In The Times last week there was an article titled “M&A (Mergers and Acquisitions) deals worth $90billion collapse as volatility makes valuations impossible” which would seem to be bad news for the massive game industry consolidation that we are currently in the middle of. So what is going to happen?

The game industry has been expanding massively over the last three years. This is not just one area that is prospering, the growth is across a number of areas:

• The largest growth area has been in casual gaming. Immersive interactive entertainment that doesn’t require the commitment of hardcore games and which appeals to a very wide demographic.
• There is the biggest ever game console war running between three giant companies, Sony, Nintendo and Microsoft, that are totally committed. Their brains, money and brands are being thrown at maximising sales worldwide.
• Virtual worlds are growing in popularity exponentially. Not just World of Warcraft and Warhammer Online, but also Maple Story, Habo, Runescape and many others, each with millions of users.
• Nintendo have deliberately set about making the appeal of video games universal. This has led to a runaway success where they have not been able to manufacture enough to keep up with demand. Their approach is now being widely imitated across the whole industry, further fuelling growth.
• Online has gone from being peripheral in games to being a fundamental element. Less and less games are stand alone. This has greatly increased the potential of what can be done with gaming, especially on the social side. And unlike, say Facebook, gaming has robust, successful and proven business models.

Amongst all this massive success there has been a continuous stream of M&A activity as the industry consolidates. There are very good reasons for this:

• Global game publishing has huge efficiencies of scale. The business model gets better and better the bigger a publisher is. Risk is reduced and spread. Optimum IP assets can be used. The very best staff paid for. Capital acquired more easily and cheaply. Sales into all possible territories maximised. Overheads spread against a consistent product stream. And more. Smaller companies are therefore at a huge competitive disadvantage.
• The world’s big entertainment media companies have no option but to move into gaming in order to survive. Gaming has the fundemental advantages of interactivity, connectivity and non linearity. The older entertainment media cannot compete and are on the way out. Film, television, books, newspapers and recorded music are all in big trouble.