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The Acceleration of Gaming M&A

By Amarins Laanstra-Corn, Roshni Padhi (Stanford University), Gurneek Gill (University College London), Mustafa Bayramli (University of Pennsylvania)

Photo: Mateo (Unsplash)


I. Background

The gaming industry has become the fastest-growing form of entertainment in the world, outshining both the music and the movie industries. Compared to $41.7 billion in revenue generated by the film industry and the $19.1 billion in revenue generated by the music industry, the gaming industry generated $152.1 billion in revenue last year, and that number is projected to eclipse $200 billion in 2021. This amounts to a CAGR of 13.4% through 2023. There are a few industry-wide trends that have been responsible for this astronomical growth.

First, there has been a shift from device-centric technology to player-centric technology, i.e. a player can play the same game on multiple different devices thanks to an increase in device compatibility. This has gone hand-in-hand with the rising popularity of mobile gaming as opposed to console gaming.

Second, the Supreme Court struck down a law that deemed sports betting illegal in most states. Following that announcement -- which took place only two years ago -- nineteen states have legalized sports betting, with more states likely to follow. These legal tailwinds have contributed to additional revenue in the gaming sector.

Third, augmented reality (AR) is likely to be at the forefront of the gaming evolution, and this transformation will be largely aided by the availability of 5G coverage, which will allow developers to create fully immersive experiences without sacrificing speed or quality. For example, Qualcomm has reported that it will be releasing 5G phone-tethered AR headsets, and they will not be the only ones taking advantage of this trend.

While these three trends have propelled the industry forward on a longer-term basis, the fourth trend has been the most significant in terms of recent industry developments, especially on the M&A front. The pandemic, by forcing people to stay at home, has caused 81% of people in the United States to play games while in quarantine. This rise in consumer engagement is evidenced by industry-wide revenue highs; for example, Unity Technologies reported a 59% YoY increase in mobile game ad revenue this April, with a similar rise in in-app purchases.

II. Zynga/Rollic

In contrast to several other sectors that have been severely affected by the pandemic, the gaming industry has shown far more resistance to the COVID-19 pandemic. Over the past year, Zynga’s stock price has risen by 60.30%; thus, it is no surprise that the American social game developer has been able to acquire Istanbul-Based Rollic, a leader in the fast-growing hyper-casual games business, for approximately $180 million. This deal provides strong evidence to suggest that the pandemic-driven rise of the gaming industry will not just be temporary, and it cements Zynga’s position as the ‘largest western mobile-game company’.

By acquiring Rollic, Zynga can diversify their business, particularly in the form of advertisement. However, Zynga has seen a slight 14% slip in share price since its peak in July. A similar drop has been experienced by many of Zynga’s competitors too, such as Glu Mobile and Electronic Arts. This drop is thought to be related to Apple’s anticipated iOS update which is expected to hamper ad-tracking technologies on their devices thus impeding advertisement effectiveness. Should this be the case, this could directly affect game download and in-game advertisement, given the volume of Apple devices that mobile games are played on. Consequently, the strategic rationale behind Zynga’s acquisition of Rollic is clear to see since Rollic generates most of its revenue from ads and they don’t use Apple’s Identifier for advertisers in player acquisition. Therefore, acquiring Rollic may be an effective way to overplay the financial distress that Apple’s update may cause to Zynga’s own ad revenue.

Moreover, this deal gives Zynga an entry into the hyper-casual game category. This type of game is fast growing and has been for a while, even before the gaming industry boost from the stay-at-home economy that has evolved during the pandemic. Voodoo achieved more mobile-game downloads last year than any other publisher and boasts a strong portfolio of hyper-causal games. Zynga will hope to add this success to their business model by acquiring Rollic, who has a strong range of hyper-casual games on their profile and are one of the market leaders in this rapidly growing category.

Overall, Zynga’s acquisition of Rollic reflects the current power of the gaming industry. Further to this, it consolidates upon their $1.8 billion acquisition of Peak Games so they can continue to expand their market share. The combination of Zynga and Rollic’s talented teams of developers will help Zynga continue to dominate an industry that is looking to continue its current rate of progression.

III. Microsoft/ZeniMax

In late September, Microsoft announced that it will acquire ZeniMax Media and its game publisher Bethesda Softworks for $7.5 billion in cash, a huge step up from the $2.5 billion valuation ZeniMax achieved in 2016. The premium at which ZeniMax was acquired represents how badly Microsoft wants to solidify its stance in the gaming industry. The deal, which is expected to close in Q2 of 2021, will grow Microsoft’s creative studio team count from 15 to 23, adding Bethesda’s best-selling gaming franchises including Fallout, The Elder Scrolls, and Doom to its collection. The timing of this deal is crucial, as Microsoft’s new cloud-gaming service Xbox Game Pass has just reached 15 million subscribers, and this acquisition allows them to bring Bethesda’s future games (such as the highly anticipated game Starfield) directly onto Xbox Game Pass. More importantly, the deal implies that Microsoft will soon have exclusive access to these best-selling games in its subscription-based revenue model, beating out long-time competitors such as Sony and Nintendo. This acquisition is strategically well-timed as the firm plans to launch the Xbox Series X and S game consoles this November, which will be competing against Sony’s Playstation 5, which is launching at the same time.

This deal also marks the transition to cloud-powered gaming. Another cloud-computing giant, Amazon, has announced that it will be releasing a new service called Luna -- a subscription-based streaming service for video games. This industry pivot is monumental and is transforming the competitive landscape; having cloud-computing companies like Amazon and Microsoft rule the gaming industry increases these games’ capacities to handle large amounts of data, thus accelerating the aforementioned augmented reality trend.

IV. Take-Two Interactive Software/Playdots

With many consumers showing short and long-term interest in gaming during the coronavirus-induced economic downturn, major game makers are eyeing acquisition opportunities to keep their portfolios fresh. As such, one company, Take-Two Interactive Software, the creator of the Grand Theft Auto franchise, announced on Aug 18th its plans to acquire mobile developer Playdots for $192 million in cash and stock. Having gained 23% in share price over the past three months ending Aug 18th, the former touted the acquisition, believing that it will help strengthen and diversify further mobile game offerings. Take-Two shares were up 1% in premarket trading on the day of the announcement, indicating positive market perception.

The prominence and popularity of Playdots’ offerings in the casual, free-to-play mobile game segment make the acquisition a particularly attractive target. The various Dots games have been downloaded more than 100 million times, with more than 80 million of those downloads coming from the most popular title, Two Dots. Playdots has seen a year-over-year increase in downloads and revenue. In the first half of 2020, Two Dots saw approximately 13.7 million installs, which is a massive 198% increase over the first half of 2019. On the revenue side, the puzzle game brought in nearly $19 million in gross revenue -- more than double the $9.2 million from a year ago. In addition, with 2,900 levels of content, Two Dots was selected as an Editor's Choice in both the Google Play Store and Apple App Store. With its dynamic development pipeline, Playdots has huge potential to grow and diversify Take-Two’s target audience.

Renowned for perennial revenue generators NBA 2K and Grand Theft Auto Online, Take-Two’s interest in the mobile segment might seem out of place. However, mobile is far and away from the most lucrative sector of gaming; in June, analyst provider Newzoo estimated that mobile games will account for nearly half of all revenue in the coming years. Additionally, these minimalistic, casual games typically require less expense to create as opposed to the more graphically demanding titles on the market. If a certain title becomes a hit, the returns can be high to a company like Take-Two that might be looking to diversify its game roster away from the hardcore games on console and PC.

V. Future Outlook

These acquisitions, among others, exemplify the increased attractiveness of the gaming sector. However, it’s extremely important to note that industry-wide revenues are expected to level off after their COVID highs. Because of this, analysts expect dealmaking activity in the space to increase in Q4 of 2020 and decrease after that, once people start leaving their homes on a more regular basis and things return relatively back to normal.

VI. References


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