How the Transition to Digital Games and Other Tailwinds Are Helping the Video Gaming Industry

05 September 2017
Joshua Spencer , Portfolio Manager

How have smartphones changed the video game industry?

Smart phones have had a substantial impact on the video game industry. They've broadened the user base. They've also increased the amount of time that people play video games. They've opened up new ways of payment in the video game industry away from simply paying for the game up front and toward things like micro transactions, paying to access new worlds, new characters using some of the mobile pay services that we see around the world in the smart phone industry.


Why is the transition to digital games advantageous for gaming companies?

The move toward digital games is very advantageous for the gaming companies for a couple of reasons on the cost side, but also on the revenue side. On the cost side it's a little bit more simple and straight forward. It's more cost effective to distribute digital content than it is to sell CDs or cartridges. There doesn't need to be a distributor involved and the content is simply cheaper so it can drive higher margins for the gaming company. On the revenue side by having digital content it's also opened up new ways of monetisation because the content can be refreshed and through payments and micro transactions gamers can access new content, whether it's new worlds, new characters or accessing tournaments that wouldn't have been possible in a CD or a cartridge that was distributed.


What is exciting about the demographics of today’s gamers?

I think what's happened in the demographics of gaming over the years is that the group of folks who grew up playing games as kids have now grown up and they're older. They're in their 20s and 30s. They're continuing to play, and also their own children are playing, so we see a broadening of the amount of gamers and the demographic of gamers. What we also see is a broadening across genders, across geographies, and we see more engagement, more involvement in the gaming industry. We increasingly see not only game play, but also involvement in watching others play and watching content and looking for tips and watching even competitive gaming, so for the younger generations I think this is a new form of media and it's going to be one of the areas of rapid growth within consumer technology in the years to come.


What characterisitcs do you look for when investing in a gaming company?

There are a number of things that we look for in investing in video gaming companies. The first is that we want to see a breadth of content, a number of different strong high quality franchises. The second thing we like to see is very strong intellectual property, so things that can be repurposed, whether it's characters or games that can act almost in an evergreen manner so that franchises have life spans of multiple years. We also like to see scale in some of the digital monetisation engines, expertise in micro transactions, expertise in digital distribution, and finally we like to see a high quality management team, one that we can trust to invest behind the R and D, to invest behind the product pipeline and guide the company over a longer period of time.


What do you think about esports and ompetitive gaming?

I think E-sports is an area that has already shown substantial growth but has a lot of runway for growth ahead. When I look at companies and their positioning behind E-sports I view it as a measure of how forward thinking and how focused on R&D and future proofing the company the management team is. It's difficult maybe for some people to get their minds around, but the fact that younger generations are really engaged in competitive gaming not just in playing but actually viewing, it's really becoming a true professional sport, and I think it will have all kinds of monetisation opportunities around the content, the advertising, the tournaments, and it will have a lot of growth in the years to come.


What else is in store for the gaming industry?

In terms of future growth opportunities I think augmented reality is one that's very much likely to come. We've seen the first successful game with Pokemon Go. I think we'll see more and more games where the gaming content is brought into the physical world. That's going to be further enabled by the technology as it becomes more widely available on smart phones. Some of the early attempts at augmented and virtual reality required specialised hardware. When the hardware is very expensive it's definitionally going to be focused on a niche market, but as the hardware becomes more easy to afford and more widely available I think we'll see the gaming content and the engagement expand along with that.





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