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Europe Meets China - How The Games Industry Is Evolving

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An in-depth look at the state of the $100bn games industry in 2017, with a focus on Europe and China and how they can continue to dominate the market

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Europe Meets China - How The Games Industry Is Evolving

  1. 1. June 2017 Opportunities in the world’s largest games market EUROPE MEETS CHINA
  2. 2. Atomico invests in disruptive technology companies with ambitious founders from Series A onwards. Our experienced team includes founders and operators from the world's most successful technology firms who partner with our companies as they scale to become global winners. Founded in 2006, Atomico has made over 80 investments into companies including Supercell, Rovio, Klarna, Stripe, ofo, Lilium, 6Wunderkinder and The Climate Corporation. Atomico’s team includes founders of six billion dollar companies, and operational leaders who were responsible for global expansion, hiring, user growth and marketing at companies from Skype and Google to Uber, Facebook and Spotify. About Atomico 1
  3. 3. We ❤ games at Atomico and have a passionate team who live and breathe for the games industry Atomico Games Team 2 Stephen Thorne Senior Associate Atomico @stephen2206 Mattias Ljungman Partner Atomico @ljungman Alexis Bonte CEO eRepublik Labs Executive in Residence Atomico @alexisbonte
  4. 4. Executive Summary Fun and games is big business. The top fifty publicly-listed games companies in the world have created almost $500 Billion [half a trillion] in public market value and, in the last year, the games industry reported revenues of over $100bn. Driving this explosion in mobile gaming are European games studios, who, having quietly proven their genius for mobile games, now have an opportunity to push on to become global giants. While they have already achieved a global reach, to take the next step, European games studios need to crack China, the world’s largest market. In the last few years, a range of private market investors have bet on the games industry, with Europe in particular taking an increasing share of global games funding rounds. A growing share of the strategic investment into European games comes from the behemoths of Asia, who recognise that something special is happening. Unsurprisingly, iconic European games companies King and Supercell are using their nous to back the next generation of European games winners. The business case is obvious. 88% of the 24 billion-dollar games companies founded in the last fifteen years have achieved liquidity, with markets showing a strong appetite for all sizes of IPOs. The top twenty-largest games M&A transactions have created $46bn in exit value-of which 70% was delivered by European targets. Europe’s status as the capital of mobile games development is solid, and, European content is going global. 36% of all mobile games publishers are based in Europe, more than any other region, and 69% of revenue is earned outside the continent. But, if we take Apple’s iOS as a sample, European games studios have so much room to grow in China. Europe has only 4.6% of the iOS market in the undisputed games capital of the world, where gamers spent $24.6bn in 2016. However, the market share of European games firms is rising, and even a 2% rise from their 2014 figures delivered in increase in revenues of 9x ($27.8m- $253.9M) in just two years. With stats like this, it’s little surprise that China’s games companies are the most valuable, and have the largest war chests. So, for European games studios to break China, there’ll need to be a new era of collaboration. 93% of iOS gamer spend in China is on Chinese games. The market is the most localised in the world. On the other hand, film and music show that the appetite for international content is extremely strong. If Western games companies produce the mobile equivalent of the Fate of the Furious, or Taylor Swift’s 1989 album, billions of dollars of value will be unlocked. Whoever collaborates correctly could produce the first gamer base of one billion monthly active users. There are now more than two billion gamers globally. Games companies, such as Activision Blizzard or Tencent, are already building player bases in the hundreds of millions. With the right partnerships, it’s just a matter of time. A word of thanks to all of our interviewees for sharing their insights and to all of our data partners, App Annie, CB Insighs, S&P CapitalIQ, and Unity, without whom this report would not have been possible. 3 Tom Wehmeier Head of Research Atomico @twehmeier
  5. 5. Alexis Bonte CEO / XIR eRepublik Labs / Atomico 4 Games Industry Interviewees for this Report Andrew Stalbow CEO Seriously Bill Wang President, Overseas 360 Games Corentin Raux CEO Pretty Simple David Gardner Partner London Venture Partners Hilmar Veigar Pétursson CEO CCP Games Ilkka Paananen CEO Supercell Jayson Chi Games Industry Expert Independent Kati Levoranta CEO Rovio Kelly Poon Partner, China Atomico Mattias Ljungman Partner Atomico Samuli Syvähuoko CEO Armada Interactive Teemu Huuhtanen CEO Next Games Wilhelm Taht EVP, Games Rovio
  6. 6. Data Partners 5 App Annie delivers the most trusted app data and insights for your business to succeed in the global app economy. Over 800,000 registered members rely on App Annie to better understand the app market, their businesses and the opportunities around them. The company is headquartered in San Francisco with 450 employees across 15 global offices. App Annie has received $157 million in financing, including from investors such as Sequoia Capital, Institutional Venture Partners, IDG Capital Partners, e.ventures, Greenspring Associates, and Greycroft Partners. For more information, visit: http://www.appannie.com The technology market intelligence platform. CB Insights software lets you predict, discuss, and communicate emerging technology trends using data in ways that are beyond human cognition. For more information, visit: http://www.cbinsights.com At S&P Global Market Intelligence, we know that not all information is important—some of it is vital. Accurate, deep and insightful. We integrate financial and industry data, research and news into tools that help track performance, generate alpha, identify investment ideas, understand competitive and industry dynamics, perform valuation and assess credit risk. Investment professionals, government agencies, corporations and universities globally can gain the intelligence essential to making business and financial decisions with conviction. S&P Global Market Intelligence is a division of S&P Global (NYSE: SPGI), which provides essential intelligence for individuals, companies and governments to make decisions with confidence. For more information, visit: www.spglobal.com/marketintelligence Unity Technologies is the creator of a flexible and high-performance end-to- end development platform used to create rich interactive 2D, 3D, VR and AR experiences. Unity’s powerful graphics engine and full-featured editor serve as the foundation to develop beautiful games or apps and easily bring them to multiple platforms: mobile devices, home entertainment systems, personal computers, and embedded systems. Unity also offers solutions and services boosting productivity and connecting with audiences including Unity Analytics and Unity Ads. For more information, visit: http://unity3d.com
  7. 7. GAMES: AN INDUSTRY GOING FROM STRENGTH TO STRENGTH
  8. 8. The games industry reached three key milestones in 2016 The games industry is at an important tipping point Source: Newzoo ▶︎Games revenue exceeds $100B ▶︎Mobile takes over to become most valuable segment ▶︎Global gamer base breaks 2B for the first time 7
  9. 9. 2016 2017 2018 2019 2020 Global Games Revenue Total Games Revenue Mobile as % of Total 38% 42% 46% 51%48% $101B Games is now a $100B+ global industry reaching 2 billion gamers Source: Newzoo, Motion Picture Association of America,IFPI, Unity 8 Games industry revenue set to grow at 6% CAGR to hit $129B in 2020, powered by mobile games $109B $116B $123B $129B ▶︎ Global games revenue exceeded $100B for the first time in 2016 with the total market continuing to grow at 6% CAGR ▶︎ Games industry set to be worth 2x the combined value of the global movie ($39B) and recorded music ($16B) industries ▶︎ There are now over 2 billion gamers worldwide, according to Newzoo. While Unity data shows games using its software have been installed on 6.3B unique devices, including 1.1 billion in Europe and 1.6 billion in China “Mobile games seem to continue being a very appealing way to consume time and the experiences they can offer are just getting better and better. Innovation and creativity will be boosted by tougher competition. It feels like each year in mobile gaming will be more exciting than the previous one.” Kati Levoranta CEO Rovio
  10. 10. 24 $B+ games companies founded in just the last 15 years 9 The games industry is a factory for $B+ companies… Source: Atomico IGG 2006 | Singapore | Public MZ 2008 | US | Private Zynga 2007 | US | Public Garena 2009 | Singapore | Private Unity 2009 | Europe | Private Colopl 2008 | Japan | Public Gree 2004 | Japan | Public Koei Tecmo 2009 | Japan | Public Supercell 2010 | Europe | Acq’d King 2003 | Europe | Acq’d Mojang 2009 | Europe | Acq’d Outfit7 2009 | Europe | Acq’d Playtika 2010 | Europe | Acq’d ZQGame 2007 | China | Public Ourpalm 2004 | China | Public Perfect World 2004 | China | Public Q1 2008 | China | Public Youzu 2009 | China | Public Kunlun 2008 | China | Public Changyou 2007 | China | Public Dalian Zeus 2010 | China | Public G-bits 2004 | China | Public Kingnet 2008 | China | Public Electronic Soul 2008 | China | Public
  11. 11. 6 43 30 334 36 5 1960s 1970s 1980s 1990s 2000s 2010s Total Enterprise Value by Decade Founded (US$B) Decade founded 10 …and has a rich history that now spans more than five decades Note: Based on games companies with Total Enterprise Value of >$100M Source: S&P Capital IQ Platform, as of 31 March 2017, For Illustrative Purposes Only ▶︎ Since the 1970s, every decade has produced games companies that have gone to list on the public markets and with tens of billions of enterprise value ▶︎ The development of the online and mobile games segments in the 1990s and 2000s saw a huge expansion of the number of public games companies Going back to the 1970s, the games industry has produced tens of billions of enterprise value per decade 2 3 4 20 32 10 Numbers of Public Games Companies (TEV>$100M) Founded Per Decade
  12. 12. 43 of Top 50 most valuable public games companies are from Asia, including 18 from China Games has created ~$0.5 trillion in public market enterprise value 11 China Europe Rest of AsiaUS Korea Japan ActivisionBlizzard NetEase ElectronicArts Nintendo Sanqi PerfectWorld NCSoft Konami Ubisoft Take-TwoInteractive NEXON YouzuInteractive Kunlun Ourpalm G-bits Mixi Kingnet DalianZeus SquareEnix DeNA KoeiTecmo IGG CDProjekt ElectronicSoul Zynga Sanrio NetDragonWebsoft GungHoOnline Capcom Changyou.com Com2uS TianGeInteractive ZQGAME Gree NHNEntertainment Colopl ParadoxInteractive AkatsukiInc. WebzenInc. Starbreeze DOUBLEUGAMES GAMEVIL Aeria gumi Mynet FeiyuTechnology GluMobile Me2onC G5Entertainment Top 50 publicly-listed games companies by Total Enterprise Value (US$B) Tencent “It's easy to forget the Asia success story. If you look at China and Asia, there are all these publicly-traded companies that nobody thinks about. People in Western markets will often say ‘Oh, those Asian companies, they don't count’ and I'll say ‘are you kidding me?’" David Gardner Partner London Venture Partners Note: Based on games companies with Total Enterprise Value of >$100M Source: S&P Capital IQ Platform, as of 31 March 2017, For Illustrative Purposes Only
  13. 13. Public market investor confidence driving games companies to new highs 12 Weighted average TEV/LTM revenue multiple of games index of 72 companies >$100M TEV up to 7x ▶︎ Investor confidence in games companies has increased significantly over the past five years, resulting in doubling of the weighted average TEV/LTM revenue multiple ▶︎ Tencent, unsurprisingly, weighs heavily on the index, but even excluding Tencent, average multiples globally have expanded from around 2x revenues in 2012 to >4x in 2017 0 2 4 6 8 Weightedaverage TEV/LTMrevenue Weighted TEV/LTM Revenue Multiple Games Index Games Index (ex-Tencent) 4.0 5.8 9.5 6.9 19.6 29.5 27.8 45.9 Games Social Marketplaces SaaS Median trading multiples by category EV/LTM Rev EV/LTM EBITDA ▶︎ Despite an increase in multiples for public games companies, they trade at discount to other tech categories ▶︎ On a trailing 12-month basis, public games companies trade at a median of 4x EV/revenue and 20x EV/EBITDA Note: Based on games companies with Total Enterprise Value of >$100M Source: S&P Capital IQ Platform, as of 31 March 2017, For Illustrative Purposes Only
  14. 14. EUROPE’S RISE TO BECOME THE MOBILE GAMES DEVELOPMENT CAPITAL OF THE WORLD
  15. 15. 14 Private market investors want to invest in games, especially in Europe… Note: Data for 2017 to 31 March 2017 only Source: CB Insights YTD 2017, Europe accounts for 35% of global games funding rounds, more than any other region ▶︎ Despite perceptions in some quarters that investors have pulled back from gaming, the number of rounds closed by games companies globally has stayed consistent since 2012 ▶︎ Based on the rate of investments into games companies in the first quarter of the year, 2017 is on track for a very strong year ▶︎ Investment rounds into European games companies have been increasing since 2012 ▶︎ As a result, the region is taking growing share of global rounds and accounted for nearly 36% of rounds in 2016 ▶︎ $0.8B has been invested into European games companies since 2012 228 189 219 201 172 62 186 2012 2013 2014 2015 2016 2017* # of rounds into global games companies # of rounds Annual run-rate based on 1Q17 52 49 46 66 62 22 0% 10% 20% 30% 40% 0 20 40 60 80 2012 2013 2014 2015 2016 2017* # of rounds into European games companies # of rounds % of global total 248
  16. 16. Mobile games companies dominate, but investment is flowing into a diverse field of games categories 15 …where games companies of all types have attracted funding… Note: Categorisation based on keyword analysis of business descriptions of companies that raised investment rounds during each defined period (1 January 2012 to 31 December 2014 and 1 January 2015 to 31 March 2017). Source: CB Insights ▶︎ Games companies focused on mobile continuing to attract the largest number of investment rounds in Europe ▶︎ New categories, such as VR, esports and (to a lesser extent) AR have emerged as new investment categories in Europe ▶︎ Social has seen declining use in company descriptions, partly due to a decrease in Facebook games, but also as more games now have some social element to the point where it's expected and not included in descriptions 71 13 52 1 0 1 2 4 1 4 3 62 19 16 14 8 6 4 4 3 3 3 # of rounds into European games companies by company focus # of rounds - 2012-2014 # of rounds - 2015-2017
  17. 17. Europe is home to some of the world’s leading angel investors and VCs focused on games …from a deep and sophisticated local investor base… 16 Ilkka Paananen Jari Ovaskainen Jonas Mårtensson Samuli Syvähuoko Sebastian Knutsson Moaffak Ahmed Paul Bragiel Jens Hilgers Carl Manneh
  18. 18. Strategic investors, especially from Asia, are driving a high volume of investment activity 17 …as well as from new pools of capital active in the region Source: CB Insights The Rise of Asian Strategic Investors The Blurring of the Entertainment & Media Landscape One Generation of Studios Investing in the Next Nexon Korea Playfusion UK invested in… NetEase China Reforged Finland invested in… Lionsgate United States Next Games Finland invested in… Universal Music United States Nuday Games Sweden invested in… Supercell Finland Shipyard Games Finland invested in… King Sweden Snowprint Studios Sweden invested in… ▶︎ Asia’s largest games companies have emerged as a new source of strategic investor capital in Europe by investing actively into local studios ▶︎ Investors from the entertainment & media industries are becoming active as they seek to add games to their portfolio of entertainment services ▶︎ Europe’s leading games companies are starting to invest into the next generation as they seek to build ties to the region’s up-and- coming studios
  19. 19. 88% of the 24 $B+ games companies founded in the last 15 years achieved liquidity Investor interest in games is not surprising: it’s tech’s most liquid market 18Source: Atomico 2 2 3 6 11 Rest of Asia US Japan Europe China # of $B+ games companies founded since 2003 88% 39% 12% 61% Games companies Tech companies (ex-Games) Operating status of $B+ games companies founded since 2003 IPO'd or acquired Private ▶︎ 24 games companies founded since 2003 (last 15 years) have gone to reach valuations of more than $1 billion ▶︎ China (11) and then Europe (6) have been the two regions that have produced the most, accounting for 68% of all $B+ companies founded over the past 15 years ▶︎ Games companies have proven to have a much clearer path to liquidity compared to tech companies from other categories ▶︎ While only 39% of non-games $B+ tech companies founded in the last 15 years have IPO’d or been acquired, 88% of games companies have achieved liquidity 2
  20. 20. Games companies of all sizes are finding strong investor interest in their initial public offerings Large-cap: Netmarble IPO Small & mid-cap: Next Games IPO Games is seeing a healthy market for IPOs… 19Source: Bloomberg, Next Games
  21. 21. Top 20 largest M&A transactions in the games industry have driven a combined $46B in exit value 20 …and an unprecedented level of consolidation Note: Top 20 largest games M&A transaction by total implied enterprise value between 1 January 2012 and 31 March 2017 Source: CB Insights TRANSACTION EV (US$B) YEAR Supercell (Europe) acquired by Tencent 10.2 2016 King (Europe) acquired by Activision Blizzard 5.9 2015 Supercell (Europe) acquired by SoftBank Group 5.5 2015 Playtika (Europe) acquired by Shanghai Giant 4.4 2016 Supercell (Europe) acquired by GungHo/Softbank 3.0 2013 Giant (China) acquired by Baring Private Equity Asia 3.0 2014 Mojang (Europe) acquired by Microsoft 2.5 2014 91 Wireless (China) acquired by Baidu 1.9 2013 Shanda Games (China) acquired by Management Buyout 1.9 2015 OutFit7 (Europe) acquired by United Luck Group 1.1 2017 TRANSACTION EV (US$B) YEAR Twitch (US) acquired by Amazon 1.0 2014 FunPlus (China) acquired by Zhongii Investment Holding 1.0 2014 Big Fish Games (US) acquired by Churchill Downs Inc. 0.9 2014 Shanggame (China) acquired by Ourpalm 0.7 2015 Kabam (US) acquired by NetMarble 0.7 2016 iDreamSky (China) acquired by Management Buyout 0.6 2015 GameABC (China) acquired by ZheBao Media 0.6 2012 NaturalMotion (Europe) acquired by Zynga 0.5 2014 gloops (Japan) acquired by NEXON 0.5 2012 Gaikai (US) acquired by Sony 0.4 2012
  22. 22. 21 Europe leads on games IPOs since 2012, but typically at small scale… Source: S&P CapitalIQ Platform, as of 31 March 2017, For Illustrative Purposes Only ▶︎ There have been a total of 52 games industry IPOs on a global basis since 2012, with highs of 14 in 2014 and 2016 ▶︎ Perhaps surprisingly, Europe has delivered the largest number of games IPOs over this period (20) ▶︎ Games IPOs in Europe have typically been at smaller end of the scale (<$100M EV), raising a median of just $8M at IPO ▶︎ A lack of large outcomes via IPO from Europe is in contrast to the number of large-cap outcomes via M&A by European games cos Europe has produced 38% of games company IPOs 2012-2016, but almost all have been small-cap listings 2 2 4 5 6 1 1 2 4 1 3 1 2 1 3 3 2 2 2 1 1 1 2 2012 2013 2014 2015 2016 2017 Number of games company IPOs by region, 2012- 2016 Europe China Japan Korea Rest of Asia US 122 84 51 40 40 120 25 21 8 18 China Korea Japan Europe Rest of Asia Average proceeds raised at IPO (US$M) Mean Median
  23. 23. …and is also driving a significant share of global M&A volume… Note: Data based on transactions from 1 January 2012 to 31 March 2017. Source: CB Insights 22 >100 European games companies have been acquired since 2012, including 71 since 2015 ▶︎ The UK and Nordics account for nearly 50% of all M&A volume in Europe’s games industry and have seen 50+ exits since 2012 ▶︎ Other European markets have all seen significant exits, such as Spain (Social Point), Slovenia (Outfit7) and Israel (Playtika) ▶︎ There have been 106 acquisitions of Europe-based games companies since 2012 out of a global total of ~500 ▶︎ In total, Europe accounted for 22% of exits since 2012, although the share of European exits has accelerated more recently and reached 39% of all exits since 1 January 2015 35 71 187 184 0 50 100 150 200 250 300 2012-2014 2015-1Q17 #ofM&Atransactions # of games M&A transactions European Exits Rest of World Exits 25 14 12 10 8 8 8 4 4 3 10 # of games M&A transactions by country
  24. 24. Top 10 largest European games M&A transactions by deal value since 2012 …including multiple $B+ exits via M&A… 23Source: CB Insights COMPANY HQ COUNTRY VALUE (US$B) YEAR BUYER HQ COUNTRY Supercell Finland 10.2 2016 Tencent China King Ireland 5.9 2015 Activision Blizzard US Supercell Finland 5.5 2015 SoftBank Japan Playtika Israel 4.4 2016 Giant China Supercell Finland 3.0 2013 GungHo/SoftBank Japan Mojang Sweden 2.5 2014 Microsoft US OutFit7 UK 1.1 2017 United Luck Group China NaturalMotion UK 0.5 2014 Zynga US Jagex UK 0.3 2016 Shandong Hongda China Social Point Spain 0.3 2017 Take-Two US ▶︎ Europe has seen 7 billion- dollar acquisitions since 2012, including Supercell, which has been acquired on multiple occasions ▶︎ Each of the Top 10 largest transactions in Europe has involved buyers from outside the region, led by China, the US and followed by Japan
  25. 25. 71% 22% 6% 1% 0% Share of aggregate value of Top 20 largest games M&A transactions by target HQ % of Value by Target Region Europe delivered 7 of the Top 20 largest M&A deals by value since 2012, accounting for deals worth $33B 24 …amazingly, European targets drove 70%+ of M&A value in Top 20 deals Note: Based on sum of Top 20 largest M&A transactions involving games companies by deal value between 1 January 2012 and 31 March 2017 Source: CB Insights “True revolutionary disruptive innovation, is coming from these unknown territories. Weird places like Finland up north, where we have nothing to lose. We’ve had Rovio, Supercell, and King emerge from this region, and that innovative culture is trickling down.” Samuli Syvähuoko CEO Armada Interactive
  26. 26. 25 …helping cement Europe as the world’s mobile games developer capital Note: Share of 2016 revenue includes revenue generated from iOS App Store and Google Play Source: App Annie 11% 15% 11% 9% 6% 5% 25% 20% 35% 36% 7% 10% 6% 6% 1 2 Distribution of mobile game publishing companies by company headquarters region China Japan Korea United States Europe Rest of Asia Rest of World 2012 2016 19 8 10 8 4 4 4 3 3 1 30 6 7 5 4 3 3 3 47 4 2 10 Shareof2016Revenue &2016Companies Share of 2016 revenue from companies headquartered in Europe % of 2016 Companies % of 2016 Revenue by HQ Country ▶︎ Inside Europe, the UK, Russia and Germany boast the largest concentration of mobile game publishing companies ▶︎ Finland, meanwhile, punches above its weight dramatically. It accounts for 3% of all European mobile games companies, but delivers nearly 50% of the region’s mobile games revenue 36% of all mobile game publishing companies are based in Europe “European games developers could start from scratch on mobile because they had no legacy PC or console business. They started out with small teams to create games for mobile platforms and for a long time had almost no competitors, especially not the big studios from the US or Japan.” Corentin Raux, CEO, Pretty Simple Distributionofgamespublishing companiesbyregion
  27. 27. Europe is home to 36% of mobile games publishing companies, more than any other region Unique advantages allowed Europe to lead world in mobile development 26 “In the Nordics, you have had the kind of mixture of technical prowess as evidenced by the mod scene and tech companies in the region and this long rich tradition for world creation. It goes back to the Prose Edda, which were ancient narrative masterpieces written in the 1300's.” Hilmar Veigar Pétursson CEO CCP Games ▶︎ Deep, Passionate Talent Pool of Small Teams ▶︎ Creative Strength Steeped in Storytelling ▶︎ Building for Mobile ‘Before it was Mobile’ ▶︎ Deeply Connected Community via Mod Scene ▶︎ Not Encumbered by Legacy Businesses ▶︎ Funding Culture Supporting Experimentation Source: App Annie
  28. 28. European mobile games developers earn 69% of revenue outside their home region 27 European studios are successful ‘exporters’ of games to new markets… Note: Data refers to combined iOS App Store & Google Play revenue (unless stated) for 2016 Source: App Annie HQ Region of company 69% 50% 42% 29% 13% Europe Korea United States China Japan % of 2016 Revenue Generated Outside HQ Region ▶︎ European games developers earn the largest share of revenue outside of their home region compared to those from all other regions ▶︎ According to App Annie, 69% of European game publishing companies revenue was earned outside of Europe in 2016 ▶︎ Japanese developers earn the lowest share of income outside their home market at just 13%
  29. 29. Brands such as Rovio’s Angry Birds and Mojang’s Minecraft have achieved incredible global recognition 28 European games have built powerful global entertainment brands… Source: Rovio 99%98%98%98%97%97%95%95%94%94%91%90% 84% 74% Worldwide aided brand awareness 99% 97% 97% 95% 93% China US Korea UK Spain Rovio aided brand awareness Games rank amongst the most recognised entertainment brands… …and have built powerful presences on a global basis, especially in China
  30. 30. Rovio, for example, leveraged a global brand to build new revenue streams around its core games business 29 …and also successfully ‘exporting’ their brands beyond games Source: Variety, PocketGamer Rovio’s successful move into film, which generated $350M globally and became the #3 international animated film in China… …has served to strengthen its games business and led to rapid growth
  31. 31. CHINA’S RISE TO BECOME THE MOST VALUABLE MARKET IN GAMES
  32. 32. Chinese gamers now spend more on games than any other market globally, hitting $24.6B in 2016 China, meanwhile, became the undisputed gamer capital of the world 31Source: Newzoo “If you want to be a world leading game studio, you cannot ignore the Chinese market. There are over 600 million gamers in China. That’s twice the population of the US.” Kelly Poon Partner Atomico Market value: $20.3B Share of global market: 20% Market value: $24.1B Share of global market: 24% Market value: $24.6B Share of global market: 24% Market value: $4B Share of global market: 4% Market value: $12.4B Share of global market: 12%
  33. 33. 3% 31% 37% 23% 16% 22% 24% 10% 11% 7% 8% 6% 1% 2% 2012 2016 Share of global iOS App Store games revenue Korea Rest of World Rest of Asia Europe Japan United States China $2.4B In China iOS App Store games spend hit $5.5B in 2016, making it the world’s most valuable market 32 On iOS App Store, Chinese spend grew 72x vs 5.5x outside China Note: iOS App Store games revenue only. Refers to net revenue after payments to Apple Source: App Annie $18.0B ▶︎ Net revenue generated by games on iOS App Store has grown 8x between 2012 and 2016 to hit $18B in 2016, underpinned by a huge expansion of spend in China ▶︎ While regions such as Europe (3x) and the US (5x) have grown rapidly, the pace of growth is dramatically outstripped by the expansion of the Chinese market, which grew 72x between 2012 and 2016 ▶︎ The market share of European games publishing companies on iOS App Store in China has grown from 2.5% to 4.6% between 2014 and 2016, but thanks to the rapid growth in value of the Chinese market from $1.1B to $5.5B over this period, this is actually the equivalent of an increase in net revenues earned in China on the iOS App Store from $27.8M in 2014 to $253.9M, an increase of 9x in just 2 years
  34. 34. “Thomas Chong, an analyst at BOC International, estimates that Honour of Kings will contribute more than 50 percent of Tencent’s smartphone game revenue this year, and that it recorded monthly gross revenue of 2.8 billion to 3 billion yuan in April.” Tencent’s ‘Honour of Kings’ grossed ~$435M in April, an annual runrate of >$5B, according to analysts 33 When games achieve breakout success in China the scale is jaw-dropping Source: Bloomberg
  35. 35. 0% 55% 23% 19% 3% Share of aggregate value of Top 20 largest games M&A transactions by buyer HQ % of Value by Buyer Region Top 20 largest M&A deals by value since 2012 generated $46B in total exit value in the games industry 34 China has also become the most important driver of consolidation Note: Based on sum of Top 20 largest M&A transactions involving games companies by deal value between 1 January 2012 and 31 March 2017 Source: CB Insights “The Chinese market is very competitive, so more companies are now looking outwards for growth potential. Also, for those Chinese companies which aim to be global leaders, they’ll want to bring on board talent, they’ll want to get IP.” Bill Wang President, Overseas 360 Games
  36. 36. 35 China home to the most valuable companies & the largest war chests… Even excluding Tencent, Chinese games companies account for largest share of public enterprise value 338 70 45 9 8 2 China US Japan Korea Europe Rest of Asia Total Enterprise Value (US$B) of public games companies* by HQ region 72% 15% 9% 2% 2% 0% % of TEV of Public Games Companies (TEV>$100M) 28 18 9 2 1 0 China Japan US Korea Europe Rest of Asia Cash Balance (US$B) of public games companies* by HQ region 47% 31% 16% 4% 1% 0% % of Total Cash Balance of Public Games Companies (TEV>$100M) ▶︎ Chinese games companies account for largest share of total enterprise value created in the public markets ▶︎ As yet, Europe has not delivered huge exits to the public markets (with the exception of King in 2014) ▶︎ China, US & Japan account for largest share of enterprise value on public markets ▶︎ Successful games companies are highly cash generative: the largest public games companies hold $58B in aggregate cash and short-term investments ▶︎ There are 11 public games companies with more than $1B in cash, while the Top 10 public games companies control nearly 80% of aggregate cash of the Games index Note: Based on games companies with Total Enterprise Value of >$100M Source: S&P Capital IQ Platform, as of 31 March 2017, For Illustrative Purposes Only
  37. 37. …who can leverage their premium multiples to build a global base Note: Based on a basket of companies for each category Source: S&P CapitaIQ Platform. as of 31 March 2017, For Illustrative Purposes Only 36 Chinese games companies trade nearly 2x higher on an EV/revenue basis to those from other regions 7.4 4.3 1.8 2.9 3.0 33.3 21.2 9.6 12.9 19.7 China Europe Japan Korea US Median trading multiples by region EV/LTM Rev EV/LTM EBITDA ▶︎ Chinese games companies trade at significantly higher multiples compared to those from other regions ▶︎ This premium creates significant leverage for Chinese companies actively looking at international acquisitions “The multiples Chinese companies are getting on their local stock markets are higher than those for companies from other regions. So there's this big disconnect or arbitrage opportunity that works in favour of China as a potential consolidator” Alexis Bonte CEO eRepublik Labs Executive in Residence Atomico
  38. 38. 1,760 1,210 664 650 340 337 312 285 233 217 Top 10 Largest Sales & Marketing Budgets* (US$M) 79 171 292 256 25562 87 145 170 299 2012 2013 2014 2015 2016 Number of new mobile games published per year (,000) iOS Google Play 1,500 new mobile games are published daily, while the largest companies spend $500M+ per year Of course, with huge opportunity comes huge competition… 37Note: Sales & Marketing Budgets refers to total company sales & marketing expense in last 12 months Source: S&P CapitalIQ Platform, as of 31 March 2017, For Illustrative Purposes Only (Sales & Marketing Expense), App Annie (games published per day) ▶︎ The top 10 public games companies spent over $6B in sales & marketing activities in the last 12 months ▶︎ On average, the largest public games companies are spending in excess of $500M per year to acquire and retain customers 389 707 1,197 1,167 1,518 Number of new games published per day “I say to our team the whole time, we're competing against Netflix, Amazon Prime, Instagram, Snapchat. You're not competing just within your vertical anymore, you're competing on the most competitive media platform in the world, which is the phone.” Andrew Stalbow, CEO, Seriously
  39. 39. China is a daunting market and is seen as the most challenging globally to enter …not least in China, where outsiders face even greater challenges 38 “It is not that your game is not fun or it is not that your game cannot work in China from a consumer perspective, it is from a supply side, from a shelf space, and I hate to say that, but because mobile games have shelf space, the ranking is shelf space, people's attention is shelf space, and you're just going to get squeezed out unless you're already a proven game and someone from the big guys is willing to give it a shot.” Jayson Chi Games Industry Expert ▶︎ Competition for Shelf Space ▶︎ Frightening Pace of Change ▶︎ Complex, Fragmented Distribution ▶︎ Unique Local Tastes & Preferences ▶︎ Regulatory ‘Paywall’ ▶︎ Piracy and IP Source: App Annie
  40. 40. A NEW ERA OF COLLABORATION AS EUROPE MEETS CHINA
  41. 41. According to App Annie, 93% of gamer spend on iOS in China goes to games developed in China 40 China is the world’s most ‘localised’ games market Note: User spend in China refers to iOS only. Data refers to 2016. Source: App Annie 93% 86% 63% 56% 36% China (iOS Only) Japan Korea United States Europe % of user spend on ‘home-grown’ games ▶︎ China is the world’s most localised market, exceeding both Japan and Korea in terms of share of user spend allocated to local companies ▶︎ In 2016, 93% of all revenue from iOS games in China was generated by games belonging to China- headquartered games companies, versus 86% in Japan and 63% in Korea
  42. 42. Chinese box office & music charts show that there is strong demand for international content and IP 41 Other content categories show these challenges can be overcome… Top 10 All-Time Highest Grossing Films in China Top 10 All-Time Best-Selling Digital Albums in China TITLE RECEIPTS (US$B) COUNTRY YEAR 1 The Mermaid 3.4 2016 2 The Fate of the Furious 2.6 2015 3 Monster Hunt 2.4 2015 4 Furious 7 2.4 2016 5 Transformers: Age of Extinction 2.0 2013 6 Kung Fu Yoga 1.8 2014 7 Mojin: The Lost Legend 1.7 2014 8 Journey to the West: The Demons Strike Back 1.7 2013 9 Lost in Hong Kong 1.6 2015 10 Zootopia 1.5 2017 Source: Wikipedia TITLE ARTIST COPIES (M) COUNTRY YEAR 1 Guardian: The Lonely and Great God OST Various Artists 3.4 2016 2 Growing Wild Li Yuchun 2.6 2016 3 Xplore Lu Han 2.4 2016 4 Reloaded Lu Han 2.4 2015 5 MADE Big Bang 2.0 2016 6 1989 Taylor Swift 1.8 2014 7 Anti Rihanna 1.7 2016 8 Venture Lu Han 1.7 2017 9 E Big Bang 1.6 2015 10 D Big Bang 1.5 2015
  43. 43. Collaboration between European and Chinese games companies can unlock enormous value 42 …but it will require a new era of collaboration “This is an industry that provides very fertile ground for global cooperation and global business. But it is also a challenging one, in which the gaming culture in Asia's three big markets are all different from each other, and they're all different from the west.” Wilhelm Taht EVP, Games Rovio “You probably need a local partner and localise the game more than just the language. I'm not saying it wouldn't work if you don't, but I think it's kind of unlikely. You're better off working with a Chinese partner and really taking the time to localise the game for their specific market” Teemu Huuhtanen CEO Next Games
  44. 44. 3 of the Top 10 companies by downloads in Europe and 2 of the Top 10 by revenue were Chinese in 2016 43 Collaboration will drive success not just in China, but internationally Note: Based on combined revenue and downloads from iOS App Store and Google Play in 2016. Tencent numbers exclude Supercell. Source: App Annie Top 10 Companies by Game Downloads in Europe, 2016 Top 10 Companies by Game Revenue in Europe, 2016 COMPANY HQ COUNTRY 1 Electronic Arts 2 Tencent 3 Outfit7 4 Supercell 5 Activision Blizzard 6 Ubisoft 7 Doodle Mobile 8 Cheetah Mobile 9 Vivendi 10 Rovio COMPANY HQ COUNTRY 1 Supercell 2 Activision Blizzard 3 MZ 4 Electronic Arts 5 Niantic 6 Elex Technology 7 IGG 8 GAMEVIL 9 Zynga 10 Playrix
  45. 45. There is a huge opportunity to unlock the next great milestone and reach a billion gamers Whoever gets this right will build the first gamer base of 1B+ MAU 44 “If you look in other consumer technology categories such as social or utility apps, we’ve seen a select few grow to more than one billion users. It hasn’t happened in games yet, but we believe it’s just a matter of time” Mattias Ljungman Partner Atomico “Games have become truly mass-market and it's a massive, massive opportunity that's only going to get bigger. One of these days somebody’s going to build a game that reaches a billion users a month” Ilkka Paananen CEO Supercell
  46. 46. 1. Company and app rankings are based on the download, revenue and usage estimates available through App Annie Intelligence. 2. Revenue rankings are based on revenue that the iOS App Store and Google Play earned from paid downloads and in-app purchases. They do not include revenue earned from in-app advertising. 3. Top companies in Games are ranked by downloads and revenue in the Games category only while top publishers in Apps are ranked by downloads and revenue in categories outside of Games. 4. Download rankings are based on individually downloaded apps and exclude app downloads when included in bundles. Revenue rankings are based on download revenue from individually downloaded paid apps as well as in-app purchase revenue from both individually downloaded apps and app bundles. 5. For publishers acquired by another company, downloads and revenue is attributed to the new parent company from the start of the calendar month after the acquisition occurred. 6. Occasionally, a publisher may decide to shift an existing app from one category to another category. In these cases, the App Annie ranks that app based on its app store categorization at the time of writing. 7. Download and revenue rankings in this report are based on unified apps made possible by App Annie’s exclusive DNA. In unified apps, similar versions of the same app with different names and on different platforms are unified. For example, Fruit Ninja and Fruit Ninja Free on iOS, and Fruit Ninja and Fruit Ninja Free for Android on Google Play are all aggregated and ranked as a single Fruit Ninja unified app. 8. Company and app rankings are based on the current and historical App Annie DNA relationships as of the time of writing. App Annie DNA relationships are subject to change over time. 9. In the event that a unified app in the top downloads and revenue app rankings is connected to multiple companies, we selected one company to be represented in the ranking. For top company rankings, each app directly connected to a company contributed to that company’s rank. For instance, Tencent’s version of Candy Crush Saga contributed to Tencent’s ranking. 10. In App Annie's rankings, all apps and publishers are reported under their parent companies, where available; for example, the Minecraft - Pocket Edition app is reported under its parent publisher Microsoft, rather than its direct publisher Mojang. Note that if you view the Microsoft parent publisher page on Store Stats, you will see the publishers that roll under the parent publisher Microsoft, including Mojang. The Minecraft - Pocket Edition app will be listed under the Mojang publisher page. 11. In Google Play, an app can be categorized under only one category, so there is no double-categorization. 12. App Annie Intelligence is currently available for the iOS App Store and Google Play. It does not currently provide estimates for other app stores, such as the Amazon Appstore. While iOS and Google Play represent a significant portion of the app market in many countries, that is not the case for some countries. For example, China has a number of sizable third-party Android app store. App Annie methodology 46

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