What’s Going on?
I’m not sure the games industry has ever been in the center of things like it is today:
The giants fighting over fees (Epic - Apple)
Remarkable IPO’s. Unity is currently at a $25B valuation
Spac opening new growth and investment opportunities. Draftkings followed by Skillz
Fundraising taking on new heights, i.e Playco
Tech leading companies taking further steps to becoming global Game giants. Amazon launching Luna
I wanted to share a short (personal) point of view on all the above.
Tech Giants Fighting
Store commissions in general have been a hot topic for years, on the developers front they are contributing too much to the store and on the storefront those are justified as they are providing the infrastructure for Games to reach their gamers. Where the truth lies is a matter of perspective but I think a few things are facts that should be discussed.
30%, this has been the amount for a long time. The fact that it is a status quo raises questions on has this been revisited and analyzed to the necessity of 30%. Possibly with advanced tech while keeping healthy margins for the stores (as they are running a business) it could be reduced?
Discoverability, marketing costs are increasing year after year. If I go back to my days at Google I think CPI growth was double digit. This has to do with the ability for very smart targeting but that’s for a separate post. The question is, how much cost of acquisition (discoverability) is saved for the developer due to the fact that there is one defined market place to find new games. Think about it when promoting a website, besides building the brand and intelligent UA you need to reach a designated website while in our case this narrows down very much “where you go looking for the next game” and it is filtered to categories, genres and in many cases personalized. So the fact that on Amazon/Airbnb or any other market place we pay commissions is ok? I know fee levels are different.
New stores/platforms, the alternatives are starting to rise. Look at Epic Store and Unreal engine, Steam, Manufacture stores (Samsung etc.) Possibly the leadership of Google and Apple on mobile will now meet severe competition and will allow more competitive pricing. Also we do see stores embedded in stores, like the Roblox app on IOS. As consumers we will benefit for sure from alternatives that could expose us to new content especially if they are related to our taste. The formation of new platforms and stores has enhanced in the past few years and we have yet to see the economical change although it’s coming. So yes developers are commission sensitive and may pick engine/store based on the commission attractiveness.
So I have no idea who will “win” or “lose” . I do know that the fact that it is questioned and argued between leading companies in this space is a right thing and competition will at some point allow more games to be developed which is great for consumers and great for the ecosystem. As an investor this will have an impact of course on valuations and profitability of companies as less store commissions mean more directly to the bottom line, so keen to see where this lands.
IPO and Spacs
I have read a lot recently that the pandemic fast forwarded the Games industry by 3-5 years. On a consumer level I totally agree, people are playing more, diversity of content is growing and we see the blur between platforms vs. content. I would argue that the same goes for the stock markets. I would not consider myself a market expert and fully understand that we are living in a geopolitical, health uncertainty time but if we put that aside a few things are clear.
Games are the fastest growing entertainment source globally, and day after day more people are playing and investing in games.
Platforms are key, (i.e Unity, Unreal) as they allow more content to be developed and time to market has dropped significantly.
Games are expensive, and the more we move forward the more we will see consolidation - meaning that future value should be embedded into valuations.
Now, does the above justify or not the price? To be honest I have no idea, I do know as an investor who has invested in several studios developing games on Unity I must say the flexibility of the platform and the capabilities of building uniqueness vs. infrastructure highly support our portfolio.
On Spacs specifically, I think they are great. A new way for investors to gain value and a simple (relatively) way for entrepreneurs to exit and grow. I have been close to Draftkings for the past few years and although an amazing company before, the combination and new opportunities that grew out of the formation are super exciting.
If you are a game studio and considering fundraising I have one simple thing to say about this - fund raise! The amount of capital that is now in the market seeking for game opportunities is unbelievable. Think big, vision, team and see how you can test grounds fast. I highly recommend (and of course I’m biased) but truly believe in it, if you are in your early days try to pick the right partners/investors to work with. It is super important they/we understand games, understand what it means building games and what metrics, content and data points mean. Wrong investors could take you “off course”. This is way more important than valuations or bits and bites in the early days. Later on of course capital and valuations play a super important role. The market is not in the same place it was 6/12 months ago, so if needed revisit your plans, strategies and act accordingly. If you are an amazing team, building amazing Games no matter what stage feel free to reach out to firstname.lastname@example.org
So the fact deals are getting better and bigger goes without saying, but more importantly deals are defining new strategies. Let's take the Microsoft deal acquiring Bethesda. For those who don't know, Bethesda is one of the largest and most famous AAA studios out there today. I was asked recently in an interview what I think is the most important trend in Games and my simple answer is tech is becoming a commodity. Think about this, we use to develop games for a specific console, PC, mobile but who really cares. I think we can all agree that content is King. Well if you look at the tech giants they understand it as well, everyone wants to play multiplayer no matter where and on what they are playing. XBox is great but is it that different than other platforms, consumers are consuming content not devices. With Microsoft acquiring such a strong developer with exclusively unique content it is very clear where things are going. So I expect we will still see exclusivity for a certain (time to create differentiators and selling points) but over time the more diverse the game is the better. The more people can play together regardless of platform, size, location will enhance the experience. And 5G will only accelerate this…
On the growth M&A like Zynga with the well respected M&A of Peak. Well that is one of the reasons I started VGames. Launching games is hard, trying to aim to the right flavor of the market, on the right timing, with the right capital. To do it again and again is super difficult and actually very few companies succeed. When talented teams build amazing games they are prospects for acquisition regardless of size, those who enhance that don’t only earn incremental revenue and EBITDA but new cultures and new genres are created and broader the scope of current portfolio.
I’ll address the cloud platforms in one of my next posts, I have a lot to say and share on that front. As you probably understood I truly believe and am privileged to be part of the ecosystem, I think with all the challenges the world is facing, the opportunities for Games being a vast source of entertainment are greater than ever before. Lets capture them!