For several years, some relevant mergers, acquisitions, or studio formations were happening in the video game industry every month. Companies like Microsoft, Sony, and Embracer Group went on shopping sprees, and studios many of us never expected to be acquired, like ZeniMax Media, Bungie, and Gearbox Entertainment, were respectively bought up. These companies seemed dead set on infinite growth, with no plans to stop. That tone changed throughout 2023.
Microsoft completed its $69 billion acquisition of Activision Blizzard, but only after an arduous legal process that enflamed the console wars, leaked information the industry historically kept secret, and forced Microsoft to deemphasize its cloud gaming efforts. Meanwhile, layoffs have rocked the industry, with the biggest culprit being Embracer Group, which has been shedding studios and workers ever since a deal meant to sustain its growth fell through. As 2023 wraps up, the game industry is in a much less bullish state than it was just 12 months ago, and the people paying for that are the developers who make the games.
Infinite growth
As with any industry, mergers and acquisitions have always been part of the game industry. That goes back to 1978, when Atari sold itself to Warner Communications. But over the last decade, as gaming has become much more accepted and relevant in the mainstream, the amount of deals and prices attached to them have only increased. Microsoft frequently invested in the game industry, peaking quantity-wise with the announcement of six studio acquisitions throughout 2018.
The 2020s have contained a massive boom where companies like ZeniMax Media, Zynga, Rovio, and Bungie all got acquired. To learn more about what caused this golden age of acquisitions, I spoke with Omdia’s principal analyst for games tech, Liam Deane, for more insight.
Deane tells Digital Trends that “increasing development and marketing costs have made it harder for medium-sized publishers to compete with the biggest players” in the AAA space, so acquiring or merging with other studios gives them a better chance to compete with the big dogs. In talking about the Zynga, King, and Rovio acquisitions over the past couple of years, Deane says they occurred because “traditional publishers have realized that they’ve fallen behind in mobile and have sought to acquire mobile publishers to catch up.”
The game industry thrived during the COVID-19 pandemic, which caused lots of venture capital and private equity money to flow into the industry. Deane believes that “drove a more speculative [mergers and acquisitions] boom which peaked around 2021.” That was the year Microsoft completed its acquisition of ZeniMax Media, while Embracer Group brought nearly 30 companies, ranging from game publishers like Gearbox Entertainment and Perfect World Entertainment to even some outside of gaming like Dark Horse.
The trend continued well into 2022, with that January being particularly busy as Take Two, Sony, and Microsoft announced their intentions to buy Zynga, Bungie, and Activision Blizzard for billions of dollars, respectively. A few months later, Embracer Group purchased three studios from Square Enix. By 2023, the cracks in this endless growth strategy these companies partook in started to show.
Nothing is infinite
Until its $69 billion Activision Blizzard acquisition, Microsoft’s game studio purchases had not garnered much scrutiny from government organizations. Because Activision Blizzard owns many of gaming’s most successful franchises, Sony and the Federal Trade Commission (FTC) didn’t let the deal go through without a fight. Extended court battles forced Microsoft to admit its past gaming shortcomings, reveal more about its future plans than it wanted to, promise not to take Call of Duty exclusive, and downplay its cloud gaming efforts.
That’s undoubtedly the most grilling that a game industry acquisition has ever endured, which calls into question whether any more deals of that scale are sustainable in the future. Deane hesitated to compare Microsoft’s purchase of Activision Blizzard to most other gaming acquisitions because of its sheer size. However, he thinks “the arduous regulatory process that deal had to go through might give second thoughts to anyone contemplating a future mega-deal for the likes of EA or Take-Two.”
As Microsoft was embroiled during that legal process throughout 2023, another negative trend overtook the industry: layoffs. Over 9,000 people have been laid off from video game companies this year, according to data from tracking website Video Game Layoffs, with the bubble finally bursting after years of hiring sprees and studio mergers and acquisitions. Sony’s Bungie let go of many people in October, pushing back Destiny 2’s next expansion and the release of Marathon. There were also massive layoffs at companies that had made their fair share of acquisitions in recent years, like Epic Games. The workers at Embracer Group were one of the industry’s biggest casualties, and those layoffs particularly stung due to how aggressive it had been at buying studios up over the past several years.
Embracer’s aggressive investment strategy needed sustained rapid growth to pay off.
I went as far as to call the company “gaming’s new megapower” after it acquired Crystal Dynamics, Eidos Montreal, and Square Enix Montreal from Square Enix in 2022 because the studio had finally accrued so many studios and IP to put under its banner. It also started launching higher-profile titles recently, like the reboot of Saints Row, SpongeBob SquarePants: The Cosmic Shake, and Dead Island 2. Although things were looking up for Embracer Group heading into 2023, this year proved that it is, in fact, not a megapower.
Embracer Group had hyped up a major $2 billion deal with investors. While it never confirmed who the partner was, Axios reported it was Saudi Arabia’s Savvy Games. At the last minute, that deal fell through, and Embracer Group didn’t have any backup plan. The company began a “restructuring program” as a result, so throughout the rest of 2023, we saw many layoffs and closures across its portfolio of studios.
It shut down Volition, a studio with a decades-long history, gutted the workforces at places like 3D Realms and more, and closed Free Radical Design before it could even get its first game off the ground. “The specific deal that apparently fell through for Embracer is really just a reflection of the wider reality that the games market is no longer growing at the rate that it was,” Deane explained. “Embracer’s aggressive investment strategy needed sustained rapid growth to pay off, but in fact, we’ve seen a correction, with the market moving back to something more like its pre-COVID trend.”
Paying the price
Essentially, companies like Embracer Group thought it was safe to overinvest because of the boom the game industry was seeing, and are now paying the price as they realize that growth can never truly be infinite. Acquisitions will continue in the game industry. Atari was aggressive this year in purchasing Nightdive Studios and Digital Eclipse. But heading into 2024, the video game industry isn’t as fertile for investment anymore, and the workers at the studios, not those making the deals, are the ones paying the price. Deane thinks we’ve hit the low point, so the only way to go is up.
“It’s possible that the market has actually bottomed out at this point, and we may see [mergers and acquisitions] activity picking up a bit in 2024 as investors start to see more value in the market compared to the sky-high valuations of a few years ago,” Deane said. “Certainly, the games market is now a bit out of sync with the rest of the tech industry, which has been having a very good year, at least as far as share prices are concerned. That’s bound to create an environment where game companies start to look attractively priced relative to other investments.”
Video game fans can theorize about which mergers and acquisitions will happen next. like they did in years prior, but after 2023, it’s worth keeping in mind that these kinds of business moves impact the people who actually make the great games you enjoy. Even if the mergers and acquisitions market improves, as Deane predicts, that doesn’t absolve what happened to people at Embracer-owned companies like Free Radical Design and Volition or workers at places like Bungie, Naughty Dog, and Epic Games. Both video game studios and consumers should remember what happened at acquisition-happy companies this year the next time a multibillion gaming deal between companies is announced. At the very least, we should be wary if we see another company attempting to replicate Embracer Group’s former strategy.
“Embracer’s acquisition strategy was uniquely aggressive,” Deane said, “and I think it’s fair to assume that nobody is going to try to replicate the experiment any time soon.”
