Making Sense of GameStop’s Insanity

Hi everyone. First off, thank you for the great response to our part-time opportunity at Naavik last week. If you missed it and if you’re interested in joining our team part time and getting paid to write about gaming-related startups, emerging trends, and venture capital please email us at either [email protected] or [email protected].

Second, news weeks continue to be light, but earnings season is revving up and we’ll be covering more earning updates in the following weeks. In the meantime, there are other interesting topics that stand out. So now, here’s your weekly roundup and analysis of what’s happening in the video game industry…

#1: Oh, GameStop - What Are You Doing?

Even though GameStop is a gaming business, this story -- the fact that GameStop’s stock has more than 100x’d from its 52-week low -- really has nothing to do with games… or its business. It’s actually a story of Reddit-fueled mass hysteria that’s taking aim at the Wall Street establishment.

So what happened? Well, the subreddit r/WallStreetBets came together with a simple mission: retail investors (aka everyday people) are tired of hedge funds manipulating the market, are tired of billionaires getting bailed out, and are tired of big media companies taking the side of Wall Street, so the community is rallying together to push up the price of one of the most shorted stocks in the market (GameStop). You can come up with your own opinions on this -- especially now that censorship policies have now forced the community private on Reddit and kicked off of Discord -- but it’s essentially a more effective, internet-driven version of Occupy Wall Street.

Obviously there’s more nuance to the subreddit’s mission and how markets function, but the mob’s tactic is working in the short-term. Excessive buying triggered a massive short squeeze, which caused prices to skyrocket further -- roughly up 10x in the past week -- driving hedge funds (and others) who are short GameStop lose boatloads of money. It’s a fascinating example of how the internet enables communities to effectively voice their opinions at scale and influence financial markets. (It’s also why I’m not inclined to short!)

So what’s the catch? There are a couple. One, it’s all fun and games for now, but the good times won’t last. Sorry, but GameStop isn’t worth $24 billion, and it doesn’t deserve to be the most traded stock in the market. Many of the same everyday people who are pushing the stock price up will be the same people who lose a ton of money as reality inevitably sets back in. We’ve seen this time and time again (crypto 3 years ago, internet stocks 20 years ago, etc.).

Second, as you may have picked up on, I (Aaron here) haven’t even mentioned the business yet. Sure, maybe there’s a small turnaround story at play I previously underestimated; if GameStop can grow its online business faster than its retail stores close down (plus benefit from revenue share partnerships with console providers), maybe it can stay alive as a niche retailer. That’s what Chewy founder, Ryan Cohen, and his crew seem to think, and they’re taking on board roles. However, this hope is a far cry from being worth $20+ billion. There’s an interesting question of whether GameStop can opportunistically capture this moment, find a way to raise money, and then use that money to reinvest or acquire in a way it couldn’t do before. That’s classic reflexivity, but I have doubts management can pull it off.

Anyway, nothing on MTM is investing advice and this isn’t either. The bottom line is that 1) internet mobs are unlocking new forms of influence, 2) GameStop is a short-term beneficiary, 3) this has little to do with the underlying business, and 4) we’ll see if management can seize the moment to their advantage. It’s also a good time to re-internalize Isaac Newton’s classic quote: “I can calculate the motion of heavenly bodies, but not the madness of people.” So true!

Alright, let’s get back to stories that are actually about business and games...

#2: Capcom Sees Great Growth

With the global pandemic, more and more social behaviors are taking place in the digital realm: work, shopping, and of course entertainment. It’s probably still too early to say how things will evolve and whether this trend is here to stay. One thing however is certain: because physical interactions decreased dramatically, people have turned more and more to gaming to occupy their free time. It is therefore no surprise that Capcom - like many others in the gaming industry - has seen an increase in sales and operating income in 2020. The company is even expecting this fiscal year to be the most profitable in company history.

Resident Evil 3 was singled out to explain the strong performance. With over 100M units sold, Resident Evil is by far the biggest franchise for the company - the Monster Hunter series comes in second with 65M sales (you can see the whole list per franchise or per title). Resident Evil 3 was re-release in April 2020 and has so far sold 3M copies. The original title was released in 1999 on the Playstation and has sold 3.5M copies. And re-releases selling as well - or better - than the original seems like a common pattern. The remastered version of Resident Evil 2 sold 7.5M units, and the original PS version released in 1998 had sold close to 5M units.

Part of that can be explained by the fact that more households have consoles compared to 20 years ago (for example, more PS4s have been sold since 2013 than original PS between 1994 and 2012). But that alone doesn’t explain why the re-releases sell so well. In an industry so focused on innovation and the next big thing, it can be easy to lose sight of the fact that sometimes you can create an experience that doesn’t fall out of fashion. Capcom has successfully created franchises and games that stand the test of time. What’s more, Capcom has been successful in leveraging its unique portfolio and capitalizing on its past successes to drive future growth. This year will be particularly good because Capcom expects strong sales from it’s new Monster Hunter title. But its careful management of its historical portfolio means that it’s not as dependent on the next release for continued success. And in that respect Capcom is quite unique in the business. (written by Alex Macmillan)

#3: Reviewing Epic Games Store’s 2020

The Epic Games Store (EGS) is growing to become a distinct pillar in Epic’s business, apart from the Unreal Engine. The goal was simple - reinvest Fortnite profits to destabilize Steam’s monopolistic stranglehold on PC storefronts and subsidise a more developer-friendly take rate.

In a developer’s mind, switching to EGS is a no-brainer if the platform has a competitive player base, the growth of which will be driven by the content hosted on the platform. As mentioned in our Epic Games breakdown, Fortnite’s massive audience is a huge fire starter to address the player side of the equation. Over the last two years, Epic followed that up with free game giveaways and ongoing exclusives. The latter has only gotten better over time with popular titles including Rocket League, Assassin's Creed Valhalla, Tony Hawk’s Pro Skater 1+2, Godfall and most recently the hugely successful Hitman 3. And let’s not forget when GTA 5 was offered for free, causing severe technical problems as 13 million average peak concurrent users logged on to redeem it over the course of Epic's “The Vault” campaign.

So how has EGS been faring over two years of activity and versus Steam? Epic released a flurry of 2020 EGS performance stats to help us compare versus Steam’s 2020 recap. Please note that Steam’s registered accounts and revenue numbers have been estimated from multiple sources.

Based on the above data, three things are very clear. First, EGS still has a long way to go to make a significant dent in Steam's audience and revenue numbers. But Steam is likely already starting to feel the pinch, especially with EGS’ 2020 MAUs (56M) being roughly half that of Steam’s (120M).

Second, EGS’ free game giveaway strategy is driving massive engagement on the platform with an approx. +150% YoY increase in 2020 free games claimed per registered account. This is likely creating a significant word of mouth effect, and thereby bolstering the roughly +50% YoY uptick in EGS’ 2020 registered accounts.

Third, EGS needs to focus locking in higher quantity and quality of exclusive platform launches going forward. Third party revenue equated to ~40% of the store’s total 2020 revenue, which is not too shabby. But third party revenue per registered account dropped -30% YoY in 2020, which is not a very good sign for maximising EGS’ growth engine. The giveaways can only go so far, beyond which growth is all about being able to host new, exciting and exclusive content.

A possible fourth point could be EGS still lacking in terms of a feature set versus that of Steam’s. But this is mostly natural and will definitely change for the better over time. Steam took years to find its groove, and Epic seems committed to adding new features at a steady rate.

All in all, EGS has made notable progress over 2020 towards its initially stated goal. But if I (Manyu here) as Epic had to choose one thing to focus on 2021/2, it would be figuring out a way to secure way more high quality exclusive third party content deals to truly supercharge platform player growth.

🎮 In Other News…

Microsoft Cloud strength drives second quarter results. Link
RuneScape publisher Jagex acquired by The Carlyle Group for at least $530 million. Link
Rovio shuts down Hatch. Link
IO Interactive's Hitman 3 made back its dev costs in a single week. Link
AppOnboard raises $20 million for no-code game creation. Link
Pocket Worlds raises $7 million to double down on social mobile games. Link
Microsoft’ PlayFab grows ninefold in 3 years. Link
Tencent picks up minority stake in Dontnod for $36.3 million. Link
Tencent acquires majority stake in Don't Starve dev Klei Entertainment. Link
Tencent Games forms strategic partnership with RedMagic. Link
EA launches new Skate studio. Link
Bollywood star Akshay Kumar teams with nCore for new mobile game. Link
Ludo AI game creation platform now in open beta. Link
Plex is launching a game subscription service filled with Atari games. Link
Xsolla launches commerce to take mobile games beyond the app stores. Link
MegaDev secures $1.9m for PC cheat platform Plitch. Link
Azerion fully acquires Habbo Hotel dev Sulake. Link
Magic: The Gathering Arena Mobile soft launches on Android. Link

🖥 Content Worth Consuming

Our 360-degree view of the metaverse ecosystem. (Venture Beat) “Our GamesBeat Summit: Into the Metaverse and GamesBeat/Facebook: Driving Game Growth event drew more than 3,400 registered guests (not counting those who viewed livestreams), building a community around the metaverse and mobile games that we didn’t really know was there. We had record engagement with this metaverse event, and that confirms for me that we’re all fed up with the Zoomverse. Thank you for support, as you affirmed that I’m not alone in this passion. While we may not be able to define the metaverse yet, it feels like we all agree something else should connect us amid the bleak reality of the pandemic." Link

Joost van Dreunen – Unlocking Value in Gaming. (Invest Like the Best) “My guest today is Joost van Dreunen, an investor in the gaming space, professor at NYU's Stern School of Business, and former CEO and co-founder of SuperData Research, a data-driven gaming firm that was acquired by Nielsen. He also recently authored One Up: Creativity, Competition, and the Global Business of Video Games, a great book on the business game industry and why I reached out to speak with him in the first place. Our conversation covers the rise and decline of GameStop, what parts of the value chain actually make money in video games, the evolution of video game business models from Nintendo to Fortnite, and what other industries can learn by studying the video game industry. I hope you enjoy my conversation with Joost van Dreunen.” Link

2021 Predictions #5 Sports Games Race into a Billion Dollar Club. (Deconstructor of Fun) “Despite being the smallest category by revenue share on mobile, 2020 was a very good year for Sports & Racing as it breached the billion-dollar mark, with combined revenue of $1.2B compared to $827M in 2019. The category saw double-digit growth of +30% YoY, compared to just +17% in 2019. Sports saw YoY growth of +29% ($880M), while Racing registered +23% YoY ($331M). All sub-genres enjoyed a healthy double-digit revenue growth that helped the category to finally push past the billion Dollar in in-app purchases mark!” Link

Makers Fund’s Archie Stonehill on what they expect from founders on their first meetings. (PocketGamer.biz) “Archie Stonehill is a venture capital investor covering the EMEA region at Makers Fund, one of the leading global VC funds that invests in interactive entertainment. Stonehill joins us for Investor Connector at Pocket Gamer Connects Digital #5, a fringe event which pairs pre-selected developers who are seeking funding with investors. Before the event takes place next month, we caught up with Stonehill for his thoughts on investment and how the current pandemic has affected getting funding.” Link

The rise of Fall Guys and how Mediatonic plans to take it higher. (Gamesindustry.biz) “There were several factors behind the game's success: the increased number of people playing video games during the coronavirus pandemic; the launch timed to coincide with the summer holidays when younger gamers would have more leisure time; and the accessible concept that's instantly understandable to anyone that has watched an episode of Takeshi's Castle (or its numerous progeny like Most Extreme Elimination Challenge or Wipeout). But one of the key pillars to Fall Guys' rapid rise was its inclusion as a free game for PlayStation Plus subscribers.” Link

Thanks for reading, and see you next week! As always, if you have feedback let us know here.