The first half of 2022 was a record-breaking period for M&A activity in the gaming industry with more than $95b in announced deal value across 150 transactions. For context, in 2021 there were 299 deals worth $38b throughout the entire year. While this puts 2022 almost directly on pace from a deal count perspective, the massive uptick in value has been heavily driven by a series of mega-deals headlined by Microsoft’s unprecedented $68.7b acquisition offer for Activision Blizzard, Take-Two’s $12.7b buyout of Zynga, and Sony’s $3.6b deal to purchase Bungie.
Late last week, rumors began circulating that the next big deal would be Amazon acquiring Electronic Arts (~$35b market cap). While these initial reports were promptly refuted and both parties opted not to make any public comments, this deal could make a lot of sense for Amazon.
Let’s begin by taking a look at Amazon’s history with gaming:
Amazon’s first venture in gaming dates back to 2011 when the company launched its Amazon Appstore. This Android-native marketplace was intended to be more curated and selective than the Android Market (renamed Google Play Store in 2012). It was a logical first step for the world’s leading ecommerce platform, but ultimately failed to gain traction in the duopoly controlled by Apple and Google.
One year later, Amazon Game Studios was formed to start developing first-party content. The company’s flagship game, Living Classics, was released in 2012 as a free-to-play social title distributed through Facebook. This was the beginning of a series of relatively simple mobile games that set the stage for years of mediocre gaming content from Amazon.
Several years later in 2016, Amazon announced three of their most ambitious (and disappointing) projects:
One of the most anticipated Amazon gaming projects encountered a similar fate in 2021 when the company announced that its Lord of the Rings title was canceled mid-development. This came two years after its announcement in 2019, as Amazon’s development partner (Leyou Technologies) was acquired by Tencent and the two parties could not find a mutually agreeable path forward.
A sense of underachievement became common for Amazon Game Studios until Lost Ark was released earlier this year. Unlike its predecessors, Lost Ark was an existing MMORPG originally released in South Korea in 2019. Amazon came in as a publishing partner and helped adapt the game for western markets. The project was a near instant success and reached Steam’s second highest player concurrency of all time with 1.3m users. Unlike New World, the game has maintained a much stronger engagement arc, and still has more than 100k concurrents (despite some claims around outsized bot engagement) at the time of writing.
Despite the Amazon Game Studios struggles, Amazon’s best gaming-related decision to-date came through the $970m acquisition of Twitch in 2014. It is estimated that Twitch generated $2.5b in revenue during 2021, up 41% over the prior year. While the platform has suffered from talent flight in recent years, this has objectively been a bright spot in an otherwise turbulent history for Amazon’s gaming efforts.
Unfortunately for the company, not all platform and tooling projects have proven to be as successful as their Twitch acquisition. In 2016, the company announced Lumberyard, “a free, cross-platform, 3D game engine for developers to create the highest-quality games, connect their games to the vast compute and storage of the AWS Cloud, and engage fans on Twitch.” Although this seems like a highly synergistic platform given the number of developers already relying on AWS and millions of gamers engaging with Twitch, Lumberyard ultimately failed to attract third-party developers away from legacy market leaders such as Unity and Unreal. Several years later, the company transitioned the engine to an open source project known as Open 3D.
The focus on integration was key to Amazon’s past content efforts. To date, internal games have been developed with the company’s own tools, leveraging its own servers, and built with embedded audience engagement capabilities. With this in mind, the company has been endeavoring to build a synergistic ecosystem for their games: engine (Lumberyard), viewership (Twitch), and servers (AWS). However, one of the key missing components has been distribution.
The core way in which Amazon is addressing this gap is through Luna, a cloud gaming service announced in 2020. Luna officially went live in the US earlier this year with a “channel” system that bundles different types of game content, which includes the Prime Gaming Channel that houses free content for subscribers, Retro Channel with classics like Street Fighter and Castlevania, Ubisoft+ Channel featuring titles such as Assassin’s Creed and Far Cry, and more.
There have also been rumors that Amazon is building its own game distribution platform to rival Steam. A project codenamed “Vapor” was allegedly extracted from a Twitch data leak last year. Limited information is available regarding this unconfirmed project, but it would bring the company full circle from its gaming origins with Amazon Appstore (circa 2011).
Amazon has clearly demonstrated an interest in building a comprehensive gaming ecosystem that addresses the entire value chain for both consumers and publishers. With the company’s resources, they are potentially well positioned to create a cohesive offering for the games industry. That said, to date they have been quite unsuccessful at making that vision a reality.
While they have a strong server offering (AWS) for the games industry, they have lacked the ability to create first-party content. As Amazon has learned the hard way, creating a successful game is incredibly hard. Moreover, game development is not Amazon’s core competency.
EA + Amazon: rather than taking the time to build these titles internally and assuming the risk associated with uncertain audience reception, the quickest way for Amazon to gain adoption is through acquiring IP and talent. Looking at EA’s diverse portfolio, it is an incredibly compelling roster of fantastic game titles: numerous evergreen sports titles, Apex Legends, Battlefield, Star Wars Battlefront, Titanfall, SimCity, Dead Space, and a number of other household names.
The prospects of Amazon acquiring a market leading publisher such as EA is not surprising considering; 1) EA has IP exposure across console, PC, and mobile (through their acquisition of Glu), and 2) Amazon’s clear inability to create their own content internally. The ability to cross-sell and truly own the relationship with players and developers will be a core driver of this (potential) acquisition strategy.
The strategy of “buy vs build” is similar to what we have seen pursued by Microsoft (Activision Blizzard) and Sony (Bungie) through their acquisitions earlier this year, but the execution Amazon might be pursuing is actually more similar to how Google approached cloud gaming (rather than hardware) as a delivery mechanism.
It is unclear whether Amazon’s strategy of “buy” instead of “build” will work, but they clearly cannot build so “buy” is their inevitable path. Additionally, given increased regulatory scrutiny, it is unclear if an acquisition of EA would even make it through a bureaucratic review. This is true of the other sizable acquisitions taking place across the industry, and has become particularly noteworthy following the FTC blocking Meta’s acquisition of Within (we recently wrote about this topic here).
It is easy to look back at Amazon’s past failures and assume that the company is non-endemic and simply does not understand gaming. Yet we disagree. We actually think that the Amazon ecosystem is primed to do extremely well in gaming, especially given the consumer insight data they have via Twitch (where millions of gamers spend their time on topics and trends). The M&A strategy is the right approach for Amazon and we think this could actually be quite successful. Whether Amazon acquires EA, Ubisoft, Take-Two, Embracer, or another larger player, this strategy is about far more than just content.
Takeaway: Amazon’s gaming efforts have often been written off as a failure. While criticism is valid, the last ten years have also produced a variety of critical pieces to an extremely compelling Amazon games offering to the industry. One of the most notable gaps is a high-quality portfolio of content that serves as a go-to-market for existing and upcoming infrastructure projects. Regardless of who the target is, we believe acquiring content will round out their development, marketing, and distribution capabilities and allow Amazon to steadily become a key tenant in the gaming industry.