Hi Everyone. Welcome to another issue of Naavik Digest! If you missed our last one, be sure to check out our breakdown of the Sega and Rovio deal and what it means for the Sonic the Hedgehog developer’s mobile ambitions. This issue, we’re dissecting Riot Games’ defense of esports amid the competitive gaming industry’s ongoing struggles.
The Tabletop Renaissance. Jane Chung Hoffaker is an Emmy-winning executive producer for League of Legends’ Arcane Series who is now embarking on a new adventure: building a board game startup called Incredible Dream Studios. We’re throwing it back to the days of yore, discussing what makes a good board game, what’s easier and harder in development versus video games, whether AAA underutilizes board games in franchising and expanding their IP, and some of the business model impacts of running a COGS intensive business. Tune in to learn about what Incredible Dream is building and their strategy of starting with a physical IP, Jane’s take on the Wizards of the Coast OGL kerfuffle, and more! Website | YouTube | Spotify | Apple Podcast | Google Podcast.
Interoperability, Game Ecosystems and Web3. Interoperability between game ecosystems and economies has been held up as a possibility that is opened up by decentralized protocols, blockchain technologies and web3, but until now, it has mostly been a pipe dream rather than a reality. But now, two web3 companies — metaverse avatar developer Ready Player Me and open-world shooter developer Faraway Games — have partnered up to deliver on the promise of interoperable game worlds. Your host Niko Vuori chats with Alex Paley, Founder & CEO of Faraway Games, and Timmu Toke, Founder & CEO of Ready Player Me, about interoperability, closed versus open game ecosystems, and the promise of web3. Website | YouTube | Spotify | Apple Podcast | Google Podcast.
#1: Riot Games & The Problem With Esports
Written by: Max Lowenthal, Naavik Business Lead
When I wrote late last year that 2023 would deliver a correction to the esports market, I imagined it would take a bit for us to see the full effect. My critiques centered around monetization — namely, that despite the rapid viewership growth esports has seen in a post-COVID world, the market's inability to turn that growth into revenue alluded to a business model that was fundamentally broken at its core.
Since then, it seems the correction has come at an expedited pace: industry analysts have warned of harsh realities, major brands have been forced to consolidate, and some of the space’s most beloved names have gone out of business. Needless to say, esports winter has arrived early. The industry’s expedited slowdown can be attributed to all the usual factors — limited revenue, a slowdown in financing from outside investors, and an overall lower willingness to pay from consumers. As one industry veteran put it, “esports events operate with NFL expectations and high-school football revenue.” It begs the question — is there a path forward for developer-driven esports content?
Riot Games seems to think so. Last week, John Needham, the company’s President of Esports, penned a post for the Riot blog titled “Building the Future of Sport at Riot Games.”
A vote of confidence to some degree, Needham's article covered a few important aspects:
- A detailed outline of the company’s history (and lessons) from establishing one of gaming’s largest esports presences
- A thesis on why Riot remains bullish on the space despite recent market downturns
- And a exploration of how the company is looking to solve some of the existing monetization problems (and why traditional options like broadcasting deals may not be the solution)
The piece reads just as much as an olive branch to frustrated team owners and investors as it does an advertisement for the LCS. But it also does a surprisingly effective job implying why developer-driven esports models struggle — namely due to what I’ll refer to as accessibility and optionality issues. He also proposes Riot’s solution to these problems.
On the accessibility front, Needham notes that unlike leagues like the NBA, the LCS is designed for veteran viewers with “foundational knowledge of the game.” The content of most esports simply isn't conducive to watching without any context, which makes it difficult for new or even casual fans to become invested in the outcomes. This fundamental difference is one of the primary reasons the industry has struggled with concepts like broadcasting deals, which are designed to maximize viewership and make up the lion's share (>60%) of revenue for many traditional sports leagues.
There simply isn’t as much inherent interest in sitting down and catching a quick round of CS:GO, and even if there was, it’s not always clear what’s happening on the screen unless you’re already a diehard fan. Another important distinction Needham notes is that about 60% of Riot esports viewers watch to get better at playing the game in question, a motivation that does not necessarily translate to a mass mainstream audience in the way it does for traditional sports viewership.
This knowledge and motivation barrier places a heavy burden on developers not only to garner player interest in titles, but also to educate them to the point where esports viewership makes sense. It’s a resource-heavy “land and expand” strategy that continues to become a natural limiter on the growth of any one esport over time. Even Riot, in all their historic leadership for the space, has been somewhat cagey about overall player growth, agnostic of esports interest, having not released metrics on the subject for almost two years. Imagine how hard it is to then turn that stagnant casual player base into esports fans.
The other barrier esports faces is that of optionality — the games industry simply has too many good options and changes too quickly for an esport to mature. Even players with plenty riding on the industry, like 100 Thieves’ CEO Matt “Nadeshot” Haag, note that cornerstones like League of Legends, which have been around for more than a decade, are struggling to find viewership in the face of trendier titles like Fortnite.
When you pair the burden of accessibility with the constantly evolving landscape of optionality, the picture of how we arrived at esports winter starts to become a bit clearer. Riot admits that rapid revenue growth in such an economic environment is hard, and the current model places a large burden on developers to find a quick way to turn players into super fans and keep their attention over time — or risk falling behind.
The path forward seems murky, although Riot seems quite aware of the challenges it faces. Needham uses his post as an opportunity to announce a new “Virtual Pass” business model for the company’s esports, which will give buyers access to upgraded viewing experiences (interviews, in-game angles, replays etc.), new services (skins, event pass), and ways to express fandom and excitement (physical goods, custom emotes, team-only chats, etc.).
Subscription-like passes are a savvy solution because they’re predicated on focusing the monetization efforts on the deep fan bases that have surpassed concerns of accessibility and optionality. The system also comes with the added business bonus of giving companies a more predictable form of revenue generation, particularly when you imagine bundling a whole year’s worth of events into a single cost.
However, subscription and event passes don’t necessarily solve the fundamental problem we discussed above. They assume that a game has monetizable teams that fans are willing to paying for (which can often take time and finances to develop). Meanwhile, this system also heavily relies on bundling pre-existing revenue streams, specifically merchandising and in-game purchases, which will likely see some sort of cannibalization in the process. The development costs of such a bundle also aren’t nominal, especially when you consider Riot’s promise of exclusive in-game kill cams, interviews, and emotes. This strategy works for a company like Riot, but is questionable when applied to more nascent games and developers.
Ultimately, the issues Riot face are symptomatic of a broader identity crisis in esports as an industry. Because of accessibility and optionality issues, esports might never be able to grow in the same way something like the NFL or NBA has. This isn’t necessarily a bad thing, but it does mean developers will have to keep getting creative in the ways they make money from hardcore viewing experiences, or chalk the costs up as marketing losses in the process.
#2: The Future of Web3 Game Distribution
This piece is a preview of a research essay written by Maxime Eyraud for Naavik Pro. To read the full piece, along with our other Naavik Pro content, request a trial now.
In a piece aptly titled "Distribution Is Everything," Naavik’s Fawzi Itani recently touched on the need for developers to innovate when it comes to putting their games into the hands of as many players as possible. Competition, poor discoverability, and the self-reinforcing nature of "Top 10" charts on every storefront are making it increasingly difficult for new titles to break through if developers rely only on mainstream platforms for distribution.
As it happens, web3 gaming finds itself in a similar conundrum, albeit for different reasons. For a long time, many in the industry were betting on web2 leaders ultimately adopting web3’s capabilities and mindset. Incumbents, they believed, simply couldn't afford to miss out on blockchain as a technology or on blockchain-enabled gaming as a business. Traditional companies would have to open their doors eventually, or get left behind as players’ preference for the web3 paradigm grew stronger.
The reality, however, has been a different story. From blanket bans to punishing taxes, web3 gaming has faced plenty of obstacles in recent years and still isn't anywhere close to reaching ubiquity or even what you might consider mainstream visibility. Unfortunately, these distribution hurdles have only added to adoption challenges that inevitably arise from building on the blockchain, making the overall process more challenging even for the most determined teams out there.
In this context, it’s worth taking a closer look at the present and future of game distribution in web3. First, we’ll provide a refresher on where web3 stands with regard to each of the main platforms: PC, mobile, and console. Then, we’ll show how some web3-native companies are taking the matter of distribution into their own hands. Finally, we’ll cover three areas in which we think platform providers can bring the most value to players and developers alike.
A Q&A with Riot Games esports head John Needham (Digiday): “We have a lot of teams who are out in the marketplace; they’re trying to source new sponsors and new investors, and they’re struggling, frankly. A lot of it has to do with uncertainty about general economic conditions, but another part of it is just the narrative that’s out there around esports. And a lot of that is how other publishers have run their esports — which isn’t Riot’s way. No, as in most things, Riot is just very player-focused and team-focused as a company, and we take it seriously, our business relationship with teams. So it was trying to dispel some of the narrative around how other publishers have approached esports.” Link
The Next Era of Gaming and AI: And Why We’re (Even More) Bullish on Games (Gigi Levy-Weiss | NFX): “Now is the time to be serious about investing in and building great games. NFX has been bullish on games from the very beginning. While other investors seem to have lost some interest in the sector, we remain deeply confident in it. We know that games are a strong area where a lot of value can be created in a short period of time… But what’s less obvious are the drivers behind the ongoing growth of gaming. There are evergreen attributes unique to games that give them an incomparable ability to grow fast — and there are also exciting new trends to pay attention to. (Generative AI among them). That’s why we wrote this essay.” Link
Give me the money: A mobile funding application guide (Victoria Beliaeva | Gamesindustry.biz): “Each company cares a lot about its funding. Whether it's to develop a new game, grow a studio, or transform a gaming passion into a successful business, none of this would be possible without resources. Even a supposedly hit idea requires a compelling pitch, a high-quality presentation, and a relevant offer to secure funding from investors. This guide will explain in detail ways and reasons to prepare a good investor pitch and is based on the conference lecture I gave at the WN Dev Day Canada 2022. Before applying for funding, it's crucial to know the purpose for which you need the funding and the things you will use it for. Thus you can quickly figure out the deal format and then look for the right partner in the future.” Link
Roblox grows up (Harry McCracken | Fast Company): The company’s aspirations now go well beyond entertaining and educating little kids: The long-term mission, says cofounder and CEO David Baszucki, is ‘bringing a billion people together.’ Before Roblox gets anywhere near that figure—at the end of 2022, the 16-year-old platform hit 59 million daily users, up 19% year over year and more than triple the figure in 2019—aging up its audience is critical to its business plan. The company, which went public in March 2021, brought in $2.2 billion in revenue and had adjusted earnings of $356.5 million in 2022. Its primary source of revenue comes via its virtual economy, which is based on ‘Robux,’ the digital currency that users purchase to pay for gameplay experiences, clothing, and accessories for their avatars, and even new moves and expressions. Link
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