Hi Everyone. Thanks for tuning in for another week of Naavik Digest. If you missed last week’s edition, we wrote about Embracer’s latest earnings and plans for the future. Lastly, we’ll also be taking Sunday the 27th off for the Thanksgiving holiday and will return the 30th for our next edition.
Building the Web3 Marketing Stack
In web2, the marketing stack is rich in every area that matters - marketers have a place to scale up budgets, tools to measure ROI and the ability to measure downstream impact years down the line.
And none of this is true in web3! The anonymity and pseudonymity of web3 makes segmentation and understanding of personas hard if not impossible, and while everything on-chain is by default completely transparent and open, having the wallet and the tokens it contains be the primary identifier is severely limiting.
In this episode, your host Niko Vuori talks to three leading minds in web3 marketing - Quinn Campbell (VP of Growth at Sky Mavis), Justin Vogel (Co-Founder at Safary) and Warren Woodward (Co-Founder at Upptic) about the challenges web3 marketers face, the tools that need to be built and the current tactics that need to be employed to grow a web3 game.
#1: NetEase: Profitable Earnings, Painful Break-Ups
Chinese game developer NetEase reported its third-quarter earnings results last week, posting net revenues of $3.4B, up 9% YoY and 5% QoQ. Unsurprisingly, the company's portfolio of online games, led by Fantasy Westward Journey and Westward Journey Online, made up the largest portion of the games-related revenue, pulling in nearly 93% of the total gaming-related pie.
Outside of the company’s staples, the biggest boost came from the release of Diablo Immortal’s Chinese launch last July. The game quickly made its way to the top of the country’s charts, with NetEase going on record that the Chinese market revenue contribution is equivalent to other markets. The company seems to be doubling down in quick succession, helping to release an expansion, battle pass, and exploration system back in September.
Despite the success and history of regular earnings beats NetEase continues to be a far cry from rival Tencent. The company has largely been able to drive profits and cement itself as China’s #2 player primarily due to their ability to serve as an entry point for publishing in the Chinese market for Western IP and developers.
Among the company’s Western partnerships, which also includes IP like Harry Potter & Lord of the Rings, none looms larger than their deal with Activision Blizzard. For the past fourteen years, NetEase has been responsible for publishing series like World of Warcraft, Diablo, and Overwatch in the Chinese market. Analysts like Niko Partners attribute games like WoW as some of the country’s biggest games, with the MMO specifically serving as China’s seventh highest grossing and ninth most played PC Game in 2021.
The success of that relationship made it all the more surprising when the company announced alongside its earnings that Blizzard would be ending its partnerships with NetEase come January 2023 following reported disputes over intellectual property and data ownership. The move comes as the final stage in a broader series of disagreements that have spanned 2022, most notably bookmarked by the cancellation of an in-development WoW mobile game earlier this summer.
The relationship between the two companies has been fruitful since its inception. Niko Partners pegs NetEase’s Activision-related revenue in 2021 at anywhere from 4 - 6% of the company’s total earnings, representing nearly $750M in total impact. Meanwhile Blizzard reports that 3% (slightly more than a quarter of a billion dollars) can be attributed to its mainland China-distribution deals with NetEase. The one silver lining of the deal is centered on the recently released Diablo Immortal, which will reportedly continue to be available in China under a separate agreement.
There’s no doubt that the deal is one of the main reasons NetEase has cemented itself as a player in the Chinese market. Can the company sustain its competitive edge without the power of big IP? Let’s unpack how NetEase hopes to mitigate this impact.
Much in the way my colleague Matt outlined Krafton’s expansion strategy in a previous issue of Naavik Digest, NetEase is betting on regional and IP expansion to bolster its success in Blizzard’s absence. The company has placed several bets to increase presence globally, each of which they were quick to point out in the wake of last week’s earnings. They acquired Paris-based Quantic Dream back in August, have opened a Montreal-based studio led by 20 year Ubisoft vet Jonathan Morin, launched U.S-based Jar of Sparks, and announced a new first-party studio in Japan earlier this month. Their reach expanded even further with the recent release of Naraka:Bladepoint on Xbox Game Pass in June and an ongoing mobile port in the works. The company has also invested in up and comers like Sweden’s Liquid Salt and US-based Something Wicked.
The playbook at work here is one we have seen before. As Matt notes in the previously mentioned piece, regional expansion gives companies like NetEase channels to distribute their most successful IP globally. This is particularly notable when recognizing that the two most significant revenue-generators (Fantasy Westward Journey and Westward Journey Online) are Chinese-centric IP. Combine this with the company’s continued foothold in the Chinese-market and they are left with a relatively solid base to work from. It’s clear that NetEase can launch and build its own games.
Despite not renewing the partnership, this doesn’t seem to deter the company’s other IP expansion and co-development opportunities. While The9, the previous Chinese publisher of Blizzard games in China, relied mainly on Blizzard IP to drive success until its deal fell apart in 2008, NetEase has a myriad of other franchises in their corner. The company is preparing Harry Potter: Magic Awakened (which we covered late last year) for a global launch in 2023 after finding moderate success in China and released its licensed Lord of The Rings title in the U.S. late last year.
Let’s also not forget that Diablo: Immortal is still on the table despite the loss of the broader agreement, and will undoubtedly continue to be a revenue-driver for the business well into the future. Given the increasingly difficult publishing/regulatory landscape in China, coupled with countless examples of failed attempts from Western companies at launching their own publishing division within the region, NetEase will almost certainly continue to be a player in the space despite the deterioration of one (albeit notable) partnership. However, it’s worth mentioning that NetEase is also still the de facto partner for distribution of Microsoft’s Minecraft in China, an interesting wrinkle as the details around the Activision Blizzard acquisition continues to play out.
The ending of the Blizzard deal opens up a myriad of questions, and not just for NetEase. Is there risk of Blizzard jumping ship to rival Tencent? Does the break-up limit more co-development opportunities for Blizzard with regard to Diablo: Immortal? Is this the end of Blizzard games in China for good? Despite the uncertainty, it's clear that NetEase has built itself an otherwise solid portfolio of non-Blizzard IP that should help it sustain success in a post-WoW world. Time will tell if they are able to meaningfully expand homegrown games in the way that they have with third-party partners like Warner Brothers, but the unique combination of existing foothold and strong partnerships feels promising. (Written by Max Lowenthal)
#2: Hypercasual Meets Web3 — Gameta, Joyride, and Benji Bananas
Hypercasual games — which are instantly playable, boast lightweight mechanics, and are highly engaging in (typically) short sessions — have seen a lot of success in terms of reach on the web and (primarily) mobile. That trend persists even to this day, and the hypercasual genre has continued to grow and evolve despite multiple predictions of its demise.
In October 2022, total game downloads on mobile stood at 4.6B, and hypercasual games, with 1.29B downloads, accounted for close to 28% of the total. Hypercasual punches above its weight in terms of downloads on mobile, and it similarly does the same in the realm of web3.
According to DappRadar, as of the end of October, daily unique active wallets (UAW) stood at 923K. UAW is of course an imperfect metric for actual users — many active users might not interact with on-chain elements (and therefore get counted), some users may have more than one wallet, and it doesn’t filter out bots — but it’s the best we have, and we can still use it to track general game and network trends of where users are ebbing and flowing.
For example, when you take the top 100 blockchain games and sort those UAWs by blockchain, you get the chart below:
BNB (40%), Polygon (15%), WAX (15%), and Flow (10%) together represent 80% of the UAWs. Next, let’s break it down further and look at the top games by UAWs.
The top 10 games contribute 81% of the UAWs. However, on closer inspection, 54% of all the UAWs are from hypercasual games. Gameta leads the race with 34%, Joyride is second with 10% (the sum of Trickshot Blitz (8%) and Solitaire Blitz (2%)), and Benji Bananas comes third with 8%. Naturally, the aggregate download numbers are still a minuscule fraction of the mobile web2 hypercasual equivalents, but it’s still a trend worth noting and exploring.
Overall, this trend isn’t shocking since hypercasual games also lead web2 gaming downloads, but downloads don’t paint the full picture. It’s true that the hypercasual genre has managed to onboard a decent amount of users on-chain, but we need to further understand what part of this userbase is actively engaging with the on-chain economies of these games, whether the games are actually any good, and how sustainable this whole “hypercasual web3” push really is. In order to figure that out, we will deconstruct Gameta, Joyride, and Benji Bananas. Each of these projects takes a different approach and holds unique lessons to learn.
Content Worth Consuming
Generative AI Revolution in Games (a16z): “What’s transformative about this work is not just that it saves time and money while also delivering quality – thus smashing the classic “you can only have two of cost, quality, or speed” triangle. Artists are now creating high-quality images in a matter of hours that would otherwise take weeks to generate by hand. What’s truly transformative is that: this creative power is now available to anyone who can learn a few simple tools; these tools can create an endless number of variations in a highly iterative way; Once trained, the process is real-time – results are available near instantaneously.“ Link
Upfronts, Guarantees, Recoups (Rami Ismail): “When you go with a publisher on an independent game, one of the most critical parts of the equation has to be the Revenue Share (or sometimes colloquially called the "split"). Sadly, it's often poorly understood and not something many new developers feel qualified to seriously negotiate about with their publishers. The survival of many promising indie studios would've been much less fraught if folks understood the nuances and implications of these very common systems.” Link
AI Arena Deep Dive (FOGDAO): “In our new Deep Dive segment, we go deep into projects building on the edge. In this maiden episode, your host Nico Vereecke is joined by AI Arena team members Brandon, Wei, and Michael. AI Arena is a Web3 gaming platform designed to empower AI talent around the world. AI Researchers and Gamers compete to design, train and battle AI-powered NFTs in a PvP fighting game.” Link
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- Activision: Associate Manager - Global Digital Commerce (Santa Monica, CA)
- Naavik: Content Contributor (Remote)
- Naavik: Games Industry Consultant (Remote)