The Power of Play

Is Everybody Gaming?

Worldwide, 31% of consumers play video games on a console, PC, mobile phone or other device.ⁱ And with each new generation, gaming expands its reach. Of course, the youngest generations are growing up in a world where gaming is an integral part of everyday life. But even the older generations are playing, helped in part by new technologies (such as mobile phones) that make gaming more accessible. In fact, according to YouGoviⁱ, 64% of weekly gamers play on a smartphone. No wonder, since almost every consumer owns one, the controls are easy to learn, and most titles are free to play.

Source: YouGov Gaming and Esports Whitepaper 2023 – Reaching gamers everywhere.

Not only does gaming have a strong user base, but people also value the time they spend playing gaming. In its 2023 research on the US video game industry, the Entertainment Software Association (ESA) found that nearly half of people say that video games provide the most entertainment value for the money they spend.ⁱⁱ

Moreover, gaming is expanding its reach. As Newzooⁱⁱⁱ notes in its 2023 report on how different generations engage with video games, gaming is spilling over into other forms of interaction. Gamers – especially younger generations – are weaving games further into their lives. They are joining and interacting with video game communities, socializing within game environments, and watching game-related content (e.g. esports, gameplay videos, or films based on games).

Combining these trends, we can only expect to see even higher participation rates among both older and younger generations in the future.

But the Gaming Industry is in Trouble

Despite the undeniable popularity of gaming among its users, the gaming industry is currently facing a turbulent period marked by widespread layoffs and corporate restructuring. Studio closures, layoffs, and project cancellations are casting a shadow over the industry’s success story. Amid these challenges, investors must navigate carefully and select the right investment options.

Gaming’s current problems have many causes, as industry expert Matthew Ball describes in a recent analysis^iv. Among them is the end of the pandemic boost that gaming received. Rising interest rates and inflation are also to blame. Modern game development is expensive, partly because of labor costs and partly because production costs increase with game quality and length (e.g. more immersive and life like visuals).

Gamer preferences and business models are also changing. Instead of boxed games, people now buy and/or download games online. In addition, many popular games are (almost) free to play. These free games can include (mobile-based) casual puzzle games, such as Candy Crush, but also (PC and console-based) online games like Fortnite or League of Legends. Other games, such as World of Warcraft are subscription-based. Either way, these so-called live service games are designed to keep people playing (preferably for years), with players paying for in-game upgrades, such as cosmetics, weapons, or other character enhancements.

For game developers, however, maintaining live service games is expensive. They must constantly provide players with fresh content (capable of supporting hundreds of hours of play), and they must operate the infrastructure to support millions of players (Fortnite, for example, has over 230 million monthly active players).

Still, Gaming Has Its Success Stories

Despite the turmoil, gaming still has success stories. They help our team to select the most likely beneficiaries of gaming’s strong position in smart homes. The most important item on their selection list: proven intellectual property (IP). Their reasoning? Games, like other media categories, have become increasingly concentrated in the hands of a few major content creators and franchises. What’s more, the unique characteristics of games ensure that these properties are even stronger than in other sectors.

For example, games benefit from stronger network effects and player lock-in. People use games to socialize and connect with their friends, reinforcing the network effect. In addition, people spend a lot of time and money customizing their characters and progressing through a game. Such an investment is hard to leave behind, creating a strong lock-in effect. Such effects make it harder for new games to break in, giving existing games an edge.

Looking at the top 10 of games of the last decade, we see the same franchises like Call of Duty (Activision, now owned by Microsoft), FIFA (now known as EA Sports FC owned by Electronic Arts), or Mario, Zelda, and Pokémon (all owned by Nintendo). In addition, many of the new titles that have reached top 10 status in the last decade are based on existing IP, such as Spiderman (Sony), Star Wars (EA), or Hogwarts Legacy (Warner Bros.).

Source: Dasym Research based on VGChartz and NPD Data.

Transmedia is an increasingly important part of the franchise strategies, but as Ball explains in his analysis^iv, the biggest players with the most popular IP are the most likely to succeed. They can afford the investment and bear the risk if a movie does not do as well as hoped, or profit if it becomes a blockbuster. Nintendo, for example, financed half the production costs of the successful Super Mario Bros. Movie.

So what do we invest in? The current main gaming holdings in the portfolio of the VanEck Smart Home Active UCITS ETF are Electronic Arts, Nintendo and Sony. They all have one or more top 10 titles. Moreover, Nintendo and Sony offer an added value through their consoles: the Switch (Nintendo) and the Playstation (Sony). In addition to the physical sales of these consoles, both companies also benefit from the additional revenue stream of digital game sales for which they receive a fee.

The prices of the securities in the ETF are subject to the risks associated with investing in the securities market, including general economic conditions and sudden and unpredictable drops in value.

It shows that despite the challenges gaming is currently facing, there are bright spots. Gaming remains a strong secular trend as gaming culture continues to spread and new gamers are added with each new generation and potential gaming device.