Tim Merel of IBIS Capital, an investment bank focused on digital, media and communications, released a major global review of video games fundraising, investment, M&A and JV opportunities.

The review focuses on fundraising, investment, M&A and JV opportunities in video games (including console, massively multiplayer online [“MMO”], casual online, mobile, online gambling, skill based, and in-game advertising sectors) for industry players and investors (including major and independent video games companies, VC and private equity firms, and major media companies). The review also includes industry and sector dynamics, segmentation and economics (including public company valuations, recent M&A and private placements).

 

 

Commenting on the review, Tim Merel said - “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, and deal activity is being driven by subsector consolidation.”

On the pure console video games sector –

“The pure console sector will remain the largest, low growth sector, where major video games companies have converged on “fewer, bigger, faster” video game franchise refreshes. This makes perfect sense in the short to medium term, as it maximises earnings and minimises risks. However it is a high risk strategy in the long term, as churning out the 25th incarnation of most franchises won’t cut it. If the games business is all about innovation and new unimagined games experiences driving growth, the majors risk becoming like old media companies. Cash generative, but declining and cost driven.”

On why the next console cycle may be the last –

“Downloadable content (as with Valve’s Steam) and actual delivery of PS3/Xbox360 quality games via broadband without a console (as with the anticipated OnLive launch) are challenging traditional game distribution and console hardware platforms. There are concerns about bandwidth requirements and usage restrictions, but increasing broadband speeds in developed markets should address these in the medium term. So while it appears that there should be an 8th console cycle starting in 2013-14, there are now question marks over whether there will be a 9th console cycle at all. If the next console cycle is the last, it would create potentially significant long term issues for Sony, Microsoft, Nintendo and GameStop amongst others.”

On casual online and mobile video game sectors, and what they mean for major publishers –

“Casual online and mobile games are both high growth investment opportunities, but the majors aren’t structured for these markets. Major publishers’ core competencies focus on management of $20m+ serial, high risk, complex developments, launches and commercialisation. In contrast, casual online and mobile games require rapid, multiple, small scale parallel development platform investments.

On why the MMO sector is both a good and bad place to invest –

The MMO sector is interesting in that it’s both high growth and consolidated, while still being cash generative. It remains an early stage market with evolving dynamics, but there is a clear hierarchy of successful business models. High end retail MMO offers significant rewards, yet remains as hit driven and risky as the pure console sector. The businesses I like most are subscription and in-game item/micro-transaction supported (like Bigpoint) which have already delivered significant revenue and profit traction. The trick here is “game balancing” to ensure that the players who spend the most don’t spoil the game for free players.

On the mobile video game sector and Apple’s iPad –

“Mobile games growth rates are even higher than online, and Apple promises to change everything as it focuses on becoming the mobile entertainment company. I believe that the iPad will have a far greater impact on video games, but take far longer to do so, than people expect, mainly due to the many copycat products already in development. To put this in stark relief, 58% of the 150,000 apps in the App Store are games, so there are already more iPhone/iPad games than all the different Android, Nokia, Blackberry, Palm and Windows mobile apps of any type combined.

On the independent console video game sector –

“Many independent console games companies are in a bad way, because of the stage of sector consolidation and the impact of the majors’ strategies cutting both development advances and third party work. Some good AAA houses are either sadly going to the wall or more happily exiting, such as the Warner/Rocksteady deal. VC/Private Equity firms generally won’t (and shouldn’t) invest in this space because of the risk profile.”

On the in-game advertising sector –

“Lastly there is in-game advertising, which is still early stage. It is forecast to double in size, but is still a small part of the market. High growth rates to be sure, but a relatively small opportunity.”

On investment in video games in general –

“So there are as many opportunities and pitfalls in fundraising, investment, M&A and JVs in the video games market as in the games themselves. I guess that’s part of why the industry is so entertaining!”