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#1: Understanding Epic Game's app store crusade
Epic's feud with Apple (and to a slightly lesser extent Google) is old news at this point, but it's no less important. If you're catching up, we recommend reading Game Changers' legal breakdown (part 1, part 2). Also, make sure to watch Epic's spoof of Apple's classic 1984 commercial (oh how times change).
But let's cut to the chase. Is Apple doing anything illegal? No. But are some of its policies anticompetitive? Undoubtedly yes. There's a long list of evidence: blocking competing payment options, blocking links that send users to web sign-up pages, rejecting cloud gaming apps for business model reasons, killing the IDFA while retaining enhanced targeting capabilities itself, promoting first-party services/apps over others, etc.
The issue is less whether or not a 30% take-rate is egregious and more whether the app store model in its entirety is designed anticompetitively, especially when there are ~1 billion mobile iOS users. Scrutiny is scale dependent, and times have changed.
Will Epic Games win its case? I don't know, but three things are clearer than ever. One, the cracks in Apple's model are piling up; legitimate complaints from notable companies are coming left and right. Two, Apple actively cares more about control than revenue, because control is ultimately what enables long-term, sustained platform revenue. And three, the more Apple escalates how it cracks down to maintain control — especially in highly public cases like with Epic — the more obvious its anticompetitive grip is to more people.
As I see it, Epic's strategy is just as much about drumming up noise and support as it is about winning this specific case, because actual foundational change is more likely when other big companies, personalities, and governments pile on. Epic's stance is certainly selfish in some ways, but it's hard to argue that app stores wouldn't be healthier for business as a whole if Apple were to loosen its policies.
What's going to happen? Although this battle will certainly carry forward for a while (Apple retaliating by threatening Unreal's access to iOS developers is one clear sign), it's a matter of when not if app store policies change. The main uncertainty is what does "change" look like, because it will impact literally dozens of industries. Even though existing antitrust laws are horribly outdated, the antitrust case here (beyond just Epic) is fairly obvious.
If I had to guess, the EU will probably lead the charge and other governments will follow suit. Of course, any change would be riddled with complexity, which takes time to work out. The Apple storm will probably get worse before it gets better, but my hunch is that in the long-run this headwind will ultimately reverse into a tailwind. Even if Apple doesn't immediately drop its 30% take-rate, loosening policies that add more app store flexibility should give companies a better means of bypassing it. Time will tell.
#2: Tencent posts strong results despite geopolitical headwinds
According to the company's second quarter earnings release, Tencent's online games revenue jumped 40% year-over-year. That growth was driven entirely by mobile games, which grew 62%.
Peacekeeper Elite was a major contributor, the China release of Brawl Stars (by Supercell) made a healthy dent, and the launch of Chess Rush was successful. PC games were a headwind this quarter — revenue down 7% or so; DnF and Crossfire results were soft — but there remain catalysts. Valorant, Riot Game's new FPS, recently dominated Twitch and launched at a time when people were stuck at home, so international MAUs trended up nicely.
The backlog of domestic/China content remains healthy, distribution advantages (like via WeGame) remain strong, Tencent is still a key partner to foreign companies who wish to scale their games in China, cloud opportunities are abundant, and Tencent is keeping a firm eye on international expansion.
The last point is the highest risk, especially as geopolitical tensions rise (keep in mind, Trump is banning WeChat and there's been more chatter in India about banning additional games). Nothing is set in stone and there isn't yet pressure to spin-off foreign holdings like Riot (although it's a non-zero possibility), but Tencent could have a harder time striking full acquisitions in the West.
So far there's little evidence it's a problem, and Tencent's business as a whole is exceptionally positioned, but geopolitics is a risk that management will have to delicately work around.
#3: Sea Limited is on fire
It's hard to find any company that is performing better than Sea Limited right now. Shopee, the company's e-commerce platform, gets outsized attention — and rightfully so; it's easily the larger opportunity — but the company's gaming segment (Garena) is doing outstanding, too.
As a refresher, Garena distributes games like League of Legends and Call of Duty: Mobile across Southeast Asia, and its own games — Free Fire most notably — are making waves.
The company recently reported that its Digital Entertainment segment now has 500 million quarterly active users (+61% YoY) and 50 million of those QAUs are paying users (+91% YoY). As a result, gaming revenue is unsurprisingly shattering records and that segment is quite profitable.
Free Fire hit a record high of 100 million DAUs, which is wild, and it was once again the highest grossing title in Southeast Asia and in Latin America. The team is doing a great job engaging users through content updates (like collaborations with Netflix for a Money Heist crossover) and esports.
What the team is doing with Free Fire is extremely impressive, and I see little reason why the game can't excel for many years. Sea Limited will naturally try to diversify through acquisitions and new game launches, but the story will still very much revolve around Free Fire.
And, of course, profits from the gaming business are the fuel that is helping Shopee acquire users and eventually dominate Southeast Asia's e-commerce market too.
Master the Meta is a newsletter focused on analysing the business strategy of the gaming industry. It is run by Aaron Bush and Abhimanyu Kumar. To read this week’s entire meta, visit www.masterthemeta.com!