Hi Everyone. As a reminder, Naavik is teaming up with Deconstructor of Fun and Phoenix Games to host a Royal Beach Party at Gamescom. The event will be the evening of August 24th, and it will be a great opportunity to grab a cold drink and hang out with incredible people from across the games industry. Interested in learning more details and RSVPing? You can register here — or at least join the waitlist. We can’t wait to see you then!

This Week on The Metacast 

Matthew Ball: Gaming x The Metaverse: In this episode, Matthew Ball — brilliant thinker, prolific essayist, active investor, founder of Ball Metaverse Research Partners, a producer of media, and now a published author — joins Naavik co-founder Aaron Bush to discuss his book, The Metaverse: And How It Will Revolutionize Everything, which can be purchased here. The duo also discusses how virtual worlds could take their first steps to connect and interoperate. Matthew also shares why he’s excited about Massive Interactive Live Events (MILEs), and what he’s learned as a producer of one. Website | YouTube | Spotify | Apple Podcast | Google Podcast.

What VCs Look For in Web3 Games — Crypto Corner: On this week’s Crypto Corner, Play Ventures’ Anton Backman and Konvoy Ventures’ Philip Collins join Nico Vereecke for a discussion about how we see the Web3 Gaming space evolve over the next two years. The group explores the trade-offs between building games vs building tooling/infrastructure, the importance of innovating on gameplay design versus tokenomics and their theories on what games will be the most successful. Website | YouTube | Spotify | Apple Podcast | Google Podcast.

#1: Activision Blizzard Reports Q2 Earnings

As was expected, the main narrative around Activision Blizzard’s earnings is wrapped largely into the Microsoft acquisition (RIP earnings presentations and webcasts). The merger has started facing more scrutiny in recent months from regulators and competitors alike. The most interesting (and perhaps noisiest) of the criticisms come from Sony:

"Content, as the main driver of purchasing decisions, is the most important barrier to establishing a digital distribution channel for PC, console and mobile games…One of the reasons why the Game Microsoft's Pass has grown so quickly that's why since 2017, Microsoft has acquired several third-party studios, including Double Fine, Obsidian Entertainment, Ninja Theory, and Bethesda, and added their content to Game Pass. Such acquisitions have given Microsoft a greater mass of content - even without Activision's games… Adding Activision games to that content would represent a tipping point."

This critique falls in line with our analysis last edition about the console market, which examined the near-term decline in the console market. A subscription-centric future depends on a wide range of differentiated content, and the Call of Duty’s potential exclusivity on Game Pass presents an existential risk to Sony given that it’s one of its top selling games. Near term this won’t be a problem, given Xbox’s commitment to open ecosystems. But it does reinforce the fact that Sony is focused on and worried about supply on the IP side, and what it means to have platform exclusivity for top grossing titles.

All of this is secondary to the fact that Microsoft is still waiting for FTC approval. While I don’t foresee any problems on the regulatory side, the FTC blocking Meta’s acquisition of Within is a signal that maybe Lina Khan (among other global regulators), despite the recommendations from her staff, wants to be cautious about allowing deals that may eventually lead to anticompetitive behavior even if it doesn’t today. In my opinion, it’d be great if policy makers think more about policies around exclusivity per Sony’s point rather than the deal itself (ironically, Sony would still be the bigger company given its large array of exclusives).

Earnings

On the Earnings side, the narrative is mostly consistent with what we mentioned about the console market — without any new major games, consolidated net revenues decreased to 28% in comparison to 2021 levels. CoD: Vanguard also significantly underperformed its predecessor and this led to a decrease in net bookings on the console side. Further, most DLCs have a planned launch toward the second half of 2022 across major IP like Warzone, CoD (PC), and Warcraft. Diablo Immortal, which recently surpassed $100M in lifetime revenue across the App Store and Google Play, finally launched in China and is an optimistic sign.

Interestingly, mobile continues to be a bright spot for the company, driving 51% of total revenue this quarter. King’s advertising business grew 20% YoY and net bookings increased 6% YoY. Both Diablo Immortal’s and King’s performances offset the decrease in net bookings from CoD: Vanguard and World of Warcraft. And all this said, the company is still sitting on a mountain of cash (net cash of $7.1B) and driving healthy operating income ($338M).

The business also saw average MAUs decrease by 12% (or 47M) as compared to the same period last year. So, even if mobile results were quite strong relative to the business, this doesn’t hide the fact that the business will continue to underperform and lose market share if it doesn’t meet content expectations.

Challenges

Talent: Given cultural issues and the ensuing loss of productivity, Activision has had trouble retaining talent. Further, employees are unionizing and leadership has been leaving. It’s one of the many reasons they acquired Proletariat a few months back in order to keep development on track for World of Warcraft.

Content: As we previously called out, the company faces major headwinds on content cadence that it needs to figure out. Content challenges are directly tied with the need for talent. The company is actively working on this, given the ~25% increase in developer talent. There are key titles coming out in the near future that should increase MAUs and mitigate this concern, but this is dependent on their timely releases. This is something the industry is suffering from on all fronts, but Activision is resetting to develop a new CoD after its next MW2 which should mitigate some stress.

Regulatory: There’s risk that this deal doesn’t actually pull through. We anticipate this shouldn’t be the biggest problem, but with regulatory criticisms abound, we hope this doesn’t take away from employee morale and company focus. However, in the chance that this deal falls apart, I think the company will be more than okay.

Macro: While Candy Crush and Diablo Immortal have solid brands, conversion funnels could be more expensive and difficult. Additionally, a bulk of Activision Blizzard’s revenues come from Europe, which is experiencing its own currency troubles and resulting in lower cash flow for the company (something many fortune 500 companies are likely dealing with).

The company is certainly experiencing many of the same problems that are being articulated broadly in the industry. However, in some ways Activision’s path is clearer than most and not much has changed. They have a clear eye toward being bundled into a larger subscription service, new IP & DLCs will prove valuable to their services segment, and mobile continues to have solid traction across a variety of geographies. Lastly, the CoD strategy is still in effect — while the brand had a bad year, the additions of Warzone (F2P) and CoD Mobile (F2P + Mobile) have given the franchise a new trajectory. They’ll continue to follow this strategy with other IP — WoW being the most important — so there’s still reason to be bullish if they can solve their talent issues. The next year will be about maintaining a solid team and execution. (Written by Fawzi Itani)

#2: Arc8: Bringing Skillz to the Metaverse

This is the introduction to a full game deconstruction of Stepn, written by Karan Gaikwad. Check out Naavik Pro to request a demo, read the full write-up, and access our entire research library.

Arc8 is a blockchain-based play-and-earn mobile gaming platform which hosts several games that allow players to compete for token prizes (as opposed to real money (fiat) prizes on comparable platforms like Skillz). The platform is one of GAMEE’s four projects: Arc8, the GAMEE token, G-Bots NFTs, and the Prizes App (fiat money-based competitive platform).

Arc8 uses tokens instead of fiat money to run skill-based matches. There are primarily two modes— the 1v1 mode where two players enter a match using tokens and the winner takes all after giving a cut to Arc8, and then there is also a Tournament mode where multiple players pool in tokens and the rewards are distributed based on the ranks that players achieve at the end of the tournament. The games here are typically skill-based hypercasual games that are either familiar or are very easy to learn.

GAMEE was founded in 2015 by Bozena Rezab, Miroslav Chmelka, Jan Castek, and Lukas Stibor and is headquartered in Prague, the Czech Republic. Bozena Rezab is GAMEE's CEO, who previously worked at Google and was responsible for YouTube’s business development across European markets. She has 17 years of experience in developing consumer technology brands and businesses. Jan Castek is GAMEE's Chief of Product, who over the last 12 years as an entrepreneur created several consumer tech products ranging from social networks to finance applications. Miroslav Chmelka is GAMEE's Chief of Technology, with over a decade of experience in technology development for consumer-facing services.

GAMEE was one of the first game developers to launch games in the messaging apps Telegram (in 2016) and Viber (in 2018). In 2016, GAMEE was one of the global game companies selected to pioneer Facebook Instant Games, a group that also included gaming giants Konami, Bandai Namco, King, and Zynga. In 2017, GAMEE was listed in the 100 Disruptive Brands by Marketing Week, was the Czech Republic’s national winner of “Startup of the Year'' in the Central European Startup Awards, and was named one of the Czech Republic’s 10 most promising startups by Forbes. Of course, much has changed over the past few years.

Most notably, in July 2020, Animoca Brands acquired GAMEE for €4 million (approx. $6.53 million) in shares plus earn-out payments of up to €1 million (approx. $1.63 million) in cash or shares. The acquisition aimed to add strategically valuable in-house HTML5 skills, a portfolio of over 80 casual games, and a gaming community of 13 million registered users and 1.3 million monthly active users. This confers to Animoca Brands the capability to offer browser games independently from third party platforms, providing greater freedom, flexibility, and unrestricted search — particularly valuable in light of its larger strategy with blockchain technology.

Yat Siu, co-founder and chairman of Animoca Brands, said: “We see browser gaming as the key to mass adoption for blockchain gaming. The talented team at GAMEE therefore fills a critical gap in the ability of Animoca Brands to execute, on a massive scale, the goal of delivering true digital ownership to gaming audiences. GAMEE’s significant presence on platforms such as Telegram - one of the main communications platforms for the blockchain industry - is particularly important to maximize our reach and influence.”

If mass adoption is the goal, then Arc8 is Rank #6 with its MAW’s (monthly active wallets) touching almost 100K (if you trust DappRadar). However, with a monthly transaction volume of less than supposedly $1.5K, there seems to be very little tokenomic activity happening at this point in time. The reason why we are looking at Arc8 despite these low numbers is that it is one of the earlier companies that Animoca Brands had acquired while building its ecosystem of games. Given Animoca’s metaverse ambitions, it makes sense to look under the hood.

The skill-based tournament-styled business model has multiple advantages by using on-chain tokens instead of fiat money used by Skillz among others (which we’ll cover later in the report). The model is basically akin to the audience pooling in money for a skill-based contest where the winner wins disproportionally, the loser loses disproportionally, and the game takes a cut and always makes money. If Animoca wanted to make money on Arc8, it probably could; for example, Solitaire Blitz, which was released just over a month ago, has a similar business model (with just one game), is already competing with Arc8 based on MAWs and with 600x the transaction volume. However, the strategy here seems to get as many players onboard without them needing to be on-chain, then give them a taste of what it is like to play with tokens so as to convert as many on-chain players as possible. These players can then be cross-promoted to other projects.

What makes this interesting is that Arc8 is more of an Animoca ecosystem play rather than just a single product and offers a sneak peak into the larger strategy of Animoca Brands in its quest for greater interoperability and scale across its many projects.

With this in mind, lets take a deep dive into Arc8 to understand:

• How has Arc8 woven in tokens and NFTs into the multi-game — play and earn — tournament-based model?

• How has this performed?

• Can the real money/token tournament-based model succeed with blockchain games at a greater scale?

• What is the role of Arc8 in the overall strategy of Animoca Brands?

Content Worth Consuming

Tripledot Simplifies Development (Forbes): “For a bunch of guys in what can be the high-touch world of video games, the Tripledot Studios founders are remarkably unsentimental. Making a game can be a lot like making a movie: long, costly and successful only with obsessive focus on elements like narrative and character. That’s a lot of hooey, say the Tripledotters, CEO Lior Shiff, COO Akin Babayigit and Eyal Chameides, the chief product officer. Their fast-growing, profitable—profitable!—mobile games unicorn makes inexpensive versions of puzzle concepts and classics such as solitaire. Their process prioritizes Excel sheets over storyboards, where metrics like, say, a game’s 90-day user retention rate guide them. (It measures how many users keep playing three months after first downloading the app. A roaring success will have a rate of 10% or higher.) ‘We’re very good operators,’ Shiff says. ‘We excel in the business aspect of building mobile games.’ ” Link

Yield Guild Games: One Year On and Looking To The Future (YGG): “In late 2020, at the time of YGG’s inception, nobody in the media was talking about play-to-earn. We were a small community focused on Axie Infinity, investing a lot of time and money to build the play-to-earn narrative. From day one, YGG wanted to bring play-to-earn to the masses. We produced the documentary “Play-to-Earn: NFT Gaming in the Philippines” in partnership with Emfarsis and Delphi Digital, and we spoke to every media outlet globally that was willing to listen so we could tell them about a new concept that was changing lives.” Link

Netflix Games is Pivoting. Here’s Why (DoF): “Mobilegamer.biz reported that Netflix Games’ exec hiring spree continued with a swoop for 14 well-known game execs as the streaming giant has continued to add a multitude of senior folks from companies like Xbox, Scopely, EA, Riot, Zynga, and more. Two of its biggest recent hires indicate that Netflix is moving into live service games.” Link

Unlocking On-Chain Games: Part One — Throughput (Dark Forest DAO): “This is Part One of a series exploring constraints at the intersection of blockchains and games. The objects of enquiry are “crypto-native” or “on-chain” games, which maintain their game state trustlessly… Assuming a successful game has 20,000 concurrent users who change the game state every two seconds, on-chain games become woefully constrained. No blockchain can support those requirements.

To play games on chain, we need to rethink their design. The tail must wag the dog.” Link

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