VC Investing in Gaming
Why we’re playing with Gaming start-ups
At RLC we’re interested in gaming as one of our six major verticals. The industry is rapidly transforming and is increasing in its economic impact. Leading the charge are ambitious founders who are challenging the status quo. If that’s you or someone you know, we’d love to hear more about how we can help.
Globally, gaming is worth around $150 billion and according to Microsoft, is estimated to have 2 billion customers. The UK dominates the European market and is estimated to be worth nearly £6 billion, posting double-digit growth in recent years. To dive deep into the macro-environmental factors underlying this trend, it’s helpful to break it down into political, economic, social and technological factors.
On the whole, UK government policy encourages technological development. This has been agreed upon by leading economic historians who dove deep into why the world’s first industrial revolution was in Britain. The bottom line is that it paid to invent the spinning jenny and the steam engine. One core mechanism at play here is how secure intellectual property rights influence developers to pursue the creation of new games and their underlying infrastructure. Specifically, innovators within the gaming sector have enough faith their new ideas won’t be easily copied, and hence maximum profit can be retained. It makes sense why we see 40% of UK gaming companies dedicating some of their spending towards Research and Development, with some dedicating as much as 20% of turnover. It seems more rational to spend millions on developing the next big idea when you know there won’t be 100 imitations on the market the day after you launch, all branded similarly yet priced cheaper. Property rights matter.
Virtually all innovators require capital and if you’re building gaming technology, you need lots of it. The UK Games Fund has received in excess of $5 million from the UK government since 2015 and will receive in over $2 million more until 2020. This initiative is designed to incubate early-stage gaming companies. Furthermore, the UK government has sponsored a Research and Development initiative named InGAME, committing millions of pounds to foster new and improved gaming technology.
As discussed in our last article, foreign direct investment is at a six-year low yet at record highs for the UK technology sector, which includes gaming. Foreign-owned gaming development companies can apply for tax relief if they have a UK presence: and 212 productions with a collective budget of $360 million have benefited from this policy. Strong economic incentives directly boost the industry as larger companies can produce beyond their minimum efficient scale and hence charge competitive prices for high-quality products.
Given property rights and developed capital markets are not unique to the UK, culture can help explain the impressive growth of the gaming sector. It can be hard to quantify but academic literature suggests that individualism promotes creativity, which is a necessary factor in the development of new games. Additionally, cross-cultural synergies with the United States such as language may also play a role. For example, Rockstar Games, the developer that grossed $1 billion in three days of releasing GTA V, has over 90% of its offices in the UK or North America with its international publishing headquarters based in London. As a result, the UK industry benefits from both the knowledge and consumer demand spillovers from across the Atlantic. Ignoring the States, gaming within the UK is becoming increasingly popular: the London Games Festival has seen crowds double to 60,000 since 2016 and for the first time gaming generated more revenue than movies and music combined.
Andreesen Horowitz identify a major trend in the gaming sector to be the growth in cross-platform gaming using cloud technology. Cloud technology enables devices like mobile phones to stream games with more advanced graphics and storylines than was previously possible. A catalyst for this factor is that the UK has been unrolling 5G network technology throughout 2019. This is crucially in time with China’s rapid 5G expansion that will create the world’s largest cloud gaming market. Furthermore, the UK rolling out 5G is in time for Google’s release of Stadia, a cloud-based gaming app that hosts games from over 20 different publishers. Released in November 2019, subscribers of Stadia can play over 30 games without even having a console – just Chrome needed. What’s more is that after initial payment for headphones and a controller, it’s only £8.99 per month and a free option is set to arrive in 2020. The big question now is… what has Apple got to say in response?