Video gaming looks, at first blush, like a very odd target for private equity. It is a hit-driven business, so it doesn’t usually generate the stable cash flows that make leveraged buyouts work. And the industry is undergoing structural change. The fabulously profitable console gaming model, in which customers buy a disc to slap into that box in front of the couch, is in decline: between 2008 and 2011 console software sales dropped 15 per cent in the US, according to researcher NPD.
The fast-growing part of the business – games delivered over the internet, often sold to casual rather than hardcore gamers, and frequently played within social networks or on mobile devices – is exciting but hard to predict. Consider how social game maker Zynga’s growth has come to a sudden and unexpected stop.
All the same, rumour has it that private equity is looking at Electronic Arts; the speculation gave its shares a jolt yesterday. And on closer consideration, a buyout could make sense, and not just because EA’s shares, having lost almost half their value since last autumn, are looking cheap.