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Game Over for ‘addictive’ electronic games?

Assif Shameen
Assif Shameen • 10 min read
Game Over for ‘addictive’ electronic games?
SINGAPORE (July 10): Every year in mid-June, a who’s who of the electronic entertainment and video game industry, from makers of consoles to game developers, descend on Los Angeles, the entertainment capital of the world and home to Hollywood, for E3, t
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SINGAPORE (July 10): Every year in mid-June, a who’s who of the electronic entertainment and video game industry, from makers of consoles to game developers, descend on Los Angeles, the entertainment capital of the world and home to Hollywood, for E3, the annual games conference and exhibition.

CEOs of Sony, Microsoft and Nintendo Co rub shoulders with creators of games such as Angry Birds, Candy Crush Saga and Minecraft. Interactive games and entertainment, including online and multiplayer games, have burgeoned into a huge business.

The global games industry had annual revenues of over US$100 billion ($138.4 billion) last year, with Asia accounting for about half the market. It has been growing 8% annually.

But has the industry become too big for its own good? Are game developers, in their bid to outdo each other and chase new revenue streams, making new games too addictive?

Beijing’s move this past week to scold game developers for poison ing young minds with “addictive” games is seen as a reminder that the industry’s unfettered growth may indeed have limits. The boom in interactive entertainment has been driven by a rapid shift to mobile and user growth in China, where almost 800 million people, or over 60% of its population, now play some sort of game, mostly on a mobile device.

“The growth in the games sector in China over the past decade has been explosive,” says Tom Wehmeier, head of research of London-based venture capital firm Atomico, which has invested in top game producers such as Supercell, maker of Clash of Clans, and Angry Birds creator Rovio, both based in Helsinki. Mainland Chinese have taken to interactive gaming on mobile devices like a duck to water, spending US$24.6 billion on games last year.

“Every game developer in the world — European, American, Japanese, Korean — wants to make games for Chinese gamers,” he says.

To be sure, interactive gaming, once seen as a niche market, has come a long way over the past two decades. From arcade games to those played on desktop PCs, Sony’s Play Station, Microsoft’s Xbox or Nintendo’s Wii consoles to those played on mobile devices, interactive gaming and entertainment has morphed into an industry with huge profit pools in hardware, peripherals, software and services.

Barriers to entry lowered
The ubiquity of mobile devices has lowered the barriers to entry and made everyone a potential gamer. Half the world’s adult population has a smartphone, which, with faster access to mobile internet or WiFi, can double as a device to play an array of interactive games. That gives mobile an advantage over console- and PC-based gaming.

As mobile’s lead grows, more and more games are created just for that platform, making console and PC gaming less alluring. Free mobile games titles already allow tens of millions of players to compete against one another.

Moreover, as the creation of games for mobile becomes easier, developers have an incentive to prioritise mobile as the main platform. Smartphones are also helping to vastly expand the demographics of interactive gamers, from mostly young people to just about anyone who can use a phone or download a gaming app.

The style of gameplay, too, has expanded from hardcore games created for the most serious fans to casual, bite-sized interactive content catering to the masses. 30% of all interactive games are now played on smartphones. Add tablets and other handheld devices and that figure rises to nearly 40%. Games played on PCs or with consoles on TV make up less than 28% each.

Games-focused market research firm Newzoo estimates that by 2020, smartphones and tablets will account for well over 50% of the total interactive gaming market. From adventure, simulation, action, stealth shooter, combat, real-time strategy and multiplayer online battle arena games to massive multiplayer online role-playing games, there are growing genres of games being played globally. Developers such as Activision Blizzard or Tencent Holdings already have player bases of hundreds of millions for some of their games.

Atomico’s Wehmeier believes it is only a matter of time before a developer comes up with a game that attracts a billion monthly average users.

“It’s not a question of if, but when it will happen,” he says. The global gamer base broke through the two-billion mark for the first time earlier this year. Widespread adoption of live streaming platforms such as Amazon.com’s Twitch.tv and Microsoft’s Beam have helped popularise competitive video gaming, while eSports has dramatically transformed the global gaming landscape.

Media firms such as ESPN, Fox Sports, BBC and Turner have embraced eSports because they see it as one way to engage with millennials and offset the decline in ageing viewers of traditional sports.

Fortunately for the old media giants, sponsors and advertisers that were fleeing to chase younger audiences elsewhere are starting to return to lure new millennial viewers. So far though, the arrival of virtual reality and augmented reality has had little impact on the games industry.

Several tech companies are set to release hardware and software that will boost VR- and AR-based games. Apple is expected to release the iPhone 8 in September, reportedly with AR gaming capabilities that have attracted the attention of AR games-focused app developers. Moreover, the next iteration of Sony’s PlayStation, dubbed PS5 by the media and set to be introduced next year, has reportedly greatly enhanced VR gaming capabilities.

The top 50 listed games companies in the world now have a market value of over $550 billion, though Ten cent, with its tentacles in e-commerce and financial tech nolo gy, makes up more than half of that. Forty- three of the 50 most valuable listed games companies are based in Asia, 18 of them in China. There are now 26 games companies that have a market value of more than US$1 billion. More than half a dozen new listings are reportedly in the pipeline.

In mid-May, South Korea’s Netmarble Games, creator of the Lineage2 Revolution, listed on the Seoul bourse after raising US$2.3 billion. Netmarble is now worth US$12 billion, more than giant Korean consumer electronics firm LG Electronics. But unlike the frothy social media stocks such as Snap and other bubbly tech sectors, games companies are still trading at relatively reasonable valuations based on enterprise value to revenues or enterprise value to earnings before interest, taxes, depreciation and amortisation, says Wehmeier.

Game developers are rushing to global bourses for listings or seeking large games-focused companies such as Hong Kong-listed Tencent as strategic partners or investors. Comparatively lower valuations have not dampened their enthusiasm for IPOs. Singapore-based Sea, formerly Garena, the distributor of League of Legends, is reportedly readying an IPO on Nasdaq in September.

Wall Street investment banking giants Goldman Sachs Group and Morgan Stanley are seeking to raise over US$1 billion for what will be the biggest Southeast Asian IPO on tech-heavy Nasdaq. Sea’s upcoming IPO comes on the heels of the success of Singapore-headquartered, China-based online game developer IGG (formerly IGotGames), creator of Lords Mobile, Castle Clash, Clash of Lords 2 and Deck Heroes.

IGG, which listed on the Hong Kong bourse’s techfocused Growth Enterprise Market board almost four years ago, has seen its stock soar 310% since, which has helped the company transition to Hong Kong’s main board. IGG stock has more than doubled in the past four months, giving the firm a market value of US$2.1 billion.

The real action in the games sector over the past five years has been in the private market rather than the IPO market.

Four years ago, Supercell was acquired by Japan’s GungHo Online Entertainment for US$3 billion. GungHo is controlled by Singapore-based Taizo Son, younger brother of Masayoshi Son, the CEO and founder of Japanese tech giant SoftBank Group. GungHo later brought in SoftBank as a partner in the deal. Less than two years later, in 2015, Masayoshi acquired the rest of Supercell, valuing it at US$5.5 billion at the time, from his brother’s firm.

Last year, SoftBank flipped Supercell to Tencent for a whopping US$10.2 billion. Early last year, Activision Blizzard paid US$5.9 billion for Candy Crush developer King Digital. A year ago, Shanghai Giant Network Techno logy led a consortium that included the private equity arm of Alibaba Group Holding’s founder Jack Ma to buy Israeli social casino game company Playtika from Caesers Entertainment for US$4.4 billion.

Three years ago, Chinese search giant Baidu paid US$1.9 billion to acquire Chinese gaming outfit 91 Wireless. In 2014, Microsoft acquired Swedish game developer Mojang for US$2.5 billion. Up-and-coming games firms from Singapore join the large global players such as US-based Activision Blizzard, Electronic Arts and Take- Two Interactive Software, China’s Tencent, NetEase, Perfect World Co, Wuhu Shunrong Sanqi Interactive Entertainment Network Technology Co, Korea’s NCSOFT Corp and Nexon Co, France’s Ubisoft Entertainment and Japan’s Nintendo, GREE and Konami Holdings.

Game studios a threat to Hollywood
Increasingly, game studios such as Supercell and Rovio are being seen as potential rivals to Hollywood counterparts Paramount Pictures Corp (part of Viacom) or Warner Brothers (part of Time Warner, which is being acquired by giant telco AT&T).

Indeed, the threat is so big that Hollywood has been busy buying emerging game studios around the world. Independent Hollywood studio Lions Gate Entertainment last year invested in Finland’s Next Games and Universal Music in Swedish game developer Nuday.

Watch out for gaming studios buying up Hollywood studios. Tencent has made little secret of its desire to make its own blockbusters. The Shenzhen-based giant was a key financier of Warcraft, one of the most successful movies in China last year. It also wants to own US entertainment assets, film libraries, TV archives and studios. Lions Gate is an oft- mentioned target.

Sony Pictures released computer animated comedy The Angry Birds Movie last year jointly with Rovio. Rather than licensing Disney or Sony, Rovio, or for that matter Tencent, could easily make the next movie themselves, leaving Hollywood to handle just the global distribution. It is only a matter of time before the interactive gaming business becomes far bigger than Hollywood itself.

But Tencent, now the world’s 17th largest company by market value, was reminded this past week that its new-found power also makes it more vulnerable.

On July 4, Beijing’s propaganda tool, People’s Daily, slammed Tencent’s popular Chinese fantasy multi player role-playing battle game King of Glory, calling it a “poison” for young people. The game (also known as Honour of Kings) is based on League of Legends, a team battle game created by US developer Riot Games, which Tencent acquired in 2011. It has 200 million players and earned US$900 million in revenues in its first three months this year. “The game’s content is a twist of values and historical views,” the paper says. “Young people’s minds and bodies are consumed by their indulgence in the game.”

Tencent’s stock plunged 4.2% in the aftermath, wiping out US$15 billion in market value. The company moved swiftly to pacify authorities, saying it will limit play time for users of the game, particularly those under 16, and provide electronic child locks.

The game is popular among those aged between 12 and 18. So far, China has allowed the industry to regulate itself, but the addictive nature of the games and their appeal to youngsters is forcing a rethink. With its one-child policy — relaxed to two-child in 2015 — China has long pampered its kids. Every 10-year-old wants a games-enabled smartphone.

But Wehmeier believes the games industry will weather the current storm. In a year or two, the latest kerfuffle, he argues, will be remembered as just another bump in the road.

Assif Shameen is a technology writer based in North America.

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