Major global video games investment review

Press Release 29th March 2010

Tim Merel of IBIS Capital, an investment bank focused on digital, media and communications, released a major global review of video games fundraising, investment, M&A and JV opportunities on 29th March 2010. The full review can be found at

The review focuses on fundraising, investment, M&A and JV opportunities in video games (including console, massively multiplayer online <“MMO”>, casual online, mobile, online gambling, skill based, and in-game advertising sectors) for industry players and investors (including major and independent video games companies, VC and private equity firms, and major media companies). The review also includes industry and sector dynamics, segmentation and economics (including public company valuations, recent M&A and private placements).

Commenting on the review, Tim Merel said -“The video games industry is big, getting bigger and changing, with console game costs, revenue and risks accelerating and online/mobile games growing and fragmenting the market. Investment dynamics are entering a new phase, and deal activity is being driven by subsector consolidation.”

On the pure console video games sector–

“The pure console sector will remain the largest, low growth sector, where major video games companies have converged on“fewer, bigger, faster” video game franchise refreshes. This makes perfect sense in the short to medium term, as it maximises earnings and minimises risks. However it is a high risk strategy in the long term, as churning out the 25th incarnation of most franchises won’t cut it. If the games business is all about innovation and new unimagined games experiences driving growth, the majors risk becoming like old media companies. Cash generative, but declining and cost driven.”

On why the next console cycle may be the last–

“Downloadable content (as with Valve’s Steam) and actual delivery of PS3/Xbox360 quality games via broadband without a console (as with the anticipated OnLive launch) are challenging traditional game distribution and console hardware platforms. There are concerns about bandwidth requirements and usage restrictions, but increasing broadband speeds in developed markets should address these in the medium term. So while it appears that there should be an 8th console cycle starting in 2013-14, there are now question marks over whether there will be a 9th console cycle at all. If the next console cycle is the last, it would create potentially significant long term issues for Sony, Microsoft, Nintendo and GameStop amongst others.”

On casual online and mobile video game sectors, and what they mean for major publishers–

“Casual online and mobile games are both high growth investment opportunities, but the majors aren’t structured for these markets. Major publishers’ core competencies focus on management of $20m+ serial, high risk, complex developments, launches and commercialisation. In contrast, casual online and mobile games require rapid, multiple, small scale parallel development platform investments.

Large scale casual online/mobile M&A is high risk, as these markets are early stage and fragmented, with low barriers to entry. Social game acquisitions are particularly high risk because of their primary dependence on Facebook distribution. EA bought Playfish for $400M to leapfrog the market, yet despite strategic and operational synergies the risks remain significant. Then again, EA bought Jamdat in late 2005 for nearly $700M and now has 1/3 of the US mobile games market.

To avoid the risks of large scale M&A, dedicated game funds (as opposed to the standard publisher model) offer a lower risk solution. These would focus on equity investment in casual online and mobile parallel development platforms, rather than individual games (effectively a VC A round). The strongest developments would then be backed with significant marketing and distribution support (as a B or C round). Corporate VCs Intel Capital and SAP Ventures have already done well with a VC style approach in their respective sectors, and Shanda Games’ Mochi Media has recently set up a small game fund of its own.

A fund like this should use a light structure and portfolio approach, with a high growth slate of parallel development platforms. The commercial winners would be backed to deliver a substantial return, with commercial losers closed with limited costs at risk. In practice, the initial focus should be on small scale (say $150M) game funds, investing $30m a year for 5 years. Fund sizes could then be increased if sufficient revenue and profit traction were delivered. Managed by small teams with experience across video games, direct investment, deal making, and software engineering/product development, what I really like about this approach is that it is lower cost and lower risk than big ticket M&A.”

On why the MMO sector is both a good and bad place to invest–

The MMO sector is interesting in that it’s both high growth and consolidated, while still being cash generative. It remains an early stage market with evolving dynamics, but there is a clear hierarchy of successful business models. High end retail MMO offers significant rewards, yet remains as hit driven and risky as the pure console sector. The businesses I like most are subscription and in-game item/micro-transaction supported (like Bigpoint) which have already delivered significant revenue and profit traction. The trick here is“game balancing” to ensure that the players who spend the most don’t spoil the game for free players.

The challenge for the MMO sector is that World of Warcraft (“WoW”) is so dominant that it skews the market, with fantasy almost the default genre. As there have been many copycat offerings, investing in yet another fantasy MMO looks like hard work. I think that the opportunity is investment in breakout MMOs in other game genres, with the prize being do to the MMO market what Nintendo’s Wii did to the console market. I met W. Chan Kim when he published his“Blue Ocean Strategy” book, and Nintendo’s Satoru Iwata has already shown that his approach can work extremely well in the video games market.

On the mobile video game sector and Apple’s iPad–

“Mobile games growth rates are even higher than online, and Apple promises to change everything as it focuses on becoming the mobile entertainment company. I believe that the iPad will have a far greater impact on video games, but take far longer to do so, than people expect, mainly due to the many copycat products already in development. To put this in stark relief, 58% of the 150,000 apps in the App Store are games, so there are already more iPhone/iPad games than all the different Android, Nokia, Blackberry, Palm and Windows mobile apps of any type combined.

Online and mobile business models are already converging, with some“free” games with in-game items sold for 99c grossing more than major publisher supported mobile games selling for $6.99 a pop. So the“freemium” model has already successfully transferred from online to mobile games.”

On the independent console video game sector–

“Many independent console games companies are in a bad way, because of the stage of sector consolidation and the impact of the majors’ strategies cutting both development advances and third party work. Some good AAA houses are either sadly going to the wall or more happily exiting, such as the Warner/Rocksteady deal. VC/Private Equity firms generally won’t (and shouldn’t) invest in this space because of the risk profile.”

On the online gambling and skill based video game sectors–

“Online gambling continues to cannibalise offline, with the skill based sector of most interest for most major video games, media, venture capital and private equity firms. However, skill based games still have only 4% of the market. If current efforts to legalise online poker in the US come to fruition, then skill based games would become a quarter of the legal online gambling market and a much more exciting prospect. The online gambling tech firms also remain interesting, because of their different risk profile and high growth.”

On the in-game advertising sector–

“Lastly there is in-game advertising, which is still early stage. It is forecast to double in size, but is still a small part of the market. High growth rates to be sure, but a relatively small opportunity.”

On investment in video games in general–

“So there are as many opportunities and pitfalls in fundraising, investment, M&A and JVs in the video games market as in the games themselves. I guess that’s part of why the industry is so entertaining!”


Tim Merel is a Corporate Finance Director with Digital Media, Video Games, Technology and Telecoms experience in industry, direct investment, financial services, growth company development and turnaround, across Europe, USA and Asia Pacific, with background in software engineering, law and business from Yale and Sydney University. When he’s not doing sensible things, Tim writes adventure stories and plays a mean guitar.

Contact: Tim Merel


Phone: +44 788 0505 651

Games PressGames Press is the leading online resource for games journalists. Used daily by magazines, newspapers, TV, radio, online media and retailers worldwide, it offers a vast, constantly updated archive of press releases and assets, and is the simplest and most cost-effective way for PR professionals to reach the widest possible audience. Registration for the site and the Games Press email digest is available, to the trade only, at