Markets

What's the State of the Video Game Industry Now?

If you're looking for an industry with a ton of rapid growth behind it and plenty of room for more ahead, you could do worse than to consider video games. The amount of time we spend on them is increasing at a ridiculous clip, as is the amount of money, and the global trends appear promising, which adds up to an opportunity for investors. If you don't feel ready to take advantage, Motley Fool Answers co-hosts Robert Brokamp and Alison Southwick want to help.

For this podcast, they've invited senior analyst Jason Moser back into the studio, this time to talk about the current situation in the world of video games and e-sports from an investor's perspective: which companies look strongest, how this particular business might move the needle for some more diversified companies, and more. In this segment, they focus specifically on the current state of the market, where profits are coming from, which companies are winning, and why it's all so wildly different from back in the old days of Super Nintendo and the like.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

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This video was recorded on Oct. 8, 2019.

Alison Southwick: Today we're going to talk about gaming and e-sports. Let's just see how it goes. All of our listeners that know way more about this than I do can go ahead and just email us afterwards and email us their thoughts.

Jason Moser: Well, to be very clear, I'm sure there are a lot of listeners that know a lot more about gaming and e-sports than probably most of us in this room do, at least from a user's perspective. We look at this market, obviously, from an investor's perspective, and that will be the difference. I'm sure we'll get some terminology wrong or mess something up, but people will email, and tweet, and let us know. And we appreciate that.

Southwick: We do. Thank you!

Moser: Because it means they're listening.

Southwick: Thank you! Keeping us honest. So right now, as we are talking, the League of Legends World Championship is waging in Europe, and Bro, I can tell that this means a lot to you. What does this even mean? Well, League of Legends is a game. I'm not even going to try and describe what type of game it is, but it's a game that people play and it's one of those e-sports compa-titions that... See, I'm already off to a great start.

Robet Brokamp: Compa-what?

Southwick: The point is that supposedly last year's League of Legends finals were watched by 100 million people and while that's still very small compared to the billions of people that watch World Cup soccer or Olympic ceremonies -- keeping it in the area of sports -- that's roughly the same as people who watched the Superbowl.

Moser: It's a lot.

Southwick: Today we're going to talk about, again, gaming. E-sports. Maybe a little gambling.

Moser: Maybe.

Southwick: Let's start off with some fun stats. According to research from Limelight [Networks], gamers play on average, in the U.S., seven hours and seven minutes each week, which is up 20% over last year. Do you want to guess the country where gamers play more hours, on average, than the U.S.?

Brokamp: China.

Moser: I think I'm going to go with China.

Southwick: It's Germany.

Moser: Germany? Wow.

Southwick: On average, gamers in Germany play almost eight hours a week. Then comes the U.S. Then after us is Singapore. Most of that time is spent on mobile games, and the average is two hours for gamers. Computers follow that at almost two hours and then console time an hour and a quarter. Most people are playing casual single-player games like Candy Crush or Angry Birds. This probably isn't going to surprise you. Gamers 26 to 35 spend most of the time playing. They're at about 8.21 hours a week and those over 60 spend about 5.63 hours playing.

Moser: That is fascinating!

Southwick: Yeah. It's easy to think of being a young person's thing. Actually, it's not. Like when we think of games and gamers, we think of like dudes in recliners with their Call of Duty headsets on and they're playing marathons for hours and hours. Eating Frito pies straight out of the bag. I don't know.

Moser: That's a pretty safe stereotype.

Southwick: That's the stereotype, but the truth is a lot of people out there play games.

Moser: Oh, yes. You look at the numbers in gaming. Go back to 1995, you had somewhere in the neighborhood of 100 million gamers in the world. Today it's 2.6 billion, so you can see how big that is today. And also when you consider the global population, it's somewhere in the neighborhood of 7 billion at this point. There's still a lot of room to go.

A lot has happened in a short amount of time to open up that audience. You mentioned mobile, and mobile really is the key to it all. When you look at the global games market value, in 2018, mobile was $63.2 billion. That was up 13%. Then you had PC at $33.5 billion. Consoles at $38 billion.

So mobile has really picked up a lot of share in a short period of time, and that makes perfect sense. Now we've got these smartphones in our pockets that do virtually everything, and gaming has changed. The nature of these games has really changed. I remember when I was 5 years old -- and I'm not going to tell you how many years ago that was -- but it was long enough back to where my birthday present when I was 5 was the Atari. The Atari console that you hooked to your TV...

Southwick: We had a Coleco.

Moser: You'd get Pong and...

Brokamp: Space Invaders...

Moser: That was really, to me, the coolest thing that could have ever happened at that time in my life, and it was really just getting started at that point. Video gaming was kind of prohibitive, and today it's [not at all] prohibitive. You can get a game just with a couple of clicks of a button on your phone, and that opens up a lot of opportunities for a lot of different players in that value chain.

Southwick: There's consoles, so you think about a PlayStation.

Moser: Xbox.

Southwick: Xbox.

Moser: And things like that.

Southwick: People playing Nintendo on your computer. I used to love Super Mario Bros.

Moser: I had a Nintendo. I had probably one of every one of them.

Southwick: And when you think of mobile, you also think of the added revenue generator of ads. You don't have ads on a console game. You don't have ads on a computer game, necessarily. Is that much of a game changer? Like people are moving to mobile because they are also moving to their phones, but there's also the added benefit of ad revenue.

Moser: There's advertising revenue. There's also the in-app purchases, now, to where you can play a game, and in order to reach a certain level or to do something different, you can make a purchase here and there. Those little microtransactions really add up, and obviously, your phone is more or less just a bank, as well, so you can buy virtually anything you want anytime you want.

There are a lot of different opportunities to monetize in gaming, today, beyond just what historically was you sell that physical game to the individual. The consumer goes in and buys the Donkey Kong cartridge and then the money has changed hands. That's it. That purchase doesn't extend into the future. I'm not upgrading that cartridge. It was just that one time.

Now, you've got games that live much longer lives because of new iterations. New stories. New themes. New goals. Think about Activision Blizzard with the games that they're really well known for, World of Warcraft and Call of Duty. Those are the franchises, but the stories that you can tell within those franchises are virtually endless. They can keep on going as long as they have the creative juices to keep coming up with new stories. And they have. They've done a very good job with that.

Really it is about coming up with a compelling universe and then figuring out ways to tell all sorts of different stories. You also see a lot of these gaming companies partnering with all of these bigger companies out there with all that cool IP. Think about Disney, for example, and Marvel superheroes and whatnot. Just a lot of different ways to do it, and anytime you see big market opportunities out there, you're going to see companies go out and pursue them.

Southwick: There's also the added element of community. Speaking of World of Warcraft -- my husband used to play World of Warcraft -- he was in a guild. These are real people. You are getting together with real people around the world. You are going on raids and you are accomplishing these things together. Having that element of community also makes these games stickier than when your community was just the kid next door who would play Donkey Kong with you.

Moser: No doubt. I think a lot of people really enjoy the fact that they can play games together. We were talking before we started taping about how just 10 years ago or so, FarmVille was on Facebook and Facebook was still a relatively novel concept for a lot of people at that time. The attraction of being able to play FarmVille and then talk with your friends about what you're doing and how that's working had a social dynamic to it.

Zynga is a company that was on the forefront of bringing social and gaming together and they partnered up with Facebook to be able to get out there in front of the widest audience. I think a lot of producers -- game publishers -- are all using that social aspect, that social dynamic when they consider the games that they're making, because it is something that matters to a lot of people.

[...]

Southwick: So you talked about Activision Blizzard. Is Zynga still around?

Moser: Zynga is still around. As a matter of fact -- and I guess I can say this -- it's a recent recommendation in Stock Advisor.

Southwick: Oh, really?

Moser: David Gardner picked it out in Stock Advisor several months back. Just saw some good things they were doing. David obviously is a big gamer, so for him it was neat to see that maybe Zynga has a second act.

Southwick: When we're talking about other game makers, a lot of them are going to be small, privately held companies. Are there any, in particular, that you really like? You mentioned Activision Blizzard.

Moser: There are going to be a lot of companies that a lot of our listeners and members are very familiar with. I mean, Tencent is one that I think is important simply because it's the biggest gaming company in the world. That's based in China. Tencent is always one to consider. Activision Blizzard, Take-Two [Interactive]. Those are all companies that are available for investors today.

One that I've got my eye on, that's not public yet but I'm excited for it to go public -- I think it will go public at some point -- is a company called Niantic. Niantic is the company behind Pokemon GO. Behind the new Harry Potter: Wizards Unite. Those are games that were very mobile based. Incorporated augmented reality, which you know I love.

Right now, if you want ownership in Niantic, you've got to own shares of Alphabet. Alphabet still owns a little piece of that company, but I think at some point in the near future, we'll see Niantic go public, and that, to me, would be really exciting because that's a gaming company that really is focusing a lot of its future technology on AR, VR, mixed reality, and whatnot.

Southwick: It's funny that you mention Niantic. I was talking about the stereotype of a typical gamer -- which is not me. I was not describing myself, but I've played the Harry Potter game. I've played Pokemon. I play several mobile games. Wait a second -- I'm a gamer!

Moser: Can I ask you a question about the Harry Potter game while we're at this, because I'm not the biggest gamer in the world anymore? I like going back a ways and hitting that arcade downstairs where you've got Donkey Kong and Ms. Pac-Man and Galaga.

I downloaded the Harry Potter game and fiddled around with it for a little while just to get familiar with the technology. That [didn't seem to] be the easiest game in the world to play. Like I couldn't figure out, exactly, what the ultimate goal was.

Southwick: It's a bit confusing.

Moser: It was a bit confusing. I never played Pokemon GO, so I couldn't make the comparison, there. I'm assuming you played Pokemon GO.

Southwick: I did play Pokemon GO.

Moser: What was your take on those?

Southwick: I live in Old Town, Alexandria, which is a pretty densely populated place. It really helps when you play these games because there are specific, real-world places that you have to go to, to do things. You have to go to specific places to get more spells if you're playing the game.

Moser: Go to the Washington Monument and get this thing.

Southwick: Right. It's also like the CVS on the corner, but all of these locations are denser, where [there's more people], so it becomes much easier to play when you live where it is densely populated. Basically you just walk around and do stuff. You're walking around and you look on your map, and things will pop up. You tap them and then, "OK, look. It's a dementor [Harry Potter]. I need to cast this spell to catch the dementor. Maybe I do. Maybe I don't." Rick used to play Pokemon GO. He can also describe it.

Rick Engdahl: My kids are big into Harry Potter...What is it? Wizard World?

Southwick: Wizards Unite.

Engdahl: They play that, as well. It's definitely in the tween demographic. Those games are great. And there's not a real objective other than to gain levels, I guess.

Moser: And just keep having fun.

Southwick: To level up is a goal. And there's also a community element to both of them -- definitely with Pokemon GO. You were supposed to come together to take down a really really big Pokemon. And we did. Oh, I'm definitely such a nerd! I love it! We actually made friends, because you have to go to these specific locations at specific times to capture a specific, special Pokemon, and you're like, "Oh, hey, how have you been? I saw you at the last one." Then we became friends with people at the PTO and we would go out together.

Moser: That's funny. Well, you connect the dots. We were talking about Tencent. For people who don't fully know Tencent, they do a number of different things in China. But Tencent owns a controlling stake in Epic Games, and Epic Games is the home of Fortnite. And I'd be willing to bet that everybody out there has heard of Fortnite, so if you want to invest in Fortnite, you invest in Tencent. It connects the dots.

Engdahl: Fortnite is everybody's nightmare as a parent, whereas the Pokemon GO and the wizarding thing. My kids will ask me, "Hey, can I go for a walk?" They want to go outside. They want to go out in the neighborhood. They want to go do things. They might walk into the middle of the road in traffic without looking up...

Brokamp: But other than that...

Engdahl: I'll go with them. My son and I will go on a "Poke walk," we call it. It's much better than Fortnite.

Southwick: Because in Fortnite they're just going around killing other people.

Moser: That's putting the headset on, saddling them up...

Southwick: And then like yelling at people...

Moser: Sitting there for a while from what I've seen.

Southwick: ...and being mean and saying angry things, killing each other and dancing.

Moser: Which is the downside of social. Not all social is good. There are a lot of people out there in the world who just aren't very nice, and unfortunately, these social aspects let them all come to the forefront because there really isn't accountability. There's no gaming police that will yank your card if you're being mean. They do suffer from all of the things that these social platforms, today, suffer from. Those are always things to keep in mind. I think Rick's example, there, is an interesting one.

Southwick: Pokemon GO and Wizards Unite -- to make an analogy to a board game -- they're like cooperative games. You can play them on your own, but they are like cooperative, so you don't need to be mean to other people. Whereas games like Fortnite, you're trying to kill other people.

Engdahl: That can be fun. That can be fun and you can kill each other good-naturedly.

Brokamp: And you can join on the team with your friends. My 15-year-old daughter does a lot of Fortnite. She does it with her gymnastics friends. They all form a team and they take on horrible people throughout the world.

Moser: I'm very lucky that neither of my daughters have expressed any interest. They'll fiddle around with some games on their phone here and there, but they never got bitten by the Fortnite bug, and Pokemon GO was just a little bit before they got their phones.

Southwick: They've got to have a phone.

Brokamp: One other thing with my son, who did a lot of the Fortnite. It used to be like you said, you'd go to your friend's house and pull out the Atari. You don't go to your friend's house anymore because you can just play online.

Moser: I'll meet you on the TV.

Brokamp: That made me a little sad, like everyone's doing it in the basement and then you get up...

Southwick: Cross-legged on the shag rug...

Brokamp: On the [beanbag] and then watch a movie.

Moser: When I was a kid, you'd get out on your bicycle and you'd ride to wherever you want to go. Now people aren't doing that as much, because they don't have to go to the physical place to get there. There are virtual ways to get there. Technology giveth and it taketh away, and you've got to deal, because there's nothing stopping them.

Southwick: Well, that's maybe enough of a bunch of uninformed, old people talking about a young man's game.

Brokamp: A young woman's game, too.

Southwick: A young woman's game, too. That's true.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Alison Southwick owns shares of Walt Disney. Jason Moser owns shares of Alphabet (C shares) and Walt Disney. Robert Brokamp, CFP owns shares of Facebook. The Motley Fool owns shares of and recommends Activision Blizzard, Alphabet (A shares), Alphabet (C shares), Facebook, Take-Two Interactive, and Walt Disney. The Motley Fool has the following options: long January 2021 $60 calls on Walt Disney and short October 2019 $125 calls on Walt Disney. The Motley Fool recommends CVS Health and Nintendo. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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