An Industry Analysis, from a VC Perspective Nik Shah T’05 MBA Fellows Project
March 11, 2005 Hanover, NH
The Video Game Industry
An Industry Analysis, from a VC Perspective
Authors: Nik Shah Nik.Shah@Dartmouth.edu Tuck Class of 2005 Charles Haigh Charles.Haigh@Dartmouth.edu Tuck Class of 2005
The video game industry is poised for significant growth, but many sectors have already matured. Video games are a large and growing market. However, within it, there are only selected portions that contain venture capital investment opportunities. Our analysis highlights these sectors, which are interesting for reasons including significant technological change, high growth rates, new product development and lack of a clear market leader. The opportunity lies in non-core products and services. We believe that the core hardware and game software markets are fairly mature and require intensive capital investment and strong technology knowledge for success. The best markets for investment are those that provide valuable new products and services to game developers, publishers and gamers themselves. These are the areas that will build out the industry as it undergoes significant growth.
A Quick Snapshot of Our Identified Areas of Interest
• Online Games and Platforms. Few online games have historically been venture funded and most are subject to the same “hit or miss” market adoption as console games, but as this segment grows, an opportunity for leading technology publishers and platforms will emerge. New developers will use these technologies to enable the faster and cheaper production of online games. The developers of new online games also present an opportunity as new methods of gameplay and game genres are explored. Wireless Games. Mobile gaming is projected to be a large market in the coming years and this has led to its identification as a “hot” VC segment. It has seen a lot of financing and consolidation activity recently, so while we still see opportunity, we believe that it may be approaching the saturation point of initial funding and should be entered carefully. A follow-on investment in a market leader is likely
Video Game Industry Analysis March 11, 2005
the best strategy for entry at this point, until software standards are set and an initial shakeout occurs. • Communications. Massively Multiplayer Online Games (MMOGs) involve players scattered in all geographies. Thus, the communication tools within games are important for both interacting during play and recruiting players for a game session. Most of these tools are currently embedded within games themselves, but a few standalone tool suppliers are emerging and we believe that “best of breed” and technology agnostic solutions will win the market. Advertising / Content and Other Services. The growth of games has led to their adoption as a marketing tool, and we believe this will continue throughout all segments of gaming, including console, PC, online and wireless games. All forms of marketing, including both “advergaming” and product placements represent areas of opportunity since one of the most sought after advertising demographic groups are now the primary gamers. Other services, such as product exchange, will also grow as the online/MMOG market, in particular, grows. Enabling Software. The software toolkits and platform software used by all types of game developers is a disparate and under funded market. We believe it is poised for growth as game technology advances particularly in the mobile gaming segment. Advanced toolkits both reduce the cost of game development and increase the sophistication of games. Enabling Hardware. While some graphics and sound chip sectors are mature (consoles, PCs), opportunity still lies in the emerging hardware sectors (wireless, handheld) for technologically advanced semiconductors with the appropriate small formfactor. Hardware and software standards have yet to be set in...