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Pure console sector investment is "risky" - report

IBIS Capital review of the sector identifies opportunities in online and mobile instead

A new report published by investment bank IBIS Capital has identified solid investment opportunities for online and mobile games - but labels big bets into the pure console sector as "risky" because growth in that part of the industry is flat.

"The videogames industry is big, getting bigger and changing, with console game costs, revenue and risks accelerating and online/mobile games growing and fragmenting the market. Investment dynamics are entering a new phase, and deal activity is being driven by sub-sector consolidation," said the review's author, corporate finance director Tim Merel.

"The pure console sector will remain the largest, low growth sector, where major videogames companies have converged on 'fewer, bigger, faster' videogame franchise refreshes. This makes perfect sense in the short to medium term, as it maximises earnings and minimises risks.

"However it is a high risk strategy in the long term, as churning out the 25th incarnation of most franchises won't cut it. If the games business is all about innovation and new unimagined games experiences driving growth, the majors risk becoming like old media companies. Cash generative, but declining and cost driven."

Meanwhile, said Merel, the casual and online sectors are "both high growth investment opportunities," adding that the big traditional publishers still weren't in the best position to cater to them.

"Major publishers' core competencies focus on management of $20m-plus serial, high risk, complex developments, launches and commercialisation. In contrast, casual online and mobile games require rapid, multiple, small scale parallel development platform investments."

He added that the growth rates of mobile games are even higher than online - and that Apple is set to "change everything" as it continues down the path started on by the iPhone.

"I believe that the iPad will have a far greater impact on videogames, but take far longer to do so, than people expect, mainly due to the many copycat products already in development. To put this in stark relief, 58 per cent of the 150,000 apps in the App Store are games, so there are already more iPhone/iPad games than all the different Android, Nokia, Blackberry, Palm and Windows mobile apps of any type combined.

"Online and mobile business models are already converging, with some 'free' games with in-game items sold for 99 cents grossing more than major publisher supported mobile games selling for $6.99 a pop. So the 'freemium' model has already successfully transferred from online to mobile games."

The full report, which also covers the MMO, in-game advertising and online gambling sectors - and also investigates the feasibility of new generations of consoles - is available now.

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