The hosts discuss the paradoxical state of the games business, comparing it to the post-pandemic video streaming industry. They explore the implications of increasing consolidation, the end of the ten year surfeit of cheap money, and the over-investment of private capital into studios. They also cover topics such as the evolving definition of gaming, challenges faced by gaming studios, and the impact of COVID-19 on valuation and growth. Additionally, they touch upon the challenges faced by the gaming industry in China.
Consolidation in the games industry could limit innovation and acquisition opportunities.
Rising interest rates and investor focus on profitability may lead to cost reduction and layoffs in the industry.
Lack of distribution innovation and concentration of power among existing platforms pose challenges to the long-term health and innovation of the industry.
Deep dives
Consolidation in the Games Industry
The podcast episode discusses the recent trend of consolidation in the games industry, noting major mergers and acquisitions such as Microsoft's acquisition of Activision. The consolidation is seen as potentially problematic because it reduces the number of potential publishers for third-party content and limits the options for smaller game companies seeking acquisition. The episode suggests that this consolidation could have a chilling effect on innovation and acquisition activity in the industry.
Challenges in the Post-Zero Interest Rate Environment
The podcast highlights the end of the zero interest rate phenomenon and its impact on the games industry. As interest rates rise, it puts pressure on public stock prices and reduces revenue and earnings multiples for big companies, impacting valuations across the industry. Venture capital, which relies on the public markets and cost of capital, also faces challenges as investors seek better returns in other options. The episode suggests that this shift in investor focus from growth to profitability could lead to cost reduction and layoffs in the industry.
Oversupply of Content and Lack of Distribution Innovation
The podcast discusses the oversupply of content in the games industry and the lack of innovation in business models and distribution. It points out that many recent investments in the industry have primarily focused on content rather than finding new ways to distribute games. This oversupply and lack of distribution innovation has led to a concentration of power among existing distribution platforms such as Valve, Apple, Google, and Microsoft. The episode suggests that this concentration of power and lack of distribution innovation could pose challenges to the long-term health and innovation of the industry.
Implications and Challenges for the Games Industry
The podcast episode explores the implications and challenges facing the games industry, including consolidation, the end of the zero interest rate phenomenon, oversupply of content, and lack of distribution innovation. It points out the potential negative impact of consolidation on innovation and acquisition opportunities. It also highlights the challenges posed by rising interest rates and the shift in investor focus from growth to profitability. Additionally, the episode discusses the need for more focus on distribution innovation and the potential consequences of a concentrated power among existing distribution platforms. Overall, the episode provides insights into the current state of the games industry and the various factors shaping its future.
Market Changes: Profitability vs. User Growth
In the podcast episode, the speaker highlights the rapid change in market demands, shifting from prioritizing user growth to profitability. Many companies previously focused on user acquisition and top-line revenue growth without much consideration for cost control. However, the market now expects companies to switch gears and prioritize profitability, requiring significant effort and a shift in mindset.
Challenges in the Chinese Market
The podcast discusses the challenges faced by game companies in the Chinese market. During the zero interest rate phenomenon, China was seen as a lucrative opportunity for the video game business, with expectations of an open market and significant growth. However, the Chinese economy experienced a contraction, causing valuations to plummet and uncertainties due to policies introduced by the Chinese Communist Party. These challenges have led to a period of retrenchment for both local and Western companies trying to do business in China.
Season 2 of the GameCraft podcast kicks off with Mitch and Blake introducing the new 8-episode season, followed by an analysis of the current health of the games business.
Mitch and Blake discuss the paradoxical state of the business, where a "golden age" of content is facing some increasing financial headwinds. They compare the games business to the post-pandemic video streaming businesses, which have all faced difficult belt-tightening after a growth phase that produced some of the best content ever.
They look at the implications of increasing consolidation in the business (i.e., Activision/Microsoft, Zynga/TakeTwo, etc.), the end of the ten year surfeit of cheap money (the "Zero Interest Rate Policy"), and, finally, the over-investment of private capital into studios to fund game creation.
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