A gamer plays video games on a computer.Quavondo Nguyen/Getty Images/iStockphoto
With video games collectively out-grossing movies, celebrities such as Kim Kardashian are getting involved in the sector. For investors who are interested in getting involved, they may want to take note that growth is hopping over the Pacific, with China overtaking the United States in revenue.
Still, "It's a tough area to invest in; it's hard to see the hit game before it actually happens. And even if you have a success, it's hard to reproduce hits that you've had before," says Chris Ye of Uken Games Inc.
In the six years his Toronto-based company has been in business, more than 30 million people have installed the firm's games, with nearly 10 million people downloading just one, Bingo Pop.
He's part of a global market that's worth $91.5-million (U.S.) and growing by 9 per cent a year, according to Newzoo Games Market Research.
Celebrities have figured this out. For instance, Ms. Kardashian has launched her own downloadable games and Paul McCartney has written video game music.
The worldwide market for games is changing, with revenues growing in most parts of the world but surging in some. Newzoo projects this year that China's game market will bring in $22.2-billion, up 23 per cent from last year and narrowly overtaking the United States, which took in $22-billion.
The U.S. market is still attractive to investors. "There are a lot of companies there and a lot of investment there," says Wojtek Kawczynski, chief executive officer of Mississauga-based BDA Entertainment, which produces a strategy game called Realm of Empires.
Domestically, the situation is different. "In Canada there aren't many private or institutional investors who would do gaming industry deals."
Mr. Kawczynski , who has previous experience as an investment manager, says the Canadian industry is dominated by small independent studios, who are more dependent than larger firms on government funding and small infusions of private startup cash.
In the entertainment sphere, game revenues are huge compared to other media, including movies. "As a point of reference – the top grossing game on mobile devices makes more annually than the top grossing movie," Mr. Ye says.
Indeed, the Culturist, an information-gathering website produced at University of Western Ontario in London, Ont., notes that the top-grossing movie in history, Gone with the Wind, has grossed more than $3.4-billion since it was released in 1939. By comparison, Space Invaders, released in Japan in 1978, has grossed nearly $14-billion.
Each of the top 10 highest-grossing games had higher revenues than each of the top 10 movies. Ms. Kardashian's game, called Kim Kardashian: Hollywood, is expected to bring her about $85-million out of a total $200-million in revenues.
Sir Paul, who wrote a theme for the popular game Destiny, said he recognizes the popularity of video games even though he's a terrible gamer.
"I'm the guy who comes up and says, 'Give me a go,' and gets killed instantly, then hands the controller back," he told the Guardian.
Picking winners and losers as an investor is even harder than playing the games, it seems. Thought the market is huge and growing, it might require similar nerves of steel because of all the different parameters that can affect success or failure. Here are some to consider:
Markets
The relative size of different markets for games does not necessarily match their growth. Latin America's game market is growing by 18 per cent according to Newzoo – second only to China's – but the market is only $4-billion. That's a quarter of the market in Europe, the Middle East and Africa, but those regions are only growing collectively by 5 per cent. The Asia-Pacific region outside China is the most robust, with $43-billion in revenues and growing by 15 per cent year over year.
Production costs
"It takes quite a lot of money to make even a relatively simple game," says Mr. Kawczynski. "Even for a quick mobile app you're looking at $100,000 plus. And that's risky because if you make a crappy little app you're probably not going to make any money on it."
Business models
Developing a game is only half the battle, says Mr. Ye. A company has to know how to market it and, more importantly, how it expects to make money.
"It isn't something that you put on the shelf, it's a service. If you do a good job then revenue starts to flow," he says. Investors should look at how revenues are supposed to come in.
Technology
Anyone remember Pong from the 1970s? Those massive, primitive console games may have a retro cachet, but leading edge technology is easily supplanted. Many game industry watchers expect virtual reality technology to take hold as it improves. It may be a good bet, but in an industry that combines up-to-the-minute entertainment with up-to-the-minute technology, it's hard to predict what products and games will prevail.