February 2, 2021
Good morning! This week in Protocol Gaming, your weekly guide to the business of video games: what happens to GameStop now, the next steps for Stadia and the rise of the gaming SPAC.
(Was this email forwarded to you? Subscribe here.)
The Big Story
What's next for GameStop?
The meme-fueled rise of GameStop stock (that's GameStonk for all you Elon stans) has become a Rorschach test for the markets. The Wall Street Journal would have you believe it's "the Platonic ideal of a stock bubble." NYU professor Scott Galloway chalked the situation up to "young men not having (enough) sex," building on his thesis that Robinhood "is not only bad for young men, it is bad for the markets."
Meanwhile, progressives were eager to portray the short-squeeze as Occupy Wall Street 2.0 — only this time, disenfranchised Americans are hitting hedge funds where it hurts. Krystal Ball, host of The Hill's Rising, tweeted: "The #WallStreetBets ppl are attempting to pull off the rarest of occurrences, a transfer of wealth from Wall Street to Main Street. Glorious."
With all the market fervor, it's easy to overlook the fact that there's an actual company underlying $GME. You know … that strip mall chain where you can trade your entire video game collection for $3.47 of in-store credit? Or, as GameStop would rather emphasize, the omnichannel marketplace where you can earn loyalty points by purchasing digital downloads, collectibles and gaming hardware.
Fundamentally, the stock rally doesn't change GameStop's long-term predicament as the gaming industry shifts to digital sales channels:
- Gaming subscription services are on the rise, which will cannibalize sales of standalone games. EA Play and PlayStation Now are gaining momentum, but Microsoft's Game Pass has pulled ahead as the dominant subscription service. Last week, Microsoft announced that Game Pass had 18 million subscribers, up from 15 million in September 2020. And while Microsoft backtracked on raising the price of Gold, the initial attempt demonstrates the company's faith in Game Pass as the future model for gaming distribution.
- Microsoft and Sony are steering gamers to disc-less consoles. Microsoft's disc-less Xbox Series S is $200 less than the Xbox Series X and Sony's Playstation 5 Digital Edition is $100 cheaper than the regular PlayStation 5. This pricing isn't just about the incremental cost of an optical drive: Microsoft and Sony also stand to make more money over the lifecycle of a disc-less console if gamers purchase from their digital storefronts instead of, say, buying a used game from GameStop. And while GameStop sells digital downloads, most people won't bother to take the extra step of buying from a third-party retailer.
- Cloud gaming services could even restrict GameStop's ability to sell digital downloads. Services such as Google's Stadia, for instance, require that all games are purchased directly through their digital stores. While cloud gaming is still in its infancy, it presents another long-term threat to GameStop's existing business model.
The rise in stock price has some upside for GameStop, but it isn't a magic bullet.
- As with any publicly traded corporation, GameStop is a legal entity whose purpose is to maximize shareholder value. In that sense, the rise in stock price matters because it is the only thing allowed to matter.
- Brushing efficient market theory aside, there are measures GameStop could take now to boost its long-term positioning. Primarily, GameStop could issue stock. Other companies that have been targeted by r/WallStreetBets — AMC Entertainment, for instance — have done so. By issuing stock when prices are high, companies generate more money without having to dilute the ownership stake of existing shareholders as much. GameStop hasn't issued stock since the short squeeze, which suggests it doesn't plan on doing so in the foreseeable future.
- GameStop could use funds to accelerate its strategic plan, which involves closing brick-and-mortar retail stores and investing in its digital sales capabilities. The plan has helped reduce costs and move the company closer to profitability.
So what's next for GameStop? In truth, not much has changed for the company since its stock was trading at one-tenth the price four short weeks ago. It has succeeded in making some of its shareholders very wealthy: BlackRock and MUST Asset Management cashed out their long positions on the stock, generating estimated profits of $2.4 billion and $1.1 billion, respectively (so much for the Occupy 2.0 narrative). But GameStop executives still lack answers for long-term industry trends, and GameStop retail employees still lack job security. If anything, the GameStop debacle underscores what has become increasingly clear during this pandemic: The stock market is not the economy.
— Hirsh Chitkara
- "They said, 'You can talk to us,' but in the end everybody knows you can't really say anything against the founders, otherwise you're fucked." —Scavengers Studio, maker of the beautiful new title Season, is under investigation for its alleged toxic work culture fostered by the studio's co-founders, CEO Amelie Lamarche and creative director Simon Darveau. In a note, Lamarche said she's stepping down and Darveau has been suspended indefinitely during an independent audit.
- "It's just really down to physics and engineering. We're not holding them back, we're building them as fast as we can. We have all of the assembly lines going." —Phil Spencer didn't mince words when asked why the new Xbox is still in short supply. AMD expects the chip shortages to last through the first half of the year, but plans on adding capacity later in 2021.
Introducing Protocol | China
Chinese technology and innovation are shaping our lives and workplaces. We launched Protocol | China to give you the news, analysis and research on the people, power and politics of Chinese tech. We move beyond the day's headlines to tell you what's next at the intersection of technology, policy and business in the world's largest country.
- Google is shutting down Stadia's game studios and planning to offer Stadia tech to game publishers looking to stream. Third-party games will continue to run, which were always its bread and butter and a way to show off how great cloud gaming can be (I started paying for Stadia to play a working version of Cyberpunk 2077!). But as one source told Kotaku: "Google was a terrible place to make games. Imagine Amazon, but under-resourced."
- Speaking of: Why has Amazon struggled with gaming? Current and former staff largely blame the leadership of its gaming division, which reportedly has a yearly budget of $500 million. And as Protocol reported in August, being the leader in scale doesn't always translate to fostering creativity.
- Want to understand the origins of Game Workers Unite, one of the first video game-workers unions aimed at remedying the awful working conditions across the industry? This excerpt from Sarah Jaffe's book "Work Won't Love You Back" traces them to the beginning.
- Epic's Games Store is having a moment: The company said the store has more than 160 million PC users — up from 108 million in 2019 — with daily active users up 192% year-over-year to 31.3 million. And gamers spent $700 million in 2020, with $265 million on third-party games.
- Germany will extend its antitrust probe against Facebook to include the company's ties to Oculus.
- League of Legends teams in the U.S. have recruited at least 40 superstar players from Asia since 2016, with an average salary of $460,000 for a player in a team's starting five. I'm sure the 25,000-square-foot training center with the same chefs and physical therapists used by the Clippers and the Lakers doesn't hurt, either.
- SPACs are invading the game space: Russian mobile game developer Nexters — maker of the super popular Hero Wars RPG — is going public via a SPAC at a $1.9 billion valuation. Playstudios is doing the same at a $1.1 billion valuation.
- Gaming ad platform Anzu raised $9 million from an eye-catching list of investors, including WPP, Sony Innovation Fund, Riot co-founder Marc Merrill and SuperAwesome co-founder Dylan Collins.
- Netflix announced a Tomb Raider animated series based on the more-recent reboot trilogy (and the best three games in the series, IMO) that was first released in 2013. No word on who'll lend the voice to Lara Croft, but I'm hoping whoever it is has the same vibe as Camilla Luddington.
— Karyne Levy
Look Out For
Games are movies are games
This year's Sundance festival has gone big on VR and AR, with experiences and networking opportunities galore. And as AR and VR storytelling begins to find its feet, the line between "game" and "movie" is increasingly blurred. "Fortune!," an AR short from Brett Gaylor, Nicolas Bourniquel and Arnaud Colinart, is a perfect example. Through your phone, delightful animations telling the story of a fraudster appear on your dining table. Moving your phone around changes your view of the scene. While you can't actually interact with anything, changing your perspective lets you see fun details you might have otherwise missed. You're playing at being a cameraperson, basically, and that might be part of the future of both games and movies.
— Shakeel Hashim
Thanks for reading. Tell your friends and colleagues to subscribe here, and send tips, feedback and ideas to firstname.lastname@example.org. See you next week.