G’day guys, gals and galahs. Issue #34. Same shizzle, different week, keen to share what I’ve been reading, learning, and compressing. A quote from Josh Wolfe to start:
Failure comes from a failure to imagine failure
Here’s the format of today’s email:
Part 1: Nintendo
Part 2: Tencent
Part 3: Gaming in Asia
Part 4: Bonus Quirky Content - Something to Read, Watch, and Listen
Everyone’s favourite gaming company. Going to highlight a few deep dives worthy of your time.
Nintendo: Not a Typical Console Cycle [Link]
This 12-minute presentation from Todd Wenning is only a week old, so super timely!
Been thinking about the above graph for a while. And would love to have some more recent data. You could argue gaming is already mainstream, but Nintendo is in the prime position of being able to offer a fun experience that can cater to parents and children. Through both hardware and software. Who else is really competing with them?
Nintendo’s IP today is in a similar place to where Disney’s was in the 1970s after the Baby Boomer generation started passing down their love for Mickey Mouse, Donald Duck, and other Disney characters to their Generation X children. In 1991, Warren Buffett remarked that Disney’s IP was “like having an oil well where all the oil seeps back in…essentially, you get a new crop every seven years, and you get to charge more each time.” Neither Mario nor Mickey Mouse negotiate for higher contracts and each new twist on the IP is gobbled up by passionate fans.
Nintendo, Disney, and Cultural Determinism [Link]
Matthew Ball just spanks it out the park on this one.
Nintendo has actually become niche over the past decade — not because it’s less popular, per se, but because it hasn’t grown. Consider Nintendo’s two biggest hits of the past five years: The Legend of Zelda: Breath of the Wild and Super Mario Odyssey. Each title has achieved 17MM in unit sales. They probably have fewer than 1MM active monthly users today. This is a tiny portion of the 250–300MM console/PC gamers and 2B mobile players. To this end, Fortnite regularly has more than 10MM active users at a given moment; Roblox recently peaked at 4MM.
But fear not, hope is not lost for Nintendo:
Nintendo does not face the near or even medium-term challenges that Disney or Apple did in the 1990s. Unlike these two companies, its internal creative output and talent remains strong. Nintendo’s IP may have been eclipsed in recent years, but it still reaches tens of millions a year. Its hardware, too, continues to soar. And there will be substantial lift from a Nintendo subscription — even if it doesn’t launch for several more years. This means that innovation, profits, and outstanding games will continue.
But Ball does highlight later on that Nintendo cannot ignore the shift to mobile. It’s where the growth, innovation, players, playtime, and revenues reside both today and in the future.
Nintendo - Switching the business model [Link]
A little bit more on the valuation side. But one part that stuck out for me:
Management clearly do care a lot of the company. When sales of Wii U and 3DS plummeted, the CEO and senior executives cut their salary by 50% rather than deciding to cut their workforce.
This part I love. For all their faults, you at least know that Nintendo’s management cares. And are willing to put their money where their mouth is. Which is more than what a lot of other managements can say.
Nintendo: Infinite Games [Link]
Probably more story focused and on their corporate history. So a pretty easy and entertaining read.
few companies have thrilled as much as Nintendo, winning over children and adults with lovable characters, ingenious gameplay, and a unique sense of fun. But success has made the company precious, cautious, conservative in its maneuvers.
Asian Century Stocks on Nintendo [Link]
Michael Fritzell (@Fritz844) covers the main bullish and bearish arguments for Nintendo and provides plenty of graphics to make it easy on the eyes.
When thinking of investing in Nintendo, the monetisation model is the one that does give me the most hesitation (Disclosure: No position held)
The only problem is that it takes 4-7 years for Nintendo to create a hit product. And in between those years (typically coinciding with console cycles), Nintendo might get wind pockets of weaker earnings.
And as many other game developers have developed more recurring revenue through in-app purchases and social elements (MMORPG), Nintendo has not yet made this transition. They continue to rely on up-front purchases and single-player games where the consumer pays 1x and then moves on to something else.
Bonus: Michael was also my first guest on the podcast if you want to check that episode out.
Crossroads Capital 2018 Annual Letter [Link]
GOAT writeup and valuation. From April 2019 so not super-duper up to date, but the core of it is amazing!
Like all companies with great platforms, Nintendo will continue to grow, becoming exponentially more efficient the larger it gets. It won’t happen overnight. But as its moat deepens and the underlying quality of its business continues to improve, we think investors will gradually start connecting the dots and realizing the financial and operational implications of its ongoing transformation. And we think that revelation should drive at least a tripling of the share price. Again, the downside protection here is immense, while the road ahead is thrilling. This is one game we want to keep playing.
Be rude not to include a video with a great story! The takeaway is to just have a crack.
Just a thread I wrote highlighting Nintendo’s growth opportunities. Specifically:
The video game market as a whole.
~1.4bn mobile gamers worldwide and, according to Newzoo, the market is expected to grow at 9.9% until 2023.
Represents more than 45% of industry revenue and more than two-thirds of growth, yet only 3% of Nintendo’s revenue came from mobile.
Shifting to Digital.
Digital sales (download-only software) currently make up 18% of revenues yet grew by 106% y/y
Taking advantage of their IP library.
Like Marvel, Nintendo has the opportunity to build a universe of characters, using the popularity of one to elevate the other.
Their new theme parks.
Demographics of gamers changing.
The loyalty and nostalgia towards Nintendo.
They have 21 of the 25 best-selling console and handheld games of all time!
Also planning to write a thread every Monday night this month, so stay tuned!
Tencent: Getting Comfortable With Games [Link]
Graham (@longriver_hk) has done a great job outlining some of Tencent’s structural advantages compared to their peers:
Netease’s near duopoly in Chinese gaming due to regulation
"developers will pay Tencent up to 70% of revenues for its help with distribution. Compare that to the Apple App Store which charges 30%."
Chinese gamers embrace the “pay-to-win” monetisation model
"A longer product cycle makes publishers’ business models more predictable as a result, and ceteris parabus, allows them to earn a higher return on their upfront marketing costs."
Tencent’s in-house distribution networks (QQ and WeChat)
"an advantage in lower customer acquisition costs, and then also in soliciting and collecting players’ feedback."
Tencent’s deep pockets
Tencent is willing to make minority investments and controlling investments
"This flexibility has allowed it to become one of the world’s most prolific investors in game developers and gives it unmatched insights into and influence over the industry’s direction."
Before Honour of Kings became the world’s most popular game, it was a desperate experiment [Link]
Tencent wants to create a mobile version of League of Legends (LoL). California-based Riot Games (Owner of LoL) does not.
Tencent decides “stuff it” and releases its own mobile game similar to LoL.
Honour of Kings goes on to become the first game in the world on any platform to average more than 100 million users a day
Honour of Kings raked in an estimated US$2.6 billion in revenue from in-app purchases last year
According to experts and players the Post spoke to, its continued popularity can be boiled down to two major factors: its ability to encourage social interactions and its heavy emphasis on Chinese culture. […]
The use of historical Chinese figures provides a “natural connection” for new users, [Chundi] Zhang said. “Unlike most Western games, where characters are set in a virtual world at the design stage, in Honour of Kings most of the heroes are drawn from Chinese history, mythology, or fiction.”
Insert pikuchu_surprised_faced.jpeg. Who woulda thought! Making a game catered to local audience would make them appreciate it more? But seriously, in my opinion there’s a common theme of copy and pasting successes in the west to other places then being shocked when they don’t work out. See: Why Starbucks Failed In Australia.
Thinking of doing a deeper dive on Tencent like Nintendo this week, so feel free to point me in the direction of any good resources you know of!
Gaming in Asia
Just a couple resources on gaming in Asia that I haven’t yet covered.
Genshin Impact: Deconstructing Mobile's Next Frontier [Link]
Honestly wouldn’t be worth my salt if I was talking about gaming in Asia without starting with Genshin Impact. And this deep dive is top-notch.
Essentially, you could argue Genshin Impact’s success boils down to: Being a cross-platform, console-like game experience, yet on mobile. The game packs a punch and players love it. It’s that easy! ;) And as good as Genshin Impact has been, the authors argue it could have been better:
GI’s take on fusing typical action RPG free-to-play mechanics with an open world experience ends up looking like mixing oil and water. As a result, the game is heavily focussed on maximising the character progression vector, but ends up losing the opportunity to deliver on a truly open world experience, in which world exploration could have been maximized as a long-term retention driver.
This means that GI, in its current state, will likely burn down to its core super-fan audience and end up relying on them for long-term revenue much faster than is necessary.
E-sports stars in Southeast Asia’s US$4.3 billion gaming industry train like athletes, battle like gladiators and get paid like bosses [Link]
Between 10 and 12 hours of gaming and tactical discussions daily.
Players are encouraged to do physical exercise and eat healthy diets.
“they do not want their prizefighters falling victim to the ‘stress, obesity and diabetes’”
Esports teams often have a psychologist to help deal with the stress.
Teams live together in dormitory-style gaming houses, watched closely by managers and coaches, to build rapport and teamwork over the course of the gaming season.
One Indonesian gamer mentioned earns a base salary of US$1,200 to US$1,600 a month. More than five times the average of a fresh Indonesian graduate!
Game crunch lessons: How to avoid game development crunch [Link]
Okay, not specific to Asia I’ll admit. And a little left of centre. But crunch in the video game industry is a pretty big issue and this article argues why it needs to change. 996 culture (9:00 am to 9:00 pm, 6 days per week) is what it is, so this article is just a cool insight on how they might avoid that
We always have designers who think a feature is going to be amazing, but it's over by four months and it's not going to fit. On Halo 2, I was that person, and before you know it I'm there every day until 4am and I never see my wife.
Bonus Quirky Content
Something to read: The business of HYBE [Link]
A super-deep dive into HYBE Entertainment. Yeah yeah, I know Kpop isn’t everyone’s cuppa tea. But it’s an awesome look into a business behind the behemoth.
HYBE is one example of a company born from the mind of a visionary wanting to do it differently, using great content, consumer obsession and technology to eventually build an innovation powerhouse.
HYBE has fully understood that to win a game where any card on the playing field available was stacked against them they needed to go a different direction
Something to watch: The Mystery of a Dictator's Missing $10 Billion Fortune [16 mins]
Just an insane story.
Something to listen to: Gojek's Growing Pains Of Becoming A Decacorn [Transcript Link] [Apple Link]
I wish more companies had their own podcast like Gojek. A great window into a company and its management. Nadiem makes a great point about solving problems as a startup at about 16 mins in:
I think a lot of entrepreneurs at different stages of their development and their personal journey often focus on successful use cases elsewhere. So they're […] chasing businesses as opposed to chasing problems, problems and problems can exist without first a business model, right. If, but if you can crack, generally speaking would GOJEK has found throughout its whole history is that if you can crack a fundamental user problem, you will find a way to monetize it. Sooner or later you will find them. And that's very true. I think. I think a lot of, uh, the dogma, Silicon Valley was very correct about this, that first chase the problem and then revenue kind of comes in. But of course it depends on which stage of the company.
Something to listen to: Talks With Tony [Link] [Apple Link]
Tony Fernandes (AirAsia’s CEO who I featured in CbK #11) now has his own podcast! The first episode is a cool insight into his life. Not quite sure exactly why, but I could honestly listen to Tony for hours.
For those who prefer watching interviews, the interview is on YouTube too:
Something to listen to (from me): Saket Mehrotra on Compounding Curiosity [Transcript Link] [Apple Link]
Saket’s (@mehrotra_saket) story is great. Love how he’s been able to turn passion into something he’s now paid for. Has some great insight into building a community around investing, going paid, and some thoughts on the Indian market!
Once you start putting your work out in the public, do not think of what the downside is. […] The risk which is there is so, so less than the benefits that can potentially come from there. Whether it was my article getting published in investing.com, or me writing a guest piece for Moneycontrol, or me ending up giving an interview with a Turkish news channel. All of those things wouldn’t have been possible if maybe I had not put out my work in public. So I think that those benefits far, far outweigh from what the potential risks that can come.
Rabbit hole/resource to dive into: CNA’s YouTube Channel [Link]
They upload a lot of full episodes of their programs. This is cool for someone like me in Perth, I can catch up on some Singaporean TV and get a feel for what’s going on.
Bonus investing links that don’t fit anywhere else:
Guest Interview: Michael Mitchell [Link]
"I wouldn’t be a successful investor without good family life. I know others are able to segment their career vs the family and be successful regardless of what happens at home but that’s not me. I know I have a wonderful spouse at home that would support me win lose or draw. That safety net allows me to take bigger swings than I otherwise would."
After Afterpay [Link]
"Combined, Square and Afterpay are worth more than Citigroup, which once harboured a strategy to become a financial supermarket. The modern equivalent is a super app and although that’s not a term Square management likes to use, that’s what it’s becoming."
Final thought for the week:
Until next week, have a good one!
You can find previous issues of Curated by Kalani here. I’m on the web at kscarrott.com, interviewing at Compounding Curiosity, and on Twitter @scarrottkalani.
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