Ukraine & The Games Industry

Welcome back to another issue of Master the Meta by Naavik. A quick reminder that we’re always growing our writing team. If you’re interested in having your work shared with thousands of executives, investors, and professionals from across the gaming industry, please reach out.

Roundtable #38: Can AI Tech Innovate Game Development?

In this Metacast episode, David Amor, Abhimanyu Kumar and Matt Dion join your host Maria Gillies to discuss:

Realistic Characters & AI for Virtual Worlds
Genshin Impact’s User Generated Content
Four-Day Work Weeks

If you’d like us to discuss any other gaming-related topics, do reach out at [email protected]. We’d love to hear your general thoughts and feedback, too!

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#1: Ukraine, Russia, and Video Games

Ukraine Games — *Source:* *The Limited Times*

Naavik never has been and never will be a political-driven organization, but it’s impossible to not speak about the devastating war in Ukraine, Russia’s threat to democracy there, the thousands of lives lost, and the millions of lives altered. To be clear, this write-up will focus on the war’s impact on the games industry, which has accelerated over the past week, but it’s just one minuscule piece of a broader conflict. Importantly, I’m no war expert or journalist, and I live on the other side of the world, but let me do my best to summarize where we are now.

This war has many emerging externalities on the games industry, but those who feel the most affected are obviously those in Ukraine. Not only is Ukraine home to many native studios — like 4A Games (Metro Exodus), Stepico Games (Guild of Guardians), Frogwares (The Sinking City), and GSC Game World (S.T.A.L.K.E.R.) — but it also hosts many larger companies — including Ubisoft, Playtika, Gameloft, etc. — that set up teams in the country. Plus, there are plenty of others who touch the industry in various ways (such as the team who codes up this very newsletter) that are also affected. From what I’ve seen, most companies have been doing a good job helping their teams stay safe, which is the #1 priority. However, when your country is being torn apart and you’re forced to relocate and prioritize safety, it’s bound to lead to disruptions and delays.

Of course, in response to the aggression in Ukraine, much of the world is pushing back economically against Russia. Obviously moves like sanctioning important Russian exports (namely oil / fuel) and banning Russia from much of the financial system are quite meaningful. This week we saw a rising tide of gaming companies backing away from Russia, too. Sony, Xbox, CD Projekt, Epic Games, Ubisoft, Electronic Arts, Bungie, Take-Two, Activision Blizzard, Rovio, Nintendo, and many others are no longer selling hardware, software, or services in Russia. Twitch no longer pays out Russian streamers, Google Play’s billing system no longer works in Russia, and every day more companies are exiting Russia. In effect, much of Russia’s gaming market has essentially been shut down. This does little to affect the war, but when paired with similar actions from other industries it increasingly removes Russia from the broader economy. Private and public responses are in interplay.

There will be other externalities in Russia, too. We may see a companies with offices in Russia — including Riot, EA, Ubisoft, and Plarium — shut down or relocate. Russian gaming startups will have a tougher time raising money, and Russian talent will likely get less global support and be forced to relocate or switch industries. It’s also realistic that the Western world will support Russian games less, and that Russian-native studios won’t get the same level of publicity or partnered support as in the past.

I don’t want to predict what comes next. Maybe escalations continue and the divide grows larger, or maybe deescalation is possible and the games industry slowly starts to welcome Russia back over the next many years. I don’t know. What I do know is that the Russian games industry was worth about $3.4B in 2021, which is about 2% of the global games industry. According to IDG Consulting, $1.4B is mobile, $1.2B is PC, and a little over $800M comes from console. Crippling the Russian games market will lead to a noticeable loss of business (definitely by some teams more than others), but it won’t make a meaningful dent for the big companies pulling out. Of course, that doesn’t mean the Russian games industry can’t continue to evolve, but when console platforms don’t work and systems like Google Play are shut down (not to mention a decimated currency, stock market, and broader economy), it becomes more difficult.

I understand why many industries are increasingly isolating Russia even if it doesn’t directly impact the war on the ground. That said, in my opinion not selling games to Russia doesn’t accomplish much, and there are other ways to support those in need. For example, over the past week we’ve seen many games companies show monetary support to organizations actively supporting those who need it. 11 bit studios raised $850k for the Ukrainian Red Cross; Ubisoft donated money to a handful of non-profits and set up a fund to support its Ukrainian teammates; Supercell is donating €1 million to the UNHCR (United Nations High Commissioner for Refugees); Riot will donate proceeds from battle pass sales for a week; and many more companies are jumping into the fray. For those with the means to support, consider joining. Additionally, one easy way for individuals to support is through Itch.io’s Bundle for Ukraine; for a minimum of $10, you can receive nearly 1,000 gaming-related products, and all proceeds go to charity.

The games industry is at its best when it tears down borders and creates unity around shared experiences, not when it’s involved in division and geopolitical conflict; hopefully, we can move toward more peaceful days soon. (Written by Aaron Bush)

#2: Thatgamecompany Raises $160M

If you’ve never played Sky: Children of Light before, now’s the time to download it. It’s one of those games that completely transformed my perception of social interaction and community in digital spaces. It’s also a beautiful and peaceful game. I’d argue that the studio behind the game, thatgamecompany, has done more to push video games as an artistic medium than most other game studios. And indeed, with the company’s latest $160M round from Sequoia and TPG, it has every intention to continue pushing the bounds of video games as artistic innovation and digital interaction. With this latest round, Ed Catmull, the cofounder of Pixar, also joins as a “principal adviser on creative culture and strategic growth”.

Ukraine Graph — *Source:* *SensorTower* *| Downloads over time. With 160M total downloads across Switch, iOS, and Android, Sky has by far been the company’s most successful title.*

Talented game reviewers and writers have written about this studio’s history and approach to game development: it started with three exclusive titles on Sony platforms (including indie-hit) Journey, with spiritual successor Sky opening a new chapter in the company’s history. There’s a lot that makes this company special.

One metric in particular stands out: after four years “about 50% of the Season Pass sales were gifted from one player to another, and over 22% of the revenue of other merchandise is also gifted”. To put this another way, the company has generated 10’s of millions of dollars through gifting. I’m struck by this player behavior that the studio has managed to tap into – it’s so unique to me the notion that community members are supporting one another, keeping each other engaged, and nurturing connection through in-app purchases. Do we see this in other games? To be fair, some of this might be uniquely geographical (most of Sky’s commercial success comes from China, after all) but it still indicates that they’re onto something.

This game shows that community — at the earliest innings of onboarding to the latest stages of live ops-driven retention — can be a significant determinant to a game’s longevity. In this newsletter, we so often talk about marketplace behavior – Roblox, NFTs, Valve’s community markets, and the like – and in-app cosmetics or battle passes as a way to drive revenue. But for gifting to play such a large role in the title's expansion teaches us a different story. If you create something that "emotionally appeals to people of all ages, identities and backgrounds within a single experience” you might be able to develop a different, yet equally effective, method of sustaining a game long-term.

Today, Sky: The Children of Light’s audience is 70% woman, and the game generates consistent monthly revenue. In the future, who knows what sorts of playgrounds thatgamecompany will build for its demographic. For the studio, the focus will surely be on creating superb content and cross-platform experiences, art, and community, but with the addition of Pixar’s cofounder, there will also likely be a strong emphasis on content in video game adjacencies. While there have been a few notable departures in the studio’s tenure, including lead designer Chris Bell who formed his own studio, thatgamecompany should have no problem continuing its stride with this funding round and an exodus of talent from legacy players. (Written by Fawzi Itani)

🎮 In Other News…

💸 Funding & Acquisitions:

Immutable raised $200M at a $2.5B valuation. Link
Griffin Gaming Partners announced a $750M fund. Link
Makers Fund closed a $500M fund. Link
SciPlay acquired Alticus for $100M in an all-cash transaction. Link
Loco, a games streaming startup, raised $42M from Hashed and Makers Fund. Link
Lightforge raised a $15M Series A led by BITKRAFT. Link
Studio 369 raised $15M through a private token sale. Link
Niantic bought 8th Wall to level up its AR offering. Link
Tiny Rebel Games raised $7M. Link

📊 Business:

A graph on MAUs across platforms: Steam, Epic, PS, Xbox. Link
Bytedance is partnering with Qualcomm for XR. Link
According to Sensor Tower, half of the top grossing mobile games used a season pass. Link
After Steam Deck announced that it would support Windows, Stadia hinted it might do the same. Link

🕹️ Culture & Games:

Lots of games companies are temporarily removing their games from Russian markets. Link
Bandai Namco will reportedly spend $130M creating a Gundam Metaverse. Link
Prime Video is in talks to produce a live action TV show of God of War. Link
Polygon’s list of best games of 2022, so far. Link

👾 Miscellaneous Musings: