Gaming: a growing opportunity for companies and investors
The games industry has grown spectacularly over the last few years, and now generates more value than the music and film industries combined. Not only are more games being released, but there are also more and more players and game developers. Whether you're on the move with your smartphone, playing at home on your console or honing your skills on your PC, gaming is everywhere.
The global gaming market is expected to be worth around 188 billion USD by 2023. Right now that’s more than seven times the value of the recorded music industry and more than twice the value of the video streaming market, including advertising-based plans.
José Hernandez, Equity Analyst at KBC Asset Management
Impressive growth
The growth outlook for the games industry is spectacular. This global sector is expected to be worth an impressive 188 billion USD this year. With projected growth up to a whopping 212 billion USD by 2026 - an annual growth rate of 4.2% - the future of the games industry also looks bright.
This growth is bolstered by the increasing number of players worldwide. The pandemic has also given this number an unprecedented boost. Many newcomers who started gaming during that period have since become avid gamers. What began as a niche market is now an essential part of our modern culture. Millennials and Generation Z are leading the way here, along with some older players who grew up with gaming in the past.
It is not only in developed markets that the number of gamers is steadily growing; in developing regions, too, such as Latin America, better Internet infrastructure, affordable Internet subscriptions and the spread of smartphones are helping to make gaming an accessible form of entertainment for the masses. Most mobile online games are free to play, which also makes them attractive to people on lower incomes who cannot afford to spend hundreds of dollars on a new PlayStation or Xbox.
Mobile devices are therefore popular. There has been a clear shift worldwide from fixed consoles and PCs to mobile platforms on smartphones and tablets, which have led to explosive growth in revenues thanks to faster and more affordable internet connections. Mobile gaming currently accounts for roughly 50% of the industry's revenue, followed by consoles at around 30% and PC gaming at 20%. That might seem surprising to people in Europe and the US, where console gaming is the norm, but in Asia and other parts of the world, mobile gaming is much more popular.
It is true that an annual growth rate of 4.2% is much lower than the growth of around 10% per annum in game market as a whole over the last seven years. During those seven years, mobile gaming, which is main driver of growth in the gaming industry, accounted for two-thirds of total revenue growth. New privacy restrictions are now forcing mobile apps to ask their users for permission to track them and show ads. Makers of mobile games, which mainly generate revenue from ads, find it harder to market their games as a result. They also face a bigger challenge in offering an attractive value proposition to advertisers. This will impact the future growth of the overall gaming industry. This isn’t really a problem however: confidence in the games industry continues to rise, with ad revenues in turn expected to nearly double by 2027, and to reach the 100 billion USD mark in 2025.
Mobile games represent roughly 50% of the industry's revenue, followed by consoles at around 30% and PC gaming at 20%. That might seem surprising to people in Europe and the US, where console gaming is the norm, but in Asia and other parts of the world, mobile gaming is much more popular.
José Hernandez, Equity Analyst at KBC Asset Management
Clearly, the gaming industry is the standout performer in the modern world of entertainment. Geographically, the Asia-Pacific (APAC) region is by far the largest in terms of sales, with countries such as China, Japan and South Korea leading the way. North America and Europe are following their lead. Even here in Belgium, the rise of gaming and e-sports is significant. Think of the large-scale championships that fill the Sportpaleis Arena in Antwerp, for example, and attract millions of viewers from all over the world.
Profitable business models
In the past, game companies generated most of their revenue by developing a game and then selling it. That has changed radically in the last ten years.
Video games have an advantage over other content. While a big-budget film is usually only watched once or twice, a good video game can be played for hundreds of hours. This provides a fantastic opportunity for game developers to showcase additional products months after the initial consumer purchase, thus enhancing the player experience even long after the purchase. These extra products, such as a new outfit or a nice gadget for a game character, are called 'live services' or 'in-game purchases'.
Selling live services within an existing popular game offers game companies much more stable and reliable revenues than selling an entirely new game. Consequently, game developers are deriving more and more of their revenue from live services rather than from selling completely new games and their sequels. This imbalance in profitability is prompting a tendency by game companies to make big-budget games that can be played for years, such as Grand Theft Auto (GTA), for example, rather than risk developing a new game that may not prove popular at all.
Selling live services generates much more stable and reliable revenue for game companies than selling a new game, because it is more profitable and less risky to develop additional small products for a game that is already popular than to sell a whole new game.
José Hernandez, Equity Analyst at KBC Asset Management
A derivative of this live services model is the ‘Free To Play’ (F2P) model, where the game developer offers free online games and derives all its revenue from the sale of live services. Fortnite is a striking example of this. In these kinds of F2P games, it is easier to win or to hone your skills if you pay for certain content. No less than 85% of gaming revenue comes from these ‘free’ games.
In FIFA, for example, the player can buy a player pack that increases their chances of winning in online matches. This F2P model is called ‘Pay To Win’ (P2W). Some players get so absorbed in these F2P and P2W games that they end up paying thousands of dollars for in-game purchases, which are very profitable for the developer.
In short, the trend towards live services, F2P and P2W is on the rise and it does not look as if that trend will reverse anytime soon.
Room for innovation, with an eye for risk
Cloud gaming, Virtual Reality (VR) and Augmented Reality (AR) offer long-term opportunities in the gaming industry that could revolutionise the way games are played. However, it could take many years before they become widespread.
What may take less time to establish itself is generative artificial intelligence (AI). Generative AI can improve the speed of game development, allowing developers to work more efficiently and theoretically making game companies more profitable. For example, a game developer who is looking to design a game landscape could design one flower and then engage AI to make 100 variations of it.
One potential negative social side-effect could be that generative AI leads to redundancies within the game industry, although it could also ensure that humans have more time to create authentic and innovative content. So far, AI has only been criticised for producing video game content that is too generic and therefore less authentic.
Other risks for the gaming industry include potential regulatory issues, such China's strict crackdown on video gaming and the fact that some P2W purchase methods can fuel gambling behaviour among young people.
Investing in a vibrant sector
Investing is not a game. But gaming companies do offer opportunities for investors. However, there is no magic key to immediately move up to the next level. What is positive is that both gamers and investors are ultimately looking for the same things: value, meaning and personal satisfaction.
So, let the games begin!
Investing is never without risk, and that also applies for investing in game companies. However, gaming as a mainstream form of entertainment is only going to grow in popularity. That is a trend that investors can’t afford to ignore.
José Hernandez, Equity Analyst at KBC Asset Management
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This article is informational only and should not be considered investment advice.
