The Case For Investing In Media & Games
Since our inception, Hillfarrance has been one of the only active local investors in the media & gaming industry across Australia/New Zealand (ANZ). We’ve heard whispers of how gaming is super risky without much return potential and that it’s an asset class that people do not understand.
It’s about time we address some of the misconceptions about media & gaming and why we think it’s an awesome industry to put $$$ into.
Let’s first talk about the industry of media & gaming
To us, media & gaming is an umbrella term that encompasses the whole spectrum of content, technology, tools & infrastructure that powers how we:
Create;
Monetise; and
Distribute.
As an example, we have funded studios that create content in the form of games & animated films, such as:
On the flip side, companies such as IGC provide the software and tools to enable game studios to monetise in new ways through on-demand physical collectables.
The first misconception we’ve seen is how people view the games industry in just a content-based lens when it is so much more. As people say, “Content is King”, however, we can breakdown “content” into several business model buckets, such as:
Game Sales: Revenue generated from the sale of a video game across various platforms (PC, console, mobile).
Downloadable Content (DLC): Additional content, expansions, in-game items, or season passes sold after the initial game purchase.
Subscriptions: Revenue from subscription-based services for access to games (e.g., Xbox Game Pass, PlayStation Plus). Think of the World of Warcraft.
In-Game Advertising: Revenue generated through advertisements displayed within games.
Microtransactions: Small in-game purchases for virtual goods, skins, characters, etc.
Esports: Revenue from tournaments, sponsorships, and advertising associated with competitive gaming.
In addition to the sale of one copy of a game, there are five other ways for a game studio to monetise, which provides a diverse revenue stream from an investment perspective.
Secondly, we’ve seen that the negative sentiment around gaming investment is predicated on the “hit-driven” nature of such content. We both agree & disagree with this notion because if one IP from a game studio blows up, you could have the next Star Wars or Among Us on your hands. Conversely, if you’re relying on just one IP to return 10x, you’re probably not doing the best job at investing.
The fact of the matter is that media & gaming is an exponentially growing market with the potential for huge outcomes.
Let’s dive into the stats.
Gaming as a Market Size
It’s probably sounding like a broken record now, but we want to really emphasise how big the video gaming industry is. With a projected player base of 3.38 billion people worldwide and generating $184 billion in revenue in 2023, it’s a market that must be treated with respect.
As VCs who invest in lines, not dots, it’s prudent not to include this graph of the history of video gaming, which shows how market revenues are now split between personal computers (PC), console & mobile-based game revenue.
Source: https://www.visualcapitalist.com/wp-content/uploads/2020/11/history-of-gaming-by-revenue-share-full-size.html
Media & Gaming Generates Significant Revenues
Individual companies are making significant revenue from the gaming industry alone. These 11 companies (soon to be ten if the acquisition goes through) have seen their total revenue grow from US$ 74.5 billion in 2019 to US$ 131.8 billion in 2022. This means, on average, a growth of 15.05% annually.
COMPANY | 2019 | 2020 | 2021 | 2022 |
|---|---|---|---|---|
Tencent | $ 4,240,040,000 | $ 21,854,000,000 | $ 24,402,000,000 | $ 23,898,000,000 |
NetEase | $ 6,668,195,000 | $ 8,369,152,000 | $ 9,855,703,000 | $ 10,811,122,000 |
Sony Interactive Entertainment | $ 18,190,000,000 | $ 24,800,000,000 | $ 24,400,000,000 | $ 25,960,000,000 |
Ubisoft | $ 446,000,000 | $ 1,534,000,000 | $ 2,240,000,000 | $ 2,370,000,000 |
Microsoft | $ 11,386,000,000 | $ 11,575,000,000 | $ 15,370,000,000 | $ 16,230,000,000 |
Take-Two Interactive | $ 2,668,390,000 | $ 3,088,970,000 | $ 3,372,770,000 | $ 3,504,000,000 |
Activision Blizzard | $ 6,490,000,000 | $ 8,090,000,000 | $ 5,100,000,000 | $ 7,530,000,000 |
Embracer Group | $ 502,370,000 | $ 864,620,000 | $ 1,633,200,000 | $ 3,604,540,000 |
Apple | $ 8,500,000,000 | $ 13,500,000,000 | $ 15,300,000,000 | $ 15,900,000,000 |
Nintendo | $ 10,800,000,000 | $ 13,000,000,000 | $ 16,500,000,000 | $ 15,000,000,000 |
Electronic Arts (EA) | $ 4,650,000,000 | $ 5,600,000,000 | $ 5,629,000,000 | $ 6,991,000,000 |
TOTAL | $ 74,540,995,000 | $ 112,275,742,000 | $ 123,802,673,000 | $ 131,798,662,000 |
It is important to note here that out of all those listed above, Apple alone does not develop games. Their whole revenue comes from hosting the “App Store” platform, which distributes mobile games. This shows that serious money can be made through the whole value chain. It also notes that companies like Apple and Microsoft have a growing interest in the gaming industry. This culminating point is that Microsoft has made a $68.7 billion dollar acquisition bid on Activision Blizzard. (hence the possible reduction to 10), signalling the significant growth potential and profitability associated with gaming and interactive entertainment. Of course, these are industrial behemoths that are, understandably, not on our radar as possible investments.
On a more local basis, however, we have huge market examples such as Grinding Gear Games in Auckland, which generated a net profit of $49m NZD in 2022 & Playside in Australia, which is on track to generate $30m AUD in revenue this year (2023). This does not even include all the other private game-related companies in this region that do not disclose their revenues (and, more importantly, margins).
The NZGDA (New Zealand Game Development Association) sized the NZ gaming industry at a remarkable $407 million NZD in earnings in 2022, which saw a growth of 47% in the last year. Starting to see a trend here now?
Now back to the global gaming market, the graph below shows the market in 2023, boasting a total market of 187.7 billion US dollars. This excludes advertisement, secondhand trading, secondary markets, advertising revenues in and around games, consoles, peripheral hardware, B2B services and the online gambling/betting industry.
Source: https://newzoo.com/resources/blog/explore-the-global-games-market-in-2023
To put this into context, the global digital video content market encompasses ALL TV shows, movies, music videos, and advertisements combined.
Media & Gaming Companies Get Funded
Media & gaming companies have been proven to be venture-fundable. Between 2020 - 2023 in Australia & New Zealand alone, 29 media & gaming-related companies were funded with a total of $306m NZD raised (as per Crunchbase data). This may not seem like much from our region, however, on a macro-level, we are certainly punching well above our weight as this data does not show the true total deal amount.
Note: Crunchbase (2023), Advanced Search | Funding Rounds | Crunchbase. This graph is in NZD dollars. Only funding rounds for which the amount was disclosed.
The total global venture capital interest in gaming also took flight. While the market was down in 2022 to US$ 13.3 billion, from US$ 16.6 billion in 2021, it nearly quadrupled its 2019 level. The growing interest mirrors the increasing potential for high returns and its track record of profitability. According to InvestGame, there were 263 closed private investments in the first half of 2021 alone, representing $1.1 billion in total value.
We Have an Active Investor Network In This Region
Media & gaming in this region, like SaaS startups, have attracted a myriad of investors to this region.
Note: This list comprises Gaming VCs who have invested as a lead in an Oceania-based gaming-related company between 2020 & 2023, as per Crunchbase.
There is some serious money in the VC gaming industry. The likes of Bitkraft Ventures, Makers Fund, and Animoca Ventures have raised US$ 823 million, US$960 million, and $1.5 billion, respectively, just to invest in media and games. All three of these VC firms (including several more listed above) are actively deploying into this region.
What we hope to see in the coming years will be venture-backed exits occurring in the gaming space, which will further validate this truth.
Significant Outcomes Happen In The Media & Gaming Industry
Source: Crunchbase (2023), Advanced Search | Funding Rounds | Crunchbase
The gaming industry experienced a significant surge during the COVID-19 pandemic era. The total exit amount skyrocketed from around 2.2 billion NZD in 2019 to an impressive 29 billion NZD in 2022. Although 2023 showed a notable decline in exits, dropping to 9 billion NZD, it still outperformed the global venture-backed exit market, which witnessed a 90% decline. This statistic correlates with a hysteresis effect in the gaming industry. Still, this is only a droplet in the bucket.
Source: https://newzoo.com/resources/blog/explore-the-global-games-market-in-2023
What is interesting to see is that although most exits have come from the US using Crunchbase data, most of the players in the world are coming from Asia-Pacific, meaning an incredibly export-heavy industry. We see this as being a core factor to why media & gaming investment is such an investment-worthy industry - as games and its adjacent GameTech can be shipped/launched just about anywhere from day 1, much like software.
Gaming is not as affected by economic cycles compared with other industries.
The real growth for the industry is located in demographics. People of all ages play video games, and those who started playing games 20 years ago are still playing today. A prime example of this is how mobile games that are designed to attract Gen X and Baby Boomers (43+) make up 25% of the top-grossing games in 2021. An even more spectacular development is that Gen Z (11-26 years old) is the first demographic cohort that spends as much time gaming as it does watching video content.
Some would say this can be seen as a hedged investment in a potential downturn. Not only is it becoming a larger part of the spent leisure time, but staying at home fighting zombies is a relatively cheap activity when you consider the value of a $60 game, which can last hours and stretch into months. This makes games a bargain during an economic downturn, and that is why, historically, consumers have kept spending on video games during recessions.
Source: Morgan Stanley. (2022). Could the video game industry be a recession hedge? | Morgan Stanley.
Why Media & Gaming Isn’t All That Scary
Game Development as a methodology follows the same life cycle as software
Due to the hit-driven nature of some video games and longer development-to-launch cycles, they’re seen to be “riskier” than other assets, which is fair. However, we view it differently and urge folks to look at the fundamental pillars of both game development and how it compares with more popular startup investment categories such as SaaS.
On the left-hand side, you have the software development life cycle (SDLC), and on the right, you have the Game Development Life Cycle (GDLC). Quite a similar framework & process, however, where one might assume that:
Games have a longer planning and designing period before they get lodged into the pre-production stage;
It’s much easier for you to test & iterate on an end product in software than it is in games at the beginning;
Theoretically, time-to-revenue in software tends to be much faster than game development; and/or
Cashflows are different within games since they’re not reoccurring (excluding Games-as-a-service).
The realities are that game development makes up for these nuances by:
Having highly adaptable frameworks and pipelines to make development scaleable after the pre-production stage;
Having the ability to offer games in an early-access (alpha/beta) state with revenues can come very early in the production life cycle;
Having multiple revenue streams associated with a single game title (like the ones we mentioned above).
Ultimately, whether you’re building a piece of revolutionary software for a new market or creating a unique game, success rate and risk rate go hand-in-hand.
The Payback Period For Games Can Be Significantly Shorter Than Other Venture-like Investments
Development Costs
While game development can be expensive, it often involves reusable assets, engines, and frameworks, reducing the need for repeated investments. Software development may require more custom coding and integration, potentially increasing development costs and extending the payback period.
Monetization Strategies
Games can employ various monetization strategies, such as freemium models, DLCs, and cosmetic microtransactions, allowing for multiple revenue streams and faster payback periods. Software: Software monetization is often more straightforward, relying on licensing fees or subscription models, which may take longer to generate substantial revenue.
Conclusion
Ultimately, to summarise, we are extremely bullish on this market and are going to continue to double down on it. We hope that by shedding light on the core statistics of this industry, we can open up investment and growth opportunities in this sector we love so much.
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