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The Metacast Episode #5

Netfix The Metacast

In our latest Roundtable episode of The Metacast, Nico is joined by David and Florian to discuss:

  • The benefits and drawbacks of using blockchains in games

  • E3: The good, the bad, and the ugly

  • Gaming subscriptions: the future of game monetization (or not)?

In particular, if you’re looking for a no-hype, beginner-friendly explanation of why applying blockchains to games is interesting but challenging, this is a great place to start.

As always, you can find us on Spotify, Apple Podcasts, Google Podcasts, our website, or anywhere else you listen to podcasts.

#1: Netflix & Games

Netfix Controller

Source: PocketNow

The video game world tends to get very excited whenever a big tech company announces anything to do with video games: Google Stadia, Shopify Rebellion, Apple Arcade, Amazon as a gaming publisher. It’s yet to be seen how these projects will play out, but the hesitancies of industry veterans are certainly warranted in today’s crowded and competitive market. In a recent report, The Information leaked that Netflix is also thinking about gaming, approaching gaming executives “to expand out gaming efforts.” For Netflix, this isn’t a new story, though. In a 2019 letter, Reid Hastings famously said that Netflix “competes with (and loses to) Fortnite more than HBO”. The broader point here is the competition for time and attention. Now, we’re learning that Netflix wants to compete by directly entering video games.

With slowing subscription growth rates, notoriously high retention, and 207M+ paying subscribers, how does Netflix – which has no experience in gaming – get into games?


Lots of people wrote (here and here) about Netflix and games. Here’s what I think will likely happen instead:

  1. Netflix will remain focused on video content and they’ll enter into gaming slowly (management has essentially said this in earnings calls.)

  2. Netflix’s focus will initially fall on a spectrum of interactive entertainment that best serves Netflix’s existing product and audience.

  3. After experimenting if they want to invest more in actual games, they’ll find a way to fully own the process (like they did with video), making it a part of the subscription business.

Of course, no one really knows and they could still experiment with other things like licensing or selling games separately, acquiring a game engine (perhaps too ambitious?), or even strategic partnerships/investments into studios to expand their IP offering.

That said, Netflix has always been a very focused company, and they’re still hyper-focused on investing billions in increasingly global video content. The most important metrics moving forward are international subs and pricing power. This will likely be the case for a few years, so any tease of video games (h/t The Information) is likely a red herring of sorts.

In short, Netflix won’t focus on video games in the traditional sense. As the Netflix membership cost rises, they’ll likely shift to testing more types of interactive content driving more value. There’s a spectrum of interactive entertainment a la Bandersnatch (five endings, 312 minutes of content, and more than a trillion permutations) or a Rival Peak-esque MILE that better fits into Netflix’s niche of content.

Netflix management recognizes that "interactive entertainment" can become a natural embedded extension of the Netflix membership experience over the long term. And yes, interactive content makes sense to be centered around leading self-owned IP, although they could experiment with anything. That’s the beauty of live ops and gaming that Netflix will likely explore — how to make IP more valuable, how to drive recurring value out of content, how to get subscribers to come back and drive affinity/loyalty, and how to transform commodities into assets.

Netflix’s DTC-ification and IP

My colleague at Forerunner Ventures, Jason Bornstein, wrote an excellent piece on why LTV is a more top-of-mind metric than CAC. This feels particularly relevant with Netflix’s increasingly high CAC. Netflix can increase LTV by: raising prices (done several times), retaining longer (they’re already the best at this), or doing new things (which can either fit into the subscription, leading to higher prices and better retention or be sold separately).

Perhaps one of the obvious responses to the question of LTV is Netflix’s HypeBeast-esque recent entrance into ecommerce, allowing ardent fans to make purchases of their favorite IP. Notably, the popularity of Queen’s Gambit led to 178% increase in Chess set sales and a missed opportunity for Netflix. With $17B+ spent on original content, Netflix is in a prime position to capitalize further on its original IP, with anime taking the foremost role at the moment.

Netfix Graph

Source: Xbox News

Joost Van Dreunen makes the interesting point that Netflix has the potential to inject capital into industries seeing lots of demand: “Such growing demand puts strain on the supply side. In the case of anime, studio leads worry about the availability of talent to meet such rapidly growing demand. The billions of dollars that a Netflix brings into a creative industry to satisfy its strategic needs can change that industry permanently.”

We’re seeing a parallel trend happening in gaming. Aside from the fact that anime is a primary source of IP for games, the rate at which M&A is happening and venture-backed studios are popping up is astounding. Microsoft’s acquisition of Zenimax Media for $7.5B is emblematic, adding 25+ titles to Game Pass, the “Netflix of Games”. As the supply-side gets more strained, we’ll see talent fill these white spaces. As a producer of robust original IP, Netflix is in a prime position to capitalize on this white space.

Hypothetical Future-Orientation:

“The reality is that the most valuable real estate in the world is the top fold of Netflix home page. And Netflix not only controls it, they don’t rent it to anyone. You can buy a billboard, Amazon’s homepage, Facebook, Snapchat. Not Netflix. It’s only for Netflix.” – Matthew Ball

Netflix’s native advertising promotes content to 207M subscribers; that is, what Netflix promotes will likely enter the pop-culture paradigm, from Bird Box memes to Bandersnatch. The Witcher franchise is another great example of how Netflix has power with IP. Netflix reported that at least 76M people watched part of the show. The Witcher 3 notably also broke its online concurrent player record (at nearly 100k concurrent players) shortly after the show’s release. The effect of this can’t be overstated. Netflix demonstrates that it can have a more powerful cultural cache than influencers, steamers, and creators – the ability to turn passive viewers into ardent fans and to resurge IP into the limelight.

How does this turn into an interactive entertainment strategy? As we mentioned above, Netflix has the capital and influence to carve out new directions for entire industries. Ultimately, Netflix’s entire strategy has been about bringing capabilities in-house and relying on external partners less. They’d do the same with games: increasingly own all the IP and capabilities internally all under their subscription model.

And of course, this is all hypothetical. I’ve written 1000+ words extrapolating on a rumor, history, and strategy, and presenting a different view than Deconstructor of Fun and Joost (both thoughtful pieces, exploring different aspects). What remains to be seen is how Netflix might bundle more into its subscription offering to increase LTV and my excitement for Netflix potentially taking an interactive entertainment strategy. For now, management has its eyes set on growing international subscribers and producing original content, with gaming in the long-term horizon. (Written by Fawzi Itani)

Sponsored By Heroic Labs

Netfix Heroic Labs

Lightheart: Hyper-casual at hyper-scale

Heroic Labs builds server technologies that specialize in massively real-time, social, and competitive gameplay across all platforms for studios such as Gram Games, Zynga, Paradox Interactive, and many more.

Heroic Labs’ flagship product is Nakama - the open-source, social, and real-time game server.

Read more on what Kalle Kaivola, CEO at Lightheart Entertainment had to say about us:

We chose Nakama as it has a proven track record of success and scalability. The Heroic Labs engineers helped us onboard onto the technology and enabled us to release Mr. Autofire with deep social features to boost engagement and retention. Nakama allows us to build games without limitation for millions of players

#2: Krafton Files for IPO

Netfix Krafton

Source: Krafton

South Korean gaming giant, Krafton, is expected to raise $5B in an upcoming IPO. The company will offer 10 million shares for purchase (70% new shares and 30% existing) at a $24.6B market cap — this could become the biggest IPO in South Korea since Samsung Life Insurance. We expect the IPO to make Krafton one of the top-10 gaming companies by market cap in the world, and the biggest gaming company in South Korea. Following the IPO, the founder of Krafton, Chang Byung-Gyu, will have a 14% stake in the company, while the leading investor Tencent will hold 13.2% of the shares.

The company’s key revenue driver — by no surprise — is the PUBG franchise. The mobile version of the game has over 1 billion lifetime downloads, while the PC&Console versions cumulatively have over 75 million copies sold. Meanwhile, Playerunknown’s Battlegrounds: NEW STATE, a new mobile game of the franchise, recently completed its alpha testing in the United States and is slated for release later this year. Krafton is also developing several new titles, including The Callisto Protocol, Project Windless, and Project Cowboy. This bodes well for the future orientation of the company.

In 2020, Krafton reported $1.47B (+53.6% YoY) in Revenue and $682m (+115.4% YoY) in Operating Profit. In Q1’21, Krafton showed a significant YoY decline of the key stats: Revenue decreased by 11.6% reaching $408.2m, while Operating profit dropped by 33% to $201.2m. The decline was partially caused by the ban of PUBG mobile in India in Sep’20. The local government was concerned that one of the most popular mobile apps in India could misuse the personal data it had on hand. Recently, Krafton managed to get the app back to the Indian mobile stores by launching new Battlegrounds Mobile India, powered by the local servers. In Nov’20 the company also announced plans to invest $100M in India’s local video games, esports, entertainment, and IT industries. Considering that the Korean market generates only 6% ($88.2M) of the company’s total Revenue, it bodes well that Krafton collaborates with local governments and promotes its products abroad.

One way the proceeds from the IPO might be used is the expansion of the PUBG franchise to other media, including movies and animated series. At the same time, Krafton will focus on discovering new business areas like deep learning and artificial intelligence (AI). Having one of the most successful battle royale IPs in the industry with a dedicated fan base and a proven concept, Krafton is already among the top players of the industry, and the upcoming IPO has all chances to confirm — or even upgrade — its status. (Written by Andrei Zubov and Vladimir Sergeevykh)

#3: Gaming’s Newest Dark Horse: Snap

Netfix Bitmoji

Source: 9to5mac

Snap has long been a social media dark horse, and it might just be a gaming one, too. Many “experts” snickered when Founder and CEO Evan Spiegel turned down Facebook’s $3B acquisition offer and the 2017 IPO initially flopped. Many skeptics were slow (and maybe still are) to change their minds. However, over the past few years Snap has executed impressively and is now a Gen Z powerhouse.

Look at the stats:

  • Snap has 280M DAUs, and they added over 50 million in the past year alone. Plus, approximately 50% of US-based smartphones use Snapchat, and US-based winnings are used to fuel international expansion.

  • In the most recent quarter global revenue jumped 66% year-over-year, ARPU grew 36%, and the company generated positive free cash flow for the first time as a public company.

  • The company now claims a $100B+ market cap.

Much of this financial growth is driven by improved ad capabilities, but there’s more to the story. Snap has invested heavily in new technology (like AR lenses), content (like Snap Originals and games), and features (like Snap Maps), which all drive heightened engagement and new reasons for users to join.

Again, there’s a lot happening in Snap’s ecosystem, but let’s zoom in on games for a moment. I’ve long believed that as gaming and socialization merge, social media apps have underrated potential to make their mark in mobile games (and widen the addressable market). This is primarily done through HTML-based games that require no downloads (aka Instant Games). Snap obviously isn’t the only contender, but it has massive distribution advantages, a compelling demographic, and a critical social graph built in.

To date, Snap has made relatively small moves in gaming. The app hosts approximately 20 in-app games (1st and 3rd party), all of which can be accessed directly from Chat, and Snap makes it easy to play with friends. Little here is earth-shaking, but as you can imagine it’s not hard for these games to reach millions of players. And, heck, even something as simple as bringing your Bitmoji avatar into multiple games (like the Mario Party-inspired Bitmoji Party) can be a compelling feature. Plus, the company supports in-game ads and sells Snap Tokens, which are used for a variety of in-game purchases.

It’s not a threat to the App Store (which will cover many more genres and serve larger audiences), but it’s notable nonetheless. However, what’s more interesting is less where Snap is now and more where they could be heading.

First, I think it’s likely that Snap opens its game platform to more (if not all) developers — similar to but more complex than how any user can now create lenses. Distribution and monetization will be the benefits if the company can pull it off, and the team has plenty of reason to strive toward enabling more types of UGC. Why? Because aligning Snap’s community with its own goals (higher engagement and monetization) could enable it to turbocharge faster in that direction.

Second, Snap is heavily investing in AR — from software to hardware — and the recent Snap Partner Summit made the company’s ambitions clear. Snap is creating new versions of Spectacles (not ready for the public) that leverage the same familiar user interface as the app. Not only could this familiarity eventually make adoption more seamless, but it means many of the same in-app features Snap is aggressively building (lenses, maps, games, etc.) will be perfectly extendable to the new device. In other words, Snap is shifting from an “app” to an “extensible operating system” with a growing number of use cases — and games remain quietly in the center of the action.

Sure, it’s possible Snap won’t win the AR race (Apple and Facebook will be heavy hitters) — and whatever the case it’ll take years to play out — but either way it’s building a uniquely powerful ecosystem with more room to run. It’s possible games get pushed into the background, but I think Snap will surprise us in the next couple years with exciting game-centric announcements. Snap remains a dark horse, but we’ll be watching it closely. (Written by Aaron Bush)

#4: YGG’s Series A

Netfix Yield Guild

Source: Yield Guild

Earlier this week, Yield Guild Games (YGG) announced it raised a $4 million Series A — led by BITKRAFT Ventures — to accelerate the adoption of play-to-earn. What’s noteworthy about this deal is that it’s very much on the bleeding edge of what a games “company” can be.

A tricky part of play-to-earn is that it takes upfront capital for individuals to buy digital assets that then generate yield through play. As you can imagine, this can discriminate against those in less fortunate financial situations. Enter YGG, a decentralized autonomous organization (typically referred to as a DAO); in other words, instead of being a corporation, it operates more like a distributed asset-owning collective. And the $4 million that was raised is going to the purchase of digital in-game assets (yes, NFTs) that are then rented to players. This is referred to as a “scholarship,” and the income earned from active players is shared between the player itself and YGG. The pitch is that YGG buying and renting these in-game assets both creates paying jobs for scholarship recipients and yield for the DAO itself. It’s a win-win that’s uniquely enabled by the new possibilities of play-to-earn.

Of course, this remains a very early stage bet. YGG’s goal is to seek yield and provide scholarships across a wide range of play-to-earn games (including Immutable’s Guild of Guardians, which Naavik is advising). Right now there aren’t many such successful games, and Axie Infinity remains the go-to example. The game isn’t a blockbuster success, but as is seen in this documentary, the game is truly helping people in places like the Philippines. It’s likely a good omen for what’s to come as the game design community gets smarter about how to create play-to-earn experiences.

In the same way it took Niantic four years to go from Ingress (niche hit) to Pokemon Go (worldwide sensation), play-to-earn could similarly take some time before hitting the mainstream. There’s much to sort out — maintaining a sense of income and fun, solving for scalability, tokenomics best practices, navigating App Store rules, etc. — but because play-to-earn ultimately empowers players and there’s tremendous momentum from a passionate and growing community, it’s hard to see play-to-earn not become a more relevant sleeve of the gaming industry. It likely won’t disrupt everything (in the same way free-to-play mobile didn’t eradicate AAA single-player console games). However, those who find ways to jump in early, such as supporting the YGG DAO, could be nicely rewarded. (Written by Aaron Bush)

🎮 In Other News…

💸 Funding & Acquisitions:

  • Lingokids announced $40M in funding for its educational games platform and for international expansion. Link

  • VR Firm Otherworld raised $3.4M to fuel its UK expansion. Link

  • Adtech outfit Vungle acquired influencer marketing platform Jetfuel. Link

  • Xsolla and Devcom agree on a one year strategic partnership. Link

📊 Business:

  • FB will start putting advertisements in Oculus Quest Apps. Link

  • Twitch had a record 2.2B hours watched in May. Link

  • FB launched gaming fan groups to grow player communities. Link

📜 Culture & Games:

  • Xbox and Nintendo had their respective summer games showcases. Link

  • Pokemon is making a concerted effort to better monetize its IP, with the release of a mix of new games. Link

  • Niantic is working to build a suite of tools to empower other developers and with Hasbro on a Transformers Game. Link

  • Excel is now an esport. Link

👾 Miscellaneous Musings:

  • A look into Animoca Brand’s $1B valuation and its NFT-leaning strategy. Link

  • Apex Legends and finding success with diversity. Link

  • “PlayStation has a culture where it’s fearless to create”. Link

📚 Content Worth Consuming

The Future of Games Is Instant (Jon Lai, a16z Future): “This frictionless, inherently social mode of play has the potential to vastly expand and democratize access to games, unfettered by the constraints of hardware. And in the near future, a decentralized network of these experiences could disrupt — and even surpass — the dominance of the App Store itself, upending how we develop, discover, and distribute games.” Link

Fans, Not Professional Developers, Will Drive the Hit IPs of the Future (Jade Raymond, a16z Future): “In 2021, the mark of a successful blockbuster franchise is not one that produces a ton of sequels. Nor is it when a game successfully goes transmedia, generating best-sellers across media categories. Today, a franchise is truly successful when fans start writing fiction … and making art depicting your two hetero male lead characters kissing. For fans, that imagined liplock is a sign of personal investment — there’s a deep appreciation that goes hand in hand with this type of fan interpretation.” Link

Hybridization is The Key for the Latest 4x Strategy Success Stories (Game Refinery): “Whether it’s through necessity or a sense of adventure, mobile developers are finding newer and more innovative ways to engage their users and draw them deeper into the gameplay experience. We’ll undoubtedly see some exciting genre mash-ups in the future, whether it’s the evolution of the 4X-genre to appeal to wider new audiences or games like, for example, Arknights that blends Tower Defence with a deep RPG layer. All evidence points to the fact that this increasing ‘hybridization’ of mobile games opens up new revenue streams, which inevitably means that we will see many more examples of this in the coming months.” Link

Andrew Green On Lessons Learned From Startups (EGD): “Today I’m talking with Andrew Green, who is the SVP of Operations and Growth at Stillfront Group. Andrew has been in gaming for twenty years, has founded two companies, and has worked for other gaming companies including Take-Two, EA, and TinyCo. He then did a two-year stint at Andreessen Horowitz, before then joining Stillfront. We’ll now talk with Andrew about his journey in gaming and startups and what lessons he’s learned.” Link

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

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