Top News

#1:  Global Advertising Market Weakens in Q2

The broad macroeconomic issues the world is facing (continuing Covid-related supply chain disruptions, rising fuel costs due to the war in Ukraine, and inflation increasing as a result) have caused advertisers to pull back on spending, reducing the advertising revenue of companies like Meta, Google, Twitter, and Snap Inc. This isn’t just limited to digital advertising either, as advertising spend in television also shrunk, with Roku stating in its shareholder letter that, “There was a significant slowdown in TV advertising spend due to the macro-economic environment, which pressured our platform revenue growth.”

Some highlights from the companies’ Q2 earnings include:

• Alphabet saw weak growth in YouTube Ads at 5% YoY compared to a post-pandemic surge of 84% seen in Q2 2021.
• Meta announced its first revenue decline since it went public in May 2012 and saw the average price per ad decrease by 14% YoY.
• Snap reported a 25 percentage point decrease in revenue growth.
• Unity reported a 13% decrease in revenue of its Operate Solutions (where its ads business sits) segment.
• Twitter reported a sluggish 2% growth in advertising revenue at $1.08 billion.
• Applovin reported +118% YoY revenue growth in its Software Platform segment, but it proactively reduced the take rate on its ad exchange to keep publishers spending.

Across the board, the companies attributed the drop in revenue to reduced advertising spend and ad intelligence firm SocialPeta reported a 27.83% decline in the number of mobile game ad creatives. This has a direct impact on mobile games in several ways which we’ll touch on below.

#1: Games reliant on ads for revenue will struggle

Hypercasual games, with the majority of their revenue coming from ads, will bear the brunt of the weak advertising market. When competition (ad intelligence firm SocialPeta reported a 27.83% decline in the number of mobile ads YoY) for ad views is low, eCPMs will follow suit. According to Appodeal, eCPMs of rewarded ads (usually the most valuable ad unit) for both iOS and Android have dropped in Q2. This then adversely impacts games that rely heavily on ads as a revenue source, like Hypercasual games and Idle games. As an example, Rovio reported that its hypercasual studio, Ruby Games, saw declining revenue compared to Q1 of this year due to the weaker ad market. A good proxy of overall ad revenue trends in the industry is from Ironsource’s earnings report which showed a decline in revenue quarter-on-quarter, the first time this has occurred since at least 2019 (the earliest data point we can get, courtesy of its IPO presentation).

#2: Opportunities for developers

The reduced competition for ads should make it easier for teams to find efficiencies in user acquisition, such as honing into the most effective ad units for their games or localizing campaigns into specific regions/countries that show good ROAS. In fact, Activision Blizzard credited strong execution in user acquisition (along with effective live ops) for the 6% increase in King’s Q2 in-game net bookings.

#3: Belt-tightening across ad platforms

In light of the challenging market ahead, companies will take a hard look at operating expenses. Many, like Google and Meta have already initiated hiring freezes or are cutting down on hiring while others, like Unity and Applovin have taken the proactive step of staff reductions. Again, Ironsource’s quarter-over-quarter EBITDA drop is very telling.

It is hard to predict what will happen in the second half of the year, though most companies expect the weak advertising market to continue in Q3. There may be signs of reprieve on the horizon though, as US consumer sentiment has been improving since July, and inflation may have peaked. Unfortunately, that is tempered by the energy crisis in Europe and the ongoing war in Ukraine. What’s clear is that no one really knows what to expect for the second half of the year and this uncertainty is likely going to keep advertisers quiet with a wait-and-see approach for the near future.

#2: Roblox Bookings Down, But The Future Still Looks Bright

Roblox announced its Q2 earnings last Tuesday and shared that engagement with the platform saw healthy growth, with DAUs increasing to 52.2 million (up 21% YoY) and hours engaged increasing to 11.3 billion (up 16% YoY). Despite that, bookings were down 4% YoY at $639.9 million, missing Wall Street’s expectation of $644.4 million, causing its shares to drop (which have since recovered).

We’ve written about Roblox extensively over the past couple of years, from our first look before its IPO, a deep dive into its Q4 2021 results, and most recently, an investigation into Roblox Developer Unit Economics. Throughout our coverage of Roblox, we’ve been bullish on Roblox and remain so, despite the lack of bookings growth this year, and in this article, we’ll outline a few reasons why.

July was one of the best months ever for Roblox

Despite bookings for Q2 being down 4% compared to last year, bookings for the month of June were actually up 8%. This flowed through to July when Roblox hit record-high engagement across all regions and demographics and posted bookings for the month that was just below the peaks of December 2020 and 2021. What this tells us is that player spending in Roblox isn’t slowing down just yet. One new feature that may have helped was the release of layered clothing in April, and in the earnings call, Roblox CFO Mike Guthrie shared that over 100 million players had purchased a layered clothing item and that users who purchased these items were more likely to spend in other areas.

Roblox is successfully aging up its player base

In our previous article on Roblox, we highlighted that aging up Roblox’s player base was an important strategy for Roblox’s continued growth, and it looks to be executing it successfully. In Q2, DAUs of players over 13 rose 36% YoY, and in the US, the 17-24 demographic actually outperformed the 9-12 on a bookings-per-hour basis and is the fastest growing cohort of users. In the earnings call, Roblox also shared that 481 out of the top 1000 experiences had more players over 13 than under.

As part of its strategy to attract an older audience, Roblox has invested heavily in upgrading its visuals. From increased lighting fidelity, dynamic skies, PBR rendering, and most recently, a complete revamp of its materials, Roblox experiences will become more and more realistic and visually appealing.

This Rain showcase (screenshot above) shows that Roblox has the potential to host more immersive experiences than ever before and can attract gamers and developers who have steered clear of the platform due to Roblox’s reputation of “being for kids”. It may only take one successful game targeted at the core/mid-core audience to break open the dam to a flood of new players (and spenders) to the platform. Of course, greater visual fidelity means the cost of creating experiences also increases, which brings us to the next point.

Continued Investment In Economic Opportunities For Developer and Creator Communities

Roblox has long outgrown its original “by kids for kids” mantra, and the most popular experiences are now created by multi-person studios. Uplift Games, the studio behind the most popular game Adopt Me!, has over 50 employees, while third-party developer Gamefam has over 100 staff.

In our analysis of developer unit economics, we estimate that a game developer needs to be in the top 250 games just to break even. Given that there are millions of games on the platform, it clearly isn’t feasible for the majority of developers to release a break-even game and something that Roblox will need to improve on to attract even more high-quality developers to the platform.

One of the features that will go towards improving developer economics is what Roblox calls immersive advertising, which will go into testing later this year. In the earnings call, CEO Dave Baszcuki likened it to billboard ads in real life. These ads would be easily scalable across all the experiences on the platform and can also act as a portal into the brand sponsor’s Roblox experience. As more and more brands set up experiences in Roblox (and other games looking to scale up users), this opens up performance marketing opportunities and can increase a developer’s bottom line.

For the creator communities, Roblox’s vision is for every element of player avatars to be community-created (even avatar bodies themselves), greatly expanding the opportunities for creators to sell custom elements. Layered clothing was deemed to be a stepping stone towards that vision, and the dynamic head system which was released at the end of June brings it another step closer. Dynamic heads are expected to be available in the marketplace in Q4 of this year.

The amount of money the creator community can make from selling UGC items has flown a little under the radar in comparison to developers making experiences. This may be due to the fact that creators need to be vetted by Roblox before they can upload their creations (there are currently around 247 approved UGC creators), but the top creators can earn a good chunk of change. The user maplestick was the first to reach 1 million in sales on their Evil Side hat in just two months, which would have netted them ~$52,000 after Roblox’s 70% cut, not bad for a quick texture job in Blender!

Conclusion

Roblox has always been a company with long-term vision and a methodical execution towards its goal to be a “human experience platform” that reaches 1 billion people. While it has saturated the 9-12 demographic, there is still plenty of growth potential in older users and new territories (DAUs from India grew to just under 1 million as reported in the Q1 earnings call). The upgrades in visual quality may unshackle it from a reputation as a kid’s playground and see higher fidelity experiences and an accompanying mature audience with disposable income. The next Call of Duty may just be a Roblox game, and when that happens, I’ll catch you there.

Game Launch Radar

#1: Tower of Fantasy

• Publisher: Level Infinite

• State: Launch
• Territories: Global
• Classification: Midcore – RPG – MMORPG

• Quick thoughts:

  • As an open-world game with an anime aesthetic, it inevitably will be compared with Genshin Impact. At first glance, they do seem similar, but the difference is in the gameplay. Genshin Impact is primarily a single-player hero-collector RPG while Tower of Fantasy (TOF) is an MMORPG and allows character customization. Gameplay in TOF is also in a shared open world, and you can explore dungeons and ruins with other players and even create or join Crews (TOF’s guilds). TOF was made by Hotta Studio, a subsidiary of Chinese publisher Perfect World which has developed and published multiple MMORPGs for the domestic market.
  • It saw huge popularity on its launch day, making it extremely difficult to enter the game due to servers being congested and some players seeing wait times upwards of 24 hours to get in. These issues seem to have been fixed, and the developers have provided compensation of in-game resources.
  • Tower of Fantasy was caught using assets from HoYoverse’s Honkai Impact 3rd in an ad, which has been blamed on the outsourcing process for the advertisement by a spokesperson from Tower of Fantasy.

#2: Avatar: Generations

• Publisher: Square Enix
• State: Soft Launch
• Territories: Canada, Denmark, South Africa, Sweden
• Classification: Midcore – RPG – Turn-based RPG

• Quick thoughts:

  • Based on the hit Nickelodeon animated series, it will have plenty of fans of the IP that might pick up the game, though they will be disappointed by its lack-luster visuals. The 3D turn-based battles in particular combine bland 3D backgrounds with unimpressive cel-shaded characters and stilted animations.
  • The gameplay is by-the-numbers mobile squad RPG and it definitely looks and feels like a play for nostalgia rather than a desire to innovate.
  • As seen in our Dislyte deconstruction, a strong presentation and setting as well as high levels of polish can set what could have been another generic hero-collector into a standout of the genre. Square Enix needs to follow Lilith Games’ playbook and really make the game look and feel like you are in the world of Aang and his friends, otherwise it’ll just end up as just another one in the pile of Square Enix’s failed mobile games.

Other Game Announcements

• Com2Us announces The Walking Dead: All Stars, a hero-collection RPG. Link

• Level Infinite’s MMORPG Tower of Fantasy reaches #1 in the free games chart in 22 countries. Link
• Tilting Point’s space-builder TerraGenesis: Operation Landfall is now available on iOS and Android. Link
• Apex Legends accidentally allows players to buy an unreleased Legend in its store. Link
• Netmarble’s newest 4X game, Grand Cross W, is opening up for beta testing on Android. Link
• One Punch Man: The Strongest, an upcoming mobile RPG based on the popular manga, is open for pre-registration in the US and Europe. Link
• The Pokemon Go Fest grand finale is happening on the 27th of August. Link
• Thai team Vampire Esports is crowned the PUBG Mobile World Invitational 2022 champion. Link
• Dragonball is coming to Fortnite, and the tweet teasing the collaboration broke the record for the most liked tweet in Fortnite’s history. Link
• Mattel is hosting an Uno! Mobile tournament featuring some of the most popular influencers, including Valkyrae, the most popular female streamer on YouTube. Link

Company Announcements

• PUBG Mobile makes up more than three-quarters of Krafton’s H1 2022 revenue. Link

• Unity formally rejects AppLovin’s unsolicited merger proposal. Link
• PlayStation Mobile is looking for acquisitions. Link
• Nexters announces strong fiscal Q1 results and a board re-shuffle. Link
• Roblox Q2 revenue up 30%, but stock falls on missed earnings expectations. Link
• Rovio reports good Q2 results despite economic headwinds. Link
• 27-year Capcom veteran Hiroyuki Kobayashi joins NetEase Games as producer. Link
• Mobile game subscription service Unleashd adds two games to its roster. Link
• East Side Games reports a successful Q2 with 32% revenue growth YoY. Link
• Unity lowers its full-year revenue guidance. Link
• Spin Master, the company behind the popular animated series Paw Patrol, acquires Swedish mobile game developer Nørdlight. Link
• Publishing group Thunderful’s CEO steps down to take a new role in the company’s game segment. Link
• Nexon sees Q2 revenue jump 50% year-on-year. Link

Ecosystem Announcements

• Only 1% of Netflix subscribers have downloaded its games. Link

• Pac-man is getting a live-action movie. Link
• Social casino developer Product Madness unveils incubator program for chance-based games. Link
• Game content production company Virtuos opens a new studio in Malaysia. Link
• Unity signs a multi-million dollar contract with CACI, a mission and enterprise technology firm that works with the U.S government.
• Game studios work together to raise £400,000 for Make-A-Wish UK. Link
• Chinese youths are playing less games since government-mandated restrictions have kicked in. Link
• Istanbul-based mobile game developer Agave Games raises a $7 million funding round. Link

Content Worth Consuming

• Basics of F2P Game Economy Design | Saturday School #2 (LILA Games): “John Kelly has had a distinguished career in F2P game design working at companies like Zynga, Rovio, Wargaming, and most currently at PlaySimple Games (acquired by MTG). In this talk, John talks about the basics of economy design for F2P games.” Link

• Your Core Game Isn’t Enough (Elite Game Developers): “Players haven’t felt a similar novel experience on mobile for years. Now it’s about being a core audience fan who sticks around because of social features or because your friends are playing the game. Even if you still have a new novel gaming experience, you might rely too heavily on early retention. Many developers fall into the trap of the core game progression, taking care of the player’s appetite to retain and monetize, which is usually fine until Day 30. What happens on Day 30 is that the content becomes repetitive. The player feels progress, but it feels a little too similar. Suddenly, on Day 60, you only have a few percentage points of players playing. You never achieve DAU stacking, where you have countless cohorts of players playing indefinitely.” Link
• Episode 31: Crafting a Charming Farming Game: The Story of Sunrise Village’s Development (Game Refinery): “In this episode of the Mobile Gamedev Playbook, Thi Detert, Senior Lead Game Designer at InnoGames, and Product Owner, Alison Simpson talk about the development journey of Sunrise Village with GameRefinery, a Liftoff company analyst Teemu Palomäki and our host, Jon Jordan.” Link