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juillet 17, 2020
The Global Gaming Industry Takes Center Stage
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juillet 17, 2020

The Global Gaming Industry Takes Center Stage


MACRO INSIGHT

The Global Gaming Industry Takes Center Stage

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juillet 17, 2020

 
Executive Summary

Over the last 20 years, the gaming industry has evolved from a crude arcade style into an immersive, graphically gorgeous, social form of mobile entertainment, featuring live video streaming and supported by cloud-based infrastructure. It is also now a $135 billion industry and, like the early days of internet advertising, has yet to be fully monetized (Newzoo, December 2019). Already one of the world’s largest and fastest-growing entertainment industries before COVID-19 hit, gaming has exploded during the lockdowns, bringing an activity once considered fringe more deeply into the social mainstream.

1

Why We Take Video Games Seriously -  It is estimated that there are currently 2.6 billion gamers across the globe, a roughly twofold increase in just five years. At $135 billion, the size of the global video game industry is now larger than global film and music combined, where roughly one-third of the global population says they play or watch video games (Newzoo, December 2019).

2

A Growing Industry: New Ways to Pay, Play, Engage - and Monetize – New formats such as “free to play” are accelerating adoption.  While most investors dismiss the industry as “hit-driven,” our global team evaluates gaming publishers with durable franchises and predictable streams of free cash flow.  Further, like the early days of internet advertising, the attention shift towards gaming has yet to be fully monetized.  Many well-known games monetize at a fraction of the average cable channel or live sports on a per hour basis (ClearVoice Research, August 2019).  The vast opportunities in mobile gaming, particularly in the emerging world, only enhances the industry’s appeal.

3

New Technology Is Making a Significant Difference - The global adoption of smartphones, coupled with increasingly powerful 5G networks and cloud-based infrastructure, is likely to fuel continued growth in mobile gaming, allowing the industry to scale rapidly at a low marginal cost.

4

Global Gaming Is Attracting New Players - Younger users still comprise the majority of gamers, but just as movies and music have penetrated the majority of the global population, we expect a greater proportion of the global population to play video games over the long term. Furthermore, the proliferation of mobile options is helping to bring more women into gaming, a trend we expect to accelerate meaningfully over the coming years.

5

ESG Considerations: Cybersecurity and Government Regulation – Video games are considered by some as problematic and a growing public health issue, similar to other addictive behaviors. The industry will be faced with a number of challenges in the upcoming years, including costs associated with enhancing cybersecurity and regulatory compliance.

In summary, as traditional social media user growth slows, we expect the next major social network to exist inside virtual gameplay. The global buildout of 5G infrastructure and the resolution of technical hurdles to high performance game streaming remain mid-term growth catalysts for cloud gaming. But we expect seismic changes in consumer behavior and a new target audiences to help establish a new long-term growth trajectory for gaming activities, steeper than the one evinced pre-pandemic.

 
 

Advances in technology, new social formats and monetization methods are bringing an activity once considered fringe more deeply into the mainstream. Video gaming is now arguably on its way to becoming the world’s new favorite pastime, creating a new realm of virtual property, currency and entertainment. Like the early days of Internet advertising, the attention shift towards gaming has yet to be fully monetized, and many AAA games earn only a fraction of what cable TV and live sports earn on a per hour basis.1

 
 

1. Why We Take Video Games Seriously

Over the last 20 years, the gaming industry has evolved from a crude arcade style into graphically gorgeous 3D mobile entertainment featuring live video streaming and supported by cloud-based infrastructure. Newzoo’s 2019 Global Games Market Report estimated that there are currently 2.6 billion gamers across the globe, a roughly twofold increase in just five years. Add in another couple hundred million people who watch gaming clips or competitions, and roughly one out of every three people worldwide say they play or watch video games.2

With $135 billion in annual revenue in 2019, gaming is already bigger than the music and film industries combined (Display 1), with much faster growth.3 We estimate that more people played video games in 2019 than those who played any other sport, with the exception of soccer (Display 2). In short, we see the rise of gaming as a structural shift in the entertainment industry, which is getting an added boost from the lockdowns.

 
 
 
Display 1: Global Gaming Is Larger Than the Global Film and Music Industries Combined
 

Source: Newzoo, IBISWorld, Musically 2019

 
 
 
Display 2: Esports Are More Popular Than Many Traditional Sports
 

Source: IBISWorld – June 2019; Newzoo – December 2019

 
 

 

Our investment approach seeks to identify global trends that are investible across the developed, emerging and frontier markets, and we see gaming as a tremendous growth opportunity in every region, driven by new ways to play, pay and engage; new mobile and networking technologies that are expanding gaming markets in the emerging world; the rise of a passionate younger generation, who we expect to increasingly shape global consumption patterns; and the emergence of new players, including older generations and a growing group of women who game. We see an industry with an abundance of long-term, secular growth drivers.

As video games grow in popularity and shift from home consoles to mobile devices,4 the industry has attracted increased scrutiny from government authorities, and we are closely tracking the regulatory risks and opportunities in both developed and emerging markets. What follows is our base case for digital games as a sector worth holding.

2.  A Growing Industry: New Ways to Pay, Play and Engage

While most investors dismiss the industry as “hit-driven,” our global team evaluates gaming publishers with durable franchises and predictable streams of free cash flow; Notably, the global games market generated over $150 billion in sales in 2019, eclipsing a record year at the movie theater box office for the second consecutive year and further demonstrating the staying power of publisher franchises. Our global investment team focuses on what we consider two of the most promising subsectors: 1) studios building mobile and cross-platform experiences, and 2) video game publishers.

Current and future growth drivers include new ways to play (multi/cross platform, streaming), pay (full price, free-to-play, and subscription) and engage (esports and live streaming), which MSIM estimates will result in double-digit industry sales growth globally through 2025. Furthermore, high levels of player engagement within global gaming franchises, the opportunity for operating leverage as businesses increasingly transition to a recurring-revenue subscription offering, and the vast opportunities in mobile gaming, particularly in the emerging world, only enhances the industry’s appeal.

Despite this appeal, the most well-known (AAA) titles still only monetize at a rate of 65% of the average cable channel and roughly 25% of live sports on a per hour basis.6 For example, Fortnite (developed by Epic Games, a privately-held company) likely represents the largest persistent media event in the industry’s history; As of today, the game has likely had more than six consecutive months with at least one million concurrent active users, all of whom are participating in a largely shared and consistent experience that spanned multiple “seasons,” storylines, and events. Fortnite began as a game, but has evolved into a social network and medium through which brands, intellectual property, and stories express themselves. As Matthew Ball has argued, the ultimate ambition of game-makers is to rule the metaverse ─ a vision of the internet future, in which people will work, play, shop and conduct business simultaneously in the physical and digital worlds.7 The online stores and live concerts held inside games like this are early prototypes of what the metaverse could be: a new virtual economy.

3. New Technology is Making a Significant Difference

The global adoption of smartphones, coupled with increasingly powerful 5G networks and cloud-based infrastructure, has fueled rapid growth in mobile gaming, allowing the industry to scale rapidly at a low marginal cost.

In 2019, consumers spent $135 billion on video games (excluding hardware), up from $35 billion 15 years ago, making the spending category more than three times larger than the global box office and four times larger than the recorded music industry.8 In recent years, video game companies have significantly expanded their reach and enhanced their technology infrastructure, implementing internet capability in traditional consoles and introducing games onto modern mediums, such as smartphones (Display 3).

 
 
 
Display 3: Video Game Spending Continues to Grow
 

Source: IBISWorld, MSIM Estimates – June 2020 - Forecasts/estimates are based on current market conditions, are subject to change, and may not necessarily come to pass

 
 

 

Incumbent platform companies in the United States and Japan have launched online gaming services, opened digital stores for distribution of games, and broadened their devices’ access to the array of digital content available. While their sizeable bases of serious gamers and longstanding relationships with top publishers and developers give them substantial momentum, we expect global Internet platforms to leverage their scale, reach, technical prowess and financial resources into viable game-streaming businesses.

Lacking the legacy infrastructure of landlines and cables, many emerging markets moved straight to building mobile networks as the digital age dawned. Led by China, many are mobile-first societies, skipping past the desktop computer and landline phone and adopting mobile communications; we expect a similar pattern in gaming, with users forgoing single-purpose consoles in favor of smartphone devices which can play mobile games. With smartphone penetration rates climbing across emerging markets, mobile gaming was ranked the largest entertainment segment in 2019, per App Annie, reaching 45% of the global games market at $68 billion, a 10% increase from 2018.

Mobility represents the key driver for growth in the emerging and frontier markets. As connectivity improves in Latin America, Emerging Europe, the Middle East and Africa, and Asia-Pacific, new and traditional industries are experiencing rapid growth (Display 4).

 
 
 
Display 4: Mobile Gaming Is Big and Growing, Especially in the APAC Region
 

Source: IDC, MSIM estimates – June 2020 - Forecasts/estimates are based on current market conditions, are subject to change, and may not necessarily come to pass.

 
 

 

Consumer spending on games is expected to grow to $196 billion by 2022 (a 9% compounded annual growth rate), and mobile gaming will grow to represent almost half of the entire games market by 2022 (Display 5).9

 
 
 
Display 5: Smartphone Gaming Is on the Rise
 

Source: IBISWorld, MSIM estimates – June 2020 - Forecasts/estimates are based on current market conditions, are subject to change, and may not necessarily come to pass.

 
 

 

As user growth slows in developed markets, the industry will shift focus to the developing world, driven by increasing levels of smartphone penetration, 5G network connectivity, and rising income levels.

4. Global Gaming Is Attracting New Players

While younger users still comprise the majority of gamers today, there are indications that older generations and past gamers have re-engaged with video games during the pandemic and will likely continue gaming as the world normalizes. This represents a significant structural change which we expect to yield an increased customer lifetime value for publishers, along with incentives to create long-lasting global franchises marketed across the developed, emerging and frontier markets.

Furthermore, the proliferation of mobile options is helping to bring more women into gaming, a trend we expect to accelerate meaningfully over the coming years. Over the past two decades, the number of female gamers has increased steadily and as of January 2020 make up half of the gaming population according to both the Entertainment Software Association (ESA) and the Interactive Software Federation of Europe (ISFE).

We see an exciting opportunity for a more equitable and inclusive games industry, as despite the growth of the video game industry over the last several decades, there remains a lack of both diversity and inclusion in video game content and studio cultures. From virtual dating to playing strategy games, women now account for nearly half of all players in China’s $16.4 billion mobile gaming industry, which has been proactive in gender inclusivity across areas such as game design, storylines, and social media advertising.10 However, only 28% of the gaming employees are female, transgender, or another gender identity, according to the International Game Developers Association; this lack of diversity and inclusivity has trickle-down effects, from the way women are depicted within games to the number of jobs offered to female developers in an industry dominated by men. Gender equality has been the focus of much inquiry and consideration in the gaming community, though we nevertheless see room for improvement. Although our data shows gaming is more prominent in fast-growing markets in Asia Pacific, Latin America, and the Middle East and Africa, the gender ethnicity gap between creators and players remains unaddressed. As stakeholders, we remain excited about the opportunities for traditionally underrepresented gamers creating communities of budding digital creatives, whose imaginations are waiting to explode into the digital arena. A closer understanding of diverse player motivations, as well as perspectives and preferences toward game content, allows stakeholders to make more informed, culturally-sensitive decisions in the development, marketing, and management of their games, will ultimately benefit shareholders in the long-run.

 
 
"
As stakeholders, we remain excited about the opportunities for traditionally underrepresented gamers creating communities of budding digital creatives, whose imaginations are waiting to explode into the digital arena."
 
 
 

 

5. ESG Considerations: Cybersecurity and Government Regulation

Following an era of unprecedented growth, the video game industry faces a number of challenges. In an environment where maintaining trust is business critical, we expect the costs of enhancing cybersecurity and regulatory compliance to grow over the coming years. Given that use of video games has been considered problematic by some and a growing public health issue, it raises the possibility of introducing and/or strengthening governmental regulation, similar to other addictive behaviors (e.g., alcohol consumption and gambling). At present, policies regarding gaming mostly exist in Asian countries such as South Korea and China. In-game purchasing systems have also generated a great deal of debate on the need for gaming-specific regulation and consumer protection across many jurisdictions. The use of parental controls is largely up to the parents or guardians themselves. Government regulation could influence the availability of such control, and state-financed campaigns could raise awareness among parents regarding the usefulness of such features. However, there is currently no evidence on the efficacy of such measures in helping keep gaming behavior within limits and under control.

Purchasing Behavior: A Look at “Loot Boxes”:  With the shift to digital media and micro-transactions available on internet-enabled devices, app-store purchases are constrained only by credit card limits and self-restraint. Following the introduction of the mobile app store in 2008, a substantial selection of games were released for mobile devices, and anyone could develop game applications relatively cheaply and market them online for a profit; A previously untapped market, the mobile sector now accounts for 51% of the global games market.11  The payment model for gaming has transformed as consumers have transitioned from purchasing consoles and titles in-person to downloading free mobile apps that earn revenue through advertisements and in-game purchases.

This introduction of loot boxes in games has been controversial. A loot box is a virtual item which can be redeemed to receive a randomized selection of virtual items, or loot, like a player's avatar or weapons and armor. Similar to gambling, gamers pay real money for a randomized micro-transaction that gives users a chance to win a random virtual prize of perceived value. The Federal Trade Commission’s decision to consider potential regulation of loot boxes in the United States is one of many reactions to this growing trend in the video game industry globally. To date, while most attempts to ban or regulate in-game loot-box mechanisms have been unsuccessful, the growing scrutiny of such practices by government officials globally deserves the attention of investors in the video game industry. In our opinion mobile gaming publishers in the emerging markets, for example, can generate more than half their yearly sales from loot boxes and in-app purchases, where over 45% of gamers purchase in-game items.12 Given that the marginal cost to deliver a virtual good is zero, loot boxes are enormously profitable – and controversial - for the industry.

“Not all screen time is equal”: Children and minors globally are spending significant amounts of time on smartphones and digital content, yet studies show that certain forms of gameplay not only improve hand-eye coordination and problem-solving skills, but also the mind’s ability to process information.13 The proliferation of screens and their potential impact among children and young adults, however, has sparked concerns including the consequences of screens on actual brain development, though research on this topic remains in its infancy. A recent paper found video gaming to be the one form of entertainment neutral in its effects on teen depression, in contrast to social media applications.14

6.  Our Outlook on Gaming

As traditional social media user growth slows, we expect the next major social network to exist inside virtual gameplay. The viewing audience for online video game broadcasts is estimated at about 380 million worldwide,15 with almost half of those considered enthusiasts, and we expect lucrative branding opportunities within forms of gaming-focused social networking. As gaming capabilities expand into new form factors and devices (such as Virtual Reality and Augmented Reality) new experiences evolve and monetization models are unlocked, such as subscriptions, audience/spectator micro-transactions, and cloud-gaming. Today’s fans can transport their imagination into a virtual space and share their creativity with friends and the world. Many companies are facilitating, promoting and financially rewarding the ongoing generational change in which younger audiences don’t merely “consume” content, they “create” and “remix” it. Driven by seismic changes in consumer behavior and preferences following the COVID-19 pandemic, we expect gaming activities to establish a new long-term growth trajectory, steeper than the one evinced pre-pandemic. While younger users still comprise the majority of gamers, we expect that as they age, an increased proportion of the global population will want to play video games. This structural change will allow for increased advertising attention to new forms of media, including esports, video streams, and the games themselves. The global buildout of 5G infrastructure (particularly in China, Korea and Japan) and the resolution of technical hurdles to high performance game streaming remain mid-term growth catalysts for cloud gaming, which allows gamers to compete across both platforms and geographies and will be the next phase in the industry’s evolution.

 
 
 
Display 6: A Summary of Global Industry Regulatory Changes16
 
 
 

 

1 Citi/Goldman Sachs – April 2020

2 Newzoo Global Games Market Report – December 2019

3 MatthewBall.vc – January 2020

4 App Annie State of Mobile – February 2020

5 Alliance Bernstein – March 2020

6 ClearVoice Research – August 2019

MatthewBall.vc – January 2020

MatthewBall.vc – December 2019

9 Morgan Stanley Research – January 2020

10 Quartz – “Chinese Gamers are a Dominant Force in the Country’s Gaming Market” – May 2018

11 BOND Internet Trends – May 2019  

12 University of York – November 2019

13 JAMA Network – November 2019

14 IBISWorld – Video Gaming – December 2019

15 Goldman Sachs Research – Nov 2019

16 Jefferies Research / PwC – Video Game Regulation – November 2019

 

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steven.quattry
Global Emerging and Frontier Markets Investor
 
jessica.whitt
Global Emerging Markets Head of ESG Research
 
jorge.chirino
Emerging Markets Investor
 
 

This paper is a collaborative effort by the Morgan Stanley Investment Management Active International Allocation, Emerging Markets and Frontier Equity investment teams.

 
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