Photo by Florian Olivo on Unsplash
In the late 1970s and early 1980s, the video game industry was young and exciting. New technology was allowing people to play video games at home for the first time and investors were throwing everything they could at it, in the hopes of striking big returns.
However, in 1983, the North American video games market crashed. This was due to market saturation and a lack of quality control as publishers rushed to get titles to retailers as quickly as possible.
The industry never truly returned to the pre-crash peaks when you adjust for inflation, though it appears to be getting close. So are we seeing the beginnings of a new bubble, or is there genuine cause for investor optimism?
Record Revenues
There are countless times in living memory where investors have got over-excited about a particular asset or industry and driven its share price up to unjustifiable, astronomical levels. Recent examples include the 2017/18 Bitcoin boom, the dotcom bubble and potentially even Tesla right now.
Several major gaming companies, including Electronic Arts, Take-Two Interactive, Ubisoft, and Microsoft are all trading near or above record levels.
But these high share prices are not without merit. These companies are posting record revenue and profit figures, and most are expected to benefit from the launch of the new generation of consoles in the coming weeks.
iGaming
iGaming, which is the term for businesses that offer sports betting and online casino games through a website or an app, is also performing well. The 2018 changes to US federal law have meant new markets have begun opening in the country and many of the established players from around the world are trying to build a market share.
Even in established markets like Europe, revenues continue to grow with gross gaming revenues from casino games alone expected to reach €25 billion this year.
Recent innovations of “live casinos” have helped to make online casino games more engaging for many players, which has led to more customers and longer gaming sessions.
Mobile Gaming & Microtransactions
While both new consoles and innovations in iGaming are helping to drive stronger revenues and stock prices, the biggest drivers of growth in the gaming industry come from mobile games and microtransactions.
The microtransaction model has become ubiquitous in recent years. It started first with casual games played through social media sites like Facebook and smartphone apps offering the option to purchase in-game items and extra lives, but this has since found its way to other games.
Take-Two Interactive, one of the companies that have been enjoying a rising share price, has seen its revenues and profits surge thanks to microtransactions.
Its Grand Theft Auto Online game is generating significant revenues, despite it being more than seven years old. Red Dead Online is also helping to keep the two-year-old game alive. Both titles enjoy high levels of player engagement thanks to regular updates that keep users returning to the game.
In 2019, Take-Two made almost 60% of its profits from microtransactions in its online games, while in May 2020, the company announced that it had seen its profits increase by 116%.
Long Term Revenue
As well as helping older games to have a longer lifespan, the content that generates microtransactions doesn’t require the same level of upfront development that is required for a new game.
This means that video game developers are able to make more money for much longer periods of time from their intellectual property with lower associated costs.
Valve, the creator of Counter-Strike: Global Offensive, announced at the end of 2018 that the game would become free-to-play. The game, which was six years old at the time, remained incredibly popular with fans thanks to skins and other customisations that generated revenue through microtransactions.
The game still sees hundreds of thousands of concurrent players on the Steam platform, eight years after it was released.
A Good Investment?
Gaming companies are enjoying rising revenues and profits. The monetisation model for most video games has been evolving over the last few years to one that generates more revenue from fewer releases.
Based on this, and an ever-growing number of players, gaming companies may be good investments.
