Hi Everyone. Welcome to another issue of Naavik Digest! If you missed our last one, be sure to check out our guide to fully on-chain games. This issue, we’re discussing sports betting and whether it presents a path to profitability for the struggling esports business or a risk not worth taking.
We would also like to announce the launch of the Naavik Gaming Podcast Mailbag. We’re inviting listeners to submit any feedback or questions to help inform our future coverage and also give us the opportunity to spotlight community insights. Are there topics you’d like us to discuss or learnings you’re keen on sharing? Do you have feedback on a past episode or just want to drop us a line? Please email us at [email protected].
Sega + Rovio Plans / Stillfront + Playtika Earnings Reports / Sony vs Microsoft
What is Sega's strategy for Rovio? What do the earnings reports for Playtika and Stillfront say about their acquisition methods and growth? Can TreesPlease build a profitable game around planting real-life trees? How can Microsoft compete with Sony's recent console success? Join us for all the latest games business news with Abhimanyu Kumar, Tammy Levy, David Kaye, and host Devin Becker.
#1 Esports Betting: A Path Forward or A Lost Cause?
Written by Max Lowenthal, Naavik Business Lead
Travel to New York City, Philadelphia, or Chicago and you’ll likely see the nearest sports arenas or public transportation covered in ads for gambling platforms like DraftKings and FanDuel. The mass advertising push is no coincidence: sports gambling has rapidly proliferated across the U.S. over the last few years, with consumers betting $220 billion since the country’s Supreme Court cleared the way for states to offer it five years ago.
At the heart of this boom in sports gambling lies a potential path forward, albeit a thorny one, for the struggling competitive gaming scene. But it doesn’t come without some serious risks. Take for example what’s been unfolding in recent years in the broader sports gambling market. Gambling addiction is up 15%, numerous professional athletes have faced suspension, and leaders in the space have lost their jobs due to tampering concerns. However, through both the good and the bad, one thing has remained painfully clear: gambling has cemented itself as a viable monetization model for traditional sports leagues and the burgeoning ecosystem of companies that now support it.
Last month, I analyzed the struggles Riot and others have faced in building viable and resilient esports leagues, namely the developers’ difficulties turning players into esports-caliber fans, retaining them in a constantly changing industry, and finding ways to monetize them to profitability. I discussed how these two issues lay at the heart of the mischaracterized comparison to traditional sports leagues — it’s simply harder to retain and develop fandom in games than traditional IRL sports.
But while the problems plaguing league ownership are different in nature, the heart of the matter often takes the same fundamental shape: monetization. Could gaming-centric gambling platforms provide a respite for struggling competitive gaming developers? The answer is a somewhat tangled web of legal obscurities that are worthy of a proper analysis, and it all begins with CS:GO.
History of Esports Gambling + The Market Today
While not the first game to develop a gambling economy, Counter Strike is arguably the most famous and impactful title in the gambling chapter of gaming’s history. Buoyed by the buying and selling of in-game skins that first launched back in 2013, the game’s roots in betting were historically tied to a network of third-party sites that would let players bet in-game items on the results of professional matches, the acquisition of rare items, and even on simple games of chance. Led by third-party sites like CSGO Lounge and CSGO Lotto, the space grew into a $4.8 billion industry by 2016 and was poised to represent the lion’s share of the gaming-based betting market.
But as quickly as the space had grown, it was hit with a wave of scandals that ultimately led to its demise. YouTubers were promoting gambling sites without disclosing their ownership stake in said sites, while other creators would partner with third parties to stream betting content while knowing the results before even going live. Ultimately, the situation grew so legally compromised that developer Valve had to step in and effectively ban third-party gambling sites permanently, shrinking what was once a billion dollar business into a tenth of its size by 2019.
To be clear, Valve’s concerns were not unfounded. With a predominantly younger male audience, the most egregious examples would result in public instances of kids losing thousands of dollars due to poor, unregulated services and systems. Valve’s history is largely symptomatic of the existential issues that face esports betting today: a lack of protection for younger players, match fixing, and illegal gambling.
However, despite a pronounced lack of developer support and a history marked by controversy, the state of gaming-centric gambling platforms has significantly proliferated in the years since CS:GO scandals rocked the space. Today, most of the participants can be categorized into one of four groups:
- Mainstream Players: Consisting of the businesses who already make a living from gambling who are exploring games as an area of growth. Notable names include DraftKings, FanDuel, and Bet365.
- Gaming-Centric Players: These businesses are gaming-centric in their DNA, often with financial backing and infrastructure from mainstay players. The biggest names of note here include Loot.bet, Luckbox, unikrn, and vie.gg.
- The Legally Gray Platforms: The questionable underbelly of the space, there are a litany of gambling options that operate using crypto-centric payments in an effort to bypass legal concerns and regulations.
- The Data Platforms: A relatively new entrant to the space, there is also a growing group of platforms who focus not on managing gambling, but instead enabling others. Most notable is odds-making technology platform Pandascore and competitor Ultraplay, both of which offer software that powers several of the entrants mentioned above.
Outside of the four core entrants, distribution and media surrounding gaming esports are sparse. Riot does not allow gambling sponsorships in LCS, while Twitch banned all gambling streams following continued promotion of third-party sites on the platform. Despite the growing number of options for esports gambling, the distribution partners across the industry broadly do not associate with gambling whatsoever.
That isn’t to say this will always be the case,. Traditional sports leagues in the U.S. were vehemently opposed to gambling on their leagues up until the day it became legal (upon which they rapidly changed their opinions). But with such limited distributor interest and a wealth of options to choose from, it’s worth understanding what roadblocks stand in the way of gambling becoming a viable monetization model for esports developers.
The Future of Esports Gambling
At its core, Valve’s story is a perfect cautionary tale as to why we haven’t seen developers engage with betting platforms thus far — there is simply too much legal risk. Valve itself became the subject of two class action lawsuits as a result of its third-party skin scandals. Now imagine the legal ramifications of a developer-sanctioned offering leading to a similar outcome?
To be clear, the upside potential for gambling-based esports platforms is straightforward. Traditional formats like multi-option “parlay” betting, “prop” bets (where participants wager on smaller details like character selection or player performance), and traditional win/loss wagers all transfer over to a gaming format exceedingly well. Certain segments of gaming, particularly mobile titles, also already leverage adjacent game design today through formats like gacha and loot boxes. These mechanics are a core reason why games like Genshin Impact and FIFA are so successful.
Of course, these mechanics have also invited major scrutiny from both legal entities and fans alike, with gacha and loot boxes in particular becoming a notable divide between Western and Eastern based developers and players. Yet it’s also worth noting that gambling-based content creates new avenues for developers to engage fans, and monetary upside could very well be a shortcut to helping players reach a skill level high enough where they meaningfully engage with esports-level competition.
If watching esports is, as Riot describes it, more about getting better at the game than pure novelty, you can imagine how introducing externals factors like short-timing-based bets could balance the scales. It’s also worth noting that betting could hypothetically retain fans by giving them more skin in the game. On paper, it seems to address both the issues of accessibility and optionality I discussed in my previous piece.
By this logic, I think developers would gladly participate in the space should the right situation arise, but the reality is that the amount of associated risk — both from a business, and fan perspective — is simply too great to justify even dipping a toe in the proverbial sea of betting.
Fundamentally, I believe that four core issues would have to change before we see any substantive investments in the space:
- Clarity Around Digital Assets: Games’ digital nature will always mean that virtual currencies and assets like CS:GO’s skins will play a role in the monetary economy of games. Governments in the U.K. and Denmark recognize this and have been quick to establish commissions, licensing terms, and litigation that define skins as assets and their associative activities as gambling. But if the fundamental currency by which game-based betting would take place isn’t even legally considered a security, I do not expect any company to build systems that would treat it as such.
- Better Protection and Support: One of gaming’s greatest strengths (and source of issues) is the fact that it’s largely accessible to anyone and everyone around the world. This accessible nature is what landed Valve in trouble in the first place, as the company (and the third-party gambling sites) simply circumvented user protection and verification policies. Outside of the very material mental and social risks of this missing function (most notable underage gambling and gambling addictions) this level of infrastructure would be table stakes for developers’ ability to protect themselves from legal risks and any associative lawsuits.
- Esports Market Adoption: Outside of the purely legal considerations outlined above, there’s also the question of monetizable upside for oddsmakers when it comes to esports betting. Opinion surrounding games-based betting amongst mainstream experts defines the space as “a small opportunity growth” — particularly when you consider that these companies only take 10% of the broader market and legally-backed gaming-based gambling is still a <$1B business today.
- Esports-Native Solutions: If my analysis of Riot’s esports business is any indication, the fundamental architecture of competitive gaming is so fundamentally different from traditional sports that it requires solutions that are entirely custom-fit in nature. Large sets of trustworthy, consistent data are table stakes for established players in the space to consider gaming a new vertical. Meanwhile, we’re already aware that the way esports fans consume content about and interact with their games is much more active and opinionated than that of traditional sports. It reasons that betting platforms would likely need to be the same.
Ultimately, I believe we’re a long way off from any of these four factors reaching a point of maturation where it would make sense for developers to explore further. A more universal stance on digital assets still feels out of reach given the associative impact it would have on the much broader NFT/web3 industries, both of which are constantly pouring money into lobbying for change. The closest of the four issues to being solved — building esports-native betting solutions — is arguably the simplest and least impactful. While companies like Pandascore suggest this stage is already well into development, it’s clear that building software without fixing the core risks to the problem won’t make developers consider the opportunity more seriously.
The path to esports-centric gambling becoming a viable monetization model for developers like Riot and others feels unattainably far. Regulatory concerns, industry maturation, and technological limitations are each existential blockers to industry development in their own right, let alone when in combination. However, as this period of economic slowdown forces esports companies to fundamentally re-examine their business models, it’s not so unreasonable to believe there may be a world in which esports-driven betting becomes a viable option in the future. It simply becomes a question of when and how.
#2. Earnings Snapshots: EA, Unity, and Roblox
FIFA drives EA’s growth. EA reported its Q4 results on Tuesday, most notably announcing 11% quarterly growth in bookings year-over-year. Live services were the key driver, and FIFA alone saw 31% bookings growth over this quarter last year, making FIFA 23 the most successful launch in the franchise’s history. The outperformance of FIFA has been EA’s #1 driver for some time, which makes this year’s hyped brand change to EA SPORTS FC all the more important to perfectly execute. Both Apex Legends and The Sims showed promising results as well. It’s important to remember that EA is refocusing on three long-term strategies: 1) building games and experiences that entertain massive online communities; 2) creating blockbuster interactive storytelling; and 3) amplifying the power of community in and around its games with social and creator tools. The first two are fairly standard, but the last one is actually pretty new for EA. So it will be interesting to see what the company does there — such as its partnership with Overwolf to enable superior UGC for The Sims. Naturally, as it continues to center on its best IPs and stays mindful of profitability, EA is in a good position to continue generating healthy cash flows over the long term.
Unity continues to struggle. Although we have tremendous respect for what Unity’s technology enables for our industry, we’ve held several reservations about the business over the past many quarters. We thought Unity overpaid for acquisitions, wasn’t focused enough on ROI, was being overly dilutive, and not clear to investors about the state of the business. Unfortunately, Q1’s report solidifies many of those concerns. For the quarter, revenue hit $500M, up 56%, but it’s actually down -2% on a pro-forma basis — which combines historic Unity / ironSource numbers to provide a better apples-to-apples comparison. Furthermore, the number of “$100K+ customers” fell sequentially, and the dollar-based net expansion rate of 107% is the lowest it’s ever been for Unity as a public company. Fortunately, it looks like Unity’s previously wild dilution is slowing down, and management is focused more on profitability. What’s unfortunate is that focusing on “adjusted EBITDA” is mostly smoke and mirrors and disregards actual profitability — but conducting now three rounds of layoffs (the most recent axing 8% of the workforce) will help nudge actual profit margins in the right direction. Of course, despite these issues, management is hyped about AI and Unity’s role in it. That hype may be valid, but it won’t turn into value until the company returns to underlying growth that actually translates into bottom line performance.
Roblox finds its rhythm. At its very core, Roblox continues to thrive — in Q1, average DAUs were 66.1 million (+22%) and hours engaged were 14.5 billion (+23%). This led to 23% growth in bookings (to $773.8M) — marking four quarters of acceleration, with the 17-35 age bracket growing the fastest (35%) — and net cash provided by operating activities clocked in at $173.8 million (a 22% margin). The company did report net losses, largely driven by high stock-based comp (hence why cash flow is so much higher). That’s something to look out for, but management seems to be aware: “With the momentum we see in bookings, we can now begin to slow our year-over-year increases in headcount and compensation expenses… [which will] result in operating leverage.” Operating leverage would be a major unlock for the business, also because so much margin gets sucked up by app stores. Besides the network effect of users and creators, Roblox’s $1B+ R&D run rate continues to be the company’s largest competitive advantage, and we’re curious to see what kind of lift the company could get if it makes the most of anti-steering rules disappearing. Plus, even in a period when the Unreal Editor for Fortnite launches, Roblox is still well positioned given its outsized focus on mobile while Fortnite is still largely stuck on console/PC. In short, Roblox has found its rhythm and we look forward to seeing where it goes from here.
In Other News…
💸 Funding & Acquisitions:
- Frantic Games raises $2.4M for action-based hybrid casual mobile games. Link
- Publisher Astragon acquired sports sim studio Independent Arts for an undisclosed sum. Link
- WePlay Ventures launched Europe’s largest accelerator program for gaming startups. Link
- Nintendo warned of a big slowdown in Switch console sales. Link
- Sony shut down Concrete Genie studio PixelOpus. Link
- Roblox hit record revenues, but losses continue. Link
- EA's fiscal year revenue topped $7.4B. Link
- Capcom confirmed a record number of game sales as share price hits all-time high. Link
- Riot CEO Nicolo Laurent will step down and be replaced by President A. Dylan Jadeja. Link
🕹 Culture & Games:
- Private Division signed a new action-adventure IP from Game Freak. Link
- Elden Ring sales topped 20.5M units. Link
- Zelda: Tears Of The Kingdom reviews say it’s even better than BOTW. Link
- Team Cherry announced a delay for Hollow Knight: Silksong. Link
👾 Miscellaneous Musings:
- Ampere Analysis published research on gender breakdowns by gaming device type. Link
- GQ’s 100 Greatest Games of All Time ranking proved controversial. Link
- Devolver’s Mike Hickey on mobile ports, subscriptions, and exclusives. Link
- Astra Fund: Operations & Finance Manager (Remote)
- Backbone: Product Manager (Remote)
- Carry1st: Head of Growth, Games (Remote)
- Immutable: Economy Designer (Sydney, Australia; Remote)
- MY.GAMES: Production Director (Remote)
- Voldex: Product Manager (Remote)
- Voldex: Game Designer (Remote)
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.