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Welcome to Master the Meta, the #1 newsletter focused on the business of video games.

Here’s your weekly roundup of the best content in the video game industry.

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So. Many. Company. Updates. This Weekly Meta mentions a bunch of businesses I’ve never covered before. I won’t closely follow the companies I’m less impressed by, but checking in ever so often to see if anything’s changed is a healthy exercise. Earnings season is in full force, so I can’t cover everything in depth (in fact, I’m still leaving a bunch out), but let me share the highlights.

Before jumping in, here are a few high-level observations: 1) most gaming companies are too busy running on the content treadmill to be innovating, 2) innovation occurs in big and small ways in both big and small companies, 3) for most gaming companies, innovation doesn’t matter if they stop making great games, and 4) generally speaking, legacy Western publishers are slow to adapt, but the Japanese equivalents are falling behind even faster.

Why am I so focused on who’s innovating? Because the innovators are who will shape the future of the industry. If you want to understand where the future is going, seek out and follow the innovators. Alright, now let’s dig in:

• Tencent’s Q1 earnings. “Online Games” revenue grew 31% YoY, a fairly sharp acceleration thanks to higher COVID-driven engagement and major contributions from the top smartphone games (like Peacekeeper Elite, Honor of Kings, Clash of Clans, and more). Even growth in the social network division was partially driven by in-game virtual item sales. Tencent’s gaming business is huge but still positioned incredibly well for the future. Growth will decelerate as the world “normalizes,” but Tencent will continue developing games, investing in other companies, partnering with foreign businesses, scaling its platforms, and working quickly to lead cloud gaming (among other) endeavors in China. Regulatory risk shouldn’t be ignored, and growing internationally will be a trickier undertaking, but Tencent is well equipped to continue growing its colossal gaming business. Link

• Sony’s Q4 earnings. Sony’s Game & Network Services division saw sales dip 14% YoY and operating income fall too. This is to be expected; the PS4 is at the end of its life, and Sony’s studios haven’t released a major first-party game recently. Over the past year, the PS4 base grew approximately 14% (to 110 million), and the number of PS+ subscribers also rose 14% to 41.5 million (~38% of total units sold). There’s still much more room to increase that engagement, and I imagine the strategy surrounding the PS5 (and future exclusives and revamped services) will help nudge that number higher. The good news is that the PS5 remains on schedule to launch later this year. We should learn much more about the console in the next couple months. Link

• Sega Sammy’s Q4 earnings. The quarter was positive, but Sega remains far below its all-time highs. Sega was plagued with takeovers/restructurings and has been running in place for the past decade (at least from a revenue standpoint). The company sells more than games, but from a video game standpoint I wouldn’t expect too much to change. Digital sales will gradually help boost margins, but packaged games remain a major seller. Even over the past quarter/year, Sega’s packaged game sales counterintuitively grew materially faster than digital sales. The company makes solid games (Sonic, Yakuza, Total War, etc.), but it’s hard to believe Sega will take advantage of important trends (like mobile) and rekindle any unexpected long-term momentum. Link

• Square Enix’s Q4 earnings. Square Enix saw sales dip over the past year but profits rise thanks to higher margin digital sales. The MMO business grew — thanks to expansions for Final Fantasy XIV & Dragon Quest V — but the company’s overall line up was weaker than the last year’s (which included games like Shadow of the Tomb Raider, Octopath Traveler, and Kingdom Hearts III). The good news is this new fiscal year should start strong with the launch of Final Fantasy 7 Remake (and Marvel’s Avengers which launches in September). Looking longer-term, Square Enix has the brands and talent to sustain a strong business, margins should rise as digital gains share, but it should really look to co-development partnerships to bring more of its iconic brands to mobile. Link

• Ubisoft earnings. From an engagement perspective, the quarter was encouraging. Rainbow Six Siege saw record engagement, The Division 2 rebounded nicely, Just Dance 2020’s net booking were up 156% compared to the prior version, and Assassin’s Creed Odyssey continues to see improvements over Assassin’s Creed Origins. This is all encouraging, but let’s remember that Ubisoft faced a tough 2019 that was filled with mistakes and major delays. It was the first year in 30 years that operating cash flow came in negative. Fortunately, that’s in the past now. This fiscal year should include 5 AAA releases, so bookings and cash flows will almost definitely come roaring back. Also, Ubisoft will hopefully continue to improve its live ops capabilities so that players stay engaged longer and spend more in-game. I still don’t fully understand the company’s mobile strategy — it seems scattershot — but that’s also a major area for improvement. Overall, things will get better, and even if Ubisoft isn’t perfect it surely has learned from its mistakes. Link

• Nexon’s Q1 earnings. Nexon isn’t growing quickly, but it generates tremendous free cash flow (TTM: nearly a 50% FCF margin). Revenue fell 11%, but the country-by-country swings are more profound: China: -42% (weaker Dungeon&Fighter performance); Korea: +78% (higher MapleStory & FIFA Online performance), etc. Also, mobile gaming revenue rose 10%, and Nexon’s mobile gaming ambitions seem ahead of other legacy Korean or Japanese gaming companies. I’ll have to study the company more to learn what to expect going forward, but with a vast pipeline of games and a strong financial position, Nexon will be worth taking a closer look at. Link

• Turtle Beach’s Q1 earnings. This small company — a leader in selling gaming headsets — gets more attention than it probably should. Higher gaming engagement drove higher demand this quarter, resulting in a beat-and-raise, but demand spikes aren’t steady (sales are still down from 2018, when Fortnite took off), margins are fairly thin, revenue isn’t recurring, the market size is limited (even as non-gamers buy headsets), and Turtle Beach’s brand isn’t as powerful as many probably think. There’s certainly room for upside if demand steadily rises and the company extends any pricing power, but it’s not the type of company that usually piques my interest. Link

A big week for Epic games. Not only did the Epic Games Store crash after making GTA V available for free, but the company shared two major announcements:

• Epic unveiled Unreal Engine 5, the company’s newest game engine that will launch in 2021. It seems to have two primary innovations: 1) Nanite, virtualized geometry tech that lets devs import high quality art with fewer compromises, and 2) Lumen, impressive dynamic lighting technology. What they shared looks cool, but it’s important to remember that Unreal isn’t the only player and what they showed was a tech demo (played on a PS5). Link

• Although less flashy, the other announcement — Epic Online Services — is also cool. In a nutshell, it’s a free SDK that lets devs more easily create cross-playable games by supporting the accounts of multiple platforms. Founder & CEO Tim Sweeney is serious when he says he wants to build the opposite of a walled garden. Link

Private market fundraising. Here are a couple interesting deals I noticed:

• Parsec raised $7 million to build peer-to-peer, low latency streaming tech for gamers and development teams. Link

• Sleeper, a rising star in mobile-first fantasy sports leagues, raised a $20 million series B to tackle new verticals, primarily esports starting with League of Legends’ summer split. Link

Applovin acquires Machine Zone. Applovin has created a successful ad network / mobile marketing platform that many mobile gaming companies use to improve customer acquisition. Having access to useful data helps the company expand into adjacent lines of business… including developing its own mobile games. The company has already started its own internal studio, and acquisitions can help turbocharge further growth if the company thinks it can leverage its platform/data to improve performance. In this case, Machine Zone is most known for Game of War, which was once one of the most popular games on mobile app stores. That’s no longer the case, so Applovin is probably getting a reasonable price. The company’s tactics appear to be working, so expect Applovin to continue being somewhat aggressive in its deal-making. Link

Tilting Point rebrands. The company is pursuing “progressive publishing,” where it gradually works even more closely with successful developers. Relationships with Tilting Point start when developers “power up” their games using the company’s marketing tools; once games are successful, Tilting Point may look to “team up” and co-develop future games. There are similar parallels to Applovin — starting with marketing tools and then expanding into new parts of the value chain. Link

Keywords Studios raises $122 million. Keywords Studios, a global services provider for the gaming industry, is an interesting business. Most developers want to reduce their fixed costs, so they’re always looking to outsource certain functions (like localization or QA). Keywords Studios has been rolling up the gaming service provider industry for several years, and it’s being incredibly proactive right now. The company is raising $122 million — approximately 10% of its market cap — to acquire additional service providers who are struggling in the current climate. The company isn’t perfect (just check out Glassdoor), but this strikes me as a sign of clever leadership. Link

Apple acquires NextVR. NextVR was a cool idea ahead of its time. Experiencing concerts or NBA games in VR still isn’t ready for mainstream adoption, so the company is selling out to Apple for a rumored ~$100 million. For perspective, NextVR raised $115.5 million (according to Crunchbase). Link

A big milestone for Playrix. Thanks to mega-hits like Gardenscapes and Homescapes, Playrix has officially hit 1 billion downloads. That audience is also is converting well to revenue: Link

🖥 Content Worth Consuming

The VR Winter. I’m optimistic that VR will eventually find its moment (and, if anything, VR Winter has already lasted several years), but this is a good read: “However, we haven’t worked out what you would do with a great VR device beyond games (or some very niche industrial application), and it’s not clear that we will. We’ve had five years of experimental projects and all sorts of content has been tried, and nothing other than games has really worked. Meanwhile, it’s instructive that now that we’re all locked up at home, video calls have become a huge consumer phenomenon, but VR has been not. This should have been a VR moment, and it isn’t.” Link

10 Learnings From 10 Years. Supercell’s founder and CEO shares 10 lessons he and the team have learned over the company’s lifespan. Link

Niantic Eyes Lead Role in AR ‘Gold Rush.’ (FT) “After launching just two games since the company was spun out of Google in 2015 — where Mr Hanke had run Google’s Earth and Maps products — Niantic is planning to step up the pace. Mr Hanke says he wants to release two Niantic-made titles a year, plus a small but growing number created by third-party developers using a version of the AR technologies upon which the Pokémon Go and Harry Potter games were built.” Link

Minecraft theme parks. What people build in Minecraft never ceases to amaze me. Link

The State of Esports Betting. “Esports has witnessed 40x growth when it comes to betting, largely due to both FIFA and NBA 2K taking the top spots. With traditional sports – namely football and basketball – mostly becoming inactive, their virtual counterparts have stepped up to the spotlight. EveryMatrix has identified that FIFA and NBA 2K are making up 80 percent of the betting volume.” Link

See you next week!