Is investing in gaming like betting on Hollywood?

Is investing in gaming like betting on Hollywood?

On a recent trip to Tokyo, I met with a handful of business partners and investors in the mobile gaming sector, one of my investment themes over the past few years centering on European endeavors in this space.

A familiar debate comes up every time: Is mobile gaming as a sector still investable? Has mobile gaming simply become a ‘hits’ business like the film industry?

Coincidentally, last week’s Economist magazine contains an opinion piece on how Hollywood should be an inspiration for businesses in other industries. In a knowledge-based economy, management of talented prima-donnas becomes increasingly important, deriving the best from people without stifling their creativity. Time-to-market in launching new products is faster than ever before, requiring expertise in building buzz quickly for new products. And the money shot:

Businesses that are skeptical about the value of marketing, and about the possibilities for creating consumer awareness rapidly, should look closely at how Hollywood manages to come up with new brands on a near-weekly basis. The key is to treat the marketing as a core part of the project, rather than as an afterthought.

The piece also suggests that Hollywood’s traits of surmounting the fear of failure, continuous improvement of films via “retakes” (lean startup, anyone?), and even a model of greater productivity from job insecurity are all requirements to succeed in the new global economy.

Aspirations to think beyond national boundaries in market potential is characteristically Hollywood-esque too, as I would argue that mass film-making is one of the few industries in which America still dominates the globe. Furthermore, the trend toward winner-take-all in many industries encourages a sharper focus on producing blockbusters.

In the tech world, the Hollywood blockbuster metaphor is thrown about most in the mobile gaming space. Is the analogy appropriate?

Yes and no, in my opinion.

Without a doubt, mobile game developers live and die by blockbusters. King has become a $3.6 billion listed company largely on the back of Candy Crush, a sweet financial story which whips up over $500 million in cash yearly faster than salt-water taffy (questions about the reproducibility of this success explain the lacklustre stock performance). Or take Mixi, virtually unknown outside Japan but a company that once represented the Japanese Facebook… until Facebook took over. Mixi’s stock price followed a slow decline into oblivion, but then came alive last year and since multiplied by 28x as the company developed a successful hit mobile game called Monster Strike.

This is logical because as mobile technology becomes more advanced, mobile games are becoming increasingly sophisticated, resulting in corresponding development costs of mobile games that approach the traditional console game model (see my infographic).

In contrast however with blockbuster films, which may remain in the spotlight at best for a few weekends, mobile games can be prime time for several months. Look at the multi-year reign of Angry Birds. Or my personal favorite: GungHo’s Puzzles and Dragons, which started taking Japan by storm back in February 2012, and is still on a tear, making $4.5 million per day since the start of 2014.

Another difference is that a filmmaker can hire an actor like Will Smith or Tom Cruise to essentially guarantee a minimum box office threshold and hence mitigate risk.

The sheer uncertainty of whether a game will be a hit or not, combined with the potential for long-term milking in the hands of a savvy master of monetization mechanics push mobile gaming to the extreme edge of the risk/reward frontier for an investor. A successful mobile game investment can return an entire fund, yet requires a stomach to finance increasingly costly development and distribution in blind faith that the horses will eat the hay.