Game Business Investment Faces Chilly Summer, But Much Warmer 2024

Uncertainty over the big Microsoft
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-Activision
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deal, increasingly assertive regulators, the disruptions of AI hype, and a weak economy with fast-rising interest rates and several big bank failures all bode poorly for the near-term investment climate for the formerly superheated videogame sector, said speakers at today’s LA Games Conference in Los Angeles.

“(Mergers & acquisitions), deal multiples have really come down a lot,” said Vivienne Zhao, Lazard Freres director of interactive media & technologies. After a huge spike in dealmaking early in the pandemic, the market has cooled considerably, though Zhao said that’s mostly about the market returning to pre-COVID activity levels.

“The perspective on near-term M&A is very mixed,” Zhao said. ‘The key takeaway, with M&A, is that it will be a little more difficult executing. Valuations are challenged, interest rates are rising, general political and international economic uncertainty. That said, companies are looking for growth. We are going to see a lot of activity” later in the year and into 2024.

Already this spring, Zhao and others pointed to two big deals for mobile game companies, Scopely (by Saudi-backed Savvy Games Group for $4.9 billion) and Rovio (by Sega for $775 million).

Upcoming deals are likely to shift away from the mobile industry, however, in part because business models there have been undercut by new privacy policies imposed in Apple’s iOS and Google’s
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Android mobile operating systems. That’s made marketing, user acquisition, and data collection far more expensive and difficult, a killer for mobile’s widely used free-to-play, ad-supported business models.

Contributing to the recent chill has been a disconnect between what startup founders and backers think is a good price, and what new buyers might be willing to pay. As startup reserves run dry, companies may start looking for safe havens, with more realistic exit prices.

“With the clock ticking on balance sheets, it’ll start softening up more,” said Scott Rupp, founding general partner of tech VC BITKRAFT Ventures. Market potential for “the early stage (companies) is not that different. It’s still a market where great teams and great founders can still write their tickets and get full-priced deals.”

But startups a little further along the investment ladder, or in other parts of the industry, are definitely feeling a crimp. The conversations also have moved on the dominant conversation of 2021 and 2022, around games and experiences using Web3.

“I feel like AI replaced Web3 in the conversations this year,” said Holly Liu of PKO Investments, an investment syndicate whose members include founders of Twitch, CrunchyRoll and the mobile gaming company Liu co-founded, Kabam.

“AI is the next supercycle” in investing, said Clinton Foy of UTA.VC, the venture-capital arm of Hollywood’s United Talent Agency “I think we’re going to see a raft of (deal) announcements next quarter through end of year. AI and creation is really interesting right now. Andreessen Horowitz is deploying a lot of capital in this area. Founder’s Fund too.”

Even the Web3 companies of last year are rapidly pivoting to an AI focus, which may or may not work, given their DNA, but at least gives them relevance in the shifting market.

One big potential catalyst: the gigantic pile of cash sitting in the bank accounts of tech giants with game-adjacent businesses, including Apple
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, Alphabet, Amazon
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, Meta, and Microsoft. Apple alone has as much as $200 billion in cash and near-cash equivalents, said Foy. And most of the big tech firms have relatively little debt, which means their carrying capacity for acquisitions is even larger.

“There’s probably going to be some more M&A in 2024 when capital markets open back up,” Foy said. And while the “Chinese spigot” of game investments has been turned off amid that country’s recent crackdowns on tech and gaming, “the Saudi and Middle East spigot is opening. All these companies are sitting on a lot of cash. We’ll see how the Microsoft-Activision deal plays out.”

Microsoft has been trying for more than a year to secure regulator approvals for a $69 billion purchase of publisher Activision-Blizzard. Though most regulators around the globe so far have signed off on the deal, Britain’s Competition and Markets Authority last month blocked the sale. Microsoft said it would appeal.

That deal, the biggest in videogame history by quite a lot, would reshape the industry. T he maker of the Xbox game console and the Windows software that runs high-end PC gaming would gain ownership of the publisher behind Call of Duty, Halo, Diable, Warcraft, Candy Crush and other giant franchises.

Once the Activision deal is resolved, panelists suggested it may set off other deals, particularly if Microsoft can shepherd the deal though. And it just won’t be tech giants and industry incumbents chasing deals.

There likely also will be pressure on Hollywood studios to drive growth with gaming investments or even acquisitions. Their streaming subscription services are struggling to break even, losing $10 billion collectively last year (though Netflix
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had $3 billion in positive free cash flow in 2022).

As the studios look for more growth elsewhere, they may look at the massive success in recent months of HBO’s The Last of Us and The Super Mario Bros. Movie from Universal Pictures. Both are adaptations of hugely successful game franchises. All the big companies will be looking at ways to inject new franchises, talent, and revenue into their busineses.

“I’m still a consolidation optimist,” said Rupp. “Scopely and Rovio (acquisition) watermarks were very helpful to the industry, probably 20X EBITDA multiples, maybe high teens. Big companies have become sequel companies, not content creation companies. They’re basically treating startup ecosystem as an innovation ecosystem. This AI stuff is very deflationary. Banking has been very deflationary. We’ll probably have a commercial real estate cycle that’s deflationary.”

But once that’s worked out, Rupp and others said, it’s going to be game on.