Digi-Capital Global Games Investment Review 2013

January 15, 2013

Games Investment Market Transition in 2013

Digital investment bank Digi-Capital has published its Global Games Investment Review 2013.

Commenting on the Review, Digi-Capital Managing Director Tim Merel said, “The games investment market is in transition in 2013.

Online/mobile games continue to deliver strong growth and returns. Online/mobile games could grow total video games market size to $83B and take >55% revenue share at $48B in 2016F (12.2% CAGR 12F-16F). Games market M&A + IPO returns delivered > 6x investment value return on investment (ROI) between 2005 and 2012. Games IPOs have followed a 2 year cycle since 2005, with potential in 2013/2014 after no substantial games IPOs in 2012.

Global video games sector revenue ($B)regional online/mobile games revenue ($B) global video games investment (incl-IPOs*) ($M)

Games M&A beat all records in 2012, with record $4B M&A in 2012: +18% transaction value, -27% transaction volume (83 transactions), +60% average transaction size ($49M) vs prior record 2011 ($3.4B). Games M&A transaction value was led by MMO (38%), Mobile (27%), Social/Casual (18%), Middleware/Gamification (13%), Console/PC (4%) and Advertising (<1%). Games M&A transaction volume was led by Mobile (28%), MMO (20%), Social/Casual (19%), Middleware/Gamification (19%), Console/PC (12%) and Advertising (1%).

Global video games investment (ex-IPOs) ($M)

Sector M&A 2012

There could be a games investment gap in the medium term. There was $853M investment in 2012 (similar to 2010): -57% transaction value, +9% transaction volume (165 transactions+), -60% average size ($5M) vs record 2011 ($2B). Games investment transaction value was led by Middleware/Gamification (35%), Mobile (31%), MMO (18%), Social/Casual (7%), Console/PC (7%) and Advertising (1%). Games M&A transaction volume was led by Mobile (39%), Middleware/Gamification (29%), Social/Casual (10%), Console/PC (10%), MMO (9%) and Advertising (2%). The decline of >$1B in social games investment equals 94% of the decline from 2011, as VCs abandoned social games investment (excluding mid-core & social gambling). Some prior VC games investors exited the market completely after the social games investment bubble of 2011 burst. We think this has created a disconnect between fundamental online/mobile games market growth and investment.

Sector Investments 2012

Kickstarter emerged to complement, not replace, VC, amounting to less than 6% of all video games investment ($49M – video games only, excluding board games), and was concentrated on PC games (63%) and hardware (23%), with 87% of value in ~7% of projects.

Videogames kickstarters by sector 2012

Video games Kickstarter by value range 2012

There was significant games public market volatility during 2011/2012. Digi-Capital’s Global All Games Index declined to 87 (31 December 2010 base = 100) from the start of 2011, with Console Index decline countering positive online/mobile Indices growth. There was significant volatility across individual Digi-Capital Game Sector Indices (high/low – 31 December 2010 base = 100): Mobile/Tablet (179/80), Social/Casual (141/86), MMO (137/96) and Console (103/61). There is potential for mispricing of both public and private games market assets in 2013.

global games public market sector indices (base = 100)

Games consolidators are changing towards Asia and a new generation of acquirers. 7 of the 10 largest games M&As in 2012 were made by Chinese, Japanese or South Korean buyers, and today’s growth companies could become tomorrow’s consolidators. However, knowledge and relationship gaps remain for M&A/investment between Asian/Western markets and across games market sectors. We are actively working with companies to bridge the gap between Asia and the West, as well as across sectors globally.

Games consolidator pyramid

Industry dynamics are changing at an unprecedented rate. Free-to-play could deliver 55% of mobile/tablet app revenue and 93% of mobile/tablet app downloads in 2016F. The basis of competition across games market sectors is moving towards free-to-play and communal (competitive/collaborative) games and business models. Gamification is attracting significant early stage investment, although much development remains for that market to achieve its potential.

Changing basis of competition by games sector

There is a consolation prize, as the 8th console cycle could start to reinvigorate the console sector in 2013. The console games sector declined in 2012, but the 8th console cycle could start to revitalise the sector if Sony and Microsoft join Nintendo in 2013. The basis of console games competition could become more free-to-play, communal (competitive/collaborative) and cross-platform than the current 7th generation. Our Strategic Review work with console games companies has given us a keen insight into the potentially substantial opportunities which the coming generation might bring for the console sector and the games industry more broadly.

We see great opportunities during this transitional year, taking us and our games clients into new markets and ways of doing business in 2013.”