Deconstructor of Fun

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🎮 (The Unofficial) Deconstructor of Fun 2022 Gaming Awards

Jesper Gustavsson

In Today’s Email

As the year is coming to a close, we spend this week’s newsletter going over the biggest moments from across the year.

2022 was incredibly eventful (as you can read about below) and we are looking forward to starting the new year with all of you in a few days!

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2022 GAMES AWARDS: And the winner is…

The Biggest News Item of 2022

Looking back, 2021 was truly booming in terms of game news. We followed the Microsoft-Activision saga, watched Apple’s privacy changes rollout and read about blockchain gaming madness that saw self-proclaimed Web 3 companies pick up massive investments at nosebleed valuations.

2022 has been the opposite. War, inflation, rising interest rates, recession struggle of performance marketing all influenced the games business that these days isn’t quite as recession-proof as it was back in 2008. This is no wonder, given that the business model has evolved from premium products to free-to-play, subscriptions, and ad monetization while competing against other forms of entertainment such as video streaming and social media.

The biggest news items of the year are Meta losing $15 billion in trying to build a metaverse and the collapse of FTX, which hopefully but not likely is the last gigantic crypto collapse we see (Binance is reportertly struggling as well).

While these are not directly gaming-related news, both Meta and FTX were significant players in the gaming ecosystem. Meta’s venture into the metaverse coincided with Apple’s privacy changes and resulted in the loss of the platform as the number one ad channel for mobile games. FTX on the other hand was lavishly funding blockchain gaming while holding assets for some of the companies.

Both these news items signaled a paradigm shift in our industry. Blockchain gaming, (aka Play-to-Earn, aka. Play-and-Earn) went in a year from a buzzword to something companies just refer to broadly as Web3. And the same happened to Metaverse.

The Trend of 2022

The trend is a bear market. We’re seeing a 5 to 10% decline in mobile in Western countries. While the number is relatively small, this is still unprecedented because the mobile market has only grown double digits year after year. The decline can be explained somewhat by inflation, interest rate increase, and the end of lockdowns. But those three have likely less impact combined than Apple’s privacy policy changes, which single-handedly evolved the industry to what we now know as the post-ATT era.

Overall, we believe that 2023 will be the year of austerity and efficiency. Companies are getting hyper-focused on profitability and reducing all ‘fat’. This means cutting new games in development, investing in revenue-generating titles, reducing headcount, and implementing hiring freezes. Push for efficiency can already be seen in the increasing amount of companies mandating employees to get back on-site. Overall, it is clear that the shift of power will go back from employees to employers as jobs become scarce.

Most Sceptical Move of 2022

Web3, NFTs, metaverse, blockchain gaming, and remote work. If a gaming company didn’t mention at least one of those four magic words, they were deemed as a dinosaurs in 2021. Companies with no outlook and place in the future of gaming.

Remember the time that Zynga hired a CocaCola executive (aka. Crypto Czar) to run their non-existent NFT business? That’s a perfect definition of eyebrow-raising skeptical move that was a response to the overwhelming hype that seemed to captivate the investors and executives more than developers and players.

But Zynga wasn’t the only one to raise our skeptical hippo eyes in 2021 - nor the only company to hire a Chief Crypto Bro. All the nosebleed valuations in blockchain gaming were far from sustainable as the hype train kept picking up speed with outrageous land sales and mints of NFTs for games that didn’t exist - and many never came to exist either.

During 2022 Embracer continued to make us even more skeptical about the moves they made. Whether it’s one of their dozens of acquisitions from Crystal Dynamics to Square Enix Montreal (which they closed literally days after closing the deal) Embracer just continued to surprise us every quarter. The decision to take a massive investment from Saudi Arabia was just icing on the cake.

Meanwhile, Netflix steamed ahead with building their version of Apple Arcade, which everyone by now knows would be a failed service without the Apple One subscription. Nothing in Netflix's strategy is making us assured that they won’t suffer a similar fate in coming years - if not already in 2023.

But what makes Embracer the winner of the most skeptical move in 2022 was the $780 million acquisition of the Lord of the Rings IP without the movie or TV-show rights. In other words, Legolas in an Embracer game will look nothing like Orlando Bloom and Gandalf will have no resemblance to Ian McKellan. Is that a problem? For that price, we think it is.

Who was the biggest winner in 2022?

Last year it was difficult to pick up only one winner. Roblox had a remarkable year as did. So did Turkish Dream Games (Royal Match) and Finnish Metacore (Merge Mansion) as both scaled up and reached the top of grossing charts worldwide. Not to mention Riot, which saw massive success with Valorant and Wild Rift in China while taking a major step outside games with Arcane on Netflix.

But one stood above them all in 2021. And the one was AppLovin who on paper executed perfectly in the face of privacy changes while picking up some very exciting assets for reasonable prices with Adjust and MoPub. Boy did we get this one wrong…

In 2022 there are not as many winners as we’re in the down market. We have to give it up to companies that are bucking the trend and growing even a little bit while their competitors are tumbling down the charts.

The biggest winner, in our eyes, is Activision-Blizzard. King is growing on mobile while their competitors are in trouble. Blizzard’s Diablo Immortal reached $300M in just 6 months. And Call of Duty is kicking ass on all platforms. Sure, Overwatch 2 launch was a disappointment, Crash Bandicoot on mobile ran into an early grave and the Microsoft deal is facing all kinds of headwinds. But compared to the competition, the company did well.

Who took the most damage?

In 2021 several public gaming companies started to tumble down after the rowdy lockdown days and the rollout of ATT. Stillfront was down 54%, Ubisoft declined 45%, Activision dropped 30%, and was probably the biggest loser based on market cap. Zynga was down also 30% while Playtika fell nearly 50%. But it was really the Chinese gamers and game companies that took the most damage with the CCP laying down the hammer on the market and significantly slowing down the release of new games while heavily restricting playing hours.

We did call out AppLovin as the biggest winner of 2021 applauding their content fortress strategy. How the mighty fall and how wrong we were... AppLovin’s stock today is 10% of what it was a year ago. They’ve divested from games. And failed in their public bid to hitch up with Unity. A lot of companies took damage this year, but AppLovin got beaten up from a pillar to the post.

Honorable mention goes to investors who deployed funds into Web3 games. For example, A16Z, a truly premier venture capital fund, lost 40% of its $4.5 billion crypto fund during the second half of 2022. Most smart games investors hinted off-the-record that they saw the upcoming collapse of blockchain gaming as the valuations were out of control and the traction amongst players was not justifying the hype. Yet investors were forced to deploy capital from their newly raised crypto funds in hopes that the companies they invest in won’t get wiped out in the inevitable crash.

The positive outlook is that the blockchain gaming companies that managed to raise bigly will have the capital and thus the time time to pivot and find their way towards growth. Also, funding for new Web3 gaming companies will continue due to crypto funds raised by the investors. Though the valuations have mostly come down by now.

Another mention goes to mobile gaming that got devastated by Apple’s privacy changes. The former posterchild for venture capital is now a genre many investors avoid. And that will lead to less mobile gaming companies formed, less new games and overall more mature and stagnant market - apart from launch of big budget and big IP titles.

Best game of 2022

A year ago we talked about Death Loop, Final Fantasy IV, Outriders, Valheim, and Royal Match as being in the run for being the best games of 2021. In the end, the award went to APEX Legends, which mastered the live ops in a highly competitive and mature battle royale genre.

The best game of 2022 has to be either Diablo Immortal or Call of Duty Modern Warfare 2. Diablo Immortal has now earned Blizzard and NetEase $300M, which is a massive achievement for the game - and raises a question of how the two hungry giants are dividing the loot, given that they just severed relationships over World of Warcraft…

The winner is Call of Duty Modern Warfare 2, which becomes the fastest-selling Call of Duty ever hitting $1bn in sales in just 10 days. And they thought that the console was dead…

Most underperforming game of 2022

In 2021 GTA Trilogy missed its mark. Call of Duty Vanguard was a letdown as were Supercell's soft-launched titles: Clash Quest and Clash Mini, out of which the first one has been killed and the second one likely facing the same sentence.

Nevertheless, the most underperforming game of 2021 was Krafton’s PUBG New State. The game was meant to take on Tencent’s PUBG Mobile only to fall into the abyss after generating massive hype with 40M pre-registrations and getting 34M installs quickly after the launch

The most underperforming game of 2022 has to be Sky Mavi’s Axie Infinity. In 2021 the game boasted about its $1.2 Billion Annualized Revenue and how it will overtake Candy Crush Saga. That was led by a $152M round led by A16Z. In 2022 the price of the AXS (the coin of Axie Infinity) has declined to less than a tenth by the end of 2022. And to add salt to the wound, hackers breached the game and stole worth approximately $620 Million at the time.

Because Axie Infinity is a “play-to-earn” game, its economy relies on the rising price of Axies, which is driven by the rising price of AXS that lures new investors in. The game itself is played by people in 3rd world countries who farm for their masters who actually own the Axies they play with. The decline of AXS essentially removes the business case. And because no one was really playing the game for fun but rather for money, it’s a bit of a tricky situation to be in.

But then again, Sky Mavis has raised a lot of money and earned even more, according to the reports. So it’s not all doom and gloom and the company will have more than enough resources to search for growth.

 

NEWS

INDUSTRY

PUBLISHER

INVESTING / M&A

  • NDreams's first acquisition is Shooty Fruity developer Near Light

  • Tencent purchases 20% stake in Korean game developer Shift Up

  • The Sandbox sells $1.66M of virtual land for its metaverse

  • Kwalee saw 12% revenue growth and 200 million downloads in 2022

  • Moon Active to acquire Zen Match from Good Job Games

  • Rainmaker Games raises $4.7M in additional funding

NEW GAMES