Digi-Capital Global Games Investment Review 2013 – Q2 Update

July 17, 2013

Mobile has fundamentally disrupted the games market

Investment bank Digi-Capital has published the Q2 2013 Update to its Global Games Investment Review (free Executive Summary at www.digi-capital.com).

Commenting on the Review, Digi-Capital Founder Tim Merel said,

“Mobile has fundamentally disrupted the games market across sectors globally.

Mobile internet is the most disruptive technology today. Mobile internet could create up to $11 Trillion in value globally by 2025 (across all industries, not just games), built on a well developed mobile tech stack. Mobile internet connected devices, mobile broadband subscriptions, mobile data usage and mobile apps growth are driving disruption across all tech related markets. For games, the transition to free-to-play and communal gameplay is changing sector dynamics, delivering  up to 10x-20x revenue uplifts for market leaders.

ios/android (mobile/Tablet) Usage

Mobile games dominate mobile app usage, downloads and revenue. Mobile games consume 43% of mobile app usage across iOS/Android tablets and smartphones, and accounts for 67% of all tablet usage. Mobile games have grown to ~72% of mobile app revenues in 2013 (from ~40% in 2010) and ~40% of mobile app downloads (iPad/iPhone). Most interestingly, mobile games monetize ~4x more effectively than all other mobile app categories combined.

Global Games of Share and Revenue

Despite fundamental market growth, games M&A to Q2 2013 has declined from >$4B record in 2012. Mobile/online games could grow total video games market size to $83B and take >55% revenue share at $48B in 2016F (12.2% CAGR 12-16F). Games M&A value to Q2 2013 declined by 47% pro-rata from 2012 to $1.1B, with fewer large M&A transactions reducing average deal size by 54% to $22.9M. Games M&A to Q2 was dominated by mobile (73% M&A value, 21% M&A volume) and consolidating console after bankruptcies/disposals (19% M&A value, 44% M&A volume).

Sector M&A to Q2 2013

Games investment to Q2 2013 is recovering from 2012’s decline, but is well below $2B record in 2011. Games investment value to Q2 2013 grew by 63% pro-rata from 2012 to $706M, but is still well below the $2B record investment levels of 2011. Games investment volume to Q2 2013 grew by 7% pro-rata from 2012 to 89 transactions, with average investment deal size up by 51.7% pro-rata from 2012 to $7.9M. Mobile games (56% investment value, 37% investment volume) and tech/gamification (35% investment value, 35% investment volume) dominated games investment to Q2 2013.

Sector M&A to Q2 2013

There is a significant investment gap in the games market. Post-Zynga IPO, many VC games investors have exited the games market completely. There is now a mismatch between investment demand and supply, with capital markets not taking advantage of long-term growth, particularly in mobile. There could also be mispricing across both private and public games markets in 2013.

Global games public market sector

Asia’s potential dominance is accelerating vs Western markets. 8 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 and Western markets, and across games market sectors.

Asia’s potential dominance is accelerating vs Western markets

PS4 and Xbox One launches in Q4 2013 could turn around console decline, but questions remain. Console market decline continued (-25% total, -44% software to May 2013), despite the Wii U launch. Sony PS4 and Microsoft Xbox One launches in Q4 2013 could revitalise the market, but uncertainty persists about the size of potential installed bases for next-generation consoles, level of shift to digital distribution, and impact of free-to-play business models.

The Big V is accelerating the split into Value and Volume Markets

In summary, in our experience we haven’t seen a market as large, growing as fast as mobile apps/games. We think this could be the highest growth, large technology market today. Yet capital markets aren’t taking advantage of the opportunity. Particularly in mobile, we think the opportunity cost of not investing is potentially more significant than the investment itself. As well as being a major opportunity, mobile disruption could pose a significant risk for those who don’t learn how to play.”

Tim will be presenting highlights of the Review at ChinaJoy in Shanghai.