Fortnite, the survival shoot-em-up phenomenon of the 2018 gaming world has probably made it onto the radar of most readers in some form or another. Even if it just through second-hand information gleaned from teenagers within earshot or reading ‘get to know’ content on England’s World Cup squad designed to personalise the team’s extraordinarily wealthy young stars. You may, or may not, have much of a clue what the game actually looks like or involves.
As an investor, the quality of Fortnite you may find most interesting is that over July the game generated average daily revenue of $2 million from in-game purchases – the game itself is free to play. On July 13th a record $3 million flowed into the accounts of developer Epic Games and in several months Fortnight has made more than $1 billion. Over $100 million of that came through the mobile iOS version for iPhones with the Android version of the game still to be released.
That the most popular computer games on gaming consoles such as Sony’s Playstation, Microsoft’s Xbox, PCs and smartphones, with many now playable across platforms, are lucrative for their developers is probably no surprise. What has possibly gone under the radar of most middle-aged investors, and possibly even younger generations simply not thinking of the sector in investment terms, is the scale of value the wider gaming market has reached – expected to be $138 billion in 2018. And it is on a steep upwards direction with double digit annual growth forecast for at least the next decade. It’s not only the revenue generated by games sales or in-game purchases in the case of freemium models.
Hardware and accessories are also big business and the greatest growth is in eSports – professional competitive gaming. Having first gained popularity in Asia, eSports are now quickly gaining traction in the USA and Europe. Again, those of a more mature demographic will likely find the idea of Counterstrike and World of Warcraft world championships as a spectator sport a little difficult to get your head around. But not only has watching teams and individuals play computer games competitively become a live spectator sport, it is one that fills out whole stadiums and high profile events attract an online audience in the upper double digit millions. The world’s richest sports league is the NFL, which in 2017 generated annual revenue of around $12.5 billion. To put that in context, it is almost double the $6.4 billion made by the English Premier League – by far the richest football (soccer) league. Within 5 years, the audience for eSports is forecast to surpass that for the NFL, making hitting buttons on a joypad potentially the most lucrative sport in the world within half a decade.
As the hardware and software supporting Virtual Reality, Augmented Reality, Mixed Reality, and probably another several as yet undefined takes on reality, develops, analysts predict that we will spend an ever increasing portion of our leisure time immersed in some form of digital ‘gaming’. But gaming is already a huge industry – one of the biggest in the world. And the pace at which it is still growing and likely to for the foreseeable future means that, as an investor, it would be remiss to not look at how best to gain exposure to the revenues gaming companies are generating.
Pixelated Ping Pong to League of Legends: the Evolution of a Money Printing Machine
While not the first home games console, that was the Magnavox’s Odyssey released three year earlier, Atari’s one-game Pong console was the first to gain real market traction, helped into homes across the USA through a marketing tie up with Sears department stores. The 1975 Atari Pong was subsequently followed up by the company’s 2600 console – the first to offer a single hardware base to support multiple games stored on cartridges.
Over the course of the 1980s, early generation gaming consoles and PCs became a fixture in homes across the economically developed world. By the end of the decade, 8-bit consoles such as the NES and Sega Master System and PC alternatives like the Commodore 64 and ZX Spectrum had taken over and games were more varied, complex and colourful.
The first mobile multi-game console to have widespread commercial success was Nintendo’s Game Boy, released in 1989. By the following year an extraordinary 1 in 3 American homes contained a Game Boy and its success spurred the race for market share of a now lucrative sector. The result was a processing power arms race that saw the bit-size of gaming consoles multiply several times over the course of the 1990s up to 64-bit Nintendo 64 and Sega Saturn.
The industry also became increasingly lucrative as the children of the 80s grew up. Many remained gamers into their young adult lives and the combination of technology developments and a new demographic with higher disposable income saw game budgets increase and more sophisticated open-end formats that didn’t stick to the linear narrative (eg. Might and Magic, Grand Theft Auto etc.) that dominated previous generations of games.
The arrival of home internet access and LAN networks added fuel to the fire this kind of game format had lit under the industry. In 2001, despite a mild recession, the gaming industry was worth a record $9.4 billion. Nintendo and Sega’s duopoly of the gaming consoles market gave way to the Sony PlayStation and Microsoft’s Xbox and online multi-player gaming flourished. Fast-forward to 2018 and League of Legends, the world’s most played game, attracts 27-million gamers a day and 67 million a month – up to 7.5 million of whom are actively playing at any one given time.
The rise of smartphones has proved a further boon to a burgeoning industry and as of 2018 mobile gaming is forecast to, for the first time, to contribute more than 50% (51%) of the industry’s total revenues generated.
The Investment Case
When discussing the investment case for the gaming industry it makes sense to start with mobile. As illustrated by the first visualisation of the sector’s value, it is mobile gaming, specifically smartphone-based gaming, which currently represents the engine for growth. The value of the smartphone gaming industry is forecast to show 29% YoY growth over 2018 and the wider mobile industry, including tablets, 25.5%. PC and console value is expected to show more incremental 1.6% growth, which rises to over 4% if browser-based games, whose popularity is slumping, are excluded.
The good news for investors is that while the gaming industry provides openings for breakthrough players to secure a piece of the expanding pie, think Candy Crush-developer King, 77% of total industry revenues was generated by 25 publically listed companies. Also, while overall industry revenue grew by 14.3%, the share lapped up by those 25 gaming players rose by 29% between 2016 and 2017. That means exposure to the lion’s share of the rapidly growing industry can be achieved through a diversified mix of equities.
The sector offers a good mix of enough competition and social mobility to drive innovation with enough of a concentration of power to make investing across the industry practical. There is a broad oligopoly and at least for now the balance of power is holding. The top 11 to 25 public companies saw earnings grow by an average 24% over 2017 to keep pace with the market leaders. There were also new entries such as mobile-exclusive Chinese games publisher Perfect World, which came in at number 23 on earnings. The viral success of South Korean company Netmarble’s Lineage 2: Revolution also propelled the company into the top 25 as its earnings leapt 82% to $2.3 billion.
The biggest companies can be roughly split into hardware manufacturers, platform owners and games publishers, with some cross-over between the three. There is also a split between the Chinese/Chinese-speaking market and most of the rest of the world. The Chinese market is the biggest in the world, worth an estimated $37.9 billion in 2018, followed by the USA ($30.4 billion) and Japan ($19.2 billion). That means investors would be wise to not ignore the less familiar Chinese companies that can be invested in individually or through gaming-industry focused ETFs and funds. Chinese internet giant Tencent has been the largest gaming revenues generator in the world and has been for 7 successive years now.
Sony and Microsoft take the 2nd and 4th spots, mainly by virtue of their hold on the consoles market and growing eSports industry and Activision Blizzard the leading games publisher and also cashing in on eSports. Statista.com, the stats website, forecasts the value of the eSports industry to have more than tripled between 2016 and 2020, from $493 million to $1.49 billion. Growing revenue is coming from a combination of advertising, stadium ticket sales, sponsorship deals and gambling. The major games publishers and platforms are investing heavily in eSports with Activision Blizzard particularly active.
Gaming Industry Investment Vehicles
Investors keen to gain moderate risk exposure to the gaming industry can opt for individual stock picking if experienced in doing so or a sector-focused fund that offers broad-based exposure to a range of companies. A number of gaming stocks have performed handsomely in recent times and Take-Two Interactive, the parent company of Grand Theft Auto’s publisher gained 110% in 2017. Following an early-year slide in 2018 a new record high share price was again set in July.
In 2017, the first ETF dedicated to the gaming industry, the ETFMG Video Game Tech ETF (GAMR), was up over 60%. It’s down very slightly this year after a slump from huge gains recorded between late April and early June but offers good diversified exposure to the industry. While the first fund dedicated to the gaming industry investors can expect more to follow as the sector belatedly gathers attention. eToro also recently launched a gaming copy fund – InTheGame.
Other higher risk ways to invest in the industry include tax-efficient EIS/SEIS equity investments in promising start-ups.