"Don't call it a comeback."
So starts LL Cool J in his hit song Mama Said Knock You Out.
With Microsoft closing in on Apple, we are arguably witnessing a historical moment. Sure enough, despite its sleek design and reality distortion field, Apple has managed to make a mint (I shamefully don't know how many of their devices I own). But here is Microsoft, the great terrible monopolist from earlier, now catching up to claim the title of tech champion.
A few thoughts.
First and most obvious, this 'bigger than' narrative and persistent emphasis on growth is equally boring and unproductive. I appreciate that it sells newspapers, but for the millions of end-users that exist within the Microsoft-Apple-Amazon-Facebook-Google matrix, it is of little use.
Second, Microsoft has been around for years. It is remarkable that it has managed to both exist and thrive despite the presence of cheap substitutes (Google, Amazon) and fancier hardware (Apple, Sony).
What gets lost is the third notable aspect here, namely the beginning of a next technological shift. After the popularization of the personal computer, broadband internet, and the smartphone, we are about to embark on cloud computing. Granted this technology has been around for a while, but is now finally becoming accessible for the consumer market, starting with the introduction of cloud gaming. (See below.)
Several of the tech titans have a distinct interest in cloud gaming's success and are investing to capture market share early. The promise is that an average person can access triple AAA content through a service regardless of the technical specs of their device.
That could, indeed, knock a lot of competitors out.
Heads up: next week I'll be in London to talk the new casual game audience, digital distribution, and the emergence of gaming video content. If you're in town, hit me up for some crumpets!
This week's Big Read is about the imminent downturn in the games industry (fear! anguish!) Comments always welcome and appreciated.
On to this week’s update.
GameStop sells Spring Mobile business for $700MM
Things are not looking great. Its share price is down 45% y/y and its recently appointed CEO, Michael Mauler, just resigned. Now it is selling its Spring Mobile. Back in 2014 it had acquired the telecom retail chain to help diversify its offering and reduce its exposure to the growing pressures of physical game sales. Its ability to sell AT&T data plans during the Pokémon GO
craze in 2016 was a bright but brief moment that seemingly proved the case. But now it is selling off the asset to keep itself afloat and/or become more attractive to a potential buyer: GameStop has about $819MM of debt on its books and has been unsuccessfully trying to sell itself for the last six months. Sure enough physical video games sales are doing just fine right now so excitement around earnings (this Thursday) should be moderate. But you can practically hear private equity revving its spreadsheets in search of a deal. Link
+++ Webinar on Cloud Gaming
I'm doing a 30-minute online presentation on cloud gaming. If you're interested in attending shoot me a line
Sony hasn’t given up on handhelds yet
According to a Dutch tech site (go Orange!) Sony has filed for a patent in South Korea that suggests it is cooking up some kind of electronic game cartridge. Link
Fox launches streaming service
Proudly dubbed as “non-PC” to indicate exactly how well-informed it is going to be, Fox has launched an on-demand right-wing programming service. I find this fascinating, because I grew up in a country where, immediately after WWII, your (religious) beliefs determined what newspapers you read, the radio and TV stations you tuned into, and the people with whom you socialized. It’s called pillarisation
, because for a long time people would stay in their own lane and generally regard ‘others’ with contempt. I’m excited to see that we’re going back to this simpler time despite the progress I thought we had made with digitalization and media technology. Link
Twitch CEO on tech addiction
Here’s a lengthy interview with Emmett Sheer, including his take on Twitch’s early years. It’s mostly stuff we already know and lacks a clear vision of what’s next for the platform. Sheer argues that Drake, with his appearance on Ninja’s stream, did so because he needed the channel. He fails to acknowledge that by doing so Drake, in fact, pushed the platform into the mainstream in a way that it had not been able to do even with Amazon’s help. Like Spotify (see below), Twitch continues to build out its A&R activities and announced it expansion with TwitchCon Europe, held on April 13-14 in Berlin, Germany. Link
Spotify wants to become a record label
Vertical integration makes sense, as there is no clear upside to having labels as intermediaries. Just like HBO and Steam, having your own content is deliciously profitable. But it also more difficult for a platform to start producing its own content than it is for a content owner to distribute direct-to-consumer and add others to the mix. Link
BIG READ: Winter is Coming
I’m still full of turkey but it’s not the tryptophan talking.
The past few years have been a great ride. All boats have been going up. Time and money spent on video games has been at consistent high and the addressable audience has expanding enormously, allowing the industry to grow consistently for years.
That’s about to change.
Specifically, interactive entertainment revenue will soon start to flatline and, possibly, decline. Here’s some of the writing that’s currently on the wall.
First, several of the biggest growth drivers have started to slow. Mobile gaming is showing saturation across different markets, including in China. Big handset manufacturers can no longer rely on the continued momentum and are switching their focus to extracting greater rents from their existing user base in lieu of fueling ongoing growth.
Next, we’re at the end of the current console cycle. Sony and Microsoft have both done well, but are now starting to consider the future (PS5? Cloud gaming? Electronic game cartridges? What?). Investors are actively doubting Nintendo’s ability to deliver on its ‘stretch goal’ of 20MM units sold by end March. Not in the least because Nvidia reported weaker-than-expected sales of its Tegra chips, which are predominantly used for the Nintendo Switch. Any changes in Nvidia’s sales indicate a change in Nintendo’s prospects.
This, in turn, spells no uncertain doom for GameStop. The US-based specialty retailer has been going through a series of challenges as spending on interactive entertainment has shifted largely to digital channels. More so, its C-suite is a mess, resulting in a letter from one of its largest shareholder, Tiger Management, to get its sh!t together (aka perform a strategic review). It’s been unable to find a buyer and now finds itself forced to essentially abandon the diversification strategy it initiated in 2014 by acquiring retail chain in parallel market segments. Just this week GameStop sold off Spring Mobile and is likely to use the money to pay off its debts and improve the likelihood of some private equity firm or Amazon to buy it (see below).
More broadly, this is all taking place against a backdrop of tech stocks losing value. The last few weeks have been a wild ride resulting in the decimation of all of 2018’s gains. Big tech has gone from loved to loathed as firms like Google and Facebook are repeatedly hit with lawsuits and regulatory fines. Apple has stopped reporting some of its key sales figures, and Amazon is increasingly toying with divestiture.
During earnings season this quarter a lot of the publicly traded firms were hit with drop in share value despite posting solid figures. Investors, it seems, had been holding onto their shares and had waited to sell them off immediately following the major releases scheduled for the end of the year.
Sure enough, in some cases the decline is situational. Tencent, for instance, has suffered a great deal as a result of its close ties to the Chinese government. After growing up without really having to worry about foreign competition, the hand that fed it is now taking its share. The recent regulatory changes and, more so, delays are costing the firm dearly. If nothing else, risk has increased greatly, which means that Tencent will be looking for ways to diversify its current portfolio of activities and reduce its reliance on gaming (which it did, btw, by making up the difference with advertising).
The future is cloudy. On the one hand several major firms like Google, Amazon, Microsoft, Tencent, and others are investing heavily cloud gaming but, on the other hand, the prospects remain foggy. If they build it, will consumers come?
One interpretation here is that the games industry which was previously thought to be anti-cyclical, is now in sync with the rest of the economy. Consider it a by-product for having become a mainstream industry, finally, after three decades on the fringes of the entertainment business. Games are seemingly more vulnerable to high-level economic fluctuations, prone to fickle investor sentiment, and much less insulated.
Let's see how things hold up.
RIGHT QUICK TIDBITS