This Week in Business is our weekly recap column, a collection of stats and quotes from recent stories presented with a dash of opinion (sometimes more than a dash) and intended to shed light on various trends. Check every Friday for a new entry.
Our top story this week is that TinyBuild announced that it was shutting down Versus Evil, the indie publisher it acquired in 2021.
It might have been an easy bit of news to miss, what with it being announced on Friday, December 22, the last working day before Christmas, when much of the industry had already set their out-of-office auto-replies and unplugged to spend some time relaxing with family and friends.
It was announced with a tweet at 1 p.m. Eastern time, a couple hours after our last regular newsletter of the year was sent out, so we didn’t even get the chance to put it in our daily round-up.
We know companies often get accused of shenanigans in order to avoid bad press of the sort that would accompany things like shutting down a division that you just acquired two years prior, or laying people off on the last working day of the year. One might make you look incompetent, while the other might make you look heartless, and no business wants to look like that.
Even so, it’s really unfair that people could even suggest TinyBuild would treat their employees so callously in an attempt to sneak that news by with the wider industry taking as little notice as possible.
But I know that’s not TinyBuild’s style, and I want to defend them from any such scurrilous accusations.
In fact, I’m so confident that this was just an unfortunate quirk of timing and the company wasn’t trying to hide anything that I wanted to shout it from the rooftops and make TinyBuild’s last-minute pre-Christmas shutdown of Versus Evil the headline segment for this week’s This Week in Business column, even though it technically happened two whole weeks ago.
It’s okay, TinyBuild. You don’t need to thank me. I got your back.
Nexon’s trip to the penalty box
Here’s a fun one. Nexon was fined this week by the Korea Fair Trade Commission as punishment for misleading users about loot box probabilities over a span of more than a decade, from September of 2010 to March of 2021.
How was it misleading, exactly? Well it originally doled out the contents of its loot boxes randomly such that there was an equal chance of getting any particular item, called a Cube in the game’s lingo, and people quickly got used to that.
But after a few months of that, Nexon quietly decided to take the items that people actually wanted and make them come up less frequently.
That still wasn’t enough, so about a year later, Nexon changed it so that some of those items would simply never show up in the loot boxes. Of course, Nexon didn’t tell players about these changes.
Telling people loot boxes have a chance of giving them a thing and then ensuring that will never happen is indefensible on the face of it. There should be no debate on that.
There can be considerably more debate on what an appropriate punishment for such an act would look like.
STAT | ₩11.6 billion ($8.9 million) – The amount Nexon was fined.
STAT | ₩550 billion ($419 million) – The amount Nexon made from the sale of loot boxes in those games over that time.
The fine works out to a little over 2% of the revenues Nexon made from the loot boxes over that span of time.
Despite that, the KFTC insisted the fine it levied against Nexon was a big deal. And to be fair, it is the largest fine it has ever imposed on a company for violating the South Korea’s Act on Consumer Protection in Electronic Commerce law.
QUOTE | “We imposed the largest fine because the Cube is a core product of the game (Maple Story), the period of the violation is long and this is the second violation (by Nexon) following Sudden Attack.” -KFTC market surveillance department director Kim Jung-ki.
Oh, that’s right. Nexon was already caught doing something like this once before. That was in 2018, when it had special loot boxes with 16 possible items and told people it was doling those out randomly, but neglected to mention that “randomly” didn’t mean “distributed without deliberate intent” so much as it meant “some of these pieces will only show up 0.5% of the time because Nexon saw the McDonald’s Monopoly game and thought it would be great to do the same thing but without giving people food.” (Netmarble and NextFloor were also fined for misleading loot box practices at the same time, just in case you thought Nexon was some kind of lone wolf bad actor.)
The long and short of it is that Nexon misled people for a decade about their loot box odds, got caught doing it multiple times, and the punishment for that is a fine that almost certainly means it was still a very profitable endeavor for the company.
We reached out to the Entertainment Software Association for comment on this, because Nexon is a member of the ESA and we are certain the US trade group of game publishers is absolutely mortified that one of its own would be engaging in this kind of shady behavior.
As of this writing, the ESA hasn’t returned that request for comment on the Nexon news, of course. Thankfully, the group has said plenty in the past about loot boxes and how responsible the industry is in handling them.
QUOTE | “We as an industry provide consumers with the most robust information about the games they play and the tools to manage how those games get played.” – ESA CEO Stanley Pierre-Louis, in a 2019 response to calls for loot box legislation.
The thing about the robust-information-and-tools defense is that it doesn’t work nearly as well if the robust information you’re providing is inaccurate and the tools don’t work.
One tool the industry loves to point to when loot boxes come up is spending controls that let parents set limits on how much kids can spend. And those are great, but they don’t do anything to help when the problem is not that kids are buying a ton of Ultimate Team packs on mom’s credit card but publishers are running a rigged shell game for all players, kids and adults alike.
Another tool the industry will point to are the ESRB and PEGI product labels that inform customers about when a game contains loot boxes. I know that’s sort of a bare minimum concession when you’ve got government committees calling for a complete ban on loot box sales to kids, but at the very least, that’s evidence of a commitment to transparency and fair dealing, right?
STAT | 60% – The number of games given a randomized in-game purchases label by PEGI or the ESRB did not get the same warning from the other rating board, according to a study last year from loot box researcher Leon Xiao.
STAT | 7% – The percentage of ads for loot box games on Meta-owned platforms or TikTok that comply with EU and UK requirements to disclose the presence of loot boxes, as determined in another study from Xiao that we reported on just yesterday.
You can’t really blame companies for not taking this seriously, though, because the self-regulatory bodies that are supposed to keep them in check don’t take it seriously, either.
When PEGI finally noticed that Activision Blizzard was running Diablo Immortal for almost a year before it actually adopted the loot box warning label, it fined the ESA member company a whopping €5,000.
Fellow ESA member Plaion was also fined €5,000 for not disclosing loot boxes in Hunt: Showdown, but the “robust information and tools” provided by the industry are so inadequate we couldn’t even verify that the game has loot boxes in the first place.
The robust-information-and-tools defense continues to deteriorate when the people mounting that defense have shown a keen interest in tricking consumers into buying stuff.
Like when ESA member Activision Blizzard patented a method of encouraging in-game spending by giving spenders favorable matchmaking, putting a discrete finger on the scale to surreptitiously squeeze more money out of customers.
Or when ESA member Electronic Arts patented a method of adjusting difficulty in its games in order to push people toward buying more loot boxes.
Now, Activision said in 2017 that it hadn’t actually put its patented technique to use in any games to that point, and EA has said it will never use its own patent (at least not in the FIFA, Madden, or NHL series). But you need to trust these companies if you’re going to find those assurances comforting, and the patents themselves are evidence of their willingness to fool you to make a buck.
After all, Nexon told people there was a random chance of finding those items in their loot boxes, and it turns out it was anything but. And even after Nexon was caught misleading people about loot box odds with Sudden Attack, it kept fooling around with loot box odds for three more years.
In fact, it took a fan revolt for any change at all to happen. You may have read about it on this very site, but probably not.
QUOTE | “The company said MapleStory players in February grew frustrated with the “lack of communication” around odds disclosures, leading to a decline in active users. Nexon responded by providing compensation to users in the following months, and committed to disclose probabilities for its games in Korea.” – The last paragraph of our story on Nexon’s Q1 2021 earnings.
I believe that’s about the only coverage we have of what happened, and it doesn’t really do the story justice.
Fortunately for us, last year a group of researchers (including Xiao again, because he is nothing if not focused) published an academic account of “The Maple Refugee Incident,” the early 2021 player uprising that both convinced Nexon to start disclosing its loot box drop rates and more or less led to the KFTC’s investigation into the company’s practices.
After a simple MapleStory patch note acknowledged that the game’s loot box drops were not distributed evenly, players upset with exploitative loot box practices but still unable to gather in public because of COVID-19 launched a crowdfunding campaign to rent mobile billboard trucks to carry their demands to Nexon headquarters and the South Korean capitol on a daily basis for a week, at the cost of about $7,000 a day.
While I can’t recall any such truck protests over games in the West, they have been far more common in Korea.
QUOTE | “Forget a trusty steed, now LED trucks are the weapon of choice for battle” – The headline of a fascinating January 2021 story in Korea JoongAng Daily detailing truck protests around Fate Grand/Order and League of Legends esports teams. It traces the tactic back to fans of K-pop band Blackpink pressuring their mangement in 2019 to let the members perform solo and appear on TV more often.
Back to MapleStory, players called for the government to step in because the industry was incapable of responsible self-regulation. Nexon made some disclosures, which revealed some more exploitive design that got players even more upset and made “probability manipulation” into a mainstream news story. (And because this is video games, there was also toxicity and harassment between various factions of players.)
Numerous MapleStory players left the game in favor of other free-to-play titles like Lost Ark, with enough referring to themselves as “Maple refugees” as to give this incident its name. The government passed legislation to require loot box odds disclosures that goes into effect in March, and truck protests continued to be a popular form of activism even after pandemic restrictions on public gatherings were lifted.
That saga didn’t get much ink in the Western press, but it absolutely should have because it seems pretty relevant to the years-long fight over loot boxes we’ve had in the games industry here.
Live service monetization practices are black boxes, and the games industry not only has the usual corporate incentives to maximize profits but is also paranoid in the extreme about showing anyone else how its business works.
That’s a combination that lends itself to abuse, something we’ve known for a while.
While testifying at the US Federal Trade Commission’s workshop on loot boxes in 2019, Columbia University’s Dr. Adam Elmachtoub shared his findings from a model he put together with researchers from the University of Toronto and the University of Pittsburgh to determine which loot box formats made the most money for publishers.
Elmachtoub’s model found that the way to maximize revenues from loot boxes was to distribute items in a truly random fashion. If there are 1,000 possible items, each one would have a 1-in-1,000 chance of being pulled. But there was one key qualifier there; that was only the optimal distribution tactic if the company setting the odds was playing fair.
QUOTE | “It turns out if the seller publishes some list of probabilities and lies about them, the seller can make significantly more money. There is a benefit for lying. Since there’s a benefit for lying, there must be regulation around this.” – Elmachtoub, in his testimony to the FTC.
Elmachtoub was right, and while I’m convinced government intervention will be necessary, maybe it shouldn’t start with bans but with external audits.
Give the public a chance to actually understand the business of loot boxes in all the ways publishers have stubbornly refused to tell us before we make a decision on exactly what to do about it.
A rebuilding year for esports?
We ran our annual analyst predictions piece this week, and there are a bunch of interesting calls in there.
Newzoo’s Tom Wijman expects to see an onslaught of open-world Souls-likes announced as everyone who started on an Elden Ring clone after the game’s launch two years ago will be ready to show their work this year.
Ampere Analysis’ Piers Harding-Rolls believes Microsoft will try its own Android app store boosted by Candy Crush maker King, which became Microsoft property as part of the recently closed Activision Blizzard acquisition.
Kantan Games’ Dr. Serkan Toto expects Saudi Arabia to acquire one of the big game publishers.
Midia Research’s Karol Severin and Perry Gresham think AI is already having a big enough impact on game development to drive the number of game releases up and make it easier for new titles to be lost in the flood of competition.
But the thing that stood out to me most wasn’t even a prediction.
QUOTE | “The esports bubble popped in 2023 and teams, leagues, and sponsors are taking a more cautious and sustainable approach to investment.” – Niko Partners president Lisa Cosmas Hanson prefaces one of the firm’s predictions for esports in 2024.
My first thought upon reading that was, “Didn’t the esports bubble burst year ago?” At the very least, its status as a Next Big Thing had been severely downgraded, overtaken over the years by the metaverse, blockchain, augmented reality, and generative AI.
Contrast the buzz around those fields in the last few years with that of esports, which has seen maybe 20 years of effort and investment into making it “a thing” while even the biggest and best examples of the form existing primarily as a marketing exercise to promote a separate game business rather than something profitable in and of itself.
That said, 2023 was undoubtedly a bad year for esports, as Niko Partners noted.
Six years after the Overwatch League’s first season and a year after Overwatch 2 failed to recapture the original game’s lighting in a bottle, Activision Blizzard gave up on its original esports effort. The Call of Duty League didn’t seem to be doing much better.
QUOTE | “Our collaborative arrangements for our professional esports leagues (i.e., the Overwatch League and the Call of Duty League) continue to face headwinds which are negatively impacting the operations and, potentially, the longevity of the leagues under the current business model. We continue to work to address these challenges, which could result in significant costs, and such efforts may prove unsuccessful.” – In an SEC filing last year, Activision Blizzard discussed its esports leagues in a management overview of business trends.
Compare the tone of that statement with the tone Activision Blizzard struck back when it was reportedly charging would-be team owners up to $60 million to join the Overwatch League after its inaugural season.
QUOTE | “The train has left the station, and there are a lot of brands that recognize it and they recognize that now’s the time to get in and become a part of what’s undeniably going to be part of the sports and media landscape for a long time to come.” – In a 2018 interview with us, Overwatch League Commissioner Nate Nanzer celebratorily spikes the ball at the line of scrimmage.
Some of last year’s esports faceplants didn’t even take the better part of a decade to come to fruition.
STAT| $725 million – The valuation of gaming and esports outfit Faze Clan’s value when it went public in July of 2022.
STAT| $18.5 million – the valuation of Faze Clan when it sold to GameSquare in October.
Even the established success stories in esports aren’t exactly thriving, as far as we can tell.
STAT | $40 million – The total prize pool for Valve’s Dota 2 tournament, The International, in 2021.
STAT | Less than $4 million – The total prize pool for Valve’s Dota 2 tournament, The International, in 2023.
Part of that drop can be explained by Valve explicitly shifting resources away from creating content for the Dota 2 Battle Pass (which sees a portion of proceeds going toward the prize pool), but it’s at the very least an indication of how little value Valve sees in supporting the growth of Dota 2 as an esport relative to the value of simply investing in the game.
If you step back to look at more than just 2023, these aren’t the only high-profile esports efforts that seem to be underperforming expectations.
Take League of Legends, which has been one of the shining success stories in esports for a decade now, but was still unprofitable for Riot Games as of 2021.
QUOTE | “I’ll be honest. We don’t waste a lot of calories trying to convert nonleague players to watching League of Legends Esports. Fundamental to the experience is knowing the game.” – Speaking with The Washington Post in 2021, Riot head of esports John Needham explains that the company has basically given up on the vision of esports that mirrors something like the NFL, where the popularity of the sport has broken far beyond the realm of people who actually played football and established a mainstream audience pulled from every corner of society.
Esports clearly isn’t the main draw for Fortnite, but Epic Games certainly did what it could in putting up a $100 million prize pool for the game’s 2018-2019 esports season. Unfortunately, it also overestimated Fortnite esports revenues for the year by $154 million. But in all fairness, the problem might be less about esports and more about Epic being really bad at financial forecasts.
Despite this, esports has been growing its revenues, with Niko Partners putting it at about $1.3 billion in revenue globally last year.But it hasn’t been growing as quickly as expected, and perhaps not in the markets most visible in the Western press. Niko has Asia accounting for more than half of the market, with more than half of that money coming from China. With interest in North America and Europe cooling, the firm also believes the big impact from esports for the year ahead will be coming from Asia and the Middle East, North Africa, and Latin American markets.
There’s room to grow for esports, but much like the rest of the industry, it appears likely to be modest, incremental growth (or larger growth heavily subsidized by companies trying to make fetch happen, as the sector has seen to this point).
If esports is modeling itself after traditional sports leagues to this point, its closest corollary would have to be upstart football league XFL, a foray into a legitimate entertainment field from a commonly disparaged outsider (in this case, pro wrestling’s WWF), one that arrived with a fair bit of buzz decades ago, but failed to convert it into a viable business. Even so, the idea has enough support and potential that there’s always someone who wants to give it a shot and see if they can be the ones to finally realize its long-standing promise, even if they’re still losing money in the near-term.
In 2016, Take-Two CEO Strauss Zelnick described esports to us as a marketing expense, “more a promotional tool than anything else,” something that helps boost engagement and spending within a game but isn’t likely to pay for itself otherwise. I don’t think it has outgrown that assessment yet.
Esports is not traditional sports. I’m not optimistic it will ever fill that same role in our culture, but that’s not to say it has no place in the industry. Much like VR (another common investment target of the past decade), esports is a valuable addition to the gaming landscape and a viable thing to pursue; it just might not be the thing people spent so much time and money chasing, or the thing they promised us it would be.
The rest of the week in review
QUOTE | “After much contemplation and in light of today’s news that our publisher has announced closure, we have decided not to delay in informing you that we are shutting down Jukai Studio.” – Soon after Versus Evil’s closure announcement, Jukai Studio said it was also shutting down, citing poor sales and reviews for Stray Souls and cyberbullying.
STAT | 19 – Bossa Studios laid off 19 employees at the end of 2023, as we learned this week. There are 40 people remaining at the studio, which is now focusing entirely on the co-op survival adventure Lost Skies.
STAT | 1 – The number of times the word “blockchain” appears in the 2024 New Year’s Letter of Square Enix president Takashi Kiryu, despite it being one of three “focus investment fields” for the company.
STAT | 14 – The number of times the word “blockchain” appeared in the 2023 New Year’s Letter from Kiryu’s predecessor Yosuke Matsuda.
QUOTE | “The CMA held to a tough stand, and I respect that. But in my view, it was tough and fair. It pushed Microsoft to change the acquisition that we proposed for Activision Blizzard… I think the CMA vindicated its position but still created a pragmatic path forward for innovation and investment. I think that is good for everyone.” – About 19 minutes into the January 1 episode of BBC Today, Microsoft president Brad Smith takes a very different tone around the regulator than he did last April after the CMA tried to block the Activision Blizzard deal.
QUOTE |”I think it’s bad for Britain… the strong message that the CMA has sent, is not just to surprise everyone who fully expected this acquisition to be approved, but to send a message that will discourage innovation and investment in the United Kingdom. And I think in that sense the impact of this decision is far broader than on Microsoft or this acquisition alone.”– Smith last April, when he called the CMA blocking the deal “the darkest day” Microsoft had seen in four decades in Britain and emphasized it “does more than shake our confidence in the future of the opportunity to grow a technology business in Britain than we’ve ever confronted before.”
STAT | £2.5 billion – Seconds after praising the CMA’s pragmatic decision on his BBC appearance this week, Smith said that Microsoft had committed a new investment of £2.5 billion over the next three years “to build out AI infrastructure in the country.”
Regardless of whether the CMA rooted its ultimate approval of the deal in its remit to protect consumers or because it was worried Microsoft would stop spending money in the UK, Smith’s decision to tie the two subjects together certainly makes it fair game to wonder if a giant corporation used money here to buy the legal outcome it wanted over the interests of the people, which is a) basically how we’re used to things working and b) exactly the sort of thing consumer protection agencies are supposed to be able to stop.
STAT | 25% – After one of China’s regulatory agencies announced strict new restrictions on loot boxes and game monetization techniques last month, shares in NetEase fell 25% while Tencent stock tumbled 16%.
STAT | 1 – The number of trading days between those restrictions being announced and the regulator backtracking, saying it would be “earnestly studying” public views before instituting such rules. Reuters reported this week that the head of the regulator’s publishing unit was removed from his post soon afterward.
It’s good to know some things work the same no matter which country you’re talking about.
STAT | 10 years – The length of Jurgen Post’s first stint with Sega Europe, during part of which he served as president and COO. He rejoined the company this week as COO of West Studios and regional managing director.
STAT | 1 – The number of games journalism awards I’ve been up for in the nearly quarter century I’ve been writing about video games, as I’m on the shortlist for the Best Games Journalism award at the New York Game Awards later this month. They haven’t told me specifically what work I’m on that list for, so I can only assume it was the Bobby Kotick pea joke.
Seriously though, I’m honored to be listed among some amazing peers and I’m just grateful for the privilege I’ve had of doing this for a living. It’s tremendously gratifying to know that people are reading and appreciating it on top of that.