Video games have come a long way since the days of joysticks and Atari. The last time I had my hands on a console remote was when I played table tennis with my then-teenage daughters on Wii sports. My kids are no longer interested in video games, so, fortunately, I’ve never been asked to buy a $3000 gaming PC or a $300 gaming chair.
While video games no longer play a role in my family life, it is evident that the video game industry is experiencing strong secular growth globally. Predictions state that by 2025, consumers’ global video game spending will exceed $200 billion, up from $140 billion in 2018. There is a strong belief that rising consumer spending on video games underpins a secular growth theme in the sector.
A Closer Look
The gaming market is currently worth $138 billion. In the US, the gender split is 56% male and 44% female. The average US gamer is 34 years old, while the average Canadian gamer is 39 years old. Adult women make up 33% of the group, while young males only account for 17% of the group, contrary to general public perception. The majority of the gaming demographic has stable income and can make frequent purchases, through mostly digital formats.
Currently, there are a few key drivers for the industry:
1. “Mobile-first” customer behaviour - Many users access games via smartphones, instead of traditional game consoles or PCs. These customers are highly connected to their social networks. A prime example of this is Candy Crush, which is heavily integrated into Facebook.
2. Gaming for education (“gamification”) - Publishers incorporate educational content into games, creating an interactive learning experience, and making them more appealing to parents and educators. An example of this is Microsoft’s Minecraft: Education Edition, which is designed for classroom use.
3. Technological advancement - Rapidly changing technology offers new gateways for companies to grow. For example, “Game as a service” (GaaS) refers to the trend of providing games or game-related content on a continuing revenue model, similar to the “software as a service” trend. Advanced cloud infrastructure also allows players to play games that run on remote servers, eliminating the need for cost-prohibitive local hardware.
The video game market is divided into premium games and free-to-play games. Premium games often have optional recurring purchase prompts, including downloadable content, which provides additional storylines for players to complete. Free-to-play games have gained popularity, as they require no upfront payments. Some games can monetize this user base with micro-transactions, such as virtual goods. In cases where the user base is poorly monetized, the advertising revenue can still be substantial.
The Key Players
In 2018, consumers spent $140 billion on the video game industry globally, which represents a 13.3% growth rate year–to-year. The market revenue by segment is evenly split between hardware and mobile. Since each demographic group has different tastes and gaming preferences, no firm has been able to establish a leadership position. Sony, Nintendo and Activision Blizzard are the three largest players, but they only hold a combined 22% of global revenue. The largest game makers in the developed markets are Activision Blizzard (ATVI), Electronic Arts (EA) and Ubisoft Entertainment (UBSFY). Microsoft (MSFT) Sony (SNE) and Nintendo (NTDOY) are the leaders in the hardware space, producing gaming consoles such as Xbox, Play Station and Nintendo Switch. Nvidia (NVDA) and other semi-conductor firms play a small role in the industry by producing and upgrading chips for gaming hardware.
Investment Standpoint
Despite the growth trend we’ve seen in this sector, video games are nevertheless consumer discretionary goods, and therefore cyclical by nature. The risk can be significant, if a slowing global economy were to take hold. There is also geopolitical risk, such as when the Chinese government put a halt on issuing new game licenses in 2018. Tencent (TCEHY) shares took a painful dive following that development. Furthermore, there are always new entrant developers that can disrupt both premium and free-to-play games.
from picking individual gaming-related stocks, investors can also review with their advisor an ETF (GAMR) that offers comprehensive industry exposure. Talk to your advisor if you’d like to learn more about getting some exposure to this market.