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The Free Zone: MMOG Monetary Miscellany and More

Column By Richard Aihoshi on April 08, 2014

Do you get the feeling that there has been a lot of recent activity in the area of game-related corporate ownership changes? If so, your impression appears to be very solid. According to information released late last month by UK-based Digi-Capital, the total value of mergers and acquisitions during the first quarter of this year was more than $5 billion.

The company, which describes itself as an investment bank for games, apps and other types of technology, made available the 26-page executive summary from its $1,999 Q1 update covering the “global games market, including revenue forecasts, economics, industry dynamics, trends, highlights, M&A and investment transaction summaries, and public company indices”. While it addresses more than just the MMOG sector, our favorite category is named as a major driver, along with mobile and tech.

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The report says Q1 almost equaled the total M&A value for 2013, which it pegs at $5.6 billion, representing a jump of 29 percent from 2012. However, we're told this figure doesn't count the management-led portion of the Activision deal. Including this would add another $2.3 billion. Not surprisingly, the purchasers in nine of last year's 10 largest M&As were from Asia. Unfortunately, the transactions aren't listed.

Another interesting part of the summary is the projection that global video games revenue could reach $100 billion this year. The exact figures can only be estimated by eyeballing a chart, but it looks like this would be an an increase of approximately $5 billion. This would put 2014 below the 10.1 percent compound average growth rate from 2011 until 2017, when the industry is expected to bring in about $125 billion.

As you might expect, the largest contributors to the total are dedicated hardware and console software. In 2014, they are projected to represent approximately 25 percent apiece. Online and mobile follow at slightly above and below 20 percent respectively, with PC around eight percent and advertising accounting for the rest.

Looking forward, Digi-Capital anticipates that mobile will experience the fastest growth. It is forecast to become the largest sub-sector in 2017, bringing in about 27.5 percent of that year's projected $127 billion total. The other figures shown are approximately 22 percent for dedicated hardware, console software 23 percent, online 21 percent, PC 5.5 percent and advertising 1 percent. Sadly, we're given no meaningful indications as to the reasons why the shifts are thought likely to occur.

Another chart reinforces what we already know and expect, that the Asia Pacific region is and will remain the leader as well as the main driver of growth in mobile and online game revenue. This year, it's expected to account for about 61 percent of the projected global total, which is a shade under $40 billion. EMEA (Europe, Middle East, Africa) trails at 22 percent, which is still significantly ahead of North America's 13 percent. In 2017, the forecast calls for a nearly $60 billion total. The regional balance won't shift much though, with Asia Pacific about 62.5 percent, EMEA 21 percent and North America 12.5 percent.

Beside the latter graph, is a rather intriguing statement, “Chinese, Japanese and South Korean domestic strength has produced high volume, low ARPU, cost efficient games businesses with up to 50%+ operating margins, enabling significant investment in foreign markets.” Here again, no details are provided. Nonetheless, it does give indications, albeit just generally, as to what's behind the dominant Asian presence in the game industry M&A landscape. What's more, if the region fulfills expectations by continuing to out-grow the rest of the world, we can expect even more of the same provided the supply of companies worth buying doesn't dry up.

Reported elsewhere but related to the Q1 M&A spurt, Chinese giant Tencent has made another sizable investment, agreeing to pay about $500 million for a 28 percent stake in South Korea’s CJ Games. The deal apparently includes the Netmarble portal owned by the latter's parent, CJ E&M Corp. While there's no obvious reason to think this deal will impact us here in North America, the news about it did bring word that the Shenzhen-based company’s online gaming revenue was a healthy $1.4 billion last quarter. So, its war chest is undoubtedly still amply filled to fund further purchases. Could we see another studio acquisition like that of Riot Games?

Being more than just a game company, Tencent is busily positioning itself to take advantage of the boom in mobile Internet use, particularly in its domestic market. Its main competitors in this respect are Alibaba, China's biggest e-commerce company, and Baidu Inc, its leading search engine. Neither is a major factor in games, but expanding their presence certainly seems like a reasonable strategy, and both have deep pockets. Should either or both opt to move in this direction, we can anticipate even more acquisitions, and quite possibly a rise in asking prices.

Closing queries

Which western MMOG developers and/or publishers are the most likely acquisition targets? How much might they sell for?

Is it realistic to think any of the Chinese Internet giants will acquire a major western publisher? Which ones would be worth buying?

Will Tencent be content to remain a passive investor in Activision? What are its intentions for Epic?


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The Free Zone
Richard Aihoshi has been writing about MMOGs since the mid-1990s, always with a global perspective. As a result, he has observed the emergence and growth of the free to play business model from its early days in both hemispheres.

He is the former Editor of RPG Vault and his column, focusing on free to play MMOs, appears on MMORPG.com every Monday.
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