The Weekly Meta #22

Sea Limited, Take-Two Interactive, NetEase, Amazon Game Studios, and more.

Welcome to Master the Meta, the #1 newsletter focused on the business of video games.

Here’s your weekly roundup of the best content in the video game industry. 

Before jumping in, I want to say thank you to everyone who filled out last week’s survey. I’ll be tweaking Master the Meta’s content as a result, starting with more emphasis on deep dives. That may mean a slower cadence of Weekly Metas in the short-term, but I’m working on a couple solutions to start scaling up content production. Stay tuned!

📰 News

April NPD data shows strong growth. It’s worth perusing the month’s data in more detail (starting with this Twitter thread), but here are two key highlights:

Domestic spending on gaming hardware, software, and accessories (excluding mobile) leaped 73% year-over-year to $1.467 billion:

The top selling console/PC games of the past 12 months:

Nothing here is shocking. Call of Duty dominates, GTA V amazingly remains a best-seller (with over 130 million total copies sold), and Animal Crossing: New Horizons had an incredibly strong debut. Of course, this industry-wide growth will decelerate, and next April we’ll probably see a dip. However, the future has certainly accelerated into the present; there are more new gamers and existing gamers are more engaged than ever.

Sea Limited earnings. Remember The Path to Titan? The general idea is that the most successful gaming companies will be the ones who turn their biggest games into services and platforms… and then reinvest those winnings into building more competitive, multi-pronged ecosystems. Sea Limited is one of a handful of gaming companies in the world on the “path to titan,” so to speak. Garena, the company’s gaming arm, is well positioned since its Tencent’s key partner in Southeast Asia (for example, it publishes League of Legends in the region). And Garena’s success jumped stratospherically with the massive success of Free Fire, which hit 80 million DAUs and was the highest grossing mobile game of the quarter in both Latin America and SE Asia. Importantly, the winnings from Garena are being entirely reinvested into Shopee, Sea’s e-commerce arm, which is blitzscaling and rapidly stealing market share across the region.

The quarter itself was mostly impressive. In the gaming division, quarterly active users hit 402 million (+48%), revenue rose 30%, and margins slightly expanded. In the e-commerce division, GMV grew 74% (an acceleration), revenue rose 110%, and the average loss per order continued to improve. These are the questions that matter most:

  • Will Garena find new growth opportunities before it becomes the victim of its own success? (probably, but there’s nothing specifically to point to yet)

  • Are Sea’s heavy reinvestments enough to ensure Shopee comes out on top in the region’s winner-take-most e-commerce market? (signs are positive)

  • Once greater scale is reached, will Shopee be able to flip its unit economics? (hard to tell from public info)

Whatever the outcome, Sea / Garena is easily one of the most interesting companies to follow. Link

Take-Two Interactive earnings. Like most gaming companies, Take-Two crushed expectations this quarter, driven by ongoing success in its most popular franchises: GTA V, GTA Online, Red Dead Redemption 2, Red Dead Online, NBA 2K20, Borderlands 3, etc. The company is still somewhat cyclical — thanks to Rockstar’s incomparable and infrequent launches — but management has a tremendous track record of organically diversifying its gaming portfolio and scaling up recurring digital revenues (51% of FY20’s bookings) to decrease lumpiness. There’s still room to improve — whether organic or acquisitive — but all signals point to continued improvement not being an issue. The most important questions for Take-Two:

  • Does Rockstar still have the magic? Specifically, will GTA 6 live up to ridiculously high expectations? (if track record is any indication, yes)

  • Will Take-Two produce hit sequels and diversify its portfolio with new IP? (yes and yes)

  • For even more upside, will Take-Two expand its mobile presence beyond Social Point? (who knows, but management is well aware of the opportunity)

All in all, lumpiness will continue, and revenue / cash flow will probably take a step back before jumping to new heights again, but there’s a path toward several more record breaking years in the future. Link

NetEase earnings. Out of the top Chinese gaming businesses, Tencent attracts the most attention (and rightfully so), but NetEase is no slouch. The company’s gaming business (~80% of revenue), which is driven by a massive collection of proprietary and partnered games, continues to consistently improve:

The content pipeline is strong domestically, and NetEase is a good partner to foreign companies who wish to operate in China or get into mobile gaming in the first place. That’s more or less a given. What’s more interesting are the company's global ambitions — expanding far beyond having only 10% of gaming sales be from overseas. Whereas Tencent’s primary approach has been to expand internationally via numerous acquisitions and investments, NetEase is taking a more hands-on and organic approach. Success of games like Knives Out and Identity V are big hits in Japan, but new studio openings (like one in Montreal) and partnerships (like co-developing Diablo Immortals with Activision Blizzard) show NetEase’s ambitions are much bigger. Expanding internationally will take time to figure out and scale up, but it seems dumb to bet against, especially when expectations are decently low. Link

Amazon Game Studios launches Crucible. Amazon Game Studios (AGS) has faced a rocky road over the past few years, but it continues to plow forward. Crucible isn’t a big hit (and surprisingly didn’t leverage Twitch well), but the game is notable because it’s Amazon’s first AAA game built on Lumberyard, the company’s proprietary game engine. I have no opinion on whether AGS’s next couple games will fare any better, but given Amazon’s 1) abundant resources, 2) willingness to lose money, 3) access to talent, 4) broader ecosystem endeavors, and 5) long-term view, I’m optimistic the team will eventually find a path toward much larger scale and success. Link

Statespace raises a $15 million Series A. If you suck at FPS games like me, you may have heard of Statespace’s inaugural product, Aim Lab. What I didn’t realize is that the company behind Aim Lab has broader ambitions to launch new products that help gamers collect performance data and improve their skills. Link

KingSoft Cloud IPOs. The Chinese company (and now public subsidiary of Kingsoft Corporation) provides cloud services to customers in specific verticals like gaming, education, and e-commerce. It’s 52% and 16% owned by Kingsoft Corporation and Xiaomi, respectively. My quick take (which is still mostly ignorant so don’t take it too seriously) is that the company lacks scale advantages over other players, which partially explains why its cash burn is rising and why Kingsoft Corporation wanted to raise external capital versus fully funding the subsidiary internally. Link

🖥 Content Worth Consuming

Sony isn’t just betting on the PS5. “[G]amers don’t have to worry about whether Sony will continue to invest in big exclusives like The Last of Us Part II and Ghost of Tsushima for the PS5, which launches during the holidays. But Yoshida said that Sony’s gaming future goes beyond what players can do on their couch playing the latest Sony hardware. It is also trying to reach more people through cloud gaming, remote gaming, and mobile experiences.” Link

Why Facebook thinks game-streaming is the future of Oculus VR. “Jason Rubin, a gaming lifer who is Facebook's vice president for special gaming initiatives, said that within Facebook, Oculus could present a major opportunity for cloud gaming. He said that while no actual cloud products were imminent, big brains at the company are thinking hard about how cloud technology could revolutionize virtual reality. This week, Facebook celebrates the first birthday of the Oculus Quest, the company's first modern VR headset that does not require connection to a computer. Facebook hopes that the Quest's ease-of-use propels VR into the consumer entertainment mainstream.” Link

Epic Games Primer. (a long but rewarding 6-part series from Matthew Ball) “[I]f Epic is successful in building out its ‘flywheel’, it will even more dramatically reshape the digital world - from data and privacy rights, to emergent technical standards, the distribution of profits, and the very ways in which humans work and relax. And all of this is critical to Sweeney’s long-term vision of society’s future: the Metaverse. Throughout this primer, we will walk readers through each area of Epic Games - detailing why it exists, how it works, what it hopes to achieve, why it matters, and how it will strengthen Epic Games overall.” Link

Can Hay Day Pop Solve the Puzzle? “At first glance, it was clear what type of game [Supercell was] emulating. The Match 3 + “Scapes” model which is dominated by King and Playrix. A bold move for Supercell, going against giants that continue to rule the casual puzzle space. A bolder move to try to use their oldest IP (Hay Day) and bring it to a modern audience. Can Supercell succeed in this space? Is it enough to compete with giants King and Playrix?” Link

Can Wild Rift become the next Honor of Kings? “Did you know that League of Legends—the world’s largest PC game — is not the largest or most profitable multiplayer online battle arena (MOBA) game in the world? That title belongs to a smartphone MOBA game known as Honor of Kings. However, a smartphone game called League of Legends: Wild Rift launching later in 2020 is looking to potentially become the next HoK.” Link

Manticore: The Next Big Game Creator Platform? “In gaming, sandbox creator platforms to become the next ROBLOX have been the talk of investors over the past few years. The latest entry into the space is Manticore with their CORE platform led by ex-Zynga executives Frederic Descamps (CEO) and Jordan Maynard (CCO).” Link

See you next week!

Aaron Bush (@aaronbush100)

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