Media Companies Divesting From Games Is A Double-Edged Sword
Just a couple of weeks ago MIDiA Research wrote about Endeavor selling off its Epic Games stake. Now it has emerged that AT&T is looking to sell off Warner Bros Interactive Entertainment (WBIE), the games arm of Warner Media. Meanwhile, companies such as Epic Games are building up cash reserves to engage in potential M&A bargain hunting.
The disruption of COVID-19 has beeen sudden and unexpected. Companies which have gone from strength to strength one month, were facing existential issues just a couple of weeks later. While occupied with the daily unfolding of the crisis on the operational level, many companies are now reaching for the lowest-hanging, liquidity-ripe fruit to boost cashflow and become more asset light.
While it is understandable companies are scrambling for cashflow and refocusing infrastructure towards core profitable divisions, the trend towards media companies to divest from games portfolios is likely to prove a double-edged sword as the long-term competitive positioning will likely suffer as a result.
Where is the value in games?
Warner Interactive owns and operates games studios and acts as a games publisher. It has been using synergies with its parent company to obtain licenses for these games. As such, WBIE does not own these licences, so the intellectual property will stay with Warner Media. AT&T’s thinking likely is: get rid of costly infrastructure and keep the most valuable asset (the licensing rights) to monetise, while others take the investment burden and risks of developing and marketing the games.
Are the selling media companies undervaluing their games infrastructure assets?
There is a key assumption which could be omitted when games studios and publishers are valued. It is that the addressable revenue opportunity which games studios and publishers generate is now dramatically higher than it was just six or 12 months ago, due to the rise of games as cross-entertainment venues and market places.
A year ago, a developer could only expect to monetise gamers for playing a game. From this year onwards it will be increasingly common for developers and publishers to compete for a wider share of consumer entertainment spend than ever before, including music, video, physical and digital merchandise etc. If the $4 billion valuation has been calculated without the above in mind (which could be the case, considering it is only two times last year’s revenue), then for many games companies WBIE could be a steal during the current climate, if they can afford it.
EA, Activision as well as Take Two Interactive, are all mentioned in the reports as potential acquirers. Each company will have a slightly different reason to do so, but each equally valid. It can be argued there will be more interested parties here; neither Sony nor Xbox should be off the table as emphasis on exclusives grows before new consoles launch.
Additionally, another ‘non-games’ company could be looking to get in. The catalogue could be interesting to Google Stadia, which will be looking to secure exclusive content as well Amazon’s games service as and when it launches.
Is AT&T throwing the baby out with the bathwater?
Another key risk associated with selling off games infrastructure assets by media companies is, that they could be ridding themselves of their next-generation distribution networks (and future competitive advantage) in the process.
- a) Games is becoming the next-generation media and entertainment distribution channels, with audiences segmented by title. Failure to capture a share of these relationships risks putting any media and entertainment company at a potential competitive disadvantage for the mid to long term.
- b) Licensing will work well at first and provide increasing revenues in the short term. But the stronger the games worlds grow, the less they will need the popular TV IP licenses to maintain and grow audiences. Similarly to what Netflix has done, games companies will be learning exactly what works and what does not from a huge amount of user data coming their way from across entertainment. In the long-term, they should accumulate enough insight to make successful music and video IP in-house with artists and video/tv creators contracted as ‘work for hire’.
It is at this point, when companies which divested from their games infrastructure will start to feel the effects. Licensing margins will get squeezed at best, or there will be a significant decrease in demand and a subsequent devaluation of the TV IP portfolios, at worst.
The bigger picture
One thing is what this decision looks like from the perspective of the games landscape, the other is how that fits into AT&T’s current strategy. Gaming currently contributes just over 1% to AT&T’s annual revenue, which will ultimately dictate where on the priority level it sits during this crisis. Admittedly, AT&T has much bigger issues to think about – be it servicing its $200 billion debt (which to put things into perspective is more than the size of the global games industry) or keeping up with dividends, upon which many investors will be even more dependent than ever due to the current crisis.
So, while it would have been great for AT&T to keep games in the portfolio, in the grand scheme of things, if the sale is serving as a cash lever to satisfy a larger play, it is understandable.
Still, there is a significant opportunity in games for anyone who wants to compete in media and entertainment seriously in the next decade. As is the case with Endeavor, AT&T exploring a sale of WBIE is understandable given current circumstances, and the broader challenges of the company. However, the company should consider its future positioning in the games landscape after it comes out of the fire-fighting period. It has spent a lot of money and effort to play a leading role in media and entertainment, mostly by consolidating video. It now turns out that games will be at the core of some of the most important media and entertainment consumption habits of the coming years. This is not the time to say ‘let us get video right first’. This is the time to double down on running to where the ball is going to be, instead of where it is now. To be clear, this is NOT to suggest AT&T should be dropping its video efforts in any way, just that a games infrastructure portfolio should remain in mind, even after the potential sale its current assets.
Endeavor was just one case. Perhaps AT&T is just another. However, if this divestment from games infrastructure by traditional media and entertainment industry continues, it will significantly affect its ability to compete in the long term.