How Xbox is Building its Gaming Universe

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The Metacast Episode #4

In Roundtable #4, Nico, Manyu, Florian, and Matej discuss:

First Time User Experience (FTUE); what HD/Console game developers can learn from mobile games’ best practices
The future of cloud gaming and Massive Interactive Live Events (MILEs)
Trends in the development of Ad Creatives

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#1: Xbox Everywhere

Xbox Earth — *Source:* *Wallpaper Access*

There is no better way to start this blurb than stating Xbox’s mission - “Bring the joy and community of gaming to everyone on the planet”. To achieve that, Microsoft aspires to empower everyone to play the games they want, with whomever they want, when they want, and where they want. What that means and as we’ve discussed before here and here, Microsoft is building a cross-platform ecosystem with Xbox Game Pass (XGP) as the centerpiece. The strategy is starting to click:

- Q1 2021 gaming revenue jumping +50% YoY, driven by hardware (+232%) and content and services (+34%)
- XGP subscribers almost doubling YoY to 18M, as of January 2021
- XGP improving engagement with members playing +30% more genres, +40% more games, and partners like EA Play seeing an 8x engagement increase
- XGP improving discoverability with >90% members playing a game they wouldn’t have otherwise
- XGP improving monetization with members spending +50% more vs non-members

It’s impressive, but what’s next? Well, ahead of Microsoft’s first-ever Xbox and Bethesda Showcase, Phil Spencer, Head of Xbox, and Satya Nadella, Microsoft CEO, discussed three key strategies that Microsoft is pursuing to continue to build towards their massive mission -

1. Increase the subscription value of XGP
2. Build out the future of xCloud within XGP
3. Focus on empowering creators

Increasing the Subscription Value of Xbox Game Pass

On tracking the evolution of XGP since its launch in 2017, it’s clear that Microsoft is focused on driving subscription value in three ways.

1. Growing content: 100+ game library + EA Play included + instant access to new games from a growing portfolio of first party studios and major acquisitions
2. Growing functionality: Including multiplayer and all the benefits of Xbox Live Gold within XGP Ultimate + building out new functionalities
3. Growing accessibility: Games can be played across console, PC, mobile and tablets

Growing all three continues to be a key focus moving forward with a target to release at least one new, first-party game into XGP every quarter across its 23 first-party studio portfolio. Further, new XGP subscription offerings are being introduced to accommodate for a wider potential market across geographies and financial realities. Also, new purchasing models (“Xbox All Access”) are being designed that allow consumers to buy both a console and XGP for a low monthly price, rather than spending money upfront. Put simply, Microsoft wants to ensure the widest possible audience has access to all its new upcoming content through XGP. This makes sense and is almost a no-brainer given how content and services make up ~80% of Microsoft’s gaming revenues, continuing to drive a majority of the vertical’s growth.

Building out the Future of xCloud within XGP

Where things get really interesting though is how Microsoft is thinking about further growing accessibility. According to the announcement:

- Xbox is working with global TV manufacturers to embed the Xbox experience directly into internet-connected televisions with no extra hardware required except a controller.
- Xbox is building its own streaming devices for cloud gaming to reach gamers on any TV or monitor without the need for a console at all.
- Cloud gaming through XGP Ultimate will launch in Australia, Brazil, Mexico, and Japan later this year.
- Cloud gaming on the browser will open to all XGP Ultimate members.

In a nutshell, Microsoft understands that services have a larger audience than consoles. But in an effort to do both, they are clearly envisioning a device-agnostic future that not only expands the TAM, but also allows this TAM to plug int Xbox’s ecosystem through XGP and the devices they already own. There are many advantages to Xbox shifting its center of gravity like this.

1. The longer-term revenue mix will move towards high-margin, recurring revenue.
2. The larger TAM will further incentivize third-party studios to choose Xbox.
3. Existing Xbox gamers will gain more flexibility - carrying the game where they go.
4. A subsection of the TAM will not have the costly adoption barrier of buying a console.
5. There is a chance that non-console/PC gamers will finally start seeping in.

Further, since cloud gaming access is already available within XGP Ultimate, it underscores why XGP will continue to grow as the centerpiece of this entire strategy. Even though performance on consoles will remain the best for the foreseeable future, it would be safe to assume that cloud streaming technology will also keep getting better moving forward. This automatically means that cloud gaming incumbents (Google, Nvidia and Amazon) will not need to build a console hardware business to compete with Microsoft, PlayStation and Nintendo for a slice of the gaming market. But they will need content. This in turn puts a lot of pressure on today’s trifecta to build towards a device-agnostic future, while making sure that each of their content libraries run deep and are attractive to consumers. This also likely explains Microsoft’s efforts to build a content moat through an increasing portfolio of first-party studios. In other words, while all cloud gaming providers may reach technological parity longer-term, content, functionality and accessibility differentiations will ensure the leaders a seat at the hub of gaming’s evolving distribution value chain.

Chain — *Source:* *Lazard Asset Management*

Focusing on Empowering Creators

While Microsoft was quite nebulous about this, there were two key points that give insight.

1. The independent developer program ID@Xbox has earned developers over $2B dollars since the program’s inception, with over 2000 titles launched and many more on the way. This model is now being used for ID@Azure, allowing independent devs to build cloud-based experiences.
2. Nadella said, “I believe we will need that virtuous cycle between content consumption, commerce driven by communities for everything we build… That’s why I’m so excited that so many games are evolving into these metaverse economies and societies, just like Minecraft, right? It’s one of the leading platforms in the creator economy… In fact, creators have generated over $350 million from more than one billion downloads of the mods, add-ons and other experiences in the game [Minecraft].”

Well of course Microsoft spun this into buzzwords like creator economy and the metaverse, but to me it mostly comes back to the previous point about content, functionality and accessibility differentiations being key to winning in the longer term services-driven and device-agnostic world. As I wrote before here, creator-driven content like game mods greatly increases the shelf-life of a single title, while extending the engagement long-tail of communities built around these titles. So if Microsoft wants to multiply the business impact of its growing content library, it’s definitely in its best interest to enable the creator communities around those content portfolios with the right tools and services. I’m personally excited to see how Microsoft further activates the modding scene.

All in all, Microsoft definitely seems to be playing the right longer term moves. When comparing it to PlayStation, it’s a new, orthogonal strategy with uncertainty, but it’s poised to build uniquely strong competitive advantages if it works. A device-agnostic world where both consoles and cloud gaming ecosystems co-exist feels like the immediately viable future, but who knows — maybe the very long-term future is no-console, and Microsoft will have its bases covered by then. As always, the gaming industry continues to remain ever evolving and it will be fascinating to see how it all plays out. (Written by Abhimanyu Kumar)

#2: Stillfront Acquires Crush Them All

Stilfront Group’s M&A streak is red-hot this year, with this week’s acquisition of mobile idle RPG Crush Them All, developed by US-based mobile games developer Godzi Lab. The acquisition is structured as an all-cash acquisition since all its assets and liabilities relate solely to the game.

This will be the third (and probably the cheapest) acquisition the company has announced this year: earlier, the company acquired Moonfrog Labs ($90m) and Game Labs ($9.75m upfront). It also closed the acquisition of Super Free Games ($79m upfront), which was announced at the end of 2020.

What’s behind the deal? Crush Them All was released in 2017 on iOS/Android, and since has been downloaded more than 7.7m times (according to AppMagic). Notably, the peak of downloads came nearly two years ago in Dec’19, when the game saw 281k downloads. According to the press release, the game currently has 250k MAU (a far cry from their peak) with almost $13m bookings for the last 12 months. Other games developed by Godzi Lab, however, have not been received as well as Crush Them All, and currently generate less than 10k downloads a month combined, so Stillfront is walking away with Godzi’s most important asset.

With this deal, Stillfront continues to implement its active inorganic M&A growth strategy. After two major deals in Q1 & Q2, the acquisition of a small Godzi Lab doesn't look strange — the company is increasing its presence on the mobile market, adding another long-life cycle title in its pipeline. With Stillfront's current audience and experience in expanding games, Crush Them All could become a more profitable and popular product, operating under Stillfront’s subsidiary Imperia Online to scale current live-ops and UA capabilities. Furthermore, for Stillfront it’s also a win-win situation, as the company added a live product with a big space for growth. Last year, Stillfront announced six acquisitions; we have already seen three this year and have every reason to expect more. (Written by Andrei Zubov and Vladimir Sergeevykh from InvestGame)

#3: GameStop’s Revival?

Here’s a funny tidbit I’ve learned about business: “One or two incredible pros can make up for a long list of cons... and one or two brutal cons can make a long list of pros meaningless. Either way, usually only a couple key points determine 99% of an outcome.”

Regarding GameStop, in previous editions I was right to call out the incompetence of previous management and the perils of failing to reinvest. I was also right that they needed to reduce store count, that the old business model would fade away, and that the company wasted precious time and resources on acquisitions and in-store strategies when it should’ve focused on a customer-obsessed omnichannel approach (which was still questionable). And I was right that the effects of the Reddit-fueled craze would burn a ton of people. I had lots of correct assumptions … but still ended up wrong (at least so far)!

My key mistake was ignoring the possibility of reflexivity — a circular cause-and-effect relationship where winning begets further winning — which is all that ended up mattering. More specifically, I failed to foresee GameStop become a Reddit-fueled financial meme. Technically being a meme reflects nothing fundamental about a business, but in this case it changed everything about GameStop’s business.

It allowed a dying company to raise capital from the public market at incredible terms. This capital strengthens the company’s balance sheet and provides capital to reinvest in ways that were impossible before. This change also makes it possible to attract talented and relevant leaders who benefit from shares being worth more. Having talented leaders makes a “turnaround” — digitizing and reorienting a decaying physical retail business — a bit less of a long shot. And being less of a long shot justifies a larger market cap, which means it’s likely GameStop will raise more money from the public market again. It goes full circle.

And it’s kind of working. This quarter, sales rose 25% year-over-year despite a 12% reduction in store count (although COVID comps make it tricky). Plus, costs have fallen, which led to shrinking operating losses. And as a result of raising capital, the company’s net debt dwindled. Perhaps most noteworthy, though, is that GameStop just onboarded a new CEO and CFO who both hail from Amazon, marking the first time that GameStop’s been led by a truly digital-first team.

Of course, we’ll see where things go from here. Turnarounds typically fail — not all disrupted companies make sense to be saved — and GameStop is now a small fish in a big pond. Also, who’s to say being a meme will continue? If not, scrutiny will increase, and non-Redditers are a tougher crowd. As I learned on Twitter this week, this was GameStop’s fourth quarter in a row with a double-digit stock decline post-earnings, and 10 out of the past 11 quarters saw down days post-earnings. In other words, despite the ceaseless noise results can be sobering.

All that said, props to Ryan Cohen — Chewy founder turned investment activist who now leads GameStop’s board — for catching lightning in a bottle and making the most of a tough and wild situation. There’s a wacky mix of luck and skill involved, and GameStop needs much more of both to truly be revitalized. However, perhaps the real moral of the story is never to underestimate the power of memes. (written by Aaron Bush)

#4: Digital Collectables & The Dream SMP

Matt’s piece last week on MILEs made it clear for me the importance of non-direct participation of communities in games: viewing, spectatorship, UGC, Discords, MILEs, etc. What does it mean to “participate” as a spectator? How do you nurture community if you are a spectator and not a player? And how does one create spaces of interactivity between the two?

One immediate thought that pops into my head is the power of digital collectives in fostering non-direct participation: streaming collective “Offline TV and Friends” with their Minecraft / Rust / Valheim servers and Dream SMP with its popular, narrative-driven Minecraft server. There are a few unique characteristics of these collectives:

The ability to synchronously view a variety of creators, hopping in and out of various streams to get unique perspectives
Interactions happen digitally vs. IRL
They all play the same game, be it async or sync
Gated access to their in-game community to select members

As a result, these collectives have the sway and reach to bring games into popularity just by playing them together. In fact, “Dream SMP” (which sees a stable cast of 34 players) saw 2B views in May alone. Another exmaple is Valheim which sold 5M+ copies, becoming a hit after Offline TV and a group of Spanish-speaking streamers helped popularize it. In these cases where the collective plays the same game, the spectator doesn’t want to miss any of what happens because presumably a lot of their favorite streamers are on at the same time. However, I suspect there are more important cultural forces at play than distribution and play. Let’s dig into the Dream SMP as a brief case study.

To most players, Minecraft is a game of gathering resources, speedrunning, survival, and hanging out with friends on a vanilla server. To anyone who keeps tabs on the Dream SMP, Minecraft is also a TV show, a serialization, a play, and a role-playing community. Earlier this year, Cecilia D’Anastasio wrote: “The spectator sport is in analyzing how, given the limitations of game mechanics, players coordinate and improvise narratives. Even in a slow, creative game like Minecraft, the artists see limits where others don’t, and don’t see limits where others do.” In adapting Minecraft into a new form of watchable stories, Dream SMP has broken the limits of the game.

Notably, Dream SMP is also a vibrant UGC community that tracks the lore, events, dialogue, actions and minutiae of the happenings in the server. What has necessarily resulted is a post-modern milieu of content: reaction videos, a Fandom page so long it warrants its own website, fan art and fan fiction, and reaction videos to reaction videos by the Dream SMP members themselves. I think one important strand to draw from this is the vast attention that these digital collectives can command. In lieu of playing video games, or watching Netflix or TikTok, people choose to participate with these digital collectives by responding back with their own forms of content. In effect, collectives like Dream SMP compete for attention with the strongest IP in the world like Game of Thrones.

I’m so curious to see how these cultural forces will continue to manifest. We’ll probably see a push by developers to create more social game experiences. But before that, what if collectives start to gatekeep content, allowing access into their servers? Or if they partner with developers to create proprietary mods, popularize them, and then release them to their own communities, effectively releasing their own games? Or even: what if games partner with these collectives for marketing pushes? These possibilities are very exciting and I’m eager to see more collectives take advantage of them. (Written by Fawzi Itani)

🎮 In Other News…

💸 Funding & Acquisitions:

In an effort to enter the adtech market, Voodoo will acquire Bidshake. Link
Sina Group is looking to purchase an 18% stake in Yoozoo Games. Link
Mythical Games raised a $75M round to continue building out its NFT-based game, Blankos Block Party. Link
Oculus announced an acquisition of Bigbox VR, makers of Population: ONE. Link
Working to gamify the mall and shopping experience, Electric Gamebox raised $11M. Link
Turkey-based Veloxia and Hungri Games raised $3M and $1.1M, respectively. Veloxia | Hungri
Phoenix Games purchased a minority stake in Midoki, which makes the game Knighthood. Link

📊 Business:

Roblox is facing a $200M copyright infringement lawsuit from music publishers. Link
Xbox announced a Xbox TV app and xCloud streaming stick. Link
Jim Ryan of Playstation interviewed with Axios: “I would say unequivocally that we are competing for leisure hours, and that any definition of competition has to extend way beyond the boundaries of what has traditionally been defined as gaming,” Link

📜 Culture & Games:

Anything World and WMG partnered to make a Temple Run-esque game called Pink Sweat$. The musician is experimenting with emergent forms of media to propel his brand and music (Spotify Premium required to play). Link
Twitch updated their emotes. Link
Summer Game Fest kicked off this week. Link

👾 Miscellaneous Musings:

Sensor Tower released an analysis on the growing popularity of Zombie puzzle games. Link
The NYT examined why Hollywood is turning to video games for new hits. Hint: it has something to do with streaming services and IP. Link

📚 Content Worth Consuming

The Creator Economy: How We Got Here, And Where We’re Headed (BITKRAFT): “At BITKRAFT, we have keenly observed these waves of change affecting creators. Never before have creators held the power and influence that they do today, and we believe that this power shift will only accelerate as more investment flows into supporting the new Creator Economy. We see two important trends underpinning this momentum that will ultimately propel the industry [gaming + creators]: 1) The ongoing shift from platform dominance to direct-to-consumer models, with audiences following their favorite creators across multiple platforms and 2) the convergence between creators, entrepreneurs, and investors.” Link

The Virtual Economy Technology Radar (L’Atelier). “We have developed the Virtual Economy Technology Radar, an interactive map of 54 key emerging technologies underpinning the Virtual Economy — their current capabilities, likely trajectory, and research ecosystem. From augmented eyewear, through connected infrastructure, to digital identity, the Virtual Economy is on the cusp of a massive, rapid and pervasive expansion into our day-to-day existence.” Link

Designing Digital Economies (Colossus): “Gabe Leydon is the co-founder and former CEO of MZ, the company behind hit games such as Mobile Strike and Game of War. We cover why great design can actually be a bad sign, why he believes NFTs will create billionaire influencers, and how different cultures design games.” Link

How to Deconstruct Games Better (Department of Play): “The process of deconstruction can be fundamental in defining the success and quality of your next game project. As such, understanding the process of ‘deconstruction’ could be considered a key skill within game design, yet it is so often misunderstood or given passing attention. Viewing a game through a deconstructive lens lets you build a mental model of the title being considered, including its function, successes, failures, and the behaviours it inspires in players.” Link

Thanks for reading, and see you next week! As always, if you have feedback let us know here and please subscribe if you enjoyed this edition.