Hi everyone — This might be our longest newsletter edition yet! We wrote about Microsoft's acquisition of Activision Blizzard and included a snippet from our premium deconstruction of The Sandbox (70 pages!). We hope you enjoy and look forward to your feedback.

Also, quick job alert: If you're interested in doing some paid writing work with us for one of our clients (a leading VC), please reach out here. We're happy to discuss more details.

Roundtable #31: Microsoft x Activision Blizzard, NFT Marketplaces & Turkish Studios

In this Metacast episode, Sebastian Park, Miikka Ahonen and David Amor join your host Nicolas Vereecke to discuss:

• Microsoft buys Activision Blizzard for $68.7B

• Opensea raises $300m at $13.3b valuation

• Turkey + Games: Spyke’s and Dream Games’ massive raises

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

#1: Unpacking Microsoft’s Acquisition of Activision Blizzard

The games industry loves new high scores. Last week’s announcement of Take-Two Interactive’s $12.7B bid for for Zynga was eclipsed (6x) when Microsoft stated its intention to acquire Activision Blizzard for $68.7B. We have a new “largest acquisition in gaming history” in the making!

According to Drake Star Partners, “The disclosed deal value for deals announced or closed was $85B across 1,159 transactions in 2021, almost three times the dollar volume for full year 2020.” We’re only three weeks into January and these two mega-acquisitions alone rival 2021’s total deal value.

The Numbers

According to the announcement, Microsoft will acquire Activision Blizzard for $95/share in an all-cash transaction valued at $68.7B, inclusive of Activision Blizzard’s net cash. The deal is expected to close in mid-2023, primarily since the large scale will require heavy regulatory approval.

It’s a relatively straightforward deal. Microsoft, which is looking to (eventually) serve 3B gamers has a ton of cash (~$52B net cash) and is ready to spend big to accelerate its goal. Activision Blizzard, which has nearly 400M monthly active users (MAUs), is a big step in that direction. In fact, as a combined entity Xbox and Activision will generate an estimated ~11% of the total game industry’s revenue.

It’s also worth noting that even though $68.7B is a lot of cash, Microsoft earned $60B in free cash flow over the past 12 months. There’s a good chance that Microsoft will earn more cash from its typical operations than the acquisition will cost them before the deal actually closes. Wild!

Furthermore, Microsoft was able to strike this deal while Activision’s market cap was severely beaten down. As we all know, Activision has suffered from culture issues that have led to lawsuits, game delays (Diablo IV and Overwatch 2), quality concerns (such as in the latest Call of Duty), and employee and executive turnover. Microsoft, of course, never mentioned “a better price” as a factor in its remarks, but it’s clear that there’s an element of timeliness to this deal. Not only is Xbox able to pick up a large number of studios and IP at a more compelling price, but it provides Activision (namely its leaders and their relationships with shareholders) a path out of its current difficulties.

Changing owners won’t immediately solve cultural problems (and, again, the actual transaction should take place in 18 or so months so nothing is immediate anyway), but Activision’s CEO Bobby Kotick will step down after the deal closes and Xbox will have freer reign to make important cultural and leadership adjustments. The business will report to Microsoft Gaming CEO Phil Spencer. Over the next 18 months, a lot can still happen — new games, continued turnover, additional calls for unionization, lawsuits playing out, etc. — but there’s optimism that larger leadership changes under a new parent company will improve the culture for the better.

Somewhat related is that Activision’s stock currently trades for $81.35, a 14% discount from the $95 acquisition price. This means that there’s still skepticism that the deal will go through — primarily from an antitrust lens but potentially for other reasons.

Lastly, if you’re curious to see how this deal stacks up compared to others in recent years, check out this diagram:

Strategy

This acquisition is all about scale. As mentioned earlier, Xbox aims to serve 3B gamers, and Activision’s nearly 400M MAUs are a big step in that direction. Also, adding Activision’s studios into the mix means that Xbox will operate 30 studios with wide-ranging capabilities. It’s the kind of move that very few companies — including Xbox’s #1 competitor, Sony — could match, which is a source of competitive advantage.

Notably, this move has little to do with the console wars of old. Xbox is now fighting an ecosystem war — with Xbox Game Pass at the center — and it plays by different rules. First and foremost, adding IP like Diablo, Call of Duty, Starcraft, Tony Hawk, etc. tremendously bolsters the value of Xbox Game Pass, which now tops 25M subscribers. And as we saw with the previous acquisition of ZeniMax, Xbox isn’t shy to move notable IP (like The Elder Scrolls) into Xbox exclusives. It’s exactly the move to a subscription offering that gives Xbox the leeway to acquire companies like Activision vs. competitors like Sony: 1) rolling it all under their subscription offering, 2) predictable streams of revenue, and 3) a wider variety of tiered pricing. Having Activision’s IP under Game Pass is a huge game changer, and eventually having its launches appear day one on Game Pass will be a major source of subscriber growth.

Importantly, this isn’t just about console / PC. It’s also about mobile; after all, no company can serve 3B gamers without a strong mobile strategy, and buying King (~estimated $600M quarterly revenue), Call of Duty Mobile, and likely more in the pipeline is a strong addition. As we’ve seen in other acquisitions, the synergies between console/PC and mobile are typically overstated, but perhaps we’ll see Game Pass play a role in certain mobile games (including battle passes / using them as a top-of-funnel into a broader Game Pass offering). Maybe Xbox will even build a more unified advertising platform (although who knows).

Making Activision’s IP playable across devices via xCloud will also be a notable achievement. In fact, we should expect xCloud to start playing a larger role in the coming years as more people start streaming games to more devices. It will be a gradual shift, but unlocking a true cross-platform ecosystem (versus simply a console one) is a big deal — be it console games on your phone or even mobile games on your TV! Also, since Microsoft Azure (on which xCloud runs) will increasingly compete with Amazon’s and Tencent’s cloud efforts when it comes to games, bringing on more first-party IP to run on your own cloud provides a unique advantage few others can match. This advantage won’t dramatically move the needle for all of Azure, but it’s a notable edge when it comes to the games industry, particularly if more games at scale choose Azure over other options.

Content is always the keystone, but the broader ecosystem of compelling subscription offerings and cross-platform capabilities is what will define Xbox’s role in the future. Game Pass probably already provides the best value for gamers, but it’s on its way to becoming indisputably the best value for the consumer. Very few companies are positioned to successfully compete on these dimensions.

We’ll also likely see some additional strategies play out:

• Given Xbox’s wider range of resources, we may see more effort put into reinvigorating old yet strong IP like Guitar Hero and Skylanders.

• Recent issues have slowed Activision down, but it was working on leveraging the “Call of Duty model” — creating more complementary, cross-platform experiences around a core brand — to IP like Diablo and World of Warcraft. Expect this to continue, and it makes sense that we could see more Xbox IPs follow suit, especially if Xbox aims to up its game in mobile and free-to-play broadly.

• Related, leaning into more free-to-play games (on whichever platform) will likely be a key top-of-funnel strategy for converting players to Game Pass.

• Phil Spencer has publicly stated that they will honor existing agreements with other platforms, such as keeping Call of Duty on Playstation. However, it wouldn’t be surprising to see Xbox turn many new launches exclusive sooner than later.

• Game Pass will likely need to add new, clearer tiers as more types of content get added into Xbox’s ecosystem. This will be interesting to track as existing subscriptions like WoW and Elder Scrolls Online get further integrated into the Game Pass ecosytem.

• Esports will never be big business for Xbox, but it will own a few games where esports matter (Halo, Call of Duty, Overwatch, Hearthstone, etc.). Activision has underperformed on esports, and Xbox may have a chance to turn things around.

Open Questions

As with any monumental deal, there are still many questions to work through. For example:

• Will regulators stop the deal on antitrust grounds? We think the answer is no. As we mentioned earlier, the combined company would drive 11% of total game industry revenues, but that’s across all platforms. Also, today Xbox is still smaller than PlayStation and Tencent, for example, so it’s hard to see regulators actually stopping this deal from taking place. That said, it puts a target on Xbox’s back for future acquisitions.

• What will happen to Call of Duty? On one hand it seems crazy to turn this money printing franchise exclusive (that’s a lot of lost revenue!); however, as we saw with Xbox’s treatment of Bethesda IP it’s certainly possible. What we might see happen is Warzone remaining free-to-play on all platforms but the premium version eventually going exclusive on Xbox. There’s also a chance that Xbox will kill the annual publishing model, which has faced some execution issues. These are all huge changes that would dramatically affect the revenue generated by this massive IP; however, it’s hard to think Xbox would’ve acquired it without thinking of ways for it to benefit Xbox above all others.

• How will everything integrate with Game Pass? For example, World of Warcraft is already a huge subscription business; will it get included into some tier of Game Pass? Would the same happen to Elder Scrolls Online as other games with that model? Could these leading games with existing subscriptions help convert existing players into Game Pass? How will Game Pass play into Xbox’s larger mobile goals? Can being a Game Pass subscriber unlock unique features like battle passes or skins? There are lots of interesting business model questions here (and lots of ways for gamers to potentially unlock value).

• What’s Xbox’s next move with mobile? As Phil Spencer notes, “the journey for us is really about business model diversity.” After all, subscription gaming alone won’t get Xbox to 3B gamers. It will require much more investment into free-to-play, as well. It’s also unlikely that a team like King will be able to help Xbox take other IP to mobile (in the same way it struggled to help Activision also achieve that goal). So would Xbox want to add a larger, more diverse collection of mobile studios in the same way it did with console/PC? It’s hard to see the same business model rationale — premium games benefit from a subscription model more than free-to-play — but maybe they’ll try to build a more unified advertising platform, too. Would it require more M&A, and will regulators give them free rein to make other large moves? We don’t know, but we’re curious to learn more over time.

• How will competitors react? And who even should we view as competitors? Let’s start with the obvious. If Sony aims to compete based on exclusives and subscriptions, it will need to continue to up its game. The company already has great exclusive games, but it’ll need more IP and it’ll need to tie them more cleanly into subscription tiers. We know they’re working on this, but will it be enough? Will they look to make even bigger M&A themselves? We think it’s likely. The other thing to keep in mind is that the range of competitors is wider than before; after all, it’s less about consoles and more about ecosystems, where newer entrants like Netflix and Amazon can also play a role. Netflix will make a big splash to grow its own cross-platform content ecosystem, other traditional media giants may eventually follow suit, Amazon may look to lean into M&A to bolster its existing (and underperforming) gaming effort, who knows what Chinese companies like Netease, Tencent, and Bytedance will try (as they lean more into international markets), Epic Games is to working to build its ecosystem, and more. At what point will newer screens / platforms like AR/VR play a larger role, and how does that change the competitive dynamics? We will have to see, but there’s still a lot of pent up competitive energy waiting to get released.

Wrap-Up

There are many forces that are driving the industry into further consolidation:

1. Big gaming ecosystems are competing based on exclusives

2. Traditionally non-gaming ecosystem (entertainment + tech) are eying games with more intensity

3. Cross -platform ecosystems make more sense than in the past

4. Subscription models become more compelling with more content

5. Diverse business models make historically lumpy gaming business more stable

6. Central ad platforms make competing in mobile more viable

7. It’s often more capital efficient to buy what you know works vs. spend a lot of money incubating new projects that may not.

This isn’t a new trend, but it’s clearly accelerating. It accelerated last year and 2022 is already breaking records. We should expect further consolidation to occur (until regulators stop it). There aren’t that many gaming companies who can afford to acquire massive businesses like EA or Roblox (or would be allowed to), but there are many who could target the next rung down. Companies like Nexon, Netmarble, Ubisoft, Square Enix, and many others may have opportunities to get scooped up into larger ecosystems in the coming months. And as we’ve seen with Activision (46%) and Zynga (64%), many targets may be able to negotiate decent premiums.

There’s also a lot of money flowing around. Titans like Amazon, Meta, Apple, Tencent, and Microsoft generate enormous cash flows and sit on tens of billions of dollars in cash. Plus, companies like Sony, Embracer, Stillfront, Netflix, Applovin, among others (including the titans) can pull other levers to achieve their various forms of consolidation. They can take out debt at low interest rates with reduced risk, as well as leverage their shares to make larger transactions more viable. There are many ways a wide range of companies can get deals done.

It’s hard to see another deal top Activision in size (at least anytime soon), but we certainly will see far more M&A in the months and years ahead. As Miikka Ahonen mentioned on a recent episode of The Metacast by Naavik: “It feels like the market is valuing content creation higher than it used to. Good content is always valuable, and teams that create good content are even more valuable. If you can top this off with household IP, this is the best setup.” In some ways, it might become more difficult for smaller companies to compete independently, but it also couldn’t be a better time to be a studio with strong IP. (Written by Aaron Bush and Fawzi Itani)

#2: Premium Research - Deconstructing The Sandbox

Axie Infinity popularized “Play to Earn,” but the next hottest buzzword in the blockchain gaming space is “Virtual Real Estate.” According to the Motley Fool, nearly a quarter of all NFT sales in early December were for Digital Land, and the buzz has gotten so hot that we’ve seen multiple articles on the subject from the mainstream media, with takes from The Wall Street Journal, Fortune Magazine, USA Today, Bloomberg, and The New York Times.

At the same time, there’s an increasing investor hunger for user-generated content (UGC) platforms. Most notably, Roblox’s explosive IPO last year earned the company a valuation well above $40 billion. Roblox joins Minecraft and Fortnite to form an intimidating triumvirate of so-called “metaverse” platforms where players don’t just play games but actively shape them. Most importantly, these platforms have become a sort of “third place” where players go to just hang out with their friends and socialize, something that has become particularly central to their lives in the age of COVID. These services are properly understood not simply as games but as a novel mix of gameplay, content distribution platform, and social network.

These platforms make an incredible amount of money. In 2020, Minecraft earned $415 million in revenue, Roblox earned $920 million, and Fortnite earned $1.1 billion. As the next generation increasingly spends more time online, many investors (and speculators) are hoping to become real estate tycoons in the metaverse. Or as Janine Yorio of Republic Real Estate famously told Bloomberg, “Buying land today in virtual worlds may end up feeling a lot like buying land in Manhattan in the 1750s.”

One game is consistently mentioned in these articles: The Sandbox, a voxel-based UGC platform with an aesthetic somewhere between Minecraft and Roblox that’s clearly attempting to emulate gameplay aspects of both. In The Sandbox, players explore a virtual world of interconnected land plots, each of which can host an interactive experience created by another player. The land plots themselves are privately owned and can be bought, sold, and traded for cryptocurrency, and, crucially, are required for deploying player-created experiences. Players can also create custom 3D assets and animations to place in their virtual worlds, which in turn can be sold to other creators through an asset marketplace.

The Sandbox boasts some truly eye-popping statistics:

• $13.8 billion fully diluted market cap for its SAND token (source: CoinMarketCap)

• $10,000 floor price for land (source: OpenSea)

• $1.45 billion in traded land value (source: Naavik, see below)

• A return on investment of over 11,000% for the past year

Looking more broadly, there are two other leading “digital real estate” platforms in the crypto space that are consistently mentioned alongside The Sandbox: Axie Infinity and Decentraland.

Axie Infinity has yet to launch its long-touted “Land Gameplay,” and it’s seen the economy of its base creature-battling game take a beating in the last few months, right in line with our predictions. The ultimate lesson of Axie Infinity is that a pure "Play-to-Earn" model can grow for a good while but is fundamentally unsustainable in the long-run; these games require new modes and features that also attract non-income-motivated players. Plus, if most players show up out of pure financial motivation, you should interpret most of your statistics (and assumptions about player loyalty) through the lens of a job rather than that of a game.

Justifiably, Axie Infinity players seem to be pinning most of their hopes on upcoming game modes, Land among them, but Sky Mavis has offered little more than teasers so far. Worryingly, Sky Mavis surprised everyone by committing to a full-3D art style out of the blue, which any veteran game developer will tell you can only delay the release considerably.

Decentraland, on the other hand, has been playable for nearly two years. At the time of writing, the fully diluted market cap of its MANA token is “only” $6 billion, a little less than half of The Sandbox’s. Of the three virtual real estate projects, Decentraland is the most mature and furthest along in development, boasting a browser-based game client that you can jump in and play right now.

The Sandbox sits somewhere in the middle of the two projects. It boasts a set of player creation tools as well as rich land sales, but current gameplay offerings are extremely limited. A closed alpha was offered in December, during which a select group of players who held one of 5,000 “Alpha Pass” NFTs were allowed to explore 18 curated experiences. Players without an Alpha Pass were still allowed to play, but could only access the hub world and three experiences, and they were barred from all play-to-earn activities. In all, the brief event lasted 21 days.

These three games are pitching themselves as the future of UGC-based “metaverse” gameplay on the blockchain. The pitch is that these platforms will carve out large “digital nations” and one day rival and even eclipse Roblox, Minecraft, and Fortnite, as well as Facebook/Meta’s potential offerings.

But blockchain games aren't the only ones who want a bite of the apple, and The Sandbox’s developer, Pixowl, would do well to remember that it faces competition on the conventional game front as well. We see not only towering titans like Roblox, Fortnite, and Minecraft, but also scrappy startups like Rec Room, VRChat, and CORE.

Another curious contender is DotBigBang, a browser-based voxel sleeper hit that invites a direct comparison to The Sandbox, but without the crypto and virtual landlords. This game has flown under the radar, spread almost entirely by word of mouth and has far more user-generated experiences (with much higher engagement) than The Sandbox.

The Sandbox has not been particularly forthcoming with its statistics. Many press articles will tout an install base of 40 million users, but if you look closely you'll see this is referring to The Sandbox franchise of games, which includes the two prior mobile games. The most concrete information we've been able to find comes from this blog post in which we are told the following about the game:

• 500,000 unique connected wallets

• 30,000 monthly active users (MAUs)

• ~15,000 users who play for more than 1 hour a day

These stats are not particularly impressive. Even Second Life, an ancient UGC "virtual world" platform from all the way back in 2003, and whose hype cycle crashed in 2008, beats these statistics easily. Second Life still has more peak simultaneous users (40,000) in recent months than The Sandbox has MAUs. And Second Life has more MAUs (750,000) than The Sandbox’s entire total player base.

Pixowl clearly still has room to grow, and we look forward to seeing detailed stats from the past two months. For proper analysis we hope to see daily metrics rather than monthly aggregates, given that limited-duration Alpha tests tend to artificially compress user activity and don’t accurately reflect baseline engagement. But let's zoom out real quick and get some context for what all these numbers mean. What are "good" stats for other platforms in this space? Here's a table of projects we were able to nail down rough figures for:

The Sandbox has an incredibly high total ecosystem token valuation, but it has the smallest userbase of all the platforms we have stats for. Effectively, investors are valuing The Sandbox’s MAUs at $472,000 dollars each. Yes, this is heightened because the platform is still in its Alpha, but even so that’s nearly 20 times as much as a Decentraland user and more than 400 times as much as a Rec Room user.

This is an unfathomably high ratio. But is it just a curious quirk of math because the platform is young and the user base is still fairly small? If you look at a huge mature game like Roblox you see its ratio has been driven all the way down to $227/MAU, which most analysts would still consider a high number and factors in meaningful growth. Could Roblox have had a much higher ratio when they were small? Let's take a few steps down the ladder and see for ourselves.

The first rung down from Roblox is Rec Room. Widely considered a huge breakout hit, it is still two orders of magnitude smaller than Roblox and sports a ratio of $1,167/MAU. If we go a step further we come to CORE, a game that has attracted a huge amount of investment but is still early in its growth cycle. This seems like a reasonable comparison, and indeed its ratio is many times higher than Rec Room’s, sitting at $5,000/MAU. But we're still approximately two orders of magnitude short of The Sandbox's valuation-to-MAU ratio.

Perhaps this crazy ratio is just the natural premium for being a crypto game? Fortunately, we have two other land-based crypto games to compare it to. Let's start with the top of the pack, Axie Infinity, which has $10,250/MAU, a good bit higher than CORE. Next stop is Decentraland with three times that, $24,333/MAU. That's an anomalously high ratio as it is, but even so The Sandbox’s ratio is still nearly 20 times higher.

What all the other games have in common is that they actually have comparatively more MAUs. The Sandbox alone sticks out of the pack as a game that has attracted incredible investment but a relatively minuscule number of actual players so far.

Let's compare things another way. These are all UGC platforms, so let's see how much content users have been uploading. We'll then compare the number of experiences to the amount of investment the game’s company has received from formal investors, excluding all token valuations.

The Sandbox comes in dead last of all the other platforms we have stats for. If we look at the investment ratios, we get $24,017/experience for The Sandbox (only counting formal investment dollars, not token values or any money raised from land pre-sales), $9,957/experience for CORE, $1,088/experience for VRChat, $2,930/experience for Rec Room, $222/experience for DotBigBang (although we’ve heard reports that there may have been additional funding rounds not yet posted), and $36/experience for Roblox. The Sandbox’s is slightly less out of whack here, sporting a ratio of a little more than twice that of CORE (both platforms, of course, not being widely available yet). Even so, The Sandbox has the highest ratio of them all, at least based on publicly announced funding.

Clearly, formal investors and token holders alike believe in The Sandbox enough to bestow upon it a valuation north of $10 billion across its tokens. All of these investors are expecting a return, which in a sustainable future can only come from a large population of content creators and players. We are therefore left with these critical questions:

• What, if anything, could justify such an optimistic outlook?

• What is The Sandbox's plan for getting there?

• Does the team have what it takes to pull it off?

In this deconstruction, we will answer these questions by charting the path The Sandbox has trodden so far, evaluating the current state of the game, and analyzing the team’s stated plans for the future. We’ll also analyze the economic dynamics between creators, landowners, and players, dig into the various tokens (LAND, SAND, and ASSETs), as well as share our thoughts on the game’s level of decentralization.

Could The Sandbox become the Roblox of blockchain games? Will its land-based model become a valuable hub in the emerging metaverse? Let’s dive in and find out.

This research essay was originally posted on Naavik Pro - the #1 research portal for blockchain and F2P games! We serve both investors and developers with our premium research. Make us your remote games research department today!

🎮 In Other News…

💸 Funding & Acquisitions:

• Microsoft announced that it would acquire Activision Blizzard for $68.7B. Link

• Animoca Brands raised $360M at a $5.4B valuation. Link

• Dream Games raised a $255M Series C at a $2.75B valuation. Link

• Stillfront will purchase 6Waves for $201M. Link

• Turkey’s Spyke Games raised a $55M seed round. Link

• Artie is back with a new $35.9M funding round to build mobile games with NFTs. Link

• Mythical Games acquired Polystream, a real-time 3D streaming service. Link

• Carry1st announced a $20M Series A in a round led by a16z and Avenir. Link

• Cyber raised $6.7M to empower the development of virtual worlds. Link

• YGG sub DAO IndiGG raised $6M to incubate India’s play-to-earn talent. Link

📊 Business:

• Facebook patents reveal how it intends to cash in on the metaverse. Link ($)

• Loop Games will spend $100M to develop and publish on its gaming platform. Link

🕹️ Culture & Games:

• Axie Infinity announced their builders program, an effort for community developers to build experiences on top of Axie. Link

• How Halo turned this esports pro into a game developer at Bungie. Link

👾 Miscellaneous Musings:

• How to secure funding for your indie game. Link

• Are video games China’s next cultural export? Link

• Why player retention matters now. Link

🔥 Featured Jobs

• Guild of Guardians: Head of Partnerships (Remote)

• Polygon Studios: VP Gaming (Remote)

• Rec Room: UGC Development Lead (Seattle; Remote)

• Riot Games: Biz Ops Manager (LA)

You can view our entire job board — all of the open roles, as well as the ability to post new roles — below.

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

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