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Hi Everyone. Thanks for tuning in for another week of Naavik Digest. If you missed last week’s edition, we shared a quick refresher on the Table-Top Role-Playing genre and the open game license. Check it out and let us know what you think.

Learning from Love & Pies + Magic Eden’s Approach to Gaming

Caro Krenzer: Building Studios, Navigating Change & Fostering Inclusivity. In this episode, Caro Krenzer – co-founder and CEO of Trailmix, the company behind Love & Pies – joins Naavik co-founder Aaron Bush to discuss her origin story and what led her to found Trailmix. Caro dives into how Love & Pies pivoted away from failed mechanics to become a break success, and the lessons she’s learned about building inclusive games and companies. The duo also explore what Caro has learned from her time at King, her relationship with investor Supercell, and what’s on her mind next. Website | YouTube | Spotify | Apple Podcast | Google Podcast.

Investing in Web3 Gaming with Magic Eden. In just a single year since launching, NFT marketplace Magic Eden has grown to dominate on Solana, with over 85% of the trading market share, and increasingly taking share from OpenSea on Ethereum as well. In this episode, your host Niko Vuori talks to Zhuoxun Yin, Co-founder & COO of Magic Eden and Tony Zhao, who leads gaming investments at Magic Eden about why Magic Eden is pushing so hard on gaming, where they see web3 gaming trends going, and what the role of an NFT marketplace is as it relates to promoting and elevating games. Website | YouTube | Spotify | Apple Podcast | Google Podcast.

#1: Take-Two Reports Earnings

“Earnings season is back and with a bang — Take-Two’s stock plunged yesterday after the company’s revenue miss. From CEO Zelnick: “I am a bit surprised, it seems severe. But in fairness there's an awful lot of securities under pressure right now, particularly in the entertainment space..."

The narrative for this earnings report two-fold: 1) Although the Zynga acquisition has led to higher sales, Zynga's underperformance is the primary driver behind the lowered sales forecasts, which is why the stock is at 5 year lows. Zynga is the largest source of weakness right now, not strength; 2) GTA V unit sales slowed noticeably this quarter — it’s clearly time for another sequel.

Coming into this earnings season, Take-Two Interactive (NASDAQ: TTWO) remains one of the more interesting companies to analyze considering the recent Zynga acquisition and the company’s mobile strategy (despite not having released any major franchise titles in recent months aside from NBA 2K). Given Zelnick’s comment above, did he not foresee the negative impact IDFA would have on the Zynga business? How can the company bounce back? Let’s look through this quarter’s financial results to better understand the company’s strategy post-Zynga acquisition.

Financial Results

This quarter, the company showed 67% YoY net revenue growth, reaching $2.5B in Net Revenue, and 68% YoY growth in Net Bookings, which reached $2.5B. By the end of FY’23, the company expects to reach Net Revenue of $5.4B and $5.5B (they previously reported $3.5B in FY’22 and forecasted $5.8B to $5.9B in Net Revenue). Digging deeper into the financial statement, the company expects 45% of Net Bookings to be generated by Zynga by the end of FY’23, while 2K Games will account for 36%, Rockstar Games for 18%, and Private Division for 1%. Let’s look at all segments to better understand this more deeply.

PC & Console

The PC & Console segments showed a decline in both Net Revenue and Net Bookings. Specifically, PC Net Bookings decreased from $284.7m to $244m (-14.3%), and Net Revenue from $275.6m to $237.1m (-14%). Console segment Net Bookings had a slight decline from $1.22B to $1.18B (-2.9%) and Net Revenue from $1.198B to $1.16B (-3.3%). Sure, this decline is relatively small, especially with no recent huge releases; however, the overall PC & Console segment Net Bookings contribution shows a significant cumulative drop to 57.1% — diluted largely due to the addition of Zynga (from 88.5% in Q1-Q2’FY22). To be fair, this new diversity in Net Revenue contribution is what Take-Two was aiming for with the acquisition.

TTWO is mostly known as a PC & Console games developer with massive IPs in its portfolio such as Grand Theft Auto, Red Dead Redemption, Max Payne, NBA 2K, etc. During this year, the company has had quite a number of new games released, but these games’ performance have been incomparable with the major franchises of the company. One of the few high-profile releases was the launch of NBA 2k23 in Sep’22. However, apart from that, TTWO has shown several smaller titles during the last 9 months, including The Quarry (Jun’22), Rollerdrome (Aug’22), and Tiny Tina’s Wonderlands (Mar’22). All of those titles received an average score from 74 to 79 from players and the press, which is quite low compared to the outstanding 97 score for GTA V. There are still some releases expected by the end of the year, including PGA TOUR 2K23, Marvel’s Midnight Suns, and New Tales from the Borderlands (released in Oct’22 after the Q2’FY23 report).

The key franchise for the company is still obviously Grand Theft Auto, which faced a difficult period during the last 12 months. This all started with the tough release of Grand Theft Auto Trilogy (Grand Theft Auto III, Grand Theft Auto: Vice City, Grand Theft Auto: San Andreas), which was heavily criticized for its technical performance both from players and the press alike. However, TTWO has fixed nearly all major issues, and now the remasters look significantly better.

In Sep’22, the franchise faced yet another challenge — the early build of the upcoming and highly anticipated Grand Theft Auto 6 was leaked, while the game had neither a release date nor trailer. On one hand, all these mishaps surely had a negative impact on the franchise; on the other, both Grand Theft Auto Online and Grand Theft Auto V still perform as strong Net Revenue generators for TTWO. Still, TTWO revealed that GTA V sales performance slowed, reaching 170+ million copies sold worldwide (while 165 million was reported in an annual report for FY’22). Given Zynga’s underperformance, this could spell disaster for the company that historically has been reliant on these keystone titles.

Mobile

Zelnick specifically called out the problems with mobile in the earnings call: “reduced forecast reflects shifts in our pipeline, fluctuations in FX rates, and a more cautious view of the current macroeconomic backdrop, particularly in mobile”. Zynga (with seemingly the exception of Rollic) is suffering from the same headwinds that much of the games industry is battling against, namely the effects of IDFA.

Before the Zynga deal, Take-Two had already expanded into mobile gaming with several other acquisitions, including Social Point, Playdots, and Nordeus. Notably, all these TTWO mobile subsidiaries only generated 8% of Net Bookings in FY’21. In this quarter, mobile Net Bookings and Net Revenue grew to $1.67B and $1.69B respectively, compared to $195.7m and $197.4m in Q1-Q2’FY22 (a year ago). Furthermore, the Mobile segment became the main contributor in Net Bookings, with its overall share growing from 11.5% in Q1-Q2’FY22 to 43.4% this quarter. Despite how the numbers looked on surface-level( i.e increasing sales), mobile still underperformed as a whole.

In Oct’22, Take-Two also shut down Playdots (a mobile studio acquired in Aug’20 for $192m). We can assume that Take-Two stumbled to reach their mobile market expectations (laid-off employees were offered to find new jobs at Zynga, so to be fair this might be more of a restructuring). From a strategic point of view, it was crucial for TTWO to change the vector of its development cycles (Grand Theft Auto Online and NBA 2K series, with their GaaS monetization models, were the main drivers of the company's long-running successful financial performance), and expand its presence in the mobile market. TTWO is a games developer with a traditional way of generating wave-shaped Revenue by developing new games and selling them on a premium basis. Mobile is a way of diversifying that into a more stable revenue stream. This, however, has not played out for Take-Two this quarter.

In the near-term, Zynga will continue to underperform. Long-term, IDFA might further impact UA, but the company has a whole bunch of new initiatives listed above that to hedge against these market risks. This includes 87 titles in pipeline across mobile, console, and PC. Of course, this doesn’t change the fact that TTWO still needs to work on its 2K and Rockstar games pipeline, but the company now may feel way safer with a more predictable and reliable Revenue source coming from the mobile portfolio. It’ll take time to understand if this acquisition was worth it. (Written by InvestGame)

#2: Game Radar: Genopets, Cross the Ages, & Aurory

This is the introduction to a Game Deconstruction that was written by Anthony Pecorella that originally appeared in Naavik Pro. Be sure to request a demo to read the full write-up, and access our entire research library.

The last era of blockchain gaming — spearheaded by Axie Infinity and the broader play-to-earn (P2E) movement — was characterized by poor economic design and out of whack incentives, and it suffered from underwhelming gameplay, weak UX, and a slew of scams and thefts. The narrative focused on how much money someone could make by playing GameFi apps. The choice of the term “apps” here is intentional, as many of these projects were more Fi than Game. Users would be more interested in ROI than in playing the game itself. Even Sky Mavis founder Jeff Zirlin’s own survey showed this to be true.

Post-crash, however, the story is very different. Nearly every game whitepaper includes two primary assertions: “This game is about fun first” and “We will have a sustainable economy.” These talking points make sense as they are a reaction to two of the biggest problems with P2E games. But they also aren’t differentiation points; rather, they are now table stakes — necessary but not sufficient — for new web3 gaming projects.It’s clear that the honeymoon phase of crypto is over, and this is actually great news for players and investors.

Instead of relying on ten-figure valuations and FOMO to prop up their projects, blockchain game developers must now catch up to the current standards of game design and production. Development of a great game is a difficult task to begin with, and combined with integrating a new, rapidly evolving technology, it becomes a truly daunting one. Fortunately, some things are in their favor: fundraising has continued, tooling has improved, expertise has grown, and blockchain technology has advanced.

In this week’s game deconstruction, we’re going to look at a set of projects that represent this new frontier. A set of more promising, or at least hyped, games that aspire to rewrite the narrative on web3 games. Today we’ll cover Genopets, Cross the Ages, and Aurory, but in an upcoming post we’ll review new titles like Guild of Guardians and Phantom Galaxies as well. It’s worth noting these games are pre-launch, so we’ll evaluate them on several criteria - including Team, Tokenomics, Game Design, Fun and Sustainability.

Do these games have what it takes to hold up to the healthy skepticism and scrutiny that web3 now demands? Can they bring us into the next era of web3 gaming? Let’s find out.

Content Worth Consuming

• Activate Technology & Media Outlook 2023 (WSJ): “Major technology companies are leveraging their scale to acquire game publishers in pursuit of full-stack gaming capabilities. This is only the beginning for M&A in the gaming space, as we expect industry consolidation to continue… ‘Habitual Gamers’, which they define as “gamers who view gaming as their primary source of entertainment and follow gaming content online”, are “more likely to be male, younger, and higher- income, and they dedicate more time to gaming across multiple devices.” Link
• Creating Constant Content With Minimal Pain (Victoria Tran): “Creating consistent and constant social media content is something all folks, even the most experienced of us, struggle with. Folks often assume social media just “comes easily” to some people. While that may be true to a certain extent, it all comes with a ton of practice and observation. More often than not I’m staring blankly at my screen, hoping something funny comes to me.“ Link
• Game Monetization — Lessons to Learn For New Beginnings (MetaPortal): “This piece will be split into four sections: 1) Short History of Individual Web3 Game Monetization, 2) Upcoming ways to monetize (and their benefits!), 3) Monetization beyond Individual Titles/IPs, and 4) What are some general metrics to measure in web3 games for efficient monetization?” Link

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