Gaming, a key growth driver for big tech

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By Hilary Frisch, CFA

Video games have become big business

Video games are becoming one of the main recreational activities in the world. Unlike most other entertainment content, video games create a social and interactive experience that gives gamers a chance to compete and cultivate their creativity. While the $180 billion industry has long been associated with young male console owners, the changing accessibility and nature of games has created a community that spans genders, income levels, ages and geographic areas. These developments have created a race among tech companies to acquire video game publishers and platforms. Earlier this year, Sony (SONY) announced plans to buy game developer Bungie for an estimated $3.6 billion, Take-Two Interactive (TTWO) agreed to acquire the mobile games company Zynga (ZNGA) in a deal valued at approximately $12.7 billion and Microsoft (MSFT) announced its largest ever acquisition for Call of Duty (CoD) maker Activision Blizzard (ATVI) for 69 billions of dollars.

The increased business activity reflects a broader shift in the perception of the video game industry by media and technology companies. Microsoft and Sony have recognized that the benefits of acquiring video game platforms and publishers extend beyond the revenue of an individual game title. Through such acquisitions, they strive to create their own gaming ecosystems – virtual destinations where gamers can download and play games as well as access digital and streaming content to create a digital entertainment destination in closed loop.

Innovations Open the game to everyone

Innovations in mobile games, content development and connectivity are expanding the total addressable market for games. One of the biggest catalysts for the growth of video games has been mobile gaming. The ability to expand gaming’s reach beyond the console has helped accelerate the game’s proliferation and engage demographics that previously didn’t consider themselves gamers. Additionally, the relatively low barriers to entry for mobile game development compared to console games have helped mobile developers release a wider range of games to attract and retain a wider audience. This has caused an explosion in the popularity of mobile games, which now account for more than 50% of the video game industry’s total revenue and total around $93 billion.

The development of games specifically for mobile such as the hugely popular Candy Crush or Fruit Ninja has caught the eye, and larger, well-established console franchises are taking notice (Figure 1). Activision Blizzard’s October 2019 release of Call of Duty: Mobile was a major console franchise’s first foray into mobile gaming. CoD:Mobile has proven to be a huge success, with almost 210 million active players and 30 million daily users. More surprisingly, it has grown in popularity beyond the traditional gaming demographic.

Exhibit 1: Mobile offers major growth opportunities

Percentage of mobile games by top video game companies

Business deposits

Content continues to be a key driver of player engagement across all platforms. The demand is so high, in fact, that gaming platforms such as Roblox (RBLX), Unity (U), and AppLovin (APP) have opened up their developer toolkits and encouraged users to use their platforms. to develop and publish their own games and experiences themselves. . Since Roblox launched in 2006, its users have created over 40 million games, spawned 9.5 million individual game developers, and around 202 million monthly active users. With 67% of Roblox users under the age of 16, the ability to create and share their own games has allowed these young developers to create content specifically tailored to other tweens, generating greater engagement with this bracket. of age. Additionally, Roblox has achieved a much more balanced gender distribution than traditional video game demographics.

Gambling has also become a much more social activity thanks to better internet access. No longer restricted to the same console or geographic region, players can now collaborate and compete with other players around the world. Companies quickly recognized that increased levels of competition drive player engagement and have been actively working to foster greater competition to expand game playability and monetization opportunities.

New Game Designs Drive Industry Growth

Video game publishers have also developed new monetization strategies. These include extending the life of their major titles and leveraging their existing fanbases by creating and selling new downloadable content (“DLC”) that offers add-ons, including skins and exclusive character levels. Mobile publishers have found new opportunities to increase revenue streams and gaming communities by developing “freemium” games, which include free games with the option to purchase premium content or include in-game advertisements Freemium games not only provide potential users with free content to incentivize upgrades to premium services, but also create a stable revenue stream by using in-game advertisements.

Finally, the shift to mobile games and digital downloads has reduced costs. While game development has traditionally entailed high upfront costs for the physical production of material such as CDs and the retail costs of storage space before a single copy is sold, direct download has reduced or eliminated many of these initial deployment expenses, reducing overall development expenses.

Gaming is crucial for next-gen digital content

While the growth and increased monetization of games are viable investment catalysts, technology companies have also recognized that video games are essential to the development of next-generation digital content.

Increased competition among gamers has boosted the appeal of esports as a viable entertainment medium. In May 2021, the Free Fire World Series with its Battle Royale mobile game was streamed by over 5.4 million viewers in 18 different languages. Sony has sought to integrate esports into its PlayStation ecosystem by acquiring the world’s largest fighting game championship tournament, the EVO Championship Series, in 2021 and filing a patent for a PlayStation-operated esports betting platform . Combined with the greater integration of video game streaming services such as Twitch and YouTube with the digital ecosystems of Microsoft, Sony, Amazon (AMZN) and Google (GOOG), esports should continue to be an important content driver for big tech companies.

The role of video games in the burgeoning metaverse offers even more possibilities. Envisioned as a network of 3D virtual worlds focused on social engagement, the Metaverse offers participants the possibility of nearly infinite digital environments in which to work, shop and engage. Gaming platforms like Roblox already give users the tools to create their own games and serve as a microcosm of the larger digital ecosystems that tech companies are trying to build. As tech companies look for new ways to maximize their footprint in the metaverse, they will increasingly turn to the resources and experience offered by traditional and emerging game companies (Figure 2).

Exhibit 2: Growth potential outside of the game increases

Advertising and non-video game revenue growth chart for video game companies

ClearBridge Investments, Unity Software SEC Form S-1 2020 and Applovin Corporation SEC Form S-1 2021.

Driven by the explosion of mobile games and next-generation technologies supporting the development of the metaverse, the video game industry offers one of the most attractive secular growth profiles in media and technology.

Hilary Frisch, CFA, is a senior research analyst for information technology at ClearBridge Investments.

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