Finding Equilibrium: Hyper-Casual Games and the Case for Financing Solutions
Global spending in mobile apps is expected to reach $171 billion by 2024, with 57 percent generated from mobile games alone. The rapid growth and evolution of the sector has redefined the industry status quo, to one where only well-developed and strategic execution strategies can encourage scale and longer-term survival. The mobile gaming industry has come a long way in the last two decades, fuelled by technological advances, increased financial investment and the availability of smartphones.
The introduction of hyper-casual games, which are usually free-to-play (F2P), makes it increasingly difficult for developers to monetize — investing large amounts of money into development costs for a game that is given away for free, before having to spend further to encourage user acquisition. It costs $1.42 to acquire a user, yet 10x more to get that user to register. It is expected that only 1 percent of users will commit to in-game purchases, with a conversion time from install-to-purchase of 1 day 22 hours and 35 minutes at a cost of $86.61 per user. This means that developers will need to drive user acquisition (UA) volume as effectively as possible, through constant testing and measurement.
Risky Business
The UK gaming market boasts 2,200 game studios and employs 20,000+ people in the sector alone — it is the fifth largest video game market in the world, valued at £3.86 billion, which is more than video and music combined. Mobile gaming leads the charge (41 percent), followed by console (25 percent) and PC titles (21 percent), with 3,544 (32 percent) of British publisher’s games available on both Google Play and iTunes stores.
A 2016 study by the UK’s trade association representing the games industry (TIGA) showed that 52 percent of UK game developers identified lack of access to finance as a principal factor holding back their business — driven by a lack of traditional debt financing options combined with private investors worried over the risk factors involved (despite all of the market hype).
However, major publishers (aka AAA studios) have strong balance sheets and do not require external financing. Rather, small indie studios are typically cash-strapped and bullied into seeking non-favourable finance solutions in order to stay afloat. They face challenges from the likes of unfavourable publishing agreements (revenue shares of up to 50 percent), slow private capital and/or archaic finance platform solutions. Should they manage to scale, they are faced with the financial challenges of a medium-sized indie studio, in which UA marketing budgets are compromised and the business is pushed to seek a bank loan, venture debt or raise equity.
The Gaming Economy
While the UK market has been quick to recognize this global, industry-wide problem, with the likes of Video Game Tax Relief (VGTR) and the proposed Video Games Investment Fund (VGIF), there are no known government initiatives to encourage video game development within the world’s number one gaming market — the United States. Overtaking China, the US market is valued at $36.9 billion across 2,711 games companies, with console platforms as the predominant growth driver representing 50+ percent of total revenues. Mobile gaming captures 27 percent of the market ($9.9 billion), with 9,751 (33 percent) of American publisher’s games available on both Google Play and iTunes.
If we drill down into the market opportunity, the global games market is forecasted to reach $164.6 billion in 2020 across 3B gamers. Stripping out the top 35 AAA studios (85 percent of global revenues), the size of the global market attributable to non-AAA developers represents $24.7 billion across all gaming segments — mobile (46 percent), PC (24 percent) and console (30 percent). Of this, EMEA and North America represent $5.4 billion (22 percent) and $6.4 billion (26 percent) respectively, to a combined market opportunity of $11.8 billion across all gaming platforms.
Mobile’s sheer market dominance has displaced the position of PC and console as the core drivers of the gaming market. As such, the mobile gaming market opportunity suggests an initial addressable market of $5.4 billion — supported by an increased reliance on mobile as a means for commerce, communication and entertainment on the back of COVID-19 and is accelerated by equal measures of innovation as well as hardware upgrades and infrastructural (5G) rollouts.
The market for on-demand funding is active, with nuanced solutions spanning across industry players — Braavo Capital, Tilting Point, Sugar, PlayIgnite, Pollen VC, Rangewell and Triple Dragon. These companies help to create a more sustainable industry and are redefining the dynamic which makes the current mobile marketplace ineffective. This creates the opportunity for indie players to market test and focus their efforts on UA and post-launch growth initiatives.
By reducing barriers to entry, an increased access to capital empowers content creation and consumption. This encourages new studios to enter the fray, as it democratizes financing opportunities within a previously restrictive industry environment.
Let the games begin.
If you or your network is passionate about the space and would like to connect, please feel free to reach out.
E: Dario@Anthemis.com
