Hi Everyone. Welcome to another issue of Naavik Digest! If you missed Wednesday’s issue, we covered the state of Embracer Group's Q3 results, and explored its growing Tabletop business. Today, we look at the latest news around Microsoft’s Activision acquisition and recent concessions they’ve made to combat regulatory concerns. Let's dive in.

Growth By Acquisition & 2020-22 Gaming Deals Highlights

Antitrust Pocast

Is there further evidence whether a growth by acquisition model is sustainable? What are the consequences of Roblox leaning into generative AI? What can we learn by analysing 2020 to 2022’s gaming deals? We dive into the latest games business news with Aaron Bush, Felipe Mata, and your host Maria Gillies.

You can find us on YouTube, Spotify, Apple Podcasts, Google Podcasts, YouTube, our website, or anywhere else you listen to podcasts. 

#1: Can Dual Announcements Appease Activision Antitrust?

Antitrust Online
Source: TT

This week, leaders of Microsoft, Sony, other industry representatives met with regulators in Europe to discuss potential issues and solutions around Microsoft’s proposed acquisition of Activision. Coming out of these talks, Microsoft made two notable moves with Nintendo and Nvidia in an attempt to appease regulators / competitors from blocking the deal. We’ll dig into that, but first let’s note what the concerns have been according to the CMA:

  • “The first [concern] considers whether Microsoft would be able to harm gaming console rivals now or in future, to the detriment of consumers, by making CoD exclusive to Xbox…”
  • The second [concern] considers whether Microsoft would be able to cloud gaming rivals now or in future…” by making top franchises exclusive to its cloud gaming offering. 
  • Too much power falling into the hands of platform companies — where they can unfairly dictate prices/other factors that hurt competition across the space

In an attempt to swing momentum in its favor, Xbox announced two key partnership agreements focused on assuaging regulator’s concerns. In short, the agreements are Xbox’s way of combatting each big critique levied against it.

Remedy to Concern #1: Xbox signed a 10-year binding partnership with Nintendo to bring Activision titles like CoD and Xbox games to Nintendo (subtext, apparently game(s) is just CoD). Through an extensive survey, the CMA found that “the content available to them on a console is important to their choice of console” and 24% of respondents said they would divert away from PlayStation if CoD was no longer available (the caveat is another survey found that 29% of PlayStation owners also owned an Xbox and 31% owned a Nintendo Switch; easy to divert away if this is already the case). Xbox recognizes the power of CoD, and it’s an easy decision to keep it on as many platforms as possible; it will be higher revenue for Xbox and an obvious concession needed to push the deal through. Of course, Sony will push back no matter what

Antitrust Graph
We also continue to see the importance of AAA game availability in determining which console to buy, but Sony’s PS exclusives rank nearly as high CoD. To be fair, I do think we’re underweighting the importance of network effects in an entrenched console ecosystem for games like CoD (friends play with friends — some important factors could also include cross-play). | Source: CMA

The deal with Nintendo "proves" the idea of supporting truly cross-platform gameplay rather than turn CoD into an exclusive. Of course, this comes after multiple assurances to PlayStation that CoD would not be exclusive to Xbox. Given the technical performance needed to run AAA games with “full feature and content parity” on Switch, this is likely the reality of timing (the Switch 2 will likely be out in a couple of years and it’ll likely take 1-2 CoD cycles for the deal to click in) and the company’s small way of seeding content for the next generation of Switch. Nintendo signing this agreement is a signal that it supports this deal.

Antitrust Data
Source: CMA

Remedy to Concern #2: Xbox announced a 10-year deal with Nvidia to bring the company’s PC library to Nvidia’s cloud service, GeForce Now (25M players registered players; active players is lower). Regulatory bodies are worried that the Activision deal will lead to antitrust issues in cloud gaming, which they view as an important emerging market. Handing over an entire library of games to its biggest competitor should help alleviate concerns. The holdup is more about bundling cloud gaming into a massive subscription whereas others have to compete standalone.

All this said, I’m hesitant on the premise of regulating a nascent market like gaming subscription and cloud streaming, and it seems that the regulatory bodies might be conflating Microsoft’s unique hold on the market as both an OS (Windows) and cloud service provider (Azure). The CMA even writes, “the cloud gaming service market is nascent — as a result shares may change more rapidly as the market grows than in a mature market… Microsoft has both a short-term and longer-term solution to host cloud gaming, leveraging its large and well distributed global infrastructure or stream its game without having to pay a few of third-party cloud platforms.” This is supported by the chart below.

Antitrust Data
Share of cloud gaming services drastically changes year to year given the nascency of the market. | Source: CMA

It’s these recent announcements paired with data that Sony is the dominant player in the console market (e.g dominance in certain markets like Japan vs. necessarily the holistic market view; “percentage splits for the console market between PlayStation & Xbox: Europe: 80/20, Japan: 96/4, Global: 70/30. Sony's share was 69% during late 2022”) that could signal the end of the adjudication is near. As seen by the data below, Sony has a bulk of console revenues and installed base, in part driven by PS5 exclusives (286 vs. Xbox’s 59). Sony’s hand might be forced into signing a similar deal.

Antitrust Data
Sony dominates console share of supply by a wide margin. | Source: CMA

I’d be remiss not to mention concerns brought up around the industry. DoF’s Eric Kress specifically brings up a few good points that are worth mentioning because I haven’t seen these necessarily echoed in the CMA’s materials. To signpost, Kress’s points more target business model concerns of Game Pass rather than about antitrust (completely different!). The two are related given the nature of the deal but regulators (and the first part of my article) focus on the anticompetitive questions.

  • While Game Pass is an excellent value proposition for consumers, the only reason Xbox can create this bundle is because Microsoft can subsidize the revenue loss in the near-term. The CMA notes that Xbox time to profitability on an acquisition like Activision for Game Pass is ~5 years (across a lot of sensitivity analyses). Perhaps we can think of this akin to consoles, which have negative margins but are made up for in long generation cycles and software revenue, and brining players into the ecosystem. I do think this is more of a question around how subscriptions are run (i.e the Netflix vs. Peacock model), and Xbox seems to be looking at increasing the pie vs. hurting the unit economics of the games industry. 
  • “Content devaluation and engagement attrition” feels like a very real problem that could be a byproduct of bundled services. Should we instead investigate second-order effects to publishers and independent developers? For example, how have agreements with Game Pass fared with regards to revenue, marketing, etc. — that is, what has / hasn’t worked?
  • If subscription were to gain significant market share and have leverage over third-parties, there is a scenario in which this drives consolidation across big tech (those able to afford cloud streaming at scale). There is a narrative here to be understood in and around third-party negotiating power, upholding quality, and discoverability, all of which have considerations on both side to understand. It’s exciting to think about the diversity of business models that can exist and compete (and succeed across the industry)!

There’s more research to be done over time around the real and perceived value of Game Pass to developers and publishers (yes, apparently Game Pass depresses game sales), and also about the strength of Microsoft’s cloud gaming ecosystem in comparison to other potential competitors. That being said, here’s what we know: Sony dominates console (e.g Europe seems to only have 6M Xbox MAUs across console; Microsoft has 58 games on PlayStation, while Sony only has two on Xbox), Game Pass is still small, and Xbox has made reasonable concessions to appease the antitrust concerns. To Kress’s post, if the deal is deemed not to be anticompetitive, competing business models will spark changes in focus across the industry (an analysis for another day!). If the deal is deemed anticompetitive, the announced deals with Nintendo and Nvidia might be voided, Activision will get a juicy $3B breakup fee which will enable them to grow in other ways, and Xbox will get a chance to reset. We’ll have to wait and see what happens, but at least the data coming out of this has been awesome to dig through. (Written by Fawzi Itani)

GameIQ Solves The Industry's Toughest Challenges

Antitrust Data

Game IQ is a market and competitive intelligence tool for mobile gaming that allows publishers to identify hidden growth opportunities, tie features to performance KPIs, and help you make difficult roadmap decisions. With hundreds of thousands of gaming apps in the app stores and thousands of new mobile games released each month, data.ai (formerly App Annie) is looking at a huge number of games to be classified. On top of this, the high granularity of our taxonomy structure makes it quite time-consuming to manually figure out into which category each game should fit.

How can we cover the vast majority of gaming apps in global markets accurately, efficiently, and in a scalable manner?

Game publishers and strategists today are facing various key challenges:

•        Determining what features will provide lift

•        Making roadmap decisions based on accurately modeled expected outcomes

•        Discovering how competitors lifted performance through feature releases

•        Benchmarking performance against competitors

•        Confidently focusing on the highest potential genre for a new game release

With the enhancements we’ve made to data.ai Game IQ including Feature Tagging, Genre Summary, and Tag Trends, you can now effectively solve these challenges.

#2: Elden Ring Grows & Unity Slows

Antitrust Unity
Source: GamesIndustry.biz

Elden Ring tops 20M units sold. That’s not a shabby start for 2022’s Game of the Year! For context, FromSoftware’s previous game, Sekiro: Shadows Die Twice, sold “only” 5M units in its first year, and Dark Souls 3 (which published in 2016) took four years to reach 10M units. Very few games outside of the historically largest IPs — much less Souls-like games — hit the 20M mark. In short, Elden Ring is a true phenomenon that not only took FromSoftware to new heights but is a franchise that will certainly see more reinvestment (in DLCs + possible sequels). For more analysis about FromSoftware’s future, make sure to check out Matt Dion’s recent Naavik Digest piece.

Unity reports rough Q4 results. Unity’s stock fell 16% on Thursday after the company missed on earnings and guided below analyst expectations for the upcoming fiscal year. Full-year 2022 revenue hit $1.39B, growing 25% year-over-year, and it accelerated in Q4 to 43% due to the merger with ironSource. On the plus side, and despite a tough operating environment for mobile ads, the merger seems to be going relatively smoothly; it’s led to deeper customer relationships and growing market share. Management also expects to become more profitable this year. However, there are few yellow flags worth noting. First, “Grow Solutions” (Unity’s newly restructured segment that includes all of the advertising products) only grew 12% year-over-year; considering that includes the merger with ironSource, this hints at pretty extreme weakness in the core advertising business. Second, we can see that Unity’s largest customer cohort — those who spend over $100k per year — actually shrunk in Q3, and the addition of ironSource into the mix blurs what also is very likely continued weakness there. And, lastly, stock-based compensation remains wildly high — in fiscal 2022, there was ~$550M in stock-based comp on ~$1.4B in revenue. That’s 40% of revenue (!!) and singlehandedly a reason to roll ones eyes at Unity’s adjusted-EBITDA goals (which strip out that enormous expense). Over the next couple years, Unity should return to greater strength and more profitability as the mobile advertising market stabilizes and as spending is brought under control, but it’s a shame these issues aren’t discussed more straightforwardly. (We discuss Unity’s earnings in more depth in Naavik Pro this upcoming Tuesday!)

Blumhouse launches a gaming division. If you’re into horror, you’ve certainly come across Blumhouse Productions, which has produced hits like The Purge, Insidious, Get Out, Paranormal Activity, and most recently M3gan. The company is known for producing films on small budgets, where even moderate successes can lead to outsized profits. Blumhouse is now taking this horror focus and lower-budget business model to gaming. It will partner with indie developers to produce console, PC, and mobile games for sub-$10M budgets. Details are still scarce, but it’s not a surprising move. After all, transmedia as a model for notable IP makes more sense than ever, the indie horror market is debatably underserved, and the company can learn from others who walked this path first — like Annapurna, which similarly started producing games (such as the award-winning Stray) after initially starting in video. 

Web3 gaming guilds continue to pivot. It’s well established at this point that if play-to-earn as a business model for games is largely unsustainable, then so are the original guild business models that built on top of them. Naturally, this means that most guilds are destined to fade away, but what if certain leaders can successfully pivot? We’re certainly seeing a few entities try. For example, this week it was announced that Yield Guild Games (YGG), the largest of all guilds, raised $75M for its first venture fund. YGG has long invested and partnered with web3 gaming projects (and still does invest in in-game assets), but running as an official VC provides a sustainable business model (with management fees). Further, YGG recently sold $13.8M in tokens (to a handful of crypto venture funds) and will use the proceeds to expand its guild advancement program through soulbound reputation tokens. That’s a fancy way of saying that YGG wants to find more ways to help members participate, create value, and get recognized for their contributions to games and the community (such as through soulbound tokens, which can’t be transferred — and therefore don’t have monetary value — but act as resume builders of sorts). We’ll see how that shakes out (and Naavik Pro is covering this in much more depth on Monday). It was also announced that Manish Agarwal (ex-CEO of Nazara Technologies) and Ishank Gupta founded and raised money for India-based Kratos Studios, which just acquired IndiGG (initially YGG’s sub-DAO for India) via a token swap. IndiGG’s new mission is “to make South Asia a digital goods factory for the world.” Next week, we’ll publish an extended interview with Manish Agarwal for those interested in where IndiGG is going next.

Rovio deprioritizes the classic Angry Birds. Last April, Rovio re-released Rovio Classics: Angry Birds, but the company just decided to pull it from Google Play and change the name to Red’s First Flight on iOS. In short, even though this $0.99 game (with no microtransactions) is beloved by many, it’s hurting performance elsewhere in the Angry Birds portfolio of apps. This change isn’t that big of a deal — the classic game likely doesn’t have a huge audience at this point — but it still should help the newer, more profitable games get even more attention. This, of course, is all taking place at a time where Rovio is considering its M&A options; whether it continues flying solo or joins another business, continuing to optimize and grow the Angry Birds franchise will stay a key priority.

In Other News

💸 Funding & Acquisitions:

  • Earnings: Thunderful Group | Unity
  • Azra Games raised another $10M in a round led by a16z. Link
  • Stride raised $5.5M for collaborative storytelling from Fabric Ventures and Makers Fund. Link
  • Curio raised $2.9M for on-chain gaming from Bain and TCG. Link

📊 Business:

  • Microsoft signed a contract with Nintendo and Nvidia to bring Xbox games to each company’s platforms and services. Nintendo | Nvidia
  • Hogwarts Legacy has made $850M+ in its first two weeks, selling 12M copies. Link
  • Blumhouse launched a game division. Link

🕹 Culture & Games:

  • Nintendo partnered with Generation Esports. Link
  • Steam launched a local game transfer feature for Steam Deck. Link
  • CoD will get a new game in 2023. Link

👾 Miscellaneous Musings:

  • Supply and Demand in CS:GO. Link
  • Xbox hardware sales in Japan. Link
  • UK gaming market showed a decline. Link

This Week In Naavik Pro

Antitrust Games

Looking for more great games industry analysis? Check out Naavik Pro! 

This past week the Naavik Pro team published:

  • A fantastic deconstruction of Brawl Stars — with a focus on how the game managed its live ops to maintain engagement.
  • A bunch of earnings coverage, ranging from Take-Two Interactive, Stillfront, Netmarble, and the console companies. 
  • An essay that uses the simulation tool, Machinations, to help explain the good and bad of Illuvium’s and Splinterlands’ economy and token designs.
  • An updated game radar with takes on Arena Breakout and Tower and Titans.

This upcoming week, we’re publishing a new report on the mobile RPG genre, covering the earnings of Unity and Embracer, digging into the state of gaming IPOs, analyzing Yield Guild Games’ new raise, and tackling the Opensea vs Blur competition. And there’s much more coming after that!

If interested in learning more or signing up, request a demo below.

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 a harsh period of layoffs. Every job post garners ~50K impressions over the 45-day newsletter featuring period and results in 1 - 10 applications depending on the company and role.

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