A familiar story is playing out in the video game industry. Once upon a time, the way to grow your gaming business was to put out blockbuster titles. That meant investing a whole lot of money and time into a product that might or might not be a success with players. Now, as global competition heats up, companies are turning to mergers and acquisitions to scale up faster.
Consolidation has been transforming the industry for at least the past two years, but much of the activity was happening in the background. That all changed in the past month, as a string of deals featuring some of the biggest names in gaming threw a spotlight on the M&A boom. 
Take-Two Interactive, the owner of Grand Theft Auto developer Rockstar Games, kicked off the buying spree in early January with its purchase of Zynga, maker of FarmVille and Words With Friends, for $12.7 billion — a case of a triple-A publisher purchasing a rapidly growing mobile-first company. 
Then came the biggest deal in the industry's history. Microsoft announced plans to purchase Activision Blizzard, maker of Call of Duty and itself the result of a merger between two major game developers with serious cred among fans, for nearly $70 billion — a case of a console-maker and tech conglomerate getting its hands on the most popular franchises on the market. 
Finally, almost like a call and response, Sony announced its plan to purchase Bungie, the developer behind Destiny and the original creator of Halo, for $3.6 billion. While smaller, this deal matched the formula of the Microsoft acquisition: a console maker gobbled up a developer, one that also happened to release the very game, Halo, that put Microsoft's Xbox on the map.
Besides the eye-popping sums of money being exchanged and the familiar brand names involved, the string of acquisitions could mark the beginning of a watershed year for consolidation in the gaming industry. 

Just the Beginning

Drake Star Partners, an investment bank at the center of the M&A boom in the sector, released a report on Friday forecasting $150 billion in deals in 2022. That would be up from $85 billion worth of deals in 2021, already a record, and three times the volume of deals in 2020. 
Michael Metzger, partner at Drake Star, explained that as more gaming companies have entered public markets and more investment has flowed into the space, companies have faced increasing pressure to grow and grow quickly. 
"As a public company, in general what investors want to see is growth and scale," Metzger told Cheddar. "Growth can be very well executed organically, but it often takes time. Some titles take many years from start to finish to get out." 
Take the case of Embracer Group, a Swedish game developer that went public back in 2016. 
The company was one of the most acquisitive in the space in 2021. It purchased, just to name a few, Asmodee for $3.1 billion; Perfect World Entertainment for $125 million, and Gearbox, the developer behind the popular Borderlands franchise, for $1.3 billion. 
All this dealmaking helped stir up the PC/console segment, where M&A activity has historically lagged behind other segments, such as mobile, in part because established companies didn't feel the need to step out of their comfort zone. 
"[Embracer] to some extent started consolidation in the PC/console segment, where previously a lot of these founder-owned companies were very happy, very profitable businesses, but there were very few deals in the space," Metgzer said. 
For the companies being acquired, in theory, they now have greater access to funding and customers. They also potentially have more opportunities to diversify their offerings. 
“Far from riding off into the sunset, we are now positioned to launch new IP, do more with our existing brands, grow our base of incredibly talented team members, and capitalize on new opportunities in our mission to entertain the world," said Randy Pitchford, founder of The Gearbox Entertainment Company, after completing the merger back in April 2021. 
The ability to diversify is crucial, said Metzger. As gaming has expanded to include more channels, such as mobile, platform, and esports, companies are looking for ways to expand. Doing so organically is one option, but M&A offers a compelling shortcut. 
Take-Two Interaction's purchase of Zynga is a clear example of this. Known for taking several years to produce big-budget games with a years-long shelf life, the Grand Theft Auto-maker wasn't necessarily in a position to become a dominant player in the mobile game market.
"It would have taken them many years, and a good amount of luck, to get to scale in the mobile segment without their acquisition of Zynga," Metzger said. "It allowed them to get a significant foothold in the mobile gaming market."
There's also a geographic dimension to the consolidation wave. Drake Star anticipates that Asian players will try to acquire more western companies in 2022, especially as the regulatory situation becomes more difficult in China. Chinese gaming giant Tencent, for example, went on its own acquisition binge in 2021, picking up 11 firms from across the world. The company took a particular interest in the PC/console space, such as Sumo Group and Turtle Rock. 

IP Gold Rush 

The Sony and Microsoft acquisitions, meanwhile, highlight a slightly different set of motivations. Both companies as console makers and publishers have strong incentives to bring more intellectual property under their umbrellas to bolster their subscription services, which offer gamers access to a slew of titles for a set monthly price.  
Microsoft, for example, has been explicit that it plans to include Activision Blizzard games in its monthly Game Pass membership. The service currently has 25 million subscribers, but Microsoft has its sights on Activision Blizzard's nearly 400 million monthly active players. 
While Sony has so far invested less in its PlayStation Plus subscription service, the company is now planning a major revamp for the spring. 
“This is an important step in our strategy to expand the reach of PlayStation to a much wider audience," said Jim Ryan, the president and CEO of Sony Interactive Entertainment, in a press release. 
Many of these trends have been developing for a while, and are now coming to a head, but the question of why now is fairly straightforward for those watching the industry closely. 
"The major difference to previous waves of consolidation is that, in 2022, gaming stands as the most valuable media category,"  Moritz Baier-Lentz, partner at BITKRAFT Ventures, another investment firm involved heavily in the gaming industry, told Cheddar. 
Growing interest from competitors is quickly turning the industry into a "new M&A battleground," which he said is likely to draw in not only gaming companies but big tech as well. 
"Amazon, Apple, Meta, Google, Microsoft, Sony, Netflix, Tencent, and ByteDance — to name a few — are all placing strategic bets across content, virtual worlds, AR/VR, cloud gaming, distribution, subscriptions, and streaming."