Reflecting On 2022’s Macro Headwinds

Hi Everyone. Welcome back to another issue of Naavik Digest! Before diving into today’s newsletter, we wanted to briefly let you know about Polkastarter’s GAM3 Awards.

As one of the first web3 gaming award shows out there, we had the privilege of being on its jury panel. There are 15 award categories including the People’s Choice award, Most Anticipated Game and the coveted Game of the Year award. Plus there will be various world premiers and unreleased gameplay announcements and trailers. On top of that, you will also have a chance to win some great prizes, including a gaming PC, PS5 and much more.

So make sure to tune in to the livestream here on December 15th, 3pm UTC to check out who will walk away with the $1M prize pool and a bunch of exclusive Naavik perks. It’s going to be quite an exciting show!

Land Speculation & Economies

Why are there housing crises in online games, and how did a plot of “virtual land” go for $4M in Sandbox’s Metaverse last year? What is a land economy, and how do you run it?

In today’s Crypto Corner, your host Alexandra Takei is joined by Lars Doucet, virtual land economy consultant and author of “Land and Why It Matters” and Khaled Alroumi, Head of Monetization at Big Time Studios to discuss the concept of land economies, whether land should be a primary or secondary driver of your game economy, what to do about taxes and rent, and the do’s and don’ts of running one.

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

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#1: Reflecting On 2022’s Macro Headwinds

2022 turned out to be a very challenging year for the global economy. This was especially true for the gaming industry particularly when compared to the two consecutive record-breaking years of 2020 and 2021. his was one of the fastest growing market segments in the world these past two years, with booming interest particularly at the early-stage. At a high level, though, most (if not all) gaming stocks are YTD down — in general, public markets have been decimated. According to Newzoo, the global games market is forecasted to generate $184.4B (-4.3% YoY) in 2022. Given broader public market movements, it’s not surprising gaming will see a decline in growth this year.

As the big public companies have been reforecasting (shameless plug, check out Naavik Pro’s newly launched Financial Markets segment, it’s worth taking some space to reflect on this past year, and specifically the challenges more mature gaming companies faced / how it has impacted the games industry. This piece is more of a holistic look at some of the ripple effects some of the companies faced this past year (and might still encounter moving forward).

Regulation: With the FTC suing Microsoft for the company’s proposed acquisition of Activision, regulation has been a front and center topic for the games industry. We wrote a round up a few weeks back about the topic; since, SuperJoost and Stratechery have also provided additional nuanced perspectives on the topic that are important reads. In short, with the FTC eyeing both this new business model (subscription) and the burgeoning VR space (e.g the Within acquisition), there is growing hesitancy that studios / publishers might not find the same, competitive exit outcomes. Given all the consolidation of the past two years (and a few blockbuster ones earlier this year: Zynga, Bungie, Activision), the regulatory eye might continue to wear down. What does this mean for early-stage studios just starting up and can larger companies pioneer new business models that are accretive to the consumer?

Importantly, regulation isn’t isolated to the West. Tencent and NetEase, two of the biggest games companies in the world, saw some of the most significant stock price decreases. Of course, the stock declines are more complicated than just games (e.g Meituan share distribution), but there is shrinking games revenue and strict internet regulations. Most notoriously, China has limited the amount of time younger children can spend on entertainment and has limited licenses for foreign games to be approved in China. As a result, these companies have concertedly been building international presences, acquiring key strategic assets in these markets, and maintaining domestic revenue. There are signs of reopening in China, which might open up appetite for the games market as well but expect a stringent approach.

Semiconductor shortages: Anyone who tried buying a PS5 is familiar with the chip shortage that negatively impacted console production — it was at times impossible to find one because there was so little supply to meet demand. Sony cut its full-year sales target for the PS5 from 14.8 million to 11.5 million units. Nintendo also published revised forecasts due to semiconductor shortages and the sales performance of Nintendo Switch software. These shortages are expected to continue in the near-term but to be solved over time (unless geopolitics gets in the way).

IDFA: Although it’s hard to quantify, this is probably the largest negative impact to the gaming market this past year — marketing, attribution, and conversion are all in flux, and mobile studios / publishers are desperately trying to figure out how to navigate this post-IDFA world. We wrote a few weeks back on TTWO’s earning, noting how IDFA has significantly impacted the Zynga acquisition. EA’s Glu faces similar headwinds, and the early-stage games trying to establish market presence will also encounter trouble. This upcoming year will also be challenging for incumbents like Stillfront and Embracer, which see lagging organic growth (and more competitive M&A activity) due to IDFA.There have been so many pieces written on the subject, and everyone is still trying to wrap their heads around it. The way forward is unclear but there are clearly studios (e.g Odyssey Interactive) that are thinking through creative levers on the marketing side to drive UA in nontraditional ways. And who knows, maybe TikTok will emerge as the best UA channel?

Delays: The Game Awards previewed just last week, but it’s always unclear how many of these games will actually be released on schedule. To be fair, this has always been an industry problem (particularly vis-a-vis crunch and development costs); however, adapting to WFH policies, consumer expectation of AAA games, budget cuts, and more have all contributed added stress to development cycles. Despite breaking sales records, Pokemon Violet & Scarlet became memes with how many bugs they had. GTA VI is still in early stages of development, having been delayed (and who even knows about BioShock). It’s clear there’s room to grow in this area, but delays have undoubtedly put a dent on company balance sheets (not to mention FX headwinds) and contributed to the decline for the games industry as a whole.

It’s tough to call this “a corrective” year per se because it has been such a monumental year on a variety of fronts — new business models, unprecedented venture activity in blockchain and traditional gaming, regulatory changes, competitive platform changes, burgeoning interest in AI gaming, and more. While this article focused on broad-based macro trends that likely, negatively impacted games industry growth, there’s a lot to look forward to and understand. These aren’t temporary macro trends; rather, each will have second-order effects that will be important to assess individually (and in tandem) over the next couple years. How will regulation affect consolidation and new business models? How will specific genres like hypercasual continue to respond and adapt to a post-IDFA world? Does regulation also extend into the App Store as opposed to solely consolidation?

#2: Puzzles & Survival: A Surviving and Thriving 4X in the post-IDFA World

In December 2019, 37GAMES launched an innovative hybrid take on the 4X genre titled Puzzles & Conquest — a mix of match-3 RPG along the likes of Empires & Puzzles and a march-battle 4X game, set in a fantasy universe with mythological heroes. At Google’s Think Games event the team shared that the game was profitable but didn’t manage to scale due to rising UA costs (link). Other post-apocalyptic zombie games on the market, namely FunPlus’ 4X game State of Survival: Zombie War (SoS) which launched globally April 2019, helped 37Games verify the potential of the theme and its compatibility for strategic gameplay set in a zombies-infested world.

Thus was born Puzzles & Survival (PNS) — a follow-up to Puzzles & Conquest and a hybrid 4X Match 3 game set in the wake of a zombie apocalypse that launched in August 2020. 37Games continued to launch several other 4X-only games during the same period, like Wild Frontier (launched December 2019) set in the American Wild West and Ant Legion (launched August 2020) set in the miniaturized world of ants, though none of the games could come close to the performance of PNS. Their approach to hybrid game design that mixes gameplay from different genres smoothly together as well as testing thematic reskins to pick a theme closely fitting the strategy audience had massively paid off.

Since its release in August 2020 to November 2022 (27 months), PNS has generated $595m in revenue over 32.7m downloads worldwide across iOS and Android, with a Revenue Per Download (RPD) of $18.18. The US leads both charts with $252m (44%) of cumulative revenue and 8.39m (31%) of cumulative downloads. PNS’ second and third biggest markets by revenue are Japan and South Korea with $164m (29%) and 33.5m (6%) respectively. Japan also follows second in downloads with 4m (15%) of cumulative downloads. The game has generated over 1m downloads in several countries like Vietnam, South Korea, Russia, Germany, India, and France. The US and Japan drive over 70% of PNS’ revenue, and the game’s revenue grew in Japan a few months after the US. Top-grossing games in Japan show an affinity for Hero Collector RPGs like Uma Musume Pretty Derby and Fate/Grand Order, Puzzle Match 3 RPGs like Puzzle & Dragons and Dragon Ball Z Dokkan Battle, as well as 4X games like Mafia City and Age of Origins Z. PNS’ success story in Japan comes from being at a crossroads of the genres the region loves best as a Puzzle Match 3 Hero Collector RPG 4X game.

PNS has had stellar movement in the rankings: when looking at US iPhone top-grossing ranks for all games, PNS entered the top 100 less than three months after launch and continued to rise up the ranks to break into the highly coveted top 10 grossing spot and staying there since May 2022. As for the download ranks, the game has maintained a steady top 150-250 ranks in games overall and top 25 in strategy games.

Another point of note is PNS’ monthly worldwide revenue surpassed Supercell’s Clash Royale by April 2022 and is trending very close to Clash of Clans by September 2022. This really goes to showcase how far the game has come since its initial launch period and how well it has been able to scale revenues over that time.

4X games are notorious for their high complexity in the early game, taking players through all the game’s mechanics of building, researching, training, and march-battling on a persistent shared world map with countless other players playing on the same server. (We covered 4X games and their genre conventions in our previous essay on Scopely’s Kingdom Maker, which you can read here). Though this sounds exciting on paper, in practice, it boils down to taking players through tedious, never-ending tutorials, tapping away mindlessly through a boring (but sometimes necessary) onboarding that introduces all of the game’s complex, intertwining systems and mechanics.

These systems and mechanics truly come to shine in the mid-to-late game, bringing a lot of hidden depth and mastery to light as players band together in alliances and try to dominate the world map. PNS’ Match 3 battles and RPG progression of collecting and upgrading heroes is an attempt to solve the early game boredom stemming from the complex onboarding. The early game strategy of the Match 3 battles and progression vectors for growth of the heroes forms a helpful strategy foundation that the 4X part of the game expands and builds upon later without bombarding players with its complexity upfront.

At the heart of this smooth onboarding change is a ‘less is more’ approach taken by other successful modern games in the genre: both Lilith’s Rise of Kingdoms (RoK) and Scopely’s Star Trek: Fleet Command solve for this early game boredom by using narrative, slick UX, and smooth UI expansion to get players over the bump of the early-game complexity plaguing old 4X titles. Hence, not all 4X games suffer from this onboarding UX problem, but PNS takes a novel approach from the other modern 4X games too.

PNS further integrates the heroes participating in the Match 3 battles into 4X March-battle elements, like sending a team of them with the troops marching for attack for stat bonuses. The game also incentivizes players to collect and upgrade all heroes as they all have passive abilities that are active once players own them - some boost resource production while others give bonuses to certain troops. In these ways and more, the hero collector RPG systems are strongly tied into the 4X systems of the game, making the Match 3 battles an integral part of the game and not just a smoke-and-mirrors trick to onboard players onto the ‘actual game’ (looking at you, ‘Save the Doge’ from X-hero!).

Given its remarkable performance in the environment of IDFA depreciation, which hit the 4X genre relying on finding a small audience of high-spending whales quite hard, and its mastery of combining the hardcore genre of 4X with the more casual Match 3 RPG, this essay deep dives into the hows and whys of PNS:

Hybrid game design
Its event cadence and alliance focus
The effective feedback loop of its advertising helping scale up in the post-IDFA world
Breakdown of monetization and its hero gacha machine
A look at the future

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Content Worth Consuming

The Rise of the Video Game Union (Polygon): “For decades, studios across the industry and the globe, studios both big and small, have pushed their workers to the limit through low pay, brutal crunch, and discrimination. At first, we only heard about these injustices in whispers. Workers had little leverage, and employers wielded creative careers as a cudgel, saying that game developers should feel lucky to be able to do what they love. But in the past decade, workers across all industries have rekindled that spark of collective action, fighting back against poor working conditions with lawsuits, resignations, and stories told in the press. They’ve made inroads. On the occasion that a company had to publicly reckon with its actions — be it sexism, racism, discrimination, exploitation, or some other mixture of misbehavior and cruelty — bosses would vow to do better. In recent years, some promises have even become realities, as some of the industry’s worst offenders have invested in improvements that help them avoid legal repercussions and sliding stock prices.” Link

Where Does Netflix Go From Here (NYT): “Netflix C.E.O. Reed Hastings joined Andrew Ross Sorkin of The New York Times for a wide-ranging interview at the 2022 DealBook conference.” Link

Bigger Means Different (SuperJoost): “The proposed acquisition of Activision Blizzard by Microsoft has four identifiable benefits. The deal will: Improve competition in the mobile games market, bolster a platform-agnostic future, incentivize platforms to leverage more diverse revenue models, and enable an overall healthier ecosystem.” Link

Mobile Gaming 2022 and Beyond (Data.ai): Our partner Data.ai and friends at DoF put together a report on the state of mobile gaming in 2022 to learn about: “What the current market state actually looks like, which game categories face the most challenges in this climate, who’s seeing the greatest success despite the headwinds, how top apps are finding success, and how you can level up your strategy amid the slowdown.” Link

Creating Community Driven Feedback Loops (Series G): "Tim Morten is the Co-Founder and CEO of Frost Giant Studios, the developers behind Stormgate - a new-age RTS that brings the best of competitive and social gaming from the last 10 years into a new RTS package. Tim is a games industry veteran of 28+ years, having worked at some of the world's largest studios including Activision, EA, Santa Monica Studio, and Blizzard. In building Frost Giant, his goal is to revitalize the RTS genre for the modern age of competitive gaming and introduce new players into the space." Link