The Economist special review: video games (Part 2)

This article was first published in The Economist on 9th December 2011

The business of gaming

Thinking out of the box: consoles are no longer the only game in town

THE IDEA BEHIND video games used to be simple. Nintendo, Microsoft, Sony, Sega and others sold consoles at a loss and made their money from the boxed games they produced for them. The punters, mostly young technophile men, bought the games from a shop, played them for a few weeks and then put them away.

Those customers are still around, but they have been joined by a plethora of others. New, more casual sorts of games are being picked up by a mass audience that would previously not have played at all. “In the past few years two things have changed,” says Mr Moore of Electronic Arts. “The first is the proliferation of platforms [on which to play games], and the second is that it’s become so much easier to call yourself a gamer.”

So the industry has branched out into a bewildering variety of sub-sectors and niches. At one extreme, companies in the traditional sector are still charging $50 or $60 for high-end console games with ultra-realistic graphics and cinematic game play. At the other, a shoal of smaller firms is developing simpler, more casual games aimed at a much larger and more diverse group of customers. In between, a mix of established firms and start-ups are testing new ways to develop games and new business models for selling them.

The Economist special review: video games (Part 1)

This article was first published in The Economist on 9th December 2011.

All the world's a game

Video games will be the fastest-growing and most exciting form of mass media over the coming decade, says Tim Cross

IN NOVEMBER 2010 “Call of Duty: Black Ops” was released. Fans in many countries queued round the block to get their hands on a coveted early copy. A lucky few had won tickets to invitation-only release parties which were broadcast live to viewers across the internet. The event had been advertised on billboards, buses and television for weeks. Chrysler even produced a commemorative version of its Jeep. In the event the reviews were mixed, but no matter: the publishers, Activision, notched up worldwide sales of $650m in the first five days. That made it the most successful launch of an entertainment product ever, and people kept buying. A month later the total stood at over $1 billion.

“Black Ops” is not a film or a book: it is a video game. For comparison, “Harry Potter and the Deathly Hallows Part 2”, the current record-holder for the fastest-selling film at the box office, clocked up just $169m of ticket sales on its first weekend. “Black Ops” stole the crown from its predecessor in 2009, “Call of Duty: Modern Warfare 2”. The latest instalment, “Modern Warfare 3”, released on November 8th, set a record of its own with $750m in its first five days.

Games Investment and M&A to Q3 2011 pushing towards double 2010

This article first published on GamesBeat, Gamasutra and GamesIndustry.biz

Games investment bank Digi-Capital has just released the Q3 transaction update of its 2011 Global Games Investment Review (free download at www.digi-capital.com). Commenting on transactions this year, Digi-Capital Managing Director Tim Merel said, “As we expected at the start of the year, games investment and M&A have accelerated again. Even though Q3 2011 has just finished, global games investment so far this year is pushing towards double that of 2010, and global games M&A more than double the level of 2010. There have been blockbuster transactions like EA/PopCap, but there have been many other investments, mergers and acquisitions across sectors with increasing deal sizes. In terms of where the action is, social, mobile, social-mobile, browser based MMO and cloud gaming are leading the charge, and as we expected there has been significant activity originating from China, Japan and South Korea, as well as the US. Companies have been generally less forthcoming on how much they are paying for M&A targets this year, which may indicate that not just the headline games deals continue to have strong valuations. While the macro-environment remains challenging, the fundamental growth in online/mobile games continues to drive games investment and M&A forward. We still believe that now is a great time for the strongest independent online/mobile games companies to either invest for growth, or take advantage of the market to look for strategic exits. In that regard, we’re increasingly taking equity stakes in great games companies that we believe have global potential, as well as our traditional games fundraising, investment and M&A advisory work.”

Investors on where the smart money will go in social games

This article, written by AJ Glasser was first published on Inside Network on July 13, 2011.

Late yesterday at GamesBeat in San Francisco, game company accelerator YetiZen led a panel with top social and mobile game investors on the evolving dynamic of funding in the space. Norwest Venture Partners’ Tim Chang, Digi-Capital Managing Director Tim Merel and TinyCo CEO Suli Ali characterize an industry that’s both converging and expanding on a global scale.

“[Developers] need to think globally from day one,” says Merel. As an investor, he looks for developers that either offer a portfolio of existing games or that already have access to various channels in different countries. These companies have proven traction and very likely also have plans for multiple revenue streams beyond in-game virtual goods sales. He describes the potential behind Rovio’s Angry Birds, which now has a line of t-shirts and stuffed animals generating revenues in addition to actual paid downloads of the game. He also describes the nature of game concepts that can succeed in international markets versus those that have limited appeal due to cultural association; like the various Chinese multiplayer games based on the Three Kingdoms historical period that fail to find traction with Western audiences.

“There is a danger of false positives,” warns Chang. He talks about how many developers create a “red herring” for investors by basing annual revenue expectations on peak traffic months when there are no guarantees that the developer can retain those users, let alone monetize them. This is especially true of copycat games or developers that reskin their original game without investing resources into distribution channels.

The road ahead in mobile games

This article, written by Dean Takahashi, was first published in VentureBeat on July 13, 2011.

Mobile gaming is the wide-open battleground of the entertainment industry. While Zynga dominates social games and big publishers rule console games, the global smartphone game market is still up for grabs.

Since there are potentially billions of users in this market, mobile gaming could become the largest game market of them all. Who will win it?

Smartphone games have been growing as a market since 2007, when Apple’s iPhone debuted. Tablet games have been growing since the spring of 2010, when Apple launched the iPad. Now the fastest-growing mobile market is based on devices running the Android operating system. With triggering events such as the success of Angry Birds, the hit Rovio game that has been downloaded more than 200 million times, mobile game companies are raising tens of millions of dollars. Mobile game companies have garnered significant valuations, particularly overseas.

Tim Merel, managing director at Digi-Capital, says, “The time to act is now.”

The potential of mobile games

 

Mobile games could be a $13 billion market in 2014, according to Merel. Mobile and online games together could be a $44 billion market, or 50 percent of the global $87 billion market in 2014. Today, mobile games are around $8 billion, a small slice of the overall game market, which is still dominated by console games, web games, and Facebook games. (IDC estimates mobile games will grow to $5 billion in a few years; Gartner says that mobile gaming was $6.7 billion, or 10 percent of the $67.4 billion game market in 2010; the estimates vary, but few doubt mobile games will have a great growth rate).

How will a huge mobile game market come about? That’s one of the questions we’ll explore at GamesBeat 2011 on Tuesday and Wednesday at the Palace Hotel in San Francisco. We’ve got 80 of the game industry’s finest minds focused on the evolution of mobile gaming. We all want to figure out how to connect the dots in mobile games.

The great games market split: the Big V

We are entering a world where the games market is fundamentally splitting in two, like the media market of a decade ago. Back then what we now call "old media" scoffed at "new media" upstarts for giving away content, bizarre business practices, and products and services which made no sense to the wise old birds. "They'll destroy more value than they'll create," was the mantra.

Well welcome back to the future.

Today's games market is fundamentally splitting into "Value" and "Volume" markets, both by sector and geography. The two-speed market this is creating may have more rapid and profound effects on the games market than it did on the media market, with meteoric rises for some and slow going for others.

Global Video Games Investment Review 2011 – June Transaction Update

Games investment bank Digi-Capital (www.digi-capital.com) has just released a quarterly transaction update of its Global Video Games Investment Review 2011 http://slidesha.re/dJwTaX. Commenting on the update, Digi-Capital boss Tim Merel said, “As anticipated, games investment and M&A dealflow has accelerated again. We’re seeing some interesting trends emerging so far this year:

1. MMO M&A is increasing in scale, with Summit Partners/TA Associates/Bigpoint ($350M), Changyou/Shenzen 7Road Technology ($100M including earn out) and Perfect World/Cryptic ($50M) continuing the trend kicked off earlier in the year by Tencent/Riot (est. $350-400M);
2. Social games investments are increasing in both volume and scale, such as Kabam ($115M in two rounds since January), Wooga ($24M), Crowdstar ($23M) and Funzio ($20M);
3. There has been a significant increase in social-mobile games M&A, such as Gree’s acquisition of OpenFeint ($104M), and investment, including Papaya Mobile ($18M) and TinyCo ($18M). In non-social mobile games, Rovio impressed the market with its $42M investment;
4. Chinese, Japanese and South Korean games companies are increasingly seen by Western firms as leading industry consolidators, so critical when companies are selling themselves;
5. The gambling/social games overlap is bringing companies from either side into each others’ markets, such as Caesars/Harrah’s/Playtika ($45M) and Zynga/DNA Games/Market Zero; and
6. Console sector consolidation has been increasingly focused on repurposing quality console developers to online/mobile games markets.

Our global dealflow leads us to expect these trends to continue through H2 2011, and we remain very bullish on online and mobile games growth and investment - now is a fantastic time. We are seeing significant appetite from Chinese, Japanese and South Korean games companies to acquire and invest in strong Western online and mobile games companies, but as our Chinese operating partner often reminds us building the right relationships remains critical. Market innovation continues across the piece (particularly in social-mobile games), with US, European and Asian companies developing great businesses built on great games. We’re also privy to a groundswell of games IPO activity poised to come to market in the next 12-18 months. As people have come to expect, we remain long term bears on the pure console market, despite recent and anticipated hardware launches.”

Tim will be discussing the social-mobile games market and investment at both GamesBeat/MobileBeat (together with Norwest Venture Partners) in San Francisco and Casual Connect (together with Playfish, TinyCo and W3i) in Seattle in July.