Delta pushes growth of video gaming
With the coronavirus ripping through Australia, millions of Australians find themselves once again in lockdown and our lack of mobility is leading to increased video game use. Beyond the Delta variant of COVID-19, long-term structural trends favour the growth of video gaming and esports companies. There is little doubt that the global pandemic lockdowns too have boosted crowds and the growth profile of listed game developers and console producers.
Corporate activity in video games and esports continues to increase, with Netflix the latest the biggest US technology stocks to announce its intention to enter the space and it is easy to understand why. Aided by advances in technology, revenues from video gaming continues to increase and it comes from a variety of sources. Viewership figures and in-game player counts on Twitch and Steam (proxies for video game engagement), continues to set fresh records, surpassing levels achieved during the previous three months and the height of the pandemic (Figures 3 and 4).
Positive secular trends such as the increasing number of gamers and time spent in game, and changing global consumer behaviour, are projected to continue driving industry growth over the long term.
Here we are again
It has been said that waves come in sets of three. Looking at the seven day rolling average, the third wave may have started.
Chart 1: Worldwide new COVID cases, 7 day rolling average
The first wave resulted in worldwide lockdowns, as we scrambled to prevent the virus spreading. New variants of the virus have been difficult to contain, especially as it spread to emerging markets such as India during wave two. As economies were opening up, developed markets are once again in the eye of the storm. While the UK celebrated Freedom Day, their daily new confirmed COVID-19 cases is approaching new records.
The Delta variant is again forcing us to increase time at home. Much of Australia is now in lockdown. Based on 2020, there are a number of industries that thrive while we are confined to our homes and their adoption survives as the economy re-opens. Video gaming and esports has been one such example.
More businesses targeting video game development
While video gaming and esports have been increasing in popularity, given a boost by stay-at-home orders, Netflix has become the latest FAANGM stock to target video game development. Netflix recently confirmed that it intends to expand its content offering to include video games. Netflix joins Apple, Amazon, Microsoft and Alphabet to enter the interactive entertainment space. The rationale is simple. Financial opportunity.
In terms of share of content, most of legacy media is shrinking however, the video gaming industry is one of the few large entertainment and technology markets with growth prospects. According to Newzoo, the global games market is expected to grow from $176 billion this year to $219 billion by 2024 with 3 billion people around the world playing video games today. Mobile technology continues to be a driver of growth.
Chart 2: Gaming revenue diversity
Advances in chips, cloud-computing services and game programming engines are enabling more immersive digital world experiences and new types of online social interactions from “battle royale” shoot-outs to Zynga’s social mobile games. For some of us in lockdown, these services are among the only social experiences we are having.
Meanwhile, viewership and in-game player counts on Twitch and Steam, proxies for video game engagement, hit new record levels in 2021, surpassing levels achieved during 4Q20 and the height of the pandemic. Other metrics such as consumer spending on video games also rose, driven by new content and hardware releases.
Big opportunities ahead
The sector’s long-term structural growth story is supported by other macro trends such as demographic shifts. Contrary to the common perception that young people dominate video game playing, the average gamer is between 28 and 32 years of age. They grew up playing video games and continue to do so. They are also well educated, earn more than the average consumer, and spend their money on video games and related activities. The demographics are replicated across the world, particularly in populous emerging market countries.
Another supportive trend is the change in consumer preferences, with consumers increasingly going for interactive, not just passive, entertainment. These days, consumers want interaction, even when they are gaming. Mixing social media and gaming allows them to bring their friends into the interactive online world.
Then there is the widening of monetisation avenues through subscription and free-to-play models. Games are increasingly moving towards a subscription model, much like Netflix and hence its move into the space. Such a model provides a more reliable path to monetisation for smaller, quality games that may otherwise lack the marketing or monetisation nous to break into the mainstream. Meanwhile, free-to-play games allow developers to monetise without needing to convince consumers to make up-front purchases. Instead, they offer in-game upsell opportunities such as upgrades and expansion packs.
Diversification away from the FAANGMs
Most investors have exposure to the FAANGM stocks however recent volatility has highlighted investor’s apprehensions about overpaying for their technology exposure. This makes the video gaming sector an attractive diversifier to the FAANG giants, Facebook, Amazon, Apple, Netflix and Google owner, Alphabet.
Figure 5: Exposure to video gaming and esports
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Arian founded VanEck Australia and leads VanEck's Asia Pacific business. Recognised as a thought leader and with deep experience in asset management across a range of asset classes, Arian’s passion lies in designing investment solutions and he is...