How NFTs Transformed a Small Mobile Game Company into a Billion-Dollar Giant

Author: Justin Birnbaum

Original Title: 《How A NFT Pivot Turned A Tiny Mobile Game Company Into Multi-Billion Dollar Powerhouse》

Translation by: Hu Tao, Chain Catcher

Yat Siu is exhausted. The 49-year-old Hong Kong executive, born in Austria, has been getting no more than a few hours of sleep each night lately, but when asked about his blockchain gaming business, Animoca Brands, he can't help but perk up. Dressed in a black hoodie and half-frame glasses, he gestures wildly as he elaborates on the bright future he sees for gaming decentralization and digital intellectual property.

"Maybe we can even reshape people's views on classic forms of capitalism," he says.

This NFT and blockchain technology-dominated future has become Siu's salvation. Just over four years ago, Animoca Brands was struggling. In January 2014, the small mobile gaming business he co-founded with former SoftBank partner and early internet success Mail.com CEO David Kim saw its revenue drop 25% to $5.2 million, with a market valuation of less than $6 million.

Then, in 2017, Siu stumbled upon CryptoKitties, an early blockchain-based marketplace where users could buy, sell, and collect virtual pets. He recognized the opportunity and invested in its Vancouver-based parent company, Dapper Labs (then known as Axiom Zen), which is now valued at $7.6 billion. This was the first of over 150 NFT-related investments. Animoca Brands now holds stakes in many of the largest and most successful NFT companies in the world, including OpenSea (the largest NFT marketplace, with an estimated revenue of $375 million in 2021), Dapper Labs, and Sky Mavis (the developer of Axie Infinity).

"The only place we might not be is Antarctica," Yat Siu jokes.

In mid-January, Animoca Brands raised nearly $360 million at a valuation of $5.4 billion, more than doubling its valuation of $2.2 billion from October. Forbes estimates that Yat Siu owns a 10% stake worth nearly $500 million. Investors in this round included Liberty City Ventures, Soros Fund Management, and Winklevoss Capital. (Reports indicate that Animoca Brands is in talks with global investment firm KKR to raise about $140 million in the January financing.)

Since its struggles in 2017, the company has grown from 57 employees to over 600. In the first nine months of 2021, Animoca Brands generated $670 million in revenue, with about $530 million coming from digital assets and investment income. As of the end of November, its token reserves were valued at nearly $16 billion.

Overall, the global market for NFTs grew from $100 million in 2020 to $25 billion last year. According to NFT tracker DappRadar, one-fifth of that came from gaming. Most of the activity is happening in places like the Philippines, where low-income players have embraced a "play-to-earn" model that allows them to earn a stable income of a few dollars a day. Western gamers are less enthusiastic about this trend. Blockchain gaming is either the future of the $200 billion video game industry or another bubble waiting to burst. Given Animoca's range of holdings, many savvy investors are viewing Siu's success or failure as a litmus test for the viability of blockchain gaming.

"Few people feel they can help shape an industry," Siu says. "It's very different from seeing a surge and participating in the opportunity. But here, you can help shape it, and at least we think it could have a positive impact on everyone."

The concept behind blockchain gaming has been around for a while, tracing back to the early 2000s when online multiplayer games flourished, particularly World of Warcraft, and later to the original metaverse project Second Life, which was the source of the first virtual real estate boom (which later went bankrupt).

Blockchain gaming makes a massive bet on the idea of "true digital ownership," where players can not only buy and sell items in the game (like unique outfits or swords with superpowers), but these assets exist (on the blockchain) independently of the game. How this actually works in an industry where even game developers can't agree on the most basic standards is anyone's guess, but one NFT gaming application has gained popularity: play-to-earn.

Take Animoca Brands' mobile game The Sandbox, which was acquired and transformed into a blockchain product in 2018, for example. Players can spend about $4,000 to buy a piece of virtual land, fill it with custom buildings, objects, or characters, and then sell it at a higher price, investing only their time. Animoca Brands charges a fee for each transaction. According to CoinMarketCap.com, The Sandbox has its own game token called SAND, corresponding to real-world value—its market cap is currently $4.5 billion. Animoca Brands does not charge royalties on the tokens but accumulates reserves that show up on its balance sheet.

"No one thinks about how much we can give back to players in game design," Siu says. "It's really always been about the business."

Siu has been passionate about technology since childhood. Growing up in Vienna in the 1980s, he felt like an outsider due to his Chinese heritage. He found refuge in computers and the burgeoning internet to escape his loneliness.

He taught himself to code on early Texas Instruments computers, which he described as "glorified calculators," and later upgraded to an Atari ST. As a teenager, Siu connected to a keyboard using its MIDI port and began posting music composition software online. Not knowing his age, Atari reached out to him to discuss a job, but he was stunned when he arrived at the company's Austrian outpost. Nevertheless, they liked his online posts so much that they hired him as a consultant.

After dropping out of college and participating in several startups, Siu founded the Hong Kong-based email company Outblaze in 1998. This was his first major achievement. In 2009, he sold the company's cloud division to IBM for hundreds of millions of dollars. During the subsequent economic downturn, Siu used his millions to help restructure the company.

The inspiration for what to do next came from the most unlikely place. Tired of carrying a bunch of Baby Einstein flashcards to quiz his first child, he asked his team at Outblaze to develop a mobile app version. It was downloaded about 20 million times, leading him to create Animoca, a subsidiary of Outblaze, in 2011 to develop games. It was rebranded as Animoca Brands and went public on the Australian Securities Exchange in 2015.

It wasn't all smooth sailing. In 2012, one of Animoca's largest distribution platforms, Apple, suddenly removed all of Animoca's games from the App Store without any explanation. He suspected that his strategy of releasing a new game every week was seen by Apple as "spam." Siu pivoted the company to produce children's games, licensing popular brands like Thomas and Friends, and re-entered the App Store in 2013, until Apple reduced its focus on that category, which dealt a devastating blow to it. (Apple did not respond to a request for comment.) By 2017, Animoca Brands was a failing business.

Then, a co-founder of a game startup that Siu funded introduced him to their new NFT project: CryptoKitties. The virtual cats became an instant success, so popular that they nearly brought Ethereum to a standstill just a month after their launch in December 2017. A few months later, the crypto market itself crashed, leading to the "crypto winter" of 2018, with Bitcoin and Ethereum trading at brief lows of $3,200 and $87, respectively.

Siu was resilient. That year, he attended an NFT conference in Hong Kong with what he called "250 stubborn believers who were very willing to drink our own Kool-Aid." He leveraged that forum to build relationships with some companies that would become his biggest wins: OpenSea, The Sandbox, and Decentraland.

Embracing cryptocurrency made Siu a target for the Australian Securities Exchange, which took a cautious stance on digital assets. The exchange presented him with a stark choice: abandon cryptocurrency or get delisted. "It was terrifying," Siu said. "If you're delisted, there's no exchange willing to look at you." Animoca Brands was delisted in March 2020. (Technically, the company is still "public but unlisted," meaning it operates like a private company with about 2,500 shareholders.)

Despite the bright prospects, the world still hasn't figured out how to regulate cryptocurrencies and NFTs. The controversial "play-to-earn" model and the use of in-game currencies have heightened concerns about gambling, market manipulation, and the exploitation of workers in developing countries, who often rent NFTs from players in more developed countries in exchange for a portion of their income. Some Axie Infinity players, primarily in the Philippines, derive their main income from playing the digital monster game.

Last year, Congress introduced 35 bills related to cryptocurrency and blockchain policy. While the Australian Securities Exchange announced plans to allow cryptocurrency exchanges and ETFs to trade on the exchange, only one was passed. Jack Dorsey's Block (formerly Square) listed there in January. "It's too big to ignore," said Greg Medcraft, a former regulator at the Australian Securities Exchange.

Not everyone is as enthusiastic as Siu. Samson Mow, chief technology officer of Blockstream, said the economics of an "open metaverse" or a collection of interchangeable virtual worlds are unfavorable for gaming companies. Blockstream produces products for storing and transmitting Bitcoin. Mow said, "If Call of Duty sells you some weapons, Ubisoft doesn't want you to take them to Rainbow Six because that would erode their item sales."

"I just don't see it happening in the way people are predicting it will happen, like in (the novel) Ready Player One, where you can seamlessly move," Mow added, noting that blockchain technology has yet to truly achieve the decentralization of Ethereum, the network powering nearly all NFT games, which heavily relies on Amazon's cloud services.

According to coinmarketcap.com, Axie Infinity's main token AXS has lost nearly 60% of its value in the past three months. Electronic Arts CEO Andrew Wilson had previously expressed interest in entering the NFT space, but he walked back those comments during a recent earnings call. Valve, which owns the popular gaming platform Steam, banned blockchain games and NFTs in October. Phil Spencer, CEO of Microsoft Gaming, has stated that NFT games "feel more like exploitation than entertainment."

If the major gaming companies in the world are hesitant, Siu is not. He quickly praised Animoca's upcoming PC and Mac game Phantom Galaxies, saying it will rival AAA game quality on consoles like PlayStation 5 and Xbox Series X. Aside from a minor misstep by Ubisoft, no major publisher has ventured into blockchain gaming yet. But this bold gamble is enough to make a statement.

"I think AAA games are coming, and things will get better from here," Siu said. "That will largely happen."