Debunking the Consolidation Theory

I remember this gloomy prognosis, let’s call it the ‘Consolidation Theory’, first being sold to me during the first few months of my career as a games analyst in early 1996. Since then I’ve heard it repackaged and resold on a regular, almost monotonous, basis, whatever the market conditions. The dotcom boom years saw over $3bn of new capital raised for games, most of it by a tiny number of companies; the dotcom collapse saw widespread belt tightening and the scramble away from strategic investment and towards value; successive console generations have precipitated growing business model challenges. Over the last decade, each of these phases of the industry’s evolution have been used to support the reiteration of the Consolidation Theory. And yet it has never actually materialised. In fact the opposite appears true.

A quick peek at retail software sales, still the vast majority of the games market by value, reveals little evidence for Consolidation Theory. Using the US video games market as a barometer, there is not a single publisher that has consistently grown its market share during the last decade: all of the top 20 have continually swapped positions as well as lost market share during at least one year. However, most tellingly, the top five publishers’ aggregate market share has actually shrunk from around 68 per cent of the market in 1997 to 50 to 55 per cent for most of the last six years with an Activision-driven leap to 62 per cent last year.

Far from being dominated by a handful of major publishers, the games market over the last decade has seen a gargantuan proliferation of new games businesses fuelled by increasing geographic, demographic and business model diversification.

Taking a holistic view, the global games pie, in particular with its network and Asian gaming ingredients, is being shared far more broadly than ever before. I believe that the top five global games publishers have actually lost even greater collective market share than the US data suggests. This is thanks largely to the emergence of scores of new mobile and online games businesses in the $50m+ revenue bracket that did not exist a decade ago, which has resulted in a significant swelling of the lower and mid-tier publisher ranks that amass below the top five.

With the merger of Vivendi Games with Activision and EA’s proposed acquisition of Take Two, clearly the publishing landscape is changing and once again the Consolidation Theory is being widely discussed. Will it actually happen this time? I have my doubts. Aside from history’s propensity to repeat itself, there are a number of arguments against it.

The ‘emerging market’ of network gaming continues to attract considerable venture capital. It’s the fastest growing market segment and one where independents continue to thrive. Network gaming is undoubtedly more meritocratic than the retail market; success is more likely to be determined by product quality than by brand licence or marketing spend and, as such, it does not reward scale as the retail games market does. Network gaming can have lower barriers to entry and often employs creative and more efficient economic models which have allowed independents to identify and exploit niche or novel areas that the major players would never consider investing in.

Even within the retail games market, one can point to additional market share growth by mid-tier publishers like Ubisoft and Microsoft as well as the advent of asset-rich new market entrants such as Disney, Time Warner and Viacom as evidence of the growing rather than lessening level of competition for the retail dollar. Of course, the market could witness new top and mid-tier acquisitions but such transactions, if they take place, are arguably just as (if not more) likely to be instigated by non-games companies with a hungry eye on the games sector such as News Corp, GE and Bertelsmann (as well as Disney, Viacom and TW). Although a string of acquisitions by a single ambitious entity, although somewhat unlikely, could feasibly fashion a new top five powerhouse, such moves are more likely to bolster the mid-tier of the market rather than consolidate the top tier.

Far from concentrating power in ever fewer companies, I would argue that the games industry is currently diffusing to allow room for many more companies, many specialising in an ever-broadening array of market sub-categories, with market share being distributed more evenly amongst lower and mid-tier companies, who are both expanding and taking an increasing proportion of the overall market.

As barriers to entry for publishing diminish, over time this effect will be exacerbated by the increasing ease of home-brew development and self-publishing as well as the potentially significant impact of user-generated content. The result is further shrinkage in the top tier.