Why the 'SaaS-pocalypse' for video games makes some sense

AI has continued to define investing in 2026, much as it did in 2025 and 2024.

The pace of progress is so rapid that investors are struggling to locate the risk. It feels like 2008, when opaque debt instruments triggered panic because markets didn’t know where the landmines were.

“Fear is the mind killer”, goes Frank Herbert’s famous line. When panic sets in, rationality is a casualty.

Thus pockets of the AI sell-off have looked simply bizarre. But other sell-offs look defensible. Video games is perhaps an example.

Video games were struggling pre-AI

Video games companies entered 2026 on weak footing.

Gaming has migrated over to phones the past 10 years.

It was originally thought that this was for the better. Gaming on phone meant consumers didn’t have to buy expensive PCs and consoles. The video games industry pioneered the A/B testing for addictiveness that characterises modern apps (what social critic Matthew Crawford has called “the autism of the machine”). So it was thought gaming could be an apex predator in the deeply competitive app economy.

But a new wave of short form video apps led by TikTok has unravelled gaming’s mindshare. TikTok and its imitators have proven even more addictive than video games. Unlike video games, watching short form video is purely passive; completely frictionless; requires no group of friends; and requires no skills.

Short form video has meant the average weekly hours spent gaming and the number of gamers have both fallen in most countries. It has raised customer acquisition costs for apps of every kind.

Microsoft (NASDAQ: MSFT) – the world’s largest gaming company by revenue these days – own gaming division tells the story (table above). 

Once a standout growth engine, gaming has become one of Microsoft's weaker segments. Microsoft CEO Satya Nadella has blamed short form video.

Seeing this decline, gaming companies have focussed on extracting more revenue from existing players rather than finding new ones. Candy Crush, Fortnite and NBA 2K raising their in-game currency prices are key examples.

While raising prices has preserved revenue, Wall St remains concerned by the loss of network effects and declining player bases.

The sector’s valuation premium has collapsed. During the covid peak, the sector’s forward PE ratio was triple (i.e. 200%) the S&P 500’s. Today, the valuation premium is zero (graph below).

Why AI was the catalyst

It is this existing weakness that has made rapid AI advancements so unsettling for investors.

Google’s Genie 3 release in February, an AI system that builds imaginary worlds, led to a broad sell-off.

Roblox (NYSE: RBLX) dropped 13% on the day. Take-Two (NYSE: TTWO) fell 9%, despite the pending launch of Grand Theft Auto VI.

If Genie 3 can generate imaginary worlds immediately on demand, a major moat of game studios like Take Two, EA Sports (NASDAQ: EA) and CD Projekt erodes.

But the real pain was on the picks-and-shovels.

Unity Software, which creates physics engines for video games among other things, dropped 24%. AppLovin (NYSE: APP), which runs the advertising plumbing within video games, fell 17%.

Here, the fear is that the runtime fees and editor software offered by Unity could be bypassed entirely by Genie 3. And AppLovin could be disintermediated.

The safest way to “own” gaming may be the Magnificent 7

On Wall St, absolute levels are less important than trajectories and rates of change.

If the current glide path carries forward gaming is a post-growth industry – yet the market is pricing average growth prospects. This implies further downside is possible.

So what can investors interested in gaming do? One solution might be the magnificent 7.

Google owns Genie. Microsoft is the world’s largest gaming company following its Activision-Blizzard acquisition. Amazon (NYSE: AMZN) owns Twitch and much of the underlying cloud plumbing. Apple (NASDAQ: AAPL) and Meta (NYSE: META) control mobile gaming distribution and social discovery. Nvidia (NYSE: NVDA) sells the picks and shovels that power AI-generated worlds.

Yes, the Magnificent 7 offer less revenue purity and therefore less operating leverage to gaming. But in a world where technology risk is accelerating and moats are eroding, they may be the safest place to hide.

About ETF Shares

ETF Shares is a low-cost index ETF issuer, based at the Macquarie University Incubator. We specialise in US-focused ETFs, such as the ETFS Magnificent 7+ ETF (ASX: HUGE) and ETFS US Quality ETF (ASX: BEST)