Global gaming innovation and M&A opportunity
Dealmaking in the global gaming sector has taken a battering over the last two years. But DC Advisory’s Richard Darlington believes the space is packing a technological punch that is about to hit back.
Content is King when it comes to grabbing headline deals in the gaming sector. But thanks to a growing focus on nurturing communities around games to maximise lifespan and engagement, the gaming services subsector (community management, quality assurance, testing, marketing and development) is poised to return to growth after a rocky two years.
Following the record highs experienced during 2021 to 2022, the gaming sector has been subdued in 2023. According to InvestGame’s Global Gaming Deals Activity report, from the first three quarters of 2024 capital raised by gaming companies in Q1-Q3 2023 was four times lower than the average of Q1-Q3 2021-22, with the number of deals decreasing by approximately 23%. But CVC’s recent agreement to acquire Jagex, a leading developer of community-based games, for a reported £910m (US$1.1bn), demonstrates private equity (PE) appetite for community-driven gaming companies and provides positive signals for the wider gaming sector’s M&A outlook.
The last 12 months have been a period of conflicting reports – record high-profile launches have been countered by news of redundancies and contraction. We believe this is a right sizing to many businesses following a period of exuberance around Covid. With the stage reset, we see a significant opportunity to grow from a base that is materially above pre-Covid levels. Newzoo’s Global Games Market Report expects the global gaming sector to be valued at US$205.7bn by 2026, with a CAGR of 1.3% from 2021 to 2026. We believe this is a huge global market benefiting from tailwinds such as growth in developing countries, the digital transition and increasing cultural significance. In our view, the gaming sector is well positioned to see increased deal activity throughout 2024 and beyond.
2023 global games market revenues
Source: Newzoo, Global Games Market Reports and Forecasts – January 2024
Capitalising on evolving business models
Private equity firms and corporates aiming to gain exposure to the dynamics which are expected to grow the 3.09 billion global active video game players in 2023 to 3.32 billion by 2024 face challenges associated with intellectual property (IP) risk. According to online magazine Game Developer, well-funded AAA studios can spend upwards of US$150m producing and marketing video games, with no guarantee of success. As such, it can be daunting to acquire a gaming developer, particularly if the goal is to produce a portfolio of smaller IPs.
2023 global games market revenues
Source: Newzoo, Global Games Market Reports and Forecasts – January 2024
Approximately 70% of games are now sold digitally, with a growing emphasis on games-as-a-service subscriptions, which can create further barriers to entry, particularly for smaller operators. Once a following is established, changes in business models can offer avenues to partially mitigate these risks. For example, the transition to digital distribution through online stores coupled with the rise of games-as-a-service subscriptions helped with the working capital and distribution headaches of the past. This all may allow developers to focus on IP, but the challenge of standing out in a busy market remains.
Services businesses with potential to gain exposure to upsides from IP
We believe there is significant interest in services companies that have the capability to gain exposure to the success of IP, be it through full-service turnkey development or by providing support to scaling communities under games-as-a-service models. One of the most attractive areas for M&A in the gaming sector for mid-market PE investors will be for services businesses with an opportunity to gain exposure to successful IP launches. An extreme example would be the previously Synova-backed Mediatonic, which sold to Epic following the highly successful launch of Fall Guys – Ultimate Knockout during the Covid-19 pandemic. This deal demonstrated the potential for once services and work-for-hire-led businesses to massively outperform by launching their own successful IP. Businesses that can benefit from what we believe are structural demand tailwinds in the market, while having exposure to upside in a more controlled manner, are highly attractive.
Technological advancements and AI’s impact
The gaming industry's increasing technical complexity can present opportunities for service providers well-versed in the latest technology used to create games. AI is a potential game-changer, offering benefits to creative services by driving efficiencies in content production. Generative AI is expected to accelerate game development, enabling developers to create speech, characters, and environments more rapidly than ever. And it is anticipated that it will play a pivotal role in enhancing user interaction and experience across the gaming industry. Similar to open AI systems powering chatbots and image-creation services, it is hoped generative AI can revolutionise gameplay, systems, non-playable characters (NPCs) and user-generated content. The gaming industry's increasing technical complexity presents opportunities for service providers with a deep understanding of technology and efficient content-production capabilities. Integrating AI tools into workflows may not only increase efficiency but can also enable the creation of more effective content, and potentially lead to higher margin businesses in the sector.
The gaming industry is well positioned for increased M&A activity, driven by evolving user dynamics, technological advancements, and shifting business models. As the industry continues to grow and adapt, strategic investors, private equity, and corporates alike can find promising opportunities by identifying businesses with the right blend of services, exposure to IP, and a forward-looking approach to emerging technologies. The gaming sector, with its global reach and cultural significance, is poised for continued expansion, making it an enticing space for those looking to capitalise on the future of entertainment.