26 February 2019, London – Edison Investment Research, the leading investment research advisory company, publishes its latest Video Games report – UK Video Games: Heterogeneous not homogenous, which analyses the fragmentation, trends and opportunities in the games industry.
The games industry has evolved into a global business that commands a larger market than television, film and music combined, breeding some of the world’s biggest companies with collective revenue of $138bn, according to research from Newzoo. The industry has shown continuing healthy growth across all major segments, including mobile, console and PC. Overall games revenues are forecast to grow in excess of 10% between 2017 and 2021, according to Newzoo, mostly powered by mobile gaming (smartphone and tablet), the largest single segment of the games industry, which accounts for 51% of total market share. This may slow, however, as smartphone adoption nears saturation.
Streaming likely to be the next big revolution in gaming
Streaming is likely to be the next revolution, whereby a game is rendered in the cloud and streamed live to a ‘dumb’ (or depowered) console or digital TV. Although still a number of years away from significant user penetration, streaming is already being used at the margin to help monetise the back catalogue. What is holding it back from the mainstream is that streaming requires robust global communications infrastructure, reduced latency and high-bandwidth, low-cost distribution. Whether a publisher model or a channel model is used (such as Netflix or Spotify), significant investment is going into developing effective video game streaming models and the associated hardware. The result is that the publisher/console owner has a direct relationship with the consumer and the ability to offer content direct through a subscription.
Digital and downloadable content moves the industry to a lower-risk model
Aided by technological innovation, there has been a revolutionary transition in the past 10 years from physical distribution (DVDs/cartridges) to digital download, significantly reducing game launch costs, stock-risk and the associated need to discount prices heavily, depending on the unpredictable nature of a game’s success.
Digital distribution and downloadable content (DLC) is helping to move games towards a lower-risk, more predictable recurring revenue model. Some are calling it a second revolution, whereby shorter, more limited, core games can be launched and then added to through DLC, based on user feedback and demand. Furthermore, free or premium content can be used to improve the game, extend its life or offer an opportunity for incremental future revenue from the title – strengthening the ongoing direct relationship between publisher and game community.
eSports’ role in extending the life of games, growing audience and ancillary revenues
Concurrently, gaming has seen the rise of eSports, an industry sub-sector that will have a significant impact on gaming’s future development. eSports provides a way to support a community around successful titles, extending the life of the game, growing its audience and providing ancillary revenue streams from advertising, sponsorship and merchandising. Presently, eSports has relatively low visibility beyond its selected audience but events can draw huge live-streaming audiences on Twitch / YouTube and competitions can offer six-figure cash prizes, potentially offering attractive future exposure for investors.
China remains the largest single market
The single largest market will continue to be China, forecast to reach $50.7bn in 2021. The size of the Chinese market is hard to ignore but cultural differences mean that many Western IPs struggle for relevance and the recent hiatus in Chinese regulatory approvals (now resolved) has affected the pace of growth for mobile games in China. This has further encouraged local industry giants to look for growth and diversification overseas.
UK gaming has flourished, benefitting from VGTR
Meanwhile, the UK gaming industry has flourished in recent years, benefitting greatly from the VGTR introduced in 2014 as part of the government’s broader efforts to support the creative industries. It provides a tax credit of up to 20% of production costs for developers making commercial video games that are certified as culturally British. This has allowed UK games companies to compete on a level playing field with other key overseas territories.
Richard Williamson, director of TMT at Edison Investment Research said: ‘The games industry has grown exponentially from its beginnings as a fast-moving playground for enthusiasts more than 40 years ago into a $138bn behemoth that has spawned some of the world’s largest companies and created a global superpower that produces revenues greater than the film, television or music industries.
In this report, we have tried to analyse the market, exposing the drivers behind the industry as well as the development of gaming alongside the development of pioneering technology. As such, we hope to give companies and investors valuable insight into the future of this increasingly lucrative market as it matures and continues to innovate.
What is certain, is that this global industry is continuing to grow, evolve and fragment. UK Video Games: Heterogeneous not homogenous highlights the opportunity for investors to understand the ever-changing landscape of this fascinating and expanding industry.’