Portfolio Expansion Pack: The Gaming Industry

Whether you are a videogame-junkie, a gaming n00b (AKA a player new to the game), or don’t play videogames at all, the rapidly growing gaming industry deserves your attention. As a major segment of the entertainment industry, gaming should not be overlooked when considering investment portfolio diversification. In this blog post, we will help boost your XP (AKA experience points) as it relates to thinking about gaming from an investment standpoint.

UNLIKE TRIX – VIDEOGAMES AREN’T JUST FOR KIDS!

Videogames have a wide demographic audience, extending far beyond children. I can vouch for this personally – first becoming a gamer when I was 10 years old and growing the habit as an adult. I was first introduced to gaming while watching my dad play Doom on the computer before I was given a Super Nintendo Entertainment System (SNES) and Super Mario Bros. 3. Now, as an adult, I joke I have more consoles and gaming platforms than rooms in my house. Though I may be more on the “videogame-junkie” side of things, I am far from alone in being a gamer.

In fact, an ESA survey found that 65% of American adults play video games with three out of five reporting they play games daily. And while the most active gamers may be younger, the ESA reports that the average gamer is 35–44 years old (See Exhibit 1). Moreover, Statista reports that more than 72% of all players are 18 and older, with more than 43% of gamers being over the age of 35, and 23% older than 50.

The gaming industry is quite diverse, with genre’s spanning everything from puzzles and strategy to action and racing. Some people are virtually fighting in WWII (e.g., Call of Duty), others are playing as orcs, trolls and mages in a fantasy world (e.g., World of Warcraft and Diablo), and many are challenging friends on who has the highest scoring vocabulary (e.g., Words with Friends). Further, you don’t have to be a hardcore gamer to be considered a player. Maybe you are a more casual player – crushing some candy while waiting for a doctor’s appointment, or finally catching that Pikachu while having lunch at the park. The gaming space has evolved to include something that will appeal to almost everyone.  

DIGITAL GAMING MARKET

Prior to the pandemic, the global digital gaming market was massive. In 2019, the games market generated ~$144 billion in revenue worldwide – envious growth considering revenues were only $66 billion in 2012. In fact, gaming is one of the most profitable segments of the entertainment industry. For comparison, in 2019 Box Office and Music revenues were ~$42.5 billion and ~$20.2 billion, respectively.

While 2020 was a tough year for many industries, the gaming market thrived. One survey found that 82% of global consumers played video games and watched video game content during the height of the pandemic related lockdowns. NewZoo estimates that the total revenues for the global games market reached nearly $178 billion in 2020. This represents a roughly 24% increase in only one year! Further, the industry is on track to continue growing with several estimates showing that the market will reach more than $200 billion in the next few years (See Exhibit 2.A–2.C).  

This sentiment is mirrored by leaders in the industry. In a recent earnings conference call, Mr. Kotick – the CEO for Activision Blizzard, Inc. – stated that as the company looks forward, it sees “a long-term trend of more people gaming than ever before in more geographies and on more platforms.”

Additionally, Mr. Zelnick, the CEO of Take-Two Interactive Software Inc., reported that “the company anticipates the overall addressable market for the gaming industry to be notably larger going forward than it was before the pandemic.” Games One, a gaming industry advisory firm, also predicts persistent growth for the gaming industry, valuing the public game-industry market at more than $2.1 trillion as of market close on April 23, 2021. Private markets are booming in the gaming industry space as well. According to Games One, there were no game-specific venture capital (“VC”) funds from 1972 to 2009, and now there are about 15 firms that specialize in the space, with approximately $1.58 billion assets under management (“AUM”) as of February 2021. This again highlights the significant growth in the sector over the last decade.

GEOGRAPHIC AND SEGMENT BREAKDOWN

Nearly 50% of global gaming revenues are generated in two countries – China and the United States (“U.S.”) (See Exhibit 3). In 2020, the Asia-Pacific region held the largest share of the video game industry (~49%), with China accounting for roughly 25% of global revenues. North America is the next largest region with roughly 26% market share – however, the U.S. holds around 24% of the global revenue, with the rest of North America only accounting for about 2%.

In 2020, NewZoo estimates that there were 2.8 billion total players, reflecting an approximately 6.4% increase year-over-year (“YoY”) (See Exhibit 4). In terms of the number of game players, the Asia-Pacific region is home to the most global players (~54%). Several other regions also experienced significant increases in the number of players in 2020 (e.g., Middle East and Africa (“MEA”) at +9.9% and Latin America at +7.7% YoY). It is not surprising that the Developed regions have the largest player growth.

Developed countries have widespread access to internet and high penetration rates for advanced technologies (e.g., PCs and Smartphones). For example, in 2019, 92.5% of individuals in the U.K used the internet. This is significantly higher than in Indonesia (45.7%). Likewise, in 2020, the U.K. had a Smartphone penetration rate of 78.90% compared to Indonesia’s 58.60%. As developing countries increase both access to the internet and ownership of tech devices, they will likely see persistent upward trends in the number of players.

The gaming market can be segmented into three broad categories: 1) Mobile, 2) PC, and 3) Console (e.g., Xbox, PlayStation, Nintendo Switch). In 2021, it is estimated that the Mobile market will make up more than 50% of total revenues, generating approximately $90.7 billion. The PC and Console markets are expected to earn roughly $36 billion and $49 billion, respectively (See Exhibit 5).

According to Fortunly.com, just under half of PC owners use their devices to play video games. The PC market has experienced declining market share over the last few years. While all types of PC games have decreased in terms of earned revenues, this is sharpest for browser PC games (See Exhibit 6). In contrast, Consoles have experienced more variation in market share, not showing a consistent downtrend. This likely corresponds to the release of new generation consoles or long-awaited game releases which generate spikes in Console demand. For example, in 2017 the Nintendo Switch was released, followed by the release of the Switch Lite in 2019. More recently, both PlayStation (PlayStation 5) and Xbox (Xbox Series X/S) released next-generation consoles, though both systems have faced global supply shortages.

MOBILE GAMING MARKET

As mentioned above, the mobile market makes up roughly half of all gaming revenues. In a survey of U.S. gamers, 61% reported using their Smartphone for gaming, with 52% and 49% reporting using a Console or PC, respectively. Game developers are responding to the demand for Mobile games, with roughly 40% of game developers reporting that they are actively developing games for the mobile platform.

The ability to play mobile games is largely contingent on having access to a Smartphone. Analyzing the breakdown of active Smartphone users in 2020, there were approximately 3.6 billion users worldwide, representing a 7.8% increase YoY. Most of these users are from the Asia-Pacific region, representing 56% of total users worldwide with roughly 43% of the Asia-Pacific population using Smartphones (See Exhibit 7). As with the number of players, Smartphone users are most concentrated in developed regions. More than 80% of the North American population and 73% of the European population are smartphone users.  

A key contributor to the growth in the mobile gaming market will be in the continued adoption of Smartphone usage worldwide. As discussed above, developing countries, which hold much of the world population, have significant runway to expand Smartphone use. Exhibit 8 depicts the Smartphone penetration rates (i.e., the percent of smartphone users in the population) for the 20 countries with the most smartphone users in 2020. Even in the top 20 countries, the penetration rates are substantially higher for developed countries than for developing and emerging countries. Specifically, the average penetration rate is 75.47% for the developed countries and only 50.66% for the developing countries.

Conducting some back of the envelope calculations shows how the mobile market could grow. Applying the 75.47% developed country penetration rate to the population of the developing countries (assuming total population remains constant), implies that the number of Smartphone users could increase by roughly 0.75 billion. NewZoo stats indicate that about 75% of all Smartphone users play mobile games. Applying this rate to the estimated new Smartphone users indicates that there could be roughly 0.56 billion new mobile gamers. Applying last year’s average $33 spend/user to the potential new gamer population implies a possible increase of roughly $18.5 billion in revenues.

GAMING INVESTMENT PERFORMANCE

With the significant growth in the gaming industry, several exchange traded funds (ETFs) were created to track industry performance. Such ETF’s include the Global X Video Games & Esports ETF (NASDAQ:HERO), Roundhill BITKRAFT Esports & Digital Entertainment ETF (NYSEARCA:NERD), VanEck Vectors Video Gaming and Esports ETF (NASDAQ:ESPO), and Wedbush ETFMG Video Game Tech ETF (NYSEARCA:GAMR).

Looking at the performance of these four ETF’s since the start of 2020, all four ETFs have increased in value – nearly all doubling by May 31, 2021 (See Exhibit 9). Further, they have outperformed relative to two benchmarks: 1) the S&P 1500 Consumer Discretionary Sector, and 2) the S&P 500 Communication Services Sector. When analyzing the trailing twelve month returns, all four ETFs have outperformed the two benchmarks, as well as the Dow Jones Industrial Average and S&P 500 Index. Three of the four ETFs (excluding ESPO) outperformed the NASDAQ Composite Index, which includes tech heavy hitters including

Apple, Amazon, and Tesla. However, returns cannot be looked at in isolation. Analyzing the standard deviation (“Std Dev”), a common measure of risk, from January 2020 – May 2021 we see that three of the ETFs (excluding GAMR) have higher returns and lower risk than the S&P 1500 Consumer Discretionary Sector (See Exhibit 10). Looking at the performance of these funds Year-to-Date (“YTD”), while reporting positive returns for the year, the performance is lagging benchmarks.

BREAKING OUT: DIGITAL GAMING GOES BEYOND THE HOME  

The gaming industry has truly blossomed into a world of entertainment. A night in or out can include gaming with friends, “coming over to watch the game” does not apply just to traditional sports anymore, and being a professional gamer pays! While there have long been barcades – combining food, drinks, and games – these establishments have evolved alongside the gaming tech. For example, Los Angeles is now home to Two Bit Circus – an indoor amusement park or circus that features a variety of digital gaming entertainment.

Two Bit Circus also includes high-tech virtual reality (“VR”) gaming experiences such as VR Pods (See Exhibit 11), free-roaming team VR experiences, and 4-player VR systems. On a smaller scale, games are also encouraging people to get outdoors. For example, Pokemon GO is an augmented reality (“AR”) mobile game that requires players to physically move around in the real world to capture Pokemon.

Additionally, the world of eSports (AKA electronic sports) has grown significantly in the last decade. eSports is essentially organized, competitive videogaming. Individuals or teams from around the world compete with viewers watching along in-person, on TV, or online (e.g., Twitch). In 2014, NewZoo estimated that global eSports earned approximately $0.19 billion in revenue. NewZoo estimates eSports will earn $1.08 billion in 2021 and reach $1.62 billion in revenue by 2024. Revenue from eSports comes from a variety of streams, with the largest being Sponsorship (~60% est. for 2021). Other revenue streams include media rights, publisher fees, merchandise and tickets, as well as digital and streaming fees. eSports has an audience that rivals that of traditional sports, with more than 400 million viewers turning in to these events. In comparison, the average audience of regular NFL games is between 15 – 17 million. As the audience grows, so do the arenas. Opening in 2018, Hangzhou, a city in China, opened its “esports town,” with plans to continue expanding (See Exhibit 12). In 2019, Singapore opened Bountie Arena – a 6,600 square foot premiere eSports and gaming lifestyle venue. Viewing its website, you will see a host of familiar partners, including Coca-Cola, Monster Energy, and Nvidia.

Recently, TSM, a competitive videogame organization based in Los Angeles, announced it was changing its name to TSM FTX. FTX, a Hong-Kong based cryptocurrency exchange, is paying the organization $210 million over 10 years (~$21 million/year) to change its name. In comparison, Citibank pays approximately $21 million/year for the Mets stadium naming rights, and MetLife pays approximately $19 million/year for their contract with the Giants and Jets. But the individual players also profit off the industry. The players can generate income from winning tournament prizes (See Exhibit 13), as well as from sponsorships, endorsements, and league salaries. In fact, some of the top players in the world can earn more then seven figures per year. Now – even colleges are offering varsity eSports programs, with championship prize money acting as scholarships for the winning students. Even outside of the most elite players, there is money to be made in being a good gamer. For example, one 24 year-old works as a professional video game coach as a contractor through LegionFarm. She recently stated that she earns roughly $3,000/month, on an after-tax basis to help coach other, less experienced, players. Their contractors come from all over the world, and the hourly salaries range from $5/hour – $15/hour based on the level of experience the coach has.

CONCLUSION

While growing prior to the pandemic, the gaming industry received a HP (AKA Health Point) boost during lockdowns as many people turned to video games to escape the outside world – seeking refuge, relaxation, and connection from the confines of their homes. In fact, analyst and managing director of Games One noted that “[in] 2008, games proved recession-proof. In 2020, games proved pandemic-proof. We can forecast that, pending an extinction-level event, the gaming industry will forever prosper.”  While it should be noted that the pandemic year is likely an anomaly in the size of the growth in the gaming industry, and there may be some declines in revenues in the near term, any decline is likely to be short-lived. Given the potential market size along with ever advancing technologies, the industry is likely poised for consistent growth over the long-term.

Sources

Top Video Game Industry Statistics (2021) | Fortunly

2020 Essential Facts About the Video Game Industry - Entertainment Software Association (theesa.com)

Video Game Industry Statistics, Trends and Data In 2021 (wepc.com)

2020 Gaming Industry Statistics, Trends & Data (Biggest Study) (gamingscan.com)

How Much Is the Gaming Industry Worth in 2021? - TechJury

Mobile Gaming Demographics [35 Curious Stats for 2021] (techjury.net)

Video Game Demographis - 25 Powerful Stats for 2021 (techjury.net)

Newzoo | Games Market Data

World Development Indicators | DataBank (worldbank.org)

This 24-year-old earns $3,000 a month as a professional video game coach—here's what it's like (msn.com)

A Pro E-Sports Team Is Getting $210 Million to Change Its Name - The New York Times (nytimes.com)

EA’s CEO on the pandemic-driven video game boom and streaming’s future (msn.com)

Roblox Tops $45 Billion on First Day of Trading as Gaming Booms - The New York Times (nytimes.com)

In a World Let Loose, Video Game Makers Are ‘Doubling Down’ - The New York Times (nytimes.com)

Among Us: You're the Impostor - The New York Times (nytimes.com)

What is eSports? A look at an explosive, billion-dollar industry | CNN

Hangzhou opens its own esports town - Esports Insider

In 2020 The Audience Of NFL Regular Season Games Dropped (forbes.com)

Gaming industry charts another blockbuster year despite post-COVID concerns | S&P Global Market Intelligence (spglobal.com)

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