TikTok ban, Meta performance, Embracer goodbye (and how to adapt) – Games Growth with Upptic

• The “TikTok ban” has become law in the United States, raising concerns for marketers and content creators
• Meta’s Q1 earnings beat expectations, but the stock market reacted negatively due to concerns about AI investments
• Advertisers should diversify marketing channels and be prepared for changes in performance on platforms like Facebook
• Embracer Group is splitting into three separate entities – focusing on physical games, indies/AA games, and AAA games

Podcast Chapters

• 00:00 – Opening and introductions
• 00:42 – The TikTok ban is real, here’s what to do about it
• 11:11 – Meta stocks stumble despite strong performance (marketers take note)
• 20:41 – “Embracer” is dead – here’s what game studios can learn
• 30:11 – Closing and sponsor message

The TikTok ban is finally here

President Biden has signed a law that forces ByteDance to divest TikTok in the U.S. within 9 months, or face a ban. The bill passed the congress overwhelmingly along bipartisan lines. The law is the culmination of years of national security concerns about TikTok’s Chinese ownership and ratcheting up of tensions between the two superpowers.

TikTok was apparently surprised by the law, and plans to legally challenge it in court. However, the law was drafted to pass muster in court. It doesn’t target TikTok by name and instead targets any app or website controlled by a company on a “foreign adversary” list: China, Russia, Iran, and North Korea. ByteDance has continued its westward digital expansion – rolling out new apps including Gauth (an “AI study companion” that helps kids do their homework) and Lemon8 (an Instagram / Pinterest clone) in the US market. These apps could also be affected by the law.

While TikTok being banned might initially be upsetting for users, the reality is that there are no long-term issues in accessing short form video. The format already exists on Instagram, YouTube, Facebook, Reddit, X, and more. Influencers who exclusively use TikTok as a vehicle for their small businesses may face a tougher road. This is an important reminder that channel diversification is essential if you tie your livelihood to digital influence. For advertisers, TikTok is an incredibly effective advertising platform and has been for a long time. This will cause damage to games that rely on it as a channel for finding new users – but it’s also an important reminder to diversify your marketing mix.

Meta’s Q1 2024 report hints at performance problems

While Meta’s earnings report for Q1 2024 outperformed on practically every metric, some of the numbers hint that it has problems as a performance channel. Namely: ad impressions were up 20% YoY, but daily active users increased only 7% YoY. At the same time, the average ad price increased 6% YoY. While this no doubt looks good for stockholders, for marketers who use Meta products, such as Facebook and Instagram, for performance marketing, this is a huge red flag. It indicates that users are simply being spammed with more ads, and those ads are costing more.

This may not be a surprise to those who have been keeping a close eye on the performance of their channel mix, though – we at Upptic have noticed a decline in the quality of Facebook as a performance channel for a while. This is an important reminder to continue and diversify your channel mix and not rely too heavily on any single performance channel.

Marketing concerns aside, even though Meta had a standout Q1 and beat expectations, Meta’s stock still tumbled due to concerns about Meta’s heavy investment in AI without the expectation of much return for years to come.

Embracer Group is effectively coming to an end

Embracer Group CEO Lars Wingefors has announced the company will be splitting itself into three separate entities: Asmodee Group, “Coffee Stain & Friends,” and “Middle-Earth Enterprises & Friends” – with the latter two organizations to receive official renames at a later date. Each new company will have its own leadership team, strategy, P&L, and ticker on Nasdaq Stockholm. The Embracer name is being sunset.

Asmodee Group will focus on physical (tabletop) games, Coffee Stain will focus on indie and AA games, and Middle-Earth will focus on AAA games. Together these companies will have over 900 IPs to work with.

Embracer ended 2023 with a debt of $1.5 billion. Sale of Saber Interactive ($205 million) and Gearbox ($460 million) wiped out much of it, but the remaining debt is still in excess of $960 million. The majority of Embracer’s $900 million debt will mostly move to Asmodee (their physical games group), which has strong recurring cash flow to pay it down.

Wingefors admits taking on debt for acquisitions was a mistake in hindsight, claiming that debt is not a good trait for game companies – especially AAA game companies.

Does this mark the end of the federated states model for game companies? Here is a reminder on why this happened: 1) Interest rates were 0% for a decade, so borrowing money was basically free. 2) Most game companies were trading for higher valuations on the public market than on the private market, so a handful of companies took the free money and performed rollups without building any scaled sustainable efficiencies.

Clearly, this wasn’t a sustainable strategy in this case. Does this mean the federated states model is dead as a business strategy? Not entirely. It’s possible future companies will iterate on this to find a version that works, but in it’s current form, it has failed to lead to desirable outcomes.