Mobile game revenue will decline for the first time in history this year, market research firm Newzoo now says in a revised outlook for the 2022 global games market. While the whole game industry is expected to contract by 4.3% — another first since Newzoo began tracking the market in 2007 — the company is predicting a 6.4% decline in mobile game spending on top of a 4.2% decline in console game spending.

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Back In May, Newzoo was forecasting a year of growth for the game industry, with its outlook predicting more than $200 billion in global games industry spending thanks to a nearly 6% increase in the mobile gaming sector to a $103.5 billion. But this summer, as warning signs emerged about the effects of inflation and a severe downturn in the digital ads market, analysts and market researchers began to predict a unprecedented decline for the game industry, which in 2020 and 2021 grew at staggering rates due to excess spending on and time spent playing video games. In particular, mobile gaming declined in the first half of the year for the first time ever.

Mobile gaming has typically offset the losses in console and PC gaming and has been the largest and fastest-growing sector in the industry for years. But this year's decline marks a surprising downturn for mobile. “Mobile game spend in the U.S. continues to decline as consumers contend with both economic uncertainties and a new post-pandemic normal,” said Sensor Tower gaming insights lead Dennis Yeh last week. “While there is still a decent chance this year’s U.S. mobile game revenue will surpass 2021 levels, worsening headwinds have firmly shifted the conversation away from the question of by how much.”

A confluence of factors has created a particularly difficult time for game developers, and not just mobile ones. For one, consumers are spending less on gaming due to inflation increasing the price of everyday goods. A number of high-profile console and PC games have also suffered from delays this year, setting up a return to growth in 2023.

"Some of the drivers of the decline include the return of experiential spending, higher prices in everyday spending categories such as food and fuel, the uncertain supply of video game console hardware and certain accessories such as gamepads, and a lighter release slate of games, among others," explained NPD game director Mat Piscatella back in July, when NPD forecast a 8.7% decline in the U.S. game market.

Additionally, the digital advertising market on which many mobile games rely for revenue is also having a tough year, in part because Apple's iOS privacy changes have made it more difficult to track the effectiveness of the install ads through which many mobile developers both acquire new users and also earn money from other app makers. (Many mobile games allow players to earn digital currency by watching ads prompting them to install competing games.)

Advertisers are also simply spending less. "The timing here is clear: The declines take place as the world’s banks increased interest rates and the specter of recession was everywhere in the press,” Unity CEO John Riccitiello said on an earnings call this month. "When we talk with our advertisers, the sense we get is clearly one of caution and reticence to commit to the aggressive campaign spends." Unity, the game engine of choice for mobile developers, also runs a digital ads business. Some major publishers like Zynga owner Take-Two Interactive have also cited mobile when downgrading annual outlooks in recent weeks.

Newzoo in a press release said, "2022 is a corrective year following two years of lockdown-fueled growth, but our long-term outlook for the games market remains positive," and the firm says it still expects gaming to hit surpass $211 billion in global spending by 2025.

"While this may seem like a setback for the games market, we note that the sum of revenues generated from 2020 to 2022 is almost $43 billion higher than we originally forecast pre-pandemic," the company said.

Hello, and welcome to Protocol Entertainment, your guide to the business of the gaming and media industries. This Tuesday, we’re discussing the early success of Sony’s God of War Ragnarök amid a year of decline for the video game industry. Also: How Twitter turmoil and the FTX implosion are affecting the games industry and a major new update for Epic’s Unreal Engine 5.

God of War answers Sony’s prayers

The game market has had a rough 2022: A surprising mobile slump, lower consumer spending, continued hardware supply constraints, and game delays littering the release calendar with unfilled absences.

But what is proving to be a resounding success for Sony — and proof of the resilience of the PlayStation maker’s console-first business model — is the new God of War Ragnarök. Released last week to rave reviews and a powerful first week of sales, Ragnarök is helping buoy a struggling console market and underscores Sony’s shrewd and exacting strategy for maximizing the value of its first-party studios.

The new God of War is fantastic. I’ve played only the first handful of hours of Ragnarök’s sprawling story, but it is an improvement in virtually every way over its 2018 predecessor while still maintaining a familiar approach. The original game has sold more than 23 million copies.

• Sony opted not to make Ragnarök a PS5-only game and chose instead to target its existing PS4 base of nearly 120 million units. (The game features some graphical and performance upgrades for PS5 players.)
• While that means the game doesn’t look and feel radically different, it is available to the widest swath of buyers.
• Early sales data in the U.K. indicates Ragnarök enjoyed the biggest launch in the history of the God of War franchise, Gamesindustry.biz reported. The new entry sold more on its first day in that market than the 2018 installment did in its first week.
• Ragnarök also dominated The Game Awards nominations yesterday, earning the most of any title this year with 10.

Ragnarök arrived at a particularly troubling time for the industry. Starting this summer, analysts and market research firms began warning of a game industry downturn. By the end of the second quarter, it became clear the market was in decline after two years of explosive pandemic-fueled growth.

• New data out today from market researcher Newzoo has the industry contracting by more than 4%. The firm, founded in 2007, has never before forecast a decline for the global games market.
• The primary culprit is mobile gaming, which has grown consistently every year since the launch of the iPhone and has helped offset declines in PC and console gaming. Another factor: Several game delays have pushed many big releases to 2023.
• Analytics firm Sensor Tower’s gaming lead Dennis Yeh said “barring a major holiday season, annual mobile gaming spend in the U.S. will see a decline for the first time ever,” while Newzoo forecasts a mobile decline of 6.4% this year.
• Some good news: The latest Call of Duty game was the fastest-selling in the franchise’s history, moving $800 billion in sales in its first three days.
• U.S. market tracker NPD said yesterday that just two days of COD: Modern Warfare 2 sales were enough to make the newest entry the second-best-selling game of the year behind Elden Ring and help keep October consumer spending flat year over year despite the decline in mobile.

Single-player gaming is alive and well — for Sony, at least. The game industry continues to shift investments and priorities toward mobile, live service, and free-to-play gaming. But Ragnarök, as well as February’s smash hit Elden Ring, are offering a refreshing counterbalance to that line of thinking.

• While far fewer studios these days enjoy the resources of God of War developer Santa Monica Studio to develop single-player games, there is strong demand for big-budget experiences using cutting-edge graphics and Hollywood voice talent.
• Sony has outlined an ambitious plan to develop numerous live service games in the coming years, and it acquired Destiny developer Bungie this year for close to $4 billion to help those efforts.
• Sony has also invested in mobile development, revamped its PlayStation Plus subscription, and sped up its pace in porting PlayStation games to PC so it isn’t so reliant on console gaming.
• But at the same time, Ragnarök is evidence that narrative-driven console exclusives are still the company’s bread and butter, and Sony has no reason to ignore its core audience of PlayStation single-player fans while it invests in the growth areas it’s neglected until fairly recently.

Ragnarök may end up on PC in a couple of years, and perhaps even on Sony’s subscription service some time after that. But for now, the game is best enjoyed — and only enjoyed — on PlayStation for $60 to $70. So far, it seems likely many millions of players are still just fine with that arrangement.

— Nick Statt

A message from Meridian

While tech can be a transformational tool for change, there must be a balance to ensure we are not only depending on multilateral institutions to implement policy and standards, as authoritative regimes can easily dismiss those initiatives. Instead, we must have a holistic diplomatic approach that ensures tech diplomacy and collaboration can be spread through various platforms.

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Overheard

“The Commission is working to ensure that you will still be able to play Call of Duty on other consoles (including my Playstation). Also on our to do list: update stock pictures. These gamers have wired controllers whereas Xbox and Playstation have wireless ones since about 2006!” — Ricardo Cardoso, a member of the EU Commission overseeing the Activision deal, tweeted a curious comment last week implying he owned a PlayStation console and attached an outdated stock photo. He later clarified he is “not involved in the assessment.”

“The interactive entertainment business is very different than the linear entertainment business … So I, at least, pose the question as to whether subscription makes as much sense for interactive entertainment as it does for linear entertainment and registered some skepticism, which I still hold." — Take-Two Interactive CEO Strauss Zelnick said on an earnings call last week he was still unsure about the business model behind Xbox Game Pass and whether it made sense for the game industry.

​In other news

Twitter cuts hit the game marketing team. As part of Elon Musk’s Twitter layoffs last month, the entire five-person Twitter Gaming marketing staff responsible for helping promote the industry was let go, The Washington Post reported.

Studio Ghibli and Disney partner for a mystery project. The legendary anime studio and Disney are working together, though both are cryptic about the details. A likely outcome: a new season of anime anthology series “Star Wars: Visions.”

Meta is killing its Portal smart display for good. After previously opting to shift Portal sales to business customers, the company is now pulling the plug on the device altogether.

The Witcher 3 update will arrive just in time. CD Projekt Red announced yesterday that the next-gen upgrade for The Witcher 3: Wild Hunt will keep its 2022 deadline with a Dec. 14 launch following two delays.

A closer look at Magic Leap’s new headset. The Magic Leap 2 may well be the best AR headset yet, but it’s also out of reach and not designed for most people.

Disgraced FTX CEO was a big gamer. Sam Bankman-Fried, who pushed his imploding crypto exchange to sponsor esports teams, once played Riot’s multiplayer hit League of Legends during an investor meeting, impressing onlookers. FTX filed for bankruptcy on Friday.

Disney’s latest demo day included NFT and AR startups. Some of the companies that were part of last week’s Disney Accelerator Demo Day included Polygon, Lockerverse, and Red 6.

Gaming companies become Twitter Blue targets. Before Twitter was forced to shut down signups to its Blue service, gaming brands were among the first high-profile targets of impersonators abusing the new, murkier blue check mark.

Epic’s Hollywood takeover continues

Epic Games’ Unreal Engine 5 is getting its first major update today, and with it a suite of new features and capabilities for both game development as well as film and TV production. The goal is to make the engine, once exclusively a tool of game makers, into a widespread pillar of Hollywood production and, eventually, the metaverse.

Epic is pushing Unreal across media formats. The new update, version 5.1, is designed to take advantage of “the exponential growth in adoption of Unreal Engine over the last two years by media and entertainment professionals and companies of all sizes,” the company said.

• The new update contains a dedicated in-camera visual effects editor, meaning that people doing stage production using an LED backdrop for virtual environments will be able to edit on-screen elements — and see the results of those edits — on the fly.
• Epic says it’s adding an iOS app with touch controls to mirror the in-camera editor features on smaller screens in the coming weeks, as well as a color correction tool for adjusting virtual LED wall images.
• Other big changes in 5.1 include an overhaul to the virtual camera tool, improvements to the Lumen lighting system, and improvements to animating and rigging animated characters.

Epic’s vision goes beyond the game engine market. While the Unreal Engine is often pitted against rival Unity, the platform of choice for mobile developers, Epic has made clear its bigger-picture goal is blurring the lines between live-action and digital and making any object, character, or environment interactive.

• “As we head toward the metaverse, people will start to think of assets as usable objects just as they are in the real world,” Kim Libreri, Epic’s CTO and a former Hollywood visual-effects supervisor, told me last year. “We’re going to see a big transformation of how people think of digital content going forward.”
• “The metaverse is often associated with speculative newness, but the core experiences engaging 100M's of active users today are about games with music experiences and movie crossovers,” Epic CEO Tim Sweeney explained back in May.
• Indeed, Fortnite is in one sense a big revenue-generating battle royale game, but in another a testing ground for both Unreal and Sweeney’s theories about the future of entertainment.
• “Silly hype aside, the metaverse is about taking real-time 3D social, entertainment, and creative experiences that already exist,” Sweeney wrote in September, “and transforming them over the coming years into an open, standards-based ecosystem like the web.”

— Nick Statt

A message from Meridian

New tech innovations like Web3, blockchain, and AI have massive potential to strengthen democracies and global economic security while decreasing the digital divide. However, these innovations come with significant risks. Political scientist Ian Bremmer underscores disruptive technology as one of three looming global crises for which we are largely unprepared.

Learn more

Thoughts, questions, tips? Send them to entertainment@protocol.com. Enjoy your day, see you Thursday.

On any given day, Lily AI runs hundreds of machine learning models using computer vision and natural language processing that are customized for its retail and ecommerce clients to make website product recommendations, forecast demand, and plan merchandising. But this spring when the company was in the market for a machine learning operations platform to manage its expanding model roster, it wasn’t easy to find a suitable off-the-shelf system that could handle such a large number of models in deployment while also meeting other criteria.

Some MLops platforms are not well-suited for maintaining even more than 10 machine learning models when it comes to keeping track of data, navigating their user interfaces, or reporting capabilities, Matthew Nokleby, machine learning manager for Lily AI’s product intelligence team, told Protocol earlier this year. “The duct tape starts to show,” he said.

Nokleby, who has since left the company, said that for a long time Lily AI got by using a homegrown system, but that wasn’t cutting it anymore. And he said that while some MLops systems can manage a larger number of models, they might not have desired features such as robust data visualization capabilities or the ability to work on premises rather than in cloud environments.

As for finding an MLops platform that works for the company, Lily AI’s CTO and co-founder Sowmiya Chocka Narayanan said last week, "We're still looking.”

As companies expand their use of AI beyond running just a few ML models, and as larger enterprises go from deploying hundreds of models to thousands and even millions of models, many machine learning practitioners Protocol interviewed for this story say that they have yet to find what they need from prepackaged MLops systems.

“That is the biggest gap in the tech industry right now,” said Nicola Morini Bianzino, global chief client technology officer at EY. The auditing firm has thousands of models in deployment that are used for its customers’ tax returns and other purposes, but has not come across a suitable system for managing various MLops modules, he said.

“I’m actually surprised that none of the big companies have jumped in this space because the opportunity is massive,” Morini Bianzino said.

Depending on how it is defined, projections for the global MLops platform market vary from $3 billion by 2027 to $4 billion by 2025 to $6 billion by 2028. Companies hawking MLops platforms for building and managing machine learning models include tech giants like Amazon, Google, Microsoft, and IBM and lesser-known vendors such as Comet, Cloudera, DataRobot, and Domino Data Lab.

Although the MLops-related platforms available today are “extremely valuable,” said Danny Lange, vice president of AI and machine learning at gaming and automotive AI company Unity Technologies, “nobody right now is doing it at a level that you ideally want. It's actually a complex problem.” Right now, Unity is using a custom-built system to manage the thousands of ML models it has in deployment, Lange said

Millions of models

Like other large enterprises that have invested in ML for years, Southeast Asia’s banking giant DBS has had to build in-house to manage its data analytics and the 400-plus ML models it runs for things like personalized banking, said Sameer Gupta, group chief analytics officer and managing director.

“When DBS started our journey several years ago, the solutions available in the market primarily focused more on AI/ML activities as experiments and did not meet our requirements to iterate and operationalize quickly,” Gupta told Protocol.

“We had to leverage what was available to develop our in-house capabilities that allows us to better tailor our solutions across the bank.” The company erected its own internal analytics and AI platform, which features an operational cluster to manage data ingestion, computation, storage, and model production, as well as an analytical cluster for data scientists to experiment and develop new tools before they go into production.

Intuit also has constructed its own systems for building and monitoring the immense number of ML models it has in production, including models that are customized for each of its QuickBooks software customers. Sometimes the distinctions in each model are minimal — one company might label certain types of purchases as “office supplies” while another categorizes them with the name of their office retailer of choice, for instance. The model must recognize those distinctions.

“We actually build models that are personalized to each [customer],” said Diane Chang, director of data science at Intuit. “When you look at that, each of those individual models that we built, then we’re over millions.”

Intuit had MLops systems in place before a lot of vendors sold products for managing machine learning, said Brett Hollman, Intuit’s director of engineering and product development in machine learning.

For instance, Hollman said the company built an ML feature management platform from the ground up. “A set of features can help you train a new model. If somebody generates good features on cash flow, some other person that’s doing some other cash flow thing might come along and say, ‘Oh, well, this feature set actually fits my use case.’ We're trying to promote reuse,” he said.

Open or closed

For companies that have been forced to go DIY, building these platforms themselves does not always require forging parts from raw materials. DBS has incorporated open-source tools for coding and application security purposes such as Nexus, Jenkins, Bitbucket, and Confluence to ensure the smooth integration and delivery of ML models, Gupta said.

Intuit has also used open-source tools or components sold by vendors to improve existing in-house systems or solve a particular problem, Hollman said. However, he emphasized the need to be selective about which route to take.

“A vendor may not have all the capabilities [we] need. Looking at an open-source solution and extending an open-source solution might be a better way of approaching that particular component versus going with a vendor,” he said. “If you go with a vendor, you drive their road map, you work with them and drive their road map, but you’re dependent upon their road map versus your own internal software development lifecycle.”

The age-old “build or buy” question is the wrong one to ask, said Zoe Hillenmeyer, chief commercial officer at Peak, which sells an AI decision intelligence platform and related services. When it comes to MLops, she said, “There’s a false dichotomy between build versus buy. That’s an incorrect strategy. I think that the best AI will be a build plus buy.”

If you go with a vendor, you drive their road map, you work with them and drive their road map, but you’re dependent upon their road map versus your own internal software development lifecycle.”

However, creating consistency through the ML lifecycle from model training to deployment to monitoring becomes increasingly difficult as companies cobble together open-source or vendor-built machine learning components, said John Thomas, vice president and distinguished engineer at IBM.

“The enterprise might try to force everyone to use a single development platform. The reality is most people are not there, so you have a whole bunch of different tools. People fight over it — it’s a religious thing,” Thomas said.

IBM has responded to that reality by allowing clients to use its MLops pipelines in conjunction with non-IBM technology, an approach that Thomas said is “new” for IBM.

Engineering talent crunch

Companies struggling to find suitable off-the-shelf MLops platforms are up against another major challenge, too: finding engineering talent.

Many companies do not have software engineers on staff with the level of expertise necessary to architect systems that can handle large numbers of models or accommodate millions of split-second decision requests, said Abhishek Gupta, founder and principal researcher at Montreal AI Ethics Institute and senior responsible AI leader and expert at Boston Consulting Group.

“A lot of these places that are attempting to do this are just not tech-native or tech-first companies,” BCG’s Gupta said. For one thing, smaller companies are competing for talent against big tech firms that offer higher salaries and better resources. “There is a lack of technical talent to a significant degree that hinders the implementation of scalable MLops systems because that knowledge is locked up in those tech-first firms,” he said.

Despite the obstacles, Intuit’s Hollman said it makes sense for companies that have graduated to more sophisticated ML efforts to build for themselves. “If you’re somebody that’s been in AI for a long time and has maturity in it and are doing things that are at the cutting edge of AI, then there’s [a] reason for you to have built some of your own solutions to do some of those things,” he said.

For companies with less-advanced AI operations, shopping at the existing MLops platform marketplace may be good enough, Hollman said.

“If you’re a new entrant into the machine learning space, those platforms are the best place to start. They’re going to have a soup-to-nuts experience,” he said. “Trying to build your own ML platform from scratch is a big undertaking.”

FTX’s controversial founder, Sam Bankman-Fried, has been tagged as the main culprit for the latest crypto meltdown. But crypto industry leaders are also pointing a finger at another surprising target: Gary Gensler.

The argument goes, the SEC, under Gensler’s leadership, has done such a terrible job in providing regulatory clarity to crypto companies in the U.S. that it forces companies such as FTX to set up shop in other countries known for loose regulations — which, in turn, encouraged SBF to do really bad things.

“Part of the reason FTX was able to do what it did was because it operates in the Bahamas, a tiny island country with very little regulatory oversight and ability to oversee financial services businesses,” Coinbase CEO Brian Armstrong said in an op-ed Friday.

“Did regulators force FTX to conduct itself in the way it did? No. But they did create a situation where FTX could take dangerous risks with no repercussions.”

One wild and sinister conspiracy theory being bandied about on crypto Twitter suggests that Gensler had secret dealings with now-disgraced Bankman-Fried. Minnesota Rep. Tom Emmer, who’s been critical of Gensler, said in a tweet that his office is looking into allegations that the SEC chair was “helping SBF and FTX work on legal loopholes to obtain regulatory monopoly.”

In a tweet tagging Gensler, Ripple general counsel Stuart Alderoty also asked if the SEC chair was “acting alone when meeting with SBF? Would SBF have ended up with even more consumer assets under his control?”

No evidence has been presented to back up these allegations. The SEC did not immediately respond to requests for comment.

But the attacks on Gensler have been met with intense pushback from other industry observers who stress a different argument: The FTX crash actually proves that Gensler’s approach to crypto was correct. By embracing what the crypto industry denounced as unreasonable and rigid policies, Gensler actually minimized the harm the FTX meltdown had on U.S. consumers, they argue.

John Reed Stark, a staunch crypto critic and founding chief of the SEC’s Office of Internet Enforcement, said Gensler “saved millions, perhaps even billions, in investor crypto-losses” by taking on the industry “despite mammoth political opposition and rogue defendants with infinite financial resources.”

Marc Fagel, former SEC regional director for San Francisco who has represented crypto companies in his private practice, downplayed speculation that the SEC colluded with FTX simply because Gensler’s staff had meetings with the company.

“Plenty of players in the crypto industry have met with various members of the SEC,” Fagel told Protocol. “Indeed, I would be a little worried if the SEC didn’t take meetings with players as large as this.”

And FTX was huge: The company ran the third-largest crypto exchange after Binance and Coinbase. Like Binance, FTX is not allowed to operate in the U.S. due to regulatory restrictions, though FTX has been in the crypto lobby in Washington.

FTX and Binance are also relatively new players in the crypto industry. Binance launched in 2017, while FTX began in 2019. But their growth rates have been astronomical. Binance outpaced Coinbase, which launched 10 years ago, to emerge as crypto’s largest marketplace. FTX became the third-largest crypto exchange in just three years.

Critics argue that the rapid growth was based on a key advantage: FTX didn’t have to worry about U.S. regulations, including strict disclosure requirements. And that, critics argue, was what led to the FTX debacle.

Jonah Crane, a partner at Klaros Group, told Protocol, “the issues that took down FTX vindicate Gensler’s focus on conflicts of interest and the risks of a vertically integrated model that exists across the crypto sector.”

In fact, the whole industry is so interconnected that the FTX meltdown has inevitably affected other crypto companies and investors, including several in the U.S.

Gensler last week described crypto as “a field that’s significantly non-compliant” featuring a “very interconnected world” with “a few concentrated players in the middle.” Like the Terra-luna crash earlier this year, the FTX meltdown involved a major player with “toxic combinations of lack of disclosure, customer money, a lot of leverage, and then trying to invest with that.”

Those interconnections have enabled the contagion triggered by the FTX crash to ripple across the industry, including companies in the U.S. That’s why “there has to be unified approaches to this around the world,” Circle CEO Jeremy Allaire said.

“These are common markets,” he told Protocol. “They're deeply interconnected.”

Allaire said the U.S. Congress’ failure to pass new laws for crypto led to the tough situation that U.S. crypto companies face in the wake of the FTX crash. But he also assigned some blame to the SEC under Gensler, who has stressed that crypto companies must be more transparent through disclosures.

“We can't just say we have the rules, follow them,” he said. “What is it? That's what a lot of people have been asking for. There has to be tailored rules.”

It’s a tough bind for the SEC, which Fagel said faces “a can’t-win situation.”

“The same people shouting about the SEC’s interference in crypto markets, which they contend should not be within the SEC’s jurisdiction, are now blaming the SEC for not doing more,” he said.

“The same people who have fought hardest to keep crypto unregulated, and who made the decision to trade unregistered cryptocurrencies on a Caribbean-based exchange, are now screaming at the SEC for not protecting them. I’m not sure if that’s irony or schadenfreude.”

Amazon is planning to lay off thousands of employees, Protocol has learned, ahead of what the company has cautioned will be a slow holiday shopping season.

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As many as 10,000 workers could be impacted, according to a source familiar with the deliberations. That number could ultimately change. The layoffs could largely affect new hires, including those who have not yet started but who have signed an employment contract, they added. Among those impacted will be employees in the devices, human resources, and retail divisions, according to The New York Times, which first reported the layoffs.

An Amazon spokesperson declined to comment.

Amazon has been in cost-cutting mode for a while. Among other measures, it currently has a hiring freeze in place, according to a note from HR leader Beth Galetti that Amazon published publicly earlier this month.