The video gaming industry has been described as one of the ‘Winners of the Pandemic’ in recent months. But what does the gaming market environment actually look like and what should investors consider when entering this space?
While the activity of playing video games can be seen as trivial and frivolous, the industry around developing and publishing video games is now big business.
There are 2.7bn video game players around the world, one third of the population of the planet, creating global revenues of £160bn by the end of 2020, and the sector is still growing. A compound annual growth rate of 12% is forecast between 2020 and 2025, an indication that there is a lot of room for the sector to continue to grow.
Fundamentally, gaming is now more valuable than film, music and TV combined.
So, who are the players and where will this growth focus?
Gaming demographics show the bulk of the gaming audience to be 18-35 years old with an almost 50-50 gender split. Although it's also worth noting that, surprisingly, 20% of gamers are over 50. Asia clearly has the largest pool of gamers, 1.5bn identifying as gamers, with mobile as the platform of choice, and this will only continue to grow.
What is fuelling this growth?
Whilst stand-alone game titles are still in the majority, the growth of massively multiplayer online games has driven the revenues to new heights. Record numbers are being achieved by Fortnite (released in 2017 and updated regularly) – 250m players around the world have generated £3bn in revenue a year for Epic, the games developer. The broadcasting of games has become just as prevalent, on average 42m hours of Fortnite is broadcast on YouTube a month.
eSports has added yet another high value column to the video gaming world. Professional teams and players now compete for vast sums and draw audiences that film and TV can only dream of. The 2019 League of Legends world championship finals had more viewers (100m) than the 2019 Super Bowl (98m). Due to TV and sponsorship the prize pool for eSports competitions has now rocketed and can easily reach $30m per event, with the winning team often pocketing $15m.
Behind a lot of this is the shadow of the gambling industry. There are now multiple betting platforms to allow customers to bet on eSports and the value of that market is expected to be £14bn at the end of 2020.
What does this all mean for investors?
Investing in games development
Video games development is high risk/high reward. A video game can cost £100m+ to develop and an added huge marketing spend, with no guarantee of commercial success. It’s a crowded market.
Investing in eSports
eSports teams, in my opinion, are currently overvalued. It's common to see x12 to x14 revenue multiples based around linear (not scalable) business models. This does not justify the high valuations.
Investing in infrastructure
Infrastructure investment looks sane by comparison to eSports. In any gold rush, the real money is in the picks and shovels and building capacity to deliver games, broadcast them and scale events up as interest increases looks like the pick/shovel of gaming.
Key considerations for investors
The industry has a boom / bust cycle to it, centered around the launch of new hardware / devices. How can this risk be reduced to acceptable levels and what strategies do management teams need to remain financially sustainable in the bust period?
What kind of management team is needed to make an impact? What business experience is required – not only gaming and technology, but marketing, community management, broadcasting, sponsorship, brand management and even ethics?
Gaming is a high-end technology environment, so what will the players, tournament organisers and broadcast companies be requiring over the next 3-5 years? Gaming on demand (essentially Netflix for gaming) is going to be the next big thing, so what software and infrastructure is going to be needed by the market to fuel the growth?
Picking the right fight. The revenues generated are drawing all the big players, so where in this space is it possible to make an impact, drive growth and create value? Going head to head with the latest first person shooter might look exciting but the budget needed to compete is not trivial. So where else in the gaming landscape might represent a more viable opportunity?
There are some massive opportunities for investment within gaming, as the sector is far from peaking and the potential for revenue growth is clear. My personal conclusion is that whilst the hype belongs to the Fortnites of the gaming world, the better opportunities are within the infrastructure development and workflow management tools. As the sector matures, it will need to become efficient and taking a longer-term view towards having tools and technologies that drive that efficiency would seem a safer (if slower) direction.