A recent gamesindustry.biz article discussing the increasing consolidation of the games business caught our attention. We wanted to share our thoughts on what this means for the games industry in China.

The last couple of years have seen a wave of M&A activity in the games space. And, unlike the previous wave that happened in the early days of mobile gaming, this one is driven less by gaming incumbents trying to ensure they don’t get left out of a sea change in gaming tastes, and more by strategic investors looking to round out their financial portfolios. The question is: why is this happening?

The article notes: “This … climate … [is] unusually settled by the standard of the past couple of decades – the kind of climate where small, rapid acquisitions of innovators doesn’t really happen … but where the risk factors have cooled down to the point where bigger, more naturally cautious companies start looking at very high-value acquisition and strategic portfolio moves.”

In effect, the article speculates that the current wave of gaming M&A is being driven by mature companies – both inside and outside the gaming industry – looking for steady profits and solid expectations of growth.

We agree with this basic premise, but we also believe that, at least in the case of China-based investors, there are other factors at work. These include:

  • IP ownership opens additional monetization opportunities – In the West, there is a limited track record of successful gaming crossovers with other media, particularly films and television. The opposite is true in China. Ownership of IP means that Chinese firms are in good position to take full advantage of all possible revenue streams that that IP can generate in China. In addition to other fundamentals, this is part of what is driving up the value estimates Chinese firms place on Western game companies.
  • Vertical integration offers ancillary revenues in addition to driving margin – While it is uncommon for Western developers to own the distribution channels for their games (particularly on mobile, where Apple and Google are the clear market leaders), in the highly fragmented world of app stores in China, it’s much more common for a single company to own development, publishing, and distribution for its products. This means that not only can larger players use exclusivity around IP ownership to drive ancillary revenues (think: device sales and / or app store usage), but they can also create better margins for their investors.
  • Ownership insulates against regulatory changes – Finally, outright ownership of IP provides a higher degree of insulation from potential regulatory changes in the unique business environment of China.

So, while in China, as in the West, gaming M&A activity is being driven by the desire of companies to round out their portfolios, there are additional factors that are leading Chinese firms in particular toward outright acquisition of gaming companies and, simultaneously, driving up their valuations of those companies.

At Joyme, we believe that the relative stability of mobile and PC gaming technology, along with the continued double-digit expansion of gaming revenues in China, will continue for the foreseeable future, along with the M&A activity this has helped to spark.

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