Eric Kress: Dissecting The Video Game Market - The Metacast by Naavik

[Music] hold up [Music] hi everyone and welcome to the metacast by novik a podcast in which we explore the business of video games i'm aaron bush co-founder of novik and your host today and i'm delighted to be joined by eric kress a brilliant video game industry analyst and principal of gossamer consulting group eric thanks for joining hey thanks for having me huge fan of you guys particularly lars who i think is a genius and every time i listen to him talk about things i'm i'm inspired for someone that actually does the work and does the research and reads and understands so uh i'm a big fan of you guys yeah well shout out lars we enjoy

working with you um but eric before we dive in um into what we discussed today just for for those who don't know you could you tell us a bit more about your background and what kind of work you do at gossamer sure um i've been in the video game space about i think 25 years now um i started off in investment banking but moved into industry pretty quickly uh i think what makes my background a little bit unique compared to most is that i've spent half my career in industry and half my career on sell side research so advising hedge funds and others on investments in the publicly traded names and privately traded names for that matter i spent what seven years at ea two years at uh kabam uh to learn mobile to get my phd in mobile um but basically like strategy roles forecasting roles biz dev corp dev those type of roles throughout my career there and then i spent six years at bay street research doing independent research and

i've been the last seven years doing independent research at gossamer and what's different about gossamer is that i'm doing both so i'm also not only consulting for about my 16 17 clients on on the buy side hedge funds and long only but i'm also consulting for warner brothers and forte kind of delving into the nft blockchain space so it keeps me frosty it keeps me one one foot in investments and one foot in the industry which i think gives me a unique unique perspective on the industry great well today we're going to be talking about a wide range of topics ranging from big picture industry numbers to specific companies and you know a quick caveat up top that um you know eric he's an expert on all of this we could probably do a whole podcast episode about each of these individual topics but we're going to try to keep it high high level and you know kind of poke in where it's interesting but i figure since we have ericon we should try to cover as much ground as we can

but you know given you know the state of the market and economy not everything is necessarily bunnies and rainbows so i figure before we we dig into anything that's doom and gloom uh let's start on a positive note eric when you look at you know the business and state of gaming today what gets you excited what are you excited about you know i have to go back to my traditional roots on this one as i am uh very very excited about this next console cycle i think uh i i still believe that the consoles in general are more recession-proof than other industries and and there are some concerns about the longer term impact of like software as a service revenue like how is that impacted by a a global recession that's likely going to happen but the conscious the console cycle has been really really strong through uh recessions i think they grew like a 10 kagger over the last two recessions in 08 in 2000 or stock market crashes in that case

um and i just don't think the future business is going to be much impacted by recessions they're basically on their own uh you know platform cycle is and we are basically at the beginning of a new cycle for both ps5 and xbox series x and i think that will carry us through for the next two to three years um and as we see the supply chain improve for consoles and more software come on board because of all the issues around covet and and lockdowns created some issues with the software development pipeline i think it's going to be amazing cycle probably the biggest cycle ever for both sony microsoft and nintendo so that's what i'm most excited about over the next three to five years yeah uh what about on the game side are there any games that you're particularly loving these days or looking forward to soon i'm actually kind of excited scarily to see what world of warcraft comes up with with this next expansion because i've been a fan of world of warcraft for a long time yeah but in terms of a new game um uh oh my god i

always forget the name of this game but bethesda's star link or whatever star whatever that game starfield starfield sorry that is the one i'm most excited about was really disappointed that they pushed it out till next year but um you know as long as they come out with something quality i'll be happy about that so that's probably the one i'm most excited about yeah i'm really excited about that too a little nervous at the scope but i'm curious to see what they what they come up with there um but you know also you know it's been a year or two since we talked and we were we're kind of joking before we recorded the last time that uh we we really discussed anything we were we were talking about skills right before it went public it's back and we've we've seen how that has played out but but really you know quite a bit has changed in the industry um since then and so i'm curious over that time uh what have you changed your mind on like how have you evolved as an analyst in your thinking over the past couple years you know i i would say that the the one major thing that happened over the last

couple years that's really been bothering me a lot i've talked a lot about on the deconstructor fund podcast is i guess the extent that apple will go to reinforce their marketing message around privacy you know like it's one thing to have a marketing strategy but it's another thing to literally destroy the entire ua landscape by you know almost overnight with their you know draconian policies um you know i apple i've been talking about this for a while but apple's been hostile towards gaming ever since the beginning i just don't think the executives at apple really particularly like gaming and they certainly don't like the advertising part of gaming um and and that and that that's part of the reason they're going after facebook and others but i really didn't expect them to be this draconian right to really dismantle the advertising ecosystem before our eyes um in order to maintain control of their own platform i i get it i get it from apple's perspective but i just didn't realize and expect them to be as hostile so but we're seeing the you know the impacts of that every day right we're

watching things like unity app love and iron source get absolutely decimated right um and yeah and then we're seeing the impact on zynga still front platika anybody in the space is getting just crushed and this is not just the economic downturn this is actually a fundamental problem with ua and everything else and so that's the first thing that i just didn't think they would go this this bad it would be this bad right um but apple's done in the past and they'll continue to do in the future they protect their own um the other thing i don't i don't know if i was off on this but like i guess the one thing that i'm very concerned about and don't really know how to think about it 100 is what the impact of the subscription models are going to be on the console side um you know microsoft has always kind of been kind of leading down this this this road for a while i don't think sony will follow um but on the one hand i see it's a huge value proposition for the customer no

doubt but it is a really really great deal for the customer that you know it has the potential of opening up these consoles to a much broader audience right and that that's really really good for console but it also reduces the perceived value of the content that they're providing right so when you get a subscription for our 100 bucks a year for 200 pieces of content that implies a 50 cent value for each product right i mean saying it very simply right um so i don't know what it means for the long term viability of the console generation does it mean that it makes it harder for competition to compete as microsoft continues to deliver more content um do third parties have a challenging to compete particularly games that are competitive what with what microsoft offers for free or as part of the subscription like i think the impacts of that really knows that are aren't known at this point and and and will

um uh will basically manifest themselves over time and i know that like places like sony and others are just very concerned about what this actually means for the long-term viability of the console space but but we'll see that's the one thing that i'm just kind of trying to get my head around these days yeah so i was planning on talking about this later but i think we can go ahead and pull this part of the conversation up a little bit and i i just sort of have a like a random question what do you think the the odds are that game pass is ever allowed on playstation or i guess you know even before like the ps6 launches or something like that and let me start with you know my quick take that maybe people think i'm crazy for maybe you think i'm crazy for but you know game pass is best served by being literally everywhere and playstation should want to host it because doing so then removes a huge key maybe number one reason why anyone would ever buy an xbox so it should happen in my opinion do you think i'm smart or stupid in saying that wait you're suggesting that the

the xbox server should be on the playstation console is that what you're suggesting yeah because game pass you know is best served by having the widest top of funnel and if playstation let it on uh let xbox game pass on playstation then why would anybody buy xbox if you could just buy playstation and get both playstation exclusives and game pass you're out of your [ __ ] mind that's what you're that's never going to happen that is never going to happen not at a japanese company there's no way they're not sharing their platform with a competing platform period end of sentence not it's not a not at nintendo not a well nintendo's different maybe but like not not in sony no no that will never happen i i hear what you i know what you're trying you're just basically trolling a little bit but like i understand the point but they they will live and die by their content and their console and their ecosystem and their uh social network and sharing that with other third parties is just not

part of their calculus at all now the game is changing right and this is part of my consternation is like but but sony in general has not ever really changed that much over the years it's really it's herculean to change their direction hell they didn't even have any like software as a service developers until they acquired bungie like six months ago so it's like yeah they move at a glacial pace um and i don't think they will ever allow microsoft to be on their platform now the irony is that they are suggesting this on these these calls about act the activision acquisition is that that may be the way in which they get around these issues around monopolistic power as they say hey late we're offering sony the ability to put xcloud on our platform and that should alleviate any concern of competitive anti-competitive issues with call of duty or other franchises from activision but that is just not something they're

going to be willing to do and ironic i would just talk to my friend sony about this yesterday so i was like what do you think and he's like uh no not out so well i hear it is worth a shot than asking um i guess tangential to that are just related to to microsoft and and activision do you think that are you more or less nervous since that deal announced that it will go through and like it and if you are nervous at all is that because of the regulatory reasons or microsoft not wanting active activision anymore i'm just curious how you're thinking about that you know it's a it's a really complex issue and i have some arbs that are that are clients of mine that that have been you know doing with this and the zynga transaction etc and uh so i talk about these issues a lot about what likely could happen um and the way the stock is trading right now it's basically there's a huge contingent of people believe that this

deal is not going to go through right so um i was i above the line that it likely will go through because microsoft has like basically one bullet in the chamber and this is the one that they have and so they're gonna go full court and make sure it happens um but this is another one of those subjects that's so complex that it would take me like an hour to like go through all the all the different issues so i'm not i'm not i'm not going to do that right now but what i will say is that my conviction level on whether this deal goes through is going down over time because i think there is a chance that north america will use this as an example right there um of of of expanding how they perceive anti-competitive behavior on on the from the technology stuff and and even though microsoft is not as a direct target like facebook or google or others i think this might be an example and then the other thing that i've always been worried about that may or may not manifest itself that's hard to say is that generally europeans don't like microsoft like that

there's a lot of bad blood historically about microsoft and so i always thought like the uk would be the one that would block it or you know the eu some eu entity would block it and that would cause their problem but it could be combination of both or it could be one or the other who knows right um but i i think i would give it like a maybe a 70 chance of getting through and i was probably more like a 90 chance before so um but anyway that's something i'm kind of looking at closely and and if anybody's really interested i can go into the nitty-gritty of it but i'm not going to do that right now that yeah no that's fine i yeah i i guess i would probably lean more towards it's likely more likely than not just because regulators would have to really stretch how they define this being monopolistic or anti-competitive at all and it makes more sense for for them to you know put more rules around what would happen with you know exclusives with game pass and things like that more so than stopping

microsoft from making from making deals but also what do i know and governments are they can do what they want in a lot of sense i don't necessarily have to always make a ton of sense according to us um but anyways let's back up some more we'll talk about more companies uh later but i want to talk about some some big picture games industry numbers which right now are not they're not awesome so may 2022 we saw the lowest month of consumer spending on video games since february of 2020 so pre-coded total video game spending is down about 20 year and even mobile gaming which has been you know the number one source of turbocharging the industry over the past decade um that segment's been having a pretty hard time too so eric can you help unpack what is going on here what are the main drivers and uh perhaps more interestingly are there any drivers of this slump that you think are being under discussed

well first of all the apple apple privacy policies impacting the mobile business is by far the biggest impact uh to the space right now so mobile year date is down i think like 12 13 according to sensor tower um and to put that into perspective they've been growing at 20 a clip for the last decade right so we're talking about a 30 move from where it was over the last 10 years and so and and some people and i did a little bit of analysis on the macro issues in terms of postcovid you know uh impacts and stuff but the majority of it first of all it has nothing to do with macro economics right has nothing to do with recession or people pulling back spend because that's going forward right we're talking about for the first five months of this year which honestly didn't have any impact on anything to do with the macro economic concerns right now but but uh but there are there is some hangover from from kovid i'll admit that to some

degree but the impact is so directly correlated with what apple's been doing on the privacy side that i most of it has to do with apple right um and so yeah and and that's not changing anytime soon and if anything it's going to get worse right so if they actually start blocking ip tracking and all these then the source of user acquisition goes away it's going to get worse before it gets a lot better and so i think apple privacy is the biggest impact of the business um from the console side this is just a platform transition problem right so we're in the middle of a transition this is what happens during transition you have less software you don't have a lot of availability on hardware and and you couple that with the fact that kovit kind of delayed a lot of uh of games that were in development like we're just not seeing enough content to come out but the next two years look amazing right and and at the end of this year we're gonna get the biggest call of duty ever um and so that's gonna go into next year then we're gonna get some really amazing releases oh and god of war is coming so

i think the console stuff will fix itself kind of as i said earlier um but the mobile stuff is going to continue to deteriorate uh because not only are apple's new policies coming but google's policies are going to come into play um over the next 12 to 18 months as well so uh yeah i think mobile is kind of in in rough shape right now gotcha so you know as we think about the next year you're basically saying that you feel pretty good about console performing well more uncertain about mobile like really you know finding its footing until maybe some you know more privacy changes occur no what i'm saying about mobile is that there's no way they can recover right there's no way they can recover to the previous growth rates on mobile for the next couple years until all this gets sorted out and even then if they don't have if you don't have the ability to target big spenders

it's it's this whole business is going to collapse and it's in its under its own way because most of the game big big games are big genres that drive the industry and social casino strategy even puzzle these days is similar is all driven by ua and direct targeting at wales and like if you can't do that you know there's just no way for that to to get that type of growth it's going to go more casual i'm sorry we're going to get to this later but it's it's just not it's going to be a different business uh going forward um and people need to adjust to that that new world order okay yeah that makes sense um there's also a lot of talk right now about you know probably being in a recession um and you know we we talked about a lot of down numbers not all of that most of that is because of macro factors and it's it is pretty commonly believed that gaming is pretty recession resistant but i'm curious how how do you think this recession probably is going to be different from previous

ones after all you know last time mobile gaming barely a thing free to play was barely a thing you know platforms weren't competing on subscriptions uh you know previous recessions like how could these new factors just change what how a recession plays out in the games industry yeah i i generally speaking the reason that i think um console and gaming has been recession proof over the past two recessions is because this is a core demographic of 18 to 44 year old males if they play madden they're going to buy madden every year they don't care they get a lot of value for their for their purchases and their die hards and they're going to keep playing right uh fifa same thing right and so i don't think that calculus really changes if you're a fifa fan you're gonna buy fifa right and and both man and fifa always tend to grow or basically flatline during these recession periods as well just as in

specific examples and again console generations are based upon uh based upon the uh the platform transitions you know so the up up upgrades in the next cycle so the cycle driven not not macro driven the difference between this cycle and last cycle and the last cycle before that is that we now have software as a service so software as a service may actually be impacted potentially by recession so you can buy the main game for fifa but are you going to spend as much on ultimate team this year given macro concerns right or you know risk of losing your job i still don't really think that that is necessarily very elastic spend i think people spend money on this stuff because it's their hobby right um but that leads you to the the mobile problem right so mobile is software as a service by definition right so ongoing spend continual spend over time you know with whale driven spend as well and so and again this gets very complicated as well so if you believe like i do that

majority of the spend in this business is driven by whales how sensitive are they to macro economic concerns right so if you're spending a hundred thousand dollars on a strategy game in a year right are you going to spend 20 less or i don't know like it's it's hard to say that it's really hard to say i would say that they probably are less less willing or less impacted by macroeconomic concerns but i could be wrong on that i don't know and maybe on the margin you see lower level spenders leave the market and stop spending but um but to that to that degree i think obviously mobile has more at risk than than console because even though it is a big part of the console spend it's not the majority um the majority is hardware and full game software um so if that was clear let me know but if not uh i can explain further i just with software as a service it does change the calculus a little bit and and that's kind of what i'm going to be watching but as in terms

of like the core console business i'm not too worried um and mobile business is like i think the impact of idfa and apple's transgressions is more of a concern than macro generally speaking yeah yeah i think that makes sense basically you're saying on average the companies that already have the pretty strong footing in terms of tailwinds like the console companies and main players in that space will probably be less affected by macro issues whereas the companies that are already on weaker footing might also be the ones that get impacted a bit more by macro factors although a little tbd on how elastic or inelastic that spend is is that does that sum it up well that sums it up and then there's also the idea of that marketing spend right you know the budgets may come down and so like new games and new entrances in the market is going to challenge but companies like king for instance like they got nothing to worry about right they're entrenched in the market they have an audience that absolutely loves them um they don't even do ua anymore

right so they're not impacted by apple at all right and so they're banking on advertising so they got nothing to worry about right i don't think ea has anything to worry about madden fifa right but if uh if you're you know a new company that's coming out with a a new strategy game good luck right like that's impossible or a new casino game like in this market you're never going to make your money back right um yep makes sense um how do you think about m a in the next couple years related to all of this like how do you think it's going to look similar or different to what we've seen in the past couple years and i guess like the most obvious question of this is like are we still in an environment where big deals like microsoft buying activision or take to acquiring zynga could still happen or is that that mostly behind us at this point i think the mega deals are behind us at this point given where evaluations are you know i don't think like disney for instance is in any position to do an acquisition of 60 billion dollars for ea or something

stupid um you know microsoft like i said earlier you know they have one bullet in the chamber right they can't do another big acquisition or they will get scrutinized by every government in the whole free world right um so and then the question is like what other companies are left that could do these big transactions right and the asian companies are out right because they can't do any transactions right now given all the the the the the regulation and and scrutiny that's going on like i'm sure they want to but you know 10 cents like sitting on in their hands right now they can't do anything because of all this these issues but they would be a be a concern going forward potentially amazon has always been one but there also have a lot of scrutiny on them as well but amazon is the is the one like last company that i worry about not worry about but that could do a big transactions but from my perspective i don't think we see any big transactions take two's gonna stay independent ea's

gonna stay independent ubisoft should be sold because they don't know how to manage that their money managing that company in the ground um so something should happen with ubisoft but i wouldn't consider that a big loss uh or a big big acquisition relatively anyway um uh today today we we saw as a you know recording um playteka is getting majority bought by a private equity firm do you think that trend is going to stick or is this more of a i think that's a fake i think that's kind of fake news it doesn't make sense honestly because the stock is down five percent like if they were buying it for twenty one dollars a share why is the stock at thirteen dollars and fifty cents right there's some something uh off on that whole announcement um okay well shame on me for just reading the headline um but you're not the only one um i'm curious do you have any updated views on like the serial acquirer companies i know you've been um critical

of the strategies of you know still front embracer those types of companies so i'm curious they've obviously been crushed you were right do you still maintain you know the same uh you know mindset you had before and i'm curious like what would you have to see from these companies to to change your mind and actually like what you see from them look the fundamental issue with these companies is organic growth so if you actually see organic growth in which teams that they've acquired build games that grow their overall business outside of the companies that they're acquiring that's what i need to see right but particularly still front who i love like those guys are really really nice guys i mean alexis has been on the podcast like you know i don't i have nothing bad to say about the people per se but the strategy doesn't make sense from particularly given the environment that we're in like apple is basically destroyed like every avenue of ua growth and

and building and building a confederate of of studios that have no centralized services to really leverage is just not a good strategy in this environment and it wasn't a good strategy even before apple started their their uh their march against publishing right um so so anyway no i need to see organic growth i just don't think that they still front in particular acquired many teams that are capable of building new games in this in this new world order um embracer is a little bit more unique but they have some other challenges of their own but if it's for the same reasons right embrace her they have some of their biggest aaa launches coming up right they have uh saints row as well as dead island which may or may never come out i don't know but those games have been in development so long even if they do like five to eight million units i doubt it's actually profitable when the numbers come out right um and and they may actually do okay right and that would be considered organic growth but that's it right they say that they

have like 50 aaa games but the only triple a franchises they really have are those two so i don't know what what they do so these type of deals these type of uh consolidators are are going to collapse upon themselves because what happens is once they realize these companies realize that they can't hit their earn out targets they're going to leave and they're going to and they're going to create their own new companies that are going to get funded by all this vc money that's out there um and and and again back to the original point with no real benefits of scale in terms of like traditional services and management and and and portfolio management it's just really hard to do this um but right you know yeah we'll see maybe maybe maybe these teams come out with some amazing hit right that that kind of blow my blow my mind right i you know it's possible right yeah that's possible but it's very unlikely in this mature environment yeah i think i agree with you um still

front i mean they are trying things like they have their game engine strategy where studios can build off of other teams game engines to save money but that doesn't necessarily lead to solve anything when it comes to ua or anything like that to really sprawl on organic growth and embracer they've had negative organic growth recently because of lapping valheim and if you're lapping valheim and have negative organic growth probably your aaa strategy isn't clicking as much as you want well and you know it's like valheim is a great example right valheim was an amazing hit that for lasted for like maybe like three weeks okay so um and you compare that to apex and this may be an unfair comparison to some degree but let let me just play this out so bellahine was just lightning in a bottle and it was amazing but there was no support for this game because the studio wasn't big enough but they didn't have the resources to dedicate it to keep the game going and so it died as

quickly as it came right versus when apex came out it was the exact same problem right they didn't have the resources ea barely got this thing game out right but once they saw that it had some traction dude they were drop shipping people from like everywhere to make sure that this game was like they maintained and supported it with content and whatever they had the infrastructure and the bodies at ea just to just throw as much as they could at it to make it work and obviously they had an amazing leader and lots of centralized services they had research guys coming in they had you know everything to help support this game and it made it the hit that it is today where it does like 300 to 400 million dollars a year right dude if bracer is still front they don't have any of that none of that none of that right to support any type of success in their ecosystem right and so this is the challenge right you need these centralized services exist for a reason you know and and the centralized management exists for a reason you know having leadership like um vince impella to

to to allocate resources to these type of things like you need bodies like that to like manage these egos and and these processes and these that's the business right and so lars who's an amazing m a guy an embracer he doesn't know anything about this stuff like nothing he doesn't know anything about running a video game company and i don't know if he's even hired people to do that and the other thing with embracer as i can continue to go on forever on this is that they have all these constituents that are doing distribution that are are fighting with each other right they they have the opposite of a cohesive distribution strategy because they've hired all these disparate groups that are that are that are that are trying to sell product right it's it's a train wreck waiting to happen and what i'm hearing is that a lot of people that can't get their earn outs done are leaving already right so big teams are starting to bail and and that does not bode well for the organic growth that i was talking about earlier yeah that's a red flag but okay uh one more one more big picture question and then

i'll let's talk about a few more companies um so the stock market is down especially growth stocks from its highs quite a bit and a lot of gaming companies are right there with it so more than others and i have a feeling that we are pretty aligned that valuations at large were pretty wacky there for a while but i'm curious how you're feeling about the general state of market valuations now when it comes to gaming companies not asking you about any specific stock or you know what you'd buy or sell but just as an investor analyst like are you excited about what you see yet as a buyer or how much more red would you have to see to get excited from here well i mean i think the traditional game companies have done quite well in this downturn first of all so they have not seen this big correction you saw the rest of kind of the more speculative names than the nasdaq right so ea take two nintendo activision even ubisoft which you know we're in rumors of of acquisition which probably keep that stock artificially higher but

so anyway i think they've been refreshed anyways yeah they had already been crushed beforehand because the business is just so shitty right now for them but um but the more speculative names like roblox app love and skills iron source unity just have gotten absolutely annihilated destroyed you know 60 70 80 down right but their evaluations were ridiculous right i said in the podcast like unity was trading at like i don't know like 30 times revenue like for what you know like it's obscene right and and they were being traded as like a software as a sas company right software's a service company but i mean their their engine business is definitely software as a service but i would say that ad tech is not software as a service right you don't control your own platform um because you're at the mercy of apple and google and that's exactly what's happened is apple's just destroyed their business right um and the and the second thing is that there's there's so there's no switching costs right so if if app leveling your unity is not working you go to facebook or iron source right there's that like there's no loyalty

there right like ua people are smart right if they go where the returns are right so anyway it's not a software as a service so they pitched something that just didn't exist and that was driving me insane particularly unity i mean jr is a genius [ __ ] genius that kind as a salesman but um but that that doesn't last right um so what was your question oh so i think i i do think that the traditional companies are in far better shape to execute against this next uh console generation and and and navigate the choppy waters of mobile um uh but i think that mobile is always gonna be the the real problem sucking sound like zynga and glue for instance are just a train wreck right now um but uh but i think the valuations could come down still for both app 11 you know all these speculative names still because they still think they're trading at premiums to the traditional guys and they don't make money so they don't make as much money um so okay yeah that's interesting let's uh

switch gears talk about a few more companies and then we can go ahead and wrap up i'm curious uh to hear your updated views on nintendo which has a company at least in like you know the business of gaming circles seems to get less attention and discussion these days but i'm curious like how pleased are you uh with how nintendo is positioned right now last time we talked you were optimistic about their digital strategy so i'm curious if you still still think that way if you've changed your mind on anything well i i think the big difference i've actually never been a real fan of nintendo or or how they run their business frankly um but i think the switch generation has kind of like changed me a bit because i think the big thing that people either realize or don't realize is that their biggest one of the biggest challenges are always focusing on two platforms a handheld and a console now all their focus is on one platform and that should continue indefinitely right so basically the switch is it so all their development resources are geared towards one

platform which is freaking awesome like that that's that's the way it should have been it's huge yeah um and the other thing is that uh the reason i'm still bullish on nintendo is that they look like they are doing an apple strategy where they're basically just gonna do upgrade the switch console um to better and better specs and then build the software to be backwards compatible as well as compatible with the new platforms and that'll evolve over time right and if they maintain this um uh these this device and this this form factor and controls that makes it much easier for every transition because before historically every time they come up with a new console they'd have to start up from zero right right and and that's hard right so i still like that and then what you're talking about before is they also have tons of runway for digital because they're still like in it's their infancy in terms of taking advantage of software the services and and even even digital downloads

right which they are definitely improving uh over the last like few years since we spoke is like i think it went from like maybe like 10 to 15 to like 30 over that time period um so they still have room to grow because i think consoles in general are maybe more like 50 to 60 um on playstation micros and sony so yeah there's a lot of digital tailwinds there um they just need to keep up the software um and and build the right type of hardware and i think they they have a very very very solid footing solid place in the industry so i still do like gotcha yeah yeah one one thing you said i want to double click on a little bit i've always viewed the largest risk with nintendo at least historically the you know the risk of whatever the next hardware cycle is going to be where you know they'll come off of something great like the wii that sells really well um and then they come with the wii u which flops so are you basically saying that the boom and bust hardware cycle for nintendo might be over and

they're switching much more to like okay the switch this form factor like this is theirs for the long term and they're just going to continue iterating on it and improving it new you know different versions um and they're basically removing that key risk from nintendo's business is that what you're that's exactly that is exactly what i've been saying for the last like three years right that since the switch came out that seems to be their strategy they've kind of not articulated it specifically this way but they've said a lot of different things that make me believe that that is their strategy going forward now if they come out with another device that's console only or handheld only or something completely off the reservation with the new media or whatever then they're morons right they're they're that's not the right strategy that i would place they're not morons but you know what i'm saying like that's a moronic thing to do right at this stage um but it doesn't look like that's what they're planning on doing at this stage and they're broadening out their ip to

like amusement parks movies television like they're really focusing on building their brand even more so than before and the new management just seems to be much more open to that kind of activities which is great right okay well let's let's talk about take two uh which just acquired zynga um so i'm curious first how are you going to judge whether this was a successful acquisition or not like like what metrics people structure changes are you looking at and would be happy or upset about or do you already think that it's a good or bad deal no i already think it's a bad deal from the from the get-go right um and and i guess all you really need to do is look at what happened with glue right with ea right they acquired it not for like the highest price possible but they hire pretty freaking higher price and now that revenue is deteriorated like like 40 like i've never seen

a acquisition that has deteriorated as fast as this glue acquisition like is unbelievable unbelievable like they clearly did not do the right things in terms of making sure that existing people stayed and ensured that like the spending continued or they didn't do the right diligence on these these these games to know that they were not spending profitably there was all kinds of things must have broken down to see this level of underperformance for an asset that they acquired for such an insane amount of money right take two promised that this thing would be growing at 11 kaggar for the next three years right and so they reported their first quarter earnings before they were acquired and they were down five percent right in terms of earnings so they they are already in the hole 16 and they haven't even been acquired yet right which is unbelievable like all they have to do is keep the wheels on for this acquisition to get closed and they couldn't do it they couldn't do it their advertising revenue looked great but their in-app purchases was down 12 and if you look at the data from sensor

tower it's not getting any better right and so my thinking is that they're going to be down at least 15 probably 12 to 15 percent for the year on in-app purchases and then their advertising will help help like kind of eliminate a lot of that but they're still gonna be down you know like high single digits right and so that means it's not only that they're down eight percent but they're down the 11 as well that they promised from this business so okay so that means they're down in a hole of like 15 to 20 percent like just from the get-go right and it's crazy it's crazy and they and again they have no capability of making new games there's a reason that this thing was at six dollars before they got acquired right because everyone saw the writing on the wall like there was nothing there was nothing left in the gap in a gas tank right so the fact that take two acquired this thing for forty percent of their company is insane is insane and i don't like this deal at all because take two is a standalone company i'm very excited about because all i have to do is announce the next gta and we're off to the races and they all you know they

have nba 2k and they have like bioshock coming and and they're doing some really cool stuff around other indie [ __ ] right and i i like i like the way they're headed but here's my fundamental problem i believe fundamentally that strauss was more working on ego than he was working on the reality of what he was acquiring i i [ __ ] fire building what yeah he's empire building and that's what he's been doing in his entire career and he's done an exceptional job but what i i think happened in this case i don't think he understands this business he does not understand the the nature of of of free to play the nature of mobile the real real challenges ahead of them from a ua perspective and apple's transgressions et cetera and and and i think he just got a bill of goods that he just was not didn't understand right or the people around him didn't make him understand it better right in terms of what the risks were to this transaction and and and and that i think that will manifest itself

um you know as he tries to explain why this business is not growing the way he suggested during during the uh the sales process of the deal um it was a dumb deal is what i'm trying to say it was a dumb deal for a lot of money a lot of uh of share and it was really disappointing um from my perspective okay let's hit on two more companies pretty quickly and then we can wrap up so um ea you've you've mentioned them obviously you know you look at the numbers they're a really solid business generated a ton of money but as you've mentioned with mobile especially with the acquisition of glue they've been struggling a bit more so my question is you know if you could call up andrew wilson and give them your your top advice for like you know what the largest opportunity is they need to tackle what the largest issue is that they need to cut what would you say i the first thing i would say is andrew needs to resign or become chairman right i think laura miele needs to take over um i'm a huge fan of laura and vince and i

think they can manage this company into the next you know the next uh evolutions right um the uh i i just like i like what laura's doing i like the way you know vince has been managed his studios i think they have an amazing pipeline um of aaa products that are coming um and i think when laura takes over as ceo i think we'll see again the next level up for uh ea so i'm i'm actually really excited to see what ea has for this next generation okay cool um how about roblox so you know valuation and you know whiplashy you know growth aside um you know personally i've been pretty impressed by what they're building and how they ship new functionality and how it's leading to deeper competitive advantages uh but i'm curious you know you know looking out you know five years or so do you do you view roblox as a bigger force in the games industry with you know still

pretty limited competition or do you think that you know both it'll never really be able to break out of its you know it's aging up issues or that you know others whatever epic or facebook or whoever is working on could you know chip away at what makes roblox special today you know i mean i i'm a huge fan of roblox i think it's an amazing company and i would recommend anybody that wants to get involved with like metaverse type companies to go work there and i have friends that have gone to work there recently that i would recommend to go there i think they're really really smart and really interesting um the issue that i've had with roblox all along um from the very beginning honestly um was that they just can't it's gonna be really hard for them to grow i mean i think i think this is a perfect storm for them during covid um their expansion on to uh mobile and if you just look at the data it's really really not that complicated is that it was absolutely impossible for them to grow in 2022 right because they're

expanding in markets that don't make as much money right and we've been dealing with this with mobile my entire career it's like yeah u.s and tier one english countries are where all the money is made the minute you go out there you make less money and so they're basically spending more in marketing to make less and that is not a good place to be right now and meanwhile their monetization is not improving all that dramatically in in in the in the tier one english countries that they're that they're that fuel most of their revenue so i think i was the only one with a negative thesis last year on this name but like and i didn't look very smart the stock kept going up and i'm like dude this is impossible like there's just no way they can grow right but um but now like we're starting to see the evidence there and they're not going to be as impacted by um apple but but you know to some degree they will in terms of expanding outside of of their existing installment so anyway the fundamental problem and the reason that they're still overvalued is

that they need to grow demographic and they need to go grow geographic right they've been trying the geographic growth for like the last six months to a year and that's not working because they're not monetizing as well and they're not getting the right type of consumers so their dau mau's are going up and their revenue per you and me is going down not good right and then demographic they need to expand the audience right they need to expand it to improve monetization right and they're not and they say that they're doing it but there's no evidence that they are doing it right and i and i just think that roblox has a brand is going to be tough because i think it's it is it is a kid's brand it's not something that's cool for teenagers or older to play and do and the content's not there and and and the way their ecosystem is set up it's not there to support better developers so i think the demographics change and then then you have competitors coming right like epic is coming big this year right they're going to come out with their tools and technologies they're going to start bringing in you know big

developers and that's going to move people away from roblox because they're um uh sorry their their royalties are much better like it's a much better deal for developers particularly aaa's or bigger developers so um i again they have a lot of challenges ahead of them are they going to go away no i think they're going to be a great business and a great kids business um and then you know the final point i'll make and the point that i really made last year that that resonated with a lot of people is that the the one thing that they they challenge is that like it is it is culturally not acceptable to pay a subscription revenue for a game for an eight-year-old right like in the u.s i don't think parents as on as a whole give a [ __ ] right they'll do anything to keep their kids busy right but if you go to [ __ ] the the the eastern european countries or norwegian countries or china japan korea there is no effing way the parents are going to spend money for allow them to play games when they're

six and seven years old right so it's a cultural issue right and that doesn't change overnight right and and i think people didn't appreciate that when they're talking about expanding in china are you kidding me china is like legislating against kids playing games you're gonna send them a service that is catering towards games no way that's gonna work right not to mention there's like three or four other competitors that are going from the same market that are china born right so anyway i all that didn't none of that made none of that makes sense right um now and i'm not i'm not trying to take away from the amazingness of their platform and how that he's built you know over time i i'm not saying that right i'm just saying growing is going to be really really hard so anyway there we go yeah just to double click quickly into something there i am curious what you think about competition because um right now roblox is kind of the only player that really does what they do well um but you mentioned epic you know working on things you know maybe related to you

know fortnite or you know they announced their lego initiative um you know manticore is out there meta just acquired i forget the name of the company but they make krato which my guess is just you know they they would have tried buying roblox if they could but they couldn't so they just you know they're going this other direction um but do you think like this ultimately is a market where like the network effects at play like really keep it towards like very very few companies um or do you think this is a market where there actually could be more ugc driven companies out there that kind of carve different markets and it it's just harder that that user acquisition and like a retention problem becomes even harder in the future um again that's a really hard question unpacked in like a few minutes but like yeah sorry yeah my my my fundamental thing with with quote unquote the metaverse is that we are it's just a series of different metaverses right i would argue that

world of warcraft is a metaverse roadblocks the metaverse you know fortnite is a metaverse in its infancy right potentially to grow you know the real question is the interoperability between each of these metaverses and transitioning different items and and things to one thing to another right and so there's this new initiative that's being done and i'm totally forgetting it what it is it basically it's the meta consortium or something like that that just they just announced something recently and i think that's like the step in the right direction to make things ubiquitous to some degree right whether you're earning it in one you're in a skin in fortnight and you could bring it to call of duty like that kind of notion which i think is total horseshit right at least initially but that that's like kind of where we're headed but i don't think it's going to be one metaverse is i guess i think that you're answering i think it's going to be a multitude of different metaverses that are built around different interests and and different types of games and and and that's what makes it exciting it's because there's gonna be

something for everybody you know and obviously facebook's gonna have its thing you know like they're spending so much money um and i you know i i am not bullish on vr at all actually i think vr and cloud gaming are the most ridiculous um things going on in gaming right now uh which is another subject but um but i do think that they will be a player in that space and they'll make a lot of effort and spend a lot of money to make sure that it it happens right um in one way or another so all right um wrapping up uh could you leave us with a games industry prediction or two for the next three to five years maybe something we haven't discussed yet i would say i would say okay from a mobile perspective and this may be important to those that are still a mobile um and building games for mobile we are going to see a fundamental shift from the traditional trip uh traditional core games to more of a casual type game right given given the

issues around uh of attracting that those type of uh you know the whale type economies right so stay away from uh you know core games like strategy games stay away from social casino right and and focus more on the casual games with i i you know licensed or ip that's like more broadly interesting and and and you got to know what customers you can reach now and give them what they want right that's like a key kind of aspect of what's going to go how it's going to be evolved on mobile right i do believe that the market for vr is nascent and not going to improve anytime soon despite the fact that we know the quest 2 has done extremely well for facebook we already saw them start to bring down guidance for for for the for this year i just think it was a it was also a coveted related thing so vr is going to be nascent for the next five to ten years in my opinion i just don't think it's going to be a real value market no matter what facebook does right they just it's just

there's lots of reasons but i'm not going to go into them right now um but i do think that the metaverse and and we're gonna see in the next three to five years the birth of really amazing experiences in the kind of metaverse type thing whether it's epic even roadblocks potentially um or other other games that kind of take advantage of the social aspects of quote unquote the metaverse i think that's going to be the like the really cool things that we see in the next three to five years from an innovation perspective um so i don't know those are three quick things i can think of awesome i'll take it um and then very lastly uh if people want to learn more about you where can they find you i recommend listening to the podcast a deconstructor of fun we do this week in gaming twig which uh basically goes over the news of the week every every week um with you know we have three or four uh hosts there that are experts in their fields um i'm always on linkedin so if you want to reach reach me on linkedin and ask me any questions feel free um

you know send out some hate too because i have very strong opinions on things if you don't if you disagree that helps my process so uh you know be sure tell me when i'm wrong um but yeah link them i'm always on linkedin i do not do twitter because i'm old but uh and i and i and i i'm too obsessive right i think i would lose my life if i was on twitter all the time and probably get myself in a lot of trouble well well great we'll we'll put that in the show notes and eric thank you so much for joining and sharing your insights it was also great catching up yeah good luck with that awesome and to all of our listeners if you enjoyed this episode please make sure to give us a like subscribe five stars it would mean a lot also make sure to check out our free newsletter navic digest and if you want extra premium research like weekly game deconstructions and market updates check out novik pro links and discount codes for all of that as well as eric's gossamer consulting group are in the description thanks for watching and we'll catch you next time

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