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Are video games the future of media?

21 March 2022

Fund managers share their perspective on a fast-growing industry that most of the big tech companies are racing to compete in.

By Abraham Darwyne,

Senior reporter, Trustnet

Whenever a new area of growth emerges, investors can sometimes look to where established companies are making acquisitions as an indicator of where the next opportunity lies.

It was not too long ago that traditional TV viewing was disrupted by streaming services while companies like Netflix, Disney+ and Amazon Prime Video all stepped in to take a slice of the pie.

But it appears that the media and entertainment industry is facing another wave of competition, this time from video games – an area where there is intense activity among major corporations.

Despite being less than three months into the year, there has already been three blockbuster acquisitions announced in the sector in 2022.

Take-Two Interactive plans to buy mobile game maker Zynga for $12.7bn (£9.4bn), Sony has agreed to purchase Bungie – the creator of the popular Halo and Destiny games – for US$3.6bn, and Microsoft has announced its intention to buy video game publisher Activision Blizzard for a whopping $75bn.

Microsoft’s acquisition of Activision Blizzard could reveal where the global tech giant is looking for future growth in the years to come, according to Anna MacDonald (pictured), fund manager at Amati Global Investors.

“It’s a statement of intent,” she said. “Remember Microsoft has been very good at looking to the next area of growth over the years.”

Microsoft could be banking on the fast-growing video game sector having the revenue potential to overtake the traditional TV industry, which was once a money-making machine but is now suffering from declining revenues.

MacDonald said: “There's probably going to be a crossover between the level of revenue generated by gaming and the whole TV ecosystem over the next year or two.”

Indeed, streaming giant Netflix – which was recently stung by a 20% share price drop after it revealed slowing subscriber growth – also seems to recognise this opportunity, given that it made its first gaming studio acquisition just last year.

The company competes for user attention with traditional TV, social media content and video gaming, making the move an interesting one for investors.

But to see what the potential future of video games looks like; investors need only look to China, according to Comgest Growth China manager Jimmy Chen.

“In China video games have already replaced television as the biggest form of mass entertainment,” he said. “The trend that we saw in China with video games becoming mainstream will get replicated in the rest of the world.”

Video games have changed a lot over the past decade, which subsequently makes them better investments today than they were in the past, he added.

“Developing a new game is no longer hit and miss: advances in technology and changes in player behaviour mean successful video game franchises now have attractive and predictable revenue streams,” he said.

Chen also pointed to how the method of monetisation for video games in China has evolved and influenced the West. Most games in China are free to play, with options for players to purchase more experiences within the game – a model that has now been mimicked in the West.

Chen said: “It's easier for these free-to-play games to get a larger pool of players, to create a larger community and it’s a more sustainable monetization method – it’s not a one off, it's a continuing method.

“There's also less room for error compared to one-off licence games,” he added. “If it doesn't work when you hit the market, it flops. There's no other way around it. Whereas with free-to-play games you can tweak it, if it doesn’t work the first time, you tweak it to make it work.”

As an example, he pointed to the success of the highest-grossing mobile game in the world today, Honor of Kings, which has made more than $13bn in revenue since it was created by Chinese tech giant Tencent.

“When Tencent created it there was a one-to-two-year period where the user base was just stagnant with tens of millions of players, and it didn’t grow,” Chen said. “But then the company kept on tweaking it and at a certain point got a rise, and it went to hundreds of millions of players.”

Although video gaming has improved as an investment itself, Christopher Rossbach (pictured), manager of the J. Stern & Co. World Stars Global Equity fund, said the bigger opportunity for video gaming is in the Metaverse.

“It's really where the Metaverse is headed,” he said. “I know that's a buzzword, but it's real. Because the Metaverse is the enhanced digital experience that you have interacting in a virtual world and the gaming industry is an example of how people can really work in the Metaverse.

“A lot of the expertise around programming, around capacity, around design and around implementation for how you have those virtual experiences is in the gaming industry, I think that cannot be forgotten.”

He pointed to examples of the Metaverse as created by Facebook’s Mark Zuckerberg interacting with his avatar or that created by the interactive online events organised by various conference providers.

“If you compare the simplicity and primitiveness of that with the gaming experience, it is on a totally different level,” Rossbach said.

“So effectively, the gaming industry is already in the Metaverse, and the rest of the internet – including the big digital platforms, stunningly – are not even there yet.”

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