In the London Underground, the ubiquitous warning is to “mind the gap” between the train platform and the train. Peter Warman, head of game-market analysis firm Newzoo, thinks that’s a good analogy for the growing gap between investors and opportunities in the game market.

Newzoo 2During 2012, stocks such as Zynga’s tanked after a big initial public offering. And while mergers and acquisitions hit a record $4 billion ($3.4 billion by our own calculation at GamesBeat), game investments tumbled 57 percent, according to investment bank Digi-Capital (see chart at right).

The big difference between the acquisition values and the value of investments suggests a disconnect, where investors no longer believe they can get out-sized returns. This comes amid headlines bemoaning layoffs at traditional game companies and a fall in retail sales of titles in the U.S. But in an interview with GamesBeat (in a preview of a talk at the [a]list summit in New York on Jan. 29), Warman said the gap comes from a misperception. While traditional console releases are seeing retail sales fall, the overall game industry is still growing fast on a global basis across multiple platforms, he stated.

Newzoo 3“There is a lot of worry about the state of the game market, which is changing enormously,” Warman said. “Zynga’s stock fell, and it had such a negative effect on investors. But there is nothing wrong with social gaming and the larger market. We want to put investors back at ease and get them to understand the market that we see.”

Warman says the big trend that has benefited gaming is the increase in the number of screens people play titles on (see picture at left). In addition to the PC and the TV, consumers are playing games on tablets and smartphones, as well as portable gaming systems.

“Five years ago, only two screens mattered, but now, all of the screens form a perfect circle around the consumer,” Warman said.

Social, mobile, and online are now growing on top of the PC and console markets. And markets in emerging territories are growing at faster rates. That is a lot more to get excited about. When you add up those numbers, you get a $68 billion industry growing at a compound-annual-growth rate of 7 percent a year. All told, Warman said gamers now number about 880 million (see chart at bottom). Mobile titles are growing 32 percent a year and are now a $9 billion market. About 33 percent of all mobile-app downloads are games, and 66 percent of all mobile-app spending is gaming related.

Within this context, Warman acknowledged that some segments of the market are going through hype cycles. Social gaming had hype, followed by the mobile-gaming bubble. Investors touted “mid-core” social games even as Zynga’s casual offerings declined. Social casino games soared in the last year. Hype over the hot categories drives a herd mentality among investors and inevitably leaves them feeling burned when the category fails to live up to expectations.

“We’re confusing investors and giving them no clear outlook on the future,” Warman said. “The result is a decline in investments. But based on what we see, the game market will grow for another 20 years.”

Warman acknowledged that only a few game companies have maximized their value by succeeding in multiple parts of the market. Electronic Arts is beginning to see a payoff from its years of investments in digital efforts, but its stock price doesn’t reflect that yet. THQ, which dismantled in a bankruptcy auction last week, is an example of what happens when you make investments in the new categories too late.

“THQ ran out of time,” he said. “They didn’t have enough time to learn from experiments in gaming as a service. You have to learn your optimal investments in digital content. These days, you have to realize you are not investing in a team that will make a game and move on to something new. You are investing in a team that will run a game, like a service.”

By contrast, he pointed out that Kabam learned from years of experimentation on how to monetize games like Kingdoms of Camelot. When the studio took that property to mobile platforms in the past year, it was a smash hit, becoming the No. 1 grossing hit for the Apple iTunes App Store.

“The good news is that the tablet and smartphone platforms are poised for growth for a long time ahead,” Warman said. “And investing in international markets can pay off now. There is so much opportunity if you localize a game for a region like Russia or Turkey.”

Companies have to realize that their marketing budgets should spread across multiple platforms, not just a single platform, Warman said.

Warman highlighted five trends that matter. Consumers are using more screens. Games are becoming free. Games are becoming services. A good business model is a balanced one. And globalization matters.

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