Esports is poised to become a billion-dollar industry this year. Source: AP Photo/Terrin Waack
Despite estimates that the video game industry could see its first revenue decline since 1995, Morgan Stanley remains bullish on the $138 billion gaming industry for 2019.
The financial services firm said in a report published last week that it foresees six long-term trends playing out this year (and beyond), despite a series of “execution missteps, guide downs, delayed release timings, competitive fears and increased concerns about the hit-driven nature of gaming turned investor sentiment.” Shares of Activision Blizzard (ATVI), for instance, are down nearly 9% since the news in early January that game developer Bungie, behind the hit series “Destiny,” is ending its partnership with the Santa Monica, California-based publisher.
“There are no more ‘B’ titles — gaming is now a world of ‘As’ and ‘Ds,’” wrote Morgan Stanley (MS) Equity Analyst Brian Nowak, who points out that only the best content will prove successful.
To that end, here are six positive gaming industry trends Nowak sees playing out this year and beyond:
Recurring revenue streams will see steady growth
Over the last five years, game publishers have doubled-down on in-game purchases, online multiplayer services, and game subscriptions as a significant revenue stream, regardless of whether they’re a traditional game publisher and hit-maker like EA (EA) and Activision Blizzard or newer mobile-focused outfits such as Playlab Games, maker of games such as “Super Slam,” and “Cut the Rope” publisher ZeptoLab.
Morgan Stanley estimates that such features constituted roughly 25% to 45% of total console and PC spending since 2012 and will grow to nearly 70% of total console and PC spending by 2025. For publishers, those features translate to revenue stability over a longer, more sustained period of time — a significant change from just a decade ago, when the majority of gamers spent the vast majority of their money on games upfront to purchase content.
Competition among online game stores
Online distribution for games has become more competitive over the last 18 months. Late last year, for instance, Epic launched its online PC game store — a direct shot at services like Steam — with more generous revenue terms. (Epic takes a 12% cut of a game’s sales versus the standard 30%.) That’s making some waves. On Monday, game publisher Deep Silver announced its survival shooter “Metro Exodus” won’t launch on Steam, as its two predecessors have, and will launch on Epic’s game store instead.
Even Apple (AAPL) could get into gaming with a subscription service that would regularly charge to play a digital catalog of games. While details are scarce, an Apple gaming service wouldn't just be a juicy source of incremental revenue but a huge competitor.
Cloud gaming goes mainstream (eventually)
For years, gaming companies have chased after the holy grail: cloud gaming. Cloud gaming would enable people to stream games to their homes thanks to a savvy combination of hardware, high-speed internet and cloud computing on the back-end. And while some services like PlayStation Now, Shadow, Liquid Sky and GeForce already offer people the ability to stream games across different devices, those games are frequently less-demanding titles.
That’s very likely to change, thanks to companies like Microsoft’s (MSFT) upcoming xCloud service, and Google (GOOG, GOOGL), which is developing Project Stream, the latter of which could let testers play “Assassin’s Creed Odyssey” through the Chrome browser on their laptops and desktops. Morgan Stanley estimates such cloud gaming services could replace today’s traditional consoles in five to 10 years.
More gamers
Expect the number of gamers to grow at a single-digit compound annual growth rate (CAGR) across video game consoles, PC and mobile through 2015, driven by factors such as growing smartphone market penetration and higher player incomes. According to Morgan Stanley, that should yield higher gaming publishing revenues.
More time spent playing games
The amount of time people spend playing games has grown at a 4% CAGR over the last 15 years, according to the Bureau of Labor Statistics, even as people spend less time doing other recreational activities. Blame the ubiquity of technology and society’s change in consumption for that. That should be a boon for game publishers: The more time gamers actually spend playing, the more likely they are to make in-game purchases and in turn, boost publishers’ top line revenues.
Growth in esports
Those unfamiliar with the esports phenomenon — where spectators watch live streams of pro-gamers compete for prizes — may be surprised to learn the industry could generate $1.1 billion in revenues this year. Market intelligence firm Newzoo estimates esports revenues could reach $1.65 billion by 2021. For game publishers, that signals another potent revenue stream in the years to come.
“With this backdrop, we favor investing in the best studios like Rockstar and Blizzard and strongest IP as they are positioned to drive and capitalize on these trends,” wrote Nowak. “This latter point is important, because in our view, one impact of the growth of digital gaming and more free-to-play options like ‘Fortnite’ is that gamers are playing their favorite games for longer, they have more options. And only the best content, at launch and throughout the life of the games through engaging in-game content, will be successful.”
