Money Games: Tencent

September 2010

This article was first published by Games Industry.biz, on Sept 14, 2010, as part of Tim’s monthly column ‘Money Games’.

As the business of videogames moves ever more into the spotlight, GamesIndustry.biz is pleased to bring you a new monthly column from Tim Merel.  Each month he’ll be examining a subject or sector of interest, beginning here with China-based company Tencent – and why it could be the biggest videogames company you might not have heard of.

Who am I?

Let me start by apologising – I used to be a lawyer, then I worked for Rupert Murdoch… and now I’m an investment banker. But – I’m also a software engineer, I write adventure stories, and I play a mean guitar, so life is a balance!

We’re starting my monthly column with a profile of the greatest games company you may not know, Tencent. “No!” I hear you cry. “Surely Activision Blizzard, Electronic Arts, Take-Two or Zynga is the greatest?” Well, this all depends on your perspective, and when your perspective happens to be money, things change.

So who is Tencent?

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Online and Mobile Games should generate more revenue than console games

August 2010

First published by Venture Beat, on August 10, 2010 (reappeared in New York Times).

The video games industry is big and getting bigger. But it’s changing. Console games are getting riskier to make, while online and mobile games are taking over the market (see my updated Global Video Games Investment Review, which I’ll be using to open GDC Europe).

Today online and mobile games generate about a third of all games software revenues globally. In five years’ time they are forecast to generate 50 percent of all games software revenue, or around a fifth more revenue than pure console games. This morning, market researcher iSuppli said that cell phone games are growing fast as console and handheld games sputter. Whether you have faith in the forecasts or not, executives from the major U.S., European and Asian publishers all tell me that this is what keeps them awake at night.

What excites me about the online and mobile games markets is that they are both high-growth and profitable, which is pretty rare. The leading competitors are growing revenue 100 percent-plus annually while also delivering 20 percent to 30 percent EBITDA (earnings before income tax, depreciation and amortization) margins. Add to that a fragmented industry structure, no dominant leaders yet, plus clear strategic exit options, and it looks like this is the time for strategic game and media companies, as well as financial investors, to invest.

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‘Time is right’ for mobile and online investment: GDC Europe Presentation

July 2010

Interview by Phil Elliot, first published by Games Industry.biz on 27 July 2010, ahead of opening presentation at GDC Europe in Cologne, August 2010.

Tim Merel will be discussing the opportunities for investment in the videogames space at next month’s GDC Europe, taking place in Cologne.

According to the investment bank’s director, the mobile and online sectors are ripe for investment, and he’ll be outlining some of the findings from the company’s updated Global Videogames Investment Review.

“The videogames industry is big, getting bigger and changing, with console game costs, revenue and risks accelerating and online and mobile games growing and fragmenting the market,” he said. “Investment dynamics are entering a new phase, with growth investment opportunities in online and mobile games, as pure console sector growth is flat (and risky).

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Jens Uwe Intat to feature in top investment session

April 2010

This article was first published by Games Industry.biz on 23 April, 2010.

Electronic Arts’ European boss, Dr Jens Uwe Intat, is to headline a series of key figures in an investment panel session to take place next month, hosted by Tim Merel and the London Business School.

Intat will feature alongside other games people – including Bigpoint chairman Simon Guild, Spil Games CEO Peter Driessen and Rebellion CEO Jason Kingsley – as well as several major names from the world of finance and media.

Romain Gonthier, director of private equity firm Veronis Suhler Stevenson, and Megumi Ikeda, executive director of venture capital business GE/NBC Universal Peacock Equity will both attend, as will Time Warner’s director of strategy and corporate development, Benjamin Vedrenne-Cloquet.

The event, taking place in London on May 24, is invite-only and aimed at the senior members of the videogames business.

“We are hoping to bring together deal and decision makers from all sides of the videogames and investment industries, to find new deal opportunities which they might not see otherwise,” said Merel of the event.

In addition to the panel session itself, there will also be networking time before and after the main event, to provide the opportunity to meet a host of directors, CEOs, CFOs and partners from games companies, VC and private equity firms, and major media companies.

Video games investment trends and opportunities: interview in Games Industry.Biz

February 2010

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?

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