10 min read

EGD News #41 — Long Term Sustainability

This newsletter was sent out on August 7th 2020. If you aren’t a subscriber to EGD News, you can subscribe here.

Greetings from the summer cabin at the lake! Today is the last day for us at the cabin and it’s a bit scary to go back to Helsinki, now as the COVID cases are going up again in Finland. It’s about time to get some masks, I guess.

On to this week’s news.

♠ Zynga acquires 80% of Rollic

VentureBeat reports that Zynga Inc, headquartered in San Francisco, US, has acquired 80% of Istanbul based hypercasual mobile games developer and publisher Rollic for $168m.

This deal is a smart move, even with the upcoming iOS 14, where Apple will require end-users to opt-in for IDFA, with expectations for an opt-in rate to be low. UA talent will be in value, even in the post-iOS 14 world.

Ex-Adcolony people founded Rollic in Dec 2018. Here, Zynga is acquiring talented UA specialists, who’ve been able to transition from an ad network to game studio founders and operators. This kind of talent isn’t available far and wide.

The acquisition is a short-term move from Zynga. Previous M&A has consisted of picking up “forever franchises,” including Empires & Puzzles, where players engage with the games for years, even decades. Peak Games, acquired earlier in 2020 for $1.8bn, has Toon Blast and Toy Blast as their remaining games.

In hypercasual, the economics look a lot different. You can retain players for a few weeks, but after that, the audience churns and goes after a new game. As a hypercasual developer, you need to be bringing out new hit games several times a year, to keep your audience.

Zynga needed a boost to their stagnant MAU numbers. “Their overall audience will add 65 million MAUs to ours and that gives us close to 200 million, which gives us more scale,” said Frank Gibeau, Zynga’s Chief Exec. Unfortunately, hypercasual MAUs aren’t made of the same user quality as the “forever franchises.”

In that sense, this deal feels like the NaturalMotion acquisition, where you get talent, tech, and a portfolio of games. I’m hoping it doesn’t turn out to be like the 2012 acquisition of OMGPop, where Zynga got a game with lots of downloads, but a game where players churned en mass.

🤯 Long term sustainability

Joseph Kim did a panel discussion in July 2020 with Lloyd Melnick, Mark Sottosanti and Kristian Segerstråle. The topic was: When will we see the Amazon of gaming raise to the top? And what makes defensibility different for gaming companies, compared to tech giants Facebook, Apple, Amazon, Netflix and Google, also known as FAANG?

I’ve previously covered Kristian’s learnings, in EGD News #26 going through his talk from 2011 and had him on the podcast in June of 2020.I wanted to focus on the mind-blowing thoughts that Kristian shared in this panel, and give my take on why these thoughts are important for game devs and entrepreneurs.

Joseph: What creates defensibility for gaming companies?

Kristian: “[For defensibility], talent and culture are important. Gaming is different from the consumer internet. Gaming is an alchemy of art, design, technology, culture, and business knowledge. For free-to-play, it’s economy management, user acquisition management. More people are required to share their views, discuss, [give] feedback, and find that intersection of product and insight where all of those things fit.”

“As a company builder, I’ve become incredibly sensitive to how those disciplines, [of tech, design, performance marketing], talk to each other, and how they listen to each other as a predictor of how well things go. [Even at perfection], you still have a certain hit rate.”

Joakim: Making games isn’t simple. Gaming is an alchemy of art, design, technology, culture, and business knowledge. And getting that right, you only make your odds better. IMHO, going from 1 out of 8 hit-rate, to 1 out of 4.

(Photo by Josh Olalde on Unsplash)

Ouija game

“Disciplines are playing an Ouija game, where [one thing] might work from a design perspective, and another might work from a distribution perspective, and other things might work from an economy perspective, and you sort of land on a spot.”

“[You have to] manage the culture. [And how do you manage] the culture moving forward, so you don’t get stuck in thinking that you’re awesome because you made one good game. Constantly question yourself on figuring out how to evolve the culture.”

“It’s a very capital intensive industry, and things are getting more expensive to make. Having financial strength is important. Being able to make multiple bets. The second that you have a cash cow, you’ve already set yourself up for short-term defensibility that allows you to build long-term defensibility.”

Joakim: To utilize the “1 out of 4” and get those four bets out, you need to have the capital for those four bets. After you have success, you need to manage the culture and not let your guard down.

On Riot

“As a long term player of League of Legends, I always felt like it was always made with love and a lot of listening to the community and the player base.”

“I think that has created a certain trust in [Riot]. And [players] can say that it’s worth trying this [new game] out because we know Riot is super serious about the culture, about community and players.”

Joakim: There are only a few companies in the world who inspire similar care for their audience. Supercell and Riot are probably the best examples of this.

Not defensibility, but sustainability

“[Twenty, fifteen year ago,] retail distribution was the main distribution model, [and it had certain defensible elements to it.] But even there, technology moved forward all the time. Many companies died in the transitions, because they weren’t able to change their internal tech, culture, approach and talent to deal with these [changes].”

“[Gaming is the] business of making art, culture and experiences. It never stands still. It is not a distribution business [like Amazon,] where people want boxes at home as quickly as possible from a delivery thing. It’s never a [static] platform. These experiences always move forward.”
“[If you] attempt to build a game business off the back of the some kind of defensibility, like assuming that just because “I own a lot of network of ads, or whatever, that I am now defensible.” I think it’s a dangerous idea.”

“Long-term sustainability comes from a series of short term sustainabilities. The first thing you need is a team and then you need a little bit of money. You have to raise enough money to be able to make a prototype so that you can convince people to put in more money. [It’s about] financial stability: Do you have enough that you can go and invest deeply into the things that you want to invest in, knowing that it’s okay to fail? Because gaming is risky.”

“If you started a games company ten or fifteen years ago, you could get away with having a team of four people and start making [a game]. Today, you can make the core game with four people, but you’re now starting to need a set of different skills. There’s a big difference between having $20 million, versus $5 million in the bank from where it used to be.”

Joakim: I liked that Kristian turned the discussion from defensibility to sustainability. Gaming never stands still, so you need to keep evolving and seeing where you have your short-term  opportunities. That is the key to growth.

On Zynga and Stillfront

“One of the more interesting things that I’ve been following recently has been is the Zynga strategy or that of Stillfront in Europe, where they’ve become holding companies of multiple studios, where together they leverage the fact that you can get relatively high multiples from public markets, from having many profitable studios. In that way, you create massive financial strength.”

Zynga’s strategy is admirable: “Zynga had $1.5 billion in the bank when Frank Gibeau joined [as CEO]. And they identified the situation as “Hey, maybe our internal studio isn’t set up correctly. Let’s figure out what this company needs to look like in five years? We need to have several top 10 games in different categories and genres one way or the other. Right? Because that way, we are going to create financial strength for ourselves to figure this out.” Then they go ahead and acquire aggressively and successfully. Is that the recipe for the very long term? Probably not. But it does buy them the next five years in order to figure out the rest.”

Joakim: I think the big takeaway here is that there are two ways to defy the hit-driven nature of games business: 
1) You acquire studios with a hit game (Zynga), or a profitable “long lifecycle games.” (Stillfront). 
2) You create games, but then you need a few things in your toolbox.

  • A: Huge war chest to try things out. As K said “The difference between having $3 billion and having one billion in the bank is maybe not so big. But there’s a much bigger difference between having $20 million or $5 million in the bank.”
  • B: You have the right people
  • C. You have the right culture. As K said “Talent and culture are incredibly important in games.”

Continuing on sustainability

“Why I find running game companies so fun is that it’s always such a trade-off between trying to figure out how we do something awesome today and how to do it in a way that we can also do awesome things tomorrow, so that we can be more sustainable?”

“You need to have a team that can truly trust each other’s viewpoints on calls. Like, I always want to have a project out asap, but I need to have a CTO that can tell me that you can probably get it out in that time, but we’re gonna be in trouble in six months time, because we wouldn’t have done [some important] things, and you’re gonna be screaming at me for why our live ops is so slow.”

“For sustainability, you have to have meaningful failures reasonably frequently. If you have something good going for you, you stop questioning yourself, you stop having the kind of paranoia and nightmares about [failure]. That’s when you [loose the] aggressive hunger that you have to have, especially in gaming, where the status quo never stands still. It constantly keeps moving.”

Joakim: In gaming, culture work is so much about prioritization: Are you pushing to get something out today at all cost or are you taking the time to build something that lasts. And, as Kristian said, the most dangerous mindset for a gaming entrepreneur is to think that “hey, things are going well, then why question anything?” I’ve been in that spot several times, and it’s hard to keep your guard up.

Matthew Ball recently wrote about Nintendo, and there he mentioned about Zelda, the team getting replaced fully to do the next Zelda. “Following the success of the first entry, a top-down action-adventure game, Kotaku reports that Miyamoto-san told the team—not the Zelda 1 team, but an entirely different team—that he wanted to make a side-scrolling action game where the player had to attack with, and defend against, high and low attacks.”

Why is that? Because you want new ideas, you want fresh talent, you need to have several members of that team that are just passionate about the genre, space, the games they’re trying to build. And not having the mindset of  “Hey, things are going well, then why question anything?”

📄 Blog

50 Principles for Gaming Startups — I wanted to write out my 50 principles for success with gaming startups. All of them will help you imagine a better game development startup, and I hope they inspire you.

Here are a few:

Start with Why: Game devs often seek 80% proven ideas and 20% innovation. Rather, devs should ask WHY, to find “reason for being”. Find your Ikigai: what you’re good at, what can make you money, and what the world needs.

Reason to start: Don’t start a company just because you got laid off. BUT if getting laid off made you realize you should have quit months ago to work on a problem that you’ve got a burning desire to solve, then now’s the time.

Co-founders: Make sure your co-founders can work and hang out together. One way to figure this out before starting is by jamming and shipping a small game together. This will reveal the people around you.

Read more here.

🎙 Podcast

In this week’s new episode, I had a chat with Shaun Rutland, the Co-Founder, and CEO of Hutch, a racing games company from London, UK. Their titles include games like Rebel Racing, F1 Manager, and Top Drives. When founding Hutch, Shaun and his co-founders wanted to create a special company that would give the power and creativity to their staff.

— EGD 066: Shaun Rutland, Hutch

📃 Articles worth reading

+ Deconstructor of Fun: Battle Legion — I’ve been talking about Traplight and its development approach for a year now. Finally, there is a deconstruct available on their innovative strategy game, Battle Legion. “I see Battle Legion remixing elements of Clash Royale, but also C.A.T.S and Dawn of Titans. I would go as far as to say that Battle Legion takes the aspiration of Natural Motion’s Dawn of Titans’ 100 v 100 battler and lives up to it. Dawn of Titans was ground-breaking in many ways, but ultimately it couldn’t build a mass market hit, which is why I categorize this mechanic as “New” with Battle Legion.”

+ Interview with Alex Zhu, Head of TikTok — Blake Robbins curated this fascinating interview with Mr. Tiktok, Alex Zhu. In this interview, he shares his startup failures before Musical.ly, how Alex learned that utility matters in apps, and how they thought about growing the influencer community. “TikTok will be America in this analogy, and YouTube/Instagram will be Europe. How do you convince creators from other regions (YT/IG) to move to America (TikTok)?”

+ Mobile games revenue hit $19.3 billion in Q2 2020 — There’s been a massive increase in revenue numbers for mobile games in the last quarter. “In May, revenue hit its peak at $6.6 billion for the month, representing an improvement of 21.5 per cent year-on-year.”

+ On Inflection Points — A long-form historical and forward-looking view decoding the importance, force, and changing dynamics of inflection points within startups, technology, and our world broadly. I liked how it covers the forces that separate billion-dollar and trillion-dollar companies, the types of inflection points, and how companies catch up to incumbents.

💬 Quote that I’m thinking about

“The New American Dream is to build a profitable, sustainable, remote software business that can be run from anywhere, scales nicely, and prints money.” — Tyler Tringas

Sponsored by ironSource

We all know that developing a great game is one thing, but developing a great game business can be something else entirely. That’s why some of the top game developers in the industry use ironSource’s game growth platform, which takes care of both sides of the business, helping you monetize to fuel user acquisition, and vice versa.

From their ROAS Optimizer, the only product on the market built to optimize UA campaigns towards ROAS according to both IAP and ad revenue data, to LevelPlay, their in-app bidding solution, they offer everything you need to supercharge your growth. See for yourself at ironsrc.com

That’s it for this week. Stay safe and wear a mask.


Previous EGD News

Here are a few previous EGD News items