The New Goliaths of Video Gaming

The video game sector remains effervescent year after year and produces financial results that are increasingly out of the ordinary. Whereas video games are to this day often considered as a subset of digital media, it is transforming into a fully fledged industry—with its own rules, codes and markets—that is increasingly concentrated.

Newzoo, a company specializing in video game analytics, revealed that the video game industry grew by 29% in 2018 over 2017 and is now valued at US$121 billion worldwide.

A major trend backs this growth, with 25 listed companies today holding over three quarters of the market. And this number of companies is slowly but surely decreasing.

Taken together, China’s Tencent and Japan’s Sony occupy 15% of the market. However, the last years have been mainly characterized by the explosive growth registered by companies such as NCSoft (+104%), Netmarble (+82%) and Nintendo (+82%).

Consolidation and volatility

Faced with these phenomenal rates of growth and accompanying financial results, video game companies have become interesting acquisition targets for investors who have historically been hesitant to fully engage in this sector.

In terms of both debt and capital investment, many have perceived the financial success of studios to date as being largely random and dependent on specific titles that are successful or not, in the same manner as film studios. That is no longer the case.

To mitigate the volatility associated with titles, several studios have developed a catalogue approach that evolves over cycles of three to four years. Several major editors have completed their offers through mergers and acquisitions aimed at increasing their studios’ footprints and thereby enabling the leaders of these new empires to manage them as they would manage an investment portfolio.

According to Digi-Capital’s report covering the fourth quarter of 2018, last year, a total of over $US25 billion was invested in the industry. It is a sum that the report’s authors refer to as the “game industry’s Everest.”

This effervescence is similar to the one that has characterized the telecommunications sector over the past 20 years and that has led to a sharp drop in the number of players in the field as well as a situation where a limited number of giants are forced to optimize their oligopolistic positions, often hindering competitiveness.

However, as pointed out by Digi-Capital, investors’ enthusiasm also tends to be rather cyclical. After a record year in 2014 (US$24 billion), producers saw their capital contributions drop by 90% in 2015. A similar situation had occurred in 2007.

The video game sector is still far from having reached the same level of concentration as the telecommunications sector. Although the tendency among studios to consolidate leads to an increasing number of megaproductions, it is just as essential to protect and preserve an ecology of independent studios giving rise to new ideas, new concepts and new work organization methods.

To this end, it is interesting to note the emergence of independent studio advocacy organizations, such as La Guilde des développeurs de jeux vidéo indépendants du Québec, which encourages and facilitates the development of emerging studios and allows the video game developer community to exchange and to structure itself.

Expertise and concentration in Canada

Canada holds an enviable position when it comes to video game production. In 2017, according to Les Affaires, 596 gaming studios in Canada employed a total of 21,700 people.

Here, like elsewhere in the world, the 25 largest studios employed 62% of all workers. At the other end of the spectrum, 28% of the sector’s employees, i.e., about 5,000 people, work for companies with 25 employees or less.

It’s a sign that the country’s ecosystem is vibrant. However, to have a voice in the global video game industry, it is imperative that local players also think about possible consolidations if they are to develop their capacity to produce games in a more consistent and predictable way such as to dampen the volatility and actively participate in this new creative Eldorado.

However, as is often the case in the field of film and television, independent video game studio executives are sometimes less equipped to take full advantage of the full scale of financial possibilities available to them. These are issues that will define the future of the sector and therefore command increasing interest and attention in the years to come.

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Francis Gosselin
Francis has a doctorate in economics and is a multipreneur. Associated with the Sage Consulting Group since 2018, he is also the president of Norbert Hill and chairman of the board of directors of FailCamp, an NPO dedicated to promoting entrepreneurism and apprenticeship. He has worked as a consultant in the fields of education, media, real estate and financial services for clients such as Ubisoft, École des sciences de la gestion (ESG UQAM), Radio-Canada, Lune Rouge, BNP Paribas, Allied Properties and the Institut de Développement Urbain. He is a staunch believer in the virtues of social and philanthropic engagement, sits on the board of directors of the MUTEK Festival and is a member of HEC Montréal’s Club of 100 young philanthropists. Since 2012, he raises MIRA dogs for the benefit of people in need and contributes financially to this important cause.

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