Publication
International arbitration report
In this edition, we focused on the Shanghai International Economic and Trade Arbitration Commission’s (SHIAC) new arbitration rules, which take effect January 1, 2024.
Global | Publication | mars 2024
Amidst a challenging macroeconomic climate, M&A activity in the gaming sector has returned to pre-COVID levels. While M&A deal value technically reached an all-time high of US$86bn, that was largely due to the completion of Microsoft’s acquisition of Activision-Blizzard.1 2023 saw 163 gaming M&A deals, valued at over US$10.5bn announced, with PC and Console representing the most active segment.2 From a financing perspective, US$3.5bn was raised across 750 financing rounds, comparable to the US$3.4bn raised in 2020. 3
The sector saw a number of key M&A trends during 2023, including:
Looking ahead to 2024, cloud gaming, generative AI, cross-platform IP, and the Digital Markets Act (the DMA) will all have an impact on the industry.
The COVID-driven boom in consumer demand led to acquisitive and growth-based strategies both during, and immediately following, the pandemic. However, as consumer demand levels normalise and the cost of debt increases, a number of gaming companies are considering restructuring and cost-cutting.
For example, the Embracer Group has implemented restructuring measures to reduce its leverage and operating costs, while also increasing its focus on exploiting existing IP.4 Such restructuring measures can involve both consolidation and divestment, and may also present acquisition opportunities for those with access to dry powder.
Others, including Tencent and Savvy Games Group, have continued to push to expand their holdings in Western gaming companies:
These key actors are expected to continue to pursue these strategies through 2024.
In October 2023, Microsoft received clearance from the UK Competition Markets Authority (the CMA) for its acquisition of Activision-Blizzard.7 The CMA initially opposed the deal. To address this, Microsoft restructured the transaction, and the CMA concluded that its concerns were addressed by Microsoft’s commitment to license the global (excluding the EEA) cloud streaming rights for current and future properties of Activision Blizzard King, to Ubisoft (for Ubisoft to license third parties).
While the US Federal Trade Commission’s challenge is ongoing, Microsoft has closed the transaction. The CMA’s acceptance of the revised transaction structure (including the licence to Ubisoft) may open the door to further strategic transactions, since it appears to address the CMA’s general reluctance to accept so-called behavioural remedies.
Private equity funds are expected to become more active purchasers in the sector during 2024, as they seize opportunities represented by lower valuations to increase their holdings, whether through public-to-private transactions or acquisitions of gaming targets.8
From a deal process perspective, investors and acquirers are increasingly engaging in extended diligence reflecting a more cautious outlook. As part of these reviews, they will typically consider, among other factors:
Acquirers also have an increased focus on gearing and the revenue generating capabilities of gaming corporates. As a result, earn-out provisions have become more common, with performance milestones being a key point of negotiation.9
During the course of 2023, the industry has trended towards established IP, and cross-platform and cross-IP products. Developers and publishers have increasingly favoured established and premium IP, which are viewed as reliable sources of revenue.10 For example, the best-selling game of 2023, Hogwarts Legacy, leveraged the nostalgic value of the Harry Potter franchise.
Multi-platform games that can be played on mobile, PC and console are viewed as addressing certain retention and user-acquisition issues faced by mobile gaming.11 Gaming companies have seen success with this cross-platform model through 2023 with titles such as Genshin Impact and Among Us.12
The industry has also continued to capitalise on the success of cross-IP film adaptations with the release of the most popular video game film ever, The Super Mario Bros. Movie, which generated US$1.3bn in revenue.13
Looking ahead to 2024, cloud gaming, generative AI and the DMA are set to play important roles.
Cloud gaming was valued at US$2.8bn in 2023 and is projected to grow at a compounded annual rate of 30% through to 2030.14 Cloud gaming services such as Xbox Cloud Gaming and Amazon Luna benefit consumers by increasing accessibility and enabling gamers to stream a catalogue of cloud-hosted games.15
Experts are predicting that, within five to ten years, AI could be responsible for more than half of the game development process.16 At present, the impact of generative AI has been focused on preproduction and development planning. However, generative AI may eventually be used to:
As an early sign of broader implementation, NetEase used generative AI to power its non-player-controlled dialogue functions in Justice Online.18
Finally, the DMA, which applies to “core platform services” in connection with which gate-keepers have been “designated” in the EEA:
Following the DMA compliance deadline on 6 March 2024, the European Commission is considering the approach that both Apple and Google have taken to compliance. For example, Apple has introduced a compulsory “core technology fee” that is payable by developers working with alternative app stores on all app installs (where the app has at least one million installs), regardless of whether such apps are downloaded and installed from the App Store or an alternative app store.19 Apple has imposed content parity obligations that, coupled with switching costs and network effects, make it difficult for developers using alternative app stores to pursue consumers to use alternative app stores.20
Overall, 2024 is anticipated to be an interesting year for the gaming industry as it finds a new level. There is expected to be a healthy volume of M&A activity, and cloud gaming and generative AI are set to experience continued growth and utilisation. The implementation of the DMA has the potential to improve the monetisation of mobile games, subject to the European Commission’s conclusions regarding the approach of Google and Apple.
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Publication
In this edition, we focused on the Shanghai International Economic and Trade Arbitration Commission’s (SHIAC) new arbitration rules, which take effect January 1, 2024.
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