We expect the data advantage associated with operating at scale to be a catalyst for strategic combinations. Take-Two, in its rationale for the acquisition of Zynga, highlights the potential for “cross-marketing through a larger, shared customer database and improving game economies through more effective data analytics and machine learning models.”
In terms of implications for start-ups, it is still exceptionally difficult to create breakthrough hits, and while we are quite bullish that some of the best creative teams will find their footing with new products, it will become more difficult over time to make the utmost of the economic opportunity from those products as an independent company.
Until recently, public acquirers tended to trade at a premium given their scale and diversification relative to transaction multiples, but those multiples have inverted. We expect premium transaction multiples to be driven by an assessment of potential synergies – opportunities to optimize games with enhanced live operations and user acquisition. Scale and platform capabilities will beget a very significant competitive advantage in finding value-accretive acquisitions going forward.
RECIPE FOR THE METAVERSE
The concept of the metaverse has vaulted to the forefront of public (and investor) imagination of late.
Definitionally, we see a metaverse as a persistent digital world in which users have digital identities, can socialize, and engage in commerce. It’s a place for self-expression and social connection – a virtual environment where immersion and engagement are high.
Sound familiar? If it talks like a game and walks like a game…
While a metaverse may contain different parts of content, commerce, and socialization, it bears observing that online games have contained, for decades, all the ingredients that metaverses bake together. Some “metaverse strategies” contemplate a higher concentration of socialization to alleviate pressure on new content to sustain engagement, but if that comes with a VR headset required, at least in the near term, it leaves billions of consumers outside.
Games are a natural foundation for metaverses, and in the race to build these virtual worlds, user interface will be the key differentiator. Roblox innovated tremendously in this regard, engaging a massive daily audience of 47M users whose average playtime is ~3 hours per day. The number of creators on Roblox has exploded to 10M(15), with an obvious network effect: more content attracts more users, and more users attracts more creators looking to reach that audience.
We’re already beginning to see creators make significant investments in building immersive experiences on platforms like Roblox. When Lil Nas X performed on Roblox, they reached a remarkable 33M viewers(16). When Justin Bieber performed on Wave, a Griffin portfolio company, he reached an impressive 2.4M live viewers and posted the rebroadcast to his 67M YouTube subscribers. Numbers like these push traditional physical concerts into the shadows in terms of reach and aggregate engagement. It not only is possible for artists to reach new fans but, importantly for the platform, to engage existing audiences in new ways and fuel new user growth. While monetization of these experiences has some way still to go, given the value creation on both sides of the equation, we see tremendous potential ahead.
In a similar vein, companies like Overwolf, are investing deeply in bringing creators the necessary technology to build “Mods” and applications on established Gaming franchises, growing rapidly to over 25M users and 90,000 white-listed creators(17). It’s a smaller community of creators that is most appropriate to work with third-party intellectual properties, but the potential to deepen player engagement, create new communities of fans, and grow these existing game franchises is uncapped.
In the long run, IP owners are likely to prefer owning their own “digital theme parks”, rather than simply participating in a third party’s. There is meaningful strategic value in their dedicated fan bases to activate an all-encompassing content and commerce machine that delivers entertainment from multiple vectors. However, these investments require time, technical expertise, and continuous innovation – no easy feat.
THE NATURAL CONFLUENCE OF BLOCKCHAIN AND GAMING
Let’s begin with a primer on blockchain gaming. At its core, blockchain gaming is a technical framework for digital asset ownership in games. In free-to-play games, in which consumers purchase durable and consumable virtual goods, we estimate players spend well north of $100B per year. The value derived from these purchases only persists so long as players continue to play the game in which they’ve made a purchase. Knowing this, a player’s propensity to spend is limited to ephemeral entertainment value. Game developers know this and calibrate the prices of digital assets accordingly.
Blockchain enables a world in which players can buy assets in games like they can buy collectible cards. In this framework, players own the assets they buy – assets that not only have utility and confer status in the games themselves, but also have the potential to appreciate in financial value. Players can trade or sell these assets down the road to attempt to make money or at least recoup some of their initial investments.
While much of this is possible with a traditional gaming database architecture, the use of blockchain technology in games communicates what those games stand for in one fell swoop: decentralization, transferability of digital assets, and immutability associated with rules of the road.
There is extensive academic literature on the impact on economies of the “rule of law”, defined as “a legal order consisting of predictable, enforceable and efficient rules required for a market economy to flourish”.
The World Bank ranks countries’ legal systems on their effectiveness in protecting rule of law and property rights. In 2012, the three countries with the lowest rankings – Afghanistan, the Central African Republic, and Zimbabwe – had extremely low GDP per capita of $600 to $1,00023. These three countries are cited as demonstrating lack of adherence to the rule of law, weak government structure, disruptive land redistribution, and price controls, political corruption, and low standards of living, among other attributes. Academic sources cite a lack of clear property rights and rule of law as main contributors to these countries’ poor economic growth.