Growth By Acquisition / Roblox Generative AI / 2020-22 Gaming Deals Highlights

foreign [Music] gaming podcast where it is our mission to explore the business and future of video games we bring together the industry's brightest Builders investors and thinkers to keep a full sun current events dissect emerging Trends and games share Lessons Learned and have a great time this podcast is also part of novik's growing ecosystem which ranges from free and premium research to Consulting and advisory services for more information visit www.navic.com now let's jump into the episode hi friends welcome to another Roundtable episode where we're going to analyze the latest gaming news and today I'm joined by Aaron Bush co-founder of navic and Felipe Mata who is going to self-intro himself hi Felipe hi hello hello Maria thanks for having me today so my name is Felipe I've been working in the gaming

industry for more than 10 years now I started as a data scientist at King they're also held a product manager role on the Bubble Witch franchise I work on Bubble Witch 2 and Bubble Witch 3. and after that I was also a producer on of new games all all in casual so I kind of have to attached different ways of seeing how to make games from different angles after that I moved to the septolab where I was the the head of new games I participated in the the latest releases that Petra has has done and now I'm with fan plus so we are building a studio and building a studio here in in Barcelona to create a casual puzzle games and we are already starting to create the the the well looking for the first roll so we are hiring uh so looking for for great talent to to create this this new new ideas so very

excited about this new new adventure that's exciting new rules in Barcelona what is the weather like just make me jealous yeah Sunny is like uh like warm even in this these days so we can't complain we are so jealous making new games in the sun well thank you so much for for joining today and we have a really exciting group of topics so we'll be covering invest games gaming deals reports highlights which analyzes 2020 to 2022 um embracer and still fronts earnings Thai all tied up with talking about the future of the growth by acquisition model and also looking at roblox's genitive AI announcement and doing a tie-in with the earnings and some other topics so yeah a lot lots to get through today and yeah we'll start actually with invest game and I just want to do a shout out to Anton gordodesi who sometimes join us here on the panel who's part of co-founding invest games so yeah Aaron well what did we learn

from that report uh yeah let me find my note so I just lost oh here we are so yeah um so investigate just published its latest report and this one essentially covers um 2020 through 2022 um so it gives a good coverage of recent history and I won't cover all of the numbers but I mean the highlights are that in 2022 it was generally a a mean reversion year for deal making and that's not surprising because from 2020 to 2021 both private Investments and M A who are up trouble we're a triple digit percentages and public offerings were up about 60 and it's impossible to see that kind of growth or even growth from those like new heights um year after year and so from 21 to 2022 the value of private investments in gaming fell about 16 M A was up slightly which was driven by much fewer but bigger deals and public offerings plummeted over 80 over the the year

prior just given the tough Market environment so you know looking forward um I don't know if I would expect too much change on like the private investment front um I would expect that you know as the market levels out there are companies that would want to go public so hopefully we'll see some some new action there ramp up a bit over the 80 decline of the past year although it still is kind of a tough environment out there so we'll see when exactly that happens but the report digs into you know the details of that the deals the investors um Novak we also contributed to the report especially around making sense of the the boom and bust cycle that we saw in web3 gaming and that's an impact on Deal making and all the money raised around that so um so anyways yeah make sure to to check it out uh we link to it and our I guess at this point the last novik digest newsletter so you can you can check that out there of course go to the invest game website

was there any surprising patterns or uh learnings I took away well I think it's to me just seeing like how volatile like the public market like raises can be is always pretty surprising how um you know companies raising money like that does ebb and flow depending on the market Cycles um with more like private companies and VCS but on the public side it's just so Market driven and so to see an 80 decline over the past year um that's that's pretty huge um and of course you know these numbers are volatile too just depending on like if you have one big company that goes public like that in and of itself could dramatically change those numbers so yeah I guess I would just be looking forward partially at uh you know what's going to happen there over the next year and with so much consolidation too just going around in the industry like

um uh like you know even with like Microsoft buying Activision Blizzard or or something or you know you know companies scooping in to try to buy a Rovio just the number of like the notable public companies the Publishers and game studios uh you know it's it's gonna be trending down unless you know more come out um and I always enjoy just learning about companies when they're public so hopefully we see a bit of a bit of a change there over the next couple of years with the February coming to an end is there are there any signals with this year that would show a different Trend comparing to last year um I don't know I guess we'll see how how it plays out you never know how how the things can change as the year goes by right and just a hell of market dynamics can can change because you know there's still a recession fears and maybe we'll like narrowly escape a recession and maybe that'll have some impact on how the market plays out and provide some confidence to companies

going public but you know any any changes in the world could have an impact on on market dynamics so I don't know I wouldn't overly overly just guess on how that's gonna go down at least at least for me next update then I'm going to be looking at Marvel's Marvel's Sons the release and the sales results and then also looking at for Access like what's coming next to that studio because they had some changes now in terms of leadership I have no idea how to pronounce for axis is a fire axis is it for axis ax is on fire I have no idea I'm gonna go with faraxes and hope and hope is correct okay so I looked at the results of midnight Suns and I think the description I got for its release was a hot pot so it released in December 2022 on new gen consoles and also Windows take two in their earnings they reported that the sales fell short of expectations and also just looking at

the feedback from players it really didn't stick The Landing it has some game breaking bugs which having game breaking bugs during the holiday season when people really want to play the games that they that they purchased that's just not good for your for your ratings and so the elevator pitch of what this game is is like x-com and slay the Spire wrapped in Marvel's heroes that are fighting an apocalyptic threat this is how I managed to distill what this game was and so it really sounds cool it sounds refreshing I looked at some gameplay and it looked extremely fun but it really screams that is for a niche audience and so I think the expectations as well of turn-based combat map exploration meaning meaningful narrative we look at games like divinity and balder's gay and they just completely smashed into that genre and so the player expectation that is already into that kind of games they just have that high level of quality that they're expecting and so I

personally think that is not fully surprising that the sales fell short of expectations and I just have some really hindsight takeaways that we can learn from from this particular release so I think that for Access could have aimed to do less and deliver really high quality design than trying to check so many ambitious check marks it's like meaningful narrative map exploration turn-based combat some cars added to this element they're just trying to do so much and also the game's targeting a niche audience and wrapping it in a Marvel IP is not enough to convince the mass Market to join into such a niche gameplay and not just that I think there's a reputation that this kind of turn-based card games on Console has painful ux which makes it even more Niche I don't think the sales performance expectations were adjusted for the addressable Market that this was targeting so they could have fell even shorter than was originally forecasted

and then also and this is I think is really important the game's release was originally delayed from October to the beginning of December which means that you're now releasing your game in an extremely competitive month of the year where if you're not a big franchise IP like FIFA Call of Duty God of War you're really going to struggle and then that added into the game breaking bugs that tanks your reviews they just were not in a good position to really stick that lending and so a question I actually have for the group is that I think one concern that I have is seeing a studio that tried to take a chance in making this new refreshing Niche game and then the sales fall short of expectations I just it just fuels my fears that studios are going to take like less risks and trying to innovate on gameplay so yeah what what do you think is this unfounded well I would say that I I agree on these right and and you can see even the trend with uh more Studios

liberating on IP existing IP and just try to wrap that IP into an existing mechanic that they have so not going so much into innovation of the mechanics that is tough uh and most likely to to create uh these these issues that we have seen with with this game but leverage on the potential of the ap2 like make an existing game to reach a broader audience so I would say that that definitely yes and even recovering all their IPs uh that have performing the past and try to just do a new release so delivering more content to the players but without risking too much I would I would just add that it's probably important to pick your moments um and I would give take two in general um which is the publisher um of the scam a bit of credit for they they have done a good job like over time both like fostering

like success around their biggest IPS and giving people what they want from those IPS while at the same time still you know trying to spin up new stuff both through like you know you know internally you know their their Studios and partnering with you know Studios like for Access like XCOM even was you know something new at some point um and of course through private division which is how they partner with a bunch of more like Indie type Studios to maybe not publish like the AAA games but you know can still unlock a lot of interesting Game Innovations there but but yeah if I think you have to be right at least be aligned in terms of like what your expectations are on like what it is you're actually delivering and it seems like in this case there was just like a Miss on the expectations um I mean I'm I actually think this game sounds pretty interesting I kind of want to play it now the board yeah before I the more I hear about it um but I think maybe even

more so than like the gameplay itself which sure is is Niche and I'm sure it'll have an impact on you know for access's next game that makes sure that it's set up more to succeed than their last one um but yeah hopefully they can still continue to um to kind of push the boundaries and such but but even so I think this is more it it's partially about the game but it really is about like the launch window too like I do think that probably is like half the the battle here as you were saying Maria like yeah launching in December like I didn't even really hear much about this game even though I think I would be the kind of person that that would like it so yeah maybe waiting even a little bit longer would have been the right call because because yeah I mean in a time when consumers are being even pickier in what they buy and like an environment where consumer spending is a bit um a bit pressured and we see you know more like enormous games around like Mega IPS come out like the latest Call of Duty game like even though these are two very different games like the Call

of Duty Modern Warfare 2 just completely dominated the holidays and I'm sure you know took market share from a bunch of other games maybe including even a bit this one so yeah I think it's hard to like simplify the takeaways for the story I think there's quite a Confluence of things that led to the the outcome but it is interesting to unpack yeah also maybe take into account that probably Marvel had some demands about what the game should be and the level of communication days will have uh they invest a lot in in narrative and they want to to probably leverage on new games to to tell a new story so that was probably also adding more complexities and I don't know if the team was was ready to take all of them together right true yeah that's such a good point I didn't consider okay so now let's look at what's next for for Access so there are some leadership changes um some key two key people that were on

the midnight Suns project have left and now there's a new studio head which is Heather Hazen who was previously the CEO and I was reading what she said when she took office is that what you call it when someone becomes a studio I don't know anyway so they're going to be doubling down on their civilization IP they confirmed finally to a lot of fans happiness that they are developing in next civilization game I'm just going to call it Civ 7 because why not and I think this is really exciting and I hope that they take the opportunity to innovate on the formula because there's an evolving Market of Forex Innovation there's player desire for Meaningful narrative choices uh growing expectation of ugc there's degenerative AI that maybe can help deliver on this narrative so oh yeah hopefully they won't get too afraid of like taking these risky bets from the experience that they got from Midnight sons and really try to take the

civilization formula to the next level and I looked at civilization six so it's actually nearly six and a half years old which feels risky for a premium game that relies on DLCs but like hats off to the team because it's still consistently one of the best strategy games on Steam charts it has a really rich modding Community they released now another bundle and until March the serum more content for the game and so I think they're just throwing signals that yes civilization 7 is in Dev is I think it's going to take maybe at least another three years until we see it at least from some of the rumors that they only started developing it mid-2021 and so yeah they're going to keep sustaining that Civ 6 game with content and the longevity of the product cycle until they can release the new iteration um yeah the question I have for you is so we talked about midnight Suns and now the extension of civ6 uh product life

cycle so what do you think about them taking this approach of extending CF6 uh and try to take a stab about developing this new IP into their portfolio so do you mean instead of like just maintaining shipsticks or well just accelerating the development of Civ 7 by putting more of the team on it yeah I would say that probably they are maybe trying to to go for a bigger change with ship Seven I would I would love to see really a crush platform game where mobile is is delivering us experience as as they they could doing in other platforms I've seen they have a mobile version but like uh so many bad ratings and like complaints about the the the performance of the game I understand that doing this type of games in Marvel is is difficult but for me I think that it could be maybe uh Game Changer right in in in their portfolio

to have really a cross-platform game where they can tap into the the mobile audience so probably if they are taking so much risk they are willing to to keep investing in the previous game uh to to have more time to to secure this this bed I would also just ask like isn't it normal to like if it's been I don't know six seven years since the last game to start if you're kind of nearing kind of like a the big final push for the next game to put more more people on the team to make it over the the Finish Line it does but they could have done that earlier so I'm trying to say that they took part of the team to develop midnight Suns to try to expand their portfolio past the Civ the civilization which is now their Flagship IP but instead of trying to prolong from six to let's say nine ten years of the life cycle yeah they could have had the team try to release earlier civilization seven yeah maybe I mean I think it makes sense

for them to try something new too and you know expand beyond what they were just doing but yeah certainly that didn't maybe work as much as they were planning it would have made more sense to maybe redirect earlier but the 11 you learn and on the living you learn yeah Aaron more updates on the Microsoft Activision Blizzard acquisition they just keep coming um so apparently the leaders of Xbox PlayStation Plus other representatives of other companies and Regulators have been meeting this week I think in Europe to discuss the Microsoft's Activision deal supposedly hammering out you know any final issues and concessions I don't think anyone not many people know what's going on behind the closed doors really um but um but yeah we've we've seen some action since then it's also possible about the time by the time this episode is published everything I say will be outdated um uh but you know as of we're recording

on Wednesday we've already seen a couple announcements made um and it seems like mostly politicking until the the deal really goes through but there does seem to be some momentum out there but a couple pieces to to what has been announced over the past day or so first uh according to Brad Smith who's the vice chair and president at Microsoft's Microsoft and Nintendo signed a 10-year agreement to bring Call of Duty to Nintendo players the same day as Xbox with Full Features um and naturally it's interesting that it's Microsoft signing the deal even before they own Activision right um and by the time everything goes through I I mean I would expect that this really applies more to like the switch to like whatever that next generation of the switch really is that Call of Duty is going to be living on for the next largely 10 years or so but anyways you know they're just this is you know Microsoft trying to show that of course Call of Duty the Crown Jewel it's going to be everywhere we want all Gamers everywhere to have

access to this thing it's not something that we're going to use to our own Advantage for antitrust purposes um and Microsoft also struck a 10-year deal with Nvidia and its GeForce now cloud gaming surface service to bring all Xbox PC games to GeForce now um and I think it was the UK Regulators who viewed cloud gaming as like the next Battleground for antitrust and like the the video games industry which um you know is is obviously a bit off but but either way you know giving this level of games access to its number one cloud gaming competitor on PC um is hopefully one way for Microsoft to appease Regulators at least on that bullet point of of the argument so I guess like in total Microsoft is clearly pulling out all the stops to make concessions and try to try to pull this

this deal off um I have a feeling Sony behind the closed doors is still pretty heavily opposing the deal um but you know if you line up Sony's dominant console market share plus all these concessions Xbox is making I I do increasingly struggle to see how it makes sense for Regulators to oppose the deal that's sort of The Stance I've I've been making you know just on Anti-Trust grounds since the beginning but you know the more of these concessions we see kind of roll in the more that I think that makes sense um so so yeah it's been interesting to see I bet we're we're nearing the end of this Saga soon enough we'll have a final final yes or no approval denial from all Regulators before um too long so hopefully that happens soon enough and we can get past the the speculative stage and move on to like the concrete you know talking about like what is actually next

but but that's the update on that this week well there's still a saga of Sony well Sony is it now in a corner where they should accept the terms of the 10 years versus the possibility of the acquisition being approved and they lose that that contract I don't know it's hard to say what's really going on behind the closed doors again and again it wouldn't even surprise me too if it's for The Regulators that push for a deal like that and not even necessarily Sony for the deal to go through but um yeah if I I mean if I were in Sony shoes I also would probably be opposing the deal until the very last moment to protect my own turf so I I get it well GeForce now is going to be in a couple car brands I think to be playable within cars so I think that this is going to destroy some relationships because you're meant to go shopping with your partner and your partner's like sorry I want to stay in the car I want

to play one more war zone match uh yeah I know great joke right anyway let's carry on and forget about this uh Fleet fight so tell us about Blizzard's back to the office Monday just because we love talking about blizzard okay yeah so uh the Activision Blizzard has ordered employees to return to working on site uh under the allegation that it will Foster better collaboration so what they are proposing is a hybrid format with three days per week at the office and and today's stream in remote and this hasn't been received very well by some employees who have publicly complained on on Twitter about it and some journalists even point out that it could be viewed as a form of mass dismissal or trying to to Foster attrition uh and only long like it could potentially delay upcoming titles that

they have like Diablo 4. so yeah it's a quite a interesting interesting move uh here and also like uh another option that people are speculating is that it could be that now the company sees the opportunity to regain Authority and because people will be a bit more afraid of losing a job and won't be like hoping moving to other jobs so it's quite interesting for me um I'm not sure if they are going for this strategy of fostering some attrition to cat cost on a potential layoffs that they could have in the future or that they foresee they would need I'm not sure if it's a good strategy right because the proportion of eight players that you lose this way is much bigger than than if you like do it more

selective and we we know that top talent is is really important to uh to create new games and and keep moving the industry forward so so this is strange I don't know you have any any thoughts on these I think that the jury is still out whether full remote work is good for AAA production I don't I don't know and so this could be a reaction to a drop in quality and productivity I have no idea but I don't think there's an exact answer of how can you coordinate a team of hundreds of people to deliver a high quality game but it's also interesting that they cut the profit sharing bonus when it was one of their best years I don't fully understand that yeah yeah I was going to comment on that as well because it was announced in a in a company All Hands where they were like sharing doing this because there was a survey and the

management had faced a criticism and then they they announced this and uh well it was like something like it could be perceived as a another extra motivation for making me live so I'm not happy with the new policy of back to work and now this on top when you are like doing very well financially a bit strange and even like the the president remarked like in a message like kind of like a this if you don't like this policy well take it or leave it so yeah so you're it's okay if you're not comfortable uh answering this question but you're you're leading the the building of a new studio so do you have any thoughts about the remote work and if you're trying to build new or very complex games do you have a take on

whether it is possible to do it remotely so um we have established a similar policy for for our studio so we are also going to work hybrid so three days per week at the office and today is this remote I appreciate the advantages that the remote gives you as a person as an individual right that that freedom and like a Saving Time commuting and all that stuff but in my perception and and also other people here at Fan plus we believe that in order to create new ideas and new games you want you need this close collaboration of the team that they they work together is for me it's much more efficient being in the same room with a whiteboard uh to to like discuss ideas and and collaborate than doing it uh remote so we are like despite that we know that this is

something that makes uh finding time more difficult we've come from this from the very beginning and especially also because we're establishing a new studio so the people that we hire will probably don't know each other so you need to build this relationship it's not the same if you've been a team that has worked together for several years face to face then you move to work a remote maybe that could work or for sure it will work better than people that haven't worked together at all right so our take here is also that in order to to be competitive in this market and create and and innovate you need to to work together in the same office at least sometime yeah that's really interesting thank you thank you for sharing that okay well we'll move on then to one of our deep dive topics today where yeah Aaron so what have you found about growth by acquisition you talked about this um in a past episodes if you want

to hear Aaron's first take you can go ahead and listen to that embrace your topic but I'm curious if your take has changed um so uh a little bit and I think it's it's more it's just interesting to see how these growth by acquisition companies have changed with this the changing Market environments like they don't operate the same way that they used to and we can dig into that but really I mean this topic is kind of spurred on right now because we've now seen both still fronts and embracer published their latest earnings reports over the past um a couple weeks um so it could figure it's interesting just to take a look at what these two companies are up to and then we can maybe talk a bit big picture about what's changing here and what even makes sense for the strategy as a whole um but to start obviously both of these companies have similarities right they're both Sweden based they're both historically reliant on heavy growth by acquisition but they're also very different so still front is majority of

mobile gaming company with 78 games across a range of genres and embracer is a much bigger business it has over 16 000 employees and 100 34 internal Studios but you know most importantly you know it operates across console PC Mobile tabletop games where it actually has like pretty high market share and that that industry comics and just other entertainment services and so we'll talk about the big picture but just to drill in a little bit on on both of these companies so um let's start with still front so still front this quarter saw 24 Revenue growth all of that growth is acquired growth and most of it comes from one acquisition of six of six waves which is the acquisition that gave them exposure to more of like the I think it's like the Japanese Market but uh East Asian uh market and organic growth is negative um just down if it's like one down one

or two percent but you know the the way that silver frames it is like it is down but it is ahead of the the market as a whole and considering that they're working with a bunch of like a large portfolio some of which are more Legacy games that that is still you know considered a win and and their books still friend of course is also a very profitable business and like any company with a big portfolio it has both hits and misses in any given quarter but one thing I find interesting just to kind of pull out an interesting uh piece of data is if they grew marketing spend in 2022 29 year over year but they actually saw notable declines and you know monthly active users daily active users monthly paying users part of that is obviously ATT driven but part is driven too by pausing a subsidiary in Bangladesh that's being investigated for allegedly facilitating illegal gambling and I don't know exactly what's going on there and I think part of that is just like regulatory

changes that they're kind of fighting against over there but anyways having to pause business basically in that subsidiary it you know puts a dent in some of those like user numbers at least and you know this has been a growth acquisition business but no deals were done this quarter um and so that's interesting to note from the embracer side we see a similar pattern but almost to like even more dramatic extremes and so uh you know this was a company that saw Triple digit Revenue growth year over year also entirely driven by Acquisitions and it too had negative organic growth um and so very interesting and the game's business from what I can see has also underperformed as games like the Saints Row I think the kind of the relaunch of of that game uh didn't fare the best um and of course this is a company I mentioned they have of 134 internal

Studios which is crazy um and so they still have a massive diverse pipeline a bunch of across a bunch of stuff they're trying to spin up their more AAA games and get I think more consistent in their launches to have more consistent financials uh but one thing that's interesting is that um as the acquis the acquisitive Market slows a bit um they too are also focused more on organic growth than just like higher Roi on their games business and so um one thing they're doing is they're looking to reduce risk and earn more guaranteed profits from working with other Publishers and so one big deal that happened this quarter was partnering with Amazon to publish the Tomb Raider for example which is now an embracer IP um and uh just also just dug into a bit into their table top side of things which has been pretty strong um but anyways we could talk more about like the high level growth by acquisition just

strategy in a moment for these two companies and what's changed but before we do that I just wanted to pause there and see if either of you wanted to comment at all on any of the details earnings results or otherwise of these two companies what's going on okay yeah I was going to say that we spoke at the beginning right like creating new games is getting challenging and challenging and like uh that's the way to to keep growing right if you don't do Acquisitions right and so I think that is is intelligent to focus on one of the strategies right and like double down on that one and do it doing it properly until that they obviously are doing very good with the Acquisitions that's managing to to keep growing right but I'm not sure if that maybe with that Focus they are not empowering the existing uh groups that they have to to Really keep growing their portfolio and like operate better

the existing games or release new games and that's probably causing them to not see the potential growth that they could have right because ideally uh you would like to see that okay you grow by acquisition but also the companies that you acquire in the past keep growing themselves right so it's like everything grows and it's a multiplier I don't know maybe that that could be that I didn't choose very well where to invest but I doubt it right so I think that probably is like the ecosystem is not fostering this yeah I think Felipe has a really good take there that I do wonder I still don't fully understand how do you manage an organization that has that amount of people and companies all trying to develop new games so I'd love to get more insight in into how they operate but the question I had to you Aaron is is there space in this business model to have a new competitor enter the market or or Embrace her and still front just

too dominant and the barrier of Entry is extremely high the barrier to entry is just being willing to spend a lot of money so so I think so I think uh they're not the only ones you could even say someone like 10 cent is you know like a bit similar in this Regard in terms of like how it has done so much M A and you know Investments over time it's it's a bit different we don't have as clear of a view into the details of that that market or that the company but um there are others there are other smaller companies too that aren't as big as still front embracer that have a similar strategy uh but it is interesting right because still fronts just the comments on like could they do more for their internal Studios like it's hard to match I think it is hard to manage uh when you have that many pieces for like a central team to like really make sure that everyone is executing well I do think there can be some value in having a decentralized model that

kind of pushes decision making more like down the org if you have great like leaders almost great like entrepreneur types like leading these independent companies I think you can still do pretty well if you do a good job of picking those people and picking those those um companies to acquire but still for example they have like their still Ops program which is you know how they try to share learnings across teams I don't know if embracer has something like that um but yeah I think it's fair I also would push back and we can kind of segue at the conversation maybe into like more of the growth by acquisition strategy here I would push back and say that just because the numbers went up a lot for growth by acquisition it doesn't actually necessarily mean that they did the best job um and there are a couple reasons why but like the where like the yellow flags start to show here is that if you look at embracer for example sure over the past year it's sales have more than doubled but the stock price is

still down over 50 from its highs so something something isn't adding up and there's a difference between growing your business and growing your value for shareholders if you look at it that way and the case that that I would make is that this this style of growth by acquisition was a byproduct of like the zero interest rate uh environment that was going on over the past two three years and I've talked about this a little bit before but maybe just to kind of like just super briefly recap when uh for either of these companies if you you know a bunch of bunch a bunch of Studios together um and that creates you know it makes it look like you have higher growth for your business it makes your uh you know your company trade at a higher value when you're when you trade at a higher value you can leverage your shares to do even more deals which continues to

growth and it's like this positive feedback cycle that that works really well on the way up and of course it's propped up too by like the market looking for growth and giving the benefit of the doubt for uh for these kinds of companies so that naturally they are priced higher but eventually um mean reversion happens and you kind of revert back to the the quality of the deals that you made and so if you acquire companies that are not growing right um then you're not going to be priced as a company that is growing as quickly as like you once saw and naturally when the market changes and deal making kind of that music stops or at least slows down a lot like uh you know your growth by acquisition um like what's going to be possible there also has to slow down too and also in a market that's competitive like you're probably paying up prices that are maybe higher than they should have been

so so anyways I think there there was a little bit of value destruction that kind of happened across this growth by acquisition spree and now we're seeing these companies change course which is interesting and so as I mentioned still front has not they didn't do an acquisition this quarter embracer we'll see they're they're a bit all over the place still and not even just in gaming right yeah so I I agree I think that uh like even on top of what you say like when when the market conditions change and get worse right I think like part of the value that was seen on this uh strategy was that okay you you acquired all these companies and then you like made them keep growing right and when you don't do that right it probably is when like investors lose lose trust in you and they don't don't believe that the the future ahead is so brilliant right

because you only depend on on acquiring other companies to keep growing and if the market conditions are bad then you don't trust that that strategy is going to work so well right so I think it's it's a vicious cycle there um also probably that they haven't proved to to have managed to create synergies between the companies that they've acquired that makes the the the individuals together better than they were individually right and this is probably something that this will focus their strategy a lot right because this is what could make the difference you have a lot of creative talent in different companies but they don't talk to each other they don't share knowledge with each other they don't leverage On Tools uh or even data it's sometimes it could be that data is hard to uh like put together right yeah from the different sources right so if you cannot leverage on all these then you are losing at the advantage that you have been a big group and then you don't

create a organic value and then investors will be a bit more reluctant to trust that the filter head is more brilliant have you seen the same signals in embracer that they're slowing down Acquisitions and focusing on optimizing their current portfolio I think a little bit I think they've had some commentary about needing to de-leverage because they've taken on a lot of debt and so reducing their debt load um is I think going to be more part of their strategy and just how they're talking about Acquisitions it seems more like they're going to be choosier and their BET's not that it's going to stop but that they're going to be maybe a bit more measured um but we'll see we'll see how that really plays out I do think the Synergy point that you brought up Felipe is interesting and I do I do think that um even between these two companies so their first energies is different I think the market originally maybe was like slightly too harsh on um saying

that there are not synergies in these companies I think with still front uh they're obviously trying with their still Ops platform and you know sharing content research they're sharing game engines the across Studios and things like that so there is something there but when you were just the game studios there's only so much that you can share um across across teams right whereas an embracer it's it's not just a games business they also have comics and board games and again Chrome crashed so I lost my doubt so I'm sorry everybody but in my notes somewhere I think there was a note about how um internally asmodee which is like their you know Flagship board game company that they own uh how they spot it is like 25 or 26 opportunities internally to work with video game T to sped up like interesting interesting board games and you could say the same probably across comics and

vice versa across you know just styles of games and so I do think that there is something interesting there and as embracer has spent a lot of money even if it hasn't been the most efficient at times to purchase like more and more IPS there could be it is a company that could find ways to actually do more things with them than if they were just a game studio and so I think the synergy's there there still is a lot to be proven but I think the surface area of what is possible is a bit wider um so that's what I think but anyways Maria I'm curious if you have any take on any of this growth by acquisition stuff any of the synergies do you think anything is over or underrated whoa can't unmute myself I don't have anything to add really I think the two of you have given great takes um I do have questions can I ask questions please so so is reducing the debt even more important now that the

interest rates went up it's just more costly to repay that um it depends on the debt some debt is it has like fixed interest rates and so if they raise raise the debt at lower interest rates and it's fixed it's fine but some debt might be variable I don't know 100 with these companies what the split is between fixed and variable rate debt um but in general I would just say that like um having High net debt on your balance sheet it just reduces the flexibility of your company when you have lots of cash you have much more optionality to do different things like you can tackle more opportunities but when the when your balance sheet is flipped you you first and foremost have to spend your focus just making sure that you are protected and it's a more defensive position more so than an offensive position and so sometimes it's worth it if you take on a lot of debt to buy something really awesome that can turbocharge your business and maybe

they've done a little bit of that or maybe with like like board games or something but um in general just deleveraging the business um should put them in a position to if they want to one day to be more aggressive again they'll be able to do it more realistically and is deleveraging a polite term to selling portfolio companies well by deleveraging I just mean that like if embracer generates profits and positive cash flows as a business that instead of using those cash flows to just sit as cash or to go acquire something else they'll just use it to actively pay down debt um but of course if they want to accelerate that deleveraging then of course they could look to sell to sell assets um and then use the proceeds for further pay down debt I don't know if they'll do that

maybe impresser will change their mind at some point they don't like their empire building the way they've done it and they'll maybe want to spin some things off or sell them and that's that's fine but whether that'll all go towards deleveraging or whether it'll go towards just even maybe spinning things off as Standalone companies I think that's TBD yeah I I don't believe that they are going to to sell much more now in much because like they are investors right and like investors Buy Low and sell high and they've done the opposite they have buy High I don't believe that they are going to sell low now because now most of the things are lower value that they used to be when they we were growing faster so and that's probably where they are not buying anything now because like many many companies don't want to sell now because now they are much more less valued that they used to be a year ago and they perceived that they are losing the opportunity to keep operating for a longer uh time

independently and then sell later yeah that's actually a really great point on the the buying high and selling wow so there are companies out there maybe not as much in the games industry but just in general who they actually they're very much growth by acquisition aggressive growth by acquisition and they have negative organic growth rates but they create extreme value for shareholders and the biggest difference operationally between like those kinds of companies and maybe what we've seen here is that when the market is hot that's when they're the least active and when everything falls and is struggling and it's hard times that's when they start to become more aggressive and do more M A and such so it'll be interesting to see too if these even if these two companies or other just m a in the industry it almost just felt like the opposite um just industry-wide but I do think

that some of the smartest companies could make smart art moves kind of zag what others are zigging right and um and um yeah just time the market Cycles differently and get better prices exactly and now Cassie he's Keen so yeah I don't know if you've seen the cast now for for lowering the depth is the best strategy or is better to use it to to buy cheaper now that everybody is willing to get cash it'll be interesting to go back to these earnings in the next quarter because we it's always a good opportunity to keep evaluating the business model in itself quarter on quarter so we're going to move on to the last Deep dive of this round table and yeah Felipe this Roblox generative AI so what's what's happening there okay so Roblox had uh the Q4 earnings for 2022 recently and on top of

presenting the company's results that I will provide some highlights a bit later they announced that they are developing generative AI tools to assist developers in creating games and assets more easily so these tools that they announced include code acceleration 3D model acceleration Avatar creation or 3D material creation among other stars they also mentioned some NPC and other stuff um and the interesting thing is this is not like a fluffy announcement of the kind like we find this area interesting and we will work on it they actually showcase a couple of tools with the video uh that they show in in a blog post so the these tools that they they they mentioned that will be coming uh it will be releases released in the coming weeks uh and they include the tool to create a generative AI material so in the video we're seeing a car and the the

material of the car was changing the car of the car was changing just by inputting texting in a prompt and um the other part of the video was showing like how to generate a with generative AI could complete code or generate code so they were um texting and like the car was probably in the lights on or off they were changing the weather to rain they were making the car fly so it looks very very very interesting is a problem they're trying to solve is allow someone who has no idea how to code to just go into Roblox and develop a complete mini game by using text prompts I'm not sure I've been like thinking about this from different angles I have different hypotheses that I can throw out so one is that that you could want to open the platform so more people can can create

stuff I think that that could probably maybe drive the interest on some people to go there for the first time just to create rather than to consume what others did this could be a possibility but I think that that the biggest short-term gain is going to be in actual game makers to be able to deliver more content and more experiences faster right because these are the ones that will leverage these tools to to not to be able to to do something that you didn't know before but to do something that you know how to do that much faster so I think that that's where probably they are getting the biggest gain but another angle that I had was that um these platforms uh depend a lot of on the content right so they they need to provide constant content this is why people go there and the content needs to be refreshed frequently and

the potential risk for them could be that other platform could leverage on AI to generate content fasters that they they do and then steal their dominant position right so probably with this move rather than being thinking on how to improve the platform they are thinking on how to protect themselves like a defensive strategy for the future right so preventing or avoiding that other platforms could do this move earlier than them and then try to get like developers to move there and deliver content faster so what are your thoughts what do you think could be the well so if you're if you're increasing the rate at which content can be created and I don't know if generative AI this year will be good enough for professional game devs to to leverage it to build really high quality experiences on Roblox now you increase the quantity of content I assume that by making it easier to develop content the quality will also be

more mixed and you'll have a lot of content sorry I can't a lot of content quantity with low quality um how will that affect professional game devs that are trying to build experiences for this platform so I assume it's just going to flood this discoverability for your actually really good experience to get eyeballs on it yeah I feel like that they probably need to to get smarter about that at trying to to help people reach to the better content on the content that is more engaging easier so I think that with this you will have like more variety of content right so I guess that the normal thing will be that existing developers could deliver better experiences because they could focus more time on building the best experience and not on producing assets or uh like taking details uh or like investing too much into generate a lot of content because maybe they could do

it faster so they could think more about how to make the experience better right but there will be others that will be just playing with it and trying to see what they could came out with probably they they could publish unfinished experiences because they they are not doing that for business right they are doing just for expression uh so I guess it's the same that could happen with other platforms even like I don't know YouTube right so find the right content in YouTube is is a challenge for the platform right but you don't need to leverage just on the platform to to find that that content right so you could leverage on on other stuff which uh brings me to another interesting point is that now with the ecosystem they have they have like kind of uh the developers that create experiences right and they need like influencers or other people to Market that experience to reach the audience so they the developers have the knowledge to deliver the experience right to execute and the influencers have the the

audience right and they work together there is a benefit in working together and the audience is connected to the spirit right but what if the now the the influencers can directly create their own experiences and they don't need to work with developers to to do that because they have already the channel to communicate engage with the players right and even like maybe doing this for Their audience like showing how they did it not just how so in the the final experience but how they did it could be also engaging for the audit right so what do you think about this do you think that this could break a little bit the economics that there are in Roblox right now uh I mean in general I think this is interesting like it's a net positive if it lowers the barriers to creation and makes creation faster um that's that should be a win for Roblox as a platform I do think that it it might create more competition right like doing that means more people are more capable of of creating

um and so sure maybe certain Studios that are built on Roblox that they won't like the increased competition that that comes with more creators But ultimately like I think it still is the right decision from a platform points of view and um I mean I've always I've always thought too that uh besides like the network effect that Roblox has like it's number one advantage that it has competitively is its r d budget which is I think it's like it just now hit a run rate of one billion dollars which is which is very large and there are very few companies that can compete against that and so this being like one of many ways in which it's like reinvesting to build out its tool set that people can choose to use or not use um like I think that's that's totally fair and it's interesting and it is a mark of progress I don't know necessarily like like sure influencers can maybe have an

easier time creating things and all power to them that's awesome if more people can create more stuff but I guess I would probably just add that like um what AI is going to bring is a lot of great looking crap right like um there's a lot of other factors that go into like making great games right so like if an influencer who doesn't know anything about game design or about like building economies or or anything to come in they can maybe build something that looks cool but it doesn't necessarily mean it's going to be a great game that can immediately compete with what like a larger team of more of more experience or thoughtful game designers can can bring about so I think what this does like again lowering the Bears and entry is great um and making it easier for more people to do more things faster just as an added tool in the toolbox that's great but yeah as you were saying like uh yeah

there could it could just lead to more flooding of Roblox uh which I would argue we've already it'll be a continuation of a trend that we've already seen for some time there's a ton like there's a ton of creators on Roblox that have created a bunch of really bad things but the the reason that it worked is because of the discoverability that Roblox has in place and they'll just have to continue to improve and get better at that with any of these changes you know you'll have certain stakeholders that might not be as big of winners as others but from a platform standpoint I think all this is is interesting and it'll improve over time and they'll iterate and learn from the community but I like it as an initial first step yeah I I'm just so confused about what is the motivation to be on Roblox I feel I need a panel of gen Z and maybe some even younger people to understand what they go there to look for because are they looking for really complex

fantastic game experiences because if they're looking for that why not console or PC are they looking to just have a place to hang out and do stuff and so quality and complexity doesn't matter that much it's just something that's fun and then you just go through a bunch of experiences with your sessions and your friends I I honestly don't know because if they're looking for really complex great quality experiences then you know is generative AI going to help deliver that it wouldn't be influencers delivering that as as Aaron stated so I not knowing the player motivation is hard to answer I think looking well I don't fully understand is from the financial performance and growth of the company what problem of adding what problem they're trying to solve by adding more quantity of content and adding more creators so I think with the with the earnings they increase Revenue they increase their diu which is massive but

they had a decrease in the average bookings for Dau it's that correct yeah is it correct but I will also like understand right like if you have increased massively your du so they've increased in the the last quarter in average it was almost 60 million so 99 19 year where Dr growth but it reached 65 million high in January of daily active users in average during the general month so it's a massive increment in users so I understand that with this growth in usage you're still like have a lower amount of bookings per diu but still the the the decline on on the book in spread EU was only two percent year over year so they've grown a lot in active uses but the manifestation hasn't dropped so much

so that means that the ratio is is that they are still monetizing better or at least like the existing existing users they were mentioning that uh a larger proportion of players are players over time so that the the payers are growing and that they keep paying so it was a quite interesting graph it was showing like the return and Pages growing a month after month so I think that they that's working for them and indeed one of the key reasons they they mentioned for this growth uh especially it was in December and January but in general uh was thanks to more content and better content so I think that AI will help into more content definitely no doubts about it whether that will help with the better content this is something that we are debating not so sure and they they probably need to double down on how to make a better easier to find the better

content right yeah I would just add that bookings often lag user growth um and so seeing the user growth is the most important also just as they've been expanding to new parts of the world like users just have different bookings levels um and so I wouldn't obsess over that particular metric too much you really just want to see user growth and engagement growth and if they're doing a good job building supporting creators and building out the platform like the bookings should per user should eventually um follow I I guess I would just kind of like I mean the player framing here this isn't even necessarily just about players I mean I think I just viewed this it's just another tool in the toolbox um for for creators and they can take it or leave it and these tools these AI related tools they'll this is a starting point like they'll increase more over time and I think it is a pretty big value add that like if you can save time by using AI related tools for like your in-game artwork or planning out a map or

something like that that is worthwhile and then you can spend more time owning other parts of your game and and that you can get some improvement and quality from that but in general just as a platform standpoint they want more people creating they want more people creating more stuff and have an easier time um creating and if creators are succeeding more and more then eventually players will succeed more and more and complexity like super complex games like that yeah that's not really what Roblox is right now but I mean Roblox is still mainly like kids and like younger teenagers that aren't necessarily looking for that but all of these pieces can maybe add together to help some of that complexity come to life in the future but I don't think that's really really the point I also just view it again as I mentioned like all of these ways for it to grow it just increases the competitive competitive Advantage for Roblox type of platform

um that as we see the launch of other ugc type Platforms in the future the more that Roblox can kind of push ahead on these kinds of features the harder it will it'll be for those new platforms to compete along every Dimension and compete for creators first and foremost which is then what leads to to users so that's my view their core strategy talks about aging up your audience and so if you want to age up your paying audience you also have to age up your content I assume so that's why I assume they're trying they will have to build complex more complex high quality games to have that aging up so you mentioned the r d budget is Roblox profitable um I think it has depended I mean I don't think they're profitable from like a net income standpoint I think they have been free cash flow profitable which you know like it just it's like the actual cash that they get in and out and they were very very profitable over covid and then used a

lot of those profits to then further reinvest accelerate reinvestments into hiring and such to build out more of these features not have not 100 sure where they are right now but they're in a they're in a fine spot and of course like the biggest like variable here for them is just like if there are any regulatory changes on you know app stores that change that 30 fee uh to something something lower and actually the creators will be the biggest beneficiaries of that because though Roblox will share even more of the proceeds with with them but Roblox itself would become even more profitable too I think this is a natural point to wrap up all of these really deep dive discussions today yeah well thank you Felipe Aaron for joining today looking forward to what comes next in the following quarter for the growth by acquisition and also seeing what kind of content the generative AI within Roblox will will create when that's released so

thank you so much and we'll see you all next week if you enjoyed today's episode whether on YouTube or your favorite podcast app make sure to like subscribe comment or give a five star review and if you want to reach out or provide feedback shoot us a note at podcast navic dot Co or find us on Twitter and Linkedin plus if you want to learn more about what novik has to offer make sure to check out our website www.navic.com there you can sign up for the number one games industry newsletter navic digest level up your insights with our premium research platform navic Pro or contact us to learn about our wide-ranging Consulting and advisory Services again that is www.navic.com thanks for listening and we'll catch you in the next episode