Video Games Go from Niche to Mainstream

Massive, enduring shift in consumer behavior presents significant opportunities for active equity managers

Key Takeaways

  • We view the evolution and mainstreaming of video games as an enduring, secular trend that presents significant investment opportunities.
  • Video game usage is up for all age groups and platforms, reflecting broad adoption of the technology.
  • Evolution of gaming is part of the larger transformation of the entertainment, media and technology landscape. We would argue that active management and security selection are required to navigate this rapidly changing environment.
Nalin Yogasundram
Global Growth Equity

We expect transformation of the video gaming industry to continue over time. Because of gaming's broad popularity and the degree to which users can engage on different devices and in different forms, the video gaming industry has developed into a relatively large, dynamic, investable industry with attractive growth characteristics.

From Pac-Man® to Max Payne, game cartridges to digital downloads, two-player games to massive multiplayer online, arcades to video games have experienced a stunning evolution. How ubiquitous are video games in our culture? Even Angry Birds has its own movie! Indeed, some social scientists hypothesize that the comparatively low labor force participation rate can be explained by people dropping out of the workforce to play video games.

Just look around—the ubiquity of phones and mobile devices means that games are always accessible everywhere. And the abundance of cheap computing power and memory means desktop games offer stunning graphics and interactive video experiences that rival any Hollywood film. Entire age cohorts now watch other people play video games more than they view traditional sports such as football, baseball and basketball.

Several Trends Are Boosting Growth

Media consumption. According to "The Nielsen Total Audience Report Q1 2018," video gaming consumption has almost doubled as a percentage of all forms of media consumption since 2012. See Figure 1. Modern video games provide rich, engaging entertainment across numerous platforms, and consumers are responding.

Market size. The video game market is growing rapidly. Market size is an essential metric we use to gauge an investment opportunity. In the case of video gaming, content spend in the U.S. is escalating, reaching $29.1 billion in 2017. That amount grew at a compound annual growth rate of 6.56% from 2010-2017. See Figure 2.

Digital distribution. Downloadable content (DLC) has transformed the way people consume games. DLC ranges from free content to help build community and loyalty for a given game to updates that gamers can buy quarterly, monthly or even weekly.

Digital distribution of content benefits everyone in the gaming ecosystem—players get the content they want immediately and routinely, companies have generated greater customer loyalty and profitability, and investors have seen higher margins and more stable, year-round revenues.

Mobile. Smartphones and other hand-held devices allow people to play games almost anywhere. Notably, the variety of such devices has broadened video gaming's user base to include younger children and more women. Mobile usage has driven significant growth in the gaming space since 2016, as measured by the average daily time spent playing per adult age 18 and older. See Figure 3.

Live streaming. Live streaming has indelibly changed how people interact with games, bringing solo and small-group activities to massive audiences online by broadcasting real-time competitions or spectators viewing games in real time. For example, according to Twitch, roughly 15 million people daily watch live content via the Twitch platform—and what they're viewing most is other people playing video games.

Esports. Also known as egaming, esports is a broad description for competitive video gaming that includes both online gameplay and the viewing of tournaments. Vast audiences can view via Twitch, YouTube or TV. Many consider it as video gamers' online equivalent to pay TV sports channel ESPN. Like traditional sports, esports generate revenue streams from various sources, including media rights, advertising, merchandise sales, and sponsorships.

Virtual reality (VR). VR technology has immense potential but inherent challenges such as relatively high development costs and questions about actual user demand. However, the appeal of complete immersion in three-dimensional worlds represents a compelling frontier for the space and another source of revenue for top video game companies.

Secular Themes Can Help Drive Shareholder Value

People are increasingly playing video games and spending less time reading newspapers or consuming entertainment via old-fashioned cable TV. These shifting trends have impaired the media and communications industries, along with the stock prices of entertainment production companies like Viacom and AMC Networks.

Understanding these trends allows our investment team to identify industries and companies that are flourishing, such as video gaming, and those that are declining, like traditional media (e.g., newspapers, magazines). We believe the secular theme of video game growth is significant, long lasting and may provide a strong tailwind to companies like Electronic Arts Inc. and Take-Two Interactive Software, Inc that possess strong fundamentals.

Electronic Arts is a leading developer and distributor of video games based on a portfolio of intellectual property that such established brands as FIFA, Madden NFL, Star Wars, Battlefield, the Sims, and Need for Speed. Take-Two develops and markets video games such as Grand Theft Auto, L.A. Noire, Max Payne, Midnight Club, and Red Dead. We believe these companies have solid fundamentals, strong competitive positions within the industry and the potential for outperformance.

We view these opportunities through the lens of our investment process, which combines fundamental bottom-up research with an understanding of enduring secular themes. Secular themes, such as those we see in the fast-expanding video gaming industry, are long-term trends that can drive growth for years, even decades, within or across industries or sectors. We believe that identifying accelerating businesses at inflection points within a given theme can deliver price appreciation and outperformance for our investors over time.

Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

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