Breaking Down Sony’s Ecosystem

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#1: The Metacast Episode #2

Episode #2 of The Metacast is officially live! In this roundtable episode, the team discusses:

How player networks might hold the key to user acquisition in a post-IDFA world
How user acquisition can be used to validate game concepts in the early stages of game development

You can find us on Spotify, Apple Podcasts, Google Podcasts, our website, or anywhere else you listen to podcasts. If you’re enjoying The Metacast so far, consider leaving us a 5 star review so that more people can find us!

#2: Sony’s Emerging Ecosystem

Sony’s recent corporate strategy meeting and investor day presentation reinforced our previous takes on how the company is building a formidable games business:

Sony has sold 7.8M PS5s, which tracks ahead of the PS4 in its respective launch time (2013).
Consoles are attracting a more diverse audience. Women represent 41% of console ownership vs 18% in the PS1 era.
Software/Services/Peripherals represent 80% of game business sales, up from 52% in 2013.
There are 47.6M PS Plus subscribers, which is +15% over last year and up 5x since 2014. Related, PS Now hit 3.2M subs, up 77% over last year. And, overall, PlayStation hit 109M MAUs.
The company is increasing its investment in IP development (both 1st and 3rd party). And they’re starting to see moderate success in their PC ports of PlayStation exclusives.
All together, Sony is hoping to increase its console market share from 45% (PS4 era) to 50%+.

Sony’s progress in games is commendable, but I think it’s important to take a slightly broader perspective. As I noted in episode #1 of The Metacast, ecosystems are increasingly important, and there are three distinct types:

Franchise ecosystems — when a company builds a multi-game + multi-platform strategy around a key franchise (think “the CoD model”).
Gaming ecosystems — when a company complements its games with hardware, platforms, software, or other types of services that bring greater scale and cross-sales.
Entertainment/Tech ecosystems — when gaming is just one piece of a company’s broader self-reinforcing strategy.

Sony touches on #1 and #2 but ultimately falls into bucket #3. Yes, it’s built an incredible gaming ecosystem that could likely thrive on its own if spun out, but it’s just one strategic piece of the whole. Sony’s purpose is “to fill the world with emotion, through the power of creativity and technology” and there’s plenty of evidence that Sony’s different business units increasingly collaborate as an ecosystem:

Uncharted is a hit franchise for PlayStation but is now getting a movie produced by Sony Pictures.
The Last of Us, another hit franchise, is heading to HBO but is being co-produced by Sony Pictures Television.
Demon Slayer was originally a comic made by Aniplex (Sony-owned), but has since been turned into a successful anime + movie, and a Sony Music artist recorded the theme song. A game is also in the works. Sony also owns Crunchyroll.
Travis Scott is a Sony Music artist who collaborated with Fortnite on a digital concert experience, which many gamers experienced via PlayStation.

Sony is also growing its ecosystem through partnerships and strategic investments. For example, Sony invested $400M into Bilibili last year (we explained Bilibili here). Bilibili already operates a successful Fate/Grand Order mobile game (licensed from Sony) in China and will likely bring more of Sony’s anime/comics IP to mobile and elsewhere in the years to come. Also, Sony recently announced a strategic investment in Discord, which will integrate with PlayStation next year.

The rabbit hole goes deep, but let me leave you with three clear takeaways:

First, it’s generally a good sign when a company is thoughtful about when to build, buy, partner, and invest. Many aren’t, but Sony is doing just that.

Second, despite all the talk of disruptive technologies (like crypto, AR/VR, or UGC), the truth is that ecosystems like Sony aren’t going anywhere, and, if anything, are getting stronger. The bigger and more interconnected Sony’s web becomes, the more likely it is that Sony dabbles in emerging technologies more so than gets replaced by them. Of course, the wider the ecosystem, the harder it is to be good at everything (from console games to mobile games to movies to hardware, etc.), so even though outsized aspirations are great, execution remains the largest risk.

And lastly, as the biggest games companies grow in more ways, the industry can no longer be viewed in a vacuum. Sure, many (if not most) games companies will stay narrowed in on their niches, but as is shown by Sony (plus Microsoft, Epic, Tencent, and others), gaming is increasingly falling into an increasingly ecosystem-driven world. When more leading games companies operate at the broader cross-section of entertainment, tech, social, or even something like crypto, it’s critical to understand those industries/perspectives, too. (Written by Aaron Bush)

#3: Jam City’s Public Market Plans

Last week, the US-based mobile games company Jam City put out a press release announcing the acquisition of Canadian developer Ludia, and that it will go public via a special-purpose acquisition company (SPAC). Let's unpack these two subjects one by one, starting with the acquisition.

Both Jam City and Ludia have been around for a while. Jam City, the acquirer, was founded as Platform G in 2010. It proceeded to acquire startups MindJolt and Social Gaming Network (SGN), rebranding as the latter and making its name in the mobile casual puzzle genre as SGN. It took in significant strategic investment from the Korean games juggernaut Netmarble in 2015 before rebranding again as Jam City in 2016. On the other hand, Ludia, the acquiree, has been in the business of licensed games ever since its founding in 2007. Since 2010, the media giant Fremantle has owned a majority stake of the company.

Jam City's classic titles include casual puzzle games Cookie Jam and Panda Pop; more recently, it has achieved growth with licensed games such as Harry Potter: Hogwarts Mystery. Most titles in Ludia's portfolio are licensed titles, including games from the Jurassic World and Dragons franchises. Lovelink, Ludia's recent foray into narrative games, is a newer title that shows that the company's internal IP is nothing to scoff at either.

What is it that Jam City hopes to gain from the acquisition? Above all, it's top line growth. Moreover, Jam City hopes to leverage its machinery to gain growth from Ludia's existing portfolio. The envisioned synergies are two-fold:

First, Jam City hopes to scale up marketing of Ludia's titles. For some years already, ad creative has been by far the single most important lever that advertisers have at their disposal. Thus, in practice, this means more and better ad creatives for Ludia games, and as a result higher impression-to-install conversion and lower unit costs.
Second, Jam City wishes to improve Ludia's product metrics, including IAP monetization. One of the simplest paths to getting more revenue out of your users is more content and more events, which is something that we are very likely see in Ludia games in the near future.

Ludia's price tag is set at $175 million. In its press release, Jam City reported combined bookings for the companies at $570M for 2020. Assuming the split of total bookings between the two companies to be similar in ratio to their IAP bookings, I estimate Ludia’s 2020 bookings to be at $92M. This results in a 1.9x backward-looking bookings multiple, which is on the conservative side in comparison to recent acquisitions of similar companies. Notably, most of Ludia’s revenue comes from licensed games, resulting in lower-than-average contribution margins.

Then there's the SPAC and Jam City going public. In short, Jam City will merge with the special-purpose acquisition company DPCM Capital (NYSE: XPOA). Both Jam City’s and Ludia’s cap tables are a product of 10+ years of funding rounds including strategic investors Netmarble and Fremantle. Combine this with the SPAC and its PIPE, there seems to be enough work for a couple of lawyers here.

When all is said and done, the transactions value the new Jam City at $1.2B, Netmarble will remain the controlling shareholder, and the company will have $115M in the bank for growth. With $570M combined bookings and $33M in adjusted EBITDA for 2020, the projected valuation sets the backward-looking bookings multiple and the EBITDA multiple at 2.1x and 36.3x respectively. The EBITDA multiple may sound high, but it’s noteworthy that EBITDA can be very volatile due to shifts in marketing expenditure. For most free-to-play companies, a large portion of cost originates from direct response marketing. Increasing marketing spend—even when it’s profitable in the long term—will slash profitability in the short term. Thus, one should be cautious when assessing companies’ EBITDAs without context.

On the whole, Jam City's projections for upcoming years are certainly bullish, even considering that revenue has stayed quite stable since the growth spurt they experienced as COVID hit in 2020/Q2. The company plans to double its bookings in three years, growing both its existing live portfolio and achieving significant revenues from new, yet-to-be-released titles. If the plan pans out, and Jam City’s new titles can repeat the success of its Harry Potter game, the growth is within their reach, but it certainly won't be a walk in the park. (Written by Miikka Ahonen)

#4: The Future of Gaming Events in 2021 & Beyond

The reigning king of summer gaming events and 20+ year veteran, E3, is returning from its one year, COVID-19 induced hiatus. The event has historically been the definitive place for publishers to announce upcoming titles for the year ahead. In its absence last year, popular gaming curator Geoff Keighley launched Summer Games Fest, a series of announcement-focused gaming events that occupy a similar space to E3, serving as a spring pad for AAA publishers and more than a few indies to announce news around upcoming hits.

It’s clear that this summer’s lineup of gaming announcements is fragmented. Summer Game Fest is returning for its second consecutive year in 2021, complementing E3’s online event and a slew of direct to consumer headlines from developers like Sega. As a result, many developers are left trying to understand what the right marketing strategy looks like, opting to explore new options rather than simply return to E3. Five years ago, E3 was the only way for major publishers to announce games. Now, PlayStation doesn’t even attend the event. Let’s understand why:

Gaming’s Diversification
Gaming has expanded outside of traditional target markets. Companies like Sony have seen a 10x increase in presence outside of NA/JP/EU, and with a digital-first shift, fans and reporters don’t need to fly out to these regions to get scoops. The proliferation of live ops is also resulting in publishers releasing more content, more frequently. While E3 is a great opportunity to get eyes on big news, an event that only occurs once a year isn’t frequent enough to meet the modern expectations of live-ops focused games.

Games like Fortnite have also created core gameplay metas, in-game seasons, and storylines, that are defined by this frequent update cycle. Many of the titles that once headlined announcements at E3 but have turned to F2P, like Call of Duty, are opting to release news at their own, more frequent pace. Major console publishers are also turning towards services as a distribution strategy — moving away from big box single title sales in favor of building more consistent libraries of content. Take for example, Nintendo Direct and PlayStation State of Play: much as any industry, gaming companies are owning the audience and the narrative themselves.

The benefit of Summer Games Fest, as compared to E3, is that it allows developers to solve all of these problems. It’s a series of events, not just one week of action. That means that realistically a developer can adjust and time their announcements to more clearly meets internal deadlines, instead of at the will of E3 and an IRL schedule. The Fest still also still leaves space for companies like Xbox and Sony to take center stage, so services and exclusive titles don’t miss out on their center spotlight. But imagine if they continue to bring this in-house, announcing their IP at their own pace in consistent cycles? Owning a captive audience will ultimately be much more impactful to the publisher.

Cost & Production Value
GI.biz sized the cost of sending four employees to a three day event at a whopping $45,000, and that's not including the costs of larger booths or stage time. It costs a lot of money to put on an E3-sized press conference. That kind of cash can be cost prohibitive to small dev teams that are producing hit titles and COVID made it clear that being in-person is not longer a must. On top of the bill, there are a multitude of risks associated with doing events live, including glitches, awkward moments, and poor fan reactions. With millions of viewers tuning in live and years of work invested in these titles, why wouldn't publishers opt to spend budget in creating highly-produced pre-recorded announcements instead of going to E3?

Keighley’s experience with high-production events like Gamescon and The Game Awards also means he’s no stranger to mitigating the risks of live content. The event series directly address some of the more gatekeeper-esque aspects of E3, and make it available to the long-tail of games in a way that wasn’t before possible.

Looking Ahead
There are a multitude of changes coming to gaming events in a post-COVID world. Services like Game Pass and PlayStation Now are making game announcements more frequent, meaning other developers will need to up the ante to gain consumer attention. Platforms like Steam and the Epic Game Store are making it easier than ever for developers to make a living creating games. And Hollywood is leveraging gaming IP, bringing with it a slew of cash, celebrates, and mainstream attention.

The next generation of gaming events will account for the needs of modern game development — digital-first, live ops, global, and punchy. In the short-term, Summer Games Fest seems to be a solution to the problem, opting for a slow burn of consistently high-quality announcements over E3’s condensed approach. But with the event’s independent business model and need to rely on sponsorships from companies like Amazon, it still feels like there’s room for growth in creating a truly comprehensive experience. It’s simply one other digital-first option that commands an eager audience, but I think going DTC (especially for the biggest companies) is the most important trend here. The reality is that fragmentation will likely continue, and a “season” of announcements is increasingly on the way out vs. companies sharing updates anytime to anyone anywhere. At any rate, the summer of gaming is back in full swing and I’m eager to tune in. (Written by Max Lowenthal)

🎮 In Other News…

💸 Funding & Acquisitions:

Sensor Tower acquired Pathmatics to level up digital advertising intelligence. Link
Double Loops Games closed an $8M Series A from LVP, Garena, and Riot Games. Link
1047 Games raised a $6.5M round for its F2P shooter, Splitgate. Link
Gaming Social Platform Noice raised $5M from a strategic group of angels. Link
Gaming-focused payments platform Tiv emerged out of stealth with $3.5M in funding. Link
Zordix AB acquired Merge Games, which distributes titles like Dead Cells. Link

📊 Business:

Nintendo and PlayVS partnered to bring Super Smash Bros. and Splatoon to high school varsity athletics. Nintendo has a history of shutting down unofficial tournament organizers, so this partnership bodes well. Link
Facebook Gaming added new monetization features for VOD. Link

📜 Culture & Games:

There was another massive wave of DMCA takedown claims from record labels to Twitch streamers. Link
The Tribeca Festival has a games category now. Link

👾 Miscellaneous Musings:

“The ‘combo’ era: how GaaS, Subscriptions, and IAP mesh on PC/console.” Link
Venture Capitalist Rex Woodbury’s Twitter thread on NoPixel, a role-playing-based GTA V community mod. Link
Zynga President Bernard Kim on their acquisition of ChartBoost. Link

📚 Content Worth Consuming

Paradox Interactive, The Little Big Media Conglomerate (The Diff): “The asymptote that a well-run expansion strategy reaches is that it's practically a subscription product: as long as you're playing, you're paying. But payment has friction, and a player can be engaged enough to keep playing without being quite bought in enough to spring for an upgrade. Paradox is adjusting to this economic reality by giving players subscription options—they get all of the game's content as it's released, and pay every month.” Link

The Story of an Exit and a Mega Round In a Month (CC:): “What’s in this episode? 1) Exited Luna Labs to IronSource (raised $555M) in February 2) Raised $85M for Tripledot Studios (annual revenue $100M+) in March 3) Why gaming is more science than art 4) How Akin supports his ‘circle of friends’ while also creating $100M+ businesses 5) Rule of thumb metrics in gaming.” Link

The Case for NFT Gaming (Nansen): “Drawing this [Microtransactions] parallel to NFTs, an NFT token that is usable and provides utility to the user will end up having a solid intrinsic value. An art NFT may have unique traits or a unique name that makes it scarce (and hence some sort of buyer value), but it will still remain a collectible as long as the holder is unable to use it. Arguably, the only “value” that is intrinsic to an art NFT would be its (i) story / association, and (ii) collectability / resale value. Gaming offers an additional aspect of value that art NFTs are unable to do so - (iii) usability / player engagement. Usability functions as a direct, and thereby a sustainable use-case for NFTs, expanding NFTs’ addressable market and attracting more mainstream adoption via player engagement. You can own a Hashmask NFT in your metamask wallet, but you can’t actually wear or use it (virtually).” Link

Forte, The Blockchain Gaming platform (VentureBeat): “Integrating blockchain in games well is so hard is because most of the infrastructure that’s actually needed doesn’t exist, isn’t mature enough, or isn’t great for games. Tokenizing game items so they can be uniquely identified and tracked is relatively easy. But to actually enable the greater market opportunity that Griffin and Forte believe is possible (and also solve monetization issues today), you need an easy wallet solution (most mainstream people give up on blockchain here), developer tools, good games, full token economy models (not just selling collectibles), marketplaces, sources for liquidity, a mechanism for people to “cash out,” regulatory compliance, and more.” Link

Thanks for reading, and see you next week! As always, if you have feedback let us know here and please subscribe if you enjoyed this edition.