State of play: the outlook for interactive entertainment M&A in 2019

If you look at global revenues for the interactive entertainment market in the last five years, it is a pretty simple story; a very positive-looking "up and to the right" trend, culminating in $137.98bn of revenue in 2018. This trend is set to continue, and revenues are predicted to hit $180bn in 2021. All signs point to the interactive entertainment industry being in rude health.

Digging a little deeper into the numbers, however, reveals a more nuanced picture. Whilst PC and console sales have posted low double digit growth for every year over the past 10 years (enviable in any industry), it is mobile gaming which has really driven growth in the market in recent years, with mobile revenues poised to account for over half of global revenue, compared to comprising only 18% of revenue in 2012.

What has driven this and what does it mean for the industry?

Many of the answers are obvious; the ubiquity of smartphones has meant the potential target audience for games is huge (64% of US adults will describe themselves as "gamers"). But the increasing trend for children to have access to smartphones also plays into this, with up to a third of mobile revenues being derived from children's games. This has driven changes in the ways in which consumers interact with interactive entertainment. Games are increasingly capable of being consumed on the go in the short windows of time between the last thing and the next thing, with hyper-casual games therefore an increasing component of mobile revenue. Zynga has spent $1 billion in the past two years, deploying $700m to acquire Small Giant Games late last year, and has indicated a desire to invest further, so there is clearly appetite for good assets in this place.

Similarly, the increasing computing power of smartphones has started to allow console-fidelity games to be released on smartphone. Nintendo has further blurred the lines between console and mobile gaming, with the release of the Nintendo Switch stealing a march on this trend. It appears to have paid off, with Nintendo shifting 17 million units in 2018 and surpassing lifetime sales of its last major console success, the N64. This trend means that gaming successes which might have previously been confined to a single platform can now reach audiences via multiple channels, with the 2018 runaway success Fortnite being a prime example. Studios which are able to find a magic formula which can be replicated across multiple platforms are therefore likely to find themselves in the enviable position of being cash rich with multiple suitors.

What does the future hold for M&A in non-mobile gaming?

The drivers in the market here are perhaps more involved and are sensitive to a larger number of variables. For example, despite excitement around the development of relatively accessible VR hardware such as the Oculus Rift, uptake to date has been relatively sluggish, primarily as a combination of the lack of an anchor game to drive sales and, in the case of PC gaming, the demanding graphics card requirements to deliver on the promise of the tech (exacerbated by graphics card prices being driven up by demand from those mining cryptocurrencies). The VR development model of course can't take advantage of the multiplatform synergies referred to above to the same extent and therefore some of the early plays to take advantage of this technology are floundering. PC gaming has therefore looked to move into the cross-platform space with an increasing number of titles featuring this, notably in the facilitation of Windows and Xbox cross-platform experiences.

For the console market, recent M&A activity appears to have been driven primarily by the desire to ensure a ready supply of exclusive games. Microsoft made five studio acquisitions in 2018 which was more than it had made in the last five years. This strategic aim is unlikely to change in the short term, so we would expect any studios with proven franchise IP to continue to be of interest to the major players in the interactive entertainment field.

Will 2019 be a bumper year for M&A and if so, will it just be more of the same?

On the mobile gaming side of things, it may well be more of the same. Notwithstanding the money which has been deployed in the last couple of years, there are still companies with significant war chests who will be keen to deploy them. User acquisition models appear to be robust and relatively predictable which allows keen pricing of assets in this space.

The console market is likely to be driven primarily by the likely release of the next generation of consoles in 2020. Microsoft and Sony will want to be able to release those consoles with a mixture of proven hits and enticing new AAA prospects. Either way, one would expect the focus to be on those developers who have form in delivering blockbuster franchises so it may be that hot upcoming indie developers take a bit of a back seat in 2019 unless they have a strong mobile proposition.

Away from the spotlight, the other area where we would anticipate the interactive entertainment industry driving M&A activity is the demand for companies that provide back-end hosting solutions. With 5G around the corner and multiplayer gaming experiences on both mobile and console platforms being the flavour of the month, gaming experiences are likely to have increasingly burdensome and complex networking demands and software solutions that enable developers and publishers to optimise their server and hosting costs will be increasingly valuable. 5G also brings with it increased deliverability of truly synchronous gaming experiences on mobile so again, server-side technologies that address this area are likely to be in high demand.