Video game M&A activity is heating up as gaming companies scramble to build on pandemic-driven gains and Big Tech shows more interest in the industry.

Annual video game content revenue is on track to surpass $200 billion in 2022 following two years of double-digit annual percentage growth during the pandemic, according to estimates from Kagan, a media research group within S&P Global Market Intelligence. The growth is likely to slow, with Kagan predicting it will fall to single digits in 2022 and 2023.

Gaming companies are looking to snap up new content and talent to feed their pandemic-heightened user base and protect recent gains. The size of the gaming market has also attracted Big Tech companies, and Meta Platforms Inc.'s emerging ideas about a more robust virtual and augmented reality space are setting off a firestorm of speculation about the future.

"The pandemic played a crucial part in shining a light on the gaming market's value proposition," said Scott Kessler, global sector lead for TMT at research firm Third Bridge. "Big businesses don't want to get left behind in a market that has grown so significantly, so aggressive deal-making allows them to participate in this opportunity."

Mobile's rise

This year is already on track to smash gaming M&A records following Microsoft Corp.'s $68.7 billion play for Activision Blizzard Inc. and Take-Two Interactive Software Inc.'s $12.7 billion deal to acquire Zynga Inc., according to Kagan's analysis of S&P Capital IQ data.

Both deals targeted some of the top players in mobile gaming: Zynga is the developer behind popular mobile titles such as Empires & Puzzles, while Activision's subsidiaries include King, the developer of Candy Crush.

"Right now, the gaming industry is dominated by mobile games and microtransactions, and the significant M&A so far in 2022 reflects those priorities," said Kagan analyst Neil Barbour. "Microsoft and Take-Two will benefit from their acquisitions in the near term with a bigger presence in mobile, and over the long term they can leverage their newfound expertise in players' spending behaviors into new games and existing franchises."

For Kagan's full analysis of historical gaming industry M&A, click here.

Mobile accounted for 62% of global video game content revenue in the third quarter of 2021, outpacing growth from the PC and console segments, according to Kagan estimates. As the installed base of gaming-capable smartphones eclipses that of gaming consoles and PCs, mobile stands to be the fastest-growing gaming sector going forward, and traditional game developers are taking notice.

Publishers that previously specialized in shooting or sports titles for consoles and PCs are eyeing the casual gaming market and its broader demographics. "Mobile is too profitable a space to ignore," Kessler said.

Microsoft's moves

Microsoft's major investments in gaming in the last two years were tied to its interest in building out its Game Pass subscription service, which gives members access to a revolving slate of titles from a variety of publishers as well as all first-party games developed by the company's internal studios. In addition to the pending Activision deal, Microsoft in 2021 paid $8.10 billion to acquire game publisher ZeniMax Media.

Game Pass, which launched in 2019, reached 25 million subscribers as of January.

If the Activision deal goes through, Microsoft will inherit a slate of blockbuster titles to add to Game Pass and could expand the platform's mobile capabilities.

"My hypothesis is that we're going to see a mobile tier on Game Pass that will offer subscribers access to mobile-only titles for a lower monthly fee," said Michael Goodman, director, digital media strategies, at Strategy Analytics. "There is a vast number of casual gamers out there who are not interested in console-type games, but would be willing to shell out a few dollars to access a library of top mobile titles."

Microsoft competitor Sony Group Corp. is reported to be working on a subscription offering for its PlayStation consoles that would rival Game Pass. Sony has also been very acquisitive in the gaming space lately, including striking a $3.6 billion deal to acquire developer Bungie.

In an email to S&P Global Market Intelligence, Sony reiterated statements from its Feb. 2 analyst and investor briefing regarding its plans to collaborate with Bungie on various projects, ranging from future video games to other forms of media, including film. Sony's representatives declined to comment on whether the company plans to launch a Game Pass competitor.

Big Tech's turn

Other Big Tech players are poised to move deeper into the gaming market. Alphabet Inc., Apple Inc., Amazon.com Inc., Meta Platforms and Netflix Inc. all have gaming offerings, but none of them have made any significant gaming acquisitions to date.

"While Big Tech has some involvement in gaming, they have mostly focused on some game distribution via their respective platforms rather than outright making games," Kessler said. "However, with the metaverse being the buzzword of choice in tech circles these days, I wouldn't be surprised if these companies suddenly started investing more heavily to better position themselves in the early stages of this new trend."

If the Activision deal goes through, Electronic Arts Inc., Roblox Corp. and Take-Two would be the largest pure-play U.S. gaming companies, making them alluring targets for any company with enough resources to make a deal. Spokespeople for all three companies declined to comment on their respective M&A plans.

Regulatory scrutiny would be a headwind for any large deal involving Big Tech.

"The Republicans and Democrats agree on almost nothing, except that Big Tech is too big and needs to be knocked down a peg or two," said John Freeman, president of equity research at CFRA Equity Research. "That puts the companies in a really tough spot, because their best bet to make it big in the industry would be through acquisitions that would very likely either take a very long time to complete or get outright rejected."

Instead, Big Tech companies may choose to pursue smaller targets to avoid regulatory red tape, Freeman said. One potential exception could be Netflix, which has indicated interest in expanding its gaming offering to help diversify its streaming content business.

"Netflix could make a good case to acquire Roblox or Take-Two, because they can afford it while avoiding the same regimen for scrutiny that Meta, Google or Amazon would face," Freeman said.