Publishing

December 11, 2022

When creating a video game there are 2 core components to getting the end product into the hands of a user. The developer and the publisher. It's much like how venture capital works for startups. Studios are responsible for the creative aspects of game development, such as designing the gameplay, characters, and levels. Publishers, on the other hand, are typically involved in the business side of game development, such as marketing, distribution, and funding.

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Investment recouping & royalty distribution

In return for their investment, publishers will take a percentage of the royalties made by the game. In two ways:

Royalties are shared between the publisher and developers after the publisher has covered all of its costs.
Royalties are shared regardless if the publisher has recouped its investment.

According to an analysis of 30 publishing agreements, on average, 68% of royalties go to the publisher when there is no recouping clause and then it switches to 60%/40% distribution towards devs.

It's not uncommon for publishing rights to include some other terms outside of the remit of what something like a VC would require. A publisher can also have input into the game’s design, age classification, production plan, approval of interim deliveries and marketing. Even something as simple as age classification can drastically affect game design.

They also could control the majority of marketing and platform choice as well. All the way down the funnel to social media accounts.

Who's playing the game?

Companies have made their success developing and publishing their own games. Look at the likes of Bethesda Softworks, Electronic Arts, Zynga and Take-Two. However, some of the biggest names in gaming are publishers, Sony, Garena, Netease, Gameloft, Ubisoft, Tencent and Bandai Namco. Publishers are slowly becoming less relevant in today's society as their benefits for developers are being reduced, more funding is being pumped directly into development studios and marketing is driven more by authentic interactions and UGC (user generated content).

It seems like the final frontier is distribution. Many of these developers don't have the tens of millions to run large-scale infrastructure to host online servers across multiple continents or localise their products for international markets. The importance of localisation even in a digitally distributed world like gaming is a space worth exploring.

Platforms like Steam are driving the majority of distribution for small game studios. Look at the success of 1 person teams like Eric Barone, developer of Stardew Valley who since 2016 has sold over 20m copies of the game across pc, Nintendo Switch and mobile, you can even play it on your Tesla.

So why is any of this important? Some major shifts have occurred in the industry across the last quarter.

As developers grow options to self-publish become more relevant. Game of the Year winner FromSoftware publishers of Elden Ring has been long rumoured to move to self-publishing. Bandai Namco has warned this year that acquisitions in the space, Blizzard Activision, Zynga, and Bungie have made it harder for smaller publishers to access the best studios as competition rises.

So let's dive into some of the main affected players.

Garena (SEA)

If you've ever lived in southeast Asia you've probably heard of SEA. It operates e-commerce giant Shoppee but also up until recently owned the rights to distribute and manage Riot Games across the region.

I have fond memories of popping down to the 7/11 to buy prepaid game cards from Garena as they published Maplestory from Nexon in the region when I lived in Indonesia and Singapore.

Last month Riot decided to announce it's going to Self Publish going forward, which makes sense as the company looks to expand its product offering across game genres.

How much do these game publishing deals matter? Companies like SEA have moved into new verticals like e-commerce, payments and insurance.

In 2018 it has a market cap of $3.87b peaking at $200b in 2021. Down to below $27b today.

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Netease

Netease is one of the largest publishers alongside Tencent in China. Its main contract was with Blizzard Entertainment and World of Warcraft.

It announced it's pulling out of China starting in January next year with no plans to continue operations. Not only is this a huge blow to Netease, but to fans of Blizzard games over the last 15 years whose games like WoW were a huge part of their lives.

Netease stock took a hit on the news, but the damage control for the company was fairly good. It's almost as if publishers have been aware of the cultural power shift from developers for some time and have divested away from the reliance on developers.

Gameloft

You can't talk about mobile without mentioning Gameloft alongside Zynga which defined early mobile gaming on iOS. Founded by Michel Guillemot one of the co-founders of Ubisoft. Then sold to media conglomerate Vivendi in 2016. You couldn't look at the app store charts in the early years without seeing the iconic Gameloft square.

Gameloft alongside companies like machine zone really drove the IAP (In-app-purchase) wave that dominated the early years of the AppStore.

At peak, Gameloft was doing 2 million downloads per day of its iOS apps. The current success of its games runs off existing IP and its robust licensing deals with the likes of SEGA and Disney.

Tencent

Tencent is the undisputed king of publishing and M&A in gaming. It realised very quickly that it couldn't publish every game under the sun so it started taking minority stakes in every gaming developer and publisher you've probably ever heard of.

How big you ask? In the first 2 quarters of 2021, they averaged a deal every 2.5 days.

Like Bandai Namco, Tencent also sees competition from smaller self-publishing studios like Mihoyo. It's also hyper-aware of the state of gaming in China and wants to divest its interest away from the market as the government continues to crack down on gaming for its younger market. It's said internally a target of 50% of its total revenue coming from overseas is the company's latest OKR.

It's no surprise considering China's game revenue fell for the first time in 20 years in 2022. Also due to external regulations, a foreign game hasn't been approved in the country for over 500 days.

Valve

Valve and Steam are often the rogues of the industry. A company where you pick what you work on? Reading Valves' employee onboarding deck has been one of my favourite things over the years. Distribution has been their bread and butter. Valve allowed small studios the ability to self-publishing on their platform, much more like a marketplace that a traditional publisher. Steam quickly noticed the power as publishers grow to retain them on the platform so in 2018 they readjusted their split.

30% cut for the first $10 million
25% cut of a game's sales over $10 million
20% cut of game sales above $50 million.

A hot topic these days, with iOS and its "walled garden".

Companies continue to show their hand on what the most important part of their funnel seems to be. Here Valve is saying retention is clearly key. However, developer marketplaces like Shopify have taken an acquisition approach dropping developer fees to 0% for its first $1m in sales.

The fight over revenue split is the hottest issue right now. Whether it be for developers, creators, marketplaces or royalties. Is access to 120m+ daily active users (DAUs) worth the split?

Let's look at mobile publishing

Tencent is clearly a market leader on mobile, with fellow Chinese publishing Mihoyo not that far behind with the success of Genshin Impact.

PUBG mobile generates $5.2m a day in sales on average for the publisher, over $9b since launching in 2018.

Roblox trails behind globally but in western markets, it remains a leader, especially across the UK & US.

Genshin has transitioned us to an era of crossplay games driven by Gacha Elements. Loot boxes or Gacha isn't a new concept, but just know it generates lots of views and even more in revenue. It's no secret now that the majority of revenue is driven by "Whales" across mobile. Keep an eye out for Honor of Kings: World next year.

What this means for web3 gaming

Protocols at a web3 level, look at Enjin, Starkware, Immutable, Solana, Mythical Games, Dapper, Gala and others. Will be the modern-day publisher. A core benefit is powering an underlining infrastructure layer. So how can they help this next generation of game studios accelerate?

Excellent documentation
Lifecycle Marketing
Lifetime Sales / Retention Management
Structured unlocks and funding
Community development
Media layer and affiliates