Hi Everyone. Welcome to another issue of Naavik Digest! If you missed our last one, be sure to check out our deep dive on Fortnite Creative 2.0 and Epic’s new UGC economy. This issue, we’re breaking down Sega’s $775 million acquisition of Rovio, what it means for the Angry Birds developer and parent Sega Sammy, and how the deal is emblematic of the current moment in mobile. Let’s dive in. 

Sega + Rovio, Niantic’s Games

Saga Podcast

Sega swoops in to acquire Rovio, but are they the right buyer? Niantic announced more licensed games, but will these reach Pokemon Go levels? We dig into what Netflix’s latest hire says about its ambition, and what exactly is going on in web3 now that things are quieter. Dive into the latest games business news with Aaron Bush, Matt Dion, David Amor and your host Devin Becker.

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.

#1: Why Sega and Rovio’s Acquisition Deal Makes Sense in Hindsight

Written by: Miikka Ahonen, Co-founder of Lightheart Entertainment

Saga Angry Birds
Source: Rovio/Marija Gustafsson

On Monday, Sega announced it is acquiring Finnish Angry Birds maker Rovio Entertainment for €706 million ($774 million).

For Rovio, the writing has been on the wall since January, when rumors of acquisition talks culminated in an unsolicited bid from Israeli gaming publisher Playtika. Most analysts predicted a deal would eventually happen, but the buyer's name was harder to foresee.

The price tag, at €9.25 per share, represents a 63% premium on the January stock price before Playtika's public offer pumped up the value. The price is hardly surprising, as it's only slightly higher than Playtika's earlier €9.05 bid. Our previous report covered Playtika's proposal and how the market has consistently undervalued Rovio.

Even so, the price is still well below €11.50, the price of Rovio’s stock in its initial public offering in 2017. But the times have changed since 2017, and so has Rovio. The games industry has seen increasing consolidation during the past three years, accelerated on mobile specifically by platform privacy changes. The post-ATT world favors big incumbents and strong intellectual properties. Rovio, on the other hand, has transformed into a mature, stable company, with a focus on profitability instead of growth.

As we here at Naavik dove into Rovio’s financials following the Playtika bid, let's focus on the buyer, Sega, and its parent Sega Sammy this time around. In the West, only a few are familiar with Sammy, which is known for its pachinko and pachislot machines. To fully understand Sega Sammy, one needs to go back 20 years.

In the early 2000s, Sega had been in the red for nearly a decade. Expensive missteps with home console hardware had left it in a precarious financial position. At the same time, Sammy had realized its need to diversify from the profitable but stagnant pachinko business. As a result, the companies merged in 2004, and Sega Sammy was born.

As revenue from pachinko steadily declined over the years, Sega Sammy grew its video game business inorganically, buying companies in Japan and in the West. Rovio joins the list of Sega Sammy's significant acquisitions since 2004:

  • Creative Assembly, United Kingdom, acquired in 2005 (Total War series)
  • Sports Interactive, United Kingdom, acquired in 2006 (Football Manager series)
  • Atlus, Japan, acquired in 2013 (Persona, Shin Megami Tensei)
  • Demiurge Games, United States, 2015 (Marvel Puzzle Quest, although the game was not part of the deal) 
  • Relic Entertainment, Canada, acquired in 2013 (Company of Heroes, Age of Empires IV, latter in collaboration with Xbox Game Studios)
  • Two Point Studios, United Kingdom, acquired in 2019 (Two Point Hospital)

Notably, the only acquisition Sega Sammy has made in the mobile space was Demiurge Studios in 2015. In the following years, Demiurge shipped a handful of free-to-play titles that failed to make a splash. Ultimately, Sega divested Demiurge through a management buyout in 2020. Embracer snatched up the company shortly after in 2021 and incorporated it into Saber Interactive.

After an early hit with Chain Chronicle a decade ago, Sega has been struggling with mobile. Today, the biggest game published by Sega on mobile is Project SEKAI: Colorful Stage featuring Hatsune Miku. However, Sega has little to do with the development of this game. Hatsune Miku and related Vocaloid properties are licensed from Crypton Future Media, and the game itself is developed by Colorful Palette, a studio owned by another Japanese media company, CyberAgent. 

Project SEKAI: Colorful Stage generated $142 million in net in-app purchase revenue on mobile during the past 12 months, which represents 55% of all revenue generated by Sega-published titles. Sega’s other notable titles include mobile versions of Puyopuyo, Football Manager, Fist of the North Star, and a multiplayer Mahjong title.

Rovio, on the other hand, has proven it can ship and profitably operate free-to-play games. Angry Birds 2, first released in 2015, is still killing it. Rovio's 2019 puzzle game Angry Birds Dream Blast recently reached similar daily revenues, according to data.ai. While Rovio still struggles with new releases, the longevity of its live portfolio keeps the revenue stable and the company profitable, even if topline growth is scarce.

Saga Graph
Source: data.ai

By and large, the studios SegaSammy has acquired over the years have retained their autonomy, branding, and company identity. It wouldn't be a surprise if most Total War or Football Manager fans had no idea that Sega owns the properties and the developers of their favorite games. Thus, it's likely that Rovio will retain its autonomy and brand as well. Moreover, Rovio's well-established studios in Helsinki and Stockholm have been profitable for years, so there's little reason to intervene. If anything, it is Rovio’s satellite studios in Turkey, Canada, and Denmark whose investments might fall under tighter corporate scrutiny.

Perhaps the seeds of the deal were planted as early as 2015, when Sega and Rovio collaborated with the birds appearing as special guests in Sega's Sonic Dash, and the blue hedgehog starring as a temporarily playable hero in Rovio's Angry Birds Epic. Much like that nostalgic collaboration, Sega buying Rovio is one of those things you might not anticipate, but when it happens, it does make sense in hindsight.

Both companies should continue to invest in their crown jewels, which are their two evergreen IPs that already boast a formidable cross-media presence. Furthermore, Rovio and Sega's respective strengths in mobile and PC/console are natural complements. It might take two or three years, but we will undoubtedly see a large-scale Angry Birds game powered by Sega's muscle on PC and console. We will also see one or more made-in-Finland attempts at a fresh take on Sonic for mobile.

#2: Sony’s Latest Acquisition, PS5 Sales Surge, Netflix’s AAA Ambitions & Niantic’s AR Gamble

Saga Family
Source: PlayStation

Sony sticks to its acquisition playbook. PlayStation announced yet another acquisition on Thursday with its purchase of Firewalk Studios for an undisclosed sum. Firewalk was formed in 2018 by high-profile former Bungie employees under the umbrella of ProbablyMonsters, a Bellevue-based company that’s something of a cross between incubator, developer, and publisher. It was founded by Harold Ryan, himself a Bungie veteran who left the Destiny maker in 2016 after serving as its CEO. While ProbablyMonsters will remain independent, Firewalk and the ambitious-sounding AAA multiplayer game the team of nearly 150 has been working on for a few years now will officially become PlayStation-owned properties.  ProbablyMonsters and Firewalk already had in place an exclusive publishing deal with PlayStation, and it looks like this acquisition is simply taking the relationship one step further in what appears to a clear win for Ryan and Firewalk. For Sony, it’s good business, too. The company has been investing heavily in live service gaming and has been scooping up new studios like Jade Raymond’s Haven to build out the pipeline. What shape these games take — whether they’ll be cross-platform, as Sony intends for Bungie’s newest game, and available on PC or mobile — is anyone’s guess. But it’s clear Sony hasn’t lost its knack for getting in on the ground floor with promising new developers. 

The PS5 is Q1’s bright spot. Circana (previously NPD) and GSD have both released their data tracking the games industry’s March and Q1 sales performance. In short, on both sides of the Atlantic, video game sales suffered a year-over-year decline in March (-5% in the US and -4% in Europe). The only notable sign of strength is console hardware, which supposedly rose 67% across Europe and 10% in the US. The catch? The only actual growth driver is the PS5, which is experiencing exponential growth around the world at a time when both Switch and Xbox hardware sales are falling. Compared to Xbox, PS5 is now selling roughly 2-to-1 in the US, and Famitsu reported that the PS5 is currently selling over 100x better in Japan than Xbox. Even though the PS5 faced a slow start due to supply chain restrictions, it is now selling better than the PS4 did over an equivalent launch timeline. Given PlayStation’s stronger first party line-up, there’s little reason to expect this pattern to change until Nintendo unveils the next iteration of its hardware.

Netflix expands its gaming ambitions. Joseph Staten, a former leader of the Halo game series, has joined Netflix to develop a new AAA multiplatform game. This move showcases Netflix's growing ambitions, which started with licensing and mobile to now include several first-party studios and big-budget multiplatform games. We likely won’t learn much about this project for a while, but it’s now only a matter of time before we learn more about how Netflix plans to bring games to TVs. (How will streaming work? how will controllers work? what will the first games be?) For context, as of last month Netflix had already released 55 mobile games with plans for another 126 games — 40 of which will be released this year, while 70 more will be developed by partners for 2024 or later, and 16 more will be developed in-house for 2024 or later. Even though questions remain about what exactly Netflix’s strategy will look like and whether it will work as part of a video-first subscription, there’s little doubt that Netflix’s impact on the games industry is only set to grow.

Niantic keeps searching for its second lightning strike. The Pokémon Go developer announced a new Monster Hunter-themed AR game this week scheduled to launch in September for Android and iOS. You might be wondering why the company keeps trying to make its unique brand of geolocation-based AR gaming catch on, and the answer is rather simple: Pokémon Go is still a massive moneymaker. According to data.ai, Pokémon Go made more than $150 million worldwide over the past three months and nearly $700 million in 2022, and the game still ranks in the top 10 highest-grossing iOS apps in the U.S. As of last summer, the game had amassed more than $6 billion in lifetime revenue. So while Niantic’s follow-ups to Pokémon Go — like Harry Potter: Wizards Unite — have fallen flat, there is ample opportunity for the developer to figure out the next winning formula considering virtually no other studios are competing against in the AR mobile gaming market. There is reason to believe the company’s next game, a cute-looking pet simulator called Peridot launching next month, might fare better than many of the sloppy licensed IP plays we’ve so far. But early reception to Marvel: World of Heroes has not been great, and NBA All-World had a downright terrible launch month earlier this year. 

In Other News…

💸 Funding & Acquisitions:

  • Sega acquired Rovio for roughly $775M. Link 
  • PlayStation acquired AAA multiplayer developer Firewalk Studios. Link
  • Epic acquired Horizon Chase Turbo developer Aquiris to work on Fortnite. Link
  • Goals scored $20M Series A to develop esports ready soccer game. Link

📊 Business:

  • Netflix stole away legendary Halo writer Joseph Staten from Microsoft. Link
  • U.S. PS5 sales are now tracking ahead of PS4’s on a time-aligned basis. Link
  • China's game regulator approved 86 new games, including Mobile Legends: Bang Bang. Link

🕹 Culture & Games:

  • Atari CEO hopes to win back players' support. Link
  • Trailer for bodycam shooter Unrecord becomes an overnight internet sensation. Link
  • Panic says it’s sold more than 50,000 Playdate handhelds. Link

👾 Miscellaneous Musings: 

  • Building the future of sport at Riot Games. Link
  • Bowser has been freed from prison. Link
  • How does Zynga hunt for whales? Link

This Week In Naavik Pro

Saga Games

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

Here’s what the Naavik Pro team published this past week:

  • Game deconstruction of web3 survival shooter Undead Blocks. 
  • Analysis on competitive gaming platform Skillz amid its stock market decline.  
  • Breakdown of the state of video game adaptations following the Super Mario Bros. Movie. 
  • Update on The Sandbox’s 2023 land roadmap.
  • Update on Splinterlands’ "The Secret of Praetoria” expansion. 
  • New Game Launch Radar featuring Marvel: World of Heroes and Crushing Crew.

This upcoming week, we’re publishing a game deconstruction of Shift Up’s Goddess of Victory: Nikke, a research essay on web3 game distribution, analyses on the state of the Diablo franchise and the Sega-Rovio acquisition, and a look at Ring Games’ new web3 action RPG Stella Fantasy and Solana’s web3-focused Saga Phone. We’ll also have much more to come after that!

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

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