26 February 2016
By James Tsinidis
A structural growth area that has been gathering momentum in recent years is egaming (electronic gaming). Gaming has evolved from traditional arcade-style and console gaming to mobile applications across 4G networks. Technological advancement and high speed internet has allowed gamers to connect to online platforms and compete with other users sitting on the other side of the globe in real time. Gaming hardware and software has improved to enable users to play games on high quality platforms and has given rise to a movie-like game experience.
Superior Content Offering
Gaming companies are effectively creating ‘content’ which encapsulates consumer interest in the same way Disney, Fox or Netflix create TV shows and movies. Many consumers can identify with gaming brands such as Assassin’s Creed, Grand Theft Auto, Call of Duty or FIFA. According to Aviate Research, privately owned company Bethesda Games estimated that their release of ‘Fallout 4’ had taken in US$750m in retail sales on its first day. In comparison, Sony had pulled in US$550m at the Global Box Office for the James Bond ‘Spectre’ movie in the first 3 weeks since its release.
Additionally, large scale traditional media companies are demonstrating a keen interest in gaming. In Europe, Vivendi, which owns part of Universal Music Group and Canal (a pay TV service in France), acquired a 10% stake in Ubisoft, a game creator which is known for its Assassin’s Creed franchise. Vivendi’s acquisition highlights the importance of gaming content and traditional media’s appetite for digital content is likely to continue to grow going forward.
Perhaps the biggest indicator of the powerful nature of gaming content is the ability of gaming company Ubisoft to create a movie out of its Assassin’s Creed game. Ubisoft has sold the right to 21st Century Fox to produce and then release this movie in December 2016, and has enlisted a high profile cast. This clearly demonstrates the quality and popularity of the gaming content. We envisage gaming franchises to continue to add to the growth of ‘one source multi use’ (OSMU), where existing franchises are branched out into animation, movies and merchandising. Gaming is therefore an obvious place for increased media spend and product placement for advertisers.
The Global Gaming Opportunity
The popularity of gaming brands are not only encouraging existing gamers to play more, but also bringing new people to the gaming universe. Activision Blizzard, a leading global game publisher, suggested that the total hours spent gaming increased by 28% from 2014 to 2015. Further, Activision also estimated their monthly active user base is now larger than Twitter and Spotify combined. In fact, it has been estimated that gamers are now spending approximately 22 hours per week playing games, fast approaching the average television hours watched at 28 per week. To put this in context, hours spent gaming has risen to 22 in 2015, up from 6 hours in 2013. This clearly emphasises the pace at which the global gaming industry is growing.
The rise of the egame tournament is another indicator of the fast-paced growth of the gaming industry. The PGA’s richest golf tournament is estimated to have a total prize pool of approximately US$10m, where the winner will take home just under US$2m. In comparison, the richest egaming tournament (Dota2) has a total prize pool of approximately US$18m, where the winning team will collect over US$5m. The increased prevalence of egaming has also attracted high profile sponsors, with Coca-Cola, Nissan, SK Telecom and Red Bull all sponsoring egaming related contests, together with coverage of the contest by ESPN. Despite its relative infancy, the egaming industry has attracted the attention of consumers and corporates, a trend which is set to continue as franchises grow in popularity and attract further investment.
Gaming has moved away from typical console games to gaming online via computers, tablets and mobile phones. Technology advancements and high speed internet means that consumers are now able to play games online against people all over the world. ‘Massively Multiplayer Online’ (MMO) is an online game which is capable of supporting large numbers of players simultaneously in the same instance (or ‘world’). These games can be accessed using a PC, tablet or smartphone, and allow for greater player interaction, which in turn drives further in-game purchases or upgrades. Consumers can often access such platforms free of charge, but to further develop their in-game character, in-game purchases and upgrades are often required. This creates positive network effects for gaming companies and allows them to reduce their marketing costs.
When playing online using a gaming company’s server, the company is able to build a profile for all of its egaming participants. For example, if Electronic Arts (a US-listed gaming company) has hundreds of millions of gamers playing online, it knows who each person is, how they play, who they play with and why they’re playing, which is valuable to gaming companies who can target advertising to their audience. This is compared to traditional gaming where the consumer would purchase a hard copy of a game on a CD and then play individually on their console. In this case the gaming company has little knowledge of how the consumer engages with the game, making it difficult to market new franchises. Electronic Arts estimates that their marketing spend has decreased from approximately 21% of sales to 14% of sales in 2 years (and sales have risen almost 20% in the same time period). Being able to play on a digital medium across a vast network of people is therefore positive for the consumer as well as the gaming company itself. The shift of gaming to digital (i.e. egaming) has become a key priority for gaming companies, as recognised by Ubisoft management. The margin upside for game creators is as much as 30%, and provides a significantly wider customer base.
It has been estimated that consumers spend almost double the time on their mobile phone playing games compared to using Facebook. As depicted in the chart below, research indicates that consumers using smartphones spend approximately 17% of their time on their phone using Facebook, whilst gaming makes up approximately 32% of this time. This is even more staggering given that Facebook has a market capitalisation of just under US$300m, whilst many of the gaming stocks have a combined market capitalisation of approximately US$100m.
Source: Aviate Global Research
Gaming companies are now targeting the time people spend on their mobile as a way of monetising existing franchises. Activision Blizzard estimates that the growth in mobile gaming software is expected to be 50% between now and 2019, turning a US$36bn industry into a US$55bn industry.
Source: Activision Blizzard Investor Relations
The potential for mobile gaming is significant, and is largely driven by casual gamers. Going forward, we expect mobile gaming to meaningfully outpace the growth of traditional gaming through consoles. This in turn generates higher margins for gaming companies and opens up a broader consumer audience.
The best of the rest…
Egaming presents investment opportunities not only in gaming companies, but also hardware companies, software makers, platform providers and payment companies. Companies such as Nvidia and Logitech are well placed to continue to develop hardware and software for gaming companies. It has been estimated that the total value of the Virtual Reality market is set to expand ten-fold from 2016 to 2020. Egame hardware and software developers are expected to be key beneficiaries of this trend, and their profitability is set to significantly expand in direct correlation with the expansion of Virtual Reality.
As egaming expands, consumers are set to continue to make in-game or in-app payments to unlock various features of the game. Companies that provide digital payment processing are benefitting from egaming companies incorporating payment systems into gaming software. Companies such as Visa, Mastercard, Paysafe and Wirecard are all expected beneficiaries of this trend. The simple logic behind this thesis is based purely on transaction volumes increasing for these companies.
Egaming is a structural growth area in its relative infancy. Gaming companies have developed superior content which is constantly increasing in popularity. This content is able to be monetised and presented across digital platforms via smartphones and tablets. Despite the significant opportunity in gaming companies, the global egaming trend also presents investment opportunities in hardware, software, technology and payment processing companies. We believe egaming will provide significant investment opportunities in the medium term. Egaming stocks are currently held in the K2 international funds. Investments such as these, which are leveraged to strong secular changes and growing somewhat independently of the normal economic cycle, are typical of our process at K2.
James Tsinidis is a Portfolio Manager at K2, specialising in international equities.
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