Overseas Money Looks at US Video Game Publishers

Privately held video game publisher Codemasters is not a name that has traditionally rung a lot of bells with investors. It hasn’t had a breakout game and isn’t a real competitive threat to larger game companies.

Grand Theft Auto IV
Source: Take Two Interactive Software
Grand Theft Auto IV

But when an Indian investment firm announced it had bought a 50 percent stake in the company Monday, Codemasters quickly popped onto the Wall Street radar.

For years, analysts and investors have wondered when international companies would begin putting money into U.S. video game publishers. Now they’re wondering if Reliance Big Entertainment’s investment could be the start of that push.

While no one expects overseas companies to try to buy into industry leaders like Activision and Electronic Arts, there are a number of publicly traded companies that are in the middle of the gaming pack that could be more likely targets.

Take Two Interactive Software and THQ are the names mentioned most often, though Majesco is sometimes whispered as well.

To be clear, no analyst believes any action is imminent with any publisher, but with Reliance’s investment, chatter is on the rise.

Historically, investors have expected overseas investment in U.S. publishers to come from Japan, which has a rich gaming heritage and many big game makers. But that has so far failed to materialize. Instead, Japanese publishers have shown more interest in European companies, such as Eidos, which was acquired by Square Enix last year.

These days, industry observers say China is more likely to be the origination point for outside investment.

“What’s interesting to note is how many Chinese publishers have cash on their books,” says Ben Schachter, an analyst with Broadpoint AmTech.

Many of those companies are publicly traded. And at least two—Giant Interactive and Shanda Interactive—have over $1 billion in U.S. dollars cash on their books thanks to massively successful IPOs. (Other big Chinese publishers include Changyou, Perfect World and NetEase.com.)

King of Kings 3
Source: Giant Interactive
King of Kings 3

Cultural differences could once again be a barrier, though. Chinese publishers generally make a much different sort of game than U.S. game makers. Because of that country’s rampant piracy problem, most titles are online-based and are given free to players, with revenue generated through in-game microtransactions (small purchases for in-game items or character upgrades to let players advance further in the game).

“It’s a strikingly different model,” says Schachter. “The question is would they try it here? And if so, would they try it with one of the big publishers or would they do it on their own?”

Some analysts, though, think the chatter about overseas investments or takeovers is unlikely to materialize. Because Chinese companies are so involved in the online model, the traditional packaged goods business, which is the main source of revenue in the U.S., might be a turn-off.

“The Chinese companies have so much money they don’t know what to do right now,” says Eric Handler, of MKM Partners. “It’s ultimately going to come down to a cultural and business mix. I really wonder how much margin are Chinese companies going to be willing to sacrifice to get into new areas.”

While speculation about the intentions of Chinese gaming firms continues, everyone was caught off guard by Reliance’s investment in Codemasters. Indian companies haven’t been on the radar as possible investors—but in retrospect, they probably should have been.

Reliance, which bought the Codemasters stake from Goldman Sachs, already has a gaming subsidiary that operates 100 gaming cafes throughout India. It has also been part of a group that has been investing in Hollywood studios recently. The icing on the cake was the success of Codemasters’ cricket games in India.

The company says it plans to use Codemasters to broaden its online and mobile gaming business.