After a critical year for gaming, can the industry carry on the momentum seen during 2020?
Click here to read the previous gaming outlook.
The proposition of investing in video games has never had a stronger test case than the year 2020. Thanks to increased interest in gaming, following it up is what’s next for the sector.
The COVID-19 pandemic affected virtually every sector in the world, and in the gaming industry observers have noted that the uptick in time at home for consumers resulted in higher gaming sales.
Alongside the recent launch of a new generation of video game consoles and PC gaming equipment, what lies ahead for the entire investment sector in the new year?
Gaming outlook: Big spending makes waves
Gaming investment has picked up in large part due to the diversification of revenue now seen in the space, according to one investment executive.
Raj Lala is the president and CEO of Evolve Funds Group, and his firm oversees the Evolve E-Gaming Index ETF (TSX:HERO). Gaming investments have been good to Evolve in 2020, and the ETF manager said he has seen the value of the video game index jump significantly.
At the end of November, HERO had seen an increase in value of 50.42 percent over a year-to date period, reaching a price point of C$34.10 a share.
Lala told the Investing News Network (INN) his biggest takeaway from the year was that most investors are now understanding that there’s been a revenue evolution for video games.
In the past, Lala explained, investors were dubious about the revenue model, which previously went from game development to a one-time consumer purchase. “And that’s where the revenue would stop for the gaming manufacturer,” Lala said. “But in today’s world, it’s completely different.”
Now the gaming revenue cycle has evolved to include add-ons and expansions, plus in-game purchases and even monthly subscription services. “It just becomes a great multiple revenue stream for the gaming companies today,” the ETF executive told INN.
The change in mentality from investors may have something to do with the gigantic year of spending in the gaming industry. It encompassed both hardware and software, and also involved the performance of in-game purchases from the biggest games available — those include Fortnite, owned by privately held Epic Games, in which players can buy cosmetic assets for their gameplay experience.
Moving forward, research firm Newzoo predicts that potential revenues for the entire gaming sector will reach US$174.9 billion in 2020, up 20 percent from 2019. And the growth won’t stop in 2020 — Newzoo’s market analysis shows that gaming revenues could reach US$217.9 billion by 2023.
Gaming outlook: New hardware brings new pricing
The fall of 2020 served as a catapult for the new generation of console gaming. Rivals Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT) respectively launched the much-anticipated PlayStation 5 (PS5) and Xbox Series X and Xbox Series S machines.
And alongside the new era of hardware came the opportunity to raise retail prices for major modern video games. While not a uniform practice yet, key industry games have been released at higher price points. Examples include Call of Duty: Cold War, the latest entry in the long-running first-person shooter series published by Activision Blizzard (NASDAQ:ATVI); it was released with a new retail price point of US$69.99, representing a US$10 uptick.
The popular NBA 2K21 title, published by Take-Two Interactive Software (NASDAQ:TTWO), is another annualized franchise game series that saw a similar price hike.
Not all popular game franchises went that route. Assassin’s Creed: Valhalla and Watch Dogs: Legion, new releases from Ubisoft Entertainment (EPA:UBI), both released with the established US$59.99 price tag.
Sony Interactive Entertainment CEO Jim Ryan confirmed in a blog post that his company’s new game releases will range in price from US$49.99 to US$69.99 on the new PS5 console, including its flagship launch title Demon’s Souls.
Gaming outlook: Nintendo shines in console wars
The gaming industry has seen steady increases in reach and dollar value as the versatility of video games expands. This year that growth was put on full display thanks in large part to the effects of lockdown regulations implemented across the world given the novel coronavirus pandemic.
One of the earliest and clearest examples of this effect was seen with the launch of Animal Crossing: New Horizons, the latest entry in the popular franchise from Nintendo (TSE:7974) and the first for the Japanese video game maker on the Nintendo Switch console.
In the first four months of the game’s release, it sold over 22.4 million copies, according to figures from Nintendo. In what was almost perfect timing for Nintendo, the game also helped drive sales of the Switch console, which was originally released in 2017.
The game was hailed as a significant evolution in the Animal Crossing franchise and allowed players to experience the outdoors at a time when most couldn’t. In the game, players are tasked with arranging the landscape and buildings for an entire island while interacting with in-game villagers.
Nintendo reported an operating profit of US$1.37 billion in Q2, according to a report from the Verge. Shares of Nintendo sit near the top of the weighted holdings for the Evolve E-Gaming Index ETF.
Gaming outlook: Watch moves in mobile and esports
The growth of gaming investments can be attributed to a variety of factors, but one of the most critical is the continued scale of mobile video games and the revenue streams adopted from such games.
“Mobile is such a massive driver of gaming now,” Lala said. He explained that more gaming companies have to seriously consider how the mobile landscape could complement their existing games.
Newzoo’s market estimate indicates that mobile gaming will be the biggest contributor to overall growth for the gaming space. This segment is expected to generate US$77.2 billion in revenue for 2020.
Lala said this doesn’t mean consoles will go out the window, but the reality is video game makers can’t dismiss mobile opportunities.
Call of Duty, a staple series of the console gaming experience, launched a version of its game on mobile platforms late in 2019. In the year since its release, the game is estimated to have generated US$480 million, indicates a report from gamesindustry.biz.
While it’s taken lumps along the way, esports and the ability to invest in this arena has also aided in the development of the entire gaming landscape.
Kevin Wright, CEO of esports agency GameSquare Esports (CSE:GSQ), told INN he is encouraged by some of the signs he saw in 2020. He also said the performance of some players in the space has him excited for what’s ahead in 2021.
“Engagement with esports and gaming is expected to continue its positive trends, and we are seeing evidence that non-endemic brands are increasingly looking to esports as an effective way to reach their target demographic,” Wright said.
Gaming outlook: Investor takeaway
Thanks to the new generation of consoles and renewed interest for gaming platforms from added time at home, investors shouldn’t dismiss gaming as an investment fad.
The key for average retail investors will be finding opportunities among smaller names capturing a segment of the industry.
Gaming as a whole is bubbling to new levels of market share in the entertainment space. Lala told INN he was impacted by a quote from a streaming giant executive — when asked about the race to capture the attention of the market with increasing streaming service options, Netflix (NASDAQ:NFLX) CEO Reed Hastings said his focus is entirely somewhere else.
“We compete with (and lose to) Fortnite more than HBO,” Hastings said. Gaming interests will try to continue tipping the scales in their favor moving into 2021.
Don’t forget to follow us @INN_Technology for real-time news updates!
Securities Disclosure: I, Bryan Mc Govern, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: GameSquare Esports is a client of the Investing News Network. This article is not paid-for content.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.