Hi Everyone. Welcome to another issue of Naavik Digest! If you missed our last one, be sure to check out our piece on Fall Guys developer Mediatonic’s approach to UGC.  This issue, we’re discussing Electronic Arts and Take-Two Interactive’s most recent earnings reports and what they say about each companies’ live service strategies.

Embracer’s Deal Collapse / Take-Two & Ubisoft Earnings / Mortal Kombat 1

Live Podcast

New regions approve Microsoft’s bid for Activision Blizzard, but the saga isn’t over yet. Another former DICE member starts a studio. How did Axie Infinity finally manage to make it onto iOS, and will it succeed? Embracer loses a huge partnership deal. How will Mortal Kombat 1 fare against the upcoming slate of fighting games? What do the numbers behind Take-Two and Ubisoft’s earnings say about their future plans? Join us for all the latest games business news with Matt Dion, Aaron Bush, Felipe Mata, and host Devin Becker.

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

#1 EA And Take-Two Offer A Glimpse At Their Live Service Futures

Written by Carson Taylor

Live Football
Source: Electronic Arts

Public gaming stocks have underperformed the market this year, but the most recent earnings reports from Electronic Arts and Take-Two Interactive indicate the core business of mega-publishers remains healthy. More importantly, and more interestingly, these earnings also exposed a number of key trends about the future of the game industry: 

  • Live services continue to drive the success of these companies
  • Franchises and IP are more important than ever
  • Even the biggest publishers are interested in moving beyond today’s Games-as-a-Service and into tomorrow’s “Games-as-a-Platform”
  • The role of AI in AAA game development 

EA and Take-Two are often compared as they represent two of the biggest public third-party publishers, and both have similar business models and even content portfolios. Both companies’ leaders are vocal and ambitious about the future of the industry, and during this period of economic uncertainty and changed consumer behavior, both companies’  latest earnings reports clarify both the present and future of mass-market gaming.

Live Graph
EA (blue), Take-Two (orange), and the S&P 500 performance in the stock market since last year. Source: Yahoo Finance

Live Services Keep Growing

EA reported Q4 2023 (January to March 2023) earnings on May 9th, revealing that its core live service games are not just sustaining themselves, but continuing to grow and set new records for engagement. Marquee franchises like Apex Legends, The Sims, and especially FIFA contributed to a “record for the quarter” in terms of live services bookings, up 10% year over year and now constituting 83% of all of EA’s net bookings.

While live service monetization was heavily driven by FIFA products, engagement is spread across multiple titles. The Sims 4, a 2014 release, went free-to-play in October, bringing in “tens of millions” of new users. Apex Legends maintained a steady 20 million MAU throughout fiscal 2022. Across the company, a record-setting nearly 700 million players engaged in EA’s network, indicating “consumer appetite for interactive entertainment experiences is at an all-time high” despite macroeconomic concerns. 

Of course, even with the success of EA’s core titles, some questions remain after the May 1st shutdown of Apex Legends Mobile and the upcoming rebranding of the FIFA franchise to EA FC. The company’s repeated stumbles in launching hit mobile games, including perhaps its latest Lord of the Rings release, and highly concentrated live services bookings, contribute to lingering uncertainty around the business beyond any particular earnings cycle.

Live Graph
Even as full-year FY23 bookings declined during last year’s gaming’s market contraction, live services revenue continued to grow. Source: EA

Over at Take-Two, the addition of Zynga's sprawling mobile portfolio drove the company's strong results, but helping the situation of course was also its live service properties in the form of Grand Theft Auto, Red Dead Redemption, and NBA 2K. Take-Two uses a metric called Recurrent Consumer Spending (RCS), which is essentially subscriptions and microtransactions revenue, to report live services monetization. That metric increased by 115% in Q4 2022, the company said.

Not only does RCS constitute 78% of Take-Two’s net bookings, but CEO Strauss Zelnick’s contract renewal last year explicitly gave him a performance incentive tied to RCS — talk about a company devoted to live services!

Live Graph
Recurrent Consumer Spending (RCS) has dramatically increased as a proportion of Take-Two’s net bookings in recent years. Source: Take-Two

The Importance of Franchises

A theme across both EA’s and Take-Two’s earnings calls was the importance of blockbuster franchises. While popular IP is always central to the portfolios of big publishers, both EA CEO Andrew Wilson and Zelnick stressed that such titles are especially important in today’s uncertain consumer spending environment. According to Zelnick, “While consumers continued to exercise restraint with their purchasing behaviors, they prioritized blockbuster franchises.” 

EA also explicitly detailed its strategy around “blockbuster interactive storytelling,” noting that “consumer trepidation around spending” has meant gamers have “less money to risk against new things or smaller things or unknown things,” instead preferring the franchises they already know and love. This strategy, which is also how EA positions single-player games within its mostly service-based portfolio, is clearly bearing fruit right now as Star Wars Jedi: Survivor sits on top of the charts after its April 28th release. Counting on the very same franchise, Take-Two has its own Star Wars game set for release this year, though Star Wars: Hunters is a decidedly multiplayer, live services affair from Zynga releasing on mobile and Switch.

Live Franchise
Expanding the value of its industry-leading owned IP was a major driver for Take-Two’s acquisition of Zynga, which itself coined the term ‘forever franchises’ to reflect the importance of its most-recognizable live services titles. Source: Take-Two

Even looking beyond Take-Two and EA’s titles, it's clear how established IP is driving the industry’s revenue at the moment. While Hogwarts Legacy is 2023’s best-selling game so far (and a welcome reintroduction of the Harry Potter franchise to gaming), the second and third top-sellers are meant not only to evoke fondness for a beloved gaming franchise, but named directly after a specific beloved game in that franchise. I’m referring, of course, to Call of Duty: Modern Warfare II and Resident Evil 4. 

In Take-Two’s earnings, there is further evidence of the power of IP to loom over all else. Take-Two controls what is perhaps gaming’s biggest IP and strongly hinted at a projected 2025 release date for Grand Theft Auto VI by forecasting a $2.5 billion increase in net bookings compared to the year prior. While consistent live services growth is great, news of the next GTA and its enormous sales expectations shot Take-Two’s stock to a 52-week high. 

What Comes After GaaS?

Interestingly, despite the evident success of its ongoing live services strategy, EA was clear about its intent to look beyond this model for future growth. Wilson and COO Laura Miele revealed how EA is thinking about gaming’s future beyond the games-as-a-service concept that provides the vast majority of the company’s revenue. 

Wilson described a broad, long-term industry shift towards “games as platforms”, which is driving EA’s strategy of “amplifying the power of community in and around [its] games with social and creator tools.” EA has already dipped its toes in the UGC water with The Sims franchise via a partnership with modding platform Overwolf, and it sounds like the publisher plans to create even more social and UGC components within its core franchises across the “the modalities of play, watch, create, and connect.”

Live Platform
Overwolf’s CurseForge platform is the world’s largest mod repository, which Maxis recently integrated directly with The Sims 4. How will EA’s approach to UGC change as it pursues a ‘games as platforms’ strategy? Source: EA

Why is EA changing its strategy in this way? As I described in my last Naavik piece, the kinds of  live service games EA relies on face tough, unique challenges in today’s market — challenges that EA is very familiar with given the cancellation of many of its GaaS products over the years, from Anthem to Knockout City

UGC may provide a solution to some of these challenges, especially as it relates to maintaining player engagement by providing a continuous flow of new (user-generated) content. Epic is, of course, leading the way here, having opened up Fortnite as a creator platform and recently doubling down on this strategy through Fortnite Creative 2.0 and UEFN. Fellow Naavik contributor David Taylor has written a great deal about UGC’s role in gaming, and it's clear EA views these capabilities as critical for the next stage of its live service strategy and a core part of the entire industry’s future.

What About AI?

It’s hard to talk about the future of gaming without talking about the role generative AI will play, and earnings calls with the industry’s biggest publishers are no exception. Interestingly, EA and Take-Two’s leadership seemed to take very different perspectives on the matter. 

When analyst Mike Hickey brought up the topic during EA’s call, Wilson excitedly proclaimed that, as an industry, “we're probably going to be one of the greatest beneficiaries of AI broadly.” He then described in detail how EA thinks about using AI:

  • Within traditional live services game development, augmenting teams’ ability to create new content more efficiently
  • As it relates to EA’s newly described UGC strategy, “help[ing] our players and our fans create content in our world
  • Concerns about workforce displacement and his hopes that the technology will ultimately create more economic opportunity for people
  • Ownership of data and output of models, where Wilson alluded to EA’s immense amount of proprietary data that can be used for unique outputs (including data from its sports licensing partners)
  • The desire to collaborate with industry partners and regulators to reduce harm from “bad actors”

COO Laura Miele then described in even greater depth some of the technical outcomes EA hoped to achieve with AI:

"So in game development you would imagine the velocity of content, creative iteration is going to be advantaged greatly by having really smart content tools. Andrew mentioned creator content, lifelike animation, realtime text-to-speech for players and what that will mean for them and the experiences they have. As we think about live game support at scale there's going to be some really great imagery detection, issue detection, economic modeling that we're going to be able to apply as we continue to grow these connected ecosystems. So we're pretty optimistic and excited and inspired about this new wave of AI."

Zelnick received a similar question. In contrast with EA’s optimistic and deeply considered response, he issued a short, generic statement that AI was a tool that “will allow us to do a better job and to do a more efficient job.” Zelnick went on to diminish AI's role in creating hit games, saying, “Hits are created by genius, and data sets plus compute plus large language models do not equal genius. Genius is in the domain of human beings, and I believe we'll stay that way.”

There is obviously some truth to Zelnick’s perspective, and many of Take-Two’s products, particularly those from Rockstar, clearly ascribe to an authorial, artistic, and deeply human angle. At the same time, Zelnick’s strategy of applying AI as an ill-defined productivity tool risks missing its transformative potential across the entire spectrum of game development and consumption.

#2 Embracer Plummets, Sony’s Not-E3 Showcase & Microsoft’s Activision Deal Disagreement

Live Sunset
Source: Deep Silver

Embracer’s rough week. Embracer Group delivered an alarming piece of news this past week: a $2 billion six-year partnership deal, entirely up in smoke. The revelation, part of the Swedish holding company’s latest earnings report, sent its stock plunging more than 40%. Details on the partnership are scarce, with CEO Lars Wingefors saying the deal was “done, ready to go” and that it falling apart had “nothing to [do with] the commercial terms.” Instead, Wingefors blamed “external factors.” The situation is cryptic, but it’s a serious knock against Embracer’s gaming strategy nonetheless. Over the past few years, the company has made a major name for itself by going on a historic buying spree, snatching up properties like Tomb Raider and the rights to The Lord of the Rings. But there have been rising concerns about its approach, namely that the company has overpaid for some of its big acquisitions and is now struggling with organic growth and its content pipeline. Most of the company’s revenue growth comes from its Asmodee board game unit, while its sprawling game studio ecosystem has been contending with underperforming releases and ongoing delays. But at some point, some of the 200 or so projects in the pipeline will hit the market. For Embracer’s sake, let’s hope they hit. 

Sony’s mixed showcase. PlayStation fans gathered around the communal live stream on Wednesday to see what Sony had in store for the future. Reception was, surprisingly, rather mixed, with many diehard PlayStation fans complaining that the company failed to show more new projects from its first-party studios and instead relied on confirmed releases like Final Fantasy XVI and Spider-Man 2 alongside a fair number of titles also coming to Xbox.  For Bungie fans, however, the showcase dropped some major bombshells, including the revival of a fan-favorite character in Destiny 2’s The Final Shape expansion and the much-anticipated reveal of Marathon, the studio’s new extraction shooter. On that note, a good deal of the showcase was dedicated to giving us a glimpse at Sony’s live service priorities, with a number of first- and third-party projects like Haven’s sleek heist title Fairgame$ and Square Enix’s Foamstars looking to help fill the online multiplayer gap in PlayStation’s lineup. As the showcase came to a close, Sony did drop one final surprise: the Project Q handheld, which the company is pitching as a game streaming device for playing around the home. Whether there’s a market for something like that remains to be seen. 

Microsoft’s Activision regulatory position strengthens. While U.K. regulators at the Competition and Markets Authority (CMA) dealt Microsoft’s bid to acquire Activision Blizzard a serious blow last month, the situation has continued to improve in the weeks since. Two weeks ago, EU regulators gave the deal the greenlight, and then last week China became the 37th market to approve the merger. And then there’s news that Microsoft hired well-known competition lawyer Daniel Beard, who has a history of beating EU regulatory decisions in court and also helped Apple win an antitrust appeal in the U.K., to spearhead its efforts to overturn the decision. Yet more doubt was cast on the CMA by none other than EU competition chief Margrethe Vestager, who said that the divergence on the Activision deal between the two regulatory bodies raises “really important questions” about how each agency assessed the deal and evaluated Microsoft’s proposed remedies. Of course, none of these developments mean Microsoft has an easy path forward. But it certainly does look like the CMA has found itself standing alone and under mounting pressure to defend its killing of the deal when little evidence seems to support doing so. 

In Other News…

💸 Funding & Acquisitions:

  • Travel Crush developer BebopBee raised $4M from BITKRAFT and others. Link
  • Saudi Arabia increased its stake in Electronic Arts in Q4 by 55%. Link

📊 Business:

  • Embracer's $2bn+ deal collapsed due to "external factors.” Link
  • FaZe Clan reportedly laid off 40% of staff amid financial woes. Link
  • Honkai Star Rail exceeded $100 million in mobile revenue in less than a month. Link
  • Battlefield leaders have formed a new shooter studio, Time To Kill Games. Link

🕹 Culture & Games:

  • Blizzard said it’s experimenting with generative AI for character creation. Link
  • Sony’s new Project Q handheld will be a game-streaming device. Link
  • Halo and Destiny developer Bungie rebooted the classic FPS franchise Marathon. Link
  • Why Tears of the Kingdom’s bridge physics have game developers wowed. Link

👾 Miscellaneous Musings: 

  • How Halfbrick Studios’ Luke Muscat designed Fruit Ninja. Link
  • Extra Lives author Tom Bissell on watching his daughter play Tears of the Kingdom. Link
  • Rami Ismail's guide to surviving the indiepocalypse. Link

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 this period of layoffs. Every job post garners ~50K impressions over the 45-day time period.

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