Investing in influence: Video Games Industry Memo, 15/02/2024
Disney's Epic power play unpacked
Disney’s investment in Epic Games sparks a battle for influence in the industry
Xbox prepares to reveal the future of its platform in a podcast
Mario vs Donkey Kong provides platforming delights in this week’s releases
Dear readers, I have a humble request for you. Before we dive into this week’s VGIM, I’d like to ask you for what I most desperately crave: praise.
Alright, what I actually mean is that I’d love it if you’d be willing to give me a testimonial that I can use publicly.
I gathered some great ones from friends and well-wishers when the publication was in soft launch in the early Autumn. But it would be great to receive some fresh reviews as VGIM steadily creeps towards six months of existence.
If you’re enjoying the newsletter and have five minutes to write two lines about why, email videogamesindustrymemo@substack.com with your testimonial.
And with that neediness out of the way (in Valentine’s Day week of all weeks) it’s time to tuck into another tasty hot take.
The big read - Investing in Influence
One of the perils of writing a weekly newsletter is that you can, just occasionally, end up missing out on covering a big story due to the cruelty of time. Last week, it was Disney’s turn to make me curse the calendar.
Late on Wednesday evening UK time, the company announced that it was investing $1.5bn into Epic Games to create “an all new games and entertainment universe” that will enable its fanbase to play, watch, create and shop within the medium. Truly a utopian vision of a better world, I know.
Bob Iger, Disney’s CEO, has positioned the move as the company’s “biggest ever entry into games.” While this is almost certainly true in terms of a one time cash injection, I’d argue that the reason why this deal is significant is because it isn’t the company’s largest move into games.
Instead, this investment matters because Disney has recognised something that a number of businesses operating within (and circling around) the industry have understood. It is becoming more effective to invest to influence the work of leading games developers, rather than to build from scratch (or acquire) a costly bespoke video games presence.
And while Disney’s investment in Epic Games is principally about creating a fun virtual theme park for players to scamper around in, the rise of investment for influence in games is a trend that is, and will continue to, have larger repercussions for the sector at large.
Taking the Mickey
Rather than dive straight into why Disney’s investment in influence in Epic is a smart move, we need to take a step back to look at why the company preferred to return to games via a comparatively light touch strategy.
Disney, after all, is not a new player within the global video games industry. The company ran its own games division for nearly 30 years, releasing games under a variety of business names between 1988 and 2016.
The problem? Disney’s games division always felt like an uncomfortable part of the entertainment conglomerate’s business.
The games part of Disney oscillated between pursuing a fairly unambitious strategy of creating mostly mediocre tie-in games associated with its most popular movies and IP, while also taking speculative costly punts on tentpole titles such as the Warren Spector backed platformer Epic Mickey and the toys to life platform Disney Infinity.
The strategy, however, failed. The company shuttered its games business in May 2016 following the failure of its major in house projects - especially Disney Infinity - leading to the company laying off 700 members of staff and swearing off its internal game development ambitions in the process.
However, a challenge was emerging. Disney recognised that it didn’t want to make games itself, but it needed to maintain its position within the sector.
It initially decided to maintain its presence via partnerships with the likes of Electronic Arts, Square Enix and Warner Bros to ensure that its IP didn’t fall out of audience minds.
It also created other partnerships around the industry through other means, including supporting a plucky little development upstart called Epic Games on Disney’s accelerator programme in 2017 at the start of Fortnite’s journey to global domination.
But the industry, as it is wont to do, shifted. On the consumer side, engagement with games leapt upwards. Player counts grew. Revenue exploded. The time spent within games increased with it, eating into consumer interest in other media forms.
And on the business side, the biggest companies in the sector became much better at generating value and locking rivals out of the ecosystem.
The sector formed into a series of walled gardens and hard to reach platforms, with major games developers controlling enormous games-as-a-service ecosystems that kept players and their spend under their control - locking rivals out in the process.
The growth in the games business led to concern across the media and entertainment business. This manifested itself in Netflix’s declaration in January 2019 - less than three years after Disney shuttered its games business - that it was more worried about losing its audience to Fortnite than to Disney’s nascent Plus subscription service.
This presented a quandary for Disney: if games were continuing to grow in prominence, what could it do to meaningfully increase its presence within the medium without saddling itself with another games division that it couldn’t, and wouldn’t want to, cater for?
And how could it find a place amongst the dominant companies in the sector, who have been attracting increasingly unassailable multi-billion dollar market positions, without breaking the bank?
You’ve got a friend in Tim Sweeney
The answer was its $1.5bn investment into Epic Games. By taking a stake in the business rather than owning it outright, Disney has inserted itself as an influential player in both the company and the wider sector in three strategically useful ways.
First, the company has invested enough cash to ensure that it gets a meaningful entertainment output on the other side.
The press release and teaser trailer that went out alongside the announcement made it clear that Disney’s cash will buy it an online social games experience similar to Lego Fortnite (which is also, incidentally, the result of an investment partnership inked between Sony, KIRKBI and Epic Games back in April 2022).
And while everyone involved in promoting the deal studiously avoided using the term ‘metaverse’, Disney’s partnership with Epic Games is clearly an attempt to create a digital space that is equivalent to one of its many real world theme parks - giving fans a place to hang out (and splash out) online for years to come.
Second, investing as a partner in Epic Games ensures Disney keeps its hands clean when it comes to the making of games.
Disney knows first hand that making a games business work is hard. By choosing not to build (or in this case rebuild) its games team, Disney is able to avoid the challenges that comes with scaling an interactive entertainment business - leaving Epic with the practicalities and allowing it to act as a supervisory presence on the IP side.
Third though, and most interestingly, Disney gets a seat at the table at one of the companies shaping the future of the global video games industry and, by extension, important influence over it.
Its stake in Epic Games is not substantially enough for it to control the direction of the company by itself. Reuters reports that the $1.5bn investment valued Epic at just north of $22bn - translating into a 9% stake in the company that means it has a say (rather than sway) over its decision making process.
Tim Sweeney has also, famously, fought to maintain control over Epic’s direction, ensuring other equity partners cannot bump him too firmly into decisions against his interest. This includes occasionally butting heads with Tencent, who we’ll come back to in a moment.
But money that is quietly invested still has a habit of whispering. And Disney’s decision to trade $1.5bn for content and some soft control over Epic Games’s future direction feels broadly like a steal to me.
From creators to influencers
What impact will this deal have on the global games industry? Naturally, it’s having a commercial effect on the sector already.
Disney’s decision to invest in games comes at a tough time for the industry. It provides a welcome shot in the arm for a sector needing to rediscover its commercial confidence, while also providing Disney with a healthy short term 11% bump to its stock price after investors responded positively to the deal.
However, it has wider significance to the industry because of what the deal means in terms of the sector’s power dynamics - both within Epic and outside of it.
Disney’s purchase of a stake in Epic Games was not solely about accruing commercial value; it was about acquiring influence that extends beyond the confines of a partnership deal.
By buying into Epic, Disney has ensured that one of the world’s most powerful video games businesses is literally invested into its success in games - ensuring that it will hold some influence over Epic’s creative future.
And while Disney’s ambitions stop there, there is another business partnered with Epic that shows how using investment as a tool for influence strategy is able to reshape a global industry in its favour.
Tencent has adopted an active strategy to invest as a quiet partner in a staggering range of games businesses across the world.
While this is driven by a desire for commercial return first and foremost (and crucially not by direction from the Chinese government, whose policies towards games have often sought to limit Tencent’s power), it has allowed it to convene an influential industry community to softly advance its overall agenda through knowledge and connection.
Mostly, this takes the form of quietly hooking together the expertise of its various constituents parts when it is useful to the goals of the companies involved or Tencent more broadly. But if needed, the company can literally bring together its expertise in a way that shows its influence on the sector.
This included, reportedly, arranging a meeting of nearly a hundred leading industry executives from the Tencent family - which included senior figures from Epic Games and Ubisoft - in the fringes of gamescom 2023 last year.
And importantly, Tencent’s approach to investing in influence has also clearly inspired a final group to spread money around the sector as part of a strategy that definitely extends beyond delivering commercial returns alone: nation states.
The most prominent example of this is Saudi Arabia, which has taken stakes in a number of major games businesses such as EA, Nintendo and Take-Two through its Public Investment Fund.
The outward logic behind this is that the investment buys Saudi Arabia a seat at those tables in the way that Disney just bought theirs at Epic. It isn’t about ownership per se, it’s about access to decision makers who could meaningfully grow its cluster.
But as we’ve seen elsewhere, investment by bodies who have a political interest does tend to have an effect on the companies they invest into.
Research from the Centre of Economic Policy Research shows that investment by institutional investors into publicly traded companies in America creates a link between each organisation’s political donations and affiliations.
And even though the research shows that the link is likely caused by companies subconsciously adapting to their investor’s priorities, rather than taking direction on them, it raises a question about how the purchase of stakes in any games business may affect the politics of the wider company or the spaces it curates.
To be clear, Disney’s investment in Epic Games does not look like a plan to directly influence our political economy. The company’s strategy is rooted within extending its entertainment and parks business to the digital world, cleverly trading a small amount of cash by its standards for serious virtual upside.
It is, however, clearly as much of an influence play as it is a commercial one. And with The Guardian raising questions this week about the impact of virtual worlds upon the real one, keeping an eye on who has invested into the curators of our digital spaces will become increasingly important in the years to come.
News in brief
At podlast: Xbox is set to share its big news about the future of its platform later today via the company’s official podcast. Tune in later today to hear what Phil Spencer, Matt Booty (as said in previous VGIMs, a great name) and Sarah Bond have to say about a topic so delicately handled by “fans” last week.
PS5 - Xbox Nil: If you’re wondering why Xbox is switching its console strategy, Tom Ivan at Video Games Chronicle has a likely answer. The noted clever clogs spotted figures from Take-Two’s financials that suggest that the PS5 has outsold the Xbox Series range by two to one - giving a pretty solid indication of why Spencer and co are changing tact on its exclusives.
Fall of the Ronin: Sony has confirmed that Rise of the Ronin will not be sold in South Korea amidst controversy over the inclusion of historical scholar Shōin Yoshida, who was considered to be an influential figure in Japan’s decision to conquer the country in 1873. The decision not to release may simply be about cultural sensitivity but it is likely the game may fall foul of obscure local age rating rules which doesn’t allow the release of content deemed problematic for the Korean republic. The more you know…
Pokemon Grow: Japan is the world’s biggest market for location based games, according to the boffins at Sensor Tower. The market is valued at $620m - 50% of the global market for location titles - and is propped up by Pokemon Go, Monster Hunter Go and Dragon Quest Walk.
Games for Good (and bad): And finally, here are two bits of bedtime reading that launched this week. In the nice corner, Gaming for Good by Jude Ower and Mathias Gredal Nørvig aim to dispel the negativity around games by showing their power (and value) for delivering societal good. And in the other less nice corner, but still very much essential reading, Linda Schlegal and Rachel Kowert have edited a range of essays exploring how digital playgrounds are being radicalised.
On the move
Ben Lumsden has popped up at Reactional Music to apply its tech to a variety of Unreal contexts (the engine, not wider life)...Samantha Bell is the new Chief People Officer at CI Games…Sumo Digital lifted the lid on its new Academy Cohort last week...
Jobs, jobs, jobs
OKRE is hiring for a new Head of Operations (and games experience is very much welcomed)...PlayStation Mobile Studios is hunting for a Senior External Producer…Milky Tea Studios is looking for a Lead Producer to help them brew new games…Amazon Games has a lovely looking Social and Content Marketing Manager role going in London…And the Irish Game Makers Association is appointing a Chief Executive Officer based out of Dublin…
Events and conferences
Guildford Games Festival, Guildford - 16th February
Pocket Gamer Connects, San Francisco - 18th-19th March
Game Developers Conference, San Francisco - 18th-22nd March
London Games Festival, London - 9th-25th April
London Developer Conference, London - 11th April
Games of the week
Mario vs Donkey Kong - Nintendo’s remake of the Game Boy Advance platformer arrives to plug a gap in the release schedule (until the Switch 2 is announced…)
Skull & Bones - Ubisoft’s much delayed pirate ‘em up launched into beta earlier this week to reasonable-ish reviews.
Tomb Raider 1-3 Remastered - Lock an elderly man in a fridge (and also shoot some dinosaurs) in this rebooted trio of classic titles
Before you go…
Ever felt that your video game playing lacked a complementary tipple to really bring it to life? Well, I’ve got some good news for you.
James Evison of The Drinks Business has created a list of video games and drinks pairings to help you swig something appropriate when playing games such as Skyrim and Total War: Napoleon.
Bottom’s up!
This move definitely struck me as a "if you can't beat them, join them" strategy, and a very sensible approach.