The video game industry has undergone significant changes from the early days of Atari. It now covers multiple sectors and generates more revenue than the movie and music industry. Last year total revenue in the U.S. eclipsed $23.5 billion, jumping 5% from a year earlier. A big part of that increase is due to a shift away from physical games towards digital software.
In the past 5 years, video game publishers have focused on expanding their direct to consumer channels through robust digital offerings. Meanwhile, the emergence of mobile gaming, eSports and virtual reality are poised to take the industry by storm in the next few years. With the industry growing at a rapid clip, it should be near the top of any investor’s list.
Video Game Industry
For starters, the video game industry consists of three primary sectors; PC, console and mobile. PC gaming is currently the biggest moneymaker followed by console and mobile. However, mobile is poised to eclipse both PC and console sales in the next 5 years. Console gaming remains a blue chipper in the industry with limited upside or downside potential.
Despite the booming popularity of PC games, computer sales continue to struggle. Names like HP (HPQ) and IBM (IBM) continue to point to a weak PC market as the source of its problems. Both stocks are down double digits in the past 12 months and should only be pursued as long term investments.
Console gaming, on the other hand, has become so advanced that they are essentially mini computers in the living room. Currently, there are three major consoles on the market: Sony’s PlayStation 4, Microsoft’s Xbox One and Nintendo’s Wii U. There is little question as to who dominates this segment. The PS4 has sold 40 million units worldwide since its debut, nearly double what Xbox has moved. Sony is also updating its system to support virtual reality and 4k functionality which projects to be high growth areas. Sony (SNE) stock is down in the past 12 months, but has reconciled some of its losses since the start of the year.
Mobile gaming is quite different than it was when Snake launched in 1998. The smartphones we carry today have become so advanced that they replicate the capabilities of computers at the turn of the millennium. The Apple app store has been a popular place for developers to sell their games to a relatively untapped market.
Viral sensations such as Clash of Clans, Angry Birds, FarmVille, and Candy Crush have brought their respective makers fame and fortune. In the past 3 years mobile gaming has been brought to the public market with mixed results.
Glu Mobile (GLUU) and Zynga (ZNGA) have suffered as publicly traded companies as they attempt to deliver new viral sensations. King Digital, on the other hand, was recently taken over by Activision Blizzard in a deal valued at $5.9 billion and more importantly removed from the NYSE. Mobile gaming is still expected to eclipse PC and console sales, despite limited success on the financial market.
Video game publishers have seen the greatest impact from the shift to digital games. The recent advancements in technology and streaming now allow users to download games rather than visiting the local GameStop. Developers have seen digital downloads jump as they no longer need to shepherd their games through physical retailers.
The market for digital games grew 8% in 2015 with downloads to consoles making the biggest leap. Activision was the top earner amongst publishers, pointing to an uptake in digital services for its recent success. Game publishers remain a popular destination for investments as Activision (ATVI), Electronic Arts (EA) and Take Two Interactive (TTWO) are all up over 20% in the past 12 months.
The newest innovations in technology are poised to take over the gaming industry. Virtual reality and eSports are already household names so it’s clear why most investors are rushing to get a piece of the pie. Facebook’s Oculus Rift is scheduled for shipment in the next few months with industry experts optimistic about its potential.
Virtual reality systems are not only interactive but appeal to users’ senses of sight and hearing, creating a truly immersive experience. Some studies estimate VR/AR gaming will generate $10 billion in revenue by 2020.
eSports is already a big business, but has only recently made the mainstream news. The eSports ecosystem is already a $300 million industry with the potential to surpass $1 billion by 2018. It has over 205 million fans with expectations to garner 100 million new fans over the same time frame.
Some of the most interesting opportunities for investors are in streaming, branding, and sponsorships. Coca-Cola was one of the first brands to jump into eSports, with Red Bull, Pizza Hut and American Express exploring its merits. Meanwhile, companies such as Turtle Beach are making accessories and controllers tailored for pro gamers to gain an edge.
The video game industry is one of the fastest growing industries, but that hasn’t necessarily translated to the stock market. Publishers have seen shares spike from an increase in digital downloads while mobile developers and console manufacturers continue to suffer. Investing here, like in any other industry, requires due diligence and patience.