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Half-Year Analysis: Games Industry Big Beats and Predictions — Roundtable

In this Metacast episode, Abhimanyu Kumar and Aaron Bush join Maria Gillies to discuss:

• M&A and Growth by Acquisition

• Market Cycle in Full Swing

• Crypto Gaming’s Second Wave

• Studios Founded by Diverse Teams

• Console’s Recession Resilience

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

#1: An Introduction To Blockchain Gaming Infrastructure — and How You Can Use It Today

Forte and Naavik recently teamed up to provide ongoing deep dives geared toward helping game developers better build, launch, and scale successful and sustainable blockchain games. This is the second essay in our series, written by Maxime Eyraud.

Designing and operating a game can be daunting enough in and of itself. Add to that the complexity of blockchain technology, and you're in for a wild ride.

In a recent essay, we shared an introductory framework that we think can help game developers make sound decisions when it comes to their game's architecture, design, and economics before diving head-first into blockchain’s potential. We believe making time to research the blockchain's nascent space and define your needs and priorities is a necessary first step to create compelling games that will not only attract users but also stand the test of time.

Fortunately, you don't need to reinvent the wheel. Using some of the blockchain’s most central and exciting attributes — namely decentralization, composability, and true digital ownership — you can tap into an ever-growing stack of chains, protocols, and applications to kickstart and scale your game’s development.

By the end of this article, you’ll have a good understanding of how blockchain gaming infrastructure works, how some of the most prominent titles in the space are using it today, which teams to work with, and how it can help you bring novel capabilities to your own game.

#2: Unity and ironSource Join Forces

Well, here's another game-changing deal for the industry. Unity (NYSE: U) announced a merger with ironSource (NYSE: IS). Unity will pay $4.4B in stock, which is a 74% premium to the 30-day average exchange ratio. To understand this deal, we’ll look at the background of both companies, plus the market context. But first, let’s have a look at the transaction details.

As a result of the merger, ironSource will become a wholly-owned subsidiary of Unity. Unity will own ~73.5% of ironSource shares and the current ironSource shareholders will own ~26.5% of the combined company. Key members of ironSource management will get leadership roles in the newly combined company, three boards seats for ironSource in the combined entity. Tel Aviv will also become a new hub for Unity. Once the merger is completed, the two largest Unity shareholders — Sequoia and Silver Lake — will purchase the convertible notes of the combined company for a total amount of $1B. Furthermore, Unity’s board also authorized a 24-month buyback share program of up to $2.5B. The deal is subject to shareholder vote at ironSource and Unity, and is expected to close in Q4’22.

Though Unity is primarily known for its game engine, which is one of the main entry points for mobile game developers worldwide, the vast majority of the company’s Revenue actually comes from its advertising network and monetization tools. In Q1’22, Operate solutions (ads monetization business of Unity) contributed 57.5% ($184M, an increase of 26% vs. Q1’22) to the total Revenue, while Create solutions (Unity engine) accounted for 36.3% ($116M, an increase of 65% vs. Q1’22) of the total Revenue. Unity’s business model relies on both building an app and monetizing it — the latter is the profitability driver for the company.

However, Unity has historically had trouble competing with top ads monetization companies like Google Admob, Facebook Audience Network, AppLovin, and Digital Turbine. It’s understandable that Unity — with its huge ad network — stands to gain from incorporating an ad mediation service — the tools for increasing ad revenue by centralizing access to multiple ad networks in one SDK integration, to determine which mediated network can fill the app inventory with the highest CPM (e.g. ironSource LevelPlay) — to compete. Unity had started building its own mediation platform, which is still under development; but the ironSource deal is a massive accelerant, bringing in existing clients (in the same way AppLovin incorporated MoPub). Moreover, the growth of the ads monetization segment that was driving Unity growth, has slowed down (the company has decreased its FY’22 Revenue forecast twice).

Ultimately, what’s important for Unity’s ad business is that ironSource is an ads monetization platform with deep expertise and lots of top-industry clients (it also operates its own gaming business, but we’ll get back to this later). The merger is a way for Unity to use the expertise of a more-experienced ads-tech player. For example, it can use ironSource technology and expertise from the already established mediation solution LevelPlay, while developing its own mediation platform in parallel.

Considering that both companies have similar technology and inventory, Unity may simply hand over some of its ads operations to ironSource. Why? For one thing, to pay more attention to its engine (and thus, to more strategic, and dare we say, metaverse ventures). The company clearly thinks big and wants Unity engine to go beyond the gaming industry: during 2021 alone, Unity had seven M&As, the largest of which was the $1.6B acquisition of New Zealand-based visual effects company Weta Digital (co-founded by Peter Jackson). And of course, don’t forget that ironSource is actually profitable, while Unity is not: this is a good addition to the P&L side as well, not just the synergetic one.

Why does ironSource need this? One reason would be to expand its audience, as of December 31, 2021 the company had over 5,500 customers, with, however, 95% of the company’s revenue stemming from only 358 customers. Another key point is that ironSource needs its LevelPlay to compete with AppLovin MAX, and Unity would be of great help here; as Eric Seufert aptly put it, “the combined company lays claim to a scaled mediation platform with more potential to gain market share — read: aggregate supply — than either company could likely achieve on its own.”

Surely, both companies envision plenty of synergy in the merger (continuous Creation & Growth with one integrated data set, better machine learning, a more balanced business model, etc.); yet, allow us to express some doubt. Unlike, for example, the MoPub and AppLovin deal, wherein both sides had unique tools and audiences, we’d argue that ironSource and Unity are usually used in the same market segments with the same publishers. If we look at app-txt files, in which every publisher is obliged to disclose how it sells its in-app traffic, we can see that both companies have almost the same traffic exchanges among their clients. Furthermore, though both companies have similar tools like ROAS optimization in their toolkits, they are considered to be tier-2 solutions, compared to, say, Google and Facebook. All this is to say the obvious strategy is around mediation and existing clientele until Unity bolsters the product suite with its own tools.

There is one more aspect to consider. In Aug’14, ironSource entered the game development industry by acquiring Israel-based mobile game developer Upopa Games. In Feb’20, ironSource opened Supersonic Games division to develop and publish hypercasual titles. After the Unity deal is closed, ironSource will be able to check the statistics of all the Unity-powered games, and this may not be the best trade-off for its clients due to the increased visibility (we cited a similar reason for AppLovin’s potential divestiture of its games division). Though game publishers might not like the idea of buying ads and mediation services from other gaming companies, it usually doesn’t stop them from using the working solutions. AppLovin is in large part a gaming company, but it doesn’t interfere with its ads monetization business. Moreover, the company decided to divide its gaming and ads businesses, moving Mopub clientele to its own AppLovin MAX mediation tool, simply having enough data from third-party apps to operate both gaming and monetization projects separately. It might not be a big concern, but it’s worth the callout.

Another probable reason for the market’s reaction is the somewhat controversial reputation of ironSource, as well as the scandals surrounding Unity lately — the company was criticized for false promises among indie game developers, was judged for supporting the gambling industry, and had laid off hundreds of employees just a month before the expensive merger with ironSource. Most recently, after the merger was announced, Unity CEO also hit the headlines with his harsh comments about the developers who don’t work on their monetization.

All this said, the outlook for the merger is bright: the newly combined company is expected to generate a run rate of $1B in Adjusted EBITDA by the end of 2024. The combined entity also forecasts an additional $300M in annual EBITDA because of the synergies in the third year after the deal is closed. As mentioned earlier, the business model is expected to be more balanced and should improve revenue flow to 50% from Create solutions and 50% from Operate solutions. A newly combined platform will offer a full set of tools to develop, monetize, and grow the project for the game developers.

To summarize, the merge solidifies both companies’ leading positions on iOS in the post-IDFA world. In theory, Unity and ironSource can create a single platform, which will combine best practices, and improve the user experience and campaigns’ efficiency. However, both companies are currently relying on Apple fingerprinting — if Apple shuts it down, this might turn out to be a big obstacle (which they’re likely hedging against). Considering also that there is a decent risk of described synergies not working at all, the deal might at the very least be a solid way to optimize the costs, combine the strengths, and survive the upcoming economic turmoil. (Written by the InvestGame team)

#3: Weekly News Round-Up

Magic Eden Launches A Venture Arm: The amount of ecosystem- and company-related venture funds in crypto is invaluable — tons of capital to seed emerging companies. In some ways, this derisks the venture model in the space: where funds like Solana Ventures and Magic Ventures leverage their venture arms as BD go-to-market functions (with potential upside, of course) and later-stage institutional firms can pick winners. I do wonder about what it means on a company level vis-a-vis commitment and signaling of taking capital from certain players, but I’m keen on tracking this burgeoning trend. It takes a village to develop a new ecosystem, after all, and this [the Magic Eden venture arm] is a net positive for gaming startups.

Microsoft and Netflix Partner on Ads: The TLDR here is that Netflix chose Microsoft to partner with on their recently announced, ad-supported tier. I mention it here only because Microsoft’s Game Pass is similar to Netflix’s subscription model, and there’s no doubt given Netflix’s subscription growth woes that Microsoft will have key learnings on audience and infrastructure. A good sign for both given Microsoft’s vast advertising partners. Microsoft’s mantra has been all about expanding accessibility to all gamers, globally, and an ad-supported tier helps fulfill that vision.

Nintendo Acquires CG Company, Renames to Nintendo Pictures: There are so many incumbent studios figuring out their transmedia strategy, how to expand IP beyond just video games. Sony, Riot Games, to name just a few, have successfully done this. And today, the focus for most studios is to create a flywheel for their IP. It’s hard to think of a stronger IP than Nintendo’s, and this acquisition signals a continued and intentional focus on a transmedia approach for the company.

PlayStation Will Launch A New Loyalty Program: Digital collectibles, loyalty points, and rewards galore. PlayStation Stars is a novel attempt at platform and ecosystem loyalty amid changing business models (e.g subscription & cloud) in the console space. It also demonstrates how deeply these companies are thinking about augmenting the player and consumer experience. Expect Xbox to follow suit with a similar offering, and for these loyalty programs to integrate deeply within their subscription plans.

🎮 In Other News…

💸Funding & Acquisitions:

• Unity and ironSource announced a ~$5B merger. Link

• FaZe Clan is (finally) going public. Link

• Nordisk Games acquired Supermassive Games. Link

• Edge raised $30M from Corner Ventures to transform gameplay moments into playable content. Link

• UnCaged Studios raised a Series A led by Griffin Gaming Studios. Link

• Magic Eden launched a gaming venture arm, a go-to-market for the company’s in-game marketplace feature. Link

• Nintendo acquired a CG company called Dynamo Pictures and will rename it to Nintendo Pictures. Link

• Spotify acquired Heardle. Link

📊Business:

• “Beijing has approved 172 new games since an 8-month gaming freeze ended in April. But not one single title from twin giants Tencent and NetEase.” Link

• Netflix and Microsoft announced a new partnership to support Netflix’s ad-supported subscription plan. Link

• PlayStation teased a new loyalty program, PlayStation Stars. Link

🕹Culture & Games:

• In collaboration with Hasbro, the NYT is converting Wordle into a board game. Link

• Diablo Immortal is already seeing a gray market. Link

• Minecraft is introducing new moderation tools. Link

• Embrace Group has a large archive of retro games. Link

👾 Miscellaneous Musings:  

• State of The Sandbox. Link

• Game Monetization — Lessons of History. Link

• Polygon’s list of the best video games of 2022, so far. Link

• Making subscription platforms work. Link

🔥Featured Jobs

• Soba Studios: Crypto Games Analyst Intern (Remote)

• Lotum: Game Designer (w/m/d) (Germany)

• Discord: Manager, Strategic Revenue Finance (San Francisco, CA)

• Hidden Leaf Games: Product Manager (Remote)

• Naavik: Content Contributor (Remote)

• Naavik: Games Industry Consultant (Remote)