Tuesday, 22 February 2011

Financial Times article: China's got game

This article was first published by Tim Bradshaw of the Financial Times on 22nd February 2011.

Powered by social networks and mobiles, Chinese video games are set to topple America’s lead as the world’s largest gaming market, according to research by Digi-Capital, a boutique investment bank.
Its new report predicts that revenue from online and mobile games will grow from a third to a half of the industry’s total revenues, at around $44bn, by 2014.

Within that, China is predicted to make up almost half of sales, meaning the Chinese games market will be a quarter of the world’s total by 2014, from around 12 per cent today. Over the same period, the US’s share of the games market will fall from 26 per cent to 22 per cent.

Meanwhile, sales of traditional console games – the part of the business led by Activision-Blizzard and Electronic Arts– will be flat or even down.

“We expect to see Chinese companies as major games consolidators in 2011,” says Tim Merel, managing director of Digi-Capital. “Tencent’s Riot Games acquisition announced in February is a portent of more to come.”

Tencent’s domestic market already delivers huge volumes of online gamers – 20m simultaneous players at peak time. Mr Merel predicts an 18 per cent compound annual growth rate for online and mobile games until 2014, powered by an influx of venture-capital investment.

He contrasts the 50 per cent gross margins enjoyed in online games from the likes of Tencent, Shanda and Giant Interactive with the $20m investments required to make a blockbuster console game, which needs to sell between 500,000 and 1m units just to break even.

Little wonder, then, that venture-capital investment is swinging behind the likely winners in online and mobile gaming. Fundraisings returned to 2007 levels last year, Digi-Capital says, up 52 per cent on 2009.
Chinese games companies such as Shanda, ChangYou.com and Giant are already achieving billion-dollar stock-market valuations.

“Tencent’s market cap is substantially more than Activision Blizzard, Electronic Arts,  GamesStop, Take2, THQ, Atari, Game Group and Ubisoft combined,” Mr Merel says, at around $50bn.

As such, he expects Asian companies to drive more of the international consolidation as they push outside their home markets in the coming years.