Analysts: Video Game Industry Eyeing More M&A Activity

Following the mega acquisition of video game publisher Activision Blizzard by Microsoft for almost $69 billion in cash — and, previously, Grand Theft Auto franchise owner Take-Two’s purchase of rival Zynga for $12.7 billion — the gaming industry is a hot commodity.

After months of decline in early 2020, the pandemic, coupled with the introduction of new game consoles from Microsoft’s Xbox and Sony’s PlayStation, have helped drive a non-stop surge throughout the industry as gamers (and new consumers) up their play on both physical and digital platforms.

Industry estimates contend the gaming market generated more than $180 billion in revenue in 2021, including nearly $90 billion in mobile gaming. That’s up more than 1% from 2020 — a tally driven in large part by the September 2020 launches of the PlayStation 5 and Xbox Series X and Series S consoles.

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By comparison, sales and rentals of physical and digital movies topped an estimated $30 billion in 2021, of which about 80% of revenue consisted of subscription streaming VOD, i.e., Netflix, Amazon Prime Video, Disney+, HBO Max, etc.

Jefferies analyst Andrew Uerkwitz said Sony and Amazon are inching to acquire third-party game publishers as ownership of content and intellectual property proves just as important as hardware/digital distribution.

In a Jan. 19 note, Uerkwitz suggests that if media tech companies are “serious about interactive [game] entertainment,” Sony and Amazon appear to be the frontrunners to close deals going forward.

“We see [Activision’s] larger, higher margin, more diversified portfolio of genres and platforms, visible content pipeline, and strategic value to [Microsoft] as justifying the premium over [Take-Two’s Zynga] deal,” Uerkwitz wrote.

Possible acquisition targets include Eletronic Arts, publisher of the “Battlefield,” “Star Wars,” “Dead Space,” “The Sims” and “Medal of Honor” franchises; France’s Ubisoft (Assassin’s Creed); and CD Project, publisher of Cyberpunk 2077.

The deal underscores the crossover appeal of games, TV shows and movies. In 2021, 48.7% of the video game-engaged audience also engaged with shows and/or movies on streaming services, even with a flurry of gaming-based content continuing to be released throughout the year (Mortal Kombat, “The Witcher,” and Castlevania, among others), according to research firm Diesel Labs.

About half (49.9%) of Call of Duty players talked about shows and movies, nearly matching the average for the broader gamer audience. Another 25.6% of COD engagers also engaged with Netflix content, 17.4% engaged with HBO Max content, and 15.9% engaged with Disney+ content.

Diesel reported that on Netflix, the top three titles Code of Duty fans engaged with in 2021 were Army of the Dead, Cowboy Bebop and “The Witcher,” the latter based on a popular game series.

On HBO Max, COD players engaged with Mortal Kombat, The Suicide Squad and “Peacemaker,” while on Disney+, they engaged with “Star Wars: The Bad Batch,” “Star Wars: Visions” and the video game inspired movie Free Guy.

Meanwhile, industry consolidation runs the risk of heightened government scrutiny and regulation. Indeed, despite a bulk of Activision’s Call of Duty gamers accessing the franchise on PlayStation, there’s no reason not to believe Microsoft could limit access to its Xbox users, including subscription-based gamers.

“It’s likely [Microsoft] intend[s] to stop offering [Activision] games on PlayStation, which raises a host of antitrust concerns, so I expect that there will be some scrutiny and a likely consent decree requiring them to continue to support PS for a number of years in order to get the deal done,” said Wedbush Securities media analyst Michael Pachter.

Phil Spencer, head of games at Microsoft, tried to nip in the bud any speculation about the issue.

“I’ll just say to players out there who are playing Activision Blizzard games on Sony’s platform: It’s not our intent to pull communities away from that platform and we remained committed to that,” he said in a media statement.

Deloitte: Consolidation, Niche Content Key to Surviving Industry Transformation

In the rapidly evolving over-the-top video ecosystem, traditional media distribution has been turned on its ear as pay-TV, linear broadcast and packaged media are being supplanted by technology companies entering the media and entertainment space — many with original content.

From subscription streaming video-on-demand pioneers Netflix and Roku to e-commerce behemoth Amazon, consumer tech giant Apple and social media stalwart Google/YouTube, tech companies have forced traditional media companies and studios to reconsider their business models to survive.

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And in the midst of COVID-19, recovery from the pandemic disruption will likely dominate operational strategy in the near term, even as companies consider how to address the broader and longer-term transformations in media and entertainment.

New data from consulting giant Deloitte suggests mergers and acquisitions, in addition to content differentiation are keys to surviving media distribution in the coronavirus era.

Since 2014, more than $700 billion in strategic M&A deals occurred across media and entertainment sectors, highlighted by Disney’s acquisition of 21st Century Fox’s entertainment assets and AT&T’s acquisition of Time Warner, including Warner Bros., HBO and Turner assets. Just as unprecedented change has forced companies to consider transactions — such as merging with a rival — that would have been unthinkable years before, Deloitte contends ongoing disruption may cause companies look to invest in areas previously ignored or out of their comfort zone.

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Globally, M&A activity in the broader telecom, media, and entertainment sector fell by 17% in the first half of 2020 compared to a year earlier, while value is 47% down. In the United States, the sector has been far more resilient, with volume down only 4%. But the 45% decline in deal value suggests that companies are looking at small and midsized deals following the megamergers, albeit with continued pandemic-related uncertainty also hampering valuations. Although the economic outlook will loom large, M&A deal pricing is likely to be influenced by demand for and supply of independent targets.

Differentiated Content is King

At the heart of media consolidation is access and control of content. With the arrival of more streaming services, and the heightened competition for talent and content, costs are skyrocketing. Since 2010, the number of scripted TV shows on domestic networks has more than doubled. And streaming services are now paying up to $20 million per hourlong episode— several times the cost of just a few years ago, according to the report.

With Netflix raising the bar on original content spend almost beyond the reach of most competitors, Deloitte suggests media companies differentiate by targeting niche audiences within their platforms. In Deloitte’s 2019 Digital media trends survey, 40% of paid streaming video users said they subscribed primarily to access original content. And this was up to as high as 57% for millennial consumers.

The report says media companies should focus on excelling in one or more of the following differentiators to remain ahead of the competition:

  • Providing differentiated content and programming, either at scale or through dominating a niche;
  • Controlling direct access to consumers through owned distribution channels, including direct-to-consumer(DTC)/over-the-top (OTT) alternatives, either at scale or through owning access to a valuable consumer segment;
  • Owning the capabilities required to capitalize on increased data and using it to boost profitability, optimizing proprietary data to develop better insights.

 

Acorn TV generated more than 1 million subscribers (paying $6 per month) while maintaining high customer retention rates based on offering mainly British TV murder mysteries, even as more diverse and more capitalized platforms struggle to achieve half of that subscriber count. AMC Networks acquired Acorn’s parent RLJ Entertainment for $100 million in 2018.

Disney’s streaming-driven acquisition of Fox, including the rights to the X-Men, Avatar, The Simpsons, FX Networks and National Geographic — was a key step to accumulating premium content and expanding its digital presence through Disney+, ESPN+ and Hulu.

“A paucity of conventional targets may force companies to think more laterally about how to attain differentiated content,” read the report.

Indeed, news media businesses now view their back catalog of content as monetizable source material for video content, including TV series, documentaries, and even feature films. Similarly, companies have developed podcast programs into premium video content.

“These nontraditional sources of original content could provide targets for M&A in the coming months and years,” Deloitte wrote.

Barnes & Noble Investor Wants More Money for Bookseller

An investor holding a 3.4% stake in Barnes & Noble is urging the bookseller’s board to consider more lucrative offers for the country’s largest brick-and-mortar bookstore.

The fiscally-challenged chain, which sells DVD/Blu-ray Disc movies, in addition to digital content through its Nook subsidiary, earlier this month accepted a $478.8 million offer ($683 million including debt) from private fund manager Elliott Management.

Book distributor Readerlink LLC then disclosed it was working on a superior bid.

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Richard Schottenfeld, who reportedly ranks among the chain’s top 10 investors, in a June 13 filing said he believes Barnes & Noble is worth “considerably more” than the agreed-upon sale price, and believe that the special committee, including its chairman, Mark Carlton, “has failed in its duty to maximize value for shareholders.”

Schottenfeld’s action could be too late.

Should B&N renege on the acquisition, it would owe Elliott a $4 million break-up fee. That amounts balloons to $17.5 million after June 13.