This article is part of The Gaming Recap, a weekly rundown written by The Gaming Shark. Please refer to the disclaimer for further information.

The Gaming Recap is the world of gaming, through the eyes of an investment banker. Each week we take a look under the hood of a key theme we’re seeing in the gaming industry, and sprinkle in some news from around the street.

Some news from a few of our friends in the world of gaming:

  1. Aquilini GameCo / EGLX (TSXV:EGLX) – A couple of big pieces dropped last week. Canaccord hit the street with formal research coverage, which you can read right here. At the end of the day, Gaming Street’s publisher, Enthusiast, is creating a truly integrated media play (think Live Nation) where they are wrapping up a monopoly in the highest traffic gaming websites (they announced the acquisition of another basket this week) while at the same time building a global content brand in Luminosity. You may remember last week that they secured a Call of Duty slot in Seattle. Well, this week they announced that all-pro dback Richard Sherman has come onboard with the company.
    1. Here’s the Sherman promo video with Luminosity for all you football fans out there.
  2. Versus Systems (TSXV:VS) – They press released here that the boys were in Asia to meet with potential content and advertising partners focused on the Chinese and Asian markets and that they are planning to deploy their platform alongside a number of partners in the region. Drip, drip, drip…

A quick bit of other news before we geek out

  • Let’s get a quick laugh off our chests, right here, right now. This actor has run Forest run, saved Private Ryan, donned a cowboy hat and been Andy’s BFF, been on an island alone with a red-stained volleyball, and flown a moon buggy back to Earth. Who is he? He’s also apparently got a bit of a career on a board in the video gaming world:

  • Does Walmart care about esports? Check out their shop here. You can buy all sorts of esports gear, and by the way, lots of it is sold out…
  • Let’s talk NRG
    • About a week and a half ago, we learned that Hector Rodriguez was rumored to be joining NRG as Co-CEO. On the 15th, it was officially confirmed that he’ll be joining NRG esports.
      • Hector Rodriguez was the heart and soul of OpTic Gaming, which has been known as the big kid on campus for the Call of Duty scene. OpTic was acquired by Immortals Gaming Club. It’s a big move for one of the key players in the space, and super positive for Andy and the team at NRG.
  • Proof that Dota 2 is a different animal in the world of esports
    • Team Liquid’s Dota 2 team is one of the more successful Dota 2 teams in the world, from winning The International in 2017 to finishing second this year (note the prize pool was ~US$34M for this year’s International). A few days ago, it was announced that they would be leaving Team Liquid to start their own organization, presumably on the back of their tournament winnings.
      • There haven’t been many examples of player-owned organizations. However, given the success of Astralis (partially-player-owned) and their success with Dota 2, there is some precedent for success. Dota 2 is an esport that boasts the largest prize pool for competitive video gaming, and it lends itself to a model where if you do have the best team, you can build a business simply by winning.
  • The war for content is really just beginning
    • Netflix announced that they acquired the global streaming rights to Seinfeld from Sony Pictures Television (the publisher). The terms were not disclosed, but NBCUniversal paid US$500M for The Office, and WarnerMedia paid US$425M for Friends. Both were five-year deals. Hulu, which is majority-owned by Walt Disney, has the current US rights to Seinfeld, paying ~US$130M in a six-year deal that expires in 2021. Speaking of Disney, the current Disney CEO believes there could have been a Disney/Apple merger if Steve was still around. He resigned from the Apple Board last week when Apple TV+ became a direct competitor to Disney+.
      • We’ve spoken many times before on the basis that content is king. Much like the weed business, the construction of games is commoditized, but the brands and associated characters from digital IP (whether it’s Seinfeld or Mario) is exceedingly valuable. I’ve always thought that Nintendo would be a game-changing acquisition for Apple for what I would consider the deepest game IP library in the world, although cultural differences likely make that sort of acquisition challenging, to say the least. It would be particularly accretive as a source of endless IP for their Apple Arcade service.
  • Just some cool content that may or may not have anything to do with gaming:
    • A final message from T. Boone Pickens that he shared before his passing on September 11, 2019: Link
    • How a basement hacker transformed Donkey Kong for the Atari 2600: Link
    • Sorting 2 tons of Lego, many questions, results: Link
  • Fortune’s review of Apple Arcade
    • Fortune dove under the hood of Apple Arcade. At the end of the day – and I’m going to be honest here – I found the article total clickbait. The headline was that it doesn’t go toe to toe with the console experience. The reason I put it here is because I want to take a quick moment to talk about Apple Arcade.
    • Apple does not do things that are not deliberate and part of a multi-stage chess move. Apple does things where you see something, and it’s like in chess where you move a pawn, and that’s what your opponent sees, but you see 5 moves ahead where your queen puts the box around their king for a checkmate. Apple has deliberately launched Apple Arcade as part of a decade-long strategy. What is that strategy? I think they see Apple as becoming a gaming platform. If we really think about it long term, like think about it long term and think about immersive technologies like AR, their ability to wrap a net around game content and distribution will become increasingly important. I expect this is a first move, as part of a coordinated effort with Apple TV+ and Apple Music to own the entire content silo. They are going after Netflix in a big way, but they are also going after every prime distributor of content period.

Weekly Feature: Free Ride

Hey folks,

It’s alright, she says
It’s alright
Take anything you want from me
– Little Wing, Jimi Hendrix

Over the years, a lot has been written about the gaming industry. Here on the Gaming Recap, each week we like to take on and cover a different angle. Whether it’s the quant behind viewership and capital raised, thematic thoughts on the key players in the industry, or trends. There’s this other elephant in the room for gaming, though: the ethics behind it. It’s ironic, because many people I talk to conflate the gaming (video gaming) and the gambling industry together as one unified world known as ‘gaming’. While they are fundamentally different business mechanisms for the most part, in many cases the result for consumers can be the same.

Back in 2013, the gaming website Gamasutra ran a great, in-depth look at the ethics behind free-to-play games. They put on their Erin Brockovich hat and took a deep dive into the dark side of the free-to-play world of gaming. It’s quite the read. I’m going to summarize the salient points here. If you want to dive in this week for the full show, here’s the original article. Enjoy.

The Puppy-dog close: What is free-to-play and why?

Free-to-play is exactly what it means. It’s that simple game, like Candy Crush, that you download on your phone to play for free. There’s this expression in the world of sales called the ‘Puppy-dog Close’. This is an expression that comes from pet store owners who would want to help find a home for a puppy. All they would say to the prospective owner is, “Why don’t you take him or her home for a little bit and see if you two get along, all free of charge.” Of course, in most cases the prospective owner would become the new home for a puppy. Free-to-play games are this concept, done at scale, in gaming.

The idea is that someone downloads the game free of charge and falls in love with it. There’s no finite trial time like ‘free trials’ where, in your head, you’re thinking that if you like the game you might have to pay something. It’s just as simple as download the game, play it for free, and see if you fall in love. That’s it.

The model was pioneered for gaming in Korea in the early 2000s because of piracy. There was so much illegal downloading of games in Korea that the game developers were forced to make the games free-to-play. They then started working on concepts to generate money from people once they were playing the game – things like in-app purchases, advertising, and even loot boxes, which have become commonplace today. While it had gained traction as a business model in Korea, it took the mobile phone revolution for it to really become a mainstream business model for gaming. People quickly realized that app store consumers really didn’t want to pay to download the game. The real way to get people in the door was to give the game away for free and then monetize the user.

How powerful is free-to-play?

In a statistic, free-to-play games accounted for ~80% of all digital games revenue in 2018. Nine of the top ten games in the world are free-to-play games. Perhaps the most notable of these today is Fortnite.

I experienced the phenomenon of free-to-play games firsthand. I met the indie developer who created the game Threes! at the Game Developers Conference in San Francisco. He created it for his girlfriend in 2014. Cool story. It was a paid game, meaning it cost you a couple of bucks to download it and play it. To me, he was a bit of a celebrity, because it was what 2048 copied to become a global hit. As Picasso said, “Good artists copy, great artists steal.” Contrary to Threes!, the game 2048 was free-to-play. That was really the only difference between the games. Except one became a massive global hit (2048), and the other remained an indie game with a cult following (Threes!).

^Google trends graph for Threes! (in blue) and 2048 (in red) when they launched in 2014.

What is the game behind free-to-play?

At the end of the day, it’s Machiavellian.

It’s really about walking the fine line between addiction and monetization. You want to design the game so it is addicting enough that the user doesn’t leave, and at the same time you want to engineer a system so the user is incentivized to spend money in the game. If you’re making money through advertising, it can make the game less addicting because ads are annoying to users, so there’s a balance there. If you’re doing it through in-app purchases, it’s about carefully engineering the game so subtly the user invests their time into the game and feels compelled to spend money inside the game. Candy Crush (parent co acquired for US$5.9B) and Clash of Clans (parent co acquired for US$8.6B) are examples of free-to-play games that have figured out how to do this well.

The fine line between addiction and monetization is where the line between gambling and gaming blurs and is where the Gamasutra article on the ethics of free-to-play starts. In what sounds like a page out of a 12-step recovery to gambling, they quote numerous examples of people who were completely addicted to free-to-play games and were spending their entire fortunes inside these games. These people are known in the gaming (and gambling) world colloquially as ‘whales’ and are the most coveted customers for game developers. Ex-employees at free-to-play game developers were quoted in the article for specifically designing the games to entrap the whales.

The game developers’ stance is that it is the ultimate responsibility of the consumer to control spending, not the developer, unless there is scientific proof of addiction, as there is with gambling and alcohol, for example. Effectively, they are politely asking the government to not regulate their revenue-generating practices, while at the same time saying that there needs to be broad scientific evidence to back up the addiction part of free-to-play games. The consumers’ stance is that they feel they are being drawn into ecosystems engineered from the ground up to addict their minds and push them to spend.

Who is right?

If you’re a game developer, it depends on what you want. In the case of the game Threes!, all a guy wanted to do was create a game for a girl, and that ended up becoming a cult-hit and providing the genesis funding for the game studio he now runs. In the case of games like Clash of Clans, they were carefully engineered by their creators to not only be fun, but to keep consumers in the game and monetize them correctly. One is a cult hit, and the other formed the basis for a game studio that was sold for US$8.6B. Where do you think the real incentive lies?

The largest gaming company in the world by a country mile is Tencent. They control game distribution through their WeGame platform, which reaches hundreds of millions of unique people with a treasure trove of data on each individual person. Their process for game release is to launch the game to the first group of <1M users that they have identified as target market and early adopters. Then they go through a scientific iteration process to maximize retention (which is another word for addiction) in the game to reach a certain target percentage. They will go through this process by gradually releasing it to more users, until they have proven that the game has high enough retention at scale for them to release it to everyone. The process is quantitative, scientific, and deliberate to create games that users keep playing and monetize in the most efficient way possible.

At the end of the day, it doesn’t really matter who is right in this debate because cash is king. The largest gaming company in the world has stripped the game distribution process right down to maximize addiction and monetization of their games. It’s that simple. This process will only continue and, save for some talk about the regulation of loot boxes, I only see it continuing and becoming more scientific.

What’s out there

Enthusiast Gaming (TSXV:EGLX) – Brought Richard Sherman on board

Gaming Street collaborators helped bring our publisher company public last year, and now the merger with Aquilini GameCo has finally closed to become a premium vertically integrated esports and gaming company.

Millennial Esports (TSXV:GAME) – Consolidating their share structure and changing their name to Torque Esports Corp.

Millennial Esports was fully recapitalized with C$15M over the summer and has had a complete restructure from the board and management side. It’s effectively a brand new company, and it is good to distance itself from the OG legacy of Millennial. Good to see.

Versus Systems (CSE:VS) – Signed a deal with HP

Versus makes the technology to let people play games for rewards.

In December they brought on Keyvan Peymani as their Executive Chairman (the former head of startup marketing for Amazon Web Services and a former VP ant Warner Bros and Disney) as they began to scale their platform to new games. They allow players to win real-life rewards while playing in-game, and can be integrated into any Unity-based game.

Axion Ventures (TSXV:AXV) – Presented at the Gateway Conference

The only Canadian publicly traded game studio with a JV with the largest gaming studio in the world (Tencent). Their marquee game Rising Fire is distributed under JV with Tencent. They also have a AAA quality mobile game made in Thailand under JV with the True Corporation.

BRAGG Gaming (TSXV:AXV) – goes live with LeoVegas

GiveMeSport now reaches more than 95M monthly unique users (up from 29M in January 2019). Bragg’s core asset is ORYX Gaming, a B2B gaming technology platform and casino content aggregator.

GamingStreet Staff

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