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The four largest “pure-play” video game companies have been star stock-market performers in 2017: Activision Blizzard (ATVI)
To some investors, outperformance by this industry may come as a shock. But there are reasons for it that make sense and reveal an ongoing trend that will not be quickly exhausted — and has the potential to develop in many directions.
Investors may not have been anticipating video game outperformance because of incorrect demographic assumptions — the stereotypical video-gamer being lampooned in mainstream media as a socially inept young male living in his parents’ basement. The real demographics of video gamers are very different, and changing quickly due to the rapid growth of video gaming on mobile devices.
Recent demographic and opinion studies reveal some surprising data:
- Most American adults believe there are more male than female video gamers, while in fact, the share of men and women who report playing video games is about the same (50% for men and 48% for women).Women age 18 and older are 31% of the gaming population — while boys age 18 and younger are only 17%.
- 48% of U.S. households own a gaming console.
- While a larger share of young people play video games, 58% of Americans between 30 and 49 play video games — and 40% of those between 50 and 64.
- The average gamer has been playing video games for 13 years.
Negatively focused mainstream media have emphasized violent elements in some video games, as well as the immersive and allegedly anti-social effects of gaming on gamers’ personalities. But research shows that game-players value both the personal and social effects of playing video games.
- 61% of video game players believe that some video games can help develop good problem solving and strategic thinking skills.
- 63% believe that some video games promote teamwork and communication, and 48% play socially-oriented games.
- 68% of parents say video games are a positive part of their children’s lives, and 62% of parents play video games with their children at least weekly. Most of those who do say that video games offer “a good opportunity to socialize with their child.”
In short, the American video game playing demographic is much wider and more diverse in age and gender (and, incidentally, in ethnicity) than commonly held stereotypes would suggest. Further, gaming is much more positively viewed by the public in terms of its constructive effects on personal development (tactical and strategic thinking), and on social interaction, than negative media concentration on violence and anti-social game elements has led many investors to believe.These characteristics of the video game market help explain why growth has been more robust than many analysts have anticipated.
While the demographic and opinion data we reviewed are from the U.S., we suspect that they are also true in the world’s other large video game markets — China, Japan, and Europe.
Video gaming is also part of the ongoing seismic shift away from traditional media and traditional media delivery systems. In markets where those traditional media were less established, video games are “leapfrogging” thanks to the internet, and particularly thanks to mobile internet access.
- 37% of American gamers who report playing more games than they did three years ago say that they are spending less time watching TV.
- 45% of all American adults think that video games “are a better form of entertainment than TV,” according to the Pew Research Center.
Part of this dynamic is due to the rapid shift of gaming from PCs and consoles (dedicated gaming devices) to mobile devices. The U.S. video game market is estimated to grow at a 4.9% CAGR from 2011 to 2019.However, mobile-device gaming is expanding at an estimated 37% annually. In part this is driven by convenience — the portability of mobile devices and their play-anywhere capacity. Cost is also a factor, since with mobile gaming the investment in a PC “gaming rig” or a dedicated gaming console is not required. This shift is also part of what is responsible for the expansion of the gaming demographic that has flown under many analysts’ radar — the fastest-growing segment in mobile-based social gaming is women over the age of 40.
Social gaming is also being driven by mobile gaming growth, with multiplayer, social-network games offering compelling user-acquisition dynamics. Social networks drive new users, especially in China, where Tencent has excelled in using its dominant chat and microblogging platforms as funnels for game engagement.
Surprisingly, of massive-multiplayer online games such as World ofWarcraft or League of Legends, the free-to-play games gross more revenue globally than the paid-only games. How? The “free-to-play” mobile games have in-game advertising, but more, they have in-game transactions which encourage players to make micro-purchases to achieve game goals. Those “micro-purchases” can rapidly become “macro-purchases”: we heard anecdotally from one colleague about a player of Tencent’s popular Clash of Clans game who has spent in excess of $10,000 on the game in the past year.
More Growth to Come
Besides the ongoing shift to mobile, and the demographic market expansion it is facilitating, two video game segments are outstanding in their future growth potential.
First is e-sports — that is, consumption of video gaming by spectators. Viewing is expected to double from 2.4 billion hours in 2013 to 6.6 billion hours in 2018. This includes the consumption of individual professional gamers’ video feeds as entertainment (facilitated by platforms like Alphabet’s YouTube (GOOG)
Second is virtual and augmented reality (VR and AR). VR is a totally immersive experience, typically with a headset, while AR “layers” computer-generated images over one’s still-visible surroundings. By 2018, game and app revenue for VR is expected to be about $3.8 billion — and this will accelerate as technology improves and as mobile devices are recruited for VR/AR apps. In recent data, 20% of most-frequent gamers expressed an intent to purchase VR equipment in the next year.
Finally, of course, we may mention the vast expansion of the Chinese market. Video gaming — and particularly mobile gaming — has hit the Chinese market at a very opportune time in terms of the development of communications infrastructure, giving gaming an opening to grow past traditional entertainment media. Further, we may observe quite unscientifically that mobile video gaming appeals to some of the same cultural patterns that once led to the robust growth of gambling in Macau — for example, an enthusiasm for speculation. Now, though, the speculative stimulus can be available in every Chinese middle-class pocket — only at the cost of a micro-payment to get that little edge to push your clan to victory.
Investment implications: The largest pure-play gaming companies, as noted above, are Electronic Arts (EA), Take Two Interactive (TTWO) and Activision Blizzard (ATVI). Hong Kong-based Tencent (Hong Kong: 700HK) is the major gaming company in China, getting about half its revenue from gaming, supported by its other robust social and communications platforms. Other major participants include Microsoft (MSFT), through its acquisition of Mojang (creator of the popular Minecraft game); its Xbox console; and its HoloLens AR headset, as well as Facebook (FB), through its Oculus VR headset. While Sony (Tokyo: 6758JP) remains significant because of its Playstation console, we believe that the momentum in the industry is clearly more in mobile platforms. The pure-play companies we have mentioned have all experienced rapid price appreciation this year, and we would look for pullbacks as attractive entry points.
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