GDC Europe 2010

Tim Merel has been invited to present his Global Video Games Investment Review at GDC Europe in Cologne (16-18 August 2010 http://www.gdceurope.com/) as a follow-up to the highly successful IBIS Capital/LBS Video Games Investment Network in London. The original presentation was to a private audience of 100 CEOs, CFOs and Partners from Activision Blizzard, EA, Square Enix, Sony, Microsoft, GameStop, SPIL Games, Bigpoint, Sulake, King.com, Time Warner, Google, Endemol, Goldman Sachs, Veronis Suhler Stevenson, Balderton, DFJ Esprit, Intel Capital and others. As a result of this event, several fundraising and M&A deals are now in progress.

Commenting, Tim Merel said, “People came from all over (US, UK, Japan, Switzerland, Germany, France, Finland etc) and seemed to take a lot from the private session, so I was pleasantly surprised to be asked to reprise it at GDC. There was very positive feedback on the original presentation, but what I enjoyed most were the frank discussions in the Q&A that followed. I found the likes of Jens Uwe Intat, Simon Guild, Peter Driessen, Timo Soininen, Jason Kingsley and a group of high profile VC and Private Equity guys talking about what it meant globally for games investment fascinating. I’m hoping that the session at GDC will prompt a similar discussion, but this time with a wider audience of decision makers and investors than we could accommodate in May. And of course I hope it leads to people closing fundraising and M&A deals.”

On the GDC session:

“The session will focus on fundraising, investment, M&A and JV opportunities in video games (including console, MMO, casual/social 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). It includes industry and sector dynamics, segmentation and economics (including public company valuations, private placements and M&A), with content from the full updated Global Video Games Investment Review http://bit.ly/buA71D”

On why online and mobile games should generate more revenue than console games:

“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, with growth investment opportunities in online and mobile games, as pure console sector growth is flat (and risky). Today online/mobile games generate around 1/3 of all games software revenues globally. In 5 years time they are forecast to generate 50% of all games software revenue, or around 1/5 more revenue than pure console games! Whether you have faith in the forecasts or not, CEOs and senior execs from the major US, European and Asian publishers all tell me that this is what keeps them awake at night.

What excites me about the online/mobile games markets is that they are both high growth and profitable, which is pretty rare. The leading competitors are growing revenue 100%+ annually while also delivering 20-30% EBITDA margins. Coupled with a fragmented industry structure, no real market dominance and clear strategic exit options to the major video games and media companies, the time for investment is now.”

On the online/mobile games investment gap:

“However, major publishers aren’t structured for online/mobile investment, as their core competencies focus on management of $20m+ serial, high risk, complex developments, launches and commercialisation. Online/mobile games require rapid, multiple, small scale parallel development platform investments, completely different to major publishers’ business cultures. As a result, major publishers are not investing enough organically and most CEOs tell me that they are wary of large scale online/mobile video games M&A at this stage. So they aren’t driving online/mobile games investment in the same way they did console games.

In parallel, generalist VC video games investment is in decline. Despite rapid online/mobile games market growth, VC investment across video games in 2009 had dropped by 60% from its high point in 2007 due to general VC market weakness and limited knowledge and relationships across complex, fast moving online/mobile games sectors.

I am constantly being approached by high quality, high growth online/mobile video games companies from the US and Europe. They are finding it harder than you would expect to secure investment to maximise growth during this critical stage, before the industry consolidates. Quality demand is exceeding quality supply of investment and board representation.”

On why a growth capital games fund could fill the investment gap:

“The opportunity now exists for major strategic video games, media and financial investors to maximise returns from online and mobile, so high quality deal flow is needed. Yet entrepreneurs typically avoid direct corporate investment prior to exit, so major strategic players aren’t seeing quality deals until M&A when valuations are full or already prohibitively high. As before, the generalist VC market isn’t putting enough money to work here either.

I believe that a growth capital game fund is the most promising approach, investing in online/mobile games companies rather than project funding individual games. A true growth capital fund game fund would invest in working capital, VC A, B, C rounds and growth equity in multiple, parallel game business development platforms (not “one game” hit driven companies) across the US and Europe. That’s where the majors should be looking to invest.

The real difference with this approach is the delivery of earlier stage investments than otherwise possible, meeting the needs of high growth companies independent of stage. With the right relationships and management, this could yield high growth capital returns (>30% IRR, 3-6x money multiple) due to investment at lower, earlier stage valuations than typical M&A. So long as the rules of engagement are clear, there is substantial opportunity to make money by investing in the growth of the best online/mobile games companies.

In short, the video game funding model needs to be reinvigorated in the same way that online and mobile are reinvigorating the video games industry as a whole. The console industry today looks a lot like the old media industry ten years ago: cash generative, revenues flat to down and cost focused. Fortunately there is a real opportunity for the games industry to attract investment in online and mobile to avoid a declining future. I believe it will happen.”

About Tim Merel:

Tim Merel is a Corporate Finance Director with Video Games, Digital Media, Technology and Telecoms experience in industry, direct investment, financial services, growth company development and turnaround, across Europe, USA and Asia Pacific, with background in software engineering, law and business from Yale and Sydney University. Tim has the triumvirate of evil professions, having been a lawyer, worked for Rupert Murdoch, and now being an investment banker. When he’s not doing sensible things, Tim writes adventure stories and plays a mean guitar.