Drake Star Partners, an investment banking firm, published a report on deals in gaming made in the first three quarters of 2021. The report states that the total dollar value of acquisitions (announced or closed) is already twice that of 2020 in its entirety. The comparison to 2020 is even more striking considering that 2020 included Microsoft’s acquisition of Zenimax. In an unrelated discussion, a knowledgeable individual suggested that the rights for games from a developer that closes should not be available to be bought and the games should go into the public domain instead. Even if this particular view is not widely shared, it is difficult to find a lot of enthusiasm for acquisitions given their association with exclusivity, unfavourable treatment of popular franchises, or the eventual closure of beloved studios. This article aims to explain some reasons why these acquisitions might happen and what purpose they serve.
Why buy a game?
A company will acquire a game for the revenues it will generate, whether they are sales of an existing game (acquiring the game itself), anticipated sales for a future title (the license), or a combination of the two (acquiring the developer). In this sense a game is just like any other asset. The value of an asset can be estimated through the expectation of how much money it will generate and when that money will come in relative to other opportunities. Even this simplified view allows for markedly different motivations. Relatively mature companies may see few opportunities to grow through their traditional lines of business, and so instead choose to grow through acquisitions. A company may also want to acquire a presence in an area they may not already consider a strength (for instance, according to the Drake Star report, quite a few acquisitions are focused on mobile).
It may also be the case that a company sees an opportunity to do more with an asset than is currently realized. This kind of acquisition may bring to mind a large company expanding on a specialty it already has, such as EA adding to is sports catalogue (such as its acquisition of Codemasters), but it fits for all sizes. As a silly example, suppose ITV sees Netflix acquiring Night School and decides to get into gaming as well. Recognizing their existing relationship with Gordon Ramsay (ITV is the distributor of his TV shows) offers a unique opportunity, they try to acquire Cook, Serve, Delicious. The existing developer (Vertigo Gaming) is not likely going to find a Twitch stream of a celebrity chef berating influencers worth the effort and money to set up, but ITV may find it less costly and more impactful due to it promoting its existing shows as well as its new gaming division. In a more realistic example, the original developers of a game reacquiring the rights to continue development falls under this case since they are likely to have a unique connection with their audience, as well as a familiarity with the game (making the time they put into development more productive) and a certain perspective on what needs to be changed.
This kind of specialization is why it is more common to see acquisitions within gaming rather than outside of it. General Electric is unlikely to buy CD Projekt because it has better opportunities closer to the things it already knows how to do (and probably because they already tried entertainment and got out of it about a decade ago). Microsoft entered gaming through acquisitions and stayed, but Amazon has struggled and Google ultimately exited the development side (and, of course, these companies, along with Netflix, at least have familiarity with software development and entertainment). Opportunities are not distributed equally and so a given buyer may simply be able to make more of a given asset than its current owner.
Why sell a game?
Acquisitions cost money, and the number of people who don’t have that kind of money will always outnumber the ones that do. As such, “buying a game for the revenues it generates” will likely be rendered into the more colloquial “good old fashioned capitalist greed.” Wanting to make money isn’t the worst thing in the world, but any acquisition requires a seller, and so far the only explanation offered is an implication that they somehow value the asset less.
In the cases where a prospective buyer can realize more value than the current owner, there’s an opportunity to simply pay them more. While I don’t have affiliate links in this article, and I don’t run ads on this site (I actually pay not to), suppose when all is said and done this article drives people to somehow generate $0.50 in revenue. Another website with a more established audience and a gap it needs to fill expects it could generate $50 in ad revenue for running basically anything. Instead of paying someone to write the article they could simply offer to buy this one for $5.00 and I’d walk away feeling like I got 10x more than I should have even though I’m only seeing 10% of the revenue generated by the article (should I feel exploited? That depends on whether or not we assign a value to the website building that audience). So too with games. If an acquisition creates more revenue than can be realized by the current owner, a sale is the way the current owner can participate in some of that surplus.
Does this mean that all acquisitions involve some kind of surplus? Hardly. An unfortunate reality of game development is that almost all of the money that will be spent on a game needs to be spent before it earns any of the money it will ultimately make (with the possible exception of crowdfunding which, at least from a licensing perspective, is treated like a pre-order). Not only does the money come in after most of the expenses, the revenues for a successful game will be realized over years. As an example, if Deus Ex crossed 1,000,000 units in 2009 as Square Enix stated, then the first year accounted for less than 20% of total sales, though the share of revenues are likely to be higher due to discounts (though discounts on physical copies in the early 2000s were different than on digital games now). Developers may be unwilling or unable to wait for these revenues to materialize, even if they had perfect knowledge of the game’s future.
A developer may also sell a game or a studio to be able to realize even greater ambitions. When discussing the sale of Gears of War to Microsoft, Tim Sweeney estimated a fourth entry would cost more than what the first game made in revenue, and that “anything less [than a major success] could put us out of business.” Epic chose not to bet the business on Gears of War sequels and instead pivoted to the games it is likely best known for today. This choice allowed them to fail with Paragon, and develop Fortnite (which, at the time of that interview, was still a year away from releasing its battle royale mode and becoming a cultural phenomenon). The sale allowed Epic to focus on what it wanted to do. It is not difficult to imagine a developer being faced with a similar choice and choosing to be acquired in order to pursue even bigger projects.
Is it good that we buy and sell games?
The analysis above deals with the world as it is, but the comment that motivated this article was a claim about how the world should be (games should remain with the original developer and become public domain once they’re no longer active). It may not be wrong for a buyer to expect a return on their investment, but there is a big difference between realizing that return through long term support through high quality DLC and reissuing previously limited edition Kickstarter rewards as merchandise. It’s obvious that acquisitions already happen but the question is whether or not they serve a useful function.
The most useful function of a sale remains the ability to convert the lifetime stream of payments into some kind of present day realization, and there does not appear to be a readily available alternative. Financial returns are not the only consideration when choosing to make a game, but impairing that return is likely to limit the number and variety of games produced. Larger companies have the means to acquire games, but also have more of an appetite to realize those returns over time. The smallest possible case among sellers would be that of an individual (as in solo) developer. The qualities required to make and ship a game are desirable to a number of potential employers, and often those employers will pay better and offer more stability (the same is true for studios. Unity did not start off as a company focused on game engines and Ambrosia Software didn’t just make games). A game developer may not want to remain a game developer for their entire life. A sale is a mechanism that allows a game developer to move on. In contrast, if a developer is forced to realize that return through continuing to operate as a game developer, then it closes off the idea of game development to anyone not willing to make a long term commitment to that kind of work. Players benefit from variety, and talented developers who say what they have to say and move on to other fields are no less valuable than developers who make a lifelong career of it.
The function of a sale is not limited to an exit. The ability to realize a game as an asset has other implications such as granting access to certain types of financing. The benefits from a Gears of War type scenario in which a company with deeper pockets continues to expand the franchise are clear for the buyer, seller, and customers. Microsoft continues to get revenue from a popular franchise, Epic moved away from a risky business model they weren’t interested in pursuing, and players now have more Gears of War games across multiple genres. Even when not considering an acquisition by an entity that will finance further development, the ability to realize a game as an asset still will have a similar effect. The assets a company has will give it access to more financing options such as through investors or lenders. While the scale will likely not be as big as an acquisition from a company like EA or Microsoft, the ability to realize a game as an asset allows even an independent developer to finance more ambitious projects and, in turn, players benefit from more and better games.
The present analysis may appear too optimistic given its avoidance of acquisitions that did not turn out well. The difficulty with these cases is that it is difficult to disentangle causes that stem from factors that are not directly related to the acquisition. Acquisitions do not shield companies from economic reality. A sufficiently profitable parent company can continue to finance a studio that spends more than it makes, but it is under no obligation to do so. That same studio would also fail to exist if it had remained independent. Matters become more complicated when profitable studios are shut down, because opportunity costs are more difficult to understand. Any given company has a finite amount of money to put towards a number of projects, and costly projects that return less are less attractive than projects that return more while tying up fewer resources. This isn’t all that different from choosing between two job opportunities, or the hypothetical game developer saying “the game development thing was fun, but I want to go work on AI now.” It does not make much sense to spend money on something to shut it down, and the times it does make sense are prohibited by competition law. Acquisitions are not immune to poor judgement, changing priorities, changes in circumstance, or outright misfortune. When judging the benefits of acquisitions, it is important not to attribute individual circumstances to the practice as a whole, otherwise the conclusion is that acquisitions destroy jobs and wealth while simultaneously producing the most successful years and most ambitious games.
The bottom line
It understandable why people might be squeamish about the idea of acquisitions. People invest a lot of time into games because they value them and the interactivity of a favourite game is likely to inspire a sense of ownership over that experience. There are more players than developers, and even the developers are unlikely to have gotten into the business so they can think about their creations as numbers in a quarterly report. However unattractive it may be to think of games in this way, treating them like an asset that can be bought or sold enables a lot of activity that results in the more of the experiences we get from good games. Whether it is compensating developers on a timeline that works better for them, or financing more ambitious projects, the option to buy or sell a game enables greater variety and scope than if ownership were tied to the entity that created it. There are many reasons to sell an asset, but ultimately there’s really only one reason to buy: the buyer expects it to return something. While some acquisitions are born out of financial distress and other negative events, the act itself is a fundamentally optimistic one and one that carries benefits beyond just the buyer and seller.