Opinion: How digital distribution has changed the investment landscape for video games

Richard Darlington is a Director of Corporate Finance at investment banking firm Zeus Capital, where he heads up video gaming transactions. Zeus Capital has advised on deals including TinyBuilds $470m IPO, Sumo Group’s £145m IPO and subsequent fundraising and acquisition of Pipeworks for $99.5m, as well as the sale of Catalis to NorthEdge Capital for €100m.

Transactions in the video gaming sector have boomed during lockdown, but UK investors haven’t always had such an appetite for gaming companies. When we began actively tracking the sector four years ago, many were wary of intellectual property risk and a perceived boom and bust cycle in the industry.

Today, we’re having very different conversations with those same investors, advising on five deals worth $750m in the last year and a half. Gaming’s popularity under lockdown has contributed to this change in appetite, but it has also accelerated trends that will ensure that the sector continues to thrive after COVID-19.

Games as a Service

We’ve seen spikes of interest in gaming before, but the accelerated adoption of digital distribution models means that this demand for content is now being met sustainably. By removing the friction of delivering content to a global audience at scale and at pace, these models have created new opportunities for the sector.

For example, the latest generation of gamers is hugely focused on social engagement, which provides long-term revenue opportunities through subscriptions, downloadable content and extensions to games’ life cycles. Platforms and games like Roblox, Fortnite and Fall Guys have tapped into digital distribution to attract huge audiences and stable revenue streams. At a grassroots level, the technology can be used to Alpha release games quickly, enabling companies to take direct feedback from players on board before they are fully launched and significantly improving their chances of success.

Research suggests that the new customers are here to stay: according to a recent Google survey, over 40 per cent of new gamers are likely to continue playing after the pandemic. As a result, we expect to see the launch of exciting new models to access and leverage these new users, creating more ‘Games as a Service’ revenue opportunities and more highly engaged audiences that investors are becoming increasingly attracted to.

Content is King

The success of digital distribution has driven huge demand for exclusive content, creating opportunities across the entire gaming industry. From Epic Games acquisition of Mediatonic to indie publishers such as TinyBuild stating their desire to acquire original IP, many businesses are growing rapidly by acquiring IP that can be monetised long-term, whilst still sharing the upside with the original IP creators through revenue shares and shared ownership models.

Thanks to a reduction in the need for physical media in the supply chain, independent publishers and successful developers have blown their funding options wide open. Public and private investors recognise the scale of success possible in the sector whilst also seeing more predictable monetisation of back catalogues, giving rise to multiple exit routes. There has clearly been a boom in UK listings and consolidation in the last three years, but this has also given the UK’s private equity investors confidence that they can achieve an exit. This is evidenced by Perwyn’s investment in Sumo Group, Northedge Capital’s investment in Catalis or Carlyle’s recent investment in Jagex.

Looking forward

From an investor’s perspective, digital distribution models and a global, engaged audience have made the sector an infinitely more attractive proposition. By delivering ‘Games as a Service,’ the ability to scale up and assess return on investment have become more predictable than ever before.

Simultaneously, the race for exclusive IP is driving value in the sector by stimulating innovation and creating new possibilities, for instance cross-platform gaming, that is engaging a new and growing audience of social gamers. As an industry at the forefront of technological advancement, gaming has only just begun to realise the potential of digital distribution – at Zeus Capital, we have no doubt that video gaming deals will continue to thrive after COVID-19.