This analysis was first published in SvD Näringsliv, in Swedish, on September 26th, 2022. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.
Billion-dollar deals in the games industry keep coming as the giants fight over the next big shift — games via subscription.
“These days every little game studio has an investment bank working for them.”
Christoph Hartmann, head of Amazon’s games division, sums up the state of the games industry in a simple way.
“I’ve been doing this for 25 years, and the number of game companies I’ve seen compared to what’s left today… […] Who is even still around?”
The question is entirely fair. The games market is in the middle of an enormous consolidation wave that is not yet over. Hence the need for bankers at game studios. There are lots of people calling to see if they want to become part of something bigger.
Just look at these deals from this year alone:
Swedish Embracer has so far made 17 acquisitions — just since February. Looking at the whole market, in the first six months of the year a total of 651 gaming deals worth $107 billion were struck — which is 25 percent more than all the deals in the whole of 2021. Consolidation is accelerating. But why?
There are three plausible reasons.
The first is how Covid affected the games industry at large. More time at home and limited opportunities for other activities benefited gaming companies enormously. Tailwinds in revenue gave game publishers the confidence to spend more on new projects — and to buy each other up. Add historically low interest rates for a long time and you have both cheap financing and unusually strong revenue. It became easy to go big on games — even for players that have traditionally not been particularly active there, such as Amazon.
Interest rates are now rising, but the trend appears to be holding, if you believe the analysts. “We are absolutely not in the final phase of this yet,” says Serkan Toto of analyst firm Kantan Games.
The second reason may be a shifted strategy around risk in game development. Embracer CEO Lars Wingefors described it like this to the Financial Times:
“If you make one game, you have a big business risk. But if you make 200 games, like we do, the business risk is smaller.”
Games — like TV series and films — are heading toward becoming ever more expensive and taking longer to produce. Quality expectations have risen sharply. But like other media, the risk is therefore also high. You can test your way to a certain point, but even a large investment is no guarantee that a game will be a hit. A single game studio can live and die with a single project — and perhaps work for several years on something that is never even released.
Embracer, the best example of a company pursuing this strategy, is betting that the sheer volume of titles released will guarantee a stability that individual studios struggle to create. But for that to work, you have to buy a lot of them. Which they have done.
The third, and probably most important, reason is a change in the business model for games. Big players like Microsoft and Sony are both betting heavily on games via subscription through services like Xbox Live Pass and PlayStation Plus. Even Apple — which has primarily been a platform for other people’s games — has had success with its subscription product, Arcade.
The subscription services have been around for a while but have become a major strategic focus in recent years. It is a big shift from buying games at a single price (common on console or PC) or buying smaller upgrades inside games (common for mobile games). Games often have to be designed differently to work in this new context. On top of that, you continuously need new games to motivate players to keep their subscription.
Like Netflix or HBO — who wants to pay for them if new series and films never come? And one way to guarantee a steady supply of new games is to own your own game studios.
It is not the first time the games industry has come together and grown bigger. Large companies like Electronic Arts and Japanese Square Enix reached their strong positions partly through acquisitions. But shifting your business model at the same time as you try to keep order among many new colleagues around the world — that is a new kind of challenge for the games industry.
