The Future of Merge Games

Hi Everyone. Last week’s issue was a fun one. The top links included: our breakdown on NoPixel + The Future of UGC (Master The Meta), the thread on Axie Infinity’s model (Twitter), and Javier Barnes’ primer on pricing in F2P games (IronSource). Let’s dive into this week’s issue!

Naavik Exclusive: Roundtable #7


How sustainable is the play-to-earn model like the one we see in Axie Infinity? Is it a Ponzi scheme? Or is it the future of games? What do “instant games” entail and how will instant games continue monetize meaningfully?

Listen to the latest discussion with Anton Gorodetsky, Miikka Ahonen, David Amor and Florian Ziegler for thoughts on that and more!

As always, you can find us on Spotify, Apple Podcasts, Google Podcasts, our website, or anywhere else you listen to podcasts. Also, remember to shoot us any questions here.

#1: Merge Games’ Next Phase of Growth

Merge games have been all the rage in mobile F2P recently, so I decided to take a deeper look to understand the genre’s past performance and future trajectory. Download volumes have remained relatively stable over the past 2.5 years, even though the number of games have almost tripled over the same time period. This was definitely surprising to see for a relatively young genre with so much hype around it.

Metacore’s “Merge Mansion” is the only one aggressively scaling users at this point (thanks to Supercell), while long time incumbent “Merge Dragons” by Zynga has dropped to a Q2 2021 market share of 13% versus 40% during Q1 2019. Since the overall genre downloads pie hasn’t really grown and competitor concentration has increased, two observations can be made:

  1. Merge Dragons is potentially losing new and existing audiences to all the new competitors
  2. It also doesn’t seem like many new players are entering the genre ecosystem at the moment

That said, the genre’s revenues look much more healthy. Q2 2021’s revenue volume was almost triple that of Q1 2019’s, and the genre as a whole is on a clear revenue uptrend. In other words, every merge game that has been able to reasonably scale is juicing the long term monetisation lemon for its already acquired player base.

More specifically and as can be seen in the graph below -

  1. Merge Dragons continues to dominate with stable revenues on dropping downloads, which showcases the product’s strong long-term LTV
  2. Big Fish’s “EverMerge” is scaling revenues brilliantly on the back of UA, and could take the crown from Merge Dragons
  3. Merge Mansion is doing the same as EverMerge - but long-term stability for both games remains to be seen, though I’m optimistic

Merge games have two big advantages right off the bat - 1) they could potentially start at a higher LTV baseline by replicating and one-upping Match 3’s well established best practices around meta design, live operations, production values and user acquisition, and 2) the core merge mechanic is perfect for relatively low cost content scalability, which is especially important given how this genre’s audience is as content hungry as they get! Looking at the more recent merge games taking off, they’re nothing short of stellar experiences versus their Match 3 counterparts, which results in very competitive LTVs.

If Merge is doing so much right, the big question remains - how does Merge unlock its next stage of audience growth? The download numbers above suggest that the genre is struggling to scale rapidly through user acquisition. For such a young genre that has generally lacked competition, this could be driven by two factors -

  1. The existing Merge market has been hungry for a new “non-Merge Dragons” experience for a very long time, and they finally have more options to play. So players could be going through an exploration phase, which is driving audience and downloads market share movements between games. This also means more room for new competitors to enter.
  2. A more macro factor could be that Merge essentially competes with Match-3 for the same audience, and Match-3’s audience is 6x higher and still growing. For Merge, that is not an easy UA battle to win profitably and at scale.

Therefore, my hunch is that Merge’s next phase of growth will be driven by - 1) more games entering the genre and pulling new audiences in, and 2) those games figuring out product differentiation to fuel user acquisition. Inter-genre differentiation will be key, so that Match-3 players have a compelling reason to switch over, and Merge developers can compete with the Match-3 heavyweights (King, Playrix, AppLovin, Dream Games etc.) on one of the most expensive UA battlefields on mobile. This could come in the form of gameplay, art, theme, narrative, gender or even UA tactics differentiation (don’t forget IDFA), all while the merge core is kept intact and meta systems + live operations + production values continue to be optimised. It’s going to be a slow growth climb for Merge, but definitely a genre to keep an eye on. (Written by Abhimanyu Kumar)

With PS5’s still sold out, the new Switch OLED model coming soon, and Xbox’s xCloud strategy ramping into general rollout, Valve felt a little left out and decided to enter the competition with its latest hardware announcement, a handheld gaming PC called Steam Deck. Daniel Ahmad summarized it best in saying “Handheld gaming PC's are not a new concept” but “Valve is much better positioned than others to enter this market.” Here are some details:

  • It’s a Switch-like handheld system that comes in three variations (difference is based on size + speed of storage), with the base level starting at $399 and 64GB
  • It’s a full-fledged linux device that emulates all Steam features and can even install other games stores (i.e. Epic)
  • System opens for pre-reservations ($5 down payment) at 1pm PST on July 16th, reserved to people with Steam purchases

Why does this move make sense and why is Valve in a great position?

Expanding the TAM

While PC gaming may have hit a new stride recently with all the streamers on Twitch, in the grand scheme of the ~$170B games market, PC gaming is still relatively small, representing about $38B. Meaningfully expanding the total addressable market (TAM) is an interesting proposition that hinges on making it more accessible to people. The average low-performance desktop build is somewhere around $500, but that’s still cost prohibitive for a device that requires maintenance, set-up, and space within a home. From Valve’s co-founder Gabe Newell, “Pricing is one of the critical factors in mobile and price was on Valve’s mind”.

While the primary market is existing steam users who also want mobile flexibility, with Steam Deck, Valve can open up to high-end PC gaming to people who don’t have normal desktop PCs. There’s huge upside in recreating a PC experience with console-level flexibility. Again, Gabe Newell notes that “the top priority is to make sure PC players can pick up the Steam Deck and that it works perfectly”. Corollary to this point is the notion that perhaps not all PC games are best played with a mouse and keyboard; rather, games like Rocket League or Hades could be just as good with a controller. With Steam Deck, devs might not have to jump through more platforms APIs and SDKs to unlock new users.

Maintaining Ecosystem Dominance

Existentially, Valve probably has little to worry about. It now competes directly with Epic Games Store and a variety of Riot Games titles, but still maintains a robust market share in the PC games market. Epic, in particular, has taken away some market share by making a games store not just for hardcore PC gamers, but by making “the games store for everyone”. Steam Deck is a smart play because it 1) deepens relationships with existing steam users, 2) adds a tough-to-replicate moat in mobile hardware, and 3) effectively helms a new market and opens up that market to a variety of new consumers.

From the hardware side, this isn’t Valve’s first foray and its ability to launch new hardware should be sufficiently de-risked because of the team’s previous experience building in it. However, the difference is that those products — Steam Controller, Steam Link, Steam Machine, Steam Index — all focus on augmenting and improving the experience for hardcore Steam users. To the contrary, Steam Deck creates an entirely new play environment. It’s a similar strategy used by Xbox: they want consumers playing their games and buying from their platform, they don’t care as much where or how you do it. Enabling the “where” and the “how” is the key to a more robust ecosystem play. Case in point is that the Steam Deck gives the freedom to download the Epic Game Store on the device, but it won’t be as easy to use as Steam games will be.

Can They Do It?

We personally love the idea of Steam Deck. As nomads this past year, we’ve both defaulted to the Switch / mobile games because consoles and PCs were too clunky to carry around. With the Steam Deck, Valve has effectively solved the issues of battery life, monetization on low-margin hardware, open source, and games libraries in a way that previous mobile PC devices haven’t been able to. They’re in a strong position to capitalize on the moats (market share, high number of existing users, hardware capabilities, studio relationships, 1st-party games, etc.) they’ve spent years building to launch this device. Further, the Switch has shown that there is appetite to play high-end titles on-the-go.

That being said, a lot of companies tried handheld (PSP, GeForce, etc.) and failed to reach Nintendo-level scale. Is this enough? It’s worth admitting that we don’t know how good the hardware will be before reviews come up, so there’s still plenty of uncertainty and execution risk. We’re particularly bullish on two things: 1) The fact that Valve effectively owns the storefront that powers the device. This will create a high-margin business from an otherwise low-margin enterprise. And 2) The open source nature of the product. We think this will enable all sorts of new projects and collaborations; from mods to third party developers to more curation on Steam, the ecosystem will flourish. (Written by Max Lowenthal and Fawzi Itani)

#3: Genvid’s $113M Round

Interactive entertainment is having a moment. A few weeks back, I wrote about how Netflix’s potential gaming hire would lead a thoughtful transition into “spectrum of interactive entertainment that best serves Netflix’s existing product and audience,” and that Netflix would increasingly own the production process if successful. They’ve since hired Mike Verdu, formerly of Oculus and EA, to lead game development. It’s a notable hire that’ll significantly speed up their timeline in an increasingly competitive landscape — for example, PortalOne raised the largest seed round in Norway’s history for its hybrid game model, and Scout and Electric Gamebox are also pioneering new forms of entertainment. However, in my opinion, all these announcements are largely overshadowed by Genvid’s marked success pioneering Massive Interactive Live Events (MILEs, for short), with 100M watched hours on Rival Peak.

This week, Genvid announced a fresh $113M in funding to continue its breakneck pace of scale: reportedly six MILEs in development (one called Project Raven released a teaser but they have six others listed on their website), dozens of IP agreements in pipeline, and impending partnerships with social media platforms. Most significantly — much like Netflix’s style of producing original content — they’ll be bringing content development in-house through their newest division, Genvid Entertainment. And with Netflix’s former VP of Original Content Cindy Holland joining as an advisor, there’s no doubt the stories will resonate with consumers beyond necessarily gaming.

There are three aspects that I’m most drawn to about Genvid:

  • Infrastructure: The company already de-risked itself by building the tech, service, and underlying infrastructure to power emergent forms of media. As a standalone, the infrastructure layer could already be a behemoth of a company. Adding in an original content layer is icing on the cake that’ll meaningfully change the unit economics of their business at scale. It’s worth noting that MILEs are intensive, and infrastructure challenges exist with more scale and complexity.
  • Distribution: The success of Genvid’s Rival Peak pilot can’t be understated. Now, social media platforms – from Twitch to Facebook to Huya – understand how well this type of content can resonate and the potential it has with a broader audience. Genvid is pushing the boundaries on new forms of content (MILEs) and creating new demand as a result. Of course there’s risk in relying on platforms to distribute content, but the cloud-first, always-on nature of their content should sufficiently mitigate this.
  • Competition: This year, Netflix will reportedly spend $17B on original content. With Mike Verdu in the picture, there’s a possibility that some of that spend will likely shift to MILEs or similar-form content. Netflix is likely Genvid’s biggest competitor (or conversely, largest partner), but they’ll also only be creating content for solely their own platform, leaving the rest of the market wide open. What I like so much about Genvid is the adaptability of their content. The team can create content that works best for Netflix or for Twitch chat or for Facebook Watch. In this way, they’re agnostically helping everyone compete better among themselves, but building with intentionality that keeps them relevant and top of mind.

As we enter Genvid’s next phase of growth, I’m keen to track how they build for compounding forms of growth. The infrastructure and original content play is certainly one way. But compelling games have an innate ability drive recurring behavior and intent — in F2P, battle passes or in-app purchases are two such examples. While a MILE is ostensibly a “live event”, and is more so a show than a game, it also does have an interactive component. Ultimately, the MILE format shifts the burden of live ops from a product manager (internal) to the audience (external); that is, the decisions, optimizations, and subtle shifts are entirely controlled by us, the consumer. It’ll be interesting to track how Genvid and the studios they partner with choose to monetize this unique case of autonomy. (Written by Fawzi Itani)

#4: 100 Thieves, Gucci, and the Future of Fashion + Gaming

🎮 In Other News…

💸 Funding & Acquisitions:

  • Resolution Games secured a $25M Series C, co-led by Bitkraft and Qualcomm. Link
  • The Douya-Huya merger was blocked by China antitrust regulation. Link
  • GameSquare Esports acquired a gaming and lifestyle marketing agency called Cut+Sew & Zoned for $8M. Link
  • Creator of NFT Oasis, Provenance, raised $4.4M to enable virtual reality creators. Link
  • Pipeline raised $2M to teach gamers how to make a living through streaming. Link

📊 Business:

  • Netflix hired Mike Verdu (ex-FB, EA, Kabam, Zynga) as VP of Game Development. Link
  • Pokemon Go passed $5B in total revenue in five years. Link
  • ByteDance has hired over 3,000 people to its gaming division in the past three years, with over 80% of gross revenues (for recently acquired Moonton) coming from outside of China. Link
  • Amazon shifted Lumberyard to an open-source 3D engine from its own in-house model. Link
  • Stadia changed its model to an 85/15 rev share for single purchases and 70% for the pro subscription. Link

🕹️ Culture & Games:

  • Trail launched its platform to play and build browser-based games that use the hardware’s processing power (rather than cloud-based). Link
  • Perspective on the WoW and Blizzard exodus into Final Fantasy. Kotaku | Grummz
  • A copy of Super Mario 64 sold for $1.5M. Link

👾 Miscellaneous Musings:

  • Krafton will invest more money into India and MENA, with its India-based PUBG hitting 16M DAUs in less than two weeks. Link
  • Initial Thoughts on Rational Design. Link
  • DeansBeat’s take on the Console and Game Engine Wars. Link

📚 Content Worth Consuming

The Metaverse Primer (Matthew Ball): “I first wrote about the Metaverse in 2018, and overhauled my thinking in a January 2020 update: The Metaverse: What It Is, Where to Find it, Who Will Build It, and Fortnite. Since then, a lot has happened. COVID-19 forced hundreds of millions into Zoomschool and remote work. Roblox became one of the most popular entertainment experiences in history. Google Trends’ index on the phrase “The Metaverse” set a new "100" in March 2021. Against this baseline, use of the term never exceeded seven from January 2005 through to December 2020. With that in mind, I thought it was time to do an update - one that reflects how my thinking has changed over the past 18 months and addresses the questions I’ve received during this time, such as “Is the Metaverse here?”, “When will it arrive?”, and “What does it need to grow?”. Link

Riot Games’ Plans to Dominate Your Phone (The Launcher): “Few non-mobile game developers have successfully made the transition to mobile with significant sales to show. One of the rare exceptions is Activision Blizzard, which bought the developer behind Candy Crush, King, and now operates the successful “Call of Duty Mobile.” In an unlikely year and a half, Riot has tried to join these ranks, significantly expanding its portfolio beyond the one classic game it’s known for, netting tens of millions in sales so far. Today, Riot has a tactical shooter, “Valorant,” the card game “Legends of Runeterra” and an autochess battler, “Teamfight Tactics.” All of these except for “Valorant” have mobile versions and build on the story and characters first popularized by “League.” Co-founder and co-chairman Marc Merrill and other executives at Riot spoke with The Post in exclusive interviews about the challenges of bringing new games to mobile, growing the studio’s reputation and tackling new genres where other titles have reigned supreme for decades.” Link

Jon Hook, Boombit (Elite Game Developers): “Is hyper-casual sustainable? Every year, some people say that hyper-casual is going to die. It’s not going to. Every year it just matures. Hyper-casual is a $4 to $6 billion industry. The reason it continues to grow is in the growth of the core demographic of hyper-casual. People who are brand new [to gaming] have a smartphone, and they want to start playing games. Where do you start? For mobile games, a significant entry point is hyper-casual.Because of the maturity, you can now build games for specific audiences in hyper-casual. Earlier the CPI and the return just weren’t there. The top-end of hyper-casual and hybrid games with a hyper-casual core-loop, a bit more meta to them, a bit of IP, and maybe even some live events. You’re starting to attract players from outside of hyper-casual into these games.” Link

Why AXS Is the Best Performing Coin In The Crypto Market: “Deep-dive into the coin outperforming everything in the market recently: AXS or Axie Infinity. The guest on the show is Yan Liberman of Delphi Digital. We discuss how the game works, why it's growing so fast, how much money it's earning, price models & outlook, risks, NFT marketplace, and more.” Link

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