Michael Rhodes, Glenn Richards and Chant Vartanian Discuss Emerging Technologies, Digital Media and Gaming

The Emerging Technologies, Digital Media and Gaming panel is produced by the L.A. Times B2B Publishing team in conjunction with Citrin Cooperman, Crowe LLP and M-Theory.

The world of high-tech applications for business and personal use – ranging from new hardware and software innovations to digital media and gaming – has become a true power industry that overlaps with virtually every other business sector and has become vastly different from how it was even just five years ago. New developments in technology and communications have built up a strong infrastructure for making dynamic changes in every area.

As the legal, financial and consulting landscapes for emerging tech, digital media and gaming continue to evolve and public demand for “the latest and greatest” services and products grow, an increasing number of consumers, businesses and investors are deepening their relationships in and around the sector. As with any booming industry, learning about the ins and outs of the diverse and fast-growing space can be overwhelming.

To take a closer look at the latest developing trends in the business of new tech, digital media and gaming, we have turned to a panel of three of the region’s leading authorities who graciously weighed in for a discussion and shared insights.

Q: What are investors looking for in tech companies today?

Chant Vartanian, Chief Executive Officer, M-Theory: Investors are split between higher-risk investments and more stable long-term recurring revenue opportunities. The largest Old Guard labels do not represent much in the way of new investment, so investors are keen to work with new startups – often those with IP from proven past ventures. For instance, smaller video game industry boutiques that have AAA blockbuster titles in their portfolio are very attractive investments. On a final note, regarding investment climate demographics, we are starting to see much less investment in the Chinese domestic market. While a traditionally very lucrative market, recent policy changes that require approval from a variety of political authorities mean a new initiative can be stalled for years. Other adjacent country policies have made it very difficult to succeed in a market where rapid innovation and investment cycles once thrived.

Michael Rhodes, Partner & Technology Practice Leader, Citrin Cooperman: Investors are always looking for growth opportunities that result in attractive returns on investment. Technology solutions offer users and enterprises opportunities to drive efficiency, reduce costs, increase customer acquisition, and/or provide information to enhance decision-making. The value of technology during the pandemic was apparent, but investors are looking for more than promise and the potential of serving as a short-term fix. Investors will now be searching for ventures that offer reliable cash flow sourced from relatable revenue streams. Software-as-a-Service (SaaS) companies can provide investors with just that. Subscription model revenue is simple and straightforward, offers a great deal of predictability and potential for growth, and can be easily analyzed because revenue increases as the subscriber base grows. At an enterprise level, SaaS solutions are scalable and easy to implement.

Q: How is the current push for ESG and sustainability in all industries affecting the tech world?

Glenn Richards, Partner, Crowe LLP: The tech industry faces both opportunities and challenges from the push by investors and regulatory bodies (like the SEC) for ESG information. Tech companies that may have previously focused on what made their technology unique and valuable will now have to consider how that technology affects various stakeholders. The more that a business can evidence how it is sustainable and ethical, the broader its pool of potential investors, customers and talent will be. On the one hand, this adds complexity as management teams consider a mosaic of implications for their business decisions. On the other hand, tech companies have the opportunity to be the disrupters they have always been – leading the way toward new and improved business models.

Q: From your perspective, how dramatically and in what ways has the COVID-19 pandemic changed the tech and gaming landscape?

Rhodes: The COVID-19 pandemic brought indelible change for all businesses because widely accepted operating norms were shaken to their core. Businesses looked for ways to survive in a time when people couldn’t interact face-to-face. Crisis is often a catalyst for change and innovative technology companies enabled mainstream companies to shift gears quickly. In certain cases, the pandemic accelerated disruptive trends, such as the shift in medicine toward telehealth solutions. In other cases, it changed the course entirely, most notably in the adoption of collaboration and communications tools by mainstream businesses to facilitate methods of working remotely. COVID-19 also taught businesses to anticipate rapid changes and demonstrated that effective planning and decision-making are driven by data and analytical tools.

Q: What are some of the cybersecurity issues that tech companies need to consider?

Richards: The legal and regulatory risks related to cybersecurity continue to expand. For example, the SEC is working on a project that would enhance the requirements for SEC registrants that are affected by “material cybersecurity incidents.” At the same time, the sheer volume and sophistication of cyberattacks continue to increase. Accordingly, management teams of tech companies should have plans for when, not if their business is attacked, that focus on minimization/isolation, recovery, and legal compliance.

Vartanian: Every industry experienced big changes in work culture that persist today. Specifically, a broadly diverse workforce that works remotely. Coupled with persistent threats to IP, this is one of the biggest risks to tech companies in the ESG space. Traditional security needs are, of course, table stakes – but we are seeing increasingly higher incidents of IP theft and sabotage. Without targeted investment in hardening cybersecurity efforts, any investment risks IP loss more than any time we have ever witnessed.

Q: What are some legislative issues that digital media companies need to be aware of?

Richards: Even though digital media and other tech companies have existed for decades, their legal environment continues to slowly “catch up” to their business models. State, city, county and national governments continue to find new tax rules as well as change the landscape for things like employee versus contractor rules, retirement and other benefits, etc. Even the smallest digital media companies may find themselves subject to various legal and taxing jurisdictions simply because their business may cross borders more easily than traditional companies.

Q: What is your forecast for the metaverse? Is it here to stay and a viable platform for new businesses?

Vartanian: There are currently a number of dominant players in the metaverse, and we will almost certainly see additional players, but the barrier to entry is quite high. This conversation needs to be broken down into the key constituent segments of hardware, software, content, and addressable user base. Each of these facets represents a make-or-break element for any new segment player. Ongoing innovation remains and is the key to future success. There are many new, yet-to-be-revealed business opportunities here. No matter who is on top, this segment is here to stay.

Rhodes: The metaverse is currently experiencing adoption in targeted segments of the consumer market, including gaming, sports, entertainment, and some retail, but it has yet to experience more than moderate penetration. This is largely because the metaverse is still highly fragmented, which makes it difficult to integrate across different systems and stymies enterprise adoption. Once there is standardization and access becomes more user-friendly, we will begin to experience a material shift from a metaverse that is addressing specific use cases that complement existing technologies to one that is capable of full migration within businesses and requires regulation from a legal liability and tax perspective. Therefore, we are only scratching the surface of the impact the metaverse will have. The immersive world of the metaverse will become pervasive, not unlike our reliance on phones to do far more than make calls. Many industries, including health care and education, will migrate extensive components of their operations to the metaverse over time, but it will only come once there is standardization across technologies that enable full integration.

Q: What are some of the opportunities that the gaming industry has learned from or managed to embrace as a result of the lockdowns and challenges?

Richards: I think the past few years have accelerated changes that were already taking place within digital gaming companies. Specifically, the blurring of socialization and gaming, and a business environment that rewards flexible/nimble business models that can respond rapidly to changes in demand.

Q: Without getting into specific brands and titles, what consumer trends are you seeing as being content and category drivers in the gaming sector?

Vartanian: There are many new trends, but one that stands out is the idea of microtransactions. This mechanism is a prominent way to either augment revenue or to be the entire revenue model for a game or related digital application. The consumer is often presented with a “free application” that is considered fully functional, but they may spend a small amount of money on some facet of enhancement to their account, character, or in-game/application experience. While not new, it has become very popular in recent years. This is a highly polarizing model among gamers and generally falls into two major camps. “Pay for power,” where gameplay and associated advantages are materially affected by the use of in-game purchases or augmentations to aesthetic elements such as character personalization. The revenue stream for such transactions is not trivial! Even traditional titles can draw many tens-to-hundreds of millions of dollars on an annualized basis with this variety of revenue augmentation. The allure is strong, and many publishers have adopted some form of this model. Most video game companies have hard policies on this matter. It is rarely grey – since the perception around microtransactions is highly polarizing. This follows country market demographics. The biggest example of “pay for power” is the Chinese market, where it is both accepted and widely adopted. Ultimately, consumers shape this model’s success or failure.

Q: What does it take to attract and retain tech talent?

Rhodes: Attracting and retaining talent is likely one of the biggest issues facing tech companies today. It’s an industry that is routinely competing for talent both in the U.S. and abroad. There is no secret sauce for winning the talent war – good compensation packages are the primary determining factor, and those packages will typically include stock options, which provide an opportunity for a windfall should there be a liquidity event. Beyond providing a lucrative compensation package with upside potential, companies are attracting talent by creating a unique corporate culture which may include embracing diversity and inclusion, offering flexible work schedules, and enabling team members to work a hybrid schedule. These core principles can be apparent to a candidate during the recruitment process but may also be most obvious through a review of the company’s social media.

Q: For tech companies, what are the pros and cons of being based in Los Angeles or California in 2022?

Richards: The quality of life in Southern California draws a lot of diverse, talented, and creative people to its communities. That will continue to be its greatest asset in making Los Angeles and the surrounding areas an excellent place for tech companies to thrive.

Q: How have the gaming and digital media demographics shifted in the last 10 years?

Vartanian: Gaming and digital media continues to grow and now incorporates an increasingly more female, younger, AND older user demographic – in addition to the traditional core base of young males. In turn, this affects everything from product pipeline choices to advertising style, and ultimately, a much larger addressable revenue pool. In short, this industry is enormous and growing with little sign of changing. We continue to see publishing and distribution consolidation – even among the largest players. Consider this year’s example of Microsoft’s acquisition of Activision-Blizzard for nearly $70 billion! Microsoft is now the third-largest video game company in the world in terms of revenue. Expect to see more titles that address the newest demographic entrants in coming years.

Q: What advice would you offer to an early-stage, emerging tech company seeking growth capital for 2023?

Rhodes: Investors will be scrutinizing results more aggressively in the next investment cycle. The early-stage companies most successful in landing investor capital will be those that understand who their customers are and the issue their solution addresses. Clearly identifying and articulating the business issue while remaining laser-focused on a solution is critical. As important as these simple facts are, some developers describe their solutions using far-reaching case studies or vague language to market their product to cast a wide net to capture a broad range of possible applications. This can be confusing to investors. An investor wants to categorize the software to understand market potential and assess value, strategize on growth opportunities, and focus development efforts.