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The Business of Gaming: 2016 and Beyond

This is not investment advice. The author has no position in any of the stocks mentioned. WCCF TECH INC has a disclosure and ethics policy.

To say that 2016 has been a mixed year for the games industry would be a bit of an understatement. We've seen growth across the board, particularly so with mobile gaming. There’s been a constant looming threat of takeover against one of the big three independent publishers, as well as acquisitions. Long awaited tech (VR) has finally launched and is establishing its foothold. Throughout all of this, the games have sold. Some well, some not so, and this is what the industry is all about.

Wccftech has been bringing you coverage on gaming finances for the latter half of 2016, with an aim for expanded coverage in 2017. Working from this, here’s our roundup on the major companies for the year, plus assessments on 2017 and the direction they could take.

If you've yet to read Adrian's assessment on 2016/17 finance in tech as well as major global economic talking points for 2017, it's worth a read as this article focuses quite specifically on gaming and there are of course broader themes which he discusses that could significantly affect the industry. You can find that article here.

An Ever Growing Industry

Games are huge, this is a simple fact of life now. Little can represent this better than the assessment by company SuperData. Their end of year report indicates that the sector has generated an estimated $91 billion in revenue. The mobile sector generated the largest of this, topping at just over $40bn indicating just how large mobile gaming is now, dwarfing all but the PC with just under $36bn. It comes as little surprise, then, that there is increased focus on mobile by traditional gaming companies, a trend that will likely increase.

What may come as a surprise to some is the sheer size of the PC market. The vast majority of this revenue is through free to play (F2P) games, though what is interesting is that premium PC games only trail console revenue, each bringing in $5.4bn and $6.6bn respectively. Growing in line with the size of the PC market is eSports and gaming video. Both now have links to the current generation of consoles, but the lions share is PC based. What can be expected is growth in this area, which has been particularly noted by Activision Blizzard (NASDAQ:ATVI) who have indicated plans for the future.

Possibly the biggest loser is virtual reality, considering the pre-launch hype. Premium VR hardware (Oculus Rift, HTC Vive and PlayStation VR) have shipped roughly 1.5 million units, with Sony contributing half of this due to the lower price point and having no competition in the console market. The likely reason for Sony not hitting the 1m mark was due to insufficient supply, a result of Sony’s caution limiting the number of units produced. The low supply of Oculus Rift units, due to a component shortage, as well as the movement controllers not being launched until this month also means that the Oculus lost out against the HTC Vive. This is also a contributing factor in lower than expected software sales, even resulting in one developer stating there’s “no money in it”.

The Boom, Blowout and the Switching of Nintendo (TYO:7974)

Nintendo is briefly mentioned in our end of year tech coverage and the fact that they have had a mixed year to say the least. It’s impossible to talk about gaming without mentioning Nintendo, one of the oldest companies in the sector. 2016 has been a positive year for Nintendo by any sense of the word.

At the top of the year the company announced changes to their board, combating the stale corporate governance that permeates a large number of Japanese companies. It was a smart move and one that only expanded on the fact that Nintendo were already looking to make changes after the huge losses that came with the failure of the Wii U.

The real boom came with the launch of Pokémon Go and the subsequent rise in share price as well as the knock on effect to sales in other Nintendo products: The DS and 3DS hardware had a marked improvement, as well as older Pokémon software. The later released Pokémon Sun and Moon are now Nintendo’s fastest selling games in Europe and the Americas. Following the release of Pokémon Go the share price rose exponentially, from just short of 15,000 Yen to a high of nearly 31,000 on the 19th of July. This same boom, however, wasn’t met with the launch of Mario Run given that the Pokémon release meant the market had mostly priced in future Nintendo IP releases on mobile, plus of course the revenue model that Nintendo chose to adopt for Mario Run which was priced considerably higher than the average mobile game. Unlike Pokémon Go, actually developed by Niantic, Mario Run also represents the first mobile game developed by the company. As such, it's likely they're still learning their way and may tweak the model as they roll out to other platforms (Android on day one seems likely, as Mario Run will be released iin 2017 for Android) and additional games.

2017 has the potential to be a very good year for Nintendo, for a number of reasons. I personally have my doubts that the same lightning that struck with the Wii will once again hit the Nintendo Switch, but it has a higher potential than the Wii U ever had. Combining the home console and portable side of gaming, with a large battery life, gives the Switch a good base to work from. In some respects Nintendo seems to be building on the success of their portable consoles. The reason mobile gaming has become as huge as noted above is that the smartphone is now of course ubiquitous and people don't have to carry around another device with them to game on the go. Sure, it's effectively free of course if you want the Switch as a home console, but will it actually drive sales in and of itself? This is unclear. What is clear is that further expansion into the mobile market is almost inevitable and Nintendo has huge potential if they bring over the likes of Zelda, Donkey Kong, Kirby and Animal Crossing.

Also keep in mind that should the Switch be a critical and/or commercial failure, it is quite possible that this may be the last home console the company makes, potentially sticking by their portable consoles and going the way of that other great former maker of hardware, Sega, by just making games for other platforms. If this happens, it's unclear how much of a drag on the firm's bottom line the Switch would be, but it's something for an investor to consider.

Battle in the Boardroom: Ubisoft (EPA:UBI) vs Vivendi (EPA:VIV)

A large shadow has been lurking over Ubisoft for a considerable length of time. That shadow is Vivendi. Ever since the takeover of Gameloft, also a former Guillemot run company, eyes have been on Ubisoft and Vivendi. There has been a constant battle in the boardroom, Vivendi never proposed representation, likely on the back of what has been a reasonably good year for Ubisoft. Sales have risen and The Division is Ubisoft’s fastest ever selling title, as well as a brand new IP for the company to work with. In addition, the acquisition of Ketchapp and a strong list of releases for the near future gives the Guillemot family a good base to work from.

However, the recent purchase of shares by Vivendi, giving them over 25%, has resulted in what can best be described as a plea by Ubisoft. The core problem for the French company is that their actions, and stagnation, has led to them being seen in a negative light. ‘Another Ubisoft Game’ has come to describe the fact that large releases by the company, even those in largely different genres, have almost identical mechanics running throughout. The use of open worlds, random collectibles littered throughout and not much cohesive content to hold them together has become synonymous with their releases. Consumer apathy has been noticed, particularly with their flagship Assassin’s Creed franchise where the last main instalment has sold just five million copies compared to a series average of 9.5 million. This led to an announced year off for the series, to potentially return in 2017.

The future for Ubisoft is undoubtedly mixed. The looming threat of Vivendi will be there until something final happens, be it an acquisition or a shoring up by the Guillemot family. One of the best things Ubisoft can do is simply release a strong set of games. For Honor, South Park: The Fractured But Whole and Tom Clancy’s Ghost Recon Wildlands are all confirmed releases. In addition, the strong possibility of an Assassin’s Creed release also pushes their potential even higher. However, strong games by themselves don't really help if they don’t sell well and provide strong earnings. Should the recent strong sales continue Vivendi will likely be fended off as long as good results last as other major shareholders will not want to rock the boat while the getting is good. In this sense, Vivendi is in a great position, if the firm does well, they sit and hold an appreciating asset in Ubisoft as the company value increases, if Ubisoft stumbles, opportunity knocks to push for board representation and potentially an acquisition. It'll be an interesting time to watch, in that sense one may be inclined to think that Ubisoft is a good investment bet with either good earnings and appreciating share price or a takeover bid coming. The downside risk of course is if Vivendi decides it's no longer interested. A bad year combined with a Vivendi selloff would hit the stock hard.

Electronic Arts (NASDAQ:EA) to Continue the Winning Run?

EA are in a strong position right now and, for the most part, have had a stellar 2016. All year they have beaten expectations, now up to the 14th straight quarter of doing so. Powering this were huge releases like FIFA, Madden and UFC2. In addition, the next quarterly report will indicate just how well Battlefield 1 has done. The largest downside for the company has come with their last large release, Titanfall 2. Released just a week after Battlefield 1 and also being a shooter, it has failed to meet expectations and even sold less than the previous entry.

What should be noted is that on the day of writing this (December 23rd), EA has seen an increase in their share price of 0.89%, breaching the $80 mark. Considering the fact that the first half of the year saw shares below $65, the recovery is strong and closing back in on their all-time high of $85, indicating a renewed confidence in the company the stock in the last 52 weeks up about 17%. The strengths of EA next year will be the release of yearly titles like FIFA and Madden, but also large releases such as Mass Effect: Andromeda and a second Star Wars: Battlefront title and, logically, avoiding a case of going into competition with themselves and effectively ruining a game's chance to impact as much as it could have.

Activision (NASDAQ:ATVI): Contraction, but Forward Thinking

Activision have had what could be considered a relatively quiet year, at least that was the case until the last two months. Since the end of October, share prices have fallen $9 from $45 to the current level of $36. Part of this is due to the tepid consumer reaction to the latest release in the Call of Duty franchise. Infinite Warfare reported a worldwide drop in sales of close to 50% compared to the series high that was Black Ops III. Series fatigue is certainly a thing and after twelve years of Call of Duty games it certainly appears to be affecting CoD.

This isn’t to say that Call of Duty: Infinite Warfare was a failure. It was still a reasonable success and has sold well. The real runaway success of the year was the launch of Overwatch, where it wouldn’t be an overstatement to say it’s taken the world by storm. In addition to this, the successful release of the Legion expansion for World of Warcraft, as well as a constant revenue stream through downloadable content and subscriptions has kept the company healthy.

Beyond the sales of games, it was only two months ago that Bobby Kotick talked about his plans for Activision and the moves they have made for the future. 2017 will feature a link with CBS and feature the launch of a Candy Crush game show, being Activision’s first real use of their acquisition of King for $5.9 billion in November 2015. King, being one of the largest mobile publishers in the world, also gained Activision a large share in the mobile market. As has been discussed earlier, this is now the largest in gaming measured in revenue and is only expected to grow. It can also be expected that Activision will allow more of their IP’s to be used in this way, following on from the Netflix exclusive animated show Skylanders Academy, based on the Skylanders game and IP.

The variety of options that Activision has available is the reason why 2017 will be a strong year for the company. The takeover of MLG and announcement of an Overwatch league, as well as intentions of moving more of its games into eSports also means that the company is in a good position to control what is already close to a $1bn sector. A large number of Activision’s games are suitable for this and with planned releases for 2017 including large titles like Call of Duty and Destiny 2, there’s great potential just waiting to be grasped.

Microsoft (NASDAQ:MSFT) and Missed Opportunities

Microsoft is a fairly strange player in the gaming sector and has a turbulent time. From the (initially at least) top of the pile with the Xbox 360, the company had to settle for a distant second with the current generation with the Xbox One and has been there since launch at the end of 2013. Since then they have done all they can to make the console more appealing to the gaming audience and have made strides in this, but most of that took place prior to 2016. 2016 was seemingly all about the games for the company with big launches like Forza Horizon 3, Gears of War 4, Quantum Break and Dead Rising 4.

In addition to this, there’s a renewed focus on the PC by Microsoft, largely aiming to take advantage of what is undeniably a huge market. This focus has, however, come with a number of pitfalls. Microsoft IP’s like Halo, Gears of War and Forza have made their way to the PC, Microsoft hoping to take advantage of a larger audience but due to poor optimisation and the way the Windows Store interferes with the games themselves (inhibiting other applications, mods and more) has cost it dearly, damaging it in the eyes of PC gamers.

Considering the launch of the PlayStation 4 Pro by Sony, it’s surprising then that the only console launch by Microsoft was the Xbox One S, something that mostly brings them in line to the original PlayStation 4 by finally supporting HDR colours and slightly improved internal upgrades, giving Sony a huge advantage to build an audience for this half-generation step in hardware as well as keeping Microsoft out of the new VR trend.

The launch of Scorpio will inevitably direct 2017 for Microsoft in the gaming sector. Announced to be significantly more powerful than the PS4 Pro and with the ability to play 4K games at 60 FPS, though this sort of hardware at a budget price should be taken with a healthy dose of scepticism. There is, however, no doubt that Scorpio will support VR and considering the link Microsoft already has with the Oculus Rift (every rift comes with a wireless Xbox controller) there’s always the possibility of future collaboration. What will really benefit Microsoft is the fact that they have revealed that Scorpio will be compatible with all older Xbox One and Xbox 360 games, a key feature due to the popularity of backwards compatibility, to add on to future titles like State of Decay 2, Scalebound, Sea of Thieves and Crackdown 3.

Keep in mind however that Microsoft is of course the first company discussed here which is significantly more than a game company. It is highly likely to be more affected by changes in the global economic climate than changes to the gaming industry compared to the companies listed above. As such, do your homework, if you want to invest in companies predominantly for gaming, Microsoft will give you some exposure to this but exposure to a lot more general technology profile as well as gaming.

Sony (TYO:6758): Ahead of the Curve

PS4 Pro and PSVR inevitably mark a high point for Sony Interactive Entertainment, the division that encapsulates PlayStation and the video games Sony develops. Already the workhorse and by far the most profitable part of the company, 2016 has been an impressive year for the firm and offers so much potential for the future. The first thing that should be noted is that as of the start of this month, the PlayStation 4 (including the Pro version) has sold 50 million units worldwide. While this trails the previous entries, it still marks a strong point considering the relative infancy of the console.

The benefit this has is with the launch of the PSVR. As previously mentioned, Sony underestimated the appeal and the caution that came with that meant that the hardware sold out almost instantly. Extra appeal gained from the exclusive nature of VR, as well as the fact that there’s no competition in the console space, means that 2017 could see even larger sales of the VR headset which would provide a major boon to Sony and the game developers alike.

With no hardware releases expected for 2017, Sony will likely push forward with their expansion of PlayStation Plus (PS+), giving it even more value for money in an attempt to entice more console owners to subscribe. As of June this year, there were just short of 21 million active subscribers, leaving the company with room to expand. Working with this will be a large number of games, a lot of them developed internally, to promote the platform. Already announced are titles like Gran Turismo Sport, Horizon Zero Dawn, Nioh and Uncharted: The Lost Legacy.

Alongside PlayStation Plus, Sony also have two extra subscription services they will likely look to expand. PlayStation Now is a cloud based gaming service which has recently expanded to the PC and PlayStation Vue offers a mixture of live TV, video on demand and video recording service with a large quantity of providers having signed up to it already. The downside of this, however, is that it’s currently limited to the US.

Sony of course is the second company in our round up which has significant operations outside of the gaming unit. In many other sectors, the company is a somewhat faded giant. The heyday of Trinitron TVs and the Walkman are long gone, its mobile division (check out our mobile section finance write up in the coming days) is a long way behind industry leaders Apple and Samsung. Investing in Sony isn't necessarily going to give you a terrible return in 2017, but a lot of other divisions will likely continue to be a drag on the overall group bottom line so if you're looking for strong gaming exposure, you may again wish to consider looking elsewhere.

Alternative Funding, Private Companies and Other Movers

One thing that has had a very quiet year by all accounts has been crowdfunding. Kickstarter is by far the most popular method of this so far, but the rise of Gambitious and Fig offer an alternative method for companies to source funds. Particularly interesting is the way that Fig works, offering either a return on investment or for rewards like Kickstarter offers. Gambitious, on the other hand, only offers investment opportunities. Notable campaigns for the year have been the likes of Wasteland 3 ($3.1 million) and Psychonauts 2 ($3.8 million), both found on Fig, and the System Shock reboot ($1.35 million) on Kickstarter.

The slowdown of crowdfunding comes in part due to critical failures or mis-used funds in the sector (Mighty No. 9, Broken Age), as well as competition from the Early Access service offered on Steam which can be an easier route for developers to go down and even high profile names like John Romero were unable to get projects funded. 2017 will likely continue this trend, but the potential of Fig and Gambitious (the latter has successfully published fourteen titles so far) to offer a return on investment is something to watch.

There’s little more that can be said than the industry as a whole is on the rise and has been for a considerable time. A prediction by research firm Newzoo indicates that the industry as a whole will break the $100bn mark in the coming year. It’s an interesting and exciting time to follow the industry, even more so to be a fan when new IPs, games and considerably more media that ties into games is being released.

Do keep in mind however that gaming is in many ways a "luxury" industry. Hardware, games, peripherals etc are in no way going to be looked at as necessities if a global economic downturn hits (which is due) and consumer incomes fall. It's likely there is a reasonable degree of elasticity in demand such that falling incomes wouldn't hit the gaming sector too hard given the relatively low price point of the goods as opposed to say, a family holiday to to the Maldives, but some effect is likely if a sustained downturn materialises.