Gaming Market Update: H1 2022 in Review

Gaming market update: Industry healthy after post-pandemic pullback

After a monumental increase in gaming investments during the pandemic, there were concerns about a decline due to a “return to normal” effect.

This is in focus with COVID-19 restrictions easing, and there has now been a demonstrable downturn in spending — a dataset created by Digital Development Management (DDM) and reported by GamesIndustry.Biz indicates that the value of investment deals sank by 10.3 percent in 2022's first quarter.

In total, the amount of investment in the space reached US$3.5 billion for the Q1 period.

“We seem to be out the other side of COVID,” Grant Johnson, chairman and CEO of Esports Entertainment Group (NASDAQ:GMBL), told INN. However, Johnson said investors need to keep the bigger picture in check.

“The total numbers are still substantially higher than they were pre-pandemic,” he said. “I think all the markers are still pointing at growth.”

For his part, Nick Mersch, a financial expert with Purpose Investments, told INN he views gaming as a ubiquitous hub in the lives of millions of consumers, which will result in ongoing spending.

He credits the recent uptick in investment with helping to change the image of the industry, leading to an ongoing show of support now that the market isn’t seeing a major rush.

“It's really been a removal of the social stigma of gaming towards the socialization aspect,” Mersch said, referring to the social aspect accompanying modern games.

However, the market is challenged by the amount of money that users, whether old or new, are willing to spend on gaming options now that competing opportunities are more widely available.

“People are coming back to the drawing board in terms of how much they can spend on these games; discretionary spending is pulled back,” he said. “And that's why you're seeing a bunch of these stocks really just come off with the rest of the market.”

Gaming market update: Sector M&A totals US$8 billion in Q1

While total investment is down, there is still strength in gaming industry M&A. The DDM report indicates that M&A transactions reached US$8 billion in Q1, a 276.2 percent uptick over the previous year.

This number does not include blockbuster deals announced, but not officially closed.

Still pending are Microsoft’s (NASDAQ:MSFT) planned transaction with Activision Blizzard (NASDAQ:ATVI), Take-Two Interactive Software's (NASDAQ:TTWO) purchase of mobile developer Zynga (NASDAQ:ZNGA) and finally the private acquisition of Bungie by Sony (NYSE:SONY).

Gaming market update: Companies duke it out to get consoles to consumers

Sony and Microsoft have continued to struggle to get out of the mud of supply chain issues, which are affecting the availability of their consoles — the Playstation 5 and the Xbox Series X|S.

In 2022, the results have improved and more gamers have been able to find the consoles, which originally launched at the end of 2020. GamesIndustry.Biz reported that 20 million PS5s have been sold globally so far.

"To those fans who have yet to get their hands on a console, please know that we are planning on a significant ramp-up in PS5 production this year and we are working endlessly to make sure that PlayStation 5 is available for everyone who wants one," said Veronica Rogers, senior vice president and head of global sales and business operations at Sony Interactive Entertainment.

In a recent update, Microsoft disclosed that revenue for its gaming division dropped about 7 percent in the company's fourth fiscal quarter, which ended in June, compared to the same period in the previous year.

The period still brought sales of US$3.45 billion, making it Microsoft's second best Q4 period ever. The company's annual revenue was US$16.22 billion, which according to analysts means the best output from Xbox ever.

Mersch celebrated the turn for Microsoft, and recently Sony, in terms of prioritizing subscription-based revenue models that incentivize gamers to pay a monthly fee for access to a pool of games.

The financial expert said that despite the prevalence of games with communities dedicated to them, these subscription models play well with “the general nature of video games,” in which a player checks out a new game for awhile and then most likely moves onto a different one.

“As soon as you introduce recurring revenue into a system, it's much more predictable on a year-to-year basis,” Mersch said. “And it's usually a much higher gross margin, which investors love.”

Gaming market update: Investor takeaway

The gaming market represents a challenging landscape for investors when it comes to the future.

That said, experts agree that enthusiasm should be present in the outlook for gaming investments — even though the reality is settling in after 2020's excess spending days

The digital hobby is not going away, and the market will continue to engage with its growth in 2022 and beyond.