Sometimes the game industry seems small and quiet compared to a “hot” industry like artificial intelligence. Then we get a week like this one, where everything turns upside down, and I can understand why it has become a $109 billion business, according to market seer Newzoo. When the dust settles, I think we’ll find that much of the excitement leads to Asia and that we are but stones on a giant game of Go.
On Wednesday, Google bought virtual reality game developer Owlchemy Labs, maker of the hilarious Job Simulator. After years of collecting a toll on games as the operator of the Google Play store, the move was Google’s first acknowledgement that it may need to become a first-party game publisher, rather than leave the game making to third-party developers. It may have been a small deal, but it’s always worth noting when a giant platform company realizes that games are important.
Netmarble also held an initial public offering in South Korea. The pure-play mobile game publisher raised $2.3 billion and was valued at $11 billion, making it more valuable than LG Electronics. It also makes it more valuable than Take-Two Interactive (worth $6.9 billion), whose Rockstar Games label publishes Grand Theft Auto, one of the most successful game franchises of all time.
Netmarble has already invested in Jam City (the Los Angeles maker of Cookie Jam) and acquired Kabam’s Vancouver office (and its big hit Marvel Contest of Champions). The company has said it is setting aside around $4 billion for acquisitions as it expands worldwide and gains a larger foothold in the West.
Netmarble has discovered what Japanese mobile game companies have also found with their advanced and rabid smartphone gamers. It can generate games like Lineage2: Revolution, which made $176 million in its first month in the domestic South Korean market alone. And it can take those profits, which boost its stock price, and then pole-vault its way to success in the global games market. It is the latest example of what I call “geographic arbitrage,” where a company can take advantage of a home market that is excited about a product category and use that enthusiasm to expand into regions where the appreciation for that category — and the valuation of companies — isn’t as crazy.
And yesterday, this trend solidified even more. Pocket Gems, maker of the hit game War Dragons and the digital comic Episode, raised $90 million from Tencent, the Chinese Internet giant which is also the world’s largest game company. Tencent now holds stakes in Western companies such as Supercell (maker of Clash of Clans), Activision Blizzard (Call of Duty), Riot Games (League of Legends), Glu (Kim Kardashian: Hollywood), Epic Games (Unreal Engine), and numerous others. Tencent already has game revenues of $10.2 billion, or nearly a tenth of the entire game industry’s revenues. And it’s going to just keep on growing.
Then we had one of the most surprising deals of all. SoftBank led a $502 million investment in Improbable, the London-based maker of SpatialOS, an operating system that makes it easier for developers to use cloud computing to create giant online worlds. Improbable seemed ambitious enough on its own, as Herman Narula wants to enable the tiniest of developers to create massive online worlds that would make the Battle of the Pelennor Fields in The Lord of the Rings seem like a little skirmish.
But Japan’s SoftBank has its sights on something even bigger. Masayoshi Son, CEO of SoftBank, said last year that his goal in acquiring ARM for $31 billion and setting up a $100 billion investment fund was to make the Singularity happen. That’s the day when AI becomes smarter than the collective intelligence of the human race. It might seem a bit crazy, but I can see how SpatialOS and Improbable might be a nice piece of that gigantic puzzle.
Last fall, Son compared his strategy with ARM to the game of Go, where you place black or white stones on a board. If you put stones near your base, you can protect yourself in Go. But if you place stones far away, you have a better chance to win, he said.
“Maybe 50 stones later, that is the key to success,” he said. “I do not play for 5 years. I play for 20 years or a 50 years game. So my way of doing it is with return on investment. Our is 44 percent for the last 18 years.”
Tim Sweeney, CEO of Epic Games, spoke at our GamesBeat Summit 2017 event last week, and he foreshadowed that this kind of week would happen. He spent the last few weeks traveling in Asia, and he said the mobile game industry has become huge there. The games are starting to rival console games in graphical quality and revenues. He pointed to Lineage2: Revolution’s huge first month.
“It’s an incredibly impressive set of games being developed there, and it marks the first time in the history of the game industry that Korean and Chinese game companies are getting substantively ahead of U.S. and European companies,” Sweeney said. “It’s a little bit scary trend that so much innovation is being driven from there.”
It’s no surprise that Asian companies are behind most of these deals in the parts of the industry that will matter the most in the future. Tencent and NetEase together have more than 65 percent of the mobile game market in China. That gives them a lot of profits to expand in the rest of the world.
“There are huge sets of investors there that expect to lose money for several years building VR companies and those making the future of software with the expectation that they won’t make money for five or ten years,” Sweeney said. “It’s a little worrying here that we went through this huge VR investment boom, and now we are seeing what looks like an investment bust. Within 10 years, I think the entire world will move to augmented reality hardware. We’ve got to be willing to invest.”
At GamesBeat Summit, we also had a panel on China’s global expansion, moderated by Lisa Cosmas Hanson of Niko Partners. Panelists included consultant Jazy Zhang (formerly of Giant Interactive); James Zhang, CEO of Concept Art House; and Jim Ying, senior adviser for CV Capital.
Each of the panelists described why China’s companies and others in Asia have such an advantage. The game companies have become much more profitable as China becomes the world’s largest game market, both for PC games and mobile games, with more than 600 million people playing digital games, Cosmas Hanson said. James Zhang said that Tencent’s King of Glory (Strike of Kings in the U.S.) is akin to League of Legends for mobile, and it has more than 10 million daily active users.
Ying said that the Chinese companies have huge valuation advantages in China, where there aren’t as many places for Chinese consumers to invest their money. China’s companies can invest in overseas companies that generate profits, Ying said. The Chinese absorb those profits and report them in their quarterly results, and that drives their stock prices upward further, which enables them to acquire other companies that don’t have the same high valuations, Ying said.
Jazy Zhang noted that Giant Interactive delisted itself from the public market in July 2015 in a management buyout for $3 billion. Today, its value is $18 billion, after being relisted in a reverse merger. The company now has more access to capital, and it can now use that money to invest even more, Jazy Zhang said.
It is good to see Google take some action to move into VR games, perhaps as some kind of defensive measure. But it is such a baby step compared to what the Asian companies are doing. Facebook has made its investment in Oculus. But the Western companies like Apple, Microsoft, Electronic Arts, Take-Two, Activision Blizzard, and Amazon seem like they’re taking small steps. They are indeed making investments. And perhaps they can hope that the Asian companies are enmeshed in the hype cycle and are over-investing ahead of a time when the bubble will burst. But as Sweeney pointed out, I do not think this would be a winning strategy for the West. This week should be a wake-up call for those who want to position themselves for the global game of Go.
Here’s a video of our session on investments and acquisitions by Chinese companies.