Top News

#1: Skillz Continues Its Downward Slide

Competitive mobile gaming company Skillz recently released its Q2 earnings report, and it was dire reading for its investors. Revenue was down 22% quarter-over-quarter from $93 million in Q1 2022 to $73 million, and it reduced FY2022 guidance down from $400 million to $275 million. Its share price is sitting at an all-time low of $1.57 a share, a far cry from its November 2021 peak of almost $44 a share. For those not familiar with Skillz, we’ll explain how it works before we look at why it burned so brightly before falling to the ground.

Skillz is a platform for competitive games that reward players with real money. It gets by gambling regulations as the games it provides are won primarily by skill and not chance. Unlike other platforms, there is no Skillz app you can download from the app stores. Instead, developers make use of Skillz’s SDK and release the games themselves. This makes discovery of Skillz games difficult, and you’re only able to browse the list of Skillz games via their website. To makes things worse, you cannot even find Android versions of Skillz games on Google’s Play Store as skill-based cash competitions contravene with Google’s developer policies (ironically, real money gambling is allowed). To download the Android version of Skillz games requires the user to download the APK from Skillz’ website, hardly a frictionless experience. The games themselves are not particularly noteworthy and are comprised of generic card games or clones of popular casual games.

So how do the real money rewards work? There are two way to win money via Skillz games: 1) by playing in head-to-head matches against another opponent or 2) joining a tournament. Regardless of the method, you’ll need to pay an entry fee with real money. As an example, entry fees in Solitaire Cube (one of Skillz most popular games) start from 60 cents for a head-to-head match (for a chance to win $1) and can go up to $120 with a prize pool of $200. If you’re doing the math in your head, you might notice that ~16% of the entry fee gets skimmed by Skillz and this is shared equally with the developer.

Skillz has been in operation since 2012, but it only recently went public in December 2020 by way of a merger with Flying Eagle, a SPAC (Special Purpose Acquisition Company). For a while, times were good. Skillz was able to consistently grow revenue, from $50.7 million in 2018 to $384 million in 2021. In its IPO prospectus, Skillz boasted a three-year LTV to user acquisition ratio of 3.8x, and hype articles focused on its flashy metrics like a 94.8% gross margin in 2020 and user engagement of 62 minutes a day. It all led to an all-time high in its share price of $43.72 in February 2021.

But how big is the actual market for skill-based real money games? Skillz paints a rosy picture of a billion gamers for the taking as seen in its investor presentation earlier this year. The data point of “40% of gamers want to compete” is taken from research funded by Skillz and undertaken by Frank N. Magid Associates in 2014. (*On a side note, Mike Vorhaus, the President of Magid Advisors at the time of the study was also a seed investor in Skillz.)

What we’ve seen though, is that Skillz has overly exaggerated the size of its market and struggled to attract enough users to its games. At its peak, Skillz boasted a MAU of 3.7 million during Q4 2021 across its entire portfolio of hundreds of games (this player-created website lists 480 Skillz games as of March 2022). For context, Zynga Poker had a MAU of 6.4 million during the same period.

The lack of a sizable audience means that Skillz needs to put a massive amount of money towards Sales & Marketing to acquire users. From 2018 to 2021, Skillz spent more on Sales & Marketing than it earned in revenue (except for 2019), with a massive $465 million spent in 2021. That’s fine since the three-year LTV is 3.8x the acquisition cost, right? Well, as long as players stay long enough for Skillz to recoup its costs.

Unfortunately, it looks like that party’s over as Skillz has been losing players since the beginning of the year. In the Q2 earnings call, CEO Andrew Paradise stated, “The primary causes of the sequential decline in revenue and revenue after engagement marketing was really lower retention from some of the mature cohorts of users on our system.“ The cause of the lower retention was blamed on “a mix of instances of users cheating on our platform and past product modifications.“

Besides losing its golden cohort of players, spenders, in general, declined 26% quarter-over-quarter, with the reason being “a reduction in end-user-discounts, including engagement marketing, that were not driving profitable revenue.“ What this means in layman’s terms is that players were not spending because Skillz stopped giving them free cash.

One of the major ways Skillz encourages spend is to give players bonus cash when making deposits. In this video by Skillz content creator Mikey Slice, players using his promo code got an additional $50 worth of cash to play with when making a $30 deposit. Without this free cash, it would have been extremely difficult for a player to make any money as you would essentially need a 2:1 win/loss ratio (this varies based on the entry fee and reward) to earn any money. As players are matched based on skill (postulated by the playing community to be ELO), only the best players will come out cash-positive. Spending money to join a competition only to lose it all because you got beat doesn’t sound very appealing except for a very narrow slice of the population.

Besides the elimination of low-return engagement programs, Skillz has also slowed down its user acquisition spend in 2022 in an attempt to reach profitability. In the Q1 earnings call earlier this year, Paradise spoke of improving UA efficiency and eliminating low-return programs, something he repeated and emphasized again in the Q2 call, which makes you wonder just how loosely Skillz was using its marketing budget.

The niche audience, declining player base, high take-rate, and reduced spending on user acquisition means that being a developer for Skillz is just not very attractive, leading to just a few companies pumping out most of the successful games (many of them reskins or slight variations of their own products). The image below shows that the most popular games (as shown on Skillz’ website) are dominated by 3 game studios.

There’s also this damning chart that shows that though there are hundreds of games in the Skillz ecosystem, only 44 games exceeded $1 million in gross market volume (basically entry fees) per quarter. In a piece we wrote almost 2 years ago, we highlighted that GMV is not a good indicator of developer revenue because of Skillz’ share of that money and that “If we adjust this for the better metric, revenue (of which Skillz has a ~15% cut), it’s almost guaranteed that the number of games with >$1 million of revenue for Skillz is far less than 40.”

What’s next for Skillz? It is going through a period of turmoil, compounded by having to appoint a new CFO after its previous CFO left after only a year on the job, and circulating commentary on its negative corporate culture. On the other hand, it has two high-profile partnerships with the UFC and NFL and has also begun beta-testing its cloud gaming platform, which should significantly reduce the friction of the onboarding process. Will that be enough to gain new players and reverse the slide? I don’t believe so. The elimination of the end-user discounts means that it becomes much harder for players to get a return on investment, which for most players is the primary reason why they are in the Skillz ecosystem in the first place. And as we’ve seen in play-to-earn games like Axie Infinity, when the tap runs dry, the players fly.

Game Launch Radar

#1: Cross Summoner: R

• Publisher: Damo Network Limited
• State: Launched
• Territories: Global
• Classification: Midcore – RPG

• Quick thoughts:

  • It’s in the “anime-style hero-collector” genre that is popular in Asia and doesn’t deviate from the formula that makes it attractive to its target audience: attractive visuals, charismatic heroes, dramatic narrative, and most importantly (for the business) – gacha everywhere you look.
  • This report shows that even though anime games are played by a niche audience, they made up 20% of all mobile game revenue in 2021.
  • It was developed by Pokelabo, a subsidiary of Gree that was responsible for SINoALICE, also another hero-collector. SINoALICE had mild success (in comparative terms to front runners like Fate/Grand Order), acquiring more than $300 million in lifetime revenue since its launch in 2017.

#2: Arena Battle Champions

• Publisher: Square Enix
• State: Soft Launch
• Territories: Canada, Brazil
• Classification: Midcore – Strategy – Multiplayer Battle Arena

• Quick thoughts:

  • Terribly generic name aside, Arena Battle Champions (ABC) is trying something new for the MOBA genre. The game is played in portrait mode and battles are 3v3 in a single lane compared to the traditional 5v5 with 3 lanes. You cannot aim at individual targets. Instead, there is an attack ring, and enemies within range are picked randomly to be attacked. Also unlike traditional MOBAs, there is only one special skill that can be triggered. The effect of all of these simplifications is that games of ABC are incredibly quick for a MOBA, ranging from 4-6 minutes in length. It’ll be interesting to see if the strategy pays off or if the gameplay ends up too shallow to keep players in the game for a long time.
  • The art style is interesting and keeps the “simplify” theme as characters have strong silhouettes with bold splashes of color but without intricate detail.

Other Game Announcements

• Tencent’s League of Legends: Esports Manager debuts in the top spot of China’s download charts. Link
• Krafton announce a new game based on a Korean novel series. Link
• Honor of Kings goes into closed beta in Brazil, Egypt, Mexico and Turkey on Android. Link
• A mobile version of World of Warcraft will never see the light of day due to a dispute between Blizzard and Netease. Link
• Rainbow Six Mobile opens up for pre-registration on Android. Link
• Free Fire releases a new map, Nova Terra, in its OB35 update. Link
• Mobile Legends: Bang Bang introduces a new mode that allows players to mix-and-match hero skills. Link
• Torchlight: Infinite is open for pre-registration on Android. Link
• Fullmetal Alchemist Mobile will release in Japan on August 4th. Link

Company Announcements

• Jam City lays off over a hundred staff in a move described as “right sizing.” Link
• Space Ape co-founder, Simon Hade, transitions from COO into a new role building up marketing and publishing division. Link
• Square Enix’s fiscal Q1 sales decline by 15% YoY. Link
• Sega posts fiscal Q1 revenue growth of 11% YoY. Link
• Bandai Namco’s posts fiscal Q1 revenue growth of 21.5% YoY. Link
• Keywords Studios acquire Melbourne-based developer Mighty Games. Link
• INK Games raises $18.75 million in another round of funding which will go into its social platform and in-development mobile game. Link

Ecosystem Announcements

• In the US, almost all mobile game genres see revenue decline in H1 2022. Link
• Three people in China were jailed for 4 years for selling illegal hacks and cheats for Genshin Impact. Link
• Tencent and Logitech announce a partnership to build a cloud-based handheld gaming device. Link
• HoYoverse files and wins a $4,439 legal claim against SKYCORE for plagiarism. Link
• The owner of Philippines-based mobile esports organization, Bren Esports, is wanted for drug smuggling. Link
• Tencent is reportedly seeking a larger stake in Ubisoft. Link
• Video game investments in Q2 reached $4.8 billion according to Digital Development Management. Link
• Unity is reportedly looking to separate its China unit to give it more autonomy. Link
• Indonesian users top the world for time spent in apps. Link
• Cyber attacks against gamers and game companies are on the rise. Link

Content Worth Consuming

• Breaking Ban: Belgium’s Ineffective Gambling Law Regulation of Video Game Loot Boxes (IT University of Copenhagen): “Paid loot boxes remained widely available amongst the 100 highest-25 grossing iPhone games in Belgium: 82.0% continued to generate revenue through a 26 randomised monetisation method, as did 80.2% of games rated suitable for young 27 people aged 12+. The Belgian ‘ban’ on loot boxes has not been effectively enforced.” Link
• Why Bombay Play Believes in Hyper-social Games (Gamemakers): “Hyper-social today is games that are designed to be better with your friends, or you can advance further with them, or the fun is enhanced and they’re much easier to share by leveraging whatever technologies we can find. So that’s also why we’ve been doing a lot of experiments on social networks like Facebook, because if a social game exists on a social network, it removes the barriers to access it.” Link
• The Benefits of Agile and Lean Production Methodologies (Mastering Retention): “There are many different ways to go about creating a video game, but two of the main methodologies are Lean and Agile. The lean methodology puts an emphasis on reducing waste by recycling content, and managing workflow, whereas in Agile, teams emphasize small batch sizes to deliver results quickly. This week on “Mastering Retention” Ruby Urlings (Director, Production at GSN Games) speaks with Tom about these methods, their respective benefits, and so much more!” Link
• Digital Trails: How Bungie Identified a Mass Sender of Fake DMCA Notices (Torrent Freak): “Earlier this year, Bungie and its enthusiastic Destiny fan community were plunged into chaos. Using the DMCA’s takedown process as a weapon, persons unknown sent copyright notices to YouTube, claiming that the targeted videos should be taken down for infringing Bungie’s rights. YouTube began removing videos, including some uploaded by high-profile Destiny content creators. Other notices targeted Bungie’s own channels, causing confusion and frustration within the Destiny community.” Link