January 31, 2019
Gaming Companies Need Strategic Options in a Shifting Market
Posted by Restructuring Team
The gaming industry is undergoing seismic shifts that are disrupting existing business models. To succeed in this fast-changing environment, companies need to be able to recognize their challenges and evaluate their strategic options objectively.
The Fortnite Effect
One main disruptor is the explosive success of the game Fortnite, which is transforming the industry with, among other factors, its blending of online and mobile gaming into a ubiquitous experience for players. Developers and publishers of PC, console and mobile games that don’t allow players to compete with rivals using different devices at the same time are being forced to adapt quickly.
This pivot can be challenging, especially for gaming companies with large infrastructure investments. As bookings and revenue decrease, a firm can risk missing milestones, breaching banking covenants or, in extreme cases, running out of cash and having to fold.
Exacerbating those challenges is the fact that the market keeps evolving as firms try to adjust to recent changes and opportunities. A project or update started six months ago can miss the latest shifts if business leaders are not paying careful attention.
We recently worked with an MMPROG (massively multiplayer online role-playing game) company that was experiencing this situation. Bookings and revenue were declining quickly, and the company management had overestimated how long its cash would last as it attempted to respond.
We collaborated with the firm to reduce its cash outlays and helped management identify their options. Working with the executive team and creditors, we were able to facilitate a sale of the business that represented the best outcome for everyone under this developer and publisher’s specific circumstances.
Depending on their circumstances, other gaming companies facing financial or operational distress may be better served by adapting their delivery platforms, trimming expenses, selling or licensing assets, or selling the company. The challenge for management in these situations? Evaluating their options and making the most effective choice can a difficult for a firm that’s draining cash and struggling to remain afloat.
One common mistake we see is that company leaders put too much emphasis on one aspect of their business, which can create financial or operational challenges that are difficult to recognize.
While gaming executives are often naturally optimistic, they also need a realistic understanding of their company’s financial position, strategic value, intellectual property and opportunities. With markets and innovations shifting rapidly, they have to balance intense focus on their company’s internal operations with an understanding of current player preferences and market demand.
Fast Action Is Critical
Because the expertise of most gaming company executives is in developing games, navigating financial challenges can be a struggle. But timely action is critical: Company leaders need to develop a plan quickly, because the sooner they begin to address their challenges, the more options they will have.
An outside advisor can play a key role in helping management assess their options and develop an effective plan and an implementation timeline. An unbiased third party also provides an essential reality check for management, board members, lenders, investors and other stakeholders. Regardless of who first recognizes the need for outside expertise, advisors can meet with these stakeholders and facilitate conversations that help everyone understand each other’s positions and the most attractive options for the business’s future.
For the company, this can mean a realistic assessment of its financial condition, market position and opportunities going forward. For investors, it can mean an explanation of management’s plans and an objective overview of the company’s assets and likely success.
Having an objective assessment of the marketplace also reduces the likelihood that a company will miss out on realistic options to improve itself while management tries to save the business with a high risk/high reward “home run” move that offers increased upside but has a lower chance of success.
An outside perspective is especially valuable in situations where the relationship between a company and its investors has become strained. For example, investors may be skeptical about management’s assurance that the situation is being handled effectively, while management may not appreciate the investors’ sense of urgency.
In these situations, a third-party advisor can serve as a bridge between the company, its lenders and its investors to provide a realistic voice and impartial advice to all stakeholders.
To learn more about finding the best strategic options for your business, contact our Restructuring Services team.
Our Restructuring experts, Michael Hogan and Alex van Dillen, are Silicon Valley’s most experienced restructuring specialists for creditors, investors, boards, and executive management of financially distressed companies. They help companies prepare for downside eventualities to better understand their options, prioritize them, and drive toward the most effective outcome for stakeholders involved.