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Global Video Games Investment: China, Online, Mobile Ascendent
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Global Video Games Investment: China, Online, Mobile Ascendent

February 22, 2011 Article Start Previous Page 4 of 4

Console game investment is accelerating, as average game development costs have grown (Xbox 360, PS3: $15-30m, Wii: $5-7M). Strong development project management is crucial, and marketing costs can equal development costs or more.

With retail, distribution and hardware royalties significant at 30-40 percent of retail turnover, console publishers must generally sell 500,000 to 1 million units just to break even (ex-overheads).

I used to work with Ben Feder (retired as CEO of Take-Two in 2010) on the digital side of NewsCorp in the US years ago, and when we caught up in New York last year he had just “sucked the oxygen out of the room” with the launch of Red Dead Redemption.

What I understood him to mean was that the console market today is a true blockbuster market, where the marketing scale around major launches leaves space for just one major product at a time.

Given the Q4/Christmas sales bias in the console games market, that really restricts commercial opportunity even before you take into account the online/mobile games shift amongst consumers.

Console games are hit driven, with investment no guarantee of success

Franchises selling tens of millions of units are lower risk

However it is worth remembering that video games rival Hollywood, with a total of $77B video games (hardware $22B, software $55B) vs $85B film global revenue in 2009. So even though the console sector contracted last year, at up to $60 per game sold vs $10-20 per cinema ticket/DVD, it is easy to see that it remains a cash generative business.

We believe console games will remain flat to down this year, with growth hoped for from the next console hardware cycle in 2014 to 2016 (if it happens). Historically hardware cycles have driven the industry.

Our view is that conglomerates have the best chance to adapt, as major console publisher strategies appear to have converged on fewer franchises, refreshed more often with higher marketing budgets. While adapting to meet fundamental changes in the market with online/mobile organic investment and acquisitions, pureplay console publishers must prove that their repositioning can deliver sustainable profits.

We feel that conglomerates with diversified revenue streams may find it easier to invest in the change to online/mobile games. For example, Disney invested significantly with the Playdom social games and Tapulous smartphone games acquisitions in 2010, as well as indicating an apparent intention to invest less in console games.

It is also impossible to ignore Microsoft's investment in developing and launching Kinect (8M sold in first two months), revitalizing the sales and market share of Xbox 360 (sales up 42 percent in 2010 over 2009) and related games software. The Microsoft/Nokia announcement in February reinforces Microsoft's commitment to high growth markets such as smartphones and therefore mobile games, and they aren't to be underestimated.

So it would be fair to say that you believe there is significant opportunity to invest in 2011?

The video games market is changing across sectors (casual/social online, middleware, smartphone/tablet, browser based MMO, online skill based gaming, pure console, retail MMO, gambling).

Video Games Market Segmentation

As online/mobile games grow and fragment the games market, supported by high growth, high profit business models, we believe there is significant opportunity for online/mobile games growth capital funds to invest in the strongest independent companies.

China's Tencent, Shanda and Giant Interactive have already invested in games funds, and we are exploring the opportunity ourselves around both Chinese games companies with international potential and international companies with Chinese potential. We also see clear investment, M&A, JV and strategic partnership opportunities for corporate and financial investors, which are covered in depth in the Review.

I'll be at GDC in San Francisco in March, and expect to see more deal activity with the companies we are meeting there and those already in discussions across Europe, North America and Asia. We're very excited about the prospects for this year.

You can view Digi-Capital's full video games investment review at Slideshare.

Article Start Previous Page 4 of 4

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