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Capital Markets

La gloire des jeux

www.breakingviews.com

Profitability in the video games business is increasingly about scale. Much as with the film industry of 70 years ago, it is becoming difficult for small national players to compete against well-funded Americans. So how do European companies deal with this? Well, cultural patterns are coming to the fore if recent corporate activity surrounding the UK's Eidos and France's Ubisoft is anything to go by.

There are two trends driving consolidation. Video game sequels tend to be the opposite of their Hollywood brethren – they are both artistically and financially superior to the originals. So big companies tend to get bigger. Second, it is getting costlier to produce games as they become more visually rich. This forces groups to spend an increasing amount on the essentially fixed costs of research and development. But the marginal costs of producing a game are minimal.

All of this means that there are increasing returns to scale. So Electronic Arts, a company with revenues 10 times the size of the UK's Eidos, has operating margins of 24%. Eidos, on the other hand, has more or less consistently lost money.

And inescapable consolidation has led to seemingly inevitable responses.

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