Link

• Epic Games launches Houseparty video chat in Fortnite. Finally! Link

• Zynga will open a new studio in Austin to focus on developing a Star Wars game. Link

• Lila Games raises $3.3 million to develop free-to-play mobile shooters. Link

• Pllay raises $3 million so gamers can wager on duels in popular games. It’s so far compatible with big titles like CoD: Modern Warfare, FIFA21, NBA 2K21, and Fortnite. Link

• Lightfox Games raises $3.3 million to better work on debut game Super Battle League. Link

🖥 Content Worth Consuming

a16z Podcast: Cloud Gaming: The Progress and the Mind-Bending Promise. “In this episode, Jade Raymond, VP of Stadia Games and Entertainment, a16z partner Jonathan Lai—formerly of Riot Games and Tencent—and host Lauren Murrow talk about the challenges in building cloud-native games, their potential to upend prevailing business models and pricing, and, most importantly, the spontaneous, social, super-shareable experiences that true cloud streaming will reveal. Through the rise of user-generated content, AI, and the cloud, Jade and Jonathan believe we’re inching ever closer to the Metaverse.” Link

Roblox Presents: The Lil Nas X Concert Experience! Following Fortnite’s lead, Roblox published their first in-game concert featuring Lil Nas X. Link

Why is Roblox allowed to stream games on iOS? “That the mobile ecosystem is evolving in this direction could pose significant problems for Apple. Apple’s enforcement of guidelines, especially as those guidelines change to accommodate new forms of content interaction (eg. games streaming) or to certify certain use cases (eg. the Reader App clause), are becoming conflicted. Under increased regulatory scrutiny,

Why I’m Losing Faith in Twitch. “Has Twitch proved itself as a platform where we should keep anything here? Should we keep videos, VODs, and clips on Twitch now? At the current state of things, in this video I evaluate if it's worth putting videos, VODs, and clips on the platform as a Twitch streamer. This is also a commentary on where the current state of Twitch is at … I hope Twitch can turn around. With all of the DMCA problems, multiple ads problems, and the lack of communication from the website on actionable things to fix the platform, I'm not sure where it goes from here. It's difficult because I have so much faith in the platform after 8 years of being a Twitch streamer and eventually building a top streaming brand, but I am definitely losing faith.“ Link

Building Data-Driven Teams in Mobile Games #3: Ask Questions You Can Answer. “It can be very difficult to use data in an actionable way. It can be tempting to turn to data in the hopes that it will provide THE answer – and avoid the pain and anxiety of making a judgment call. The success of a game depends on 2 main factors: your game itself, and your audience. And while you (mostly) have control over what’s in your game, you don’t control the audience and its tastes, preferences and modes of interaction with mobile entertainment. We are dealing with an ever-changing and unpredictable audience that evolves alongside the market and is impacted by multiple factors external to your game or the mobile industry. What that means is that – unlike physics or chemistry (I’m not a physicist or chemist) – the impact of every decision is always uncertain. You can never know for sure what the impact of a decision will be. No matter how much data you throw at it. The best use of data is to inform on the potential impact of a decision – not to make that decision for you.“ Link

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