Blizzard’s Latest Buy

Hi Everyone. Welcome back to Naavik Digest. If you missed the last edition, we previewed our Naavik Pro deconstruction on the rise, fall, and future of Stepn. We also released the first episode of our new podcast segment focused on interviewing leaders around the industry featuring Eric Kress. Be sure to check them out.

Now, let’s dive in…

Collect Stepping Stones and Honor Interestingness - Roundtable

In this Metacast episode, Anthony Pecorella, Anil Das-Gupta and Matt Dion, join your host Maria Gillies to discuss Investing in Interestingness and whether or not setting goals is actually counterproductive when creating innovative games. The team also discusses the concept of full on-chain games, and chats about why traditional console developers aren’t taking full advantage of the mobile market.

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#1: Blizzard’s Acquires Spellbreak Developer Proletariat

Last week, Activision Blizzard (NASDAQ: ATVI) announced the acquisition of US-based multiplatform games developer Proletariat. The sum of the transaction is undisclosed, but the deal could be pretty big, considering the team size and the background of the studio. Founded in 2012, Proletariat is a 90+ developer studio, known for its three major titles across various platforms: mobile RPG World Zombination, action game for streamers Streamline, and, most recently, PC & console battle royale Spellbreak. The companies have been working together since May, and now Proletariat is planned to be fully integrated into Blizzard Entertainment over the next few months.

The deal is a bit unique since it’s far less about helping Blizzard expand into new markets or genres and much more about helping the team with its current production process, recovering from several failures, staffing more employees, and winning the audience back. The acquisition is a key way to deal with the criticism World of Warcraft has encountered lately — the latest expansion, Shadowlands, received negative reviews from gamers and the press alike thanks in part to delays and quality issues.

Coming off their back foot, it’s clear that Blizzard wants it next DLC, Dragonflight, to show players that WoW is still worth paying for. For this to happen, they need to (i) release the expansion pack in time; (ii) bring more content to the game at a faster pace, and (iii) maintain a certain level of quality and innovation. With that context, Proletariat’s development expertise and vast experience in live-ops seem to be a perfect fit for the WoW production team. In the official press release, Activision Blizzard representatives (and even Bobby Kotick himself) admit the underperformance of the game and promise to bring more resources and attention to the franchise. Let’s take a look at the last few years of Activision Blizzard’s results to grasp the full scale of problems the company has.

WoW’s setbacks are only a part Activision Blizzard’s bigger problems: in Q1’22, Activision saw a decrease to 100 million MAU vs. 150 million MAU in Q1’21, while Blizzard showed 22 million vs. 27 million, and King saw 250 million MAU vs. 258 million. As we wrote previously, this was mostly caused by the relatively poor performance of certain major franchises. Of course, the decrease is also partially connected to the lack of (or lackluster) new releases: Call of Duty: Vanguard sold worse than previous games in the series; WoW saw a continuous decrease in audience numbers; Overwatch 2 and Diablo IV were both postponed. As for King with Candy Crush Saga, the company showed positive financial results this year, although with the same decrease in the number of active users.

*Activision Blizzard MAU (Million) | Source:* *Activison Blizzard*

Blizzard is arguably the most criticized subdivision of the entire company. The WoW core audience remembers when Warcraft 3: Reforged, announced in 2018 and released in 2020 (again, with the delays), failed to live up to players’ expectations. Moreover, the title was rumored to fail because of mismanagement and financial restrictions from Blizzard. In 2022, the company is still making controversial headlines – Diablo Immortal has been criticized for its aggressive spend ceiling, and, at the time of writing, the gaming community is discussing how Blizzard threatened to sue the modder who worked on Warcraft 3: Reforged.

The problem, though, came long before Warcraft 3: Reforged and those delayed WoW DLCs. As a part of the company’s transmedia initiatives, Blizzard co-produced the Warcraft movie back in 2016. Even though the film scored decent box office results (namely in China), which was almost three times higher than the budget, it failed to reach a wider audience, received a lot of negative reviews, and never saw a sequel. Several years later, Blizzard caused some buzz by laying off hundreds of employees right after it reported record revenues. Plus, the company – and Blizzard in particular – faced public accusations of sexual harassment and discrimination among its employees, which obviously had an impact on employee turnover, productivity, and game timelines. All these issues won’t ruin the company with such strong IPs, portfolio, and pipeline, but they have undoubtedly influenced Blizzard’s reputation in the gaming community and the parent company’s stock price.

So why do all these details and context matter? Well, the Proletariat deal is clearly a part of the ongoing process of Activision duly addressing its major problems. Some of them might be partially solved by internal culture improvements and several upcoming releases, including Diablo IV, Overwatch 2, Call of Duty: Modern Warfare 2, and the new mobile game in the Warcraft universe, as well as WoW Classic: Wrath of the Lich King and the above-mentioned WoW Dragonflight. However, there are still problems left with other games in Blizzard’s portfolio. For example, because lots of developers focused on the sequel, Overwatch has been lacking new content for a while and is steadily losing its audience.

Microsoft and Activision expect to close the massive acquisition before July 2023, and currently the deal is undergoing a competition probe in the UK. In other words, there is still a chance the deal falls through for regulatory reasons, but either way Activision Blizzard needs to put in the work to change its systems, teams, and priorities for the better. Tuck-in M&A deals like Proletariat, which occur alongside other new releases and partnerships, are one method to help chip away at larger problem solving, and we think that it’ll help make the team more capable of serving high gamer demands. (Written by InvestGame)

#2: Weekly News Round-Up

E3 Returns in 2023: Gaming’s perennial event is coming back. ESA, the organization behind E3, announced that it partnered with PAX/NYCC organizer ReedPop to bring the event back in 2023. When we wrote about the event’s cancellation earlier this year, we highlighted several shortcomings that led to its downfall, namely the rise of gaming’s move to digital and the fact that big companies can go direct to consumers. While a new organizer won’t solve these problems, ReedPop’s consumer-centric experience will help the event lean more into its casual roots. However, a new, mass-market version of E3 is anything but a sure thing in today’s market. Don’t be surprised if E3 2023 looks different than anything we’ve seen from the event before.

U.S. Game Spend Projected to Drop in 2022: Industry-tracking firm NPD Group released a brief earlier this week projecting game spend to drop 8.7% in the U.S. during 2022. Written by industry analyst Mat Piscatella, the note mentions that higher prices in everyday goods (like fuel and food) combined with continued supply-chain issues for hardware devices would be the biggest drivers of the downturn. Of course, other factors like the timing of game releases and Apple’s privacy pressures on mobile also play a huge role.

Soba Raises $13.5M to Build No-Code Game Tools: Late last week, web3 platform Soba announced it had raised a $13.5M seed round to build no-code game developer tools. Backed by Lightspeed Venture Partners, FTX Ventures, and Cherry Ventures among others, the company is focused on developing games where players participate in creation of content, rather than consume it. Dominated by titles like Roblox and Minecraft, gaining market share in the UGC content space can be an uphill battle, even for hypergrowth companies like Rec Room. Soba sees its wedge as targeting the folks who didn’t feel at home with the development options provided by Roblox or platforms like Unity. The team behind the project is strong, so keep an eye out for this one in the coming months.

🎮 In Other News…

💸 Funding & Acquisitions:

Soba raised $13.5M to build no-code game tools. Link
Dorian acquired interactive fiction developer Nix Hydra. Link
Supercell invested $37M more into Space Ape Games. Link
Crypthulhu Studios raised $3M. Link
Klang Games raised $41M to developer its player-built online universe. Link

📊 Business:

GameStop announced layoffs and fired its CFO. Link
UK regulators are investigating the Microsoft-Activision Blizzard acquisition. Link
U.S Game spend is projected to drop 8.7% in 2022. Link
Tencent is shutting down its WeGame app. Link

🕹Culture & Games:

E3 is partnering with PAX organizer ReedPop and returning in 2023. Link
God of War Ragnarok is coming later this fall. Link
Blizzcon is returning in 2023. Link
Nintendo is releasing a new Switch OLED to celebrate Splatoon 3. Link

👾 Miscellaneous Musings:

Neon White’s creative director on “making the most video games game possible”. Link
Is game preservation a losing battle?. Link
Estimating the top Switch games in H1 2022 - and why. Link
A love letter to playing games very, very quickly. Link