How Investors Can Play in the Video Game Space

Neil Macker: We recently completed a deep dive on the video-game space where we looked at a few areas of interest for investors. The first area of interest is the ongoing Netflix-ization of the video-game space in terms of subscription models. The all-you-can-eat model has come to the video-game space in the last five years, as companies like Microsoft, Ubisoft, and EA have all introduced plans over this time period. While these plans may be good on a monthly basis for many gamers, we continue to believe that most gamers will buy games on a one-off basis. This is largely due to the fact that we believe most gamers play one to three titles a month, versus viewers of film content who may be interacting with tens to even hundreds of titles on a monthly basis.

The success of Netflix has also brought on the advent of cloud gaming. In cloud gaming, the rendering and processing of the game is done on a server and then uses a local client to upload the game, versus consoles and PCs, where everything is done in the home itself. Google is launching its Stadia service in November, an attempt to replace the console and gaming PC in the home. In contrast, both Microsoft and Sony, we expect, will be using cloud to extend where gamers can play their games. We believe this method of cloud gaming will see more early adoption over the next three to five years than the console replacement strategy that Google is using.

The third area of interest for investors is the increased governmental scrutiny of microtransactions in the U.S. and the U.K. Randomized microtransactions, also known as loot boxes, loot crates, or card packs, have helped games like FIFA from EA and Overwatch from Activision Blizzard extend their revenue tails. Government officials have focused on these types of microtransactions because of their underlying principles, which are similar to slot machines and other forms of gambling. While we agree with the market consensus that the industry will self-regulate, we do believe that investors should pay attention to this area because this approach may not work in the long term.