The year is 2020. Families and other households playing Monopoly, completing jigsaw puzzles, playing non-Yuletide charades and fixating on parlour games during the lockdown and beyond for entertainment?
Pshaw, nobody really believes that. What really happened is that households, and all the individuals within them, played video games on screens of different sizes for months on end. Board games were for Victorians; not for today’s caged generations.
In March 2020 everybody became a gamer and they’re likely to continue to be one for some time to come... something that games companies are very, very happy about.
Naturally, the money men are watching, not least the investors that follow the shadow of the money-airship that flies slowly around the world and always stops somewhere; games are having a moment and it’s going to last.
Games companies have always had a weird relationship with VC money. Games were always thought of as ephemeral, while VCs think in five- and ten-year terms.
Games publishers and developers may have millions in revenues and hundreds of employees, but were perceived as risky because they were only one bad game away from bankruptcy. The long game development cycles of games meant VCs saw companies conducting projects, not real businesses.
How Zynga Changed Everything
Everything changed with the ascension of social game company Zynga because it wasn’t a project, it was built on Facebook’s platform, something that investors really liked. Between 2007 and 2011 the company went from angel money to Series C in a series of nine investments that totalled $866.66m (£647m).
Many investors were baffled and initially they were right to be so as the company initially burned money and floundered, but as a decade-long investment, it has paid off.
Zynga’s last investment round was almost a decade ago and the company has pivoted somewhat, now focusing on mobile games. Its revenues in 2019 were $1.28bn in revenue, up 41% year-over-year.
Zynga changed everything. Games investment since the financial crisis of 2008-2010 has increased every year and now it is being transformed further by the Covid-19 crisis and the stay-at-home market. Investors are now flocking to games... and the emerging esports market that sits beneath it.
New Money
According to The Gaming Economy Index, active investment and M&A activity across the videogames industry in April-June 2020 surpassed $10.5bn (£7.9bn), representing an approximate 315% increase over the previous quarter.
Moreover, it’s still increasing with $5.7bn (£4.3bn) of activity recorded in June, compared to US$4.8bn (£3.6bn) over April and May combined.
These are not one-off figures. According to games investment specialist Sergei Evkokimov, his data shows an almost-equal increase of 310% in Q2 over Q1, albeit at a lower figure of $7.8bn (£5.9bn).
New Kids On The Block
One beneficiary is London-based ‘non-intrusive’ ad company Admix that allows games developers to earn money from placing ads in their games, a form of advertising that may break all that came before it.
In June, the company raised $7m in Series A funding and believes it will change the nature of advertising because ‘gaming is the 3D internet and the other versions of the internet are history’.
So says French-born Samuel Huber, who is the Admix CEO.
“Evolution has shown that a true sign of intelligence is about adaptation to changes. It’s never more true than in business. As a leader, your only option is to accept the changes that are thrown at you and invest wisely to conquer it. If you don’t, someone else will”.
“Every crisis leads to opportunities. We accept the new reality and will not just survive - we are aggressively putting our resources into this new reality. Investing in our team’s well-being and with a new London head office respecting social distancing measurements.
While Huber may or may not be smart in opening a London office (albeit with social distancing) when knowledge workers in the digital industry seem happy to work/game from home for an infinite future remains to be seen.
Esports Are The New Crown Jewels
Games as most people know them are not the only game in town. One such ‘subset’ of games is esports, where investment is also booming. According to Goldman Sachs Investment Research, Generation Z (18-25-year olds) now watch more video games than traditional live sports and that esports will reach 276m viewers globally by 2022.
This is a bigger audience than major league sports such as the NFL and closing fast on the Premiership. The global esports gambling market is also growing at 44% year-on-year and is projected to be a $17.2bn (£12.9bn) market by 2020. That appears to be the safest bet of all for investors.
According to Esports Insider, in the month of May 2020 alone, esports investment came to $17.4 (£13.8m) with institutional investors at the top of the queue with their digital checkbooks.
But there are problems with the very structure of esports. With the exception of Valve and CS:GO, arguably the biggest esports game right now, publishers control the games and are focused on ensuring they maximise the number of people playing the game and continuously optimise the experience… effectively stifling innovation.
For those investing in the ecosystem it means that they are subject to the greater commercial needs of the games publishers, who can change the game or the terms of service at any time.
Wasted Investors’ Money
Rich Keith is the CEO of Fourth Floor, an influencer marketing agency working in the games and entertainment space, ‘combining planning, creative, production, event and gifting expertise’ for major games brands.
Keith has more than 20 years’ experience in the games sector and, in his own words on a Zoom call, has seen games, consoles and breakthrough tech come and go.
“Gaming isn't a vertical any more, it's a horizontal that permeates all of youth culture that has swallowed music and movies and is now worth more annually than those two combined.
“Most of the money invested so far in esports teams, platforms, sponsorship has been wasted and will continue to be until the structural problems sort themselves out,” he said.
This will ultimately happen because the prize is enormous and publishers will realise that esports is more than a side-show and will have to be an industry in its own right. This will be led by bottom-up innovation rather than the publishers actively making the changes needed. That’s what disruption is for.
Big Battles To Come
Then came the news earlier this month that Epic Games, the creators of gaming phenomenon Fortnite was valued at a staggering $17.3bn after a $1.78bn funding round including a $250m strategic investment from Sony.
Its valuation is now double that of $8bn two years when Fortnite was something that only young children were interested in. Epic Games now has a chance to expand into a loyal adult market that is likely to become a dominant social network player such as Facebook. The Zynga of its day, so to speak.
But that wasn’t all, then Epic Games went for broke and launched an extraordinary action against the Apple and Google mobile stores for cannibalising in-game advertising revenues, which was quickly followed by both stores ‘cancelling’ Epic Games and removing Fortnite from their stores.
But that’s another story and a very big one at that.
The games have begun and they will have nothing to do with jigsaw puzzles, charades or games of board Monopoly. It will get ugly, as it normally does when there will be huge winners.
But will investors continue to play along? Mmm, I reckon so. Those stakes are just too high.
