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2022 media and entertainment industry outlook

Feb 16, 2022

Media and entertainment industry outlook key takeaways

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Metaverse is the buzzword du jour.

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The potential of the metaverse is driving higher valuations for gaming companies, as well as makers of design software and augmented and virtual reality hardware.

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The video gaming and esports sector is currently seeing significant growth and transaction activity, headlined by recent landmark acquisitions by Take-Two and Microsoft.

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Economics Media & entertainment

Could the video gaming and esports industry be at the center of the next economic evolution?

Video gaming and esports, perhaps at one time thought to be just a hobby for young children, should be discounted no more. VG&E is a multibillion-dollar industry poised to lead and remain at the center of a global economic renaissance. The sector’s growth and importance have been emphasized in recent months with a series of significant deals, headlined by Microsoft’s acquisition of Activision Blizzard for nearly $70 billion in mid-January.

The video game industry was estimated as a $174 billion market in 2020 and is expected to almost double to $314 billion by 2026, according to Mordor Intelligence. Driven by low barriers to entry, the landscape is competitive.

Video gaming and esports deal activity chart | Media entertainment industry outlook

The number of VG&E deals has been growing over the past 10 years, averaging approximately 150 per year from 2011 through 2018 and jumping to an average of 381 per year for 2019 through 2021. Invested capital is also on the rise, although the median and average deal sizes are diverging due to a few large transactions involving investments in excess of $10 billion.

Gaming has grown from being largely console- or PC-based to include many other categories, of which mobile is by far the fastest growing. A recent move by Apple, allowing the consumer to deny apps the ability to track user information, is expected to hamper the mobile gaming sector. However, mobile gaming has historically accounted for the vast majority of revenue in the Apple and Google Play app stores, and this trend can be expected to continue.

VG&E will quite likely be the average person’s first foray into the metaverse. Goldman Sachs estimates the total addressable market or future opportunity stemming from the evolution of the internet to Web 3.0 and the metaverse to approximate $8 trillion. Gaming is a foundational pillar of the metaverse, along with design software, social networking, live entertainment, and hardware for gaming, augmented reality and virtual reality, according to Bloomberg. As buzz around the metaverse continues to intensify, it’s impossible to ignore the contributions of gaming and esports or the role they are projected to play.

The metaverse won’t be video games’ first large-scale contribution to the world. For example, as detailed in the book The Second Machine Age, with the help of Xbox Kinect, artificial intelligence researchers were able to address one of the primary challenges to the robotics industry—simultaneous localization and mapping. SLAM is the process of building a map of an unfamiliar room or building in real time while navigating it. Most people do this almost automatically; it’s how you remember which entrance you came through, where the bathroom is or where you’ve parked your car in the garage. However, this task had proved to be a tall order for artificial intelligence researchers and the robotics industry, until a researcher picked up the Kinect and started panning around the room.

The promise of the metaverse and the lure of high returns on invested capital are driving higher valuations for game makers as well as makers of design software, augmented and virtual reality hardware, and gaming hardware. Some recent transactions that included a “metaverse premium” involved Roblox, Unity and Zynga. According to Bloomberg, Roblox’s sales multiple of 17.2 is two to three times that of its peers Activision Blizzard, Electronic Arts and Take-Two, which range from 5.0 to 7.9. Unity’s sales multiple of 25.7 is more than double that of Adobe, Autodesk and Ansys. Most recently, Take-Two acquired Zynga for $12.7 billion, at a 60% premium, according to The Verge, in what was “one of the biggest (acquisitions) in video game history, by a pretty big margin—ahead of even Microsoft’s $7.5 billion purchase of Bethesda, which was finalized last March, and Tencent’s $8.57 billion acquisition of a majority stake in Supercell.” However, Take-Two’s acquisition of Zynga was quickly overshadowed by the Microsoft-Activision Blizzard deal, which represents a premium of 45% at a share price of $95, according to Bloomberg. Following the acquisition of Activision Blizzard, Microsoft will be the third-largest gaming company.

Metaverse is the buzzword du jour, which makes the concept difficult to grasp. A simple Google search of the term yields an endless stream of news stories and coverage of the flag-waving variety: announcements of preparation for entry into the metaverse by industry incumbents in retail, technology and many other sectors; tech blog discussions of the underlying concepts and components; and links to the webpages of companies that have branded, or rebranded, themselves to signal their alignment with the changes to come. The middle market can analogize the advent of the metaverse to the introduction of the internet to the business world. The internet forced companies to evolve and fundamentally changed the way business was conducted. Ultimately, many companies were born, and some that were unable to keep up with progress disappeared. With the metaverse, we are on the brink of another, similar evolution that will determine the winners and losers of tomorrow.

RSM contributors

  • Nate Farshchi
    Telecommunications Senior Analyst, Director

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