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Hi everyone — welcome to another issue of Naavik Digest. In the event you missed our last one, we’re thrilled to announce the launch of the Open Gaming Research Initiative. If you've followed us for a while, you know we work hard to publish great, free content for the games industry every week. What this launch does is take our free content efforts to the next level.

In addition to our new publishing cadence of four Naavik Digest issues per week, we’re excited to expand our content to include more games industry analysis in collaboration with outstanding creators and keystone gaming brands. Whereas most great research is either paywalled, siloed, or scattered, everything we do is going to be free, enormously collaborative, and all in one spot.

We're lucky to have an amazing community of creators who are not just experts in their fields — as executives, game designers, investors, and more — but passionate about learning in public. The team has grown at a mind-boggling pace over the past couple of years, and we're gearing up for higher-quality output than ever before.

Now on to today's issue. In the last Naavik Digest, we took stock of Square Enix’s business at a pivotal time in the Japanese game publisher’s history following major leadership changes and an ambitious plan for the fiscal year. Today, we’re discussing Valve’s restrictive approach to generative AI in game development and how it might affect the new technology’s adoption. 

Niantic Layoffs / Square Enix’s Future / FTC Lawsuit Revelations

In this week's Roundtable, the crew discusses whether Sony may open up its PlayStation audience to Roblox, Unity's new AI tools Sentis and Muse alongside its new AI marketplace, and Scopely's acquisition of Tag Games. We also touch on why Niantic laid off a quarter of its staff after announcing multiple new games and what its reorganization means for Pokémon Go. Also on the agenda is Square Enix introducing a new CEO and the future of the company's long-term franchises like Final Fantasy, as well as interesting revelations from the FTC lawsuit against Microsoft to block its Activision Blizzard acquisition. Join us for all the latest games business news with Aaron Bush, Matt Dion, Mario Stefanidis, and host Devin Becker.

As always, you can find the Naavik Gaming Podcast 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 Is Valve’s Generative AI Policy Too Restrictive?

By Nick Statt, Naavik Managing Editor

Generative AI has been steadily creeping into game development for quite some time now. But last week marked a pivotal moment in the technology’s broader diffusion in the industry. Without much fanfare, news got out that Valve had begun quietly rejecting Steam games on the grounds that they might contain AI-generated art without legal rights to use the underlying training data. 

Valve is no stranger to drawing lines in the sand over controversial new technologies; the company has banned blockchain games and NFTs since October 2021 and has not budged on the policy since. But in declaring that AI-generated art and assets in Steam games must draw on legally licensed or owned IP, Valve is taking an especially aggressive stance on a burgeoning new creative tool. And it’s unclear whether this will hinder the spread of generative AI — or perhaps act as a positive force for artists in the long run. 

Valve isn’t banning all AI art. Instead, the company is drawing a clear distinction between AI-generated art created based on standard, open tools like Midjourney and Stable Diffusion and those created using custom training data sets.

• In a statement to The Verge, Valve clarified its stance and said its goal is “not to discourage the use of [AI] on Steam; instead, we’re working through how to integrate it into our already-existing review policies,” adding that “while developers can use these AI technologies in their work ... they can not infringe on existing copyrights.” 
• In other words, it sounds like Valve has a conservative legal team that’s wary of stepping into an unprecedented legal battle for which there is no roadmap. 
• So what does this look like in practice, and how exactly do you create permissible AI-generated art for your game? It’s not exactly clear. One can imagine that a small indie development team might find it immensely useful to use generative AI to turn a small number of environmental assets into a wider, more varied set without having to perform the labor by hand. According to the policy, Valve should see no issue with this practice. 
• But exactly how an indie team goes about doing that is more complicated. Few game development teams may have a dedicated generative AI expert on staff willing or able to spin up a custom model using training data based on their own IP. 
• An easier path might be working directly with an artist to license that person’s work for use in generating concept art, assets, or other creations using freely available tools, though it’s still not clear how a game studio can go about confirming that they’re not using others’ copyrighted works when using something like Midjourney. 

This is not unique to games. Generative AI is so new, yet so powerful, that it’s forcing difficult conversations in all creative media — and there are no easy answers. 

• While several lawsuits have been filed against generative AI companies like ChatGPT maker OpenAI and Stable Diffusion creator Stability AI, there is no current legal precedent to determine whether chatbots and image generators are breaking the law based on how the apps were trained and their corresponding outputs. 
• Without clear guidance from platform owners, it’s no wonder creators are experimenting with the tools. Pandora’s box has been opened, so to speak, and it’s going to require constant back-and-forth between platforms, creators, and the courts to draw clear lines around what is acceptable and what might be running afoul of copyright law. 
• Not even the biggest companies are immune to the allure of generative AI, despite the legal murkiness. For instance, Marvel recently disclosed that it used generative AI to create the opening credits for its new Disney Plus show, Secret Invasion. The company and its VFX partner Method Studios then had to clarify that “no artists’ jobs were replaced by incorporating these new tools,” but neither would say exactly how the art was created other than that it "skillfully leveraged the power of both existing and custom AI technologies to apply the otherworldly and alien look.”
• We should expect even more companies in gaming, film, TV, and elsewhere to deploy the “ask forgiveness, not permission” approach, at least until there are clear rules in place. 

The brewing backlash against generative AI is heating up. Many responses to Valve’s new policy on AI art have commended the company for taking a hard stance — even if the policy in its current form raises more questions than it answers.

• While Valve has put its foot down, Unity is putting its foot on the gas — to mixed reception from developers. Late last month, the game engine maker unveiled two new AI technologies, Muse and Sentis, that bring more generative AI into the game development process as well as an AI Marketplace to distribute third-party apps. 
• But Unity announced both tools without even mentioning anything regarding where the underlying training data came from (other than saying it “licensed third-party LLMs”) and whether using such tools might land a game maker in legal trouble. 
• Some developers’ responses to the announcement were not too pleased with the lack of clarity. Unity also pulled one of the new third-party "AI Verified Solutions" providers from its marketplace— asset creator Atlas — just one day after its launch, ostensibly over concerns it was pulling human-made models from Sketchfab. 
• While it may be easy to point the finger at Unity and accuse the company of moving too quickly, the reality is that these tools aren’t going away and are in fact likely to only gain prominence in the coming months and years. By investing in them now, Unity may gain an advantage over rival Epic Games and other competitors. 

The relationships between automation and creative labor and between technologies like AI and copyright raise thorny ethics questions. But these are also areas in which the law needs to be clarified, one way or another, and until that happens, it’s the responsibility of both companies and creators to adapt or risk falling behind. Valve’s approach is one of caution, while Unity’s is less risk-averse and more concerned with getting ahead of the curve. Unless the technology becomes so mired in copyright law that it becomes virtually unusable, Valve’s approach may soon feel antiquated. 

The policy also creates incredibly complex moderation challenges that Valve may not be equipped to handle. How will Valve police the massive influx of game submissions as generative AI tools improve and become more widespread, and what happens when offenders slip through or those who play by the rules get rejected anyway? Will Valve eventually change course and allow these games built with these tools onto Steam? Almost certainly, but it’s going to be a bumpy road until that point if Valve intends to wait for precise legal clarity on the subject. 

In short, while Valve pumping the brakes on generative AI presents a potential roadblock for developers, the generative AI wave is clearly bigger than whatever rule the company tries to implement to slow it down. 

#2 GTA Returns to Game Pass, Apple Appeals to the Supreme Court & Game Dev Budgets Leak

GTA V’s return to Game Pass is a good sign for Xbox. The Xbox subscription service is all over the news these days. Of course, it’s at the center of the major FTC legal battle over the fate of Microsoft’s Activision Blizzard acquisition. But Microsoft also hiked the price of the service for the first time ever last month in addition to increasing the price of its Xbox consoles. This week, Game Pass saw a fan favorite return after a nearly two-year absence, further highlighting that at least some publishers see promise in Microsoft's vision.

• On Wednesday, Microsoft and Rockstar Games announced that Grand Theft Auto V would return to the subscription platform’s console tier, marking the third time the massively successful open-world game has been made available on Game Pass. 
• GTA V first landed on Game Pass in April 2020, more than six years after its initial release. It stayed on the service for just one month before being replaced by Red Dead Redemption 2. Rockstar brought the title back a year later for a roughly four-month stint. 
• While it’s hard to divine the intentions of Rockstar Games, it’s clear the strategy of releasing its best-selling game — one that has made the company nearly $10 billion over the last decade — in limited-time bursts onto Game Pass is proving lucrative if only to drive adoption of its live service moneymaker GTA Online. When GTA V leaves Game Pass, the hope is that players will ultimately purchase the title to keep playing. 
• According to data compiled by Derek Strickland over at TweakTown, GTA V revenues have spiked in the months following the game’s release on subscription platforms like PlayStation Plus and Game Pass. 
• Microsoft’s approach to subscription gaming has been criticized for catering only to specific types of games like lesser-known indies or big-budget single-player games. Rivals like PlayStation chief Jim Ryan have called the platform unsustainable and even claimed that publishers “unanimously do not like Game Pass because it’s value destructive.”
• But the success of GTA V on Game Pass is proof that the right combination of release strategy and monetization can yield subscription success, even if it’s not the way Sony prefers to do business. 

Apple eyes Supreme Court fight over Fortnite. The long-running feud between Apple and Epic Games has dragged on for nearly three years now, and it shows no signs of stopping any time soon. On Monday of last week, Apple said it would take the case to the U.S. Supreme Court over its dissatisfaction with one narrow aspect of the ruling that was kept in place after a lengthy appeals process. 

• In particular, Apple is not pleased with an injunction ordered by U.S. District Judge Yvonne Gonzalez Rogers. The judge wrote in her 2021 ruling that Apple was found not to have been operating an illegal monopoly. Yet it wasn’t a total victory, as she also ruled that Apple will have to allow developers the option to put links and buttons in their apps to direct customers to web-based payment methods. (For a full breakdown of the ruling, here’s a good guide.)
• In other words, Apple was found to have violated California’s unfair competition law by forbidding developers from directing customers outside the App Store and its 30% cut, something known in antitrust law as anti-steering. 
• Apple, naturally, disagreed with this outcome. Epic also disagreed, as the Fortnite maker wanted a far more favorable ruling than the one it received. Both companies appealed, and the Ninth Circuit Court of Appeals ruled in April of this year to uphold the original 2021 ruling. Again, this was a win for Apple on most counts except for the anti-steering rules. 
• Apple is now claiming, however, that the judge overreached in imposing a nationwide injunction on the company. “The panel’s decision affirming the injunction departs from Supreme Court and Circuit precedent holding that an injunction cannot be any broader than necessary to make the plaintiff whole, and that relief cannot otherwise extend beyond the named plaintiff without class certification,” Apple’s legal team wrote in last week’s filing. 
• Apple’s App Store business remains as lucrative as ever, despite the minor changes the company has made to address mounting antitrust scrutiny and regulatory pressure around the globe. Now, it seems Apple wants to try and cement its policies around what it can and cannot prohibit developers from doing by taking the fight to the highest court in the country. 

Is AAA game development worth the cost? There’s been a flurry of debate recently in the gaming community over the rising costs of big-budget, blockbuster (otherwise known as AAA) game development. With costs ballooning and development cycles extending, both developers and players alike are questioning whether this Hollywood-style model is sustainable. 

• A key data point in the conversation was leaked as part of Microsoft’s FTC court battle, in which poorly redacted documents revealed the eye-popping budgets of two first-party Sony exclusives. 
• According to the docs, Sony’s 2022 PS4 / PS5 exclusive Horizon Forbidden West cost $212 million to make over a five-year dev cycle, while the 2020 hit The Last Of Us Part II had a total budget of $220 million. (Both figures are pre-marketing development budgets, with marketing adding a considerable amount to both games’ overall cost.)
• The numbers are both surprising and unsurprising at the same time. Anyone who pays close attention to the industry could probably guess that games with such high production values might have the budget of a major Hollywood blockbuster. But seeing the numbers actually laid out does add enough context to raise an important question: Are these budgets too high? 
• Sony doesn’t seem to think so, and it’s highly likely both games earned multiples of their budgets and then some, especially when you factor in additional benefits like driving PlayStation hardware sales, future subscription revenue, and brand-building and other marketing ripple effects. Axios quoted financial analysts who said a Sony exclusive like The Last of Us Part II might have earned as much as $300 million in profit, even after marketing and distributor cuts. 
• But not every game developer is Sony, which enjoys strong relationships with retailers and also the benefit of not having to pay a console platform fee when distributing its own software on the PlayStation Store. 
• Still, ever-larger budgets and more attention paid to the biggest and most dependable IPs is just part of the game industry’s natural growth, as both gamers and publishers flock to what works. This pays off not just for platform owners like Sony, but also those third-party developers — studios like Activision, CD Projekt, Rockstar, and miHoYo — that can continuously deliver, while those that can’t will have to adapt. 
• Should more games (even in the AAA category) be shorter, with smaller budgets and scrappier teams? Probably. But players want bigger, better, and more graphically impressive titles, and studios seem less willing than ever to disappoint. On the flip side, the biggest IP owners should, and almost certainly will, continue to invest more in proven franchises and reap the rewards of scale. 

Featured Jobs

• Coda Payments: Managing Director, Publisher Partnerships (Los Angeles, U.S. / Hybrid)
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• LILA Games: Lead Gameplay Engineer (Remote)
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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.