The Warning | Game Companies Face Structural Transition in 2021
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2021 will be a year of potentially big disruptions and changes in the gaming industry. What are the changes and are you ready?
Heed my warning! Don’t say you haven’t been warned…
Some of the biggest changes impacting the industry in 2021 include:
- Post-COVID Renormalization
- Lack of M&A Targets for Growth
- Impact of IDFA Deprecation
- Game Studio + Ad-Tech Vertical Integration
- The Rise of China
Many of these changes have been in the works for years but are now just coming to a head in 2021 which may become a pivotal year of change… especially when we look back 10–15 years from now.
1. Post-COVID Renormalization
2020 was quite arguably the best year in the history of the video games industry period. Many game studios saw 30%+ increases in both downloads and revenue. Based on the massive tailwind from COVID, many formerly not profitable or barely profitable game companies were able to finally get well above water.
Obviously, your mileage may have varied. Not all games were impacted the same. Games that enabled social interactions and fulfilled key user needs (especially those intensified by COVID), fared better than others.
Case in point, Among Us (Downloads):
And Roblox (Net Revenue):
Many of the acquisitions and future planning that occurred over the past year were predicated on the growth we saw from 2020.
One thing I know for sure: Big company execs generally tend to extrapolate linearly and create a lot of growth stories to justify various initiatives.
Therefore, one big question we should consider is how big of a disappointment are we in for once society renormalizes to a post-COVID society? Will some companies planning against COVID extrapolated growth get caught with their pants down?
I strongly believe that we’ll be at a slightly higher “normal” from pre-COVID based on new user habits and introducing a much wider audience to games. However, the degree to which 2021 will comp back to 2020 remains a question mark.
The big implications to watch for after renormalization:
- Have big company performance targets based on comparison to 2020 led to over-investment? Will it cause big disappointments?
- Will some companies flip back to losing money?
- Were some genres/sub-genres of games permanently transformed in terms of attractiveness? For example, more socially oriented games?
2. Lack of M&A Targets for Growth
Here’s a conceptual graph of what’s been happening from an M&A perspective for at least the past 5 years:
You need to think about ecosystems. When the wolves hunt all of the deer in a forest, some wolves will have to die off until more deer populate the forest.
If growth by M&A dies off for bigger game companies what are the implications?
For all of the talk from the consolidators like Stillfront, Embracer, Zynga, EA, etc. about “plenty of targets left,” actions speak louder than words. When we see companies like Zynga shifting to ad-tech and platform expansion, clearly they see the writing on the wall. All of Zynga’s growth has come from M&A over the past say 5 years. The man behind that growth — Chris Petrovic — is no longer at Zynga.
Let’s be real: all of the “easy” mid-tier targets have been hollowed out. Although Chris disagrees with me to some degree on this.
For a very nuanced and deep discussion on the current state of M&A in 2021, you definitely want to check out this discussion with Chris Petrovic, Eric Kress, and myself on GameMakers here:
All of the public game companies will be super hungry for growth. The key implications you should take away from this as the M&A market continues to tap out:
- #1. M&A will move to bigger (as I predicted on the Glu acquisition) and smaller (pre-product with high earn-out structures) targets
- #2. Game companies will continue to vertically (e.g., ad-tech) and horizontally (e.g., cross-platform) integrate seeking growth
- #3. As public game company execs run out of ideas, they will make some really dumb moves (and hopefully a few smart ones) or throw their hands up and just increase share buybacks.
3. Impact of IDFA Deprecation
Too much boring crap covered on this topic. Let’s get straight to the point: if properly enforced, here are the takeaways you need to be aware of:
- Ad Rev & Related Game Genres: Still too early to understand the long-term impact, however, early indications seem to imply a pretty good chance that ad revenue will be significantly impacted negatively. This could be very bad for certain ad-focused game genres like Hyper-casual and idle.
- Hardcore Games: In theory, the elimination of targeting high LTV players could negatively impact hardcore games’ ability to maintain a moat of deploying user acquisition to price out new entrants.
- Payment Behavior: Think about a supply and demand curve for acquiring players. If the supply of high LTV players disappears, then the demand/volume curve for lower price points to acquire players will expand. Therefore, products that can achieve higher conversion of players even at lower ARPU targets to payback, the more ads they can buy. *If* this plays out, the game developers that understand this, win growth.
- Casual Games Competition: The elimination of post-install events to players doesn’t mean the elimination of all data. SKAdNetwork provides limited attribution. I believe that MMP data could *potentially* be used to give a competitive advantage to scaled players with a strong data science team for casual games (see Section 4 below). If true, casual may become harder to compete for medium and smaller-sized players.
- IP Renaissance: Depending on how performance for ads works out, we may see the increased importance of organic installs and ASO. Don’t be surprised if IP licensing heats up.
For an in-depth discussion on the impact of IDFA to ad revenue, we go super deep in this GameMakers video below:
4. Game Studio + Ad Tech Vertical Integration
Let’s leave the political and business ethics arguments aside and focus just on implications.
But let’s get to the point since none of us are here on this earth for that long and we got shit to do:
- Adtech verticalization will likely result in one of 2 primary scenarios: #1. Walled Garden Netflix model or #2. Ad networks with an attached game studio business that serve external customers, but are basically compromised with conflicts of interest.
- Applovin is seemingly transitioning from #2 to #1
- Zynga seems to not quite know what it will do. However, based on public comments seems like it is going for #2.
I get a lot of very naive pushback about my warnings regarding conflicts of interest in the #2 scenario above. What we’ve seen in practice, however (and in just the past few weeks more specifically), is that people should have listened to me.
And to all of the haters who called me a conspiracy theorist 🖕🖕🖕 🤣
On a more serious note, let’s get to what you should watch for.
First, you should watch for the direction of companies like Applovin and Zynga towards the open (#2) or closed (#1) model described above. If Applovin is successful with the closed model, their “Netflix of gaming” could then imply a black hole of an audience that your games will have difficulty accessing. In the open model, on the other hand, you’ll have access to the audience offered by those companies but you should be cautious of the competitive risk.
Second, a big reason to work with open model ad networks (despite being compromised) would be if they are able to use that trove of data to provide capabilities like auto ROAS. I’ve speculated quite a lot (based on conversations with Josh Chandley) that companies like Applovin and Zynga are furiously attempting to tie MMP data to help predict the effectiveness of ad campaigns. If you can probabilistically relate SKAdNetwork data to an ARPU profile (data that the MMPs have) using data science without fingerprinting, you can potentially enable UA features like auto ROAS. While I think AppLovin and Zynga don’t figure this out for mid-core and hardcore games (you have to track and predict too far down funnel), I think they may make something along these lines work for casual games. Therefore, keep an eye out for this capability being developed by the studios that vertically integrate adtech and buy an MMP.
Third, the open model is currently under a fair amount of scrutiny and facing some backlash. This model may face problems gaining traction from customers based on lack of trust. The UA community is getting wiser and is generally well connected. Don’t be surprised if this whole model falls apart due to the conflict and lack of trust issues. It’ll be a tradeoff of scale/inventory/performance vs. trust.
5. The Rise of China
MiHoYo reported that Genshin Impact cost $100M to create and the company expects to spend $200M per year on liveops development.
In RPG and Strategy genres, Lilith is proving to be one of the biggest and best F2P game studios in the world. Further, Chinese studios dominate shooter games in F2P with Tencent studios responsible for both PUBG and Call of Duty Mobile and also rumored to be working on the APEX Legends mobile game.
For big games, there currently does not seem to be a viable alternative to working with China if it’s a F2P game. China now has a massive cost structure advantage but also a highly skilled workforce with experience in building these high-end game experiences.
The implications here are likely:
- Continued Partnerships: Expect to see big IP brands continue to partner with Chinese teams to build big F2P games
- The Demise of Western Incumbents: If nothing changes, expect the eventual demise of Western focused companies like Activision Blizzard in favor of a Chinese counterpart that becomes the next generational game company
- Hybrid Model: It’s rumored that potentially up to or exceeding 2/3rds of Riot’s Wild Rift team was based out of China. We may see more hybrid teams in the future, although political tensions may stymie this model from gaining traction.
Conclusion
In conclusion, my advice to all of you in the industry this year is to keep your eyes and ears open and think critically about what’s happening in our industry. Some changes that may seem subtle and nuanced in our day-to-day may wind up being major factors for structural change when we look back 10–15 years from now.
One of the most important initiatives for game studios coming into 2021 will be to do your best to understand the implications of all of the changes occurring in the industry. Think strategically but also think with data. This is a good time to have a good taxonomy with lots of current market data to help you understand the trends and the impact of some of the changes discussed above.
Good luck!
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