Game Industry Hot Takes: Ubisoft's Struggles, Unity's Revival, and Microsoft's Game Pass Gambit

hello everyone and welcome to pixels and profits we are back and for this episode we're going to try something new we're going to discuss four recent popular Hot Topics in gaming first an update and kind of more recent takes on Ubisoft similar kind of more recent update and takes on Unity some thoughts on China and Outlook in terms of what to expect in 202 five and finally we will end with micros the Microsoft acquisition of Activision in terms of the impact and the future outlook in terms of that acquisition how you guys doing yeah things are good doing all right Summer's over On's over it's now in the 40s when I wake up in the morning so it's it's definitely feels like fall here it's brisk yeah yeah we got football season

so that's good but um I don't know Matthew you want to take us away on the first topic as far as Ubisoft yeah we can dive right into it I know it's a hot button topic but honestly like there's not too much more for us to say I know we we went in depth about it you know a few months ago and to be frank a lot of what we discussed is still relevant so if you haven't listened to that go back and listen to it because we're not going to say the same thing over again what we will say is kind of talk about what's happened since and kind of you know just just with the news where we think it's going um you know since since we discussed we kind of outlined a bunch of catalysts that were set up for Ubisoft during the summer and into the fall that maybe could have you know put the company on the right track and you know one of those was Star Wars Outlaws that did not live up to expectations we can go into the reasons for that I think I remember saying I expected the game to be broken at launch um you know I think that was pretty much true I think it also missed on a lot of other factors

but I think there was definitely quality issues as well um they delayed more games especially an Assassin's Creed game that's never a good look um again we talked about how it's an execution story and they just do not execute as they plan to and that caused the stock price to plunge a lot on both those items and you know then there was rumors that they might look to get acquired you know there was 10-cent rumored um the stock went back up a little bit you know uh but again this is all just kind all of the same so the real question is you know those catalysts are passed they didn't pan out really they either need to make some deep cuts structurally and organizationally on you know as we talked about you know refining their portfolio to only the games that really deserve the investment or they got to find a buyer and so you know I guess from from the latter point we can open it up and kind of discuss who the logic iCal buyers and what are your thoughts

there who are The Logical buyers for Ubisoft um you know I think there's a bunch of different varieties of ways you can go with this I think just from a brass tax perspective the company is now worth you know 1.7 billion on Euro um you can make a case there's probably two or three titles in their portfolio that are worth that to the right buyer if they have the right Outlook and View and development Cadence to get behind it but you know as we've discussed before there's a lot of things that are in the way and you know one is the the ownership of the brothers and the second would be the notion that this is in France which is a hard place to perform restructuring in which I think we all agree and most do agree that uh Ubisoft requires at this point in time the the cost base is structurally too high for the product they're moving out and that only has a certain amount of Runway unless new capital is brought into the business so I mean The Logical stuff there is like I think P probably makes the most sense I think this company does need to take a step back into the private markets Maybe impetu

to um make some of these harder decisions um but like outside of like which one like who cares right I don't think this is a good fit for any of the large public gaming companies like a 10cent or a not 10cent take two or or EA here domestically um and that's mostly because it's like they'd be absorbing more headcount than they would be revenue and it's just like they'd have to do all that stuff I do think they'd be interested in potentially taking some titles off hands and I think a lot of companies would but for a full full scale buyout I I just don't see that happening it's too much disruption the caveat I'll make the private Equity is I only think that happens if two things happen one if the gimos are walking away I don't think private Equity is interested in keeping them because you're just getting more of the same right and so from that perspective like like private Equity is going to come in and be stereotypical private equity and gut this thing and then the second thing is guarantees from the French government and the unions that they can make the that they want to make um I think

without those things you know it's it's tough to see how that works um you know I think there's things that can be done to make this a more viable business you know Assassin's Creed is a great franchise and it makes a lot of money when it comes out on time I know they just delayed one of the games um but right now it's on an every it's a two out of every threee Cadence you could honestly see private Equity say we're actually going to invest more in Assassin's Creed and build up a third team and have it be an annual franchise right like that that could make sense right so I think there's opportunities you know not just cutting but also potentially reorientating some of the some of the headcount you know they'd have to probably go to the Canadian Studios where Assassin's Creed is but um you know I think that that's that's an opportunity for them um you know in terms of 10cent uh and this ties into we'll discuss China more deeply but you know if they were to try to acquire Ubisoft on the whole it it potentially opens

them up to a whole can of worms National Security and a whole cfus review um which is maybe you know uh you know scrutiny that they don't want to open on themselves by acquiring a western asset you know so uh there's there's a lot of things there and I guess they can you know just caveat every m&a discussion in gaming is you could ever rule out Saudi Arabia um you know they money is not an issue for them should they have want to buy this um I just you know strategy wise it doesn't seem like a huge fit but you never know yeah I think like ultimately they need to address a pretty fundamental and structural issue and so I think if we were to pull back from the micro looking at more the macro I actually think that we might be on the cusp of a pretty major transition from kind of like big Studio huge team monolithic game development approach that uh is you know when when you look atub Ubisoft it seems like

that's how they develop and um if you look at recent history we've seen a number of this kind of model not be super successful so whether it's Warner Brothers rock stady studios with Suicide Squad kill the Justice League they took a 200 million loss on that game Sony's Concord sold 25k copies peaked at 13k players and then the game was pulled and players were given refunds after only two weeks after release uh babylon's Fall by Platinum Games in 2022 bethesda's red fall in 2023 Battlefield 2042 and to your point Matthew we're going to talk about China a little later but I'm not quite sure if Western game developers are going to be able to pull off these kind of big budget big team monolithic game development models in the context of the modern day environment um maybe the only exception I can think of is Santa Monica Studio

but they are also known to be sort of anti- current Western Game Dev Culture by being extremely hardcore China still seems to be able to do this model I I think there are maybe some some uh Nuance differences in terms of how they actually develop though on the ground but we have seen success by mihoyo more recently with game science and black myth Wukong and by the way many more of that kind of model I think are going to be coming from China so um so if anyone can do the model I think it's got to be a Hardcore team probably with a lower cost structure probably from China or somewhere else in Asia but the West for reasons that's probably not worth getting into as part of this discussion I I think is going to be it's a question of whether this model uh can continue to create a profitable business for West gamees Studios and in particular

Ubisoft uh so we'll we'll kind of see and I don't want to rehat there's a lot of complaints I can make I we've already talked a lot about Ubisoft before so I won't go into that but my general take on Ubisoft is that you know we've been kind of talking about and warning about this I think you know I I believe we're we're the ones who probably popularized the the bookings to employee analysis uh that so many people have now coped when when with respect to Ubisoft uh but I think that speaking in terms of like a potential viable just kind of turning it positive what what what's their path to success in the future I do think that there have been attempts by many game studios to leverage Chinese game development and so maybe some form of hybrid development model driven by well not driven by Ubisoft or the making I don't know I don't know how how how

more you can much more you can do like and they still can't get that right I guess we'll have to see how that pans out maybe they'll get the inkling that that's the path forward if that does end up being a hit that's one of the Catalyst that's still hanging out there that we haven't poo pooed on yet so I guess we'll see I I do think that there's got to be a big major change I think just letting Ubisoft continue to operate as is is probably disaster in my opinion yeah um yeah I mean so I've been doing this stock market meets video games uh thing for a little bit and I I still catch up on Ubie from time to time for setups and personal interest and just what's going on in the industry but it's really not one that I have a ton of confidence trading anymore because you know any lift from here requires execution that I just don't think they're capable of so like I saw the stock down 30% a few days ago and hardly baded an ey it's it's

just Ubisoft um and I I do understand this is a tough industry making games is super hard but if you look across the industry over the last 10 years the really successful companies have found ways to increase audiences for the top franchises while also making more money from those top franchises so UB has not and then they've also done a bunch of other weird things that haven't created any value and I think you know the time is just kind of up um at the same time you know I do feel like it's in deep value territory um I'm a firm believer that it's worth more than 1.7 billion euros in some light uh but the problem is it's like big structural and managerial changes need to occur to unlock that value uh and for those of you that are newer to this stock this isn't necessarily new um I I think we all kind of shared a similar view on Unity after the price and kle incident but in that instance changed happened pretty quick it was just like a couple weeks after that the Jr stepped down and things started going in a different direction so uh you need

like step function improvements here and a couple of big things and uh the fundamental stuff just really doesn't matter that much right now so the stock will certainly improve on better than expected sales numbers provided they've tanked their guidance enough but it's certainly not going to rate anywhere near like the likes of take two or EA and without the other stuff changing you know UB is still going to throw big Dev dollars into projects that aren't really in tune with today's gaming world so it's like a corporate slow follow business um and I guess as a final thought you know one of the strangest things about Ubie aside from ownership might be their guidance methodology I think their their Finance function kind of forecast while assuming everything is gonna work which deeply contrasts how my mind works uh game Publishers should really think twice about forecasting revenues for new IPS um it's not something that I see done very often and it's for a good reason right like no company is immune to this thing about like 10% of new game launches working um

and no games company should Miss guidance because a new game didn't work out yeah I think I want to tie one thing that each of you said together you know JK you talked about um you know these massive scale teams and Brian you talked about the other pubs leaning into their large franchises large scale teams work on proven franchises Call of Duty FIFA right Etc uh Grand Theft Auto right that's a proven model that's a proven franchise as a proven place in the market as a loyal fan base in the case of Call of Duty and FIFA annual right that's what UB should have done years ago and should now look at doing for Assassin's Creed right because that is a franchise that they can build a profitable company around but like look personally Mario Rabbids was a fun game for me but they should not be making that game right you know I think the first one did end up selling like five six million units and

actually made a nice return the second one was another flop like there's a lot of these Indie quality games that they have been making that are getting way too much money to make so either make them for under $50 million with a skeleton crew and just sell it to Game Pass or you know cut you know Focus your resources on Assassin's Creed R six maybe division but I think after Outlaw it's flopped you have to question the massive studio right because the the last division game didn't do so hot and now they flopped on Avatar and on Star Wars like now there's question marks on massive which is supposed to be a strong spot of the company so I you know realistically like they should look at just becoming the Assassin's Creed company because that's where they're gonna make name the company Assassin's Creed new ticker yeah yeah well I think we got have fun with what the ticker could be with that all right indeed did we move on to Unity

or do we have any other thoughts any parting shots on Ubisoft and it's not it's not meant to take shots like this is anyone who's been paying attention to Ubisoft for a decade this is not new it's just now coming to fruition at a time where you know they don't have a ton of debt most of it's converts but the converts are underwater so there's some like weird Financial engineering that could you know okay what will those convert underwater I don't know so they do have a little bit of debt but more importantly it's just like if if they can't get the execution right they will not be viable especially if they miss on Assassin because in the past you could always say Well they're going to miss on this and this but they'll always hit Assassin's Creed delaying Assassin's Creed is the scariest thing for this company because that's that was kind of never talked about um the other thing we didn't talk about was in an acquisition scenario an MBO management buyout you know if the gimos did something if they got financing to do it but that just takes them out of the public eye it doesn't fix anything I think it's as a

good segue into to Unity It's always important to note that we want all of these companies to succeed the games industry is already at a loss for really strong public companies right we used to have a lot more we don't have so much anymore for a variety of reasons we want to get back there but right now like for Ubisoft completely falling off the radar no games PM cares about them anymore like just just to be blunt um they have so many things to fix and like the easiest way to do that is drip the Band-Aid off uh and that would be to answer these long-term questions around like who's running this company what's the streat direction we want you to succeed but anyway like so Unity not too dissimilar a situation right like We R back a year ago um very unique situation in in which like all of their customers wanted this company just to go away and it was almost overnight right just because of a pricing decision that was um somewhat of like a betrayal of trust um so just like let's talk about where we're at now so Unity trough well it could be a trough around $14 in

August implying a market cap of just over5 billion um it's also worth calling out that was a crazy week in the market that this was the uh Japan US tech unwind so like woke up and everything was down 10 20% um and I think all of this stuff makes sense in a vacuum right there's a lot of fundamental questions against unity in trying to determine what the company is worth uh the ads Biz was struggling to maintain share uh the runtime mishap we just talked about software is growing a little bit but it loses money the End Market which is gaming is troughing itself uh not a lot of Dev spend and the startup environment is really tough uh The Game Dev Community lacks trust and also questions the attention to game development versus or game engine development versus just trying to make money so all these things combined are like a really good recipe for multiple contraction which certainly occurred all right so that there's been a lot of developments over this year though like so white came in and cut costs he divested a bunch of weird

things and then he brought on Bromberg as the new CEO and bromberg's first actions were to bring on talent to revitalize the games or the ads business this is Jim Payne and Alex Blum he killed off the terrible pricing policy in favor of increasing subscription prices which all good software companies do uh new CFO and then more importantly he right-sized the expectations with the street last quarter his first quarter on running the show um meanwhile I would say like the mobile gaming backdrop is at least not getting any worse and if you can't get behind mobile getting better we're starting to see a little excitement around next Generation Computing platforms and the likes of meta and apple Google uh it's not a guaranteed win but I do think engines like unreal in unity will be relevant in the next platform even if that is four or five years out so big step back again Unity is a 500 million run rate software business which is create and a 1.1 billion ads business which is called grow this year uh a 2.5 times multiple

on ads is like 2.75 billion which at five billion means you're valuing Unity created 4.5x which again I understand given how we got there but it seems a little Grim given how many strong swings the company is taking and they also have 70% market share of their Core Business um I would also say I have a a soft spot for public market turnaround stories I don't know bronberg personally but every piece of feedback I've received has had similar quality right he's extremely smart he's hardworking he gets done and that kind of sums it up um the amount of professional respect I hear from past co-workers is very solid and I would say this covers the Zenga era as well which I had a interesting perspective on at Deutsche so that's a red flag for me to be honest with you what's up it's like kind of like uh um I I don't know counterintuitive but I I kind of feel like if you're leading a turnaround in a company that I I agree with you like the

feedback on bronberg has all been positive but uh the the kind of leaders that I've seen that have been able to affect a lot of change are generally having more mixed reviews more barbell reviews right not not mediocre but like oh this guy's great and oh this guy's a jerk he's this he's that or whatever but but didn't you didn't you get those two I I didn't get anything negative on him but you know uh the barbell was was probably like I don't want to I don't want to like you know it was just like he's tough he's like a tough guy okay so you have all these things he's brilliant and he gets things done but then I also get I hope you're right did no that that is I can but for me it was just like all these positive things about brumberg and I was like uh I'm a little worried but no I didn't get the impression he was a guy that's like bringing cats in the office and stuff and trying to win everybody over like yeah everything was like fundamentally sound it's like someone

you'd want to be able to turn something around it is a not easy job there's so many personalities to manage there's like investors to manage there's like you know things catch on fire three times a week you need someone that's ready to like just run through walls and that sounded like what it was I hope so my only caveat to what you're describing because I also love a public market turnaround story you know zingga going from what it was a dollar to getting acquired at 12 bucks or so but think that there's structural issues with this company if you believe the ads business will stabilize and stop seeding care most appen and can generate positive IA then I guess the business can be a steady state business at some level but if you don't believe that I don't know if subscriptions are enough revenue for them to you know be the business they want to be and remain a public company at that scale in which case I wonder if this company has to go

private to do a pricing transition not just start charging per download but actually go to the Epic Mod the unreal model go to a full commission model um you know we saw a lot of software companies in the 2010s mid-2010s they had to go private to go from a licensed model to a sub to a SAS model because it's a very messy transition um on how you price and I think a similar thing might need to occur with this business for them to be to be able to scale the business longer term with their customers and End Market right otherwise their their revenue is capped it's you know you can literally just you know there's so many developers in the world x% will use Unity that's their as big as they could ever possibly be aside from Price you know year-to-year price increases um and so you know I think that if if they if they wanted to really make a pricing transition and not do it in the eye of the public again and do it more holistically you need to do that as a private company I can see some some argument for that I

guess like what I'm trying to Define here is like this is like the early stage of a potential turnaround right and you see at a level at some point six months ago where this thing looked attractive so it's gone up 40% since then so you're getting a lot of uh you're getting multiple expansion but you're not necessarily getting fundamental Improvement so a lot of that stuff you have to buy into before it happens right so like right now we're all still talking about Unity being a boring U mid to high single digigit grower maybe that gets to low teens on subscription increases on year-on-year basis it's still relatively small software business 500 million right um but like what if that ads business doesn't continue to deteriorate what if the people he brought on actually could you know Drive some share gains against the app or at least not do any worse it's a very profitable business um the public comps traded a much higher valuation app Loven uh trade desk Etc um so like there's a

lot of room uh to support a much higher multiple in the stock if fundamentals inflect and right now all we know is that someone's working on it right so it's h it's a Le it's less easy to P the table here given how things have run and you know if the market wants to have a a bad day this is going to get hurt more so than those because it's a small cap name folks are still getting involved in it and getting into it um but from three or four months ago much like uh Ubisoft now no one cared about Unity like it was dead uh and more recently I've been hearing folks that they just want to get caught up on it or they want to talk about it a little bit more and see what's new so this is what's new it is a turnaround story early on but you have to have some confidence in this stuff working out to like you know take a big position against this and make some money because there's plenty of room for it to fall apart but uh this is not Ubisoft anymore yeah I wish we had more granularity on the cost structure of businesses because like a run rate Opex

is about a billion dollars coming out last quarter out of second quarter results right 1.1 billion you know it'd be interesting to know what that breakdown is because if it's 5050 it means the software business does not make money right right and that's only Opex that doesn't account for you know cogs cost a good sell it's not you know so um I think that would be something I if you start seeing them start breaking that out it might it might shed light that that's that they're going in that direction to eventually um you know out of ads but I you know I think that's kind of the the problem here is you know the technical investment they have to put into the engine and the platform is unless the revenue scale of the software business gets you know multiplies several X it's hard to you know say it's a viable Standalone business with the current pricing model yeah and like you said it's tough to see where their core market like game developers expands materially postco

right because you had like that huge Hy you have to have some again ads business aside you have to have some view that the uh The Tam for said software products going to expand whether that's through new Industries which they haven't actually haven't killed off or yeah next Generation platforms like is is the intensity for mixed reality or arvr going to pick up materially over the next three or four years that's a big question mark to well I think I think if that's the case there would be better position to capitalize on that as a private company because as a public company if you see them chasing all the buzzwords people are going to hate that private company they can make the Investments and be there and wait for the hockey stick to take off yeah I would say I've seen harder public company stories uh almost two billion of Revenue is um not bad I think everything's easier private if you have someone that's willing to put that back but you know Unity was Private once and came out and someone has to love it a lot the next five to 10 years to do that so from my perspective just speaking as

a developer on the engine side I do think that so A couple of things one I think that uh there's actually quite a lot of room for improvement I maybe I've already spoken on this before but I kind of liken Unity at least pre- bronberg I don't know what it is today but at least pre Bromberg I would say Unity from interactions with um with many of the engineers from the company or those who were interviewing um was that they uh they're kind of like old Twitter so I think there there is potential to similarly gut maybe a big part of that Workforce and get the people who are already working on the engine to be much more effective the second part is that I will say there have been some pretty nice improvements as part of unity 6 so uh

rendering enhancements with performance and optimization improvements to urp Universal render pipeline uh more for mobile and hdrp the high defition render pipeline more for HD games they've got a some new systems like GPU resident drawer GPU occlusion cing coling um render graph which helps optimize and customize the render pipeline more efficiently so anyway not to go into the weeds but there's Al other stuff around lighting visuals and AI which I won't go into some multiplayer stuff that I'm probably a little bit more suspicious about but while I would love to see a lot more and I do think Unity from a features and capability perspective has a ways to go I think it's a good start uh so I'm I'm feeling cautiously optimistic that they're going to be able to execute better against delivering more engine improvements that would be very useful to to developers like myself I also think that elimination of the

runtime fees I probably not great for the company's financials but I do think um a lot of my fellow game developers who had a lot of hand ringing about this are now feeling better my belief is that the adoption of unity 6 was very low or I I think that Unity thought that it was going to be very low so because of that I think they almost had to eliminate the runtime fees because my feeling is that the adoption of un6 would have been like really bad and then we have we talked about this before but then you'd have to manage two different software systems one for the freeloaders and then one for your paying customers it would just make no sense so look I mean longer term I'm not sure how good the game engines are as a business um I know it kind of feels like there's you know that the ad business could be a lot better uh and anecdotally I'm hearing they're just you know losing

everything to app L and maybe we should cover app L at some point but sounds like they're executing pretty well on that side but what I would what I would do is to just watch for a few things moving into next year and and is someone who's cautiously optimistic on Unity which is to one uh definitely want to see greater efficiency in the company especially in regards to execution of new features in the game engine I do think that you know they could have a much stronger uh work culture to really you know become more efficient and effective uh secondly you know I it would be good to see the economics of that game engine business improve in some way whether it's through pricing or other other ways and I do think like the game engine itself does provide significant value so it's probably worth more than just what we're paying for in terms of subscriptions but how they structure that and what looks like I think is TBD

but certainly I think it should I mean at this point I do think Unity is underpricing um third would be the ad Network side of the business which I I think could do a lot better and finally I I think that there's potential more like um option value here just because you've got relationships with so many game developers that you know you I I just feel that this could be leverag into other services whether that's ads or something else but I like to see them more meaningfully leverage the game engine business into other services D didn't really even talk about that when I was ranting but uh the the seeing results from game developers that improvements are coming they haven't seen in quite some time is also very positive yeah so I I guess um while I'm very skeptical of Ubisoft I I guess Unity I'm a little bit more cautiously optimistic um and I hope you guys are right on I

mean I know that I've I've been saying it for a year now and it hasn't materialized but I still think it's a takeout candidate whether it's a go private you know some of the vcps that backed it privately or it's a strategic I do think that you know especially if they if they can do something to right sizee the cost structure especially in the ads business potentially spin that off and become a standalone engine product you know or or could a company like Microsoft benefit from having all that Tech stack in house and then you know gut the cost structure put it on Azure have their own Engineers manage the back end like I think I think there's a lot of strategics that do make sense at the right price it's just like can they get a deal done and you know I thought when you bring in a mercenary CEO that's what you were doing but maybe just because of the interest rate environment because of the economy because of everyone's you know blowing all their capex on AI chips and AI Data Center that there was no buyers I don't I don't know but um you know I still

hold hope that as rates comes down here that there's an opportunity for that to take for that to happen and we've talked about this before but owning an ads business and an engine business makes this more difficult for a lot of buyers to find palatable I think even some of the Publishers would have been interested in engine business at some point in time but probably not getting involved with the ad the ad adbis doesn't make a lot of sense for them yeah I think tensent in particular from what I've heard once to drive the the road M for for game engines there was a point in time where like EA was trying to commercialize frostbite and I think there was a couple other examples like that too where um they kind of saw the riding on the wall before it even happened and that would have been pretty special if it lived up to the height but it just wasn't like you're not gonna find Activision using an EA engine right doesn't make a lot of sense crytech the chat yeah all right Matthew should we talk China you well I think we wanted to

briefly discuss App 11 and just kind of since it's it's I think it dovet Tales closely to the unity story I know Brian you had a couple notes here but I would you know I just say overall like it just seems like they continue to eat unity's lunch right I mean that that's just what it looks like and I don't think there's anything that says that that's going to change I don't know what you think I haven't heard anything other than app is dominating and continuing to take share which is the probably the weakest part of the unity thesis at this moment so you know and I don't get the I would say the only thing incremental that I've picked up that's interesting is that like a lot of game Publishers and developers want there to be an alternative to Apple eving it sounds like they're getting even more expensive and taking price so that's like really good for them and not so good for Unity if you you know you can't even give your product away for half the price of your competitor um and I guess like look Apple's really worked a ton the stock was at like 90 bucks after that KKR sell down a few months ago and kind of traded around there for a while then just all of a sudden took off and so people might be

scratching their heads and saying like what the hell happened well I mean it's like the company is putting up billion- dollar quarters now uh it's got a Founder owner uh that's still running the company it's growing like a weed Street numbers for next year are still a little bit too low they put down an impressive amount of free cash flow that gives them a lot of optionality so it's just like this company is maturing into uh something that could potentially be a lot bigger $1 billion a quarter is like that's that's serious Tech so a lot of people need to start looking at that stock for the first time they might be a long only or whatever else and this is just a really good example of uh reating this is multiple expansion this is exactly what you want to find early when you're owning stocks um again is this thing going to get worked over a little bit if the market gets weak but yeah sure but every other high growth High multiple stock is and if you look at this on multiple basis against something that's actually virtually software like a workday or a CRM it's still super cheap uh especially for the free cash flow metrics it puts off not as cheap as it was six months ago but

I'm all I'm saying I guess is just appen growing up uh their management team has a lot of fans the investor Community uh they continue to execute despite all the noise around fingerprinting and everything else and people are just becoming more comfortable with them as a public company so it's uh that's what happened yeah I mean it's a software business that's generating 75% evit margins like you can't beat that um and that's almost a three billion run rate business by itself self and even the the apps the game bu their game publishing business is stabilized too I mean it's a much less profitable and it weighs down their aggregate margins but um yeah I mean the the only thing you can that you can poke holes in the bu thesis is if Unity somehow stabilizes share losses or if Apple drops the hammer on fingerprinting which you know I think we've been talking about for over a year now and they haven't and so it's there and if it happens it screws everyone over but um you know

you can't really predict that until it happens I guess the other uh thing to mention over the Roaring airplanes here is that um to get comfortable with appen at some point soon you're going to need to be more comfortable with the the projects they're working on and taking share away from CTV and web working out uh and they have given indications that early testing is very strong there but you know for this to really expand Beyond mobile and to grow another billion dollar a quarter they would need to to get some Headway there y all right China yeah China is interesting as it always is right you know if you've been living under a rock when we spoke about China we talked about how the stock market was underperforming how the economy was not quite in a death spiral but just it was in a huge spiral of confidence in the sense that consumer spending was down the real estate market was down which was you know you know they they're

they're intertwined and there was really no semblance from an urgency from the government to kind of fix that well you know a couple months after that or whatever it was we get rumors of massive government stimulus they start cutting interest rates people get really hyped and then within a month or two China is the best performing stock market in the world in 2024 and literally I think that day that that stat hit the wire it was the top of the market which is perfect timing because then we've got the actual announcement of the stimulus measures and they were not as big or as you know uh just as big as people expected or wanted them to be um you know I like to or someone once subscribed to me this way and I I like to use it because it's a really good example the Chinese markets overall it's just a giant ball of liquidity that rolls from one bubble to the next and you survive by getting out of the nth bubble before it bursts and then you get into the nth plus one bubble before you know it takes off um that's how you survive as an investor in Chinese markets um and we saw the Chinese stock

market including the Hong Kong market just go on this ridiculous vertical run and then it just inverted and went the other way like literally in a couple of days um you know you talk about flows and lack of liquidity because all the foreign money Capital has gone out of China you know I think that's part of it there's just a lot of hot money that goes in and out of stocks in China that's part of it um you know in terms of what it means for gaming like it doesn't really much I mean if they're serious about reinvigorating consumers and consumer confidence I guess you can argue that that's good for gaming but we haven't really seen you know aside from the more macro pressures like and some of the restrictions on youth gaming like the slump in the last call it 18 months in Chinese consumer sentiment and overall consumption of luxury goods has not necessarily affected the gaming Market you know to the degree that it's affected other sectors so it's hard to sit here and say that it's going to have the same positive impact on the other

side um if sentiment picks up I think you can look at like luxury goods as a better proxy for that or uh you know you know um hotels and casinos and maau and stuff like that right so um you know when when you look at you know just kind of what it means for gaming like you know but 10cent you know as a proxy for the Chinese market was volatile with all of this so I mean sure is what I know yeah I agree I I think that the positive here is this puts uh I guess the Chinese stocks in the TMT perspective back on the market or like just a little bit more in Focus um because I do think the recent run felt quite a bit fed by the underweight and short phenomenon given the size and speed of the move I'm not sure we're heading back to the 2016 17 era where every TMT hedge fund had to own 10 cent in Baba in size but you know I do think the measured Pace you described will make the the space at least harder to short and for a company

like net if they do have fundamental improvements with this with more eyes on them uh the stock could move a lot more and have a better investor base but um yeah I tend to agree this is kind of like if you're G to do fundamentals just forget the last couple weeks ever happened and just get back to it you know but flows matter as Tracy allay from Bloomberg always said flows before hose um I love that line and it and it matters a lot to Chinese stocks because the liquidity is just not comparable and so um you know that to your point it was massively under owned because everyone pulled their money out in the last couple years of China and then everyone rushed in to buy everything China and the metals and you know you saw it in Copper right you saw it in casinos for Macau it was everything right it was the entire China basket just went vertical and um so obviously these you know the Chinese gaming stocks are part of that but you know I think fundamentally it doesn't really you know move the needle

for me you know and we we kind of picked like where would you rather be 10 Center netes like to your point Brian if you believe in the fundamental drivers for netes it's a cleaner story um you know I I I think there's there's less hair on that story whereas 10cent is just such a diversified uh conglomerate business that you need to have a strong view on multiple business lines at the same time all working to be really bullish there um I think it's an AI Play It's really you know it's an interesting story um doesn't really affect we're talking about gaming um directly I guess U maybe it does eventually with generated content and stuff but there still years away from that being material for them right and so um yeah you know I I I but it doesn't you know it doesn't move the needle for me unless unless they get real serious about not only stimulus but relaxing restrictions on the sector um and also relaxing you know the capital flows in the sector that was a big part of what made these companies successful was their ability to buy knowledge via

external Investments so I guess the big question is like does JK still have any Baba left I do I do the biggest fan yeah well I mean it's disappointing right I think the performance of my Baba stock unlike my others and I I I my my strategy is to hold forever and to just hold a few stocks so for me I own Tesla Amazon Google and Alibaba and un likee those other stocks Baba's been a little bit of a dog for me so but that was my that was my sort of global China hedge um but speaking about China I think the thing that I think about the most and I think is going to be a potential point of the biggest um impact for us as game developers and otherwise is essentially what happens if China invades Taiwan and and so this is like I don't hear a lot of people talk about this issue but certainly here in Silicon

Valley there's there's some folks who you know some who believe that there's going to be at least a 50% chance of that happens and that whoever becomes the next president will potentially influence whether China does attack or not but if China does invade Taiwan then I I think that you know certainly you can imagine the Banning of Tik Tok certainly can imagine some of the issues where that were popular before like splinternet and potentially the Banning of apps which already in India and as somebody who works in India a lot you know there's a num you know over a hundred games and apps in India from China that are banned that continues to this day and so this issue of a splinter net depending on what happens there with China I think could potentially have a huge impact on um on the game development ecosystem and winners and losers because when you look at for example certain genres whether it's like Forex or Shooters all of the

top game studios are from China so that's basically what I think about in particular and where potentially 2025 could be a flas point for this so we'll we'll see I hope you um I I I you know I said this about Russia and Ukraine and I was wrong I said there was they're not stupid enough to do it and they did it but I think Here China is not stupid enough to invade Taiwan and this is just my perspective having lived in Hong Kong for a few years um the ramifications not just lives lost in the actual conflict but what that means for the Chinese populace the rice Imports soybean Imports get cut off like they will starve like because they they don't they rely on Imports of basic things food energy everything right like you know there is a massive human toll that will occur if that happens and that's why I don't think it it's it's on the cards

anytime soon you know maybe if Supply chains shift and things work out differently for them but not not in the next couple years for sure I think geopolitically overall though and that was a big left turn from where we should be discussing but geopolitically overall um I think the big concern as it relates to gaming is the investe portfolio of 10cent less so netes and others right but 10 cent has just the biggest tentacles and you know this is a reason that I think that they won't try to acquire someone like Ubisoft again because if trying to buy Ubisoft opens up a cfus review that opens them up to scrutiny to the ownership of all of their assets whereas you can argue that gaming isn't important enough to matter to cifas right now but should they try to do an acquisition that is in the news then it opens them up to that scrutiny right um politically F China is pretty much the only issue that's bipartisan in Congress in Washington right now right and so like you don't want to open yourself up to that scrutiny but I think as long as they you know kind of lay low

so to speak and you know just you know wait out the politics like I think you know the geopolitical risk isn't too bad um but you know will they be investing incremental more capital in the west no I don't think so I I try to stay in my lane and geopolitical risk and uh International politics is not it so I guess uh from an investor perspective I don't have anything on that has these sorts of geopolitical RIS outside of like semiconductors and that would be uh not not a great not a great time so I certainly hope it uh cooler heads prevail or never develop in the first place but um you know it's just something you can't really solve for so I don't um but I I value your opinions no no but it's Val point you make though right it's like I remember when people were again I'm going to quote I think it was Tracy Al because I think it was OD Lots right you know know at Bloomberg right during the Russia Ukraine when

that started the market sold off because there was rumors that Russia might use tactical nukes and it's like you should always buy that dip because yeah if they do use those your life is over well if we're being really cynical Market people right option A they use nukes and we're all dead and your money's worthless anyway option b it doesn't happen and the stocks go back up you should always be buying on that right like and it's kind of the same thing if China does invade Taiwan or if the if the market sells off on rumors that China's going to invade Taiwan you probably should be buying again not investment advice just like general rules of thumb that I have in my head because everything goes to zero otherwise and they just have a few cans of pork and beans handy or whatever else couple crackers this is a much bigger is this a gaming podcast or all right maybe moving on to our last topic uh Microsoft Activision Brian you w to see us up there yeah so it's it's been a while I think it was the console Wars episode where we talked about Microsoft most extensively and the

impacts from the Activision acquisition so I figured why not Circle back real quick um because gaming is in a much different place versus when the transaction happened and you know similarly Microsoft is in a much different place versus the merger announcement which was in January 22 so you know we've had this whole expansion of AI uh and at that time you know Microsoft was enjoying rapid growth in Azure uh was one of the deao cloud Kings with designs on getting bigger in gaming which was still very attractive in that covid bump and then similarly while Activision was undergoing some turmoil and management the business was pretty strong and the pipeline was amongst the best they've had in a decade right they had War Zone in there and Diablo I um the trans the transaction created a huge gaming company almost 20 billion in annuals with some of the best content in the planet and a distribution system that was while it was losing share had designs on this post Hardware world and still does to a degree so you know I

think what we're seeing now is that Microsoft is not really immune to the gaming slowdown and in the midst of this they're undergoing a big pricing exercise where some of the most expensive games in the planet for production value are being offered on a subscription plan that can be cancelled whenever it's convenient um so I think something can be said for digital things that can be made for 200 to 300 million and then consumed by millions I mean this is a good piece of the Netflix model but movies and shows don't need live operations they just need more content uh anyway so fast forward to 2024 the dawn of 25 whatever we're in right now and AI is the way from Microsoft which also has some positive impacts on Azure and then gaming is kind of starting to feel more like a question mark they're not talking about it very much anymore the disclosures are very minimal and so I guess the question here is if we go forward another five years do we think Activision is a larger or smaller company than it is today so just set that bar at like 10 billion doll and

then further does this open up opportunities for other gaming companies like could EA actually have an opportunity finally with an annual is uh firstperson shooter with Battlefield so first first first question was uh five years from now Activision bigger or smaller than it is today I'm going to say we don't we won't know because they're just going to give everything away with and so we won't actually be able to directly count the revenue for Activision but once they go down that road right it's gonna be very hard to ever spin this company out into something again yeah because now it's it's a different kind of content yeah so I I I'm there I think a lot of investors have been waiting a long time for EA to make a battlefield that capitalizes on this right Activision malays in general they've had a lot of issues over the last decade right they've had highs and they've had some struggles along the way and some issues and getting acquired kind of

papered over some of the issues that were going on right but um you know I think you know am I betting that EA will do it it's just been how many years now since Battlefield had a good game like Battlefield 5 was that 27 yeah it's a totally totally new team and it's teams that aren't necessarily accustomed to first person Shooters right it's like a racing Studio yeah but it's also New Management oh who's the target demo for that game now because because it's been so long since Battlefield had a successful title most of the players have moved to something else whether it's Call of Duty other Battle Royale games or you know Apex whatever right they moved on to something else theoretically um the audience there's no captive audience that you can just massively bring back in necessarily like I know that there's this like old military vet on Tik Tok and he like

Snipes people from like two miles away in Battlefield 2022 and it's cool but like it's like you know the audience size is not there relative to these other games and especially the scale of investment needed to make that game that they want to make right so um you know I think this is honestly a make or break for the franchise as a whole like this game doesn't work I think I think Battlefield is is done as a franchise I think it's their best opportunity in a decade to launch an amazing battlefield but conversely if it sucks it's done yeah it timely it's also timely in the sense that it's going to be a a talk year for Call of Duty theoretically right you know Black Ops is strong but you know I think historically Modern Warfare has been a stronger subf franchise and you know we don't know what the 2025 installment is of Call of Duty if it's going to be one or if they do another sequel not a sequel right um if it's another Black Ops or if they go to some other sub genre for 2025 but if it's not Modern Warfare like that you

know there is a window here where Call of Duty theoretically isn't at its historical strongest um you know just another tidbit that plays in their favor but you know it's just been we talk about execution issues with Ubisoft but you know uh the the studio in in Sweden behind Battlefield the original one they haven't it in a while now and so Dice and yeah so it's uh you know it it's hard to just kind of have a feel on it because it's been so long since it's worked yeah I don't remember if soderland left on a good note or in terms of the last title that he worked on but uh since then it's been pretty much downhill he brought a lot of talent over to um what's I forget his studios's name but they were working Nexon now one went to Nexon and then also a lot of them went to massive at Ubisoft too right so yeah it's a great opportunity but it's like the the folks that are doing this game now are doing it for the first time yeah so smaller in five years I guess

what was the second the other question is like and I think we already answered it because I I do buy into that notion right like do I think that Activision will create 10 billion dollars of subscription revenues to Game Pass and um well you have King right King is is not going to be that let's look at it this way will the monthly active users of Activision Blizzard be higher or lower in five years well that's a better question because revenue is going to be harder to to map than engagement it's a really interesting discussion because you know like for Battlefield whatever for EA in 2025 people are going to have this decision of should I buy this game or should I just subscribe to to Xbox it hasn't really happened before um I I think I think as I'm thinking through this and as I was thinking through this before this episode and I wrote that my initial thought and the thought I'm still carrying with me is that it'll be a smaller business in five years and that's and I think that's just kind of

like mostly good for everybody else but I don't see how a company look we keep going back and forth this public markets discussion with Activision specifically and I do think that um while it's hard to be a public company I think it does instill the right qualities in gaming companies to produce the results investors want like that's consistent year- on-year growth expanding margins accountability all these kind of things and and it's almost obvious that in a larger company where you become something like an operating entity that that some of those things slip because it's not quite as stressful it's not quite as mandatory it's not quite as detrimental if you miss something uh and I just don't think we're going to see like an annual Activision Call of Duty cycle anymore it doesn't make sense on here's another question if you had to bet on one of these to take Market from Call of Duty you're betting a battlefield or a shooter from China oh I I am I would

take EA over China any day of the week I I I know I know Jo and this is completely based upon just the because you and I talk quite a bit right whether it's through this or anywhere else and I've been trying to give some Chinese games a chance that are targeted at the west and I've been surprised at how rough they are when they launch and I and I get this whole thing around being a beta or an alpha launch and stuff like that but I'm tired of playing games that aren't finished um I think you lose a lot of your audience when you do that and like what do you expect me to spend in this game so you can finish over the next two years while everyone else is producing like next Generation games and hits it just I just feel like there was a special time in that and fortnite started right in 2017 like oh this is Early Access and it still is for whatever reason um but it not everyone is fortnite not everyone can build a shooter that's out there and it's super soft and has like 40% of the cont tenant needs and has like you know bullet tracking issues and stability issues

like just get your straight like they had two good opportunities that I've tried um once human and uh Arena both of them are very different games um but they should feel better on day one yeah y I'm there and I think if you ask me who could make a scooter better for the Asian market I because if you look at games that are made for the E you know for the Asian markets they're very different right and I think that's the challenge that the Chinese companies have coming into the West is you know the the player preferences are just so different and the acceptance of what you're describing is very different too but the but if someone pulls like a a Wukong on uh Call of Duty that's a different story right if someone if in China makes a game that comes out day one that just flabbergast everybody and those are different games right Wukong is single player game this is a complex Cooperative PVP shooter um I think there's an opportunity for anybody right now but it it just can't

be soft and like Early Access and like here stick with us we'll make this game good with you over the next year like I have better things to do right yeah I mean the way that I've been thinking about the acquisition was really from the perspective of um basically Game Pass and mobile and uh I I think that the thing that I worry well I I think about more is like if Microsoft strategy is more around Game Pass what what happens to Xbox and then on the mobile side I never quite got the motivation there unless Microsoft were to do their own app store which I assume we may we may see at some point but um for me that those would be the kind of things that um would determine whether the acquisition was was good or not basically uh you know how Game Pass does I'm still skeptical we'll see and then whe they're able to leverage anything on the mobile side I think it's a combination of a their own app store

mobile game pass and either a cheaper or fremium ad powered version of Game Pass where you know you play a round of war zone and then you have or before you go in to play a round of War Zone you have to watch two minutes of ads right but then you can play you don't have to pay whereas if you pay then you don't have to watch the ads right or cheaper price like the streaming services there's the cheaper tier which has ads and then the the one that doesn't like I think there's a lot of ways they can play with the pricing model but I think ad ad-based Revenue pay plays a role in uh expanding game pass beyond whatever 30 40 whatever million subscribers it's at now yeah we we often call Activision like an acquisition but it's also a take private so they made a long-term bet on Activision being worth more down the road mixed in with some Microsoft assets and you know if they were to spin it out again over time um had I think you

mentioned this before like a variety of things need to fall into place and like one of those things is that like the value should be more than 70 billion do and it might take some time to grow into that valuation especially if you're doing a pricing transition and you could argue one that didn't really need to take place all right uh well I mean we're a little over an hour and I I think we've pretty much covered our four Hot Topics do you guys have any closing thoughts or anything else that uh you you want to discuss before we jump off here I feel like we would get feedback for not discussing it if we didn't so maybe I'll just give it two minutes and then we can end Roblox Hindenburg research there are known you know short research I hate the term like short selers as a stigma but they do research on opportunities where they think that there is an actionable short opportunity because whatever they're a fraud they're

overstating financials they're overstating their opportunity whatever the story is in this case they basically make two large acquisition accusations at ROBLOX one the user numbers are overstated two um it's a network for pedophiles um the second I don't think anyone can sit here and be an expert on because not in there every day seeing it so don't really have a view there and I think that was already reported in the news months ago and you know it's kind of just not been a non-event not new com the first comment on the users I mean look in the filings they say they can only track accounts not people so if people have more than one account 70 whatever 80 million Dow is not 80 million individuals right um and that's the same as every internet company in the world has that disclosure in their financials so um you know it was a lot of a lot of stuff that on the face of it

is like oh but then like H we kind of knew that and if you look at the stock reaction you know kind of tells it all it was not when Hindenburg hits a company and they're right the stock is down 10 20 30% if not more stock didn't really budge on this so you know I think that says it all yeah I mean the Stock's been on an absolute tear if you go back five months their last bad quarter it was down 30% in the morning and then it's just been uh up and to the right since then I think pretty much every day um so the company turned the corner on a lot of things that were knocks on them right the growth numbers inflected up um and uh yeah this was just an unfortunate timing But ultimately I think it was pretty much a non-event because as I just said it's like none of the stuff was new um and it's not if you're looking at what a TMT analyst or a hedone analyst needs understand for Tech and internet specifically um all those things are known issues with the space

um the one thing that I would say is like you know Roblox should be investing in the safety of kids on their platform it's their lifeblood and I think that they are uh but that's going to be probably the lingering question for investors is like they've talked about being able to cut costs and that through Ai and things like that so they want to make sure that's buttoned up it's just not a you don't want to read about any of your Investments having in ill effect on kids and things like that but the the user numbers for me are pretty much much do about nothing it's not unique to them either all right and I'm trying to remember but did they trying to check the filing real quick CFO is is stepping down also right yeah is that correct yeah I mean I we said that um we said that when we talked about Roblox and depth how you know yeah okay I found it right so yeah Guth three stepping down um you know he was never a public company CFO before Roblox if I remember correctly and so it's you know

I'm curious to see who they bring in because it could be an opportunity for them to really um you know get aggressive on the p&l we talked about the stock based comp and all that like a new C CFO could really uh you know enact a lot of that change totally yep I'm curious to find that out too I heard it might be JK he's also getting 60k a month um as his separation that's great let it drag on as long as possible this could be a long folks all right well there we have it I think that is the end so thanks guys always great talking to you guys about this this stuff and for our audience we will catch you next time bye everybody see you [Music]

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