Investors’ guide to the world of online gaming

Following on from the success of the film streaming business model, the meteoric rise of cloud-based video game streaming has breathed new life into the gaming industry, uncovering a wealth of opportunities for investors with a taste for tech.

 

Increasingly sophisticated product offerings have seen millennials progressively choosing gaming over mall trips and movies for entertainment. But, contrary to stereotypical perceptions of gaming as an anti-social activity carried out in dark rooms or dingy arcades, online gaming has become something of a social and cultural phenomenon.

 

Recent advancements in internet speed, which improved by 23% between 2017 and 2018 alone, means that gamers are now able to join global communities of like-minded individuals and friends, and engage in a vivid battle royale with players around the world from the comfort of their own home – all without experiencing any package losses or delays. As an added benefit, gamers can simultaneously chat with each other in real-time, sharing a rewarding digital experience without any of the awkward silences and pauses that characterised early Skype conversations.

 

And it is this very networking effect that continuously attracts new users, driving rapid uptake and market growth. According to market research company Newzoo, there were as many as 2.2 billion active gamers at the end of 2018, and this number is expected to grow to around 2.4 billion by the end of this year.

 

Additionally, growing emphasis on games optimised for mobile devices rather than traditional gaming consoles has attracted new audiences across multiple generations, who are drawn to the convenience of playing while completing daily activities such as traveling, waiting in reception areas or queuing.

 

Thus, while video game console sales have steadily dropped over the past ten years, the global market value of the cloud gaming industry soared by 46.67% between 2017 and 2018 alone, climbing from $45 million to $66 million within twelve months. And according to some market estimates, this figure could reach as much as $450 million by 2023.

Source: Statista (2019)

Source: Statista (2019)

 

The online gaming industry also exhibits other attractive features for investors, including:

 

  • Effective distribution models: Companies in the industry enjoy the benefits of an extremely simple, cost-effective distribution model. Where gaming companies previously had to print physical discs and distribute them to resellers, users can now stream or download products online, transforming the nature of these companies into highly scalable businesses that are able to advertise and reach markets globally, although effectively only distributing from one location.

 

  • Greater monetisation: Advancements in data analysis and processing have enabled creators to better monetise games through an enhanced understanding of in-game purchasing behaviour, enabling businesses to optimise their content and maximise profits. And any new digital items or looks need only be created once before being sold to all existing consumers – another key benefit of the digital distribution model.

 

  • High barriers to entry: Barriers to entry are quite high, as online games are becoming increasingly expensive and complex to develop, offering existing firms some protection in terms of revenue and value. Likewise, mobile gaming is following a similar trend as mobile games steadily become more advanced.

 

So where to start?

 

The biggest risk of investing in gaming companies is that revenues are often dependent on one or two popular titles, or on the release of new titles, as rapidly changing technology means that games can quickly become obsolete. Investors should therefore rather consider larger companies whose revenues are diversified across several titles.

 

Within this space, Activision Blizzard (ATVI) and Nintendo emerge as strong contenders for further consideration, with healthy balance sheets, well-established gaming franchises and strong prospects.

 

Activision Blizzard

 

ATVI, home of the popular Call of Duty series, sells 75% of its content digitally, and boasts nearly 500 million active monthly users across 196 countries.

 

The company already employs some 9,000 individuals, and in February it announced plans to grow its development team by some 20% over the course of 2019 in order to speed up the release of games and updates.