Video game acquisitions heat up as publishers target exclusive content

The increased M&A activity in the video game industry last year is expected to continue as publishers continue to pursue acquisitions to strengthen their platforms.

The first quarter of this year already saw deals by gaming heavy-hitters including Electronic Arts Inc., which announced its acquisition of mobile game developer Glu Mobile in February and completed its acquisition of U.K.-based Codemasters the same month. Other notable acquisitions included Nintendo Co. Ltd.'s deal to acquire Canadian developer Next Level Games and Epic Games Inc.'s play for Tonic Games.

Microsoft Corp. made a big splash with its $7.5 billion deal to acquire game publisher ZeniMax Media Inc. on March 9. The acquisition is among the largest pure-play video game deals in history and brings Microsoft's list of internal game development studios to 23.

Prior to the ZeniMax purchase, Microsoft's largest gaming purchase was the $2.5 billion acquisition of Minecraft-maker Mojang in 2014. Most of the other largest pure-play video game deals in recent years targeted mobile game developers and hardware.

When Microsoft first announced the ZeniMax deal in September 2020, the company was cagey about whether the portfolio of gaming IP it inherited from the deal will remain exclusive to its own Xbox and Windows PC platforms. However, in a recent virtual roundtable discussion about the deal, Xbox head Phil Spencer confirmed that at least some of those games would not be available on competing game consoles and services.

"We have games that exist on other platforms, and we're going to support those games on the platforms they're on," Spencer said. "But if you're an Xbox customer, the thing I want you to know is this is about delivering great exclusive games for you that ship on platforms where Game Pass exists."

When contacted by S&P Global Market Intelligence, an Xbox spokesperson pointed to an earlier statement by Spencer which suggested that the titles would be available on other consoles on a "case-by-case basis."

Michael Goodman, director of digital media strategies at Strategy Analytics, said it would not have made economic sense for Microsoft to shell out $7.5 billion to acquire ZeniMax and not leverage that treasure trove of gaming IP to attract consumers to its Xbox consoles and Game Pass game subscription service.

"Microsoft learned the hard way that it needs exclusive titles to stay competitive with Sony Corp. and Nintendo and the company is now remedying that with its acquisition spree," Goodman said. "Exclusive content is the lifeblood of any platform — be it a console, a subscription service or a streaming service."

The Walt Disney Co.'s Disney Plus streaming service, which recently surpassed 100 million subscribers less than two years after its launch, can attribute its rapid growth to its large volume of exclusive content, Goodman said. He noted that Sony and Nintendo have had similar success with their own first-party, exclusive offerings, which prompted Microsoft to open its coffers and pursue studios.

"The streaming wars have taught us that licensing content is not sufficient to stand out in a crowded market," Goodman said. "You need original content and for game publishers that means acquiring studios that either bring their existing IP to the table or develop new ones from scratch."

The ownership of exclusive titles becomes even more important as the gaming industry moves toward subscription-based models similar to video streaming, Goodman said.

Daniel Ahmad, a senior analyst at research firm Niko Partners, said subscription services and cloud gaming could be one way for the Xbox brand to increase its presence in Asia, where its stand-alone console business has performed poorly.

"We believe that Game Pass could be a great solution for players in Asia where, outside of Japan, console gaming is niche or prohibitively expensive, with gamers able to play games on already existing devices such as smartphones," Ahmad said.

Tencent Games, Chinese tech conglomerate Tencent Holdings Ltd.'s gaming subsidiary, closed 31 video game deals in 2020 alone, according to data by Niko Partners. The company also has a significant presence in the West, owning shares in Activision Blizzard Inc., Epic Games and French publisher Ubisoft Entertainment SA.

"Tencent has become much more aggressive with regard to M&A over the past year and has nearly closed as many video game related deals in the first three months of 2021 than it did during the entirety of 2020," Ahmad said. "The company has augmented its investment philosophy this year, now investing in smaller companies than it typically does, and at a much earlier stage."

Ahmad said the change comes as Tencent faces increasing competition in the games space from other large tech firms such as Alibaba Group Holding Ltd. and ByteDance.

"Tencent is in no danger of losing its No. 1 position in the games market, but it is beginning to feel some pressure as other companies have been able to disrupt its grip on the top-ten grossing games chart," Ahmad said.

Goodman said he expects Microsoft, Tencent and other major players in the gaming industry to continue acquiring studios through 2021, as in the end, the platform with the largest number of exclusive titles "will be the clear winner."