Gaming the Smiling Curve
Courtesy of Ben Thompson, Stratechery
Another week, another gaming acquisition. First Take-Two acquired Zynga, then Microsoft acquired Activision-Blizzard, and now Sony just announced the acquisition of Bungie.* Each of these acquisitions is interesting in its own right, but taken as a set they paint a picture of industry evolution that extends far beyond gaming.
Take-Two and Mobile Consolidation
The straightforward explanation for Take-Two’s acquisition of Zynga is the fact that mobile captures more than 50% of gaming industry revenue and it is growing much faster (7% last year) than PC and console gaming (the gaming industry grew 1.4% as a whole); that is a problem for Take-Two given that nearly all of the company’s revenue comes from PC and console series like Grand Theft Auto, NBA 2K, Red Dead, Bordlerlands, and more.
Zynga, meanwhile, was among the least prepared of the major mobile gaming companies for the changes wrought by Apple’s App Tracking Transparency (ATT) policy, which was introduced with iOS 14 and rolled out over the first half of 2021. In the pre-ATT world everyone from e-commerce sellers to app developers could effectively offload the collection and analysis of conversion data and subsequent targeting of advertising to Facebook, to the benefit of everyone involved: individual developers and retailers did not need to bear the risk or expense of collecting and analyzing data, and could instead collectively outsource that job to the Facebook data factory, which had the benefit of making Facebook advertising that much more effective, not only to the benefit of Facebook’s bottom line but also to that of those that relied on its advertising platform.
ATT, meanwhile, didn’t ban data collection or analysis or targeting or any of the other aspects of advertising that many of its supporters object to; what it targeted was doing so collectively. That means that the policy has been a huge boon for fully integrated advertisers (i.e. advertisers that collect data, target, and show advertisements) like Google and Amazon. In this world the natural response has been consolidation; compare Zynga’s stock price over the last year to a company like AppLovin which was ahead of the curve in buying up multiple parts of the ad stack and combining them with its own titles to maximize the value of first party data:
AppLovin is down a bit with the general market drawdown, but it’s not an accident the company increased in price last fall while Zynga plummeted (the stock is up from its depths because of the not-yet-closed acquisition): one of the keys to Zynga’s turnaround was buying small independent studios and letting them stay independent; that’s no longer a viable approach in a post-ATT world, and Take-Two will have to centralize Zynga and only then leverage Zynga’s expertise to bring its valuable IP to mobile platforms in a much more complete way than it has previously.
Microsoft and Xbox Game Pass
Take-Two wasn’t the only company taking advantage of a company with a plummeting stock price; Microsoft did the same with Activision Blizzard:
Activision Blizzard does own King Digital, which still provides over $2 billion in revenue from Candy Crush and its various spin-offs, but in this case the stock price decline was primarily due to major issues regarding Activision Blizzard’s internal culture, including a lawsuit by the state of California. Microsoft, though, was well positioned to take advantage of Activision Blizzard’s troubles thanks to Xbox Game Pass.
Whenever a major platform acquires a developer on that platform, the first question users ask is if the platform owner will make the developer’s content exclusive. It’s an obvious question — why else would the platform owner buy it, given that they can still collect revenue from the developer, both directly via platform fees and indirectly via licensing fees? — but the answer is not always straightforward, thanks to the nature of software.
Apple picture via Pixabay.
