The $188 billion video game sector may see further consolidation as a result of publicly traded gaming companies holding a $45 billion pile of cash and cash equivalents, according to a new research from venture capital firm Konvoy that was shared only with CNBC.

According to Konvoy, which examined these businesses’ most recent public reports, companies including Activision Blizzard, Electronic Arts, Singapore’s Sea, Japan’s Nintendo and Bandai Namco, South Korea’s Nexon, and China’s NetEase currently retain $45.1 billion in cash and cash equivalents.

That would provide them with more than enough financial clout to consider possible acquisition targets that would aid in the expansion of their product and intellectual property portfolio.

With live-service games that gradually add more content and paid subscription packages that give a certain number of free games and access to cloud gaming—the ability to play games online rather than download them to your computer—gaming companies are specifically trying to keep players playing for longer periods of time.

In general, publicly traded gaming companies had a rather good year in 2023.

Konvoy reports that the VanEck Video Gaming and eSports ETF, which aims to replicate the MVIS Global Video Gaming & eSports Index, has increased 20% so far this year. In comparison, the blue-chip S&P 500 index has increased by about 12% so far this year.

With a 0.4% decline since the beginning of 2023, the worldwide X Video Games & Esports ETF hasn’t done as well as it might. It tracks a modified market-cap-weighted worldwide index of companies involved in video games and esports.

According to Konvoy, large tech companies are also well-positioned and financially strong to pursue new gaming collaborations.

The largest internet companies in the world, including Amazon, Microsoft, Google, Apple, Meta, Netflix, Tencent of China, and Sony of Japan, have a combined $229.4 billion in cash on their balance sheets that they may use for possible acquisitions, according to the venture capital firm.

Partner Josh Chapman of Konvoy said the company anticipates more mergers and acquisitions and the emergence of a new generation of gaming companies as a result of the Microsoft-Activision deal, which saw the Redmond, Washington-based technology giant pay $69 billion for U.S. game publisher Activision Blizzard.

“As active gaming investors, we believe that gamers and gaming startups stand to benefit from the deal as it improves the value-proposition for gamers and leads to a vibrant M&A environment for other deals to get closed,” Chapman told CNBC in emailed comments.

Activision is now part of Microsoft’s expanding roster of game publishers, making cloud gaming a major focus. With its Xbox Game Pass subscription service, the business is promoting its cloud gaming service, which eliminates the need for conventional consoles like its Xbox Series X or Sony’s PlayStation 5.

“New opportunities for emerging game developers, infrastructure companies, and gaming platforms” would result from this, according to Chapman.

The Competition and Markets Authority of the United Kingdom approved Microsoft’s massive acquisition of Activision Blizzard earlier this month.

With the $69 billion acquisition, Microsoft will acquire some of the most profitable video game franchises, such as the enormous Call of Duty franchise, Candy Crush, Crash Bandicoot, Warcraft, Diablo, and Overwatch.

According to Konvoy’s analysis, venture capital investment into video game companies fell 64% year over year in the third quarter of 2023.

It’s an indication of how the industry’s boom years in 2020 and 2021 have faded, even with the boost from Microsoft’s historic deal.

In the three months leading up to September, gaming startups raised $454 million in total worldwide. This is a 9% decrease from the same period last year and a 64% increase from the previous quarter.

Though funding for gaming firms has returned to a “sustainable new normal” that will continue at the current pace for the next few years, Konvoy’s Chapman expects the picture for gaming VCs and startups to look brighter next year as the dire circumstances surrounding venture investing start to improve.

“As the global venture market rebounds we expect gaming, which was somewhat insulated from the initial impact of the economic downturn, to follow,” Chapman said. “We anticipate gaming VC funding to see a slight uptick over the next few quarters, when the industry will grow at a similar rate to before the pandemic.”

“Right now, VC deal volume and funding are comparable to pre-pandemic levels, and while we may not see the exponential growth of 2021, we’re excited to see a stable venture funding market in gaming for continued value creation in the industry.”

The macroeconomic environment has been deteriorating for video game developers, as rising interest rates and soaring inflation have reduced consumer demand for discretionary spending.

In contrast to 2020, when cheap credit conditions allowed people to spend freely, 2022 and 2023 have seen harder times as central bankers have raised interest rates in an effort to slow price increases.

Nonetheless, the number of video game players keeps growing; according to Konvoy, there are already 3.381 million players globally.

According to Konvoy, the video game industry is still enormous and is expected to generate $188 billion in total sales by 2023. Compared to the prior year, when gaming sales reached $183 billion, the amount represents a little increase of 3%.

However, growth has picked up speed since 2022, when sales of video games increased by just 2%.

That followed the exceptional year of 2021.

According to Konvoy’s analysis, gaming revenue hit $180 billion that year, up more than 8% from $166 billion in 2020, I presume.

The industry grew by more than 9% in 2020, an even greater year than before. Pandemic lockdowns were in full force at the time, and individuals had extra time to pass indoors playing video games.

However, Konvoy anticipates sustained expansion in the gaming sector in the upcoming years. The market is expected to reach a staggering $288 billion in total revenues by 2028, according to the business, which projects a compound annual growth rate of 9% over the next five years.

(Adapted from CNBC.com)