Welcome back to another edition of Master The Meta by Naavik. This week, the games industry is rallying behind Ukraine in its own unique way. If you’d be interested in supporting those in need, The Red Cross has been doing amazing work providing vital aid. We’re sending our best wishes to those in Ukraine, especially those on the Naavik team.

Roundtable #37: Will Steam Deck Become a Success?

In this Metacast episode, Aaron Bush and Fawzi Itani join Maria Gillies to discuss:

  • Evolution of Digital Game Sales

  • Playtika’s 2022 Strategy

  • Steam Deck’s Release

Key Resources: Episode summary | Youtube Video | Podcast. If you’d like us to discuss any other gaming-related topics, do reach out at [email protected]. We’d love to hear your general thoughts and feedback, too!

#1: Epic Games’ Acquisition of Bandcamp

Source: EpicGames

2022 is the year of the gaming deal. There was more activity in January than all of last year combined, and this week saw another interesting transaction. While it doesn’t rival Microsoft/Activision or Take-Two/Zynga in size, Epic Games buying Bandcamp surprised many this past week. What does a gaming juggernaut behind Fortnite and Unreal Engine see in a smaller music platform whose marketplace is the stomping ground for emerging, independent artists?

Source: Bandcamp

About a year ago, Aaron and I wrote a newsletter piece about how Epic’s flurry of acquisitions was fueling its metaverse ambitions. The company’s Bandcamp acquisition speaks to this vision: “Bandcamp will play an important role in Epic’s vision to build out a creator marketplace ecosystem for content, technology, games, art, music and more.” A non-exhaustive list of some of these acquisitions by category include:

  • Content — Tonic Games Group (maker of Fall Guys), Psyonix (maker of Rocket League), and Harmonix (maker of Rock Band and Dance Central)

  • Technology — 3Lateral, Cubic Motion, and Quixel (contributed to the development of Epic’s MetaHuman Creator)

  • Art — ArtStation (platform where digital artists can share their portfolios and sell their assets)

  • “More” — SuperHuman (platform that gives developers tools to create safer digital experiences for younger audiences)

In my opinion, the acquisition of Bandcamp is aligned with Epic’s focus on building out the strongest ecosystem possible to attract more developers to build on Unreal Engine and users to play Epic Games’ titles. Along these lines, large gaming companies — including Roblox and Twitch — have struggled with music licensing and fighting DMCA take-down notices from the music industry in recent years. Bandcamp provides Epic with a foothold into the music industry and leverages a team experienced negotiating with music rightsholders. There are also potential win-wins from seamlessly pairing game developers, who want pre-cleared music in their games, with independent musicians, who want to find creative ways to make ends meet given streaming’s notoriously low payouts to artists outside the top 1%.

Some articles on the Bandcamp deal have pointed to the highly successful virtual concerts in Fortnite. Major artists like Travis Scott and Ariana Grande have attracted tens of millions of views with their in-game concert experiences. Clearly, this is an exciting area for Sony (owner of the “major” record labels and publishers), having made a strategic investment into Epic Games. But that strategy focuses on superstar artists, whereas Bandcamp caters to the music middle class. So, while there certainly could be virtual concerts for Bandcamp distributed artists down the road, I don’t see that as the driving force behind Epic’s acquisition. In my opinion, the strategic rationale — bringing on a great team with years of music rights experience and providing gaming creators with music that is easy to integrate — feels quite similar to the ArtStation one, just for a different medium.

There are also similar cultural dynamics between the Bandcamp and ArtStation deals. ArtStation was seen as having a strong community of independent artists and there were concerns that an acquisition by Epic Games could change that. Among independent musicians who struggle to monetize via streaming, Bandcamp is seen as an important place to attract users and monetize their fandom. As a result, there is concern about Epic’s plans for Bandcamp and several music outlets have pointed out Tencent’s ownership interest in Epic. “The giant red flag is Tencent’s involvement, and its predication upon Epic’s adoption of a GaaS subscription model.” It’s worth noting that after Epic acquired ArtStation, it quickly cut the platform’s take-rate from 30% to 12%. Bandcamp has a friendlier take-rate at 18% (especially compared to music streaming platform’s ~30% rake), but I wouldn’t be surprised to see Epic announce a slight cut post-transaction. Along these lines, Epic CEO Tim Sweeney has been outspoken about creating fair and open platforms in addition to attractive and successful ones. Simply put, I see Bandcamp as a great cultural fit, at least on the surface, for Epic.

Tim Sweeney continues to point the Epic Games ship towards a metaverse that expands the pie for all creators. With the Bandcamp acquisition, he brings a team onboard that has been focused on generating more income for independent musicians for the past 15 years. The addition should create more opportunities for game developers and artists alike to collaborate and support Epic’s frontrunner status in developing the immersive experiences of the future. (Written by Jimmy Stone. He recently wrote a deep-dive on music & technological innovation that you can find here)

#2: Valve’s Steam Deck Hits the Market

Source: The Verge

After nearly a year since its first announcement, Valve’s Steam Deck is finally being released to consumers over the course of the last few weeks. While a majority of device preorders are expected to be fulfilled in early Q2, selected media outlets (and a few lucky consumers) have gotten their hands on Valve’s handheld console, and the reviews are…mixed.

Articles from outlets like The Verge and PCGamer laud the device for its vast library and ambitious goal, but are quick to point out the current product’s defects, of which there are plenty. Issues include limited battery life (<4 hours for certain games), and a whole host of development bugs, like audio loss, poor framerates, and broken software. However, despite numerous day one shortcomings, much of mainstream media seems to bring a sense of optimism to the device. The Verge’s review puts it well: “today’s Steam Deck expects you to tweak more and forgive more than your average PC, not less. But for me, the magic of Steam Deck is this: it makes PC gaming truly portable for the first time ever.”

When we first covered the Steam Deck announcement last July, our team echoed a similar sense of cautious optimism. As fans, we loved the idea of playing PC games anywhere. As analysts, we appreciated the idea of a PC-centric company like Valve, expanding its Steam ecosystem into another form of hardware to counteract growing competition and expand its TAM. But now that the device is in the market, it’s interesting to examine how likely it is that Valve will live up to the vision we imagined. In our minds, success for the device comes down to two key factors: in the short-term, it's about Valve’s ability to rebound quickly and deliver on its promises, but in the long-term, Steam Deck’s adoption relies on consumer preferences becoming more portable-centric, and that’s much tougher to predict. Let’s dive in deeper.

To set expectations — making portable devices is hard. Margins on devices like the Switch are slim, with reports that Nintendo makes only $43 dollars for every $300 device sold (14.3%). To offset smaller cuts, companies are forced to optimize for high unit sales. However, when we take a look at Valve's audience today, which is made up of ~120M MAUs on Steam, even a 5-10% attach rate won’t yield the kind of financial stability needed to produce the device well into the future. Rather, if Valve can’t count on moving units, the company needs to spend the next one to three years polishing the flaws of its first version device until it can deliver to an acceptable level of performance for its second go around. Nearly every review mentions UI flaws, bugs, and battery issues that would ostracize nearly all but the most patient and seasoned consumers from using the device. It’s almost as if the current iteration Steam Deck is the anti-Switch, designed with every bell and whistle imaginable, but forgoing simplicity and polish in the process. Cleaning this up will be a must if Valve wants to create a high sales volume business or expects to have a shot at releasing a second iteration of the device in the coming years.

Looking ahead five to ten years however, the future of Steam Deck is more unclear in my opinion. Smartphone gaming has proven that there’s huge demand for handheld titles, but the jury is still out on the demand for console-like handheld experiences. The Switch aside, devices like Backbone (which I covered in last week’s issue) and even the historical success of devices like the DS (154M units sold) or the PSP (81M units sold) show that the opportunity for higher fidelity mobile is there. However, rather than being handheld-first in its focus, the Steam Deck’s library focuses on bringing titles that have not historically been handheld-first to the on the go consumer. It’s a similar vision to that of cloud-based gaming, where companies like Amazon, whose cloud offering became available to all US consumers this week, are betting on the idea that console gamers will become increasingly disconnected from their high-cost, home-centric gaming devices (and to this point, there are rumors floating around that Game Pass will be available on Steam). While investments pour into the space, success for this concept is anything but guaranteed. We’ve yet to see strong adoption of any cloud platform, and many critics continue to argue that mobile experiences will never provide the same tactile, nuanced experience that something like a mouse and keyboard can provide. There’s a realistic chance that in five to ten years, the market will have shifted away from the concept completely, just as it did to motion controls in the mid-2000s, and the Steam Deck will be relegated to nothing but another failed Valve experiment.

Personally, I remain optimistic. It’s exciting to see an industry stalwart like Valve invest significant R&D into such a novel product. Yes, the device is subject to a laundry list of shortcomings, but with enough time (and money) bugs can be fixed and hardware can be optimized, and Valve has plenty of runway to fix it. Meanwhile the implications of a device like the Steam Deck being successful are massive — we could see a world in which device barriers fall away as both the PC and console market become completely upended by handheld/cloud devices, leading to a more open and approachable industry. There are, of course, a litany of open questions to be answered — including thoughts around anti-cheat implementation and competitive viability, but if Valve does manage to find a way to make the Steam Deck work and it resonates with games, things are almost certainly going to be different. (Written by Max Lowenthal)

🎮 In Other News…

💸 Funding & Acquisitions:

  • Earnings reports: Playtika | Sea | Corsair | Netmarble

  • Hiro Capital raised a $300M fund for gaming. Link

  • Makers of Journey and Sky, thatgamecompany, announced a $160M round. Link

  • Netflix announced it would acquire Next Games for $70M. Link

  • Epic Games is acquiring music platform, Bandcamp. Link

  • Tencent acquired Polish game developer and publisher 1C Entertainment. Link

  • Inworld AI raised $10M to develop AI—powered virtual characters for game. Link

  • Derby Stars, a Terra-based blockchain game, announced its $6M seed round. Link

  • Worldspark Studios raised a $3M seed. Link

📊 Business:

  • Axie Infinity raised their marketplace fees and added a creator code component to split the difference, potentially. Link

  • State of the Stream for January 2022. Link

  • Rumor has it that Valve will integrate Xbox games pass into its offering. Link

🕹️ Culture & Games:

  • The games industry is rallying together against geopolitical events. Link

  • Genshin Impact rolled out UGC dungeons. Link

  • MSCHF turned the SATs into a battle royale. Link

  • Skybound and Genvid announced their latest collaboration, A MILE with The Walking Dead IP. Link

  • Japan’s bet on esports. Link ($)

👾 Miscellaneous Musings:

  • The Factorio Mindset. Link

  • Why Gamers Shouldn’t Hate NFTs. Link

  • Sustainable Game Economies in Heroes of Mavia. Link

  • Ambiguity as a Game Dynamic in Story-Drive Games. Link

🔥 Featured Jobs

You can view our entire job board — all of the open roles, as well as the ability to post new roles — below.

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

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