Gamechangers: A video games market on the cusp of revolution

finnCap Consumer Sector analysts see that the video games industry is on the cusp of a distribution revolution; there is an explosion of gaming platforms coming which will likely address a broader, device-agnostic market, potentially significantly expanding the addressable market. 

With video games clients already actively taking advantage of new ways of working in the sector, finnCap Group would like to hear from you if you are an operator or disruptor in the video games ecosystem, or an associated company interested in this area.

The one thing that is certain about the UK consumer sector, for the foreseeable future, is uncertainty. The latest finnCap Consumer Sector quarterly report (read the summary of the report here) predicts “a highly challenging and uncomfortable period lies ahead for most of the consumer sub-sectors”.

But that irony does make the surprises all the more surprising, none more so than in video gaming. While the attractiveness and growth potential of the video games sector is already well known by investors, over the last three months, our analysts have identified a growth potential that is perhaps even greater than we thought.

The growth potential is perhaps even greater than we thought

Despite the gloom of uncertainty that hangs over the UK consumer sector, there is already considerable momentum and growth in video gaming. Globally, based on updated forecasts by Newzoo (published October 2018) the video gaming industry was estimated to generate revenues of US$135bn in 2018, to grow at a CAGR of +9.3% through 2021, with an estimated size of US$174bn. Notably, this was a significant 24% uplift from the US$140bn previously forecasted only 18 months prior.

We figured 2019 would amount to more of the same. Not so, it turns out.

In fact, the long-term growth potential in video games appears even greater than we predicted just three months ago, and we think industry growth forecasts may well be significantly raised again in the next 6-12 months.

Technical partners and co-development partners like Sumo Group will likely reap the big rewards

What is driving this growth potential?

This year feels like it is shaping up to be a pivotal one. There have already been several likely industry-changing events in the first four months of 2019, that look set to define the global video games sector for the next 5-10 years, if not decades. Indeed, we cannot recall so many industry-defining events, so soon, in any one year.

The start of the video games streaming era 

Firstly, Google announced Stadia, its video gaming platform and the first truly cloud-based system, able to run on PC, mobile, tablet and TV.

Stadia is Google's official entry into the higher specification end of the video games market, thereby reinforcing the attractiveness of the sector. The goal of Stadia is to ‘democratise’ access to gaming by removing the need for players to invest in $500+ hardware (i.e. a video game console or high-end PC).

What this achieves is a revolution in how games are distributed. It makes 'console' games in effect available to billions of broadband and mobile users, versus the 150m+ console owners. The key implication of 'play video games anywhere' is its potential to significantly enlarge the addressable market.

Industry-changing events that look set to define the global video games sector for the next 5-10 years

As such, we see Stadia as marking the start of the video games streaming era. Having said that, we recognise that streaming technology’s promise for the mainstream may take many years to fully materialise.

However, the potential for growth – and for industry disruption – is far too great for industry players and investors to ignore. With Stadia expected to be launched in H2 2019, Google’s move looks likely to be comparable to the impact of Netflix on the film and television industries.

Secondly, Apple is expanding its presence in the video games industry. Apple Arcade, its own video game subscription service, is scheduled to launch this Autumn on iOS and Mac, and therefore available on various Apple devices including iPhone, iPad, Mac and Apple TV.

Apple's expansionary move seems to be a further illustration of the technology giants' interest in gaming. We know Apple Arcade features over 100 exclusive games, with Apple having established collaboration with co-development partners developing games for Arcade, such as Sumo Group [SUMO; MCap £216m].

Indeed, with the growing prominence of games-as-a-service, technical partners and co-development partners like Sumo Group will likely reap the big rewards from this new direction of the gaming industry.

We should see leading content providers as amongst the main winners.

Content is king

We expect other such moves from key industry players and technology giants interested in the video gaming sector. It does not seem an outlandish fantasy to think that Amazon may follow suit.

Such an explosion of streaming and other gaming platforms can only be a positive for leading content providers. We see content (i.e. intellectual property) becoming even more valuable as these distribution platforms compete for the best available titles in order to differentiate themselves.

As such, we should see leading content providers (e.g. Frontier Developments* [FDEV; MCap £378m]) as amongst the main winners.

Interestingly, we did not expect 2019 to see the arrival of the next generation of video game consoles (from Sony, Microsoft and Nintendo). Nevertheless, Sony has recently released, much earlier than expected, the first key details about its next next-gen PlayStation console to replace the current PS4. Meanwhile, details on the Xbox 2 by Sony's competitor, Microsoft, are expected at E3 (a leading video games industry trade show) in June.

The announcement of a new generation of consoles indicates that the gamechanging coup by streaming platforms could still be several years away. But the explosion of gaming platforms (of which console is just one) can only drive demand for more content/IP and an increased propensity to outsource.

finnCap would like to hear from more developers and operators interested in this area

That said, the pace of change denoted by events like Google’s and Apple’s industry-impacting developments so far this year cannot be ignored.

As the video games sector goes through continuous waves of transformation, we now see the emergence of a number of new distribution platforms which can significantly expand the audience for games. Developers are providing ‘more content in more ways' and we’re likely to see some new, key beneficiaries:

1. Technical partners, ‘work-for-hire’ and co-developers – such as Sumo Group – given the increasing complexity of games and the growing games-as-a-service.

2. Leading content developers – such as Frontier Developments – given players increasing demand for higher quality games and platform distribution owners’ need for exclusive content.

The potential opportunity in this area is huge, perhaps greater than we’d previously thought, and finnCap would like to hear from more developers and operators interested in this area.

If indeed these latest surprises are the trends that define the global video games sector for at least the next 5-10 years, then the next generation of video games console could be the industry’s last.

 

If you are one of these companies, whether you are considering growth financing or not, our expert team would like to hear from you.

We see the enormous potential in this burgeoning era of the gaming sector. 

 

Contact our Consumer team:

Matt Goode, Corporate Finance Director - mgoode@finncap.com 020 7220 0575
Peter Smedley, Research Director - psmedley@finncap.com 020 7220 0548