A while back I wrote that mobile gaming was about to reach its Playstation 2 moment (i.e. peak profitability). The recent Supercell deal has clearly tagged that point on the graph. Yet at the same time, investors are increasingly reluctant to fund new games startups. What happened?
The short answer is ‘history’. The slightly longer answer is that we’re now living through the third phase of a gaming cycle that has been around for decades.
Phase 1: New platform, new hope
-Conversations tend to include phrases like “Platform X is the new Platform Y” and ”It’ll never eclipse <LastPlatformName>”
Phase 2: The river of money
-Rapid revenue growth based on heavy investment in production/marketing/distribution etc.
-Lots of new entrants with successful first games and escalating valuations
-Allocated marketing spend starts to approach and then exceed 5% of balance sheet (smart investors exit here)
Phase 3: Fear, confusion, scale and niche
-A realisation that fundamentally ”Oh shit, the games business is hit-driven, it’s just like the last time!”
-A slightly deeper realisation that content by itself isn’t a sustainable advantage
-Exit windows extend significantly and a small handful of companies become the scale players (majority of which founded in Phase 2)
-A renewed interest in niche platforms (e.g. PC, micro-console, hardcore etc.).
It took console about ten years to reach Phase 3. Mobile needed just three years. I’m betting that Glass will do it in two.