Europe Meets China – How The Games Industry Is Evolving
Two weeks ago, I was honoured to be able to present our research report ‘Europe Meets China’ to an audience of Chinese games industry luminaries in Shanghai. Today I’m equally honoured to be able to share it with the wider world; it’s a fascinating look at one of the biggest and fastest-growing sectors in the world, one which has an almost limitless market, and one which is of growing interest to investors worldwide.
The report, which you can download here and which is embedded below, looks at how the games industry is developing and how its particular qualities make synergies between Europe and China so fascinating, from both a development and investment point of view. Obviously I encourage you to download and read the report yourselves and form your own conclusions from the data we present, but I’d also like to share some thoughts of my own – and from Atomico’s wider gaming team – on what it means and what you should take away from it.
We have reached an important tipping point for the games industry; the most ambitious entrepreneurs starting out today will no longer dream about getting to 10s or even 100s of millions of users. For the first time, the idea of getting to a billion users is a very real prospect.
But why now? What’s changed?
In the last year, we have hit three important milestones
- First, we’ve seen games break through the $100B barrier. As an industry, it’s now worth three times as much as movies worldwide
- Secondly, mobile has taken over, growing to $39B and now officially the largest games segment
- Thirdly, access to games has been democratised by the smartphone and means that they are played by more people than ever across all ages, sexes, nationalities and income groups. Most significantly, we hit 2B+ gamers for the first time last year. That’s a breathtaking number.
Through this incredible expansion of the market, the industry has become a factory for $B companies. In the last 15 years, we’ve identified at least 24 companies that have gone to achieve a three-comma valuation, including 11 from China and 6 from Europe.
This builds on a rich history – spanning five decades – of this industry creating hugely valuable companies. There are no less than 72 publicly-listed games companies valued at $100M or more that collectively add up to half a trillion US dollars in enterprise value – and that doesn’t even include hugely successful private companies, such as MZ or Rovio.
This remarkable growth has, unsurprisingly, not gone unnoticed by investors. In the public markets, increased investor confidence in the games industry has helped to drive up average multiples across those 72 companies to levels not seen in many years. And while games companies continue to trade at a discount to other tech categories, such as SaaS or marketplaces, multiples have doubled from where they traded back in 2012.
In the private markets, by contrast, we’ve seen continued enthusiasm from investors to back the next generation of studios, particularly in Europe where something special must be in the water. In fact, we saw a record number of new investments into European games companies in 2016 – a trend that has only continued this year.
Investors have been attracted to this space with good reason; it’s the most liquid market in tech.
At a time when the VC community has seen increasing mark ups, but often only on paper, games companies are more than twice as likely to achieve liquidity as $B+ companies from other tech categories
In the IPO market, we’ve seen a healthy environment for new listings at both ends of the spectrum. In May, Netmarble raised $2.3B at a $13B valuation, making it one of the largest IPOs of all time in Korea, while in Europe, mid-size games companies such as Next Games & Paradox have been able to take advantage of their scale, growth and profitability to successfully IPO.
We have also seen an unprecedented level of consolidation. Just the Top 20 largest M&A transactions of the last 5 years have delivered nearly $50B in combined value. Of course, Europe’s leading games companies have been a huge beneficiary of this trend, including Supercell, King & Outfit7 as recent examples. By our calculations, European targets accounted for over 70% of aggregate exit value
According to App Annie, there are more mobile game publishing companies in Europe than anywhere in the world. So why has it enjoyed so much success? I’d be interested in hearing other theories, but Atomico’s take is that Europe was able to take advantage of unique cultural, technical and commercial factors to become a world leader in mobile game development.
Many of these are subtle points, such as the region’s rich, centuries-old history of storytelling and creativity, or, its deeply-connected communities of passionate individuals that came together through the region’s mod and demo scenes, creating fertile ground for mobile game development.
Most importantly, European studios were developing for mobile before it even became the “mobile” that we think of today, learning their craft building games on Java and optimising for Nokia or Motorola featurephones, a world away from the mobile devices and games we recognise today.
Ready Player One
Europe is only one side of the story, though. While it became the capital of mobile games with an impressive track record of building great companies, something equally remarkable happened in China.
The explosion in mobile games may have occurred a little later, but China has more than made up for lost time. It’s now not only the world’s largest market of gamers – with over 600M – but also its most valuable by spend, eclipsing the US and even the whole of Europe combined.
China cementing this position is important, because it changes what it means to be a global leader. You can still build a big games company without coming here, but if you want to be considered a world-leading games studio today, you can’t ignore the Chinese market. It is here that the most valuable companies of the next decade will need to cut their teeth.
And as the market here grew, so too did the ambitions of its biggest champions. If we return to those Top 20 largest M&A transactions and instead of looking at value by target, we look at who was buying, we see a very interesting pattern.
Not a single acquisition led by a European buyer, but more than 50% of the value accounted for by Chinese acquirers, as the ever-important search for growth fuels their international ambitions.
Now, China’s strength should not be a surprise. After all, this country is home to the industry’s most valuable companies, its largest of which account for $340B in enterprise value and 72% of the global total. What we’ve seen happen here is the emergence of giant companies with giant war chests to match
Not only that, but Chinese games companies are valued higher than companies on the public markets in other regions, creating a real opportunity to leverage those multiples to build out an international footprint.
Of course, this rapid expansion has also created unprecedented levels of competition for developers.
1,500 new games are published to just the iOS and Google Play stores every single day. That means more than 550,000 new games are competing every year, 4x the level we saw back in 2012.
Some have been able to successfully navigate that competition to make it to the top of the charts. And that’s a lucrative position to want to hold on to – hence why we see that the top companies are spending hundreds of millions per year just to retain their position – making it incredibly challenging for any newcomers.
Nowhere is this competition more intense than in China. China is a daunting market for outsiders and is undoubtedly the most challenging market to enter; the numbers bear this out. A staggering 93% of total spend on iOS here in China is spent on Chinese games; that’s more localised than any other country, including Japan and Korea.
Looking from the outside in, what we see is insane competition, a frighteningly fast pace of change, a mindbogglingly-complex distribution landscape, alien approaches to monetisation, not to mention challenges associated with regulation and piracy. It’s, er, challenging.
I didn’t even touch on local tastes, which is often brought up as another massive hurdle. And, yes, there is a strong demand for local content, but we believe there is also undeniable appetite for international content. We’ve certainly seen that in other content industries… Just look at the top-grossing box office lists or the best-selling music artists – it’s clear that great overseas IP can succeed here in China too.
And one thing we know that Europe brings to the table is great content – with amazing gameplay, beautiful design, and engaging and emotional stories.
However, it’s also clear that to capture this opportunity, will require collaboration. To reiterate the title of our research, Europe needs to meet China. The right collaboration will not only allow European games to succeed in China, but also help Chinese companies to enjoy even greater success internationally. And this is already happening – European developers already earn hundreds of millions a year in China, and if you look at the top grossing and most downloaded games in Europe in 2016, they are already graced by Chinese companies.
Much more, though, can still be done with greater collaboration. There is a huge opportunity and we believe that whoever takes advantage of this will one day soon unlock the next great milestone of building a game that reaches a billion users.
Until then, though, we can’t wait to see all the steps on the journey that leads there. I hope you’ve found our report, and the analysis, interesting; we’d love to hear your thoughts on what we’ve pulled together, so do let us know, whether on Twitter, LinkedIn or Medium; in the meantime, thanks again for reading.
Oh, and to finish, here’s a short history of games showing quite how far everything has come…