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From the Queen’s Speech to the next election: what now for the government’s agenda?
From the Queen’s Speech to the next election: what now for the Government’s agenda?

Decoding private equity’s video game spending spree

Words by:
Account Executive
March 28, 2022
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The video game industry was a notable beneficiary of the pandemic as millions of people globally were confined to their homes, triggering a period of exceptional growth: the industry is expected to expand by 14.5% annually over the next five years, reaching a value of $314 billion by 2026. Whilst the pandemic has undoubtedly proven to be a catalyst, the industry’s growth is likely to persist beyond the easing of restrictions as there are many convincing signs that it isn’t simply the result of a Covid-induced bubble.

Consumer engagement with gaming has driven and depicted the industry’s growth, evidenced by the snowballing levels of consumer spending on video game content over the past decade and similar, concurrent rises in the popularity of e-sports and streaming – Twitch went from 300,000 channels (users streaming their gameplay) in 2012 to 9 million in 2020.

Consequently, the entertainment industry is approaching a watershed moment where video games will eventually eclipse others to become the dominant source of entertainment content due to its ability to incite greater consumer interaction and engagement – at levels comparable to the biggest blockbusters and live sporting events.

Moreover, as cloud gaming inches closer to feasibility, likely to be supercharged by the eventual rollout of Metaverse’s cloud-based virtual reality, gaming will become increasingly accessible and integrated into consumers’ lives – resulting in the industry being further attractive for investors, even though in the coming years, growth may taper off slightly as the effects of the pandemic bump wear off.

Evolution of the video game industry’s business model

The video game sector was considered as the sole domain of venture capital in the past, but private equity firms have become increasingly drawn to gaming companies by their burgeoning valuations, consistent revenue streams and the evolution of the industry-prevalent business model – has piqued the interest of private investors with many monitoring closely how the industry evolves further over the coming years.

Like software, the traditional sales model for video games required significant upfront investment in development and publishing, which would be recouped through the sale of physical media (originally cassettes and CDs, and more recently individualised product serial keys that facilitated download to specific accounts) to customers.

In the mid-2000s, distribution evolved from physical to digital, due to greater feasibility because of technological and connectivity advancements. The advent of downloadable content (DLC) followed, allowing for additional features and content to be sold to customers after their original purchase as a way of extracting more revenue from a title post-sale. Most games now feature online marketplaces where virtual goods, like in-game equipment and clothing, are sold to gamers, often through in-game, virtual currencies that need to be purchased using real money.

Broadly referred to as microtransactions, these sales are now a foundational pillar of the business model. They have become a universal aspect of online gaming, featured everywhere from casual, mobile games to the top-tier ‘AAA’ titles, and are fast becoming the essential revenue stream as they comfortably surpass revenue generated from full-game sales.

Electronic Arts (EA), one of the world’s leading video game companies, revealed in recent reporting that 70% of its expected revenue in 2022 will come from ‘live services’ – including online subscriptions and in-game microtransactions – as opposed to full-game sales. The success of this trend has seen it spread throughout the industry as it enables companies to easily attract new customers with ‘free’ games and then monetise them through in-game transactions.

Referred to as the freemium model (free-to-play games with microtransactions), this is the driving force behind the success of many leading games on the market today. Activision’s 2019 release of a free-to-play mobile version of its popular Call of Duty franchise generated a record-setting hundred million downloads within its first seven days, along with $17.7 million in revenue from microtransactions – by April 2021, the game’s total player base reached a hundred million, making it the most popular game in the world globally, second only to Fortnite, that also utilises the same model.

As a result, microtransactions have contributed significantly to the growth of the industry by enabling consistent, recurring revenue streams driven by sustained consumer engagement – to the delight of private equity investors. In 2021, an average of one deal per week was closed in the UK video game sector, with commentators lauding it as one of the highest potential untapped TMT segments for private equity firms.

Regulatory attention and the road ahead

However, the road ahead for the video game industry puts it on course to be confronted with increased regulatory scrutiny. In 2017, the Gambling Commission outlined its concerns “about the blurring of the line between video gaming and gambling,” sparked by concerns over loot boxes, a microtransaction akin to buying a scratch card for in-game cosmetic and gameplay rewards.

These have been highlighted for their role in contributing the potential of ‘problem gambling’ in children by the House of Commons Digital, Culture, Media and Sport Committee (DCMS) Select Committee, in its report on immersive and addictive technologies. When asked by the committee, Neil McArthur, Chief Executive of the Gambling Commission, admitted that the Commission had “significant concerns” around children playing video games featuring elements of expenditure and chance. The Select Committee’s report, published in September 2019, called for an extension of the Gambling Act 2005 to cover loot boxes.

This has rendered the video game industry’s business model as a key aspect of the government’s review of gambling legislation, which began with the Conservative party’s 2019 manifesto pledge to review gambling laws “with a particular focus on tackling issues around loot boxes.” Subsequently, the government launched a Call for Evidence regarding loot boxes in September 2020 – with its report due in the coming months.

Providing insight into the potential scope of future regulation, the Gambling Commission previously ruled out banning loot boxes, as a prize must be either money or have monetary value for it to be considered under UK gambling legislation. Another area of concern for regulators is the proliferation of unauthorised, secondary markets for virtual currency that are used to conduct in-game microtransactions even though it is prohibited by most games’ terms and conditions.

Gambling Commission programme director Brad Enright admitted that companies like EA faced “a constant battle” against unauthorised secondary markets but questioned whether companies are serious about enforcing their terms and conditions – adding it was not up to the Gambling Commission to monitor the internet on behalf of the industry.

On March 8 2022, Minister Chris Philp said gambling reform was “long overdue,” during a speech at the Gambling Reform Rally, organised by the All-Party Parliamentary Group (an informal cross-party group of members of the House of Commons and the House of Lords united over any particular issue of concern) on Gambling Related Harm and Peers for Gambling Reform.

Given the escalating calls for reform of gambling legislation coming from politicians from across the political spectrum, campaigners, civil society groups and regulators, and the inclusion of video gaming and the microtransaction model in the scope of the overhaul of gambling legislation – investors with an interest in this sector will want to pay close attention.

The UK government’s review of gambling laws is now not expected until May, and there is significant potential for new obligations to be placed on video game companies which might affect their lucrative business model. The appetite for gaming shows no signs of abating, but investors will need to ensure that their target companies are agile enough to capitalise on this demand while remaining aligned with the government’s ambitions for online safety and responsibility.

To discuss the policy outlook for the video games in more detail, please email Arjun Upadhyay on

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