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Zynga first expressed interest in web3 gaming well before it was acquired by Grand Theft Auto publisher Take-Two Interactive, but many speculated these ambitions might have been derailed by the general slowdown in mobile and the blockchain space. On August 14th, however, the company announced what its internal web3 team, ZW3, has been quietly working on with the reveal of a project called Sugartown. 

By intentionally distancing its name from the project, Zynga is allowing Sugartown to earn recognition on its own merits while also managing expectations on the road toward a robust launch. According to recent statements from Zynga web3 chief Matt Wolf, the project has been in development for 18 months. This timeline suggests work on Sugartown began shortly after the Take-Two acquisition announcement.

Now that the project has been publicly unveiled through interviews, articles, a website, and a Discord channel, there is increasing pressure for greater transparency from the team. However, as is common with many web3 projects, there is an intentional mystery created along with a slow trickle of information to maintain interest. To be clear, Sugartown is not a game. Rather, Zynga is describing Sugartown as a transmedia IP and a platform for both games and community building. 

This approach should resonate with anyone familiar with the evolution of Yuga Labs projects like the Bored Ape Yacht Club, which transitioned from a simple series of NFT monkey images into a multifaceted IP universe encompassing multiple NFT projects, stories, games, animations, merchandise, and even a so-called "metaverse" experience. So far, Zynga has mentioned an upcoming NFT release called "Oras” and also hinted at a game experience that will incorporate ownership and staking of these NFTs.

Interestingly, Sugartown is incorporating existing Zynga IP into its narrative by featuring three characters from Farmville alongside a new character, Mel, as the mayor of Sugartown. The promotional animations and website have begun to flesh out the concept of the IP, which not only bears a strong resemblance to Yuga Labs' aesthetic but also includes direct references to Yuga IPs such as Bored Apes and the Otherside. We've seen Yuga Labs partner with other web3 gaming projects, and it looks like that might also be the case here. But that alone doesn't guarantee success for Sugartown, as we’ve seen in the past with regard to Yuga’s involvement with nWay’s Wreck League, which failed to sell even half its mint. 

Zynga has not released details about the exact mechanics of minting Ora NFTs, but it was recently clarified that the mint would be free. Zynga has already initiated a whitelist for the mint, based on participation in Twitter and Discord, which is expected to be in high demand given the free minting. A method some games have employed to manage the number of bad actors for high-demand free mints is to use KYC (Know Your Customer) verification, which is a practice Yuga Labs has employed for past mints, but it does often limit the pool of potential buyers. 

Zynga has not mentioned any KYC requirements, but it did specify the mint will be available only in five specific countries, likely for legal reasons: the U.S., Thailand, Vietnam, the Philippines, and Indonesia. While Zynga has not provided a specific date for the mint, it has indicated it will be "later this year" and will adhere to the web3 standard of 10,000 NFTs.

The most information we've received about the first game to be part of the Sugartown platform is that it draws inspiration from Zynga's classic Farmville. Players will stake Ora NFTs to gain in-game energy in the form of an off-chain resource called "Sugar," which is needed to play the game. Contrary to Zynga's typical free-to-play user acquisition strategy, this approach will initially limit the game to a maximum of 10,000 players. 

However, this isn't a typical Zynga game, considering many team members come from a web3 background or at least are enthusiasts of the culture. Zynga has had job listings for various web3-related roles open on its website for some time, and positions such as director of engineering, lead producer, and marketing asset producer in web3 are still available. A deep understanding of web3 culture is essential, as Zynga has made it clear the initial target is the web3 community, with broader user acquisition to be considered only at a much later stage.

In line with the majority of web3 projects, community engagement is the focal point of Sugartown. Rather than prioritizing product placement on physical or digital storefronts, web3 initiatives typically focus on cultivating a dedicated and engaged community through platforms like Discord, Twitter, and other social channels. This is often done in advance of any product release in order to gain immediate traction and sustain hype, although it requires keeping the community engaged during quieter periods. 

Zynga has already implemented the standard playbook of Discord activities, including poker nights, art contests, and various giveaways. Despite the team's experience, this approach hasn't been without its challenges. For instance, accessing the active channels on Discord required a password, and the initial password distributed to the community turned out to be incorrect. This led to a flurry of desperate replies and some unwelcome negativity before the issue was eventually resolved.

The ZW3 team has commended Zynga's leadership for granting them independence and autonomy in developing Sugartown, although it's unclear whether this freedom will extend all the way up to Take-Two’s C-suite. Currently, most web3 games lack a robust business model for ongoing revenue, and Zynga has yet to articulate one for this project. During a Twitter Spaces discussion, the free-to-play monetization model was mentioned, and while Zynga also acknowledged this model might not be attractive to the web3 community, it wasn't entirely ruled out. The difficulty is in finding a reliable and nonexploitative business model to deploy, especially after Take-Two paid such a large price tag for Zynga. There is a pretty huge risk this project ultimately won't move the needle for such a large company, especially with a future GTA installment looming. 

Secondary market royalties can be difficult to enforce while maintaining liquidity in the market due to the need to limit available marketplaces. At only 10% or less per transaction, the royalty business model alone also isn’t enough to sustain most web3 projects, as it relies not on selling something to your target customer, but rather on customers flipping sales in pursuit of profit. While Yuga Labs, for example, has no doubt made some profit from royalties on its extremely high-priced NFTs, it's also unclear what the company has spent on marketing, especially when including celebrity endorsements. 

Making a profit the way Zynga traditionally does, using direct in-app monetization, may not work well in web3, which has far more friction for the type of small impulse purchases that often fuel mobile revenue growth. Realistically, no one has yet to demonstrate a sustainable web3 business model for Zynga to emulate. The only way this project will likely demonstrate any reasonable level of monetization is by leveraging the IP in non-web3 games distributed through mobile app stores or by later on turning Sugartown into the kind of brand Zynga can sell merchandise for. If the ultimate strategy is to treat this as a user acquisition play for future games, then the key will be converting brand awareness into future players.

There's evident conviction from ZW3 about the future of web3 gaming, which is understandable given the background of the team. However, questions from higher-ups about when this future will materialize are bound to arise. Zynga is no stranger to betting on emerging platforms; the company rose to prominence through its early investment in Facebook gaming. Focusing on an exclusive web3 audience may seem at odds with Zynga's traditional mobile gaming funnel, but the ultimate target audience remains the same: high-spending users, or "whales” in mobile gaming parlance. 

The exclusivity of projects like Sugartown limits the audience to both those with deeper pockets and those who may be more prone to impulsive financial decisions. Ultimately, this type of project isn’t really about gaming, but rather about trying to build a brand around web3 influencers and monetizing community engagement. Based on the company’s public statements, there isn’t a clear plan of execution, as the project is meant to be reactive to the community and supported by Zynga’s heavy use of analytics.

Limiting a project's audience to a smaller, potentially wealthier base doesn't guarantee success, especially given the resellable nature of NFTs. If the audience isn't consistently engaged, retention can be challenging. Fortunately, the team has emphasized its live ops approach to this project, an area where Zynga has considerable experience. There are other experienced competitors, notably DigiDaigaku, which is primarily staffed by former Machine Zone employees. But that project has demonstrated how a lack of sustained activity can quickly diminish interest, as evidenced by the rapid decline in DigiDaigaku trades following a high-profile Super Bowl commercial that failed to maintain momentum. 

On a positive note, Zynga said the release of the first game will follow closely on the heels of its Ora NFT mint. That game will be the first real test of interest in Sugartown, with Yuga Labs’ high-profile web3 gaming endeavors as the benchmark to compare against. Despite Zynga’s reputation,  it’s unlikely any such release will hit anywhere near Yuga Labs’ metrics with the web3 native audience. This isn’t the type of project that brings a game company back to relevance and certainly isn’t similar to Zynga transitioning from Facebook games to mobile. 

In that context, Sugartown can be seen either as an exploratory learning experience for Zynga or a hopeful future brand, but probably not a profitable web3 success story in the making. Regardless, the public commitment of such a large and well-funded company to the web3 space is likely to leave a lasting impact on the future of NFT gaming culture. 

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This post appeared in the Tuesday, August 29th version of Naavik Digest. If you enjoyed it, please consider forwarding it or sharing the piece with your followers. Also, remember to subscribe to Naavik Digest here.

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#2 Gaming Market Update: August 18th – August 25th

By Mario Stefanidis, CFA, Naavik Contributor

• For the week ending August 25th, 2023: The average return for gaming companies tracked by Naavik with a market capitalization exceeding $500 million was -1.1%. The S&P 500 returned 0.8% and the Nasdaq-100 returned 1.7%. Full access to the Naavik Gaming Company universe is available here. 
• Ubisoft (EPA: UBI) rose 4.5% after signing a 15-year cloud game streaming licensing deal with Microsoft. Concerns from the U.K.'s Competition and Markets Authority (CMA) about the potential impact of this acquisition on cloud game streaming led Microsoft to restructure its acquisition of Activision Blizzard. The deal gives Ubisoft the rights to all current and forthcoming Activision Blizzard PC and console games that otherwise would have made their way to Xbox Cloud Gaming. Ubisoft will compensate Microsoft for these rights through an initial payment, followed by a wholesale pricing system based on usage statistics. As a result, Microsoft believes its acquisition has changed materially and filed additional documents with the CMA, aimed at closing the deal in the country before the previous October 18th deadline. While Ubisoft stock initially rose over 10% on the announcement, it pared over half of the gain later in the week as investors mulled the terms of the transaction.
• Embracer Group (STO: EMBRAC-B) stock fell -16.9% after the Swedish gaming holding company reported Q1 FY 2024 earnings. The results, for the most part, showcased improvement, with net sales increasing by 47% inorganically and 20% on an organic basis from the same quarter a year ago. EBIT also swung positive as a result of recent restructuring and cost-cutting efforts, from SEK -398 million (-$36 million) to SEK 421 million ($38.1 million). However, the mobile games segment saw revenue fall -12% organically due to numerous headwinds. For one, ad prices were lower year-over-year as a result of IDFA changes, lower player engagement, and “macroeconomic factors.” Furthermore, Embracer sacrificed top-line growth to shore up profitability, noting that “lower user acquisition investments in recent quarters” were a response to “new market circumstances.” The company reaffirmed its guidance for FY 2024 adjusted EBIT for between SEK 7 billion to SEK 9 billion. With a market capitalization of SEK 32 billion and SEK 17 billion of net debt as of August 25th, this places the publisher’s enterprise value to earnings multiple at 6x using the guidance midpoint.

Notable Venture Financing Deals

• London-based interactive entertainment studio Scriptic closed its seed round with a final $500,000 in funding from the Sony Innovation Fund, bringing the round’s total to $8.7 million. Scriptic’s last funding announcement was in June, when it raised $5.7 million in a round led by BITKRAFT. The studio, which Nihal Tharoor and Benedict Tatham co-founded, is focused on creating mobile-first interactive shows. Scriptic is known for its title Scriptic: Crime Stories, which eventually became available on Netflix's gaming platform.
  • The app has amassed over 1.5 million downloads across the App Store and Google Play, and was nominated for BAFTA's 2020 EE Mobile Game of the Year award. The studio was also an early user of generative AI, integrating AI tools such as ChatGPT and DALL-E to create series like Dark Mode, Viral, and You Be The Judge. The company's vision encompasses the development of its proprietary interactive content and the launch of a user-generated content (UGC) platform. This initiative aims to have creators craft high-quality interactive dramas using a cloud-based suite integrating various AI tools. James Nicholls, a veteran of the gaming industry, has joined Scriptic as Studio Director to support this initiative. Furthermore, Scriptic is adding other roles across technology, production, marketing, and design.
  • The $500,000 in additional funding is small relative to the $8.2 million the company raised earlier this year. However, Sony may be the most important strategic partner Scriptic has on its cap table, given the company’s vast resources in gaming and media. Sony may also give the studio an outlet for releasing games on consoles, as its “mobile-first” approach does not appear to be “mobile-only."
• Mobile game developer Made on Earth Games secured $3.25 million in seed funding to launch its 4X strategy game titled Everbright. The funding round was led by Gem Capital, with additional participation from The Games Fund, Raga Partners, and Heracles Capital. Currently in closed beta, Everbright aims to redefine the genre by providing a more accessible and engaging experience to an audience beyond the 4X core demographic. Made on Earth Games CEO Yuriy Krasilnikov stated that the “4X genre has inherent appeal but can be challenging to grasp.” Due to these challenges, the company is utilizing “layered cake design principles” to offer gameplay “that is both accessible and deep.” The team currently has 16 people from nine countries and has development offices in Uzbekistan and Cyprus.

Notable Strategic Investments

• Sony Interactive Entertainment (SIE) acquired high-end headphone manufacturer Audeze for an undisclosed amount. According to the press release, the move is set to bolster SIE's endeavors to further innovate the audio experience in PlayStation games. At the same time, Audeze will maintain its operational independence and continue its multiplatform product development. The headphone company is headquartered in California and is known for its planar magnetic drivers, which tend to have less distortion and faster response compared to traditional designs. Hideaki Nishino, Senior Vice President of Platform Experience at Sony Interactive Entertainment, expressed enthusiasm for the acquisition, emphasizing Audeze's position as a leading headphones brand. In particular, he noted the potential of integrating Audeze’s technology to enhance the PlayStation 5’s Tempest 3D AudioTech and the console’s Pulse 3D wireless headset.
  • Audeze represents yet another acquisition for SIE, which has been mainly focused on game development in the last two years. Since 2022, the division has made four studio acquisitions: Bungie, Haven Studios, Firewalk Studios, and Savage Game Studios. The purchase of Audeze is notable as it is purely hardware-focused. PlayStation has been focused on new devices and accessories in recent years, aimed at creating a broader ecosystem around the console. Audeze could end up developing audio technology for the next PS VR headset, for example.
• Behaviour Interactive, the Canadian game developer known for its multiplatform horror title Dead by Daylight, acquired Dutch developer Codeglue. Terms of the deal were not disclosed. Founded in 2022, Codeglue is primarily a co-development studio with additional capabilities in porting indie games to different platforms. Behaviour co-founder and CEO Rémi Racine said the acquisition represents the company’s first presence in continental Europe. It previously acquired SockMonkey Studios in February (now known as Behaviour UK - North), and opened a new studio in July called Behaviour UK - South. Behaviour UK - South is composed of former Antimatter Games employees, after the studio was closed by parent company EG7 amidst cost-cutting efforts. Following this naming convention, Codeglue will be renamed Behaviour Rotterdam, after its home city. In recent years, Behaviour has established and acquired new studios not only in Europe, but also in Seattle and Toronto. Recent endeavors include the announcement of two new games within the Dead by Daylight universe and a film adaptation in partnership with horror-centric studio Blumhouse Productions.

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