Welcome to Master the Meta, the #1 newsletter about the business of video games.

Here’s your weekly roundup and analysis of what’s happening in the video game industry:

📰 News

Microsoft is closing Mixer and partnering with Facebook Gaming. Last year, Mixer — Microsoft’s competitor to Twitch — made the bold decision to offer generous exclusivity contracts to a handful of popular streamers (like Ninja and Shroud). The gamble didn’t pay off. Despite shelling out millions, Mixer’s market share in terms of hours watched continued to hover between 2-3%, and between April 2019 and April 2020 hours watched only increased 0.2% (for context, Twitch’s hours watched doubled).

Microsoft is now admitting defeat and moving on. Mixer’s partners can shift over to Facebook Gaming (or leave and go elsewhere), Ninja and Shroud keep their signing bonuses and are free to negotiate with other platforms, and Mixer’s technology will be folded into Microsoft Teams. Most importantly, Facebook will partner with Microsoft on xCloud.

There are three key business lessons here:

1. It is possible to buy network effects — Douyu did so in China — but it can get prohibitively expensive, especially when other networks are decently entrenched. The ROI of scaling up exclusivity deals simply wasn’t worth it for Mixer.

2. It’s hard to compete against companies who already have enormous networks that can be leveraged into new markets like streaming video games. In a short amount of time YouTube Gaming and Facebook Gaming captured 27% and 9% market share, respectively. Not only do they have a huge network advantage, but they also own the means of how smaller platforms often acquire new users (ads on Facebook, Instagram, Google, Youtube, etc.).

3. The new deal is a win-win for Microsoft (cloud technology) and Facebook (distribution). Facebook Gaming will get a slight boost, xCloud will receive amazing distribution potential, Microsoft won’t have to partner with its cloud competitors, and it sets Facebook up well to develop a superior foothold in gaming.

Although this news is sad for those who relied on Mixer, the platform will go down in history as the one that changed the economics of streaming forever. Popular streamers are now able to capture more value because Mixer was willing to go against the norm and strike streamer-friendly deals. Link

Apple breaks the mobile advertising ecosystem. The mobile ad tech industry has always been fairly fragile, because Apple, a clear consumer privacy advocate, has the power to dictate what’s allowed on its devices and what data other companies have access to. At its WWDC earlier this week, Apple made some changes that have the entire mobile advertising industry scrambling to adjust.

Traditionally, Apple’s Identifier for Advertisers (IDFA) helps companies work with mobile measurement partners (MMPs) to attribute ad spend — essentially figure out which device-specific ad clicks lead to app installs and in-app activity. Apple is now rendering the IDFA useless by making it opt-in for every app (most users will deny permission to track their activity). Apple also unveiled a new privacy dashboard and updated its own privacy-first mobile attribution tool, SKAdNetwork, which will supposedly help advertisers measure the effectiveness of their ads without device-specific data.

What does this all mean? The honest answer is everyone is still figuring it out (changes roll out in September), but here are some ideas. MMPs will race to offer SKAdNetwork advice but likely have a tough time adapting. Titans like Facebook face disadvantageous adjustments but will be fine. Mobile gaming companies obviously still need to advertise to acquire users and generate revenue, so they'll likely shift over to different campaign types, but not all types of ad-supported games will perform the same. Importantly, it’s tough to say what will come after these changes, but this rollout isn’t the end. Mobile ad tech moves at the whims of Apple (and Google, which often follows), and that’s not a strong position to be in. Link

A new type of Pokemon game is announced. The most interesting game announcement of the week, in my opinion, is Pokemon Unite, a multiplayer team battle game that’s coming to mobile and the Switch likely later next year. It strikes me as a good fit for Pokemon’s IP, and it’s developed by Tencent’s TiMi Studios, which created hit games like Honor of Kings, PUBG Mobile, and Call of Duty: Mobile. Jeff Chau has a good take, here.

At the same time, Nintendo is taking a step back from mobile. As I explained in my Nintendo Deep Dive, Nintendo’s ethos is naturally at odds with what it takes to succeed in mobile. “The Nintendo Way” and gacha mechanics simply don’t go hand-in-hand. Nintendo has experimented with various (often baffling) tactics, but the games are hit-and-miss and fail to grow:

This is the third time Nintendo is rethinking mobile. Nintendo’s stubbornness leaves a lot of money on the table, but money was never the company’s top priority in the first place. My instinct is that there are alternative paths the company can take — more co-development partnerships or even striking a mega-deal with Apple Arcade — but who knows if anything along those lines will happen. Link

The Last of Us Part II becomes Sony’s fastest selling exclusive. The game sold over 4 million units in 3 days ($240M+), topping Spider-Man’s 3.3 million units in 3 days. My guess is that TLOU2 might hit 15 million total units sold. Even if it falls a bit short, it’s a huge win, a great game, and a testament to Sony’s exclusivity strategy. Link

Oculus discontinues sales of Go headsets. Oculus Go is the company’s lowest end VR model that was designed purely for video (3DoF), and consumers have made it clear that the Oculus Quest, which supports 6DoF (tracking movement in three-dimensional space — important for gaming), is where demand is at. This change simplifies Oculus’s product line-up (Quest + Rift), means the Quest will receive more resources in the future, and it reiterates the importance of games in Oculus’s VR ecosystem. The Quest still faces inventory issues, but we’ll probably see a new version in 2021, and content sales will far surpass the $100 million mark that occurred in May. VR in general is still relatively nascent and there remain issues to solve for, but refocusing on the Quest is likely going to spur meaningful growth in the years ahead. The big question is how much. Link

Roblox partners with Warner Bros. and DC. The companies are working together to create “Wonder Woman: The Themyscira Experience,” a digital world where players can experience Wonder Woman’s homeland, play related mini-games, and even find/buy DC-branded virtual items. This is all in advance of Wonder Woman: 1984, which comes to theaters in September. Games like Roblox and Fortnite are increasingly becoming important advertising partners for traditional media players, and it makes a lot of sense. Video games are exponentially more immersive, time-intensive, and offer a level of freedom that traditional video commercials will never match. Experiences like this will likely grow in popularity, and it’s an early signal of just how influential these world-building games (increasingly platforms) can actually become. Roblox will continue performing fantastically on its own, but it could also make for an incredible acquisition. Link

Tencent is beta testing a live streaming platform in the US. Tencent is strengthening its grip on video game live streaming markets around the world, and Trovo Live is the company’s attempt to gain a foothold in the US. A week ago the platform also announced a partnership program that’s backed by $30 million in creator incentives. It’s fascinating to see Tencent tackle the US market, but unless the company is willing to spend significantly more money or has a truly disruptive trick up its sleeve, it has little chance of succeeding (for the same reasons Mixer failed). And based on what I see, there isn’t anything disruptive going on. Link

Bytedance prepares to scale its gaming business. Bytedance’s gaming subsidiary, Zhaoxi Guangnian, has yet to develop a blockbuster hit, so the company is changing tactics. Over the past few months, Bytedance has signed deals with at least three mobile gaming companies — CMGE Technology, Shanghai Yaoji Technology and Kaiser China Culture Co — to secure the rights to games based on popular franchises, including One Piece: The Voyage and Naruto: Slugfest. If Bytedance wishes to become a gaming powerhouse it still needs to be able to develop its own hits, but partnering is a great way to gain an initial foothold while improving its internal studio capabilities. Over 1.5 billion people use Bytedance’s apps (like Toutiao and Douyin/TikTok), so the company has tremendous distribution advantages (much like Tencent or Facebook) that can be used to scale its mobile gaming presence. That doesn’t mean Bytedance is anything close to being an existential threat to Tencent or NetEase — after all, it’s barely getting started and the market is large enough to support another major player— but it’s a sign that competition will continue to be fierce. Link

NetEase topped Japan’s revenue charts in May. Japan’s gaming market has always proven difficult for outsiders to win in, and this achievement stands out because it’s the first time a Chinese company was #1 on Japan’s mobile gaming charts. The success is mostly driven by Knives Out and Identity V, and even if being #1 is fleeting NetEase is still in the early innings of ramping up its international operations. As mentioned in previous editions, NetEase has begun opening new studios in other countries — including Japan — so the company is clearly looking to deepen its presence in Japan and start scaling up in other parts of the world. Link

Sexual misconduct allegations are accelerating. Several brave women are increasingly sharing their stories of being treated inappropriately, and the industry is starting to take action. Ubisoft has suspended several employees, Method Esports is imploding, OfflineTV is kicking out a member, and that’s just scratching the surface. While this is obviously horrible for anyone who’s been a victim, it’s good to see victims being supported and more companies proactively taking responsibility. I’m reminded of Warren Buffett’s quote, “It takes 20 years to build a reputation and five minutes to ruin it.” Not only is being a good person unquestionably the right thing to do, but it’s apparently a competitive advantage. Let’s hope the shakeout continues to weed out abusers.

🖥 Content Worth Consuming

Shawn Layden interview: The man with the Crash Bandicoot T-shirt. “Over a career that spanned more than three decades, Layden rose through the ranks at Sony to become chairman of Sony Interactive Entertainment Worldwide Studios, an organization with more than 2,600 game developers across 13 studios that made blockbuster games like Naughty Dog’s The Last of Us Part II… But in September 2019, Layden stepped down and left Sony. He has been on an extended sabbatical, figuring out what he wants to do after the extended lockdown. But he would love to make sure that outstanding narrative games still get made. I spoke with him as part of a fireside chat for the digital version of Spain’s Gamelab event, and Layden had a lot on his mind.” Link

Mobile games industry M&A heads into overdrive. “What’s interesting from these deals is a shift from big publishers setting up their own new studios for international expansion, and moving toward increased M&A activity (though not entirely, of course). As studios around the world have become more astute at the mobile business and areas such as live operations, these skills have become more valuable in a highly competitive market.” Link

The Virtual Economy. “This is the Virtual Economy. An agglomeration of sophisticated platforms, fledgling and often dubious marketplaces, skilled nixers, volatile assets, and ambitious pioneers that exist or operate uniquely in virtual environments. It sits just out of reach, behind a digital curtain, invisible to most of us. Within it, there is a galaxy of activity and opportunity. A new economic frontier that may just be the answer to the generational wealth gap.” Link

See you next week!