Ubisoft’s Next Generation

Hi Everyone. A few announcements this week:

First, we’re thrilled to welcome Eva Grillova to the Naavik team as a consultant! Eva followed her game design calling through her 10+ years in the industry and has worked at companies like Disney, Geewa, Wooga, and most recently Social Point. She’s also a great writer, who you might recognize from deconstructions like Genshin Impact a few months back. We’re excited to work with Eva, and if you’d like to too - reach out here.

Second, we launched a new website! As Naavik continues to grow, we’ve been focused on unifying all of our content and services in one place. We’re also streamlining our branding as you can see in our newsletter’s new logo.

Lastly, Master the Meta is looking for new sponsors. If you’re interested in showcasing your brand to thousands of gaming-related entrepreneurs, executives, developers, and more, please email Max and we’ll send you more details.

Naavik Exclusive: Roundtable #8

In this Metacast episode, Nicolas Vereecke is joined by Jayne Peressini, Matej Lancaric, and Aaron Bush to discuss;

Netflix’ entry into video games.
Valve’s announcement of the Steam Deck, a handheld gaming PC.
How to approach user acquisition for Play-to-Earn games like Axie Infinity or Gala Games.

As always, you can find us on Spotify, Apple Podcasts, Google Podcasts, our website, or anywhere else you listen to podcasts. Also, remember to shoot us any questions here.

Listen to The Metacast

#1: Ubisoft’s Strategic Shift

Ubisoft Create The Unknown — *Source:* *Ubisoft*

On Tuesday, Ubisoft reported its first quarter sales for fiscal 2021-22. At a high level, the results don’t look great — net bookings dropped 20.5% year-over-year — but it’s not as horrible as it seems. This time last year, everyone was in the depths of quarantine, and there were no major releases this quarter. While other top publishers will probably outperform these results, the silver lining is that the back catalogue (especially digital add-on content) was strong enough to help bookings “only” be down 20%.

Of course, what’s always most interesting is looking forward. Three months ago, news that Ubisoft was planning to heavily invest in free-to-play (F2P) was met with skepticism. This week, management spent a good amount of time in the earnings call trying to add perspective and dispel concerns. In fact, co-founder and CEO Yves Guillemot’s opening remarks started with examples about how Ubisoft successfully entered markets where it lacked expertise in the past. He also added a framework around Ubisoft’s focus:

80% of Ubisoft’s current investments are targeted at expanding premium offerings. This includes popular sequels (like Far Cry 6), digital add-ons (such as extra DLCs for Assassin’s Creed Valhalla), spinoffs (like Rainbow Six Extraction), new IP (like Skull & Bones), and IP license deals (like with Star Wars and Avatar).
The other 20% is targeted at F2P (including mobile). This now includes three Tom Clancy games — Heartland, The Division Mobile, and XDefiant — Roller Champions, and more to come.
Notably, both investment tracks primarily focus on expanding the engagement around Ubisoft’s most important franchises.

It’s a common sense strategy as evidenced by what others like Activision Blizzard are doing. However, the devil is in the details, and actions (actually executing on a successful F2P game) will always speak louder than words (like telling everyone Ubisoft successfully entered new markets in the past). Personally, while I expect Ubisoft to continue delivering hits around its biggest IPs, I still have questions about entries like Avatar: Frontiers of Pandora and Skull & Bones, and even though Ubisoft will improve its F2P capabilities, I suspect that not all of the Tom Clancy F2P games will succeed at the desired scale. However, I look forward to hopefully changing my mind, and the company has an opportunity to outperform expectations that aren’t very high.

The other piece of news this quarter that riled people up was the codenamed Assassin’s Creed Infinity leak, which supposedly will be a narrative-rich service game. It’s too far out to speculate well on (and management is tight-lipped), but I expect the Assassin’s Creed franchise to shift from launching distinct titles every other year to one central game where players can take their single character through frequently updated realms and missions (perhaps with a multiplayer component). It’s not shocking, given the franchise is already more service-based than ever before (just look at Valhalla planning to launch fresh DLCs into its second year). The game is probably at least 3 years out, which means we’ll see another standalone title in between, but (assuming it actually happens) this reflects a meaningful change for the franchise. Plus, if it’s happening to Assassin’s Creed, it very well may happen to Far Cry as well. At a high level it sounds like a promising idea, but it adds yet another layer of uncertainty.

All in all, Ubisoft is working on a bunch of interesting projects, some of which could become nice additions. The company is wise to shift its long-term strategy — both in regards to F2P as well as live services around tentpole franchises — but it will take time to play out, and uncertainty remains. In the meantime, I look forward to trying out Far Cry 6 later this year while we wait to learn more. (Written by Aaron Bush)

#2: Tencent Acquired Sumo Group for $1.3B

Tencent announced it would acquire UK-based Sumo Group for $1.3B, representing a 43% premium on Sumo’s current valuation. Year to date, Tencent has logged 60+ gaming-related investments / M&A events and there are no signs of slowing down.

Sumo Group has a track record of developing games for major publishers like Sega, Sony, and Apple. They are a premium game developer -- predominantly for console and PC -- with an impressive roster of AAA games that they’ve brought to market since 2004. In 2020, they generated ~$95M in revenue, up 40% YoY.

Ubisoft Sumo Digital — *Source: Sumo Digital’s 10K Report*

Sumo’s multi-genre expertise is one of the reasons major IP owners like Microsoft, Sony, and Sega trust them with key franchises, and perhaps one of the reasons Tencent was interested to acquire the company. Their primary strategic objective is to continue to make great games with client-IP. It’s these partnerships with major studios) that underpin most of the company’s revenue. Sumo also plans to 1) build out their own IP through their own publishing platform, 2) enter F2P, and 3) grow inorganically through M&A. However, Sumo’s focus on full turn-key development — creating the original idea for the game and developing the game in-house — and experience handling IP that really sets them apart, bringing this expertise to Tencent.

Ubisoft Live Projects — *Source: Sumo Digital’s 10K Report*

Sumo and Tencent are also no strangers. In 2019, Tencent acquired an 8.75% stake in the publisher. This is a fairly common corporate development strategy that Tencent excels at: acquire a minority stake in a company, monitor their progress for potential synergies and advise where necessary, and then complete a full acquisition of the company should any synergies pan out. Tencent is particularly savvy at understanding where they need to boost their areas of weakness. They often leave acquisitions to operate independently, but leverage their distribution and expertise in strategic markets (mobile) and open access to the toughest channel of all, China.

A few weeks back when Tencent announced their 2020 earnings, Max wrote that one of Tencent’s strategic priorities will be to expand more meaningfully in Western markets and be more intentional about AAA in face of upstart competition in China. From Niko Partners:

“While China is the largest gaming market in the world with 33% of PC and mobile games revenue derived from mainland China gamers, Tencent wants to be a global giant. The firm stated that its target is to have half of its players overseas, but we note that only 21% of its total games revenue in 2020 was from outside China… While the majority of overseas growth is coming from mobile, Tencent understands that the PC and console market is worth over $70 billion outside China and that there is opportunity to grow those segments inside China too. While Tencent is incubating internal teams to develop cross platform and AAA titles, it is also looking to invest in game companies that already have expertise in this area.”

With more than 40 projects in development from 14 studios and 1200 employees, vast experience in AAA (having partnered with Microsoft, Sony, Sega, etc) and live services, Sumo Group indeed fits into the overarching strategy.

On one last note, it hasn’t all been smooth sailing for Tencent. Amid increasing regulatory scrutiny of public companies by the Chinese government, the Douyu and Huya merger was blocked. What’s interesting to note is that the video game supply that Tencent inadvertently created domestically in China by virtue of WeChat’s platform and by being highly acquisitive has created competitive conditions where it’s also much more difficult to acquire companies. Turning its gaze globally is as much an existential question of the power and place Tencent holds within China as it is strategic. (Written by Fawzi Itani)

#3: How Merge Unlocks its Next Stage of Growth

Ubisoft Character — *Source:* *VentureBeat*

Last week, we analysed the state of the Merge genre. Based on all that data, the key takeaways were threefold -

Merge downloads are stable since Q1 2019, even though the number of games have tripled
Merge revenues are on an uptrend with Q2 2021’s revenue being almost triple that of Q1 2019’s
Overall, Merge is hitting a UA glass ceiling with not many new players entering the genre ecosystem, and product differentiation will be key to future genre growth

We also received many interesting questions on this thread, which warranted a followup post. Here we further explore the genre’s growth equation and shed more light on what kind of product differentiation will be critical for Merge’s future growth.

Ubisoft Graph — *Source:* *Sensor Tower*

Since it seems like Merge is hitting a UA glass ceiling, future genre growth comes down to further optimising CPIs and long-term LTVs. Both would allow for more aggressive UA, thereby enabling Merge to acquire more from the highly competitive and expensive Match-3 audience pool.

It is hard to be objective about CPIs due to lack of publicly available data, but a quick look at Facebook Ads Library points to the top merge games executing well on the CPI optimisation playbook. While further CPI optimisation might be possible, we feel there is more upside in figuring out long-term LTVs. As can be seen in the graph below, Merge games start off pretty strong, but product performance weakens longer term versus their Match-3 counterparts.

Ubisoft Revenue — *Revenue per Download is not LTV, but a good indicator of the same | Source:* *Sensor Tower*

This is where some fundamental design differences between the merge and match core mechanics start to become more important. More specifically, there are three key design areas that Merge needs to improve on to be in a better position to compete for Match-3 audiences.

#1 Varying the Experience Curve: Merge experiences still lack the richness that exists in their Match-3 analogues, and it’s critical they step away from today’s straightforward and grind-y experience. In Match-3, the simple fact that players cannot predict how one move will cascade into 10 more automated matches greatly improves the overall experience. In Merge, moving through linear merge chains to create items that complete quests quickly devolves into a very predictable experience. Since this can be interesting only for so long, there is a major design opportunity to further vary Merge’s core experience curve.

#2 Increasing Context Switching: In Match-3, the existence of levels not only allows for a very tangible sense of progression, but also every new level transfers the player to a different context to perform the core matching action in. Both points result in keeping Match-3 metagame progression fresh for longer. This is not really the case for today’s Merge games, as players perform all merging actions in one static context. Since those merged items are used to progress through multiple quest lines, long-term player satisfaction is primarily driven by metagame progression with no trace of context switching.

The relationship between item spawners, quest objectives and merging board size is THE crucial balancing act for Merge. But the fact that it all rests on top of an unchanging core experience results in highly repetitive long-term gameplay. Therefore, a need exists to increase context switching in merge gameplay.

#3 Reducing Effort to Reward Discrepancies: A design oddity that exists across most merge games today is as players progress deeper, the reward amounts don’t scale well with the merging effort involved to attain that reward (see example below). While this issue also exists in Match-3 in the form of levels giving out 1 or more stars + more content regardless of the effort involved, the psychological impact of large effort to reward discrepancies is reduced by gameplay elements like boosters, luck/randomness and every level attempt getting the player one step close to actually solving it. Herein lies a design opportunity for Merge to think about long-term player progression and the relationship between effort vs reward in a fundamentally different way to Match-3.

All the above drives the previously mentioned long-term LTV differences between Merge and Match-3. While Merge’s evolution could resemble that of Match-3’s (Bejeweled → Candy Crush Saga → Gardenscapes), embracing the fundamental design differences between both core mechanics and evolving the genre’s design around it will help Merge find its own “saga” metaphor. Solving for these design challenges is not easy, but we’re optimistic, as today’s products are only scratching the surface of how fun Merge can really be. (Written by Abhimanyu Kumar and Eva Grillova)

#4: Gaming and the Future of Consumer Software

Source: Today.com

Every big tech company is thinking about games. Big players like Google and Amazon are standing up divisions dedicated to the industry, and investments have already doubled 2020 totals only halfway through the year. It’s an interesting gold rush-esque experience for one of entertainment’s most historically overlooked mediums, no doubt driven in part by the multi-billion dollar opportunities seen in IPOs like Roblox & Unity. I’ve heard some variation of the phrase “every business will build monetization like Fortnite” in a non-gaming context too many times to count.

But amidst the hype and Twitter threads, I’ve begun to notice a few distinct shifts in the way gaming is represented in the mainstream. What was once overlooked as a niche industry is now considered to be the north star when developing consumer-facing software. As I see it, there are two distinct ways I’ve seen the broader technology industry integrate games:

Using Games to Deepen Connection With Consumers

Earlier this week both Peloton and Zoom announced they were building games as an integral part of their platform. It’s an interesting strategy that turns more passive software into immersive experiences by finding ways to turn viewer input, emotions, and reactions into feedback within the product itself. Netflix CEO Reed Hastings explained the sentiment well in the company’s most recent earnings report:

“[Video Games] are enhancing the big service we have...They're not a profit pool of any material size on their own, but the reason we're doing them is to help the subscription service grow, and be more important to people's lives. We're really a one product company with a bunch of supporting elements.”

As media companies grow, they’re beginning to realize that putting content in the hands of users, instead of in front of them, is a better way to build brand affinity. Content that's intrinsically interactive by nature, like Peloton, could engage consumers in new ways. And in a world where competition for consumer attention is rapidly increasing, stronger affinity can be the difference between being a market leader vs a passing fad.

Applied Game Mechanics to Build Better Products

In a speech he gave for popular venture capital firm a16z, Rahul Vohra, founder of the pay-to-use email service Superhuman, notes that the best pieces of software feel like games. This is the case because the best games, are focused on activating our motivation and emotions, not just completing the job they’re built to do. Mechanics like goal setting, referrals systems , and in-product tutorials give users a sense of autonomy and belonging, which in turns brings people back to products over and over again. While these mechanics have been developed and perfected in the world of gaming, its taken mainstream software years to follow. Due in part to gaming’s nascent role in the public zeitgeist, combined with a lack of resources and understanding around the implementation of these mechanics, investments from companies like Duolingo or Notion are only just starting to pay off in the last few years.

With each new introduction into the digital world, I continue to be surprised by the influence games hold. New innovations like digital cosmetics or virtual goods are suddenly going beyond the use case of games to redefine digital ownership and do hundreds of millions in sales. As the digital world continues to develop, I’m optimistic games will continue to be the jumping off point for some of technology’s most innovative and interesting mechanics, and fully expect the best technology companies of the future to be built with games in mind from day one.(Written by Max Lowenthal)

🎮 In Other News…

💸 Funding & Acquisitions:

Tilting Point raised $235M to fuel expansion and acquisitions in key strategic markets like South Korea and China. Link
OpenSea raised $100M at a $1.5B valuation, and has ambitions to build out its gaming vertical. Link
Polygon set aside $100M to fund NFT gaming projects through Polygon studios. Link
Scopely invested $50M into multiple European game studios, Pixel Toys, Omnidrone, and Tag Toys. Link
Led by Tencent and Hiro Capital, Keen Games raised a $10M Series B. Link
Jam City announced it would no longer go public by SPAC. Link

📊 Business:

According to PWC, the games industry grew 10% in 2020 and will grow 4.4% YoY through 2025. Link
Netflix shed light on its gaming plans, announcing it would start in gaming through mobile. Link
Garena: Free Fire has been downloaded over 1B times on the Google Play Store, the first ever mobile battle royale to do so. Link
Apple updated its terms of services to include a clause for Roblox or Roblox-esque, creator-based services. Link

🕹️ Culture & Games:

The state of California filed a lawsuit against Blizzard over ‘frat boy’ culture. Among botched game releases and discrimination, Blizzard is quickly losing external and internal community trust. Link
NFT-based Ember Sword launched an application for its pre-launch land sale. Link

👾 Miscellaneous Musings:

What social apps can learn from game design and monetization. Link
Gaming: a potential driver for blockchain adoption. Link
Netflix’s games won’t be the Netflix of games. Link

📚 Content Worth Consuming

Mark In The Metaverse (The Verge): “As June came to an end, Facebook CEO Mark Zuckerberg told his employees about an ambitious new initiative. The future of the company would go far beyond its current project of building a set of connected social apps and some hardware to support them. Instead, he said, Facebook would strive to build a maximalist, interconnected set of experiences straight out of sci-fi — a world known as the metaverse. The company’s divisions focused on products for communities, creators, commerce, and virtual reality would increasingly work to realize this vision, he said in a remote address to employees. “What I think is most interesting is how these themes will come together into a bigger idea,” Zuckerberg said. “Our overarching goal across all of these initiatives is to help bring the metaverse to life.” Link

Infinity Revenue, Infinity Possibilities (Not Boring): “But it’s not just about the money. Axie polled its players on their main motivation for playing Axie Infinity. 48% said they played for the economy, forming a solid base of people building livings on the platform, but 37% said that their main motivation is the community. That community mainly lives in Axie’s 549k member Discord server. It’s one of only a handful of Discord servers with over half a million people in the world. Until very recently, Discord didn’t even support communities over 500k people. Fortnite, for comparison, has about 800k. “ Link

The Creator Economy Comes For Gaming (a16z): “Like microtransactions before it, the growing ubiquity of modders — fueled by cross-platform tools like Overwolf and Mod.io, which allow game developers to build extensions and mods for thousands of existing games — has transformed the game industry’s traditional business model. Now we’re seeing the beginnings of the next phase of UGC: games that open up their platforms completely for players to create self-sustaining, user-generated worlds — with player-owned economies to match. “ Link