Hi Everyone. Get pumped! The first episode of our podcast, The Metacast, releases later this week, and we’re excited to show it to you all in next week’s issue. Quick reminder: you can always email us with any questions, comments, or topic requests. Community interaction will be front-and-center, and we can’t wait to get it off the ground.

Now, let’s dive into this week’s issue…

#1: Scott Reismanis: The Past, Present, and Future of Modding

Earnings Mod.io

Source: mod.io

We had the pleasure of interviewing Scott Reismanis, founder and CEO of mod.io. Mod.io is building a platform that gives studios fully integrated and cross-platform mod solutions for their games. We discuss Scott’s history with Mod DB, why modding has failed to cross the chasm, why and how that might change, and how mod.io will be part of the solution. This is a really exciting, young company that more studios should know about, and Scott dropped a bunch of great insights. We learned a lot and expect you will too - enjoy!

#2: Ubisoft’s F2P Strategy Sparks Uncertainty

Ubisoft

Source: Ubisoft

It’s been a long time since we covered Ubisoft, so let’s take a look at the latest quarter. First, here are a few positive highlights:

  • Ubisoft had 141 million active players, +20% YoY

  • Assassin’s Creed Valhalla is breaking franchise records

  • Other franchises like Just Dance, Rainbow Six, etc. are holding up well

  • Fiscal ’21 broke records for net bookings and operating income

  • The back catalogue contributed 58% of net bookings

However, as is often the case, what’s more interesting is understanding the bigger picture and figuring out what it means for the future.

Despite the talk of “records” and “achievements” (which should be celebrated), Ubisoft’s stock is where it was four years ago; sales are a bit higher, cash flows are roughly the same, and there’s uncertainty about the future. It’s also important to remember that not even two years ago, Ubisoft faced meaningful execution issues (remember the major Ghost Recon: Breakpoint underperformance?), as well as a culture crisis that led to leadership upheaval. These issues can certainly be improved on — and it’s likely a bit better now — but they don’t change overnight.

From a business lens, Ubisoft has generally been viewed based on its ability to deliver 3-4 AAA games per year that are good enough to support meaningfully profitable live ops over time. Given that the company has regularly faced delays — and, yes, it just delayed Skull & Bones again — this ability has been put into question.

The emerging theme for this quarter, though, is free-to-play (F2P). In essence, Ubisoft aims to grow organically by dedicating more resources to F2P games, primarily those around its largest franchises. It wasn’t communicated well and confused a bunch of people who thought this meant fewer AAA games, but this is ultimately about more. We’re in the early stages of companies trying to mimic Activision’s “Call of Duty model” (premium + F2P PC/console + F2P mobile). Ubisoft is starting with The Division — The Division Heartland, a F2P experience for PC/console (and then later mobile) will launch in fiscal ’22 — and hopes to implement some version of this strategy with other IPs.

In general though, I think it’s the right strategy for certain franchises (but not for others). Building cross-platform ecosystems around games with massive player bases is a good way to widen an audience, deepen engagement, and build new organic revenue streams. But I also understand the pervasive uncertainty, because there’s minimal evidence that Ubisoft specifically can pull this off with outsized success. The company’s last original F2P effort, Hyper Scape, is a distant memory, and bringing a diverse array of games to F2P/mobile — especially those around open-world single-player IPs — isn’t going to be easy. Also, none of these franchises are nearly as big as Call of Duty, so there’s questions about the magnitude of upside and whether returns on that invested capital will be worthwhile.

Obviously management needs to pick the right franchises to build around, but it mainly boils down to the quality of execution, and I suspect Ubisoft will need talented co-development partners to prove the doubters wrong. We know Ubisoft can create great games and successfully use live ops to strengthen engagement. But can it continue to improve on its AAA execution while also devoting greater resources to multiple F2P games? It’s TBD, and it will take time to play out. Management isn’t including any impact from F2P games in its financial guidance for the next year, but over that time we’ll learn more about the company’s plans and can better judge if they’re setting themselves up for success. If there’s any silver lining, it’s that Ubisoft now has relatively low expectations to overcome. (Written by Aaron Bush)

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Earnings Spiketrap

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#3: Mythbusting Roblox’s Earnings

Earnings Roblox

Source: Roblox

On a day when stocks bled red, Roblox was a glaring outlier after its first quarter earnings report (and first as a public company!), up 16%+ on the day. In a pre-direct listing issue, we said: “Expectations are extremely high, so execution risk is real. However, if Roblox can motivate more creators, retain larger and older audiences, benefit from any App Store changes, and continue to raise the bar on what’s possible then it will continue to surpass what everyone anticipates.” Surpass they have… at least so far:

  • Revenue increased by 140% over Q1 2020 to $387M, with bookings increasing 161% to $652M.

  • Free Cash Flow increased 4.1x over Q1 2020 to $142.1 million (22% of bookings).

  • DAUs were up 79% YoY to (wait for it) 42.1M and total hours engaged at 9.7B.

  • Average bookings per DAU was $15.48. 30% of bookings were accounted for by Robux.

  • Hours Engaged were 9.7 billion, an increase of 98% year over year.

Take a moment for those stats to sink in… 42.1M daily actives who spend 2.5 hours on average each day on Roblox is remarkable and a great start to being a public company. Although these metrics show signs of slowing down — DAU growth sequentially decelerated, and hours engaged are flat from March to April — average bookings per DAU continues to grow. This means that bookings per hour spent is increasing; in fact, it sits at approximately 6.7 cents for the quarter, which is an improvement from 2020 but still poses room for immense upside when compared to other games and forms of entertainment.

All things considered, I think there are a few important myths to consider.

Myth: Pandemic tailwinds were a fad, and Roblox will struggle in a post-pandemic world.

While we haven’t fully emerged into a post-pandemic environment, there’s also the fundamental belief that Roblox is innovating against an incoming slump: physical toy brand partnerships to keep IP top of mind, spatial audio for non-game settings like education, virtual concerts, Robux gift cards, avatar cosmetics with Loom.ai, and developer relations for top-performing studios. Immersive experiences will power all sorts of new, cross-platform monetization like subscription and advertising. Even though grow will surely decelerate as comps grow difficult, Roblox is taking many right steps to ensuring long-term growth remains intact.

Myth: Roblox is for kids younger than age 12.

While it’s true that Roblox has found most of its success with younger demographics – famously, 75% of 8–12 year-olds in the US play Roblox, and for 3+ hours a day! – one of its faster growing demographics is 13+, which saw 128% growth YoY. “Aging up” remains one of the company’s top priorities, and they are actively inviting developers to make more mature games. Further, Roblox (now licensed in China) is finding marked success in Asia, Europe, and Canada as it continues to expand its global footprint.

Certainly, there’s still execution risk, especially when expectations remain sky-high. A moderation team of 2,000 continues to serve an important cornerstone for trust and safety, headcount needs to grow rapidly to serve product innovation, brand partnerships are key to bringing immersive experiences to the platform, and wooing developers in wake of intense and rising competition remains critical. That said, I think there’s a bright road ahead, particularly as they continue to scale internationally and deepen engagement with their existing players. (Written by Fawzi Itani)

#4: Unity’s Long-Term Potential

Earnings Unity

Source: Unity

Hot off an IPO back in September, Unity hosted their third-ever earnings call earlier this week, largely beating investor expectations and highlighting the company’s rapid expansion efforts. A couple highlights:

  • Q1 Revenue came in at $234.8 million (+41% YoY), 8% over analysts projections

  • The company’s two primary offerings, Create Solutions & Operate Solutions, pulled in $70.4 million (+51% YoY) and $146.6 million (+40% YoY) respectively

  • The company is rapidly expanding outside gaming, including new partnerships with Lowes Hardware and big players in the automotive and healthcare industries

  • 837 Unity customers are generating more than $100K in revenue using the platform, a 25% increase from March 2020

  • KING, makers of Candy Crush, released their 3D Mobile game (a spinoff of Crash Bandicoot) built exclusively on Unity

On the back of a solid beat, the company is raising its revenue guidance for the year by $50 million, with an overall forecast set to break $1 billion (+29% YoY) in revenue. This might feel overly optimistic for a company whose market cap has been cut in half since its peak in December and lost a very solid data pipeline thanks to IDFA, but there are still plenty of reasons to think Unity can become a much larger and more important business:

It’s (Still) Not Just Games

Let’s be honest: Unity is very much a games business and will be for many years. It’s also readily obvious that COVID-19 has been a huge boon for gaming and Unity was a major beneficiary. Short-term growth aside, in our earnings breakdown last fall, we noted that the gaming industry still offers abundant long-term upside for the engine developer (although rightly noted short-term expectations were too high), but that the potentially larger, yet much more difficult opportunity lies outside games. While non-gaming verticals only represent less than 10% of total revenues today, locking in a Fortune 50 customer like Lowes is an early sign that the company is beginning to figure out other industries in a meaningful way.

An Almost IDFA-Proof Business

Despite early warnings in their Q4 earnings, the company has managed to weather the IDFA storm. According to CEO John Riccitiello, the company sees tens of millions of user interactions per day and has already recorded north of a billion events since the launch of iOS 14.5 in late April. The company’s contextual model just doesn’t need IDFA’s data, and as a result Unity is only expecting to feel a $30 million hit from the change. What does this mean? One, they don’t have to worry about outsized loss of important data like other competitors. Second, they have gobs of information that the developers behind their industry-leading 71% of mobile games will want and need, making the product sticky and valuable.

Future Proofing for VR & AR

As we mentioned in our business breakdown last fall, the prospect of building for a VR/AR-first world (of gaming and beyond) is a huge opportunity for Unity. While adoption for the platforms continues to grow slowly, companies like Facebook are seeing outsized growth from their investment in the space, and hardware continues to become more ubiquitous amongst gaming fans. As the company continues to be a market leader in VR/AR advertising, which is more prone to sharing than normal gaming content, building an early lead in the space will ensure they remain dominant in the next generation of consumer tech. It might not be financially relevant for several more years, but it’s a future-proofed investment that may pay off one day. Combine this with non-gaming industries like construction and medicine, and the long-term prospects of the company begin to look very, very good. (Written by Max Lowenthal)

🎮 In Other News…

💸 Funding & Acquisitions:

  • Forte, which is building an infrastructure for blockchain gaming, raised $185M from Tiger Global. Link

  • Animoca Brands raised $88M at a $1B valuation. Link

  • Twin Suns Corp and Frvr (their publisher) received $6.4M to expand gaming operations. Link

  • Legionfarm, the gaming platform connecting pro and amateur players to play together, raised a $6M Series A. Link

  • Founded by former Epic and Blizzard veterans, Lightforge games secured $5M in funding. Link

  • Allstar clips raised $3.85M to compete in the crowded video clipping market. Link

  • The studio behind Axie Infinity, Sky Mavis, raised $7.5M. Link

  • An NFT art metaverse called Wilder World received $3M in funding. Link

  • A pre-launch studio called Hidden Leaf Games raised $3.2M from Lightspeed Ventures for its upcoming MOBA. Link

📊 Business:

  • “Video games evolving and changing.” 74% of EA’s revenues came from F2P this past year. Link

  • Ubisoft says it won’t let go of AAA games in favor of solely F2P. It’s a big shift that the industry is trending to. Will it remain profitable to fund large-scale, one-time games? Link

  • It’s a heavy earnings week: Nintendo, Capcom, Square Enix, Nexon, Playtika, and EA all released their earnings this week.

  • Xbox is partnering with Tencent’s TiMi Studios to co-develop games, and it appears Bethesda’s Starfield will be an Xbox exclusive. Link

📜 Culture & Games:

  • A thread on Megan Leeds, one of the most popular Adopt Me streamers turned video game developer. Link

  • Adopt Me’s team is branching off to create a larger studio called Uplift Studio and to build new games. Link

🚀 Emerging Tech:

  • One of Uniswap’s recent grants is dedicated to an “event sponsorship” with Team Secret. It’s the first time a DAO sponsors an esports team. Link

  • Niantic is expanding its developer platform, Lightship, which will offer more capabilities to third-party developers. Link

👾 Miscellaneous Musings:

  • Roblox is updating the language on its site to reflect the Apple vs. Epic court case. Apparently it’s an “experience” not a “game”. Link

  • A brief excerpt on how and why Riot Games localizes its content. Link

  • Two books on our radar: Press Reset by Jason Schreier and Ask Iwata by Satoru Iwata.

📚 Content Worth Consuming

Game Economics, Part 3: Free-To-Play Games (Building The Metaverse): “A little more than a decade ago, many of us in the f2p game industry heard from a multitude of game developers who didn’t believe these were real games; the story went that games ought to be packaged into experiences without any real-money interactions during the course of play (presumably, many of these critics had never inserted a quarter into an arcade machine). While there’s certainly a role for story-driven and stand-alone experiences that are freed from pecuniary concerns during the game, recent history has proven that most people prefer this business model. Today, free-to-play is 78% of the revenue in the game industry and is forecast to become as high as 95% by 2025.” Link

Twitch’s Rockonomics (Tarzan Economics): ”That [the creator economy] takes us to the threefold objective of this inquiry. Getting exclusive access to data (and data scientists) from Twitch, MRC Data and ChartMetric has allowed me to: (i) establish what makes Twitch distinct; (ii) enable the music industry to compare Twitch with on-demand streaming models to better understand the different ways creators can make money; and (iii) illustrate how Twitch works, using six unique artist case studies.” Link

NFT Gaming in the Philippines (Play-to-Earn): “This is the story of one small community in the rural Philippines that turned to the NFT game, Axie Infinity, to earn an income in cryptocurrency during the COVID-19 pandemic. It shows how the "play-to-earn" gaming phenomenon is creating new opportunities for thousands of players around the world, especially in emerging economies where job opportunities are lacking and government relief has been limited.” Link

The Making of Dishonored (NoClip Documentary): NoClip makes crowdfunded documentaries about video games. In this edition, they explore the game design, development, and journey of popular title, Dishonored. Link

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

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