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Market Realist (New York, NY) Web Search Monday, June 6, 2016
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The History of the Gaming Industry By Adam Rogers
How did it all start?
In 1940, American nuclear physicist Edward Condon designed a computer that allowed people to play the first
game, called Nim. Thousands played this game, although the computer won more than 90% of the time.
A decade later, Claude Shannon wrote the first programming guidelines for a chess-playing computer. In the 1960s,
the US Department of Defense created a war game known asSTAGE. The idea that video games could be played on
a television set was conceived by engineer Ralph Baer. Baer completed two TV games in the 1960s. Later in the
decade,Computer Space became the first video arcade game to be released.
Console introduction and technological advances
The world was introduced to the video game console in the 1970s. The evolution of the gaming console was rapid
and a few years after their introduction, consoles utilized microprocessors as well as programmable ROM
cartridge–based games. This allowed players to change games just by switching cartridges. Leading gaming
company Activision (ATVI) was founded in 1979.
The gaming industry continued its evolution in the 1980s with improved video game graphics. Electronic Arts (EA)
was founded in 1982. The 1980s saw the introduction of 3D games as well as the release of Japan’s (EWJ)
Nintendo Entertainment System.
In the 1990s, Sony (SNE) introduced the PlayStation system, which has been considered to be the most popular
console with 20 million units sold. In the last decade, Sony’s popularity has continued to rise. Microsoft (MSFT)
and Nintendo also released their own next-generation consoles.
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This series will look at the various trends and highlights that impact the gaming sector.
Consumer Discretionary Performance
PART 2
Shooter and action games account for 45% of total video game sales
According to Statista, shooter and action games dominate video game sales and account for 24.5% and 22.9%,
respectively, of total sales in the US (SPY). This was followed by the sports, role-playing, and adventure genres,
which account for 13.2%, 11.6%, and 7.7%, respectively, of total sales.
The best-selling video games of 2015 include Electronic Arts’s (EA) Star Wars Battlefront,with more than 12.4
million units sold. FIFA 2016 and Batman: Arkham Knight sold 14.3 million units and 6.7 million units,
respectively. Activision’s (ATVI) Call of Duty: Black Ops III was also one of the top-selling games in the last year.
Important statistics of video game players in the US
According to the Entertainment Software Association (or ESA), more than 155 million Americans play video
games. Each game-playing household has an average of 1.7 gamers.
Approximately 80% of these US households own a device to play video games, and 48% of these households own a
dedicated gaming console such as the Xbox (MSFT) and the PlayStation (SNE). More than 42% of Americans
regularly play video games, totaling more than three hours per week.
According to the CEO of ESA, Michael Gallagher, “Video games are ingrained in our culture. Driven by some of
the most innovative minds in the tech sector, our industry’s unprecedented leaps in software and hardware engages
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and inspires our diverse global audience. Our artists and creators continue to push the entertainment envelope,
ensuring that our industry will maintain its upward trajectory for years to come.”
PART 3
Video Gamers Cross All Age Groups in the US
29% of video gamers are between 18-35 years
According to the Entertainment Software Association (or ESA), 29% of all video game users are between 18–35
years of age, whereas 27% of players are below the age of 18. A surprising number—26% of gamers—are above
the age of 50, while the remaining 18% lie between ages of 36 and 49 years.
The average game player is 35 years old, while women account for almost 42% of the total gaming community.
Another interesting statistic is that women over the age of 18 account for a greater proportion (33%) of the game-
playing population compared to boys who are 18 or younger.
The average age of the most frequent game player is 43, compared to the average age of the most frequent male
player, which is 35.
Why gaming is the preferred source of entertainment
According to an ESA survey, the most frequent gamers feel that computer and video games provide the most value
for their money. The research report notes that 47% feel that video games provide more value for their money.
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Approximately 28% prefer DVDs, while 14% prefer going to the movies and 12% opt for listening to music.
According to Barbara Chamberlin, project director at the New Mexico State University Learning Games Lab,
“Games offer immediate feedback, you can see your progress, you can try something and be frustrated but later
learn more…that’s why game play is so engaging to us.”
The gaming space in the US is dominated by Electronic Arts (EA) and Activision (ATVI). The most popular
gaming consoles are the Xbox (MSFT) and Japan’s (EWJ) Sony (SNE) PlayStation.
PART 4
How Did the US Video Gaming Industry Perform in 2015?
Revenues of $23.5 billion in 2015
According to data released by the Entertainment Software Association (or ESA) and NPD Group earlier this year,
the US (SPY) computer and video gaming industry generated $23.5 billion in revenues for 2015.
In comparison, reported sales for 2014 stood at $22.4 billion, indicating an increase of 5% YoY (year-over-year) in
total consumer spending.
Sales of software content projected to reach $19.6 billion in 2019
Sales of software content rose by 7% YoY from $15.4 billion in 2014 to $16.5 billion in 2015. Software content
includes mobile games, physical packaged goods, subscriptions, and downloadable content.
“The video game industry excels because it anticipates demand—giving people what they want before they realize
that they want it—and drives trends in entertainment and across countless other sectors. Our products are
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revolutionizing how we consume and interact with media,” said Michael D. Gallagher, president and CEO of the
ESA, which represents the US video game industry. “We know that hardware and software innovations have
established this industry as a leader in high-tech development.”
Electronic Arts’s revenues rose by 15.8% between fiscal 2013 and fiscal 2016. In comparison, revenues of its peers
Activision (ATVI), TakeTwo (TTWO), and Zynga (ZNGA) returned -4%, 16.4%, and -17%, respectively, in the
last three years.
Video game industry growing rapidly in the US
The ESA stated that the video game industry in the US is one of the country’s fastest-growing sectors. In 2012, the
video game industry added $6.2 billion to the US economy. Between 2009–2012, employment in the video game
sector grew at a CAGR (compounded annual growth rate) of 9%.
In 2012, employees in the entertainment software industry earned an average of $95,000 per year. This was almost
twice that of the average US household income.
EA and Activision account for 1.2% of the Technology Select Sector SPDR ETF (XLK).
PART 5
Sony PlayStation and Microsoft Xbox Sales Drive Console Market
Gaming consoles and PCs most commonly used platforms
According to a research report by the Entertainment Software Association (or ESA) and the NPD Group, the
personal computer is the most common device used by players, with 56% of gamers opting for this platform.
Gaming consoles rank second at 53%, followed by smartphones, wireless devices, and dedicated handheld systems
at 36%, 31%, and 17%, respectively.
PlayStation 4 and Xbox One saw best YoY sales in December 2015
In December 2015, the sales of the Japan-based (EWJ) Sony (SNE) PlayStation 4 and Xbox One (MSFT) recorded
their best sales ever.
Since its launch, the total sales of Sony PlayStation stands at approximately 40 million units worldwide. Although
Microsoft has not released its Xbox One figures in the last 12 months, Electronic Arts (EA) notes that the installed
base for Xbox One is approximately 19 million units.
Nintendo (NTDOY) is expected to announce the launch date of its next hardware system, NX, in 2016. Analysts do
not expect Sony and Microsoft to announce the launch of their next-generation consoles in the near future,
however, as the PlayStation and Xbox One were launched in 2013.
As seen in the previous part of this series, software sales rose by 7% YoY in 2015. This is likely to drive hardware
sales, and analysts expect the overall growth rate to continue in the future.
“The industry’s sales performance helped to make 2015 a banner year for video games; and we anticipate continued
growth in multiple industry sectors for 2016,” stated Joanne Hageman, president of the NPD Group.
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Consumer Discretionary Performance
PART 6
Is the Shift to Digital a Key Driver for the Gaming Industry?
Global video games revenue expected to reach ~$93.2 billion in 2019
According to a research report by PricewaterhouseCoopers (or PWC), revenue from global video games
should grow at a healthy rate through 2019. Total video game revenue is expected to rise at a CAGR (compounded
annual growth rate) of 5.7% and expected to reach ~$93.2 billion by 2019.
The research report states, “The peak of hardware sales for the latest generation of consoles is likely to be between
2017 and 2018, followed by a decline regardless of whether new consoles arrive.”
The global distribution of digital games is expected to reach $12.9 billion in 2019 and should account for 19.6% of
the industry’s overall gaming revenue. However, PWC stated that the physical console market is also expected to
drive revenues due to “the ability to trade in physical games, frequently higher digital pricing and a lack of network
infrastructure will keep physical distribution relevant.”
In the previous part of this series, we saw that Xbox One (MSFT) and the Japan-based (EWJ) PlayStation (SNE)
reported a record for console sales in December 2015.
Social gaming revenue set to increase rapidly
The social gaming space is set to reach ~$22.5 billion by 2019, with the number of users playing on social media
sites such as Facebook (FB) experiencing an increase. According to PWC, India (INDA) and South Africa are
expected to drive social gaming revenues in the future.
PART 7
How Is the Digital Gaming Market Growing?
Mobile gaming to reach $52.5 billion by 2019
According to a research report by Newzoo, the global gaming market should reach $99.6 billion in revenues for
2016. This indicates a growth of 8.5% YoY (year-over-year) compared to 2015.
Newzoo is a global market research firm with a focus on the gaming industry. The firm provides market
intelligence, transactional data, and financial analysis to clients around the world, including Amazon (AMZN),
Facebook (FB), and YouTube (GOOG).
Mobile gaming revenues are expected to surpass PC gaming revenues for the first time ever. Mobile gaming is
expected to account for 37% (or $36.9 billion) of total revenues, indicating a rise of 21.3% YoY.
Asia-Pacific (or APAC) countries are expected to dominate the mobile gaming market. These countries are
expected to account for 47% of total mobile gaming revenues in 2016. China (FXI) accounts for 16% of global
revenues in this segment.
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Newzoo also expects the global market to grow at a CAGR (compounded annual growth rate) of 6.6% until 2019,
reaching revenues of $118.6 billion. Mobile gaming is expected to account for revenues of $52.5 billion.
Top countries by mobile revenue in 2015
As shown in the above chart, China led the mobile gaming space in 2015 with revenues of $6.5 billion, followed by
Japan (EWJ) and the United States at ~$6.2 billion and ~$6.0 billion, respectively. India was the fastest-growing
country in the mobile gaming segment, with a CAGR of 75%, followed by Indonesia and the Philippines at 72%
and 63%, respectively.
In the next part of this series, we’ll see how companies such as Electronic Arts (EA) and Activision (ATVI) are
focusing on the digital gaming space.
PART 8
Digital Revenues: Key to EA’s and Activision’s Long-Term Growth
Focus on recurring digital revenue streams
Electronic Arts (EA) was previously a hits-driven business. This means that if a game was one of the top games
launched, the firm would benefit greatly in that particular period, but it would also suffer financially if it didn’t
become a hit. Gamers usually play a game for six to eight weeks and then move on to the next available game on
the market.
EA also focused mainly on the PC and console segments, with very little exposure to the free-to-play and mobile
businesses. Andrew Wilson, the CEO of Electronic Arts, and the company’s management team have started to
expand within the recurring digital revenue segment.
Massive move toward the consumption of digital products
Like other product categories, the gaming space has also seen a transition toward digitalization. In November 2015,
Activision Blizzard (ATVI) announced the signing of a definitive agreement with King Digital Entertainment
(KING), a major player in the online gaming sector. Zynga (ZNGA) also has a strong online presence.
Electronic Arts (EA) wants to create a business model in which users engage more with something they find
interesting. Online sports games are popular as users enjoy creating fantasy teams, allowing them to compete online
and against friends.
Activision Blizzard
In May 2016, Activision Blizzard (ATVI) announced its 1Q16 results and reported revenues of $1.5 billion. This
was a YoY (year-over-year) increase of 13.9% compared to revenues of $1.3 billion in 1Q15. Digital revenues
accounted for 64% of total revenue, or $926 million, in 1Q16. In comparison, digital revenues accounted for 46%
of revenues in 1Q15.
Digital revenues have grown rapidly for peer company Electronic Arts (EA) as well. In 1Q16, EA’s digital
revenues rose by 18.3% YoY to $712 million from $602 million in 1Q15 for the firm. EA generates ~$1 billion per
year from FIFA.
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Activision (ATVI) comprises 4.2% of the iShares North American Tech-Software ETF (IGV).
PART 9
Growth of e-Sports a Key Driver for the Gaming Industry
The e-sports market expected to reach $1 billion
According to SuperData Research, the total global e-sports market was valued at $748 million at the end of 2015.
Its YoY (year-over-year) revenue growth is driven by an increase in advertising as well as more brands entering the
segment.
The global e-sports market is expected to reach $1 billion in 2017.
Betting and fantasy sites are attracting investments
Platforms such as e-sports betting and fantasy sites have attracted investments of more than $150 million. Revenues
earned in 2015 are expected to be $56 million. According to SuperData, “Fans remain more comfortable wagering
virtual gaming content over cash, causing real-money sites to gain traction slower than anticipated.”
Approximately one-third of the e-sports fans in the United States (SPY) participate in online amateur tournaments.
As the number of players increases, the number of sites has also increased, leading to saturation in the e-sports
market. The next big thing in this market is expected to be the mobile e-sports space, where audiences have
increased by 19% YoY in the US.
Market potential
Because there is immense potential in this segment, Activision (ATVI) and Electronic Arts (EA) should look to
increase market penetration. Asia and Europe (EFA) remains a huge market for these companies. Investors and
analysts will be looking closely at this sector as it inches toward a billion-dollar valuation.
The next two articles will provide insights into the e-sports segment and how this space is attracting major players
such as Amazon (AMZN) and Google (GOOG).
PART 10
Activision Acquired Major League Gaming to Enter the e-Sports Segment
Activision acquired Major League Gaming for $46 million
Earlier this year, Activision Blizzard (ATVI) announced the acquisition of the US-based (SPY) Major League
Gaming (or MLG) for $46 million in cash. MLG is a leader in creating and streaming live gaming events and
organizing professional competitions and competitive gaming leagues.
The acquisition is expected to help Activision build what it calls a new ESPN of e-sports and enter the business of
streaming online e-sports matches. According to MLG, MLG.TV attracts ~25 million viewers per month on mobile
devices, computers, and video game consoles.
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Focus on e-sports
In October 2015, Activision created a new e-sports unit and hired MLG’s co-founder, Mike Sespo, and Steve
Bornstein, the former president of ABC/Walt Disney (DIS). In December 2015, Electronic Arts (EA) also
announced that it intends to create an e-sports unit. Live events attract players and spectators in huge numbers. At
these worldwide events, professional gamers can win millions of dollars in prizes.
According to Activision, the e-sports audience comprises more than 100 million viewers and is projected to be
bigger than the audience for professional sports leagues. The main driver in this market is the creation of premium
content that should increase ticket sales, advertising, licensing, merchandising, and sponsorships.
The e-sports market is projected to have more than 300 million viewers by the end of 2017, according to market
researcher Newzoo. “We’ve seen the interest in e-sports grow up faster than the revenue model,” said Evan Wilson,
a Pacific Crest Securities analyst.
Activision constitutes 4.2% of the iShares North American Tech-Software ETF (IGV) and 5.4% of the Power
Shares Dynamic Software ETF (PSJ).
PART 11
Amazon and Google Share the Online Gaming Space
Amazon acquired Twitch to enter the mobile gaming segment
As we’ve already seen in this series, Activision Blizzard (ATVI) is acquiring Major League Gaming (or MLG) to
leverage the fast-growing streaming gaming market. Amazon (AMZN) entered this field in 2014 when it acquired
Twitch, a popular website for video game enthusiasts.
Twitch, founded in 2011, has grown at a rapid pace since then. At the end of 2014, it had more than 100 million
monthly unique users. In 2015, it had 1.7 million unique broadcasters compared to 1.5 million in 2014.
Twitch has more than 13,000 partners, up from 10,000 in 2014. More than 58% of its users spend more than 20
hours per week watching content on Twitch.
In the last two years, its viewership has grown by more than 100% in India (EPI), the Middle East, Germany
(EWG), Indonesia, Turkey, Italy, and Ireland. Google (GOOGL) was also interested in acquiring Twitch.
Google’s 2015 launch of YouTube Gaming
In 2015, Google launched YouTube Gaming, beefing up its efforts to make it a preferred platform among players
and streaming at 60 frames per second. This was a positive development, as gamers don’t want videos to lag while
streaming live gaming sessions.
In June 2015, Google announced its YouTube Gaming app and website. This allows video game enthusiasts to
broadcast their video games to other people or watch other people play video games in real time. In terms of
downstream Internet traffic, YouTube is currently in second place after Netflix (NFLX) in North America.
Initially, YouTube’s focus was on gaming videos recorded and uploaded on its site. Twitch was a live streaming
space for games. YouTube then launched its gaming app and competed directly with Twitch.
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Twitch has now announced plans to enable broadcasters to upload videos to its channels, just like YouTube does.
Google’s development of its own gaming platform should help Google grow its user base, similar to Twitch’s.
This should also help improve its ad rates.
PART 12
Is Virtual Reality the Next Big Driver in the Gaming Space?
What is virtual reality gaming?
In virtual reality (or VR) gaming, players can experience a 3D environment and interact with that environment
throughout the duration of the game. A research report from Forrester estimates that 52 million VR displays will be
used by customers and enterprises by 2020.
Virtual reality technology is expected to be the next step in gaming innovation. At the E3 2015 Live Streams and
Press Conference in July 2015, Facebook (FB) and Microsoft (MSFT) announced the combination of Facebook’s
Oculus Rift and Microsoft’s Xbox One.
This clearly indicates Facebook’s and Microsoft’s growing interest in the virtual and augmented reality space, the
latest innovation in the gaming world. The leading players in the gaming space are Microsoft’s Xbox One and
Japan-based (EWJ) Sony’s (SNE) Nintendo (NTDOY).
The virtual reality market expected to reach $5.2 billion by 2018
According to a KZeroWorldswide report, and as the chart above shows, the consumer VR market is expected to
total $5.2 billion by 2018.
Technology firm NVIDIA (NVDA) also uses its platform and network approach and leverage and scale approach in
the gaming sector. The company is tapping the opportunity for advanced technology brought by the upgraded
gaming consoles such as Sony’s PlayStation 4, gaming content such as mods, and VR.
PART 13
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Why Are Facebook and Microsoft Eyeing the Virtual Reality Space?
Facebook acquired Oculus in 2014
In March 2014, Facebook (FB) acquired Oculus, the leader in immersive virtual reality technology. Oculus has
built a strong interest among developers.
According to a press release from Facebook, the company plans to expand the Oculus Rift headset’s applications
beyond gaming to broader fields such as media, entertainment, communications, and education.
Microsoft acquired Havok last year
In line with its aim to dominate in the VR (virtual reality) space, Microsoft (MSFT) announced the acquisition of
Havok in early October 2015. Havok develops 3D physics engines, which is the middleware used by game
developers to create the physics for their games.
Havok’s popularity in the video games space can be gauged from the fact that all leading game developers have
employed it, including Activision (ATVI), Electronic Arts (EA), Sony (SNE), and Japan’s (EWJ) Nintendo. Its
products have become the de facto software for various popular games such as Halo, Call of Duty, Assassin’s
Creed, Destiny, Dark Souls, and The Elder Scrolls.
Microsoft has also stated that it is looking to make its virtual reality software, Windows Holographic, available to
hardware and software developers.
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Microsoft’s blog stated, “For our partners, this creates new business opportunities, unlocking mixed reality
experiences across devices. For developers, Windows Holographic apps can be written today with confidence that
they will run on the broadest set of devices.”