Three reasons investors love games right now
The last few weeks have been nothing short of spectacular in terms of funding announcements and acquisitions.
Just last week Nordisk Film acquired Avalanche, Zynga bought Gram Games (maker of 1010!), and NetEase invested a $100MM in Bungie.
Where the fin bros of the world have long been preoccupied with industries much less exciting, the lion’s share of their attention tends to go to the Big Four: Activision Blizzard, Electronic Arts, Take-Two Interactive, and Ubisoft. (Maybe there’s some love for Tencent, but that one is already much further outside of the usual investor comfort zone.)
That makes financial sense, yes.
What the most recent earnings round has taught a lot of them is that digitalization is finally here for video games. The industry is now largely a service-based business and is shedding its product-based practices. There’s a significant upside to this. For one, it facilitates new revenue models (e.g. micro-transactions, free-to-play). This makes for a more lucrative and less volatile flow of capital.
Second, it cultivates more innovation as a broader range of game companies have access to a sustainable audience base. Newcomers can carve out a living in markets like PC and mobile gaming that was previously impossible. This allows for innovative games to see the light of day.
And third it allows publishers, especially big ones, to explore growth opportunities beyond their physical units and thereby reduce their exposure to traditional risk profiles. For instance, Ubisoft managed to sidestep the looming threat of Vivendi’s empire building, in no small part due to the publisher’s ability to remain financially prosperous by embracing its “digital transformation.”
Legacy Publishing Done Digital
To put this in perspective here’s what the recent earnings looked like for the big four:
- Ubisoft was one of the big winners this earnings season and reported record levels of sales and profitability. Driven by the success of Assassin’s Creed and Far Cry 5, the publisher increased its annual sales for 2017 by +19% to $2.04bn. Digital revenue was up +38% at $1.17bn and now accounts for 58% of total (up from 50% y/y).
- Take-Two Interactive now has 81% of revenue coming from digital channels. Yes, the firm came in a little light with net bookings of $411MM (+1% y/y) but that’s mostly because physical sales are dragging a bit. Digital grew +12% to $333MM. Grand Theft Auto V has shipped over 95MM units over its lifetime, which is just ridiculous.
- Activision-Blizzard reported earnings of $1,384MM and came in well above Wall Street’s expectations. Investors have been mostly concerned with how Fortnite’s success might impact the legacy publishers’ ability to claim mind and wallet share. The very first title mentioned on the call by CEO Kotick was Fortnite in an attempt to dispel concerns.
- Electronic Arts, last but not least, reported revenues of $1,255MM for the quarter with Live Services accounting for $679MM and up +31% y/y. Overall the publisher has managed to adapt well to the new digital environment, at least enough to beat analyst expectations and convince them of sufficient upside for the remainder of the year.
Digitalization has re-energized the attention for interactive entertainment from financial investors. What used to be a rather predictable, hardware-driven, seasonal business has become more high risk/high reward and has successfully infected money managers with FOMO.
Next, there’s money in the privately-held hills, too. What Pokémon GO didn’t do, Fortnite did: convince the broader financial community that video games are not a fad but a mainstream form of entertainment. Suddenly the math makes sense: offering innovative game play with a broad appeal, that is platform-agnostic, and promoted by an enormous network of streamers equals big happy success. It is no surprise then that venture capitalists are popping up all over the place looking to get in on the action.
And emergent categories like esports and gaming video content are quickly becoming relevant additions to the games industry as well. Extending the experience beyond just playing, fans now have different ways to consume and participate in interactive experiences. On the short-term this means greater exposure. On the long-term this will likely change how we think of video games altogether.
It is clear that the venture capital community has finally discovered interactive entertainment. And certainly it’s a great time to be in the games business. (For redundancy’s sake, here’s what we learned when we raised money last year.)
It leaves the question: who is going to deliver on all that promise? Or, how will you differentiate yourself from all the other well-funded industry participants?
But perhaps it doesn’t matter when the first generation of super-successful firms like Mixi starts allocating close to a billion dollars for investments and acquisitions. As gaming grows into a more mature industry, it is also going to inherit the challenges common to established entertainment markets. Hype-cycles are one of them.
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