Re-writing the video game industry

February 2016  |  FEATURE  |  SECTOR ANALYSIS

Financier Worldwide Magazine

The video game industry is no stranger to change and upheaval. From a hardware manufacturing perspective, the story is one of change, and rebirth. Organisations such as Amstrad and Amiga, Nintendo and Sega, have played a major role in the development of the industry and have had to adapt with the times. Microsoft and Sony, the two biggest players in video game hardware, will also have to evolve moving forward.

Software has also evolved over the years as leading games studios change with consumer tastes and technological advancements. Though some major software players such as Bethesda and Electronic Arts have been around for many years, they have witnessed the latest progression of modern gaming. Video games have increasingly moved out of the bedroom, the living room and the parent’s basement and into the public realm. Indeed, some of the most avid gamers can now be found in train carriages, at bus stops and in city centres. Following the explosion in popularity of mobile and tablet devices over the last decade or so, the demographic of gamers has changed enormously, and perhaps permanently.

More and more women, for example, are now playing video games via their mobile devices and through social networks, marking a key shift in the landscape. With this in mind Activision Blizzard, one of the largest video game manufacturers in the world, has turned its attention to mobile gaming. The company has recently announced the acquisition of King Digital Entertainment in a deal worth around $5.9bn.

Activision owns some of the world’s biggest gaming franchises including the ‘Call of Duty’, ‘Destiny’, and ‘World of Warcraft’ series. By acquiring King, the company is strengthening its standing as the largest publisher in the interactive entertainment business. “The combined revenues and profits solidify our position as the largest, most profitable standalone company in interactive entertainment,” said Activision Blizzard chief executive Bobby Kotick in a statement announcing the deal. “With a combined global network of more than half a billion monthly active users, our potential to reach audiences around the world on the device of their choosing enables us to deliver great games to even bigger audiences than ever before.”

In the short term, the deal for King allows Activision to push into mobile gaming, an area in which the company is a relative novice. Only one of the company’s properties has a mobile presence in the US: PC and mobile game ‘Hearthstone’ which has attracted around 25 million players. By comparison, King’s ‘Candy Crush’ saw 474 million monthly active users in the third quarter of 2015 alone. In the context of numbers such as these, the acquisition of King assumes a whole new importance.

In the long term, the deal may influence the wider video game space, not just Activision’s bottom line. The merger of Activision and King is the largest deal in the gaming space since Activision and Blizzard combined for $19bn in 2007 and may help to buck the downward spiral of deal activity seen in 2015. The first nine months of 2015 were particularly barren in terms of M&A activity in the video game sector. Total deal values across investments, M&A and IPOs were down 82 percent year on year in the first three quarters. M&A deals in the games space suffered a drastic decline of around 74 percent.

This stagnation could be broken by Activision’s deal for King, though it is unlikely. In all probability, it would require a number of similar large ticket deals to take the sector out of its slump. The last time the industry experienced a similar drop in deal activity, it took around four years to recover. “We thought that a few big deals could turn things around before the end of the year, and the Activision Blizzard/King deal has certainly done that in terms of the headline figure for games M&A,” says Tim Merel, managing director at Digi-Capital. “It also fits in with the industry structure that has emerged in the last two years, where games leaders will continue to dominate the $45bn mobile games revenue we forecast by 2018. This one deal could be a catalyst for further large scale consolidation in the next 12 months, but it could also prove to be an isolated mega-deal in an otherwise quiet market.”

Rovio Entertainment, producer of hit mobile video game Angry Birds, is believed to be pursuing M&A deals. “There is a clear need for some consolidation to take place here (in Europe), and that is something I’m interested in,” the company’s chairman and biggest shareholder, Kaj Hed, noted in December. “As the competition gets tougher, it requires certain scale. There will be a big change in the sector ahead, because it hasn’t settled yet. We are of course interested in participating when that change happens.”

Given the size of the casual gaming market, and particularly the purchasing power of that casual market, it is somewhat surprising that some of the video game industry’s bigger hitters have not been more active in the casual space.

The speed of technological development in the gaming industry suggests the industry is likely to be a very different place in just 12 months. With more and more revenue being generated in the casual space, further consolidation seems inevitable.

© Financier Worldwide

BY

Richard Summerfield