‘Speeding up market consolidation’: Apple’s privacy changes expected to spark wave of gaming and ad tech M&A

Last month, Facebook said the IDFA changes could “render Audience Network so ineffective on iOS 14 that it may not make sense to offer it on iOS 14.” Many gaming developers — particularly those that produce so-called hypercasual games — are reliant on both the Facebook Audience Network and the IDFA to acquire new users. Without the IDFA, the ability for developers to use precision-targeting methods such as lookalike modeling to target the users who are most likely to spend the most time and make the most purchases in-app (known in the industry as “whales”) becomes more challenging.

“This new IFDA-less world will — and already is — speeding up market-consolidation: Many ad tech companies [are] for sale currently,” said Remco Westermann, CEO of German investment firm Media and Games Invest, whose portfolio includes free gaming platform Gamigo Group and ad tech assets including Verve, AppLift and PubNative. MGI remains on the hunt for more ad tech assets, he added.

“It‘s now about having an integrated tech stack in combination with first-party supply,” Westerman said.

The changes to the IDFA threaten to disrupt a highly lucrative advertising market. Appsflyer, a mobile measurement platform, estimated in March this year that app install ad spend in gaming reached $22 billion worldwide in 2019 and that this figure would more than double to $48.5 billion in 2022. Apple’s users are the most lucrative for gaming companies: The App Store generated $11.6 billion in user revenue in the second quarter, compared to the $7.7 billion spent by Google Play users in the same period, according to data from Sensor Tower.

iOS 14 isn’t expected to go live until later this month, but there have already been a number of recent notable examples of gaming companies becoming strategic acquirers of ad tech. 

In May, private-equity backed mobile marketing platform AppLovin acquired Machine Zone, maker of popular games — including “Game of War: Fire Age” and “Mobile Strike” — for an undisclosed sum to add to its portfolio of investments in games studios. Mobile gaming developer Huuuge Games acquired Dutch ad tech company Playable Platform in July. 

There have also been fire sales like MGI’s acquisition of Verve earlier in the year for a price in the low double-digit million range. That’s a trend that could continue if the likes of mobile demand-side platforms and measurement companies find their services diminished due to the IDFA changes. 

“Some of the [consolidation] might be cut price because it’s a bit more [unpredictable]” in the post-IDFA environment, said Abeed Janmohamed, founding partner of growth consultancy firm Volando Global. “Some will be contingent on various milestones: ‘If I buy you today at a lower valuation I can then put milestones in place to realize value over the course of the next three to five years.”

One possible effect of the changes could be an even wider separation between the biggest and smallest companies in the mobile gaming ecosystem, which is the largest category of paid apps. Writing in a July paper to clients, Arete Research said larger games publishers — such as Zynga, Activision Blizzard and Electronic Arts — that can target against first-party data of their already large audiences would have an advantage over the smaller hypercasual game publishers, since they can use ad inventory to cross-promote their other titles. The other trend Arete sees is the acquisition of game studios by ad networks, eager to re-position themselves as “self-attributing networks” like Facebook or Google, said Arete senior analyst Richard Kramer.

For smaller gaming studios, the ability to build or buy ad tech isn’t as straightforward.

“Facebook [Audience Network accounts for a good proportion of free-to-play ad revenue — they pay some of the market leading e-CPMs,” said Dan Beasley, co-founder of Viker, a London-based mobile games studio. The permission change for IDFA “is a shot across the industry. Studios of all sizes are looking at that and saying, ‘That’s a significant chunk of my daily revenue gone’.”

In a post-IDFA world, ad formats such as sponsorships and integrating advertisers’ products into the games themselves could become more important, Beasley predicts. Studios with a very focused portfolio around a specific genre — Viker’s core focus is social casino-type games — may benefit from advertisers who shift to more broad-based, contextual targeting, he added.

“We’re just going to adapt as an industry — we’ve got no choice,” Beasley said.