It Will Take Years Before Any Gaming Company Becomes a Unicorn

From the production, publishing, and export of video games, through esports competitions and gamer events, to collaborations with numerous other industries, the video game development sector in Croatia has recently shown significant growth. For instance, the end of last year was marked by the news of the acquisition of the domestic studio Gamepires, the creator of the popular game ‘SCUM’, which was acquired by the British game publisher Jagex for an undisclosed amount. This is another major acquisition of a domestic gaming company by a big player in the industry, following the infamous acquisition of Nanobit by the Swedish Stillfront Group in 2020, which was recently completed. Stillfront paid one hundred million dollars for 78 percent of Nanobit, but the final acquisition amount has not yet been disclosed. Aleksandar Gavrilović, co-founder and director of the gaming company Gamechuck and secretary of the Cluster of Croatian Computer Game Producers (Croatian Game Development Alliance – CGDA), believes that the gaming industry is growing exceptionally fast and far exceeds local conditions.

– For years now, there has been a major foreign acquisition every year, such as Cateia by Playrix, Croteam by Devolver, Nanobit by Stillfront, Gamepires by Jagex. These acquisitions are regularly at six-figure levels, but no gaming company has yet become a unicorn and sold for a billion euros. It will certainly take a few more years to wait for that – emphasizes Gavrilović.

In addition to large acquisitions, the quality of the games and projects they are working on is, of course, proof of quality. Nanobit, for example, released the lifestyle game ‘Too Hot to Handle’ in partnership with Netflix in December, and as Ivan Murat, the newly appointed director of Nanobit and president of CGDA, says, with 3.65 million downloads in these three months, it was the most successful release of any Netflix game.

Economic trump cards

– We expect that by summer it will become Netflix’s game with the highest number of downloads, which is currently ‘Stranger Things: 1984’ with 4.17 million downloads – adds Murat, who believes that another acquisition could further accelerate the development of gaming in Croatia.

Gamepires, on the other hand, is best known for its hit ‘SCUM’, a survival game that has sold three million copies so far, and will continue to improve it with Jagex. In 2021, it achieved 3.8 million euros in revenue, and although there are no financial data for 2022 yet, director Andrej Levenski recently revealed to Lider that they expect total revenues of four million euros for 2022, considering that they were up 20 percent in the last few months of the previous year thanks to promotion and marketing.

In addition to Gamepires and Nanobit, the Samobor-based Pine studio can also boast success. The game ‘Escape Simulator’, which was released about a year and a half ago, has been played by almost two million players, bringing excellent business results to the company. In 2021, it achieved nearly 1.2 million euros in revenue, and with continued work and development on the game, it managed to surpass those results last year.

– In the last nine years, since the studio was established, we have managed to double our profit almost every year, and in the last two years, we have had growth of over 1000 percent – emphasizes Pine studio co-owner Boris Barbir, adding that besides ‘Escape Simulator’, which is currently their focus, they are also working on a completely new project, about which he cannot yet speak.

Three hundred percent growth

That gaming is already an important segment of the Croatian economy with great development potential has also been confirmed by the first ‘Analysis of the Croatian Video Game Producers Industry’, conducted by CGDA with the support of A1 Croatia. As explained by Marijana Zagorac, media strategy, gaming, and sponsorship coordinator at A1 Croatia, during the two previous years marked by the pandemic, gaming companies in Croatia generated consecutive profits exceeding 10 million euros.

– When considering that the share of exports in that revenue is as high as 80 percent, it is almost double that of the exports generated by the IT sector, which is often considered the main trump card for economic development and growth in the Croatian market – adds Zagorac.

A1 Croatia, in partnership with the Entrepreneurial Incubator Pismo from Novska, is striving to enable young people to start their careers in this promising sector. Andreja Šeperac, director of the Regional Coordinator of Sisak-Moslavina County, emphasizes that five years ago there were only a few gaming studios in Croatia, today there are about 140, half of which were established in Novska. So far, 240 participants have attended training in Pismo, and there are a thousand different projects behind the incubator’s tenants.

– Although these are young companies, a large part of them shows excellent results from the very first days. When someone’s annual revenue grows by more than 300 percent compared to the previous year, we can say that it is a very rapid growth. Besides video games, they are engaged in the development of various IT solutions, applications, and websites, which, of course, we support because we all know that creating video games is not simple and takes a long time, and companies must survive, so they also do additional work – explains Šeperac.

Risk of financing

The gaming companies from Novska, adds Šeperac, draw about 150 thousand euros annually in various investments in their products, one of which is Misfit Village with the video game ‘Go Home Annie’.

– This horror video game, whose demo was released on the Steam platform, is definitely one of the most anticipated this year. It has millions of views on YouTube and other social media. Both players and those who enjoy watching others play love it equally – describes Šeperac the game created in that small Slavonian town.

‘Go Home Annie’, adds Gavrilović, is an example of a game whose first part of development was supported by the Croatian Audiovisual Center, and then foreign publishers took over the financing of further development, under much better conditions for the local economy. Although the gaming scene seemingly thrives, there are still obstacles that companies and professionals face, one of which is certainly the financing of development.

Gavrilović notes that, although HAVC took on part of the risk, almost all the risk of financing video games in Croatia is left to video game developers.

– They often do not have their own funds and must enter into unfavorable contracts with investors and publishers. The rapid economic growth of the video game industry must be accompanied by institutional, financial, and personnel solutions for the industry, which is still in its infancy, but there is already thinking about it, considering the progress in recent years in financing video games with the help of HAVC and educational programs – adds Gavrilović.

Seven million euros for producers

Although a double taxation avoidance agreement between Croatia and the USA was signed at the end of last year, which creates the most problems for the gaming industry as it loses up to 30 percent of revenue from video game development in contracts with American publishers, it has not yet come into force. Gavrilović emphasizes that the revenues of the entire sector will increase by 10 percent once the agreement is signed.

– Of the 70 million euros in revenue that the industry generates annually from exports, about 20 million euros comes from players in the USA, which means that this amount will no longer go to American taxes at a 30 percent deduction but directly to producers, which is about seven million euros and represents a 10 percent revenue growth as soon as the signed agreement comes into force, after Congress ratification. Most of that money will likely be reinvested in new video game projects because the industry is still in the investment phase of development – notes Gavrilović.

Companies can also use funds from the Croatian Employment Service, and Novska is an example of a city that additionally finances established gaming companies.

– At this moment, every newly established company in Novska receives 15 thousand euros from HZZ and another 2600 euros from the City of Novska – notes Šeperac.

Development perspective

Since the incubator was established as a project funded by European money, they see opportunities in the next financial perspective as well. For example, they are currently implementing an educational project ‘AI & GAMING JURK EDIH’ worth 2.3 million euros, co-financed by the European Commission and the National Recovery and Resilience Plan. Learning about video game development, they believe in Pismo, is crucial for the growth of the industry.

– The industry will not be able to develop without people with precisely defined competencies or will reach its maximum sooner than we think. Therefore, it is necessary to develop training, increase the competencies of existing staff, strengthen the profession… That is our mission, and that is why we have planned the opening of a faculty in our future campus – adds Šeperac.

Thus, for gaming companies to continue riding on the wings of past success, they must turn to the future, primarily by investing in development and workforce. Besides developers, Zagorac emphasizes that the gaming sector also employs numerous artists for the development of animations or sound, whose position in the labor market was less favorable before the development of this industry.

– The sale of two Croatian gaming studios for very large amounts confirms that our game developers are at the world top, and in this way, we indirectly help the entire industry, which increasingly needs this specific workforce. Certainly, there are many advantages that gaming brings to society, and the fact is that other companies in the Croatian market have begun to recognize it as important and sponsor it. I believe that their investments will accelerate the already prominent growth of the industry for mutual benefit – concludes Zagorac.

Gavrilović sees the greatest opportunities for growth and collaboration in connecting the entire community.

– Countries with the strongest and healthiest video game industries have strong employer associations that successfully develop that industry. In this regard, significant progress has also been made, and the Cluster of Croatian Video Game Producers has as many as forty companies with a total of about 470 workers, which is more than ninety percent of the entire workforce in the industry. The next step is the professionalization of the association through additional employment and then the creation and implementation of a common strategy – announces Gavrilović.

Despite all the obstacles, the strongest players in the gaming industry predict a bright future for it in Croatia. Barbir concludes that ‘it has finally been recognized that this is a very interesting industry, and it can also be lucrative.’