How will Immutable X become profitable? A quick high-level strategic analysis

Immutable X has recently announced their introduction of protocol fees and revealed its protocol pricing strategy.

But what does that mean in terms of cash flow now and sustainability projections for the future? It’s hard to say, and a very dynamic market environment, but let’s look at some numbers.

We’ll look at the costs and then see how the revenue under the new fee structure compares to it. Finally, we’ll look at market growth projections and determine the opportunity for long-term profitability and a strategy review before we sum everything up.

Scroll to the end if you want to go straight to the summary. You can always come back later up to check the assumptions.

Establishing an assumption for the current burn rate for Immutable X

Important: these are all assumptions and guesses based on the publicly available data.

According to LinkedIn, currently, 250 employees work for Immutable, most of them in Australia. Not everyone works on the protocol (e.g. the Game Studio), so let’s assume only 50% of the employees work on the protocol and the adjacent functions, like BD/Sales/Partnerships, to get more games using their protocol (a conservative assumption). Let’s also assume a reasonable average salary of $80,000 (the actual number is probably higher!).

This leads to a monthly burn of $833,000 per month on salaries. Another conservative assumption of an additional 20% “overhead” would result in ~ $1M in monthly costs.

Introducing a 2% protocol fee

Late last month, Immutable introduced a 2% transaction fee on primary and secondary NFT sales, with a 0.4% going towards staking rewards and 1.6% remaining as revenue.

(The staking rewards weren’t announced, but looking into the details of a recent proposal by IMX, one can find the 0.4% baked in.)

Let’s see what this fee would have generated in the last 30 days.

In the last 30 days, the relevant NFT sales transaction volume on Immutable X was ~$8M. (Data extracted from https://immutascan.io/collections on 14 July 2022, 1.31 pm.). $6.7M coming from the top 3 projects, Illuvium LAND, Gods Unchained and HRO.

A 1.6% share would have made $128,000 in the last 30 days.

Therefore, as it stands today, Immutable X loses $872k per month with the announced fee structure. (I am excluding their share of the staking rewards as I don’t know how much IMX they would stake.)

Additionally, I believe it is fair to assume that Immutable, valued at $3.5B, will continue to add a lot more people to achieve its growth targets so that the cost will go up. While not adding this to my analysis, it is essential to remember when doing a real deep dive and further research.

[Update 15. June 2022: Guru Sundaram pointed out correctly in the comments that Immutable has a revenue share agreement with Starkware, which they partnered with to create their L2 solution. The percentage is not disclosed, but it has a material impact on the analysis. The remainder of this analysis does assume Immutable can keep all the revenue.)

[Update 21 June 2022: Immutable communicates that it will increase its headcount from currently 170 to ~300 people in the next 12 months and double the number by 2025.]

The two deciding factors for long-term profitability

Two main variables determine long-term profitability: market share and market size.

Market size

A very optimistic market size prediction comes from Naavik.co and predicts massive growth from $1.5bn in 2021 to $50bn in 2025 - or 100% CAGR. I am optimistic about the evolution of blockchain gaming despite the current carnage, so let’s start with a super optimistic forecast. :)

Market share

Using the abovementioned on-chain transaction data, we can approximate a relative market share: $8M monthly transactions * 12 = $96M expected annual transaction volume (assuming everything stays at current levels). This results in a market share of ~6.4% assuming the 2021 market size mentioned by Naavik.

Using these variables and data points, we can model a few scenarios

If you want to play around with the values, here is a straightforward spreadsheet I created that you can copy and add your own numbers.

Assuming Immutable X can defend its market share, in 2025 this would equate to annual transaction volume of $50B*6.4% = 3,200,000,000 ($3.2B)

Taking 1.6% fees from that would result in $51,200,000 annual revenue, or $4.26M per month.

Therefore, in the very bullish case of a $50B blockchain gaming market, Immutable X can sustain a 4x growth in its cost base if the market share remains at the current level.

As a comparison, with a 3x market size growth and a 3x increase in market share to 20%, Immutable X would barely be profitable at the current headcount:

$4.5B*20% = 900,000,000 ($900M), which results in $1.2M monthly fees based on 1.6% of transaction value.

What is Immutable’s strategy going to be?

To become profitable today, Immutable X would need to have 7.8x the NFT transaction volume on their protocol.

One of the most critical strategic decisions for Immutable X will be the ongoing definition of their target segments. Who will generate the additional volume?

Will they focus on big games or small games? Or all games? Or even venture outside of gaming NFTs?

For example, a few big games will generate a bulk of the revenue, as we can see today (the 3 top games generate 83% of the total transaction value)—the current collaborations, e.g. with GameStop, hint toward going towards that path.?

However, the larger a game becomes, the more likely it is that the developers decide to create their version to save on transaction fees. Something similar happened to Twilio, whose stock plummeted in 2017 when Uber decided to discontinue the Twilio API because they grew to a size where building their own version was more lucrative.

Twilio overcame the blow by executing its strategy to become the go-to platform for projects of all sizes and especially attracting small-medium-sized companies.

So far, the Immutable leadership team have done a tremendous job gaming NFTs and avoided getting distracted by all the adjacent opportunities. That laser focus, in my opinion, has been the best strategic decision. It helped the entire organisation to focus on the needs of game developers instead of diluting the tools and spreading valuable product, design and engineering resources on adjacent areas like NFT profile picture projects. (There is always room to expand later)

Continuing that strategy provides the highest probability of becoming the de-facto standard for gaming NFTs, which I would expect to have a significant positive impact on the market share.

Summary and final thoughts

With its big cash reserves, Immutable has an ultra-strong foundation to build through the bear market and come out of it as one of the world’s leading blockchain companies with a substantial competitive advantage: a thriving ecosystem as the de-facto gaming NFT solution.

The fee structure can support long-term profitability if, despite the current downturn, market projections are somewhat accurate and if Immutable X becomes the de-facto standard for gaming NFTs.

The ultimate key to success will be determined by how well the team can onboard developers and studios onto their platform. The technical advantage generated by betting early on ZK-rollups will remain for another 6-9 months, at which point the developer and game ecosystem becomes the most valuable differentiator. I expect a “winner takes all” race, and the competition is not sleeping (Polygon, Ethereum etc will all offer similar features).

[Update: This aged well! Only a few days after I posted this, Immutable announced a $500M ecosystem fund. This is 100% in line with the above analysis and I've written an in-depth article about it: A strategic view on Immutable's $500M Ecosystem Fund (WHAT, HOW, WHY?)]

I am looking forward to following the Immutable X journey.

If you enjoyed reading this, please consider leaving a like or sharing the article. Thank you :)

Caveats

- This was a quick and raw analysis of the current state. It is for entertainment and educational purpose only. THIS IS NOT FINANCIAL ADVICE

- I have not spoken about any of the above with anyone from Immutable, so the assumptions are very definitely wrong!

- The goal was not to create an accurate analysis but to put the current fee announcement into the context of market expectations and long-term profitability.

- There are additional strategic factors that I did not include in this high-level analysis. Tokenomics will likely have a big impact, but this would have blown out this analysis even further. Maybe another time!

- Again, NO FINANCIAL ADVICE. Just a whole bunch of my own assumptions and guesses.