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Money Games: The Middleware Opportunity

Tim Merel highlights investment and the future potential of middleware businesses

This month Digi-Capital's Tim Merel looks at investment opportunities in the middleware market, highlights recent deals and poses questions on future growth in a sector wrongly considered "boring".

"Middleware?" I hear you cry. "Isn't that the really boring stuff that game developers don't want to do?"

And that's the point.

The reason I like middleware is because it is the really boring stuff that game developers don't want to do. And before anyone gets hot under the collar, I actually don't think it's boring stuff either.

In relation to games, middleware typically means a games engine, providing tools for rendering (2D or 3D), animation, physics, collision detection/reaction, artificial intelligence, sound, networking, streaming and so on. For our purposes, what we mean by middleware is anything which makes it possible to develop, manage and commercialise games. Simple.

The good thing about middleware companies is that they are selling shovels, rather than panning for gold.

Actually before the rise of online and mobile games, middleware did look like a relatively simple part of the market. But today the middleware market has become more diverse and fragmented, which together with high growth in online and mobile games has created a great opportunity for the company that gets it right. I believe there is a window of around 12 to 18 months to do just that.

Before we look at the games middleware market, let's take a look at middleware investment in general.

The good thing about middleware companies is that they are selling shovels, rather than panning for gold. This sounds quite dull, but from an investment point of view can be brilliant.

Investors like diversification of risk and portfolio management, which sounds more complicated than it is. Diversification is simply a way of ensuring that you aren't placing all your eggs in one basket. If you're a consumer-facing games company like Electronic Arts or Bigpoint, you diversify by having a portfolio of games and a portfolio of distribution. But this doesn't completely diversify game-by-game investment risk, which in itself means that any one games company is inherently less diversified than the entire games market.

But if you're a middleware company, then investing in you is essentially investing in the games market itself. If your solution becomes dominant in your part of the market, then from an investor's point of view it doesn't matter if any one game (or any one games company) client fails, because there are thousands of other games and game companies that will succeed who can buy your middleware too. It sounds harsh, but from an investment point of view it deals with one part of risk management.

If your middleware company happens to also be aimed at a large, high growth part of the market like online and mobile games, then investing in a middleware company looks like a good diversified investment in growth.

The bad thing about investing in middleware companies is that there is no such thing as a free lunch. So even though middleware sounds like a dream ticket, it is not without risk.

A rather direct VC friend puts it simply, "great technology without a business model is worthless." This is to say that the road is littered with the corpses of investors in middleware companies that produced great technology for which there wasn't a market, or which didn't become the dominant middleware solution in their sector. So if you do invest in middleware, you need to feel confident that your company could become one of the dominant players.

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GamesIndustry International is the world's leading games industry website, incorporating GamesIndustry.biz and IndustryGamers.com.

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