What venture investors need to know about the gaming space

  • Gaming industry outpaced TV, cinema, digital music in revenue
  • Successful stories are outliers: risks and failures exist

 

What venture investors need to know about the gaming space

 

SEEMINGLY ubiquitous, the impact that PC, console, and mobile games are having on societies around the world is undeniable. For folks under the age of 40, gaming is not just a fun way to pass the time, it’s becoming an increasingly important part of everyday life.

From entertainment to e-learning to socializing and making new friends, different people use games for different things. Because it’s such a versatile space, it should come as no surprise that aggregate revenue is surging. 

In 2018, the gaming industry outpaced television, the box office, and digital music in terms of revenue. It raked in a whopping US$116 billion (RM487.18 billion), up 10% from the year before. Industry insiders will tell you that this is not a shock, as mobile game “Clash of Clans” alone generates nearly US$60 million (RM251.98 million) in revenue -- every single month. 

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The gaming sector is undoubtedly a high-risk-high-reward space for serious investors to be playing around in. It’s one that our firm, MDI Ventures, is looking at very closely. So in no particular order, here are a few things that venture investors need to know about the global gaming space. 

Understanding the platforms

First things first: If you plan to invest in a game developer, know that it’s rare to see a team focus on more than one platform. When I use the word ‘platform,’ I’m referring to the differences between PC games (think Steam), console games (think Xbox and PlayStation), and mobile games (think pay-up-front and freemium). 

Below the hardware level, though, there is also Google’s cloud gaming service Stadia to consider, along with Apple Arcade (Apple’s version of Netflix for games), virtual reality, and other channels.

These are all different paradigms on which games can be released and accessed. US$116 billion sounds like a big market size -- with the overall market experiencing an 11% compound annual growth rate (CAGR) and mobile seeing a 26.8% CAGR. But it’s important to realise that actually the market starts to fragment rather quickly when examined from the top down. 

Each platform and distribution channel has deep reaching implications for a game’s likelihood for success, but also for its fundamental revenue model. Smart investors would do well to research all of these before considering an investment move.   

For the past five to seven years, venture capitalists have been focusing their efforts on mobile. To be exact, free-to-play mobile has been the industry’s dominant platform in terms of revenue since the dawn of Facebook games and social games (think FarmVille published by Zynga in 2009). 

This was also right around the time when in-app purchases became possible via the App Store, so we wound up with a perfect storm of ingredients coalescing simultaneously. Easy, casual games were suddenly accessible for free to anyone with a smartphone. 

It all equated to an extremely low barrier to entry, and in turn the potential user base for free-to-play mobile became far more than just hardcore game enthusiasts. Downloads could come from anyone in the world who looked to their phone for a distraction. Because most mobile games are free to play, many users find themselves enjoying the experience so much that they’re suddenly willing to spend real, cold, hard cash on in-game items. 

As you may have surmised, the global market for mobile games is significantly larger than it is for all other game types. Mobile now accounts for 51% of the global revenue for gaming at large, followed by console games at 25% and PC games at 24%. 

More than just high risk

By nature, investing in game development is almost always a binary endeavour in terms of supermassive success and complete and utter failure. 

The shining example of gargantuan success is “Grand Theft Auto V”. In April 2018, MarketWatch reported that the game had sold 90 million copies worldwide, generating US$6 billion in revenue for publisher Take-Two Interactive Inc. This made the game the world’s "most financially successful media title of all time.” It out-performed blockbuster film titles like “Star Wars” and “Gone with the Wind,” each of which collected more than US$3 billion, adjusted for inflation.

However, it’s important for venture investors to know that games like “Clash of Clans” and “Grand Theft Auto V” are far and away the outliers of the industry. For every semi-successful game title that makes it to market, there are hundreds -- if not thousands -- of unsuccessful ones. Do not invest in game development unless you’re comfortable with perpetual failure, and willing to invest many times. 

Emerging Asian markets are the next frontier

Asia is an undeniable part of the conversation for investors, namely Southeast Asia. Studies show the number of PC and mobile gamers in the region is on track to reach 400 million by 2021, and will generate an estimated revenue of more than US$4 billion. 

For the most part, this predicted growth will be driven by mobile users in Malaysia, the Philippines, Singapore, Thailand, Indonesia, and Vietnam. 

e-Sports is also now something that cannot be ignored in Southeast Asia. To put things into perspective in terms of gaming’s popularity in Asean, the Olympic Council of Asia said in late 2017 that e-sports would even be considered an official sport at The Asian Games in 2022. As a result, e-sports institutions have been cropping up throughout the region and China. 

It’s also important to note that game development is not the only thing worth looking into from an investment standpoint. There is a veritable smorgasbord of peripheral verticals in the gaming ecosystem such as emerging publishing platforms themselves, analytics, e-sports teams, payments aggregators, voucher marketplaces, and more.  

In the end, venture investors interested in getting into the gaming space would do well to understand the business models and unit economics associated with free-to-play mobile, and look for thesis-driven partners to assist in wise decision making.   

Winston Adi is an investment associate at MDI Ventures.

 
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