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