Feb 19

Hi Everyone. Welcome to another issue of Naavik Digest! We have a couple exciting announcements on the team side that we’d like to update you with:

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Jordan Phang: Many of you probably already know Jordan (he’s the hypercasual guru on our team) or have worked with him prior through Naavik. We’ve been working with Jordan for years now (and before with his 15 years of industry design experience!) and are thrilled to have him join us full-time to help lead our consulting practice with Thomas. If you’re interested in partnering with Naavik on all things games industry consulting, he’s your person!

Nick Statt: After spending a few years at The Verge and then Protocol, Nick has joined us as Naavik’s full-time managing editor and our fifth full-time team member. Since content is foundational to so much of what we do, we couldn't be more excited to have Nick come aboard and help us all level up. Of course, Nick is also a big-time gamer — deeply into games like Marvel Snap, Destiny 2, and more!

We couldn’t be more excited to welcome these two industry pros aboard. Stay tuned for next week when we launch our financial markets vertical and spotlight our team leading that. With that, let’s dive in!

Is It The Right Time to Invent New Ways Of Playing & Developing New IPs?

Roblox Podcast

Can Supercell reignite their magic of developing new ways to play? What can we learn from Capcom and Netmarble earnings? Why is there a rise of game-only acquisitions? We dive into the latest games business news with Abhimanyu Kumar, Matt Dion, Dave Elton, and your host Maria Gillies.

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

#1: Roblox Earnings & Generative AI

Roblox Wired
Source: Wired

This past week was an exciting one for Roblox. They posted their Q4 Earnings along with the company’s January numbers, and the stock jumped 26% before settling down to a 14% increase by the end of the week. In addition to this, they also announced new generative AI tools that the company intends to rollout over the coming months and years. Both events have major implications for the platform, so let's jump into it.

An unexpectedly strong end to the quarter

Roblox’s stock jump can be attributed to an unexpected increase of Roblox’s EBITDA margin at 20% rather than the 11% investors expected. CEO, Dave Bazucki, and CFO, Mike Guthrie, highlighted that Roblox had reached a new high of 65 million daily active users (DAUs), up 19% year-over-year (YoY). They also noted an increasing percentage of these players are “payers”.

This announcement came as a welcome reprieve from what had been a series of quarters with negative bookings growth that had plagued the entire industry — not just Roblox — as players reduced their spending (ABPDAU down 14% YoY) despite maintaining engagement.

Roblox Bookings
Source: Roblox, Supplemental Materials

Reading through the earnings call transcript, it was clear there was an unexpected bump in bookings to close out the year with December bookings being up 20% YoY and January bookings up 21% YoY. Big contributors to this growth came from Europe and APAC, which were up 20% YoY.  It’s particularly impressive that Roblox hit these numbers despite a marked drop in mobile revenue (23% and 25% YoY for December and January, respectively). Considering that 70% of players are on mobile, I’m assuming this means a considerable amount of additional revenue was driven by third party app stores and PC players.

Roblox Graph
Source: Global Revenue, iOS and Android, data.ai

Global expansion has been a key part of Roblox’s growth strategy since we first covered it back in 2020 now and it appears to be succeeding even in the face of an economic downturn.  

In contrast to the overall declining revenue-per-user trend, Roblox has had success in increasing their monthly payer retention quarter-over-quarter, most likely a result of more players signing up for Roblox’s Premium Membership, a monthly subscription that grants Robux, their premium currency, among other benefits

Roblox Graph
Source: Roblox, Supplemental Materials

Payers’ willingness to set-it-and-forget-it is a great signal for Roblox’s position as a mainstay in player's (and their parents’) lives, especially in the face of a tightening consumer spend market.

The year ahead:

On the earnings Q&A, there were several questions about the roll out of in-game advertisements in 2023. Bazucki and Guthrie both advised not to expect meaningful ad-revenue contributions this year, though pilots are already reportedly in the works. This likely speaks to their optimism coming from the last couple months of growth as they see no reason to over promise on what is surely a significant monetization lever. 

Bazucki also teased generative AI plans for, “code acceleration and the amazingly large data set” the company can leverage for low-code tools with additional details shared in a blog post written by CTO, Daniel Sturman, which I immediately dove into. While a lot of the post was a surface level introduction to generative AI, a couple aspects stood out to me:

  1. This is not an empty promise. They are already “rolling out tests for two new AI tools in the coming weeks: generative AI materials from a text prompt and generative AI code completion.”
  2. There was no mention of the fact that every developer will likely serve as training data for their AI model. 

These points are important because AI creation will have major implications for the structure of the creator economy and not necessarily to the benefit of the existing developer community. 

The impact of generative AI

Today, creating a game in Roblox Studio requires knowing Roblox’s coding language Luau, which means not everyone can be a creator. In other words, Roblox has prioritized depth of gameplay and creation speed over accessibility in what can be described as a UGC Games Trilemma. All UGC Game Platforms — Fortnite Creative, Rec Room, Minecraft — can only pick two of the three points that matter in UGC creation. Generative AI completely breaks this paradigm.

Roblox Trilemma
Today, UGC platforms are structured in a way that means that one must either have technical skills or accept that they will be limited in the types of creations they can make in a reasonable amount of time. Generative AI tools would mean that you don’t need technical skills to make a robust game in a short amount of time

Each platform wants to solve this trilemma in service of having more content on their respective platforms. From the developer/creator perspective, however, the limitations of a platform represent an opportunity to create something differentiated. A developer/creator can invest their time, hard-earned skills, and knowledge to do something never seen before. Differentiation enables developers to have more leverage on Roblox — their capabilities are scarce and difficult to replace, so they can capture more value.

However, if Roblox is successful in its vision of making “every user a creator”, the power shifts away from the best developers to those with the biggest audience. In my article on Fortnite Creative, I showed how developers capture only pennies on the dollar because creation is so easy. When UGC is easy, it is also commoditized, so all profits flow to the platforms and streamers who control demand. 

Roblox Trilemma
Source: Fortnite Creative Meet Unreal Engine 5

To Roblox’s credit, the company stated multiple times on its earnings call that it intend to increase fees paid to developers as a percentage of total bookings for the foreseeable future. Yet that doesn’t change the fact that if UGC game creation becomes as easy as text-based search, streamers will become the new kings and queens of Roblox —  a reality that will have profound consequences for the developer talent who have invested years of their childhood and early careers into developing for this platform. (Written by David Taylor)

#2: PSVR 2 Reviews, Saudi Arabia’s Nintendo Stake, and Supercell’s Next Chapter

Roblox PSVR 2
Source: Fossbytes

PSVR 2 impresses, with some catches: Sony’s newest virtual reality headset launches on February 22nd, and early press reviews of the device that dropped last week gave us our first real glimpse at how much of an improvement it is over its predecessor. Scores of reviews have praised the device’s improved fidelity and field of view, as well as its comfort and new haptics and eye tracking features. But almost universally critics panned the platform’s lackluster launch lineup, the headset’s inability to play original PSVR titles, and its corded requirement without the option to plug into a PC. At $550, PSVR 2 isn’t that much of a jump over the original PSVR when factoring in controllers and a camera, but it may be too big an ask when compared with the cheaper, cordless Quest 2. 

Saudi Arabia doubles down on Nintendo: The Public Investment Fund — the flush and controversial sovereign wealth fund of Saudi Arabia buying up large swaths of the biggest game publishers — made headlines not once, but twice this week for upping its investment in Nintendo. The PIF increased its already sizable stake in the company to 8.26% (after reports earlier this week said the PIF had increased the stake to 7.08%).  It’s unclear if this was two separate investments in the span of one week or just a single one, but regardless the PIF is officially the company’s largest outside shareholder, the AP reports. The PIF first disclosed a 5% stake in Nintendo in May as of last year before upping the stake to 6.07% just last month. This news also comes when Saudi’s Savvy Games announced its $265M investment into Chinese esports company, VSPO Group.

Supercell’s annual letter: Where do you go next when you’ve already proven everything? Supercell’s founder and CEO Ilkka Paananen shared his thoughts on the future of Supercell. His hypothesis: bringing the Supercell mentality cross-platform (e.g console & PC), hiring (keeping the high bar but for a more diverse set of experiences), expanding Supercell’s live-ops teams for forever titles (something a lot of developers seems to be struggling with these days), and building out an internal engine competitive with third-parties already in market. Paananen also wrapped up with the company’s financials: revenue of €1.77bn (-6% YoY); and profit/EBITD of €632m (-14% YoY) due to R&D & ATT. There’s a lot in store for this company outside of their core focus like their investments in HypeHype and Metacore. It’s certainly a company to watch even more closely over the next years.

In Other News

💸 Funding & Acquisitions:

  • Earnings: Roblox | Nintendo | Embracer Group
  • Savvy Games Group invested $265M into Chinese esports company, VSPO. Link
  • Telltale raised $8M from Hiro Capital and Skybound Entertainment. Link
  • Respawn Entertainment alumni form Wildlight Entertainment. Link
  • Meta completed its acquisition of VR fitness company, Within. Link

📊 Business:

  • Microsoft has ambitions in India. Link
  • January NPD data shows 5% YoY decline. Link
  • How Game Pass empowers developers. Link
  • Sandbox games are turning to generative AI. Roblox | Minecraft

🕹 Culture & Games:

  • Hogwarts Legacy’s opening week sales in Europe were up 80% over Elden Ring. Link
  • PlayStation’s top game downloads of 2023. Link
  • Postparty is Epic’s latest app to share clips from Fortnite and Rocket League. Link

👾 Miscellaneous Musings:

  • The Speed and Power of AI in Game Development. Link
  • Via Supercell, where do you go next when you’ve already pushed the boundaries? Link
  • Knockout’s closure and live services games’ potential for continuity. Link
  • Inside the Netease / Activision relationship. Link

This Week In Naavik Pro

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Looking for more great games industry analysis? Check out Naavik Pro! 

This past week the Naavik Pro team published:

  • A game deconstruction of Moonton’s Mobile Legends: Bang Bang
  • A research essay covering three of the most successful Roblox games: Blox Fruits, Brookhaven RP, and Adopt Me!
  • A new web3 game radar deconstruction covering Champions Ascension, Delysium, and Galaxy Fight Club 
  • A new monthly market update that explores the latest game, engagement, and funding trends.
  • Analysis on Rovio’s latest earnings report, Mini Royale’s Faraway Land expansion, and the launch of MIR M (the sequel to MIR4).
  • An updated game radar with takes on Baseball: Home Run and Tomb Raider Reloaded.

This upcoming week, we’re publishing a game deconstruction on Brawl Stars (digging into the game’s extensive live ops history), an in-depth earnings report on Take-Two Interactive, plus analysis of Stillfront’s earnings, Netmarble’s earnings, the DigiDaigaku Super Bowl commercial, and the ongoing progress of the latest console cycle. And there’s much more coming after that!

If interested in learning more or signing up, request a demo below.

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