In five years or less, we'll likely see a new round of console hardware hit the market. As the industry continues to shift towards online and digital, some would argue that the next consoles could be the last we'll ever see. Regardless, one thing is clear: online games and mobile games continue to grow at a furious pace. Tim Merel, director at IBIS Capital, sees these two areas as very high growth opportunities for the global games industry and he thinks online and mobile will dominate sales in five years.
“The video games industry is big, getting bigger and changing, with console game costs, revenue and risks accelerating and online/mobile games growing and fragmenting the market. Investment dynamics are entering a new phase, with growth investment opportunities in online and mobile games, as pure console sector growth is flat (and risky). Today online/mobile games generate around 1/3 of all games software revenues globally. In 5 years time they are forecast to generate 50% of all games software revenue, or around 1/5 more revenue than pure console games! Whether you have faith in the forecasts or not, CEOs and senior execs from the major US, European and Asian publishers all tell me that this is what keeps them awake at night," Merel commented.
He continued, "What excites me about the online/mobile games markets is that they are both high growth and profitable, which is pretty rare. The leading competitors are growing revenue 100%+ annually while also delivering 20-30% EBITDA margins. Coupled with a fragmented industry structure, no real market dominance and clear strategic exit options to the major video games and media companies, the time for investment is now.”
While some publishers have been faring better than others in the online and mobile worlds (EA, for example), the general business structure of traditional console publishers is not necessarily well aligned with online and mobile, Merel noted.
"Major publishers aren’t structured for online/mobile investment, as their core competencies focus on management of $20m+ serial, high risk, complex developments, launches and commercialization. Online/mobile games require rapid, multiple, small scale parallel development platform investments, completely different to major publishers’ business cultures. As a result, major publishers are not investing enough organically and most CEOs tell me that they are wary of large scale online/mobile video games M&A at this stage. So they aren’t driving online/mobile games investment in the same way they did console games," he said.
"In parallel, generalist VC video games investment is in decline. Despite rapid online/mobile games market growth, VC investment across video games in 2009 had dropped by 60% from its high point in 2007 due to general VC market weakness and limited knowledge and relationships across complex, fast moving online/mobile games sectors."
Merel will be speaking at GDC Europe about fundraising, investment, M&A and JV opportunities in video games.
