Every year, I enjoy going to the Casual Connect USA conference in San Francisco. It’s a place to listen to talks, roam the hallways, gossip at the parties, and chatter with old friends. The stories were familiar. Gaming is a business of hits and misses, winners and losers, big companies and indies, with very little in between.
The show this week at the Marriott Marquis was smaller, with about 2,000 people compared to maybe 3,000 people last year. Thanks to mergers and acquisitions, layoffs and relocations, I saw fewer game companies and fewer vendors selling things to them. It was almost as if everybody was reloading and figuring out new ways to succeed in what has become a $99 billion global business. It feels as if everyone is looking for a haven in a market that has become very stormy and dangerous.
“We are seeing massive consolidation in mobile gaming,” said Chris DeWolfe, CEO of SGN (which has a big shareholder in NetMarble), at the opening of the conference. “We have room for some new entrants. The mobile market can grow by 20 percent, but it is also consolidating. And we are looking for a bigger piece of a growing pie.”
Above: Pokémon Go is now under a huge pile of money.
DeWolfe’s strategy is to focus on Hollywood intellectual property. But it felt to me like very few havens there are defensible. I talked to a lot of people about the state of gaming, and here’s a synthesis of how it feels to me.
Everybody, of course, loved talking about Pokémon Go, the smash success from Niantic Labs. They noted how Supercell’s Clash of Clans and Clash Royale games are probably suffering, as noted by one of the recent research reports.
Game investments are down this year, according to Digi-Capital, a tech advisor. It also seems to me like San Francisco area companies aren’t as strong as some regions in the rest of the world, such as Finland, Israel, or China. VCs have also moved on to virtual reality and augmented reality investments which aren’t necessarily concentrated in gaming alone. So we see a mismatch now, with very little money going into games, yet huge transactions taking place such as Tencent buying Supercell at a $10.2 billion valuation.
“There’s always an appetite among venture capitalists to move to the next platform because they want blue ocean markets,” said Walter Driver, chief executive of mobile game company Scopely, in an interview. “We’re standing out with good growth. I don’t think there are a lot of venture capitalists writing checks to new mobile game companies in this market.”
But Neil Young noted that it was too early to declare mobile gaming a wasteland and shut the doors on your way out. He believes that the $10 billion mobile game is out there, and Pokémon Go shows what happens when you target an existing market with a billion users, face very little barriers to adoption, and have an outstanding intellectual property where there’s pent-up demand. Dan Fiden (one of our speakers at GamesBeat 2016) of Funplus agrees, and that’s why he set up a $50 million fund to invest in mobile games, among other things, in a contrarian strategy.
Many game studios have moved into VR and AR for some hope (which is why our conference theme is “The platform awakens: A new hope for the game industry”) to find more “blue ocean.” (The red ocean is the competitive place where the sharks are, while the blue ocean is where the innovators go.)
“The market has gotten a lot more competitive and harder to enter,” said Keith Katz, cofounder of Execution Labs, an accelerator in Canada, speaking on a panel.
Above: Mitch Lasky and Eric Goldberg at Casual Connect.
Mitch Lasky, investor in Riot Games and managing director at Benchmark, said in a session that he found the excessive funding in VR to be “scary.” He also felt that the success of Pokémon Go wasn’t reproducible, because of the special conditions that made its success so big. He did believe that the rise of Twitch, game spectating, and internet video sharing was a very exciting space. Esports were probably the bright spot at Casual Connect.
When we do see winners, it often seems due to dumb luck or bizarre behavior. One observer noted how ludicrous it was for Nintendo’s stock price to shoot so high based on the success of Pokémon Go, as Apple (which gets a 30 percent cut of purchases) probably stands to make more money from it than Nintendo. After all, Nintendo owns a minority stake in Niantic, which made the game, and a minority stake in The Pokémon Company, which licensed the franchise. If Niantic makes $50 million from the game or even $500 million, Nintendo gets a very small slice of it. Yet Nintendo’s market value rose 80 percent in the past month to $32 billion. That’s kind of nuts. Niantic, on the other hand, is golden.
Above: Elad Kushnir (left) and Robert Antokol of Playtika.
I heard, of course, a lot of talk about who is buying who. South Korea’s Netmarble is rumored to have bid $4.3 billion for Playtika, the social casino game company in Tel Aviv that is owned by Caesars Interactive Entertainment. Caesars, which previously thought the virtual goods social casino game company was a good property to go with its real-money gambling properties, announced it would sell off the business in order to pay down debt. But we may see other bidders besides Netmarble, as Asia has many more buyers.
Playtika, which has more than 1,000 employees, is one of the haves in the social casino game business. Not many startups are left in that space. Toys-to-life is also having a hard time, and it’s not necessarily that surprising that Disney Infinity pulled out of the market.
So across the board, it’s getting harder to find the golden opportunities in what everybody was calling “the Golden Age of Gaming” not so long ago.
I don’t want to make it seem like it’s all bad news. I met one entrepreneur who started a game company that I had never heard of before. He told me that, while still effectively in stealth, his company has generated more than 100 million downloads in mobile games. That’s one of those fairy tales that I love to hear about, particularly when it seems like the news is all bad, and the headlines are hard to take.
In conclusion, I would say that game entrepreneurs and investors should be careful out there, but they don’t have to despair and invest their money in something like internet porn instead. The game industry still has myriad opportunities for smart money. It’s harder to find the bright spots, but it doesn’t mean that they don’t exist. The ocean is stormy, but it’s not all red. After all, Pokémon Go is the biggest success in a long time, showing that it isn’t impossible to break the grip of the top-grossing games list that seemed so static in the past. That’s something to celebrate.