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14 February 2020

Video gaming: A bright future for investors

A roaring crowd, a packed stadium and two teams ready to compete – but no, this isn’t the football Premier League, it is for an entirely more sedentary activity. 

Esport, where teams compete by playing video games, is perhaps one of the biggest signs of just how far the video gaming sector has come since the days of SEGA Megadrive and Playstation One. Vast numbers of spectators either attend stadiums, or follow online, as teams battle it out to be named champion of world-famous games such as Fortnite. Revenues from global e-sports were predicted to reach $1.1bn in 2019 – annual growth of more than 25% according to Newzoo, a leading esport analytics provider.

The level of interest, and money, within the sector was laid bare in the £2.4m cash prize awarded to the teenage Fortnite world champion last summer.

Once perceived as the preserve of anti-social teenagers, the video game sector has grown enormously in recent years as ever more sophisticated products have come to market and players have been able to connect and interact with fellow gamers from anywhere in the world.

The emergence of video gaming as a ‘sport’ in its own right is just one sign of growth, with the industry seeing the number of players grow from 275 million 20 years ago to more than two billion players across the globe today. These gamers are playing for an average of an hour a day, with the time spent on gaming as a leisure activity slowly overtaking the average time people spend watching TV.

A GlobalData report has predicted the video games market could be a $300bn industry by 2025.  As investors, looking to the world leaders in the market such as Tencent and Ubisoft offers huge opportunity to gain access to this high growth sector. Both companies appear in the Alliance Trust equity portfolio as attractive entry points to this strong and growing trend.

Tencent, a global Chinese multinational firm, is the world’s largest gaming company. While Tencent itself may not be a household name in the West, its association with now-famous games such as Fortnite, Call of Duty and League of Legends (the latter of which it fully owns) provides some insight into its reach and influence. Call of Duty generates some $1bn in sales every year, contributing to Tencent’s incredibly strong total annual sales of $52bn.

Ubisoft may be rather more well known here in the UK as the publisher responsible for well-known gaming brands such as Assassin’s Creed, Prince of Persia, Just Dance and Far Cry. Valued at just under €8bn, it has experienced strong increases in annual revenues, with 2018/19 revenues of €2.3bn marking a 17.1% increase on the previous year.

Key to the growth seen across the video game industry has been the development of digital technology which enables games to be downloaded. The industry has moved on from customers making a one-time physical purchase of a game over the last five years and we are now at a point where we all have connected devices and games are being sold digitally and downloaded by the customers online. Once bought, online services enable customers to download additional content and services over time to enhance gameplay. The gaming franchises are no longer a one-time purchase, they are in fact much more valuable today due to the ongoing recurring sales they can secure. 

From our research of companies in the industry, the second factor leading to the success of companies such as Ubisoft, the third largest independent video game publisher in the world, is the sheer expense of production. It is becoming increasingly difficult to produce the very high-quality triple-A franchises that gamers enjoy. The amount of money required for production, the number of developers needed and the time it takes to build a new product means that it is difficult for even the biggest and best financed companies in the world to produce new games. The barriers to entry for competitors in the space are high.

There is also a shift towards consolidation. The industry has been traditionally fragmented, but we now see more companies that understand the benefits of consolidation over time. Tencent and Ubisoft are both well placed to take advantage of these trends, and both are selling at very attractive discounts.

With new markets opening up in countries such as China, and the proliferation of mobile devices, we believe the scope for expansion within the video gaming sector is substantial. As digitisation continues to make it easier for gamers to enhance play, the appetite for purchasing additional content looks set to continue to be a strong generator of recurring revenues across the market. The popularityof video gaming has continued to rise despite a plateauing of other leisure activities such as TV and internet browsing, and we expect this level of consumer attention, and excitement, to continue to grow.

 

Towers Watson Investment Management Limited (“TWIM”), part of Willis Towers Watson, has approved this communication.  This communication is intended for general information purposes only and it should not be considered a substitute for specific professional advice. In particular, its contents are not intended by Willis Towers Watson to be construed as the provision of investment, legal, accounting, tax or other professional advice or recommendations of any kind, or to form the basis of any decision to do or to refrain from doing anything. As such, this material should not be relied upon for investment or other financial decisions and no such decisions should be taken on the basis of its contents without seeking specific advice.

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