TWIG #382: Merge Mansion Falls, Xbox Fires the Wrong People, and the Math That Killed Gaming VC

That sounds pretty [ __ ] Ah, nobody goes to jail in the US. In [laughter] Trump's America? Fair. He was betting on this on Couch For financial engineering? Are you silly?
[laughter] [music]
Welcome, welcome, welcome everybody to This Week in Games episode 382. And today we have a wild bunch. I'm your host, Mishka Katkoff, founder whisperer. And then we have in the left corner Josh Chandley. President and CEO of Wildcard Games and host of DOF CUA monthly. Tim O'Brien, CEO of Tim O'Brien. And returning host Ethan Levy. Hello, it's me, Duke of Design, Grandmaster of Gotcha, backup to the backup to the backup host. I'm back. I'm back.
[laughter]
Yeah, back from building back into consulting and you'll be launching also a a little side show, I heard, right?

I'm I'm filming different pilots for you, Mishka. Trying to get some some new stuff on there. We'll see. I We just want to see more Mice Nuts. Like Mice Nuts show is the future.
the first episode of Mice Nuts monthly tomorrow. Awesome. Mice Nuts monthly. That is exactly what people are waiting for.
Nuts? That's going to be the name of it, I think. Me and Josh are just pure backup dancers. No, no, Josh has Josh has a monthly show, so so he's a he's a regular. Okay, I've done about I think [laughter] I've done 100 DOF episodes across Twig and Interviews, so
[laughter]
Yeah, exactly. He He He He He He
Yeah, Ethan helped the fort. Josh has Josh has a monthly show, so Okay, I've I think I've done 100 DOF episodes across Twig and Interviews, [laughter] so Yeah, exactly. He He He He He He
Yeah, Ethan helped the fort. So, in today's episode, we got Meta four over Metacore gets folded by Supercell. We have Microsoft CEO getting to work and heads have been rolling. GameStop is bidding for eBay. Spoiler alert, this is

financial engineering at its best. We have Roblox whose shares plummeted last week as they got serious about child safety. Us two has submitted to development costs and if we get to this, we will talk about the math that broke the gaming VC. But before that, a little banter. I could not be more excited to be back at work after a five-day family road trip with two eight-hour drives to Orlando, Florida. I brought all four kids, 10, 8, 5, 3, me and my wife, we went to Universal's Epic Universe theme park after my daughter's cheerleading competition. So, for all that effort, I would say the Mario World part of Universal Epic, the set design is amazing. It's a really, really cool. It felt like being transported to Mario World and the set design in line was great. My kids were not at all impressed with the Mario Kart AR experience. I was like, "Guys, wasn't

that amazing?" They're like, "It was fine." I was so disappointed. How old are your kids? The three-year-old didn't get to do much, but other than throw tantrums. But you know, I feel like there's a massive opportunity, Mishka, to your kind of apps monetization point that we'll get to later that like
Yeah. there's a massive monetization opportunity at those theme parks because people are on the apps checking their prices. There's all sorts of offerings. It's very confusing pricing. And like people spend 45 minutes to two hours on their phone in line. Perfect opportunity for some sort of free-to-play mechanic where a couple of people are winning like advanced access and everybody else is paying free-to-play style for it. The grandmaster of gotcha. The grandmaster [laughter] Red Bull used to do QR codes at their events, right? So, they would have mini games. like when Red Bull's doing one of their extreme sports things, you would just scan a code on the side of the venue and then [clears throat] you would play a game. So, they could So, you should do

basically scan a code to play for an opportunity to cut the line. Perfect.
And if there was monetization within that, they would be making more money than the fast pass. That's that's such an evil thinking because like they're already getting squeezed
of Gacha by being nice. Like like families get extracted by these parks. Like everything is expensive there and you have to buy your kids all kinds of toys and they the candies and this and that and and the fast passes and then Grandmaster of Gacha comes in and like that's not enough. I need unlimited spend. It's just like wow. Look, I got to pay off that credit card bill. It's going to be a tough month this month.
[laughter]
So, a little bit of a shill. Next week we have three events in Istanbul. All of them are invite-only. If you haven't gotten the invite email or slack me or Eric Kress. So, on the 12th, Eric Kress and myself will be at Moloco's Executive Summit. On the 13th, the one and only Latam Summit. Fantastic VC Summit. Kress and myself

will be again there, again speaking. And then on the 14th, we have an invite-only event for Turkish founders. It's called the China meets Turkey event. We're bringing in about 50 founders in Istanbul and some C-suiters from Chinese companies like FunPlus and Century Games and so forth. So, it'll be interesting knowledge sharing event. If you are in Istanbul between 12th and 14th and you have not been invited to this event and you are either a founder or a C-suiter, send me a message. On that note, just a a little quick shill. I'm back to consulting. I'm combining fractional work and kind of ad hoc problem solving. So, if If need help on a game or a game of five app at the intersection of monetization and game design, reach out. Grandmaster of Gacha at your service. Eiffel Tower, iconic. Tower of London, historic. The two towers, simply epic.

But none of them tell you anything about mobile app intelligence. Downloads, revenue, active users, and then my personal favorite, weekly cohort retention. Get the real story, get the real data, and get Sensor Tower today. Let's be honest. You're you're tired of chasing these dollars across the same crowded networks. We all are. That's why Vibe built a new playbook. They're the fastest growing game ad network platform, and they are helping studios scale smarter, not just bigger. Their AI-powered targeting means you will finally hit the audience you want, and with their new ROAS optimization engine, performance doesn't just grow, it actually levels up. So, if you're looking for a growth with a fresh angle, check out Vibs. It's still different. It's designed for growth, and it's powered by good vibes. So, head over to v y b s.co, and get yourself some good vibes.

So, let's jump in into the news. I think the biggest one in couple of days has been this news with a title that Supercell to fully acquire Merge Mansion maker Metacore. So, in the news, Supercell bailed out Metacore as the studio goes through massive layoffs with up to 70% of the company's employee possibly being laid off. So, in the Finnish law, you have to inform the people who are under a threat of layoffs. Like, it's not set that 70% will be laid off, but up to 70% of the employees could be laid off. So, what we see on the screen are basically the financials of the company. The revenues were above 150 million in 2024, so the 2025 numbers should be coming in any day now. These are official thing in Finland every company has to show. The operating profit, as you can see from the dip in 2021 when they went to almost 60 million minus, grew to about 15 million

a year and has been growing quite steadily year-over-year. They became profitable in 2023 and I assume that they were profitable in 2025 for sure they were in 2023 and 2024. The equity ratio is minus 139, so they have a lot of debt and their head count had been growing steadily from the early stages when they launched the game with about 10 people to up to 230 people. It was their head count in 2024 and I assume it kind of stayed in that same level. So those are the financials of the company, so turned profitable a couple of years ago. This company, Metacore, actually started as an Apple Watch company back in 2015, so they've been going at it. Five years in they pivoted to making mobile games and that was a great pivot because they built Merge Mansion and that game essentially invented the whole Merge Two genre and became an instant smash hit. 2021, Supercell has been investors since the beginning, but in 2021 Supercell gave

them uncollateralized credit of 180 million to support the scaling of Merge Mansion and that brought Supercell's total investment to Metacore to around 200 million dollars. So this was in '21 midst of COVID. At the peak in 2023, Metacore ran the celebrity campaigns and they even acquired Supercell's Everdale game, if you guys remember the sort of 4X Payday.
Correct.
Exactly. And then they were feeling themselves, they were really confident in their live ops. They acquired Supercell like, "Let us show you how to run games." And turns out in the end that live ops became their actually Achilles heel. So by the end of the same year 2023, they lost their leadership position in the genre they have created. So that's when Travel Town came in and the company invested massive sums overall into the celebrity ad campaigns, hired intensively, really tried to catch up to keep their position. They expanded with a studio in Berlin.

All while the Israeli and the Chinese competitors excelled in live operation and pragmatism and arguably arguably, I don't know I I don't have the numbers but I would assume worked more hours than their Finnish counterparts. So in the slides I just put in here is like you can see the launch of Merge Mansion in in the first one and then the competitors start coming in and they scale faster and faster over Merge Mansion. It's like they have the playbook and Merge Mansion is not growing but the category is ballooning in revenues. Because Gossip Harbor is the biggest casual game in an app purchase. Not the big Is it biggest? Well but like among the biggest if not the biggest game at the moment. So that's my take. And Josh, I'm curious. How do you read this? I think it's interesting that install charts tell like a slightly different story. You see through 2024 2025 you know downloads were down. And so yeah, they it means

that they cut UA, right? So in 2024 they were able to generate 10 15 million in profit off of dramatically lower UA spent. That means that the users that they bought in prior years are still there but they're not investing in future cohorts anymore. What's also interesting is downloads in March and April of this year 2026 they were up for it appears to be like over 100% from December. Uh but despite that revenue is still down year-over-year. My best guess is that for Metacore, you know, Q1 may have been that final push to find growth before the board just concluded it wasn't possible. The CEO himself said that their growth ambitions, you know, didn't materialize as expected. I've had those shitty meetings before where you like decide on a test with the

leadership team with, you know, predetermined actions based on the outcome. You scale spend. You watch the cohorts. ROAS doesn't follow. You make the call. It sucks. That's what this looks like to me. And this isn't just what triggered the layoffs. It probably triggered the acquisition. You know, reading the Supercell CEO's quotes, I'm not going to try to say his name cuz I can't say it. He's not saying like, "We need to inject fresh capital." He's saying, "Turning it around." He's talking about Supercell's capabilities in live operations and user acquisition. And he's saying scaling it back into a leading position. That's not the language you use if you're bailing somebody out. That it's a language that you use when you've decided it's time to take the reins. So, that's my take. If you look at the head count, they've effectively you know, nearly doubled head count year-over-year and revenue dipped. So, as a health metric, revenue

per head has gone down quite dramatically and that's a bad situation from a financial health perspective. I agree with what Josh said as well around the UA side of things. It looks like there was a period they were in the battle. And because of competition, CPMs and CPIs have gone up. They probably can't compete at the same sort of unit economics anymore. And it comes down to that that previous year's cohorts cuz the games like this, people stay around for a year or, you know, around that. So, you're going to get that halo effect and that shadow. And then it seems like the last 6 to 12 months, things have just gone very badly. Micro funnel just like rewrote the the playbook on this stuff and they're kind of bringing out a new game after new game and yeah, they're just continuing to grow the town but also cannibalize the remaining players. So, you know, Metacore in this example, I think have have just just lost the battle and I don't think they can afford to to continue in the same capacity. The CEO just quit.

Like what happened? It still makes almost $30 million a month. Like I guess Supercell have decided that they are better at, you know, live operations and and managing, you know, forever games and they'll use the internal capabilities and systems that they already have and they'll drop OPEX by cutting 70% of the team and they'll double down on Abida and profitability. So, essentially what you're saying is Supercell is the majority owner, they own 70% of this company, is laying off 70% of the employees and taking in their asset and essentially killing the company. They want their money back. They're doing like 25, 30 million a month, but what's the incremental impact of investing in live operations? Is that moving that needle? What's the incremental impact of investing in UA? Is that moving that needle? I think that we're being told the answer is not right now. Wouldn't you guess if looking at that head count chart, you would guess that they were a big part of that was

new games development, right? [snorts] That it couldn't have been all on Merge Mansion. They had to have been developing trying to develop the next thing and probably coming to the conclusion that whatever they were working on was not going to be the next big hit. Yeah. And just cut all those costs. Big game. They were doing solitaire game, right? The grandma Solitaire? Mhm. But essentially, what could have happened is that they had a board meeting and they told the CEO, Mika, is like, "Listen, man, you've been hitting your head [clears throat] against the wall for long enough. How about we just close your company and take your game?" The company wasn't losing money. That's what I'm trying to say. Like, it was actually making money. It was profitable, but it still closed. That was the most confusing thing for me. You know, like a very well-managed game sunset, especially if you're starting at a 20 to 30 million dollars a month or whatever it is, like, that can throw off millions and millions in profit over, you know, the next decade.

If it's really well-managed. And so, if they stop looking at Metacore as a growth asset, but instead, almost like, if you're Warren Buffett, like, a chain of gas stations, Mhm. cut everything that's not running the, you know, the chain of gas stations, and keep that audience fed for as long as possible and add predictable revenue to the Supercell balance sheet, which, you know, So, might make sense in a world where they haven't been the find the next Blossom.
is private equity now, essentially.
Yeah, they think of it as asset [clears throat] management, right? Like, they were looking at this asset, it was under management by Metacore, and they feel like the asset could be managed better by them. And as Ethan said, over that 10-year period, they believe that they'll have, you know, double digits or triple digits impact on the potential outlook. I'm not saying it's a wrong wrong approach. I'm just trying to like explain that this was pretty brutal what happened. If what happened is that they

essentially shut down the company and took their key title. It's smart. Yes, of course, from a business perspective, it's the smartest move. And any business person would say, "This is bold, smart, and just the way you should approach your investment." But from a company image perspective, it's very different than you would assume. Yeah, maybe the Q1 was that bad. Like, Q1 we've seen CPIs rising everywhere, like 40% in my own studio. LTVs you know, are where they are. And so, maybe again, it just got even worse this Q. You know, like maybe Q1 was so bad they were like, "Right, this is never going to turn around. We have to do something drastic." We have to close the company and take the game. Very drastic.
[laughter]
Um Another read on it is that I think Ethan made a good point. Where was that head count going? They were building a lot of new games. They weren't succeeding. And then, on the growth side as well, as far as I can see, the team was very

focused on like new user acquisition, especially last couple of months. If what you're actually saying is, "Actually, we're just going to live off this title." What you need is people to do live ops, not new games on the dev side. And what you need people is you could eat people on the UA side that kind of run a re-engage portfolio. Not a new user acquisition portfolio. So, it may have been that they just had the wrong kind of talent left over. Why do you think Supercell took the game? Like, is this a win or loss or like, what does it do for Supercell? Yeah, another forever game in their portfolio. It compounds with the rest of the catalog. This is like a back cat acquisition that you would see in PC console. You know? The game's making money. You you buy, maximize what it is, and you look at it as long as you can whilst it's making a profit. 100 mil, 100 some into your cash flow. Exactly, right. Per year. The value of a well ASO'd game

with tons of reviews in this mature mobile market cannot be overstated. You know, this could just be a one-off had we make the best out of this situation? It could be a sign of Supercell adapting their goalposts to the current market and maybe thinking, "Hey, not everything has to be a billion dollar a year game and actually we'd be really happy with a hundred million dollars a year for the next seven to ten years on a well-managed headcount operating expense. Maybe that's the new Supercell." There were no buyers in the market. Nobody wanted to buy for whatever price was being asked and they essentially went to Supercell because they couldn't sell it to anybody else and they clearly wanted out of the business if they were selling it around. That's another option. So, I don't want to paint a picture that Supercell is this evil owner. It could be that they saved the company because nobody else wanted it. I've never had a strategic

investor, so Muska, you might know this better than me. Yeah. In a standard strategic investor agreement, do they get like rights of like first refusal and last refusal on acquisition? I don't think there's any kind of standard type of deals, but the wise strategic investors are problematic for a VC for any type of a company is because they want you to do really well but not increase your value so that they can buy you before you increase your valuation. So, they want you to succeed but just not get expensive and that is against any kind like goal of any kind of a founder because you would assume those two things go hand in hand. So, that's typically why you don't want strategic investors and that's why VCs don't want to be in the same cap table with a strategic investor because their goal is opposite from each other. So, that's why VCs would always say, "Hey, don't take strategic not right now." Again, if

you're a B2B company, yes, it makes sense, but having one strategic that is is holding you down can be problematic And they will buy you at a discount, which might have happened here. What about the brand piece, guys? What do we take on that? Because, you know, Supercell has been expanding as a brand business. There's been talks about, you know, Netflix shows and there was also similar rumors about Merge Mansion becoming like a TV show and Netflix, all this stuff. And obviously, that the brand is quite recognizable. Like the Grandma, all of that stuff has been well developed over the last couple of years. Do we think that again, you know, Supercell are thinking this is another brand asset. We own the IP now. We can do spin-offs. We can do this. We can do that. Whereas Metacore maybe don't have the same resources and and expertise to execute on a multi-faceted approach. I would think they're probably just looking at the cash flow and the Angry Birds of it all. Yeah. Right? Like the Angry Birds movies work really well. Obviously, Sonic and Mario are monsters.

What other games have that sort of cachet to actually be a revenue-generating asset at the box office and not like a prestige asset like Arcane? And Fallout for being an amazing TV show might also be a prestige asset more than anything in terms of the TV show. So, like I'm not just talking about the trends media piece. I'm talking about just different sorts of genre of games. Yeah. So, sequels or maybe they want to do a match free with the IP. I don't know. I think we're beating the horse to death. Like, good on good on them. Like, whatever happened whether this was Supercell getting an important acquisition or whether this was Supercell actually saving a company that was looking for an acquirer but couldn't find an exit. I'm sure the founders did well. The valuations were very high. So, the secondaries must have flown in nicely. I know employees did really well, the ones who were early. So, good on them. And most importantly, there's ton of talented people. I know many people who worked in Metacore that are very good. So, hopefully they are able to find

their next job, whether that is in games, which is in trouble especially in Finland, or outside games where there's plenty of really cool companies that are most likely in need with a type of a talent that that this company leaves behind. But talking about rolling heads, I wanted to jump in on the next topic, which is Xbox. Xbox at the same time has seen the revenue decline over the past six quarters, six quarters, and the two 24-year Xbox veterans that were let go by the new CEO is Kevin Gamel, who was the corporate VP over Xbox UX, game dev, and publishing platforms, as well as Roanne Sones, who's corporate VP for Xbox devices and ecosystem. And every new hire that was brought in into leadership position is in tech and growth functions, none of them from entertainment, let alone games. So my question to the group is is this gaming reorg or a platform pivot in a disguise? From my perspective, there's a lot of wide swings happening here.

And I feel like they've tried a lot, and they've focused on what they believed was the right thing to do in terms of having gaming people leading gaming org, and six quarters, you know, of loss or deterioration is showing that whatever happened or whatever they picked isn't working. So let's try some some big swing to try and make something work. It personally doesn't pass my smell test. I don't see the people coming in who are going to make changes required to turn this around. I don't think non-gaming people are going to execute successfully on the big stage for gaming. But look, that's just me, man, you know? That's it doesn't pass my smell test. I I don't know, what about the rest of you guys? Yeah, I mean, the core asset of any company like this is supposed to be the exclusive to games, the reasons you play. I think I guess my take is simple. I canceled Game Pass last year. To me, this really feels like Xbox is being treated by Microsoft like a series B startup in [clears throat] a way that

that there's like a product market fit, but monetization is not really working. So, you start bringing in new talent like from adjacent places like growth hackers, product managers, people who built infrastructures, people who know how to reduce time and really optimize the funnel at the gotcha at the line to make more money at the theme park, make more out of the paying users. So, they might be fixing the right thing, but I don't know if this is really the the right problem in the sense the Game Pass being the problem. Because as Josh put it, like the first-party output has been really anemic since the acquisitions Bethesda and Activision. They closed budget studios and the content pipeline overall hasn't justified the value proposition and that's that has led to the churn or the lack of growth, but feels like they're attempting to fix the content deficit with growth engineering. And I think there's kind of like a two takes you can take. You can be really cynical and this is that that Xbox is

repositioning from a gaming brand to a cloud entertainment and developer platform. Or you can take an optimistic take on this one and say that this fresh operational talent that is outside gaming and really kind of looking in at this new problem with a new set of solutions is attacking the bloated Xbox organization.
[laughter]
Ethan, you go. Yeah, no, cuz I I actually I've been developing games for 23 years. I'm a games person through and through. And my knee-jerk when I see this headline on IGN is like, "There's no way this is going to work." I'm going to try and exercise some radical empathy here and say what's great about this move. And then John, you can tell me what an idiot I'm being, all right? So, Microsoft went all in on games over the past couple years with their acquisitions, right? They added Call of Duty, World of Warcraft, Overwatch, Diablo, Elder Scrolls, Doom, Fallout,

Starfield, Crash Bandicoot, Tony Hawk, Guitar Hero, and more. They already had Candy Crush and Farm Heroes. They have Halo, Forza, Gears, Age of Empire, Flight Simulator, and of course Minecraft, right? They have an incredible games portfolio. They have an incredible set of IPs that are beloved, that are capable of being forever franchises or platforms on their own right if they are treated the right way. They've been focusing on a summer blockbuster model. Super expensive tentpole releases. People don't want Netflix for 12 movies a year. Right? They've been focusing on kind of the wrong part, the glamorous part, the red carpet part. And what they actually need to focus on, except in the case of something like Call of Duty where that is obviously working, it's obviously going to work with the next Elder Scrolls and Fallout. But the question is, how do they take these brands and turn them into a series of forever platforms? Not tentpole releases that

are staggered in a way to keep people subscribed, but focus on the reality TV of it all. Right? Like just make every single one of these a live service platform. And if it doesn't have the raw material to become that, then it's time to, you know, let that franchise atrophy, basically, and die. As much as it would pain me to never get another Crash Bandicoot again. I think that they have an incredible set of raw material. They do have an incredible set of games executives at all of these studios and game directors and technical directors. They have a dearth of game talent. So, they do actually need people to come in, think differently, push a slightly different mission, and force, you know, kind of blockbuster movie people to think about the weekly drama of it all, the reality TV of all, and just keep people coming back week over week over week for your franchise. I don't know seriously, I think you've probably got like a really good point there, dude. Like if you look like Gears of War

as a iconic franchise. I'm not a huge Xbox person, I'm a PlayStation person, but there's a lot of franchises that are the ones you read out where not a lot is happening, right? And if they could build it out to a highly engaged multi-touch experience over 12 months, 24 months, you know, like getting people come back. The ability to come and and play one for a little while, then move into another one in that cross approach. It makes sense. Like the content's there, right? The IPs are there. They just need to maybe change the execution. Like you said, like building instead of creating Blockbuster Christmas hits, like worry about a sustainable long-form content where people can come back more often, you know, in that soap opera format. So, I think that's Yeah, maybe Ethan should take over. That would be tragic. All right, Ethan Ethan is focusing on consulting. But hey, talking about taking over, next topic is GameStop preparing to take over for eBay.

And I don't know if this is really a a gaming article. Like GameStop, is it a game company? But let's cover it in in a way because the meme continues. The retail investors who made GameStop a cultural phenomena now get a new narrative to rally around. David buys Goliath. So, in this one the GameStop is a 12 billion market cap company, you know, nothing to sneeze at. And eBay is much larger, it's 46 billion dollars. So, 12 billion dollars buying 46. GameStop did just shy over 1 billion in revenue for a holiday quarter, and they're trending down about 14%. So, it's not like eBay is blowing up with with some some new crypto coin here. And what do they do when disaster hits? They announce a bid for a company four times their size. And the way this reads is that the announcement alone, which is the saddest thing, moved GameStop's stock up by 4%

and eBay went up by 14. And Cohen, who was the CEO of GameStop, has been building a stake in eBay at the same time with shares in the company. And what you conclude is this is the quintessential American capitalism, financial engineering at its finest. Because eBay's collectibles and marketplace business has almost nothing to do with GameStop's shrinking retail footprint. And there's no synergy pitch to be made because the business are moving in opposite directions. So, any opinion pieces on this marvelous financial engineering piece? Did you say that the the GameStop CEO was acquiring eBay stock and then made a public He was building a stake in eBay shares ahead of this.
or GameStop was? Maybe GameStop was building it.
Okay. I was going to say that's that that sounds pretty pretty shady. Ah, nobody no nobody goes to jail in the US.
[laughter]
In Trump's America? Fair. He was betting on this on Kelce.

For financial For financial engineering? Are you silly? [laughter] You're not bringing up Nancy on this pod. Yeah, not even a slap on the wrist. But any other comments on on this debacle? I actually can't believe we're even talking about this. Like I'm like what the heck is going on here? Like what is Mr. [laughter] talking about? Like
All right. All right. All right. It was a It was a weird thing. Let's talk about another bad dream. So, here you can see the graph of Roblox corporation stock. So, it is looking mighty red and going downwards. But that's not the story I want to talk about because last week Roblox voluntarily took a billion-dollar hit to fix a structural problem that they were having and I think they did it before they were forced to do it. And by that I mean that the child safety and age authentication methods that they put in into the the platform. And because of this because of this action the market punished them by 18%. So, here's my take. I feel like this was

very short-sighted. I know that people didn't agree with me and they agreed with the analyst. But let me explain. What has been happening is that the regulatory landscape was getting tighter and tighter. Roblox had about 140 over 140 lawsuits regarding child safety elements. And there were also a very clear shifting public sentiment around minors online and as well as Roblox safety. I don't know how your spouse is or whether you've been seeing the reals, but I know my wife has been very anti-Roblox despite never even touching the app but just scrolling the Instagram or or kind of like hearing the murmur like this is like the most dangerous app you can install to your child. That that was her opinion of this. And so what they decided is to go ahead with the real enforcement. Not some kind of like cosmetic parental control that most platforms would default to. And the booking guidance cut is real, but look what they're getting here. They're getting a verified age

data on their entire user base, which no other gaming platform has at Roblox's scale. And through that they can build not only age appropriate content pipelines, but also offer advertiser verified age gated inventory, which I would assume could command premium CPMs. Josh, am I talking out of my ass here? A little bit. Okay. A little bit. I'm not sure I
That's that's what I did.
[laughter]
Yeah. I'm not sure I buy it. Okay, but I what I do buy is that advertising business that Roblox has been building is their focus and I think it becomes more credible, most importantly more legally defensible, when there is a verified age data behind it. And let's not forget also, with the Q1 that kind of, you know, dropped the ball, the results actually beat estimates on both the revenue and earnings per share despite these safety headwinds, if you will. And if you think about it, the users who churn because they couldn't or wouldn't verify their age were, by definition, the riskiest cohort that likely wouldn't have

monetized anyway. And so, to conclude this, company CEO Dave Baszucki has been saying for years that Roblox is building for all ages, not just kids, and this, in my opinion, is the infrastructure for the next versions of Roblox that takes age cohorts into account properly. And the competitors haven't done it. Fortnite hasn't, Minecraft hasn't, and when the regulation catches up, and it will, especially if we trust EU, the home continent for regulation, Roblox will essentially have a two-year lead to its key competitors. So, Josh, am I being too positive on this? I think the bookings cut tell a different story. I don't think this is an investment in the future. You know, age verification rollout driving a revenue drop of over 10%. It describes a a new structural impairment. You talk about regulatory landscape tightening. I'm not feeling that. I don't think John is feeling that. Most small to mid-size studios don't feel that. Another way of saying what's happening right now is

Roblox is experiencing a 10% LTV decline. And their competitors that are smaller are not. I think forcing games to do age verification is kind of silly. Not because we shouldn't do it, but because we should be doing age verification once and doing it properly. You know, like the OS needs to do it. PlayStation, like Android, iOS, kids shouldn't be asked to verify their age 50 times on the same device. Do you want like American or British or like Western kids sending age information and stuff like that to China? Or do you want Apple, Google, or Sony doing it? What that would mean is that like every kid does it once. These big companies, you know, they're not having unequal friction. And the OS just sends a flag. So, I really think this legislation needs to happen faster. It is happening and that's great. But until we get something like that, it's going to create drag for

the big guys. I spent the past few years working in the UGC space on the UEFN Meta Horizon world, a little bit on Roblox. And obviously Roblox is going through some short-term pain. This to me, putting on a monetization hat, feels like the right long-term move for Roblox and the revenue growth. And as Mishka said, their legal defense. Because what separates Roblox from Fortnite and Minecraft. Minecraft is a premium product that also sells skins and mods and merchandise, right? Loot boxes are not a big part of Minecraft and its revenue [clears throat] generation. Loot boxes are pretty much not allowed on UEFN. In-experience monetization is very new in UEFN and hardly exists relative to Roblox. Whereas Roblox games look a lot like the mobile free-to-play games we're all very familiar with, where gotcha, loot boxes, trading, collection, event, battle pass, those are the core pieces of revenue. And so, if you combine the big target that is Roblox, the thing everybody

knows about, that gets a lot of bad headlines for child endangerment, you think about all the anti-loot box legislation and sentiment that exists, and the fact their audience is viewed, whether it's true or not, is primarily under 18, like you've got a giant target and kind of a big revenue risk. And Minecraft has shown just how sticky these platforms are as players age up, right? The average Minecraft player is in their mid-20s. Roblox is probably seeing that they're much stickier than we would assume from the outside as their players age that despite the graphics that these are social hubs that are part of people's lives and are incredibly hard to push them off of if it's the place where you hang out with your friends. Also, once players move from that world of relying on gift cards and V-bucks their parents buy them to having the ability to buy them themselves because of summer jobs or full-time

jobs, whatever it is, they become more valuable players to Roblox and they can spend more on those experiences. The part of this I think is most interesting is what they're doing to incentivize developers specifically to target these players. They're offering a 42% boost to the DevEx rate and they're offering enhanced discovery opportunities. So, Roblox is saying, "Developers, we want you to focus on 18+ players. We want you to build 18+ experiences." And to me, that feels like trying to build a new stable stand of the revenue platform for Roblox by holding on to and specifically targeting with new games content these older players. Yeah, from my perspective, guys, I can't believe I'm going to be that person. I'm normally the business person, but the morality here of it it sits very well with me. As a parent, the fact that an 8-year-old could talk to an 18-year-old, you know, in the same same experience is very alarming to me.

Like, I would not let my children play Roblox right now. Again, all of the press aside, there's been an Yeah, a huge amount of of legal stuff that's happened, which needs to be addressed. I think the the CEO a couple of months ago kind of brushed over it and that personally kind of offended me, you know, that he was trying to like brush over this a huge huge thing. Well, I think they're moving in the right direction. Obviously, the immediate reaction from the market is very apparent when you remove the morality of it and this purely a business decision, you know, like our revenue is going to go down. But, I don't know why originally they didn't just do different servers for different age groups. I mean, maybe not on the age verification, but if you look at like World of Warcraft, you had different servers, right? And it would be a pain if you your friends are on one server and you're on another and you couldn't inter- interact, so maybe that's a limiting factor, but I don't know why they wouldn't do the same thing for different age groups, you know, 8 to 12,

12 to 16, 16 to 20, whatever. But, yeah, I I I think this is a move in the right direction. I'm more in Ethan's camp. Kick-ass live ops need kick-ass tools. That's where Hero Labs comes in. They just released a massive update to their Satori live ops platform and having done my research, I can say with confidence that it's second to none. In a single product, you get everything you need, including event capture, player segmentation, feature flags, remote configuration, AB testing, experimentation, live events calendar, messaging, retention grading, analytics, and so much more. If you're serious about running live services in a game, get serious about the tools you use. Connect with Hero Labs and make some serious cheese with your live ops. In today's hyper-competitive digital landscape, understanding your app's journey from discovery to download isn't just insightful, it's the difference between scaling and stagnating. Enter

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two? You want to talk about that?
[laughter]
Well, this is kind of a completely different topic, but on on the games front, I I wanted to highlight one headline out of the gamedeveloper.biz, where the us two that we all know from Monument Valley, which was an early and giant premium mobile hit, as well as games like Alba: A Wildlife Adventure and Assemble with Care, there was a great headline that us two, the CEO, said, "We've been a little bit romantic about full-time development and hiring full-time people and that we need to focus on lowering development costs." And I think this is actually an accurate temperature read on where we are overall on the industry, as well as what I think kind of the new permanent normal Over the past couple years, us two has pivoted from being a mobile-first premium developer to a PC-first premium developer. We They had a massive success with Monument Valley, and I'm sure they have a lot of recurring revenue still on on premium from that. But over the past couple years, they've ported all their franchises, they've seen success, and

they're becoming a PC-first studio going forward. And what they've said is, "Our costs were too high on those ports and that probably implies that our costs would be too high on new game development on PC moving forward and that they need to focus more on a small core of leads and bolstering their studio with contractors and freelancers. And I really think that this is where we are headed in the games industry, right? That we're going to look a lot more like bands, music bands, over the next couple of years than we will like these mega studios, especially as AI development turbocharges how much productivity you can get out of small groups of people. So really I think what's going to happen, smaller studios that are really like a core operating group that come up with their idea, come up with their plan, use AI as much as possible to get as much done, and then hire more freelancers as consultants as needed to

bolster their staff only where needed to like push the game over the edge for key milestones. It just feels like the industry has changed and is changing and this is a really good temperature read on it and this is where it feels like development is going moving forward. What do you mean by music bands? Oh, like if you think about a band as a business, right?
Yeah. Like U2 going on tour involves hundreds if not thousands of people being brought on for short-term engagements. Releasing an album similarly, right? Like the band makes a product and even making that product involves the core band bringing out producer, sound mixing engineer, etc., etc. So like there's this small team that has a following that does the thing. And then as they need to surge their business for certain releases, they do by hiring, you know, small groups of people to literally armies of people depending on what it is they're

pulling off as a business.
But the band is not doing that. Like that's record label. Like record label is actually brings in these creatives and it's actually a publishing model where you bring in these small groups, these bands, and put it under your publishing engine. I get the metaphor you're going and that's Hollywood studios because Hollywood studios
is much better in that way where you're bringing in like these smaller production houses that focus on different things and there is that creative and you kind of assemble the group all the time. There's the core team and then there's the auxiliary production houses that get together on various different projects but not even on the same ones. And that is more of the type of like a deal making, let's build a team for this specific launch. I think we're already seeing this in some games. Even like Claire Obscure famously had like 40 people working on it but in the credits there was like 300 plus people were thanked. So, you know, the delta between those two numbers is the freelancers, it's the consultants, it's the outsourcers. You know, like so I think we're already seeing this trend in

some big games. 100% and then outsourcing has never been more normalized than it is now. It's kind of silly when when you decide to build versus buying, whether it's tech, whether it's assets, like you need such a large head count to push certain larger games out or to build out the studio that it just it's hard to justify putting those costs under your own studio's set up. But I think there were there were a couple of things to take out of here because she gave some numbers, the CEO. So, she said like their budgets were between 7 to 10 million and the cycle to make a game was between three to four years. Wow, that's a a long time. And there were selling all the games at five quids, sterlings, pounds and they were supported by featuring from the platforms. And then she didn't say this but my experience having worked on premium mobile games way back was the DLCs that you would publish would make about 30% of the initial sales and then subsequent DLCs would make another 30%

of the DLC that you you sold before. So, the collapse was quite significant and DLC model could justify maybe one DLC, but the second one was always already at a loss. And because these games don't have any microtransactions, they don't have any oncoming revenue, it's just enduring costs with having the headcount and doing the hot fixes and you know, doing it for the players and because they don't also have essentially growing LTV only one number, there's no user acquisition or marketing either. So, all I'm trying to say is like without the like the math itself never worked without platform patrons such as, you know, Netflix was I think they they released Monument Valley 3 on their platform, Apple Arcade. Those were subsidized in distribution. Those were the guaranteeing revenues, Xbox passes as well. And now that those are gone, it kind of is the absolute nail to the coffin to even the most talented mid-size developers. And in this post,

she regarding the romanticization of job security, which is actually the kind of like the most honest sentence a studio head has said in years, she talked about London salaries, pensions and having a full-time headcount between 30 to 40 people, which is a lot for this type of a game. It's I was really confused. And and having like sub $10 million budgets targeting PC where they're competing with teams of five, you know, building game out of Lithuania at, you know, fraction of the price. Like the numbers just don't reconcile. So, in the end, this is a math problem. Yeah. There's also a very important thing here that we need to mention, which is with employees, you also as an employer, you pay them salary, but you also have the employers additional costs.
Side costs. Which in some regions is up to 50% Mishka, right? Like Finland. Like Finland. 50% exactly.
Yeah. [laughter] And remember if you're paying someone who's a consultant or freelancer, you don't pay that cost. Yeah. That's 50%

off the top. Yeah. So if you have a larger org the opex impacts and and direct security again Finland, it's very hard to fire someone. You know, after a certain amount of time. Um so you get locked in and that impacts your opex whereas if you can ratchet up and down like Ethan saying by with with external talent this cost per head count is less and the risk for you and exposure for you is less. So whilst it shouldn't work like that, that's a societal thing. You know, we can't beat the math unless you do stuff like this. So this is just business. You know, there's no other way of putting it. And especially with really how powerful generative AI tools have become, like what they said it's a three to four year dev cycle and seven to ten million dollars like you could imagine in the current world two people get nine months to build the prototype build the entire production plan, build the business case, like do

the UI test or do whatever the marketing test I like. And Claude could get nine months to prove what needs to be proven to invest an additional one to two million dollars to bring a thing to market. And that's it. Like that's kind of a new math of something like this. That's where we're headed, right?
[snorts]
Well, talking about math, let's end this episode talking about a VC math. So this is actually article on Deconstructor of Fun written by yours truly. Wow. Okay, so I
[laughter]
So it's a good one. Mishka, this was a good one. Sometimes I I do find a time to write and this was close to hard as a eternal friend of the VCs and my point here was really to to show that it's not that the are stupid and they don't understand games and they mis- this and that. It's more that the math just stopped working. So, in short, go and check it out, but basically a Reems quarterly gaming report, definitely you should subscribe to it. It It has all the data on on the gaming

market. But, in this one it it showed that early stage deal flow dropped below post-pandemic lows. And especially it was talking about VC-led early stage rounds. In other ways, when you're starting a company, don't ask VCs for money. That's what this graph shows. Unless your postal code is somewhere in Istanbul, maybe somewhere in Hanoi or Ho Chi Minh, maybe Lahore, not likely, but but you know, somewhere in Asia that or or Istanbul. So, I put in the numbers that the gaming startup funding went from $12.5 billion in 2021 down to 627 for the first half of 2025. Not a single growth round crossed 100 million, and I feel like this is more of a decimation that rather than a collapse. And this happened essentially for two reasons. Of course, there's many other reasons, but two biggest reasons are that the acquirers have gotten acquired. So, the Zyngas of the world

are off. There's no, you know, King making acquisitions. There's no Activision making acquisitions. Those are all part of bigger conglomerates, and a bigger company doesn't need a company that's making 50 million or even 100 million. You know, Supercell took 100 million, but most likely because nobody else was buying it. And then Apple, goddamn Apple, killed IDFA, which essentially killed efficient UA. So, we went to fingerprinting, made it everything much harder, made harder to scale big enough to get acquired now that the acquirers are gone. At the same time, you have apps trading about 10 to 17 times revenue, while games trade below three x revenue. So, as a VC, you got same revenue, but fraction of the exit. It wasn't meant to be negative that you're [ __ ] out of luck because VCs won't fund you. It was more idea to say, "Hey, the math doesn't work. Don't chase VCs because they will give you some silly KPIs and say, 'Come back in 3 months when you have hit this

KPI.'" And then when you come back, they will ask you, "You have a lead." They will take you're too early, you're too late, or this, or that. When they just won't tell you no because if they tell you no, then if you hit gold by a miracle, they won't be able to get back on the horse. So, they have to kind of string you along. Anyway, Josh Chandler, what do you think? As a VC-funded company. I think there there's like a third, maybe lesser reason, I'm not sure, that I that really sticks out to me, which is a lot of funds raised as a ton of capital in that peak euphoria of COVID. And they they raised like more than you can like deploy efficiently. Like basically, they could spend that money fast
[snorts]
or they could spend that money well, but doing both requires like perfect execution. You know, the Saudis are running into similar challenges right now with Vision 2030. They have almost unlimited

capital, but when deadlines are looming, it forces you to spend fast. UAE people see the same thing. Every dollar you scale up in theoretically is a little bit less efficient than the last dollar you spend. We we see it on hiring. If you have to hire 10 product managers in 6 months versus one, what's your average quality going to be? And it's always it's just very challenging to deploy with speed and quality at the same time. And they had to do that. So, these VCs invested primarily when things are hot, they pushed up pricing. Now we're in a market where most have over overcorrected in the opposite direction. It's hard to give money back to your LPs in that environment. That's just challenging. Curious to get John's take, but I think there's one like very strong piece of good news for gaming here. I think everyone points to IDFA. Maybe slightly messier than that, but I think the IDFA thing is huge. And if that's true,

then the bottom for multiples may be closer than we think. I mean, my my hot take is by by next year, it's going to be no IDFA, no problem. IDFA was really negatively impacting the big social networks, you know, Meta and Google. Well, Meta has now last year shipped probabilistic attribution for Facebook and Instagram. There's a lot of hope that they're going to be shipping it for in-app ads this year, aka, you know, showing high-quality ads again in our mobile games on iOS. Google's a little behind, but they have been shipping incrementally. And so by next year, we could be seeing something very different. So that's good. Look, I think firstly, read the article. Mish has done a cracking bit of writing here, and I think he explains a lot of things very well to a lot of people that wouldn't understand them. But look, my my take, very simply, is if you want to get a lot of money out of games, a lot of money's got to go into games, right? The funnel of money needs to be there.

And right now, the funnel of money and the investor queue of the queue is going down, and that in turn reduces the multiple impact or the hype factor. So, if things are trending down, the multiples you'll get will go down, and then you have a lot of uh institutional investors and BVCs looking for those bigger multiples, and they go to the next trend, right? Web 3, a lot of people put a lot of money in, they lost a lot of money, so that's the bad case of it. But, you know, AI right now, like some of the AI multiples I'm hearing about are insane. Hundreds, hundreds. And you're like, as an investor, someone says to you, "This business is worth a hundred million, Mishka, but it's only turning over 500k IRR." And you're like, "This is not a good thing for me." Or it is if I can get my money out quickly, but if once the bubble pops and the multiples go back to the real Yeah, a

realistic level, you know, you you're not going to see that that huge return. People are chasing fairy tales and unicorns, you know? And gaming's a mature market now. We need to understand that you're not going to get these massive massive multiples anymore. You're going to see probably more PE come in and pick up things like Dream Games and have long-term sustainable growth, right? But the big spikes, those dozens multiples, I don't see them coming back. That that time is over in my opinion. Well, first, Mishka, great write-up. I thought this was a really excellent article. The part that really resonated with me was the part about the acquirers got acquired and the effect that that's had on the market overall. I've been thinking, you know, I've been working almost entirely for VC-funded startups, uh that's probably 70% of what I've done over the past 23 years. And the investors were there primarily for a love of gaming, even the ones who love gaming. They're investors. They're here

for exits, they're here for multiples, and multiples only materialize in a world where an exit is possible. And I think the question before all of us is whether we are in part of a cycle or whether we're in part of a new normal. And as I reflect on the past two decades, I feel like we're in a new normal that actually Facebook free-to-play and mobile free-to-play were outliers. New platforms that brought in giant pools of new players to gaming with business models where you could pour money in and get, you know, predictable revenue generated from them once the team had proven what they were capable of. Right? And if you think about the other new platforms that have come along and got attracted VC funding, metaverse, VR gaming, AI native gaming so far, web 3 gaming, none of these new platforms have those same two properties to them. You know, web 3 gaming was really

interesting because there was a period of time where people were inventing money out of thin air pre-exit and actually able to capitalize on turning that fake money into real money. So, like, it makes sense the amount of FOMO and the amount of investment that were in crypto gaming early on despite all the ridiculousness that were there. And the question is, will there be a new platform in the future where VC funding is a natural fit? I think that we just got lucky that two happened in a row and convinced us that that's what the game industry was. And I don't think that's what the game industry is. Last one is just the uh the take that I had from a certain VC partner. Uh the article Gaming VC said they said that that retail investors are not interested in public gaming stocks because they see it as a COVID thing and because of that the multiples are pathetic on public companies. And because the multiples on public companies are pathetic, meaning that they're just not interesting for these

institutional investors, there's no point of having higher multiples for privately owned companies. So, it's actually according to them that the public market is bringing the whole market whole market multiples down, but this person said that long term they see the multiples going back to about three to four, so not you know, AI 30 to 40 or 300 to 4,000, but still somewhat healthy where early stage funding would make sense. And they're saying that one sign is not only VCs believing in this, but especially these roll-up companies and private equities are believing that this will happen in the future, and that's why they are still investing into gaming. You can actually see private equity being much more active now that VC and VC multiples are not in you know, affecting the prices. But on that note, I think we've tortured people enough with market information. Thank you so

much for the hot crew joining on the last minute notice. Josh, John, Ethan, welcome back. Uh it was a fun hour. Thanks so much. Thanks.
Thank you all. See you at UA monthly.
[laughter]
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