Analysts discuss the biggest developments of the year, with a particular focus on mergers and acquisitions and consumer spending.
2020 was a standout year for the video games industry (for somewhat obvious reasons), with people investing more time and money into the games they enjoyed and even newcomers to the gaming space getting to grips with the wealth of entertainment it offers for the very first time.
2021 has been a year dedicated to maintaining that momentum, as well as getting back on track for any projects and strategies that were delayed by the pandemic. The boost to the games market also opened up new opportunities that may not have occurred, which partly explains the jump in games-related investments or mergers and acquisitions activity we’ve seen in the past year.
Newzoo’s games market analyst and writer Rhys Elliott observes that, for some of the industry’s biggest players (such as Tencent, Embracer, Microsoft and Sony), the past year has merely seen the continuation of their M&A strategies, but others have been able to aim higher than they would have before.
“Following strong revenues last year and at the beginning of 2021, publishers are now looking to expand into new countries, genres, and platforms to continue their growth trajectories,” he explains. “M&A is at the heart of these strategies. At the same time, IDFA-related challenges mean mobile and adtech companies looking to acquire or get acquired. “
Dr Serkan Toto, CEO of Tokyo-based consultancy Kantan Games, adds that the sheer number of deals that have been closed in recent years, including 2021, is in itself one of the biggest trends seen in the games market.
“Compare that with the drought we were in after Zynga's botched IPO in 2011, and it's really like night and day,” he says.
“I think another big trend is the extremely high level of internationalisation we are seeing: Zynga bought not one but multiple studios in Turkey, Australia's Aristocrat now owns Israel's Plarium, and Tencent just made heads turn in Japan after acquiring a local studio called Wake Up.
In terms of M&A, gaming will most probably stay hot in the next few years, as investors have figured out it is not only the entertainment industry's biggest but also the most dynamic vertical.”
The mergers and acquisitions seen in the console space have been particularly interesting. Microsoft has been on a spending spree for years, so far culminating in the $7.5 billion purchase of Bethesda parent ZeniMax Media - a deal that closed earlier this year.
Its main rival Sony, however, has seemingly been more cautious, although even the PlayStation firm has made several notable deals in the past year. Since January, the platform holder has acquired Returnal creator Housemarque, long-running partners Nixxess and Bluepoint (which handle PlayStation’s PC ports and HD remakes respectively), and setting up Team Asobi (the group behind the acclaimed Astro’s Playroom) as a separate studio. Even as recently as last week, it acquired Valkyrie Entertainment, a Seattle-based developer that has been supporting titles such as the upcoming God of War: Ragnarok.
“This year, content and more broadly brand identity have been at the core of many AAA publishers’ M&A strategy,” observes Elliott. “Take Microsoft’s gaming division, for example. Xbox has long faced criticisms for a lack of content on its platform, and M&A has helped the company leap over those hurdles. Microsoft’s console-industry-disrupting acquisition of ZeniMax Media not only adds more value to the Game Pass service, but it also bolsters Xbox's IP portfolio with already-popular IP like The Elder Scrolls, Fallout, Doom, and more. This almost solves Xbox’s content problem in one fell swoop, adding to the company’s previous acquisitions of Double Fine, Ninja Theory, inXile, and Obsidian. These acquisitions will begin bearing fruit—and turning the tide of Xbox’s exclusivity challenges—in coming years.
“Sony, however, is looking to expand the PlayStation brand’s reach by releasing more titles on PC - as outlined in a recent investor relations document. That same document revealed that the PC port of Horizon: Zero Dawn brought a +250% return on investment for the company. Acquiring Nixxes, for example, and using its expertise, Sony is likely hoping to streamline the process of porting games to PC, potentially increasing ROI on upcoming PC ports.
“In the end, M&A and investment is a more efficient and less risky way for publishers to bolster their content offerings, enter new genres and markets, and facilitate growth. But it is worth highlighting that many M&A deals fail or do not met the set criteria—either because expectations are too high or success criteria are impossible.”
Elliott also points to consumer spend as an interesting area of change in 2021. Given the surge in spending on video games in 2020 while people were under lockdown, he notes that many industry folks were concerned that this would “take a massive hit” this year.
“However, consumer spending on games has proven resilient - even amid hardware supply constraints, game delays, other COVID-19-related aftereffects, and privacy changes on mobile such as IDFA’s removal,” he says.
“Consumers have generally continued to spend on game software throughout the first six months of 2021 - even more so than in 2020 in some cases. While the ongoing global semiconductor shortage will impact hardware availability even into next year, consumers have and will reallocate their gaming budgets to titles on their current hardware for the full year of 2021, just as they did in H1.”
Newzoo has forecast that revenues for the global games market will reach $180.3 billion, 1.4% up on 2020’s revenues. The company is attributing this expected growth primarily to the mobile market, which is predicted to generate $93.2 billion in consumer spending on its own (up 7.3% year-on-year).
The PC and console segments are both expected to take dips of 0.8% and 6.6% to $36.7 billion and $50.4 billion respectively. PC’s decline has been offset somewhat by the abundance of live-service games like League of Legends and Final Fantasy, whereas the hit-driven console market has been hit by pandemic-induced delays.
“The AAA release calendar has been thinner this year, so Nintendo and PlayStation may struggle to replicate their unprecedented 2020 success,” Elliott explains. ”But revenues are still high this year. It’s just that last year saw one of the biggest single-console-exclusive hits in recent memory, with Animal Crossing: New Horizons selling tens of millions of copies and continuing to sell throughout the entire year. The Nintendo Switch was also a natural entry point (back) to games for lapsed and new gamers, and blockbuster hits like The Last of Us Part II, Ghost of Tsushima, and Spider-Man Miles Morales boosted PlayStation in 2020. Consumer spend on consoles remains high this year.”
Kantan Games’ Toto touches on several other growth areas for the games market over the past year. There has been a lot of investment in companies working to bring blockchain, NFTs, cryptocurrency, the metaverse or a combination of these things into the gaming sphere, while esports and streaming services have also seen increased investment.
“It's also now a common occurrence to see institutional investors like private equity firms taking part in game company investments in a major way, a phenomenon that would have been almost unthinkable just a few years ago,” he continues.
“One of the biggest trends is the increased significance of the free-to-play and gaming-as-a-service business model across all platforms. While free-to-play has taken over mobile gaming at a very early stage, it took years for consumers to embrace the concept on console in particular.
“Today, console gamers still spend the typical $60 on a single game, but there are huge blockbusters on that platform that are entirely free-to-play, such as Apex Legends from Electronic Arts or Call Of Duty - Warzone from Activision Blizzard.
Consumers on all platforms today have not only accepted the idea of microtransactions or in-game-purchases but have also warmed up to subscriptions (especially Xbox Game Pass) or other types of recurring payment models (i.e. the monthly billed Battle Pass that is extremely popular in Fortnite). It can be expected that more and more dollars even from hardcore players will flow to games using monetisation techniques such free-to-play or subscriptions in the future.”
It’s an understatement to say 2021 has been a busy year on the business side of the games industry, but with these waves of investment now signaling multiple potential trends and strategies for the near future, it will be interesting to see how the market continues to grow in 2022.
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