M&A fastest way for Big Tech to get a share of gaming pie

London

BIG Tech will go shopping for computer games in 2021. Alphabet-owned Google and Amazon.com are trying to muscle into the multi-billion dollar industry by letting people play games on any screen for a monthly fee, much like Netflix did for television.

But as the streaming giant showed, success depends on exclusive content. Mergers and acquisitions (M&A) will be the fastest way for them to reach the next level.

The video games industry is expected to generate US$175 billion of revenue in 2020, according to global provider of games and esports analytics Newzoo. That is up 20 per cent versus 2019, helped by worldwide lockdowns as a result of Covid-19.

Amazon unveiled its new cloud gaming service, Luna, on Sept 24, with early access beginning on Oct 20, while Google's cloud gaming service, Stadia, was launched in November 2019.

In March, Stadia opened its second game development studio in Playa Vista, California.

Luna and Stadia let the companies' vast data centres do the technological heavy lifting involved in running a game. That allows Internet-connected players to stream high-end titles on low-end hardware, dispensing with pricey consoles like Sony's PlayStation and Microsoft's Xbox.

Broadband speed is still a major issue: at its highest resolution, Stadia's recommended network speed excludes about a quarter of British households. But improving infrastructure and the arrival of super-fast 5G connections should help.

The bigger question is what subscribers will play. Microsoft has not been afraid to splash out to improve its subscription service, dropping US$7.5 billion on Fallout publisher ZeniMax Media in September. Sony, meanwhile, recently spent over US$200 million on Spider-Man developer Insomniac Games.

The more content Sony and Microsoft add to their subscription services, the more likely gamers are to stick around. Global gaming M&A reached US$11.1 billion in the first nine months of 2020, according to PitchBook data, more than in the whole of the previous year.

Google and Amazon have yet to make any major purchases, preferring to fill their services with third-party games that are available elsewhere.

With combined cash reserves of almost US$140 billion, they could in theory afford any target, including industry heavyweights like Electronic Arts and Take-Two Interactive, valued at US$40 billion and US$22 billion respectively in mid-December.

However, it would make little financial sense to limit established games like EA's FIFA soccer series to a single platform. A more realistic target might be a publisher with a history of developing compelling single-player games, like US$7 billion Square Enix, maker of the Final Fantasy series. Buying individual studios rather than sprawling publishing houses would also make sense.

Any major acquisition by a Big Tech company would likely draw regulatory scrutiny. If Netflix is any guide, though, buying engaging content will be vital to being crowned gaming king. REUTERS