31 July 2020
Download - August 2020 – 1 of 6 Insights
2020 has been a challenging year. The human, social and economic costs of the coronavirus pandemic have been devastating across the world, leaving few untouched. But during a dismal time for many, some have thrived – and the video games industry has been a star performer.
The sector, already familiar with strong growth in recent years, has seen huge acceleration as people shuttered at home have turned to virtual worlds for solace and social interaction. In the mobile segment alone, gaming apps surged to the highest levels ever recorded with 14 billion downloads in Q2 2020. Spending on mobile games in Europe grew 12% between February and March alone to US$740 million, setting a new monthly record.
The global video games sector is projected to gross US$159 billion in 2020 (+9.3% YoY), with 48% (US$77 billion) of that in mobile (+13% YoY). The launches of Xbox Series X and PlayStation 5 later in the year are also expected to help the console segment comprise 28% (US$45 billion) of the market, with YoY growth of +6.8%. Around 55% of gamers will be in Asia-Pacific, the sector's fastest growing region (+7.7% YoY).
Listed giants like Nintendo, Activision Blizzard and Take-Two have seen share price rises of more than 50% since March 2020. Privately held developers like Epic Games and Playrix have also been busy. At a time of economic turmoil and tumbling advertising costs, such developers massively expanded their marketing budgets, spending more than US$2 million a day on online ads. This gamble has paid off: in April 2020 alone, Playrix generated almost 100 million app downloads (compared to previous monthly averages of 50 million) and saw more than US$200 million in player spending. The company has already indicated it will look to deploy its pandemic profits toward future M&A opportunities.
Other developers, especially in mobile, will no doubt find themselves similarly flush. Across the segment globally, downloads and daily in-app payments are up and average costs per install (the price spent on ads to achieve a download) were down 33% from March to April 2020. And with private equity and venture capital funds sitting on US$ 2.5 trillion in dry powder, opportunities in this outperforming sector will be hard to resist. As we slowly emerge from lockdown, there will surely be a few war chests ready for deployment.
A massive injection of cash and new gamers is not the only impact of coronavirus. The cessation of nearly all physical social gatherings – in particular, live music and sporting events – has hastened an existing trend within the industry: the evolution of video games and esports as social platforms.
As major sporting franchises like La Liga, the Premier League and Formula 1 had to cancel or postpone events during lockdowns, each turned to video games and esports as a means of engaging with their communities. While questions remain about how sticky the increased interest in gaming and the esports segment will be as lockdowns lift and live events return, many in the industry are looking to social networking features as key to retention. The sense of intimacy which comes from connecting with friends and favourite celebrities while gaming, they reckon, is a compelling proposition. After all, the 19,000 live spectators who attended the 2019 Fortnite World Cup in New York was but a fraction of the 2.3 million concurrent viewers on YouTube and Twitch.
Fortnite is a great example of the mass social appeal video games can offer. In May 2020, the virtual world of Fortnite played host to a series of live concerts by rapper Travis Scott. Each consisted of a 10-minute set of cataclysmic visuals which saw a gargantuan avatar of Scott walk among his fans, all virtually assembled on a familiar battlefield in their own (expensively) customised avatars. As exploding stars painted saturated colour across the sky, revellers were blown hundreds of metres into the air and the world disintegrated all around – an experience not easily replicated in real life. The developer, Epic Games, has since confirmed the concerts were attended by more than 28 million live attendees. This builds on a similar event Fortnite hosted last year with electronic DJ, Marshmello, which drew over 10 million live attendees.
All this has not gone unnoticed. In July 2020, Sony invested US$250 million in Epic Games to acquire 1.4% of the Fortnite developer. That stake looks expensive, valuing Epic Games at nearly US$18 billion — more than 20 times the valuation Tencent agreed when it took 40% for US$330 million eight years ago. It's worth noting, however, that the recent Travis Scott events also resulted in a fourfold increase in streaming for his latest music video. Analysts believe the Japanese giant may see Fortnite as an ideal platform for cross-pollination with its wider IP portfolio and VR hardware to create 3D social experiences bringing together gaming, music and film.
The drive to integrate across media is not limited to Sony. Google, already strong on the social media and game streaming side with YouTube, has recently entered the cloud gaming segment with its Stadia platform. The initial faltering steps of that platform may obscure a sleeping giant as the technology develops, exclusive games are added and the benefits of lower consumer entry costs which have so well-served the mobile segment start to kick-in. The ever-present Amazon, already active in film and music with its Amazon Prime and Amazon Music services and game streaming via Twitch, also has its sights fixed on video games proper. It has recently announced the development of its own cloud gaming platform (Project Tempo) and has Amazon Game Studios busy developing games to take on the likes of Fortnite. Apple, already a pre-eminent player in mobile and tablet devices, has also entered the gaming space directly with its Apple Arcade subscription service to sit alongside Apple TV+. Microsoft continues to have success with the Xbox Game Pass subscription service and is working on its own cloud-gaming platform, ProjectxCloud – a potentially lethal combination that may yet produce the definitive "Netflix for video games".
If the current console generation has told us anything, it's that exclusive content continues to be the killer app so crucial to the success of a gaming platform (whether physical or in the cloud). Witness the recent success of PlayStation and Nintendo over Microsoft. Might Google, Amazon and Apple be on the lookout for a handful of choice development studios to bring that must-play exclusive to their platforms?
So, does the convergence of all these factors (pandemic profits, the acceleration of gaming as a social platform, and a push toward cross-media integration) herald buoyant times ahead for investment and M&A activity? Early signs look promising:
As we move through the rest of 2020 and into 2021, expect to see more acquisitions and continued investment in the industry as incumbents pursue strategic goals and financial investors seek returns in one of the principal outperformers of the pandemic economy.
by Jo Joyce