Kirill Gurskiy is Managing Director of GEM Capital, a leading Cyprus-based investment firm with a focus on game studios.
When economists use the term “emerging markets,” they usually mean countries that exhibit the potential for rapid growth and development, like today’s China, India, Eastern Europe, Central Asia and South Africa. Emerging markets are typically characterized by transitioning economies, increasing industrialization and a growing middle class.
If you are an investor or an entrepreneur, when you hear the phrase “emerging markets,” you hear the word “opportunity.” It works for many sectors, including the gaming industry. So what exactly makes emerging markets attractive for investing in video games?
Rapidly Expanding Player Base
With the advancement of the middle class, there’s a growing number of people who can spend money on video games. Moreover, developing countries have a flourishing youth population that is rapidly getting familiar with the internet and mobile technologies, bringing in even more new players.
Today, young people quickly access information about video games and the means to play them. In addition, they get the chance to learn about the pop culture side of gaming and become a part of the international community of gamers.
In Asia, for instance, the mobile games market is continuously growing and is projected to keep doing so in the next few years, boosted by the increase in population and expanding penetration of mobile phones.
Cost Efficiency
There are a number of factors that contribute to emerging markets being regions with lower operating costs:
• Lower prices: This helps companies save money on everything from development to marketing. It also attracts highly skilled talent because employees can have a better quality of life while getting the same paycheck they would in the U.S. or Western Europe.
• Lower taxes, including salary taxes: In general, countries within emerging markets have lower taxes than in developed countries. In addition, emerging markets strive to attract more tech companies, including game developers. To achieve this, they create comfortable conditions for doing business, including certain tax incentives.
• Lower valuations: As a rule, U.S.-based early-stage gaming startups get dramatically higher valuations than the ones in emerging markets. Lower valuations create bigger upside potential for investors.
Favorable Exchange Rates
Countries with weaker currencies have their advantages. If a games company is situated within emerging markets, its operating costs are nominated in a weaker local currency, but its revenue streams still come in stronger currencies, like the U.S. dollar or the euro, since games target wealthier populations of developed markets.
Besides, as in all export-oriented economies, the depreciation of the national currency has a beneficial effect on exporters—in our case, on game developers, since they receive most of their income from abroad. For example, over the past five years, the exchange rate of the Turkish lira has fallen against the euro by five times. Local gaming companies adapted to it by increasing their employees’ salaries, but not by five times, meaning their margins significantly increased.
Unique Gaming Preferences
Versatile cultures of emerging markets translate into unique gaming tastes and preferences. It creates demand for localized or culturally specific content. By catering to those various niches, developers achieve higher loyalty and engagement and may even unlock opportunities that haven’t been noticed by their competitors yet.
These cultural differences are one of the reasons why Western developers struggle to make games that easily gain traction in Asia and vice versa. Also, it’s the reason why some games are in high demand in certain regions while being ignored in other regions.
Besides, countries differ in terms of platform preferences. While consoles are largely popular in the U.S., players from Eastern Europe often prefer PC and many Asian gamers choose mobile.
Another thing to consider in the space of culture-specific games is that many emerging markets support local gaming industries and encourage the development of local culture-themed games. For example, AD Gaming, a governmental initiative in Abu Dhabi (UAE), encourages making games that promote Arabic culture and values.
Local Development Talent
Emerging markets often have talented developers who are hungry for interesting opportunities and aren’t spoiled by the overblown paychecks of Silicon Valley. For instance, Eastern Europe is famous for its strong STEM schools where one can obtain skills and competencies that are highly valuable in game development.
Another reason why these developers are a great asset is that they understand local cultures and preferences, which allows them to create better content for their domestic market and appeal to international audiences with something fresh, authentic and unique. The relative freedom they have in emerging markets compared to developed countries leaves more room for thinking outside the box and unleashing creativity.
Leapfrogging Technologies
The fascinating thing about some emerging markets is that they bypass certain technological stages. This allows game developers to come up with unique solutions.
For instance, some developing countries may skip desktop and move right to mobile, when broadband internet coverage spreads slower than mobile internet coverage. Take India, for example. It has more than a billion people who access the internet primarily via mobile phones. It’s the second largest online population in the world after China, and the number of Indians using mobile internet is projected to grow even further. The Indian mobile revolution is one of the reasons for the great mobile games market growth in the past years.
Improving Internet Infrastructure
Even though penetration of broadband and mobile internet may be rather low in many emerging markets, the infrastructures are rapidly improving. For instance, by 2025, Asia is expected to have almost 50% of all new mobile users in the world.
Expanding broadband and mobile data infrastructures will give access to online and cloud gaming to more people, increasing potential user numbers and, consequently, potential profitability for investors and developers.
Emerging markets offer unique opportunities, with room to grow. They have their challenges, but they can also provide a more favorable business climate and better prospects for investment returns.
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