Sky Mavis’ Multi-Billion Dollar Vision

Hi Everyone. Welcome back. Today we have two quick things to share:

Firstly - We’re thrilled to welcome Maxime Eyraud to the Naavik family. A veteran in the world of interactive entertainment, Maxime has worked across music publishing, telecom, and animation before shifting his focus over to the world of gaming. As gaming’s reach expands beyond the traditional formats we know and love, Maxime’s perspective will be ever important for the future of the industry at large. Maxime will be partnering with our consulting and content teams (you can find his first piece here.) Please join us in welcoming him to the team!

Second - We’re looking to grow our consulting team. If you have experience in mobile free-to-play or crypto gaming and are interested in working on cutting-edge projects with wide-ranging clients, please send us a note. In particular, we’re looking for rockstar individuals who are passionate about and skilled in game design, economy design, product management, and tokenomics. If you'd like to learn more or express interest, reach out to Manyu.

Naavik Exclusive: Roundtable #18

In this week’s episode of the Metacast, Miikka Ahonen, David Amor, and Matej Lancaric join Nico to discuss:

How to create a new game from scratch
Honor of Kings reaches $10b in lifetime revenue
Facebook messes up (again)

As always, you can find us on Spotify, Apple Podcasts, Google Podcasts, our website, or anywhere else you listen to podcasts. Also, remember to shoot us any questions here.

Listen to The Metacast

#1: Sky Mavis Raises at a $3B Valuation

Another week, another billion dollar valuation in the red-hot crypto space: Axie Infinity developer Sky Mavis raised a $152M Series B at a $3B valuation. The round was led by Andreessen Horowitz, Accel and Paradigm. Previously, Sky Mavis raised $7.5M in May 2021, and $1.5M USD in November 2019.

A lot has been written about how Axie Infinity works, and how its “play-to-earn” model has become a way of earning a living wage. I want to focus on two questions that I feel haven't gotten enough attention:

1) Why does Sky Mavis raise funds at all? Shouldn’t a game with over $2B worth of NFT trading support a small development team, even with an aggressive scaling plan?

2) What are the long-term opportunities and risks to Sky Mavis’ vision?

So, Why did Sky Mavis raise funds? Axie Infinity revenue exploded in July 2021 (16x month-over-month) and another almost 2x to August. Since, mid-August revenue has declined, but in September 2021, Axie Infinity still generated an impressive $220M, and is on track to hit a similar number in October. However, this isn't money in the bank for Sky Mavis. Let's investigate:

Axie Graph — *Data from* *axieworld.com*

90% of current revenue comes from breeding fees. This cost is paid by players who want to create new Axies and is denominated in Axie's own token Axie Infinity Shard (AXS). Currently, breeding one Axie costs 1 AXS, all of which counts as revenue from the game. Sky Mavis had varied the price for breeding multiple times this year — until early August the breeding cost was as high as 4 AXS. The USD value of AXS has appreciated 25x since June 2021. Moving on, the remaining 10% are marketplace fees in form of a 4.25% share for every marketplace transaction of an in-game item (non-fungible tokens or NFTs). These are denominated in Ethereum (ETH), which has fluctuated much more narrowly in USD exchange rate than AXS (between a low of 1500 USD / ETH and a high of 4200 USD / ETH in 2021).

All revenue generated since the beginning of 2021 goes into the "Community Treasury" that Sky Mavis describes as "creating a base value for the AXS token". They explain: "For example, if there were 5,000 ETH in the Treasury, it wouldn’t make sense for the circulating market cap of AXS to be significantly lower than this since over time, this will be distributed back to stakers." The current balance of the Community Treasury can be looked up here.

Sky Mavis owns 21% of AXS supply. So a very much simplified version is that Sky Mavis owns $42M out of $200M in Axie Infinity revenue.

With this in mind, there are three good reasons to raise funding:

Payouts from the Community Treasury happen over a long time horizon, so game revenues are largely illiquid.
In order not to dilute their ownership and not to miss out on future appreciation of AXS value, Sky Mavis wants to "scale and hire aggressively without touching our AXS token reserves".
Co-founder and COO Aleksander Leonard Larsen said in an interview that by partnering up they want to be ready to weather any potential bear market in the crypto space, like the crash in ETH value earlier this year. The team also mentioned resilience against regulatory changes.

Sky Mavis' vision: Sky Mavis and their new investors describe grand ambitions. In the short-term, they expect Axie to grow at an accelerating pace by removing current barriers of entry (it’s not even available on App Store and Google Play) and building out additional gameplay and features. In the long-term, Sky Mavis wants to build out a platform to "fuel the play-to-earn revolution". Andreessen Horowitz expects them to "redefine [gaming]".

So what's plausible? In spite of its impressive growth this year, Axie Infinity is not an accessible product, and Sky Mavis is quick to emphasize that it's not anywhere close to "finished". Axie is not on Apple's App Store or Google Play, and getting into the game requires seven moderately involved steps, including having two digital wallets and spending ETH. Many tokenized collections have gained attention among crypto enthusiasts. In 2021, Axie Infinity managed to break out of that group when players in the Philippines figured out they could make a living by earning Axie tokens. Currently, 50% of Axie Infinity's users have not previously used cryptocurrencies according to Sky Mavis Co-founder and Growth Lead Jeffrey Zirlin.

It seems plausible that additional, richer gameplay elements, an integrated onboarding and mass market distribution on mobile (targeted for "late 2021 / early 2022") spark a second phase of hypergrowth. The raise will also help them 1) roll out F2P gameplay, 2) launch their own decentralized exchange, and 3) increase the capabilities of / support for Ronin, an Axie-specific Ethereum sidechain that helps limit gas costs for transactions. While a lot of this is for Axie, it's also laying the foundation for external developers to build their own Axie-based content, which is an expanded vision.

In my mind, this leads to two questions for the long-term view:

Is "play-to-earn" here to stay?
If so, what are the risks and opportunities specific to Sky Mavis and a potential future Axie ecosystem?

Free-to-play became the dominant business model in gaming in revenue and engagement by lowering the barrier of entry to try a new game to effectively zero."Play-to-earn" promises something even better than zero, with compounding growth of earning. In principle, this allows a compelling case for assuming that the "play-to-earn" model could enjoy significant long-term growth. Long-term it’s about players who invest time and resources in games because they enjoy them. In this new model, players also participate in the value they create for those games' overall ecosystem. This thesis requires a sustained economy. Sky Mavis' strategy to try and establish a platform supporting multiple games is both obvious and sensible.

But in the core Axie economy there are significant challenges ahead. So far, Axie’s value creation has come primarily from user growth: People wanting to play creates demand for Axie NFTs and breeding resources, which in turn creates demand for playing and earning these resources — a virtuous circle that could easily tip out of balance. As the supply of AXS approaches the pre-set limit of 270M in 2023 and user growth slows after another period of fast growth, the Axie economy’s health will likely require introducing deflationary mechanics and active management of the incentive mechanisms built into the Community Treasury.

It’s yet to be proven if Sky Mavis’ ambitious plan for decentralized governance becomes practical in the face of such challenges: by October 2023, the team wants to have handed over governance to the community of AXS holders. It's exciting, but also experimental, and it's entirely unclear how such a community-governed body would be able to react to unforeseen negative or malicious forces. One thing that is certain: the investment frenzy will continue to drive up copy cats and genuine competition in the space. It will take a long time before clear long-term winners will have emerged. (Written by Justin Stolzenberg, Co-founder of Phoenix Games)

#2: What Twitch’s Leak Means for Amazon’s Gaming Strategy

A couple of weeks ago, I wrote about the long-term opportunity YouTube Gaming has to usurp Twitch as the market leader in the world of streaming. My argument in the piece was two-fold — 1) YouTube has a lead in international markets and a product strategy that can’t be copied and 2) Twitch can’t seem to stop making self-inflicted mistakes. Fast forward to this week, and Twitch was the topic of another self-made error — a major data breach. The scope of the leak itself is nearly unprecedented. According to The Verge the nearly 125GB of data that were released to the public includes information about:

Three years worth of payout data for some of the top creators on Twitch
The entire code base of Twitch’s website
Source code for the mobile, desktop, and console-based Twitch clients
Code related to proprietary SDK’s and internal AWS services used by Twitch
An unreleased Steam Competitor being developed by Amazon
Data on other Twitch-owned properties including CurseForge and IGBD
Twitch’s internal security tools

Leaks are never fun, particularly for employees who’ve spent years bringing projects like these to market and the creators on the platform. With such a frustratingly comprehensive list, Amazon’s overall gaming ambitions over the course of the next 2-3 years have been put on display for the world to see, which ruins future announcements and can set unrealistic expectations for consumers. All the above said, leaks like these give an increasingly detailed look into the gaming strategy of one of the industry’s most well-subsidized players. With the context of the leaks in mind, we can start to unwind just what Amazon is thinking when it comes to the world of games.

The most prevalent takeaway is that, despite continued missteps and failures, Amazon won’t be leaving the market anytime soon. Over the last ten years, the company has assembled a war chest of gaming products, including Twitch, a Google Stadia-esque game streaming service, a gaming rewards system powered by Amazon Prime, a game engine, an in-house game studio, and now a Steam competitor. On paper the variety and depth of the ecosystem Amazon plans to build easily rivals that of Microsoft, who has built a successful gaming ecosystem using GamePass as the lynchpin. In my mind, the key question to consider is whether or not these bets will pay off, regardless of if Amazon continues to throw money at them. Only one of the products listed above (Twitch, which came to Amazon via M&A) has seen any sort of stable mainstream success. After the events of this week, even the stability of that platform can be called into question.

On paper, the variety and depth of the ecosystem Amazon has assembled has all the makings of a self-sustainable gaming-driven flywheel — you can play games anywhere using Luna, stream to the world using Twitch, and buy games for a great price on Amazon’s game store. While the company has built the skeletons of flywheel, I believe catalyzing it requires good games to play. The best chance for this to happen comes from Amazon Game Studios, the company’s in-house development team; but in its nearly tens years of existence, the team has only produced one moderately successful title. In a hits-driven industry like games, without successful titles to bring people into the Amazon gaming ecosystem, having the best tools in the world won't amount to much if there’s no one to use them.

To put it one way, Twitch’s data leak may be the biggest blow to Amazon’s gaming ambitions we’ve seen so far. While the platform’s most successful streamers don’t seem too upset about having their earnings exposed to the world, the information available calls to question some of the more fundamental issues about the streaming industry and how Twitch pays its talent. The company’s newly minted CEO, Andy Jassy, went on record this week to state that Amazon is in games for the long-haul. With the company’s best tool effectively losing all trust, I expect it will be quite a few years before we see Amazon as a true player in the space. (Written by Max Lowenthal)

🎮 In Other News…

💸 Funding & Acquisitions:

Axie Infinity’s Sky Mavis raised a $152M Series B at a $3B valuation. Link
AppLovin acquired MoPub from Twitter for $1.05B. Link
Bitkraft announced a $75M fund to invest in token projects in and around gaming. Link
Dapper Labs acquired Brud to integrate DAOs into the Flow Blockchain. Link
Niantic acquired Hoss to help expand its AR SDK kit. Link
SteamElements acquired Paragon, a Youtube-focused talent network. Link

📊 Business:

Apple generated $12.5B in revenue from App Store games in FY 2020. Link
Details on the Twitch leak. Link
Honor of Kings crossed $10B in lifetime revenues, the first mobile title to do so. Link
Facebook launched a $10M creator fund for Horizon Worlds. Link
Capcom plans to make PC its main platform. Link
EA filed a patent around friend recommendations to people engaged and interacting. Link

🕹️ Culture & Games:

Sora is Smash Bros. Ultimate’s final DLC character. Link
Roblox updated its ToS and now prohibits experiences that “depict romantic events, including weddings, dates, and honeymoons.” Link
The Pokemon Company is partnering with Universal Studios. Link

👾 Miscellaneous Musings: