Interview by Phil Elliot, published by GamesIndustry.Biz on 16 February 2010
Q: From an investment perspective, what are the prevailing trends that you see?
Tim Merel: It’s no secret that the big are getting bigger, the middle is getting squeezed and the small end holds a lot of potential. The scale of the videogames industry has been understood by most investors for a while, but the dynamics are changing incredibly quickly.
At the big end the major franchises are attracting increasing amounts of investment and generating increasing returns, but this doesn’t come without risk. The gaming equivalent of Eddie Murphy’s Pluto Nash ($100m cost, $4.4m revenue) is what scares the money men, so the risks of launching new franchises or making a mess of existing franchises becomes enormous.
The concern is that this end of the industry goes the same way as Hollywood, with accountants and lawyers running the show and the creatives and techs being managed like execution monkeys. Hopefully the majors are smart enough not to let this happen.
In the middle, where good-but-not-great games often lurk, the scale of blockbusters can’t be matched in terms of investment. This can have an impact on game quality, although it doesn’t have to, but definitely has an impact on marketing and distribution. The economics of this space have become increasingly challenged, so from an investment point of view what should be a lower risk investment actually becomes higher risk than a blockbuster franchise.
In other words, you invest less, but dollar for dollar the returns you are likely to see for the risk tend to be worse. This is part of the reason why many of the majors are concentrating on their big franchises to the exclusion of almost everything else. It is also driving many good independent studios out of business on a global basis, which I think is very sad for some excellent shops and for the industry generally.
At the small end, and I would include casual and mobile games here, there is a large investment opportunity which the investment community and the majors are increasingly recognising. Think of EA buying Playfish or Bigpoint being bought by GMT and the GE/NBC Universal Peacock fund. However, I don’t think the investment model for this sector works fully yet, as many players in this space have very high valuations compared to relatively low revenues and profits.
I’ve seen companies where this is justified by high growth and substantial revenues, but others where I really struggle to understand why they are worth what someone is paying for them. The right balance between risk and reward in this part of the market hasn’t yet been properly sorted by the majors or many in the investment community, which of course means that there is a real opportunity for those that do figure it out.
Q: So where do you see the investment opportunities?