Investments in the gaming industry and esports

Investing in games

The almost limitless number of audiences, the abundance of game genres, the growing availability of digital technologies for the world's population - all these factors actively attract investors to the video game industry. The video game market is growing rapidly and leaves few people indifferent. If the game becomes popular, this popularity quickly crosses the borders of states, forming around itself an extensive fan community of people of different ages and social statuses.

In recent years, the gaming industry has been increasingly forced to develop mobile games that anyone with a smartphone can afford, as well as the emergence of new versions of the new generation of PS 5 and Xbox Series X/S game consoles. The COVID-19 pandemic also pushed the industry, when, due to the lockdown, many people found in games both the best way of psychological relief and the opportunity to spend more time with friends in an online environment.

Let's take a closer look at the key features of the gaming market and the drivers of its growth, as well as consider the main ways to invest in video games.

Features of the gaming market

The video game market has a set of advantages that contribute to increasing the attractiveness for investing in this area, but it is not without drawbacks.
Positive factors:

• Positive market dynamics. The gaming industry has been growing in recent years. According to the analytical company Newzoo, from 2018 to 2022, the global gaming market grew from $ 138.8 billion to $196.8 billion, adding 41.8%. This is largely due to mobile games. Further growth is also predicted in the following years. Already in 2023, the market will overcome the $200 billion bar.
• An ever-growing audience. The target audience of the games is very wide and does not consist exclusively of insolvent schoolchildren, as is commonly believed. The average age of a gamer, according to Statista, is 34 years old. At the same time, the number of players is constantly increasing. If in 2019, according to Newzoo, there were 2.55 billion players in the world, then in 2022 it is already 3.2 billion. a person, that is, more than a third of the world's population. The largest number of gamers (about 1.5 billion) is in the Asia-Pacific region.

• Increased involvement of gamers. In addition to the growing number of players, the time that people spend playing games is also growing. The global average is about 7.11 hours per week. In Europe, according to ZarkCentral estimates, gamers spend almost 8 hours a week playing games.

• Abundance of platforms and availability of technologies. Games are now available on PC, on consoles, and in the form of mobile applications. And thanks to the rapid development and penetration of technology, a sharp increase in the number of smartphones, even those people who have never considered and do not consider themselves gamers are starting to play video games.

• The possibility of high profitability. A successful game can win fans from different parts of the world, and with proper monetization, investors can make great money on it. Here a yield of 50%, 250%, 500% per annum and above is possible.

• Simplification of market entry. Thanks to the growing popularity of mobile games, which are cheaper to develop and bring to a wide market than games on traditional platforms, opportunities for small developers are increasing.
  Disadvantages and difficulties:

   

• High entry threshold. If you are not a retail investor buying securities, but someone who wants to invest in the project directly, then you need to keep in mind that the amounts of investments required here are not the smallest and can be estimated in tens of millions of dollars.

• Growing competition. Especially in the segment of mobile games. Since about 3 and 2 thousand applications are released daily on Google Play and the App Store, respectively, and games account for about a fifth of all applications, this means that 400-600 new games can appear per day, among which it is very easy to get lost.

• Long development time. If an investor invests in a game project at the creation stage, it should be borne in mind that the process may take 1-2 years, not to mention reaching payback.

• Complexity of forecasting. Games are difficult to invest in because it is almost impossible to accurately predict future success here. Due to the opacity of the game development process, the expectations of users and investors are very often overstated, and the reality turns out to be much worse than any forecasts.

• Dependence on trends. Games are very dependent on trends. Developers quickly pick up what is popular. Therefore, even if the game you invested in seemed unique at first, then soon it may have a huge number of clones.

Directions of the gaming market

Before investing in video games, you need to choose the segment you are interested in and understand the trends that are observed on it. The video game industry can be divided into the following main segments:

• PC games;
• Mobile games;
• Console games;
• Cloud gaming;
• VR and AR games;
• Esports.

Next, we will analyze in more detail what is the essence of each direction and what prospects analysts predict for these segments in the near future.

1. PC games

PC gaming is games on personal computers. In 2022, according to NewZoo, the share of computer games accounted for 19% of the gaming market and was inferior to both mobile games, which have more than half of the market, and console games with 27% of the market. Despite the decline in popularity of PCs for games, many gamers continue to use them, especially from those regions of the world where low incomes of the population did not allow people to purchase consoles - these are Eastern Europe, Russia, South America, China.

Recently, analysts predict a drop in interest in PC games and the transition of gamers to game consoles. The research company Jon Peddie Research notes that the reason for this is the dissatisfaction of users with the rising cost of computer components and an increase in the number of exclusive games on consoles. Streaming services like Google Stadia and Microsoft xCloud can also capture the attention of some gamers.

2. Mobile games

Mobile games are video games for smartphones and tablets. According to NewZoo estimates for 2022, mobile games already account for 53% of the entire video game market. In 2021, users spent a record $116 billion on mobile games, according to App Annie estimates, which is 15% higher than in 2020. Of all the categories of mobile applications, mobile games are the most numerous in both the Apple App Store and the Google Play Store. Research and Markets forecasts an increase in the market to $272 billion by 2030, with an average annual growth of 11%.

The growing popularity of mobile games is affected by the overall increase in the duration of use by smartphone users. On average, in the 10 largest markets, this indicator, according to App Annie, is 4.8 hours per day. The growth of smartphone sales, the acceleration of the Internet and the introduction of 5G are also affected. Recent covid restrictions have also spurred the market.

Most often, mobile games run on one of the three main operating systems: Android, iOS or Windows - from Google, Apple and Microsoft, respectively. Basically, mobile games are free to download, and monetization occurs through ad impressions, the sale of boosters, the sale of extended access, subscriptions and donations. Hyper-casual games (games with the simplest mechanics) are leading in downloads today, and strategies bring the greatest profit to developers.

The advantage of mobile gaming is that the costs of its development are relatively small, while the audience coverage is huge. Mobile games can be played even by people who do not consider themselves gamers. In addition, along with mobile game publishers, the market is also being driven by traditional video game manufacturers like Activision Blizzard and Electronic Arts, which recently want to supplement their line of games with mobile games in order to extract more revenue.

3. Game consoles

Console gaming occupies a major direction in the video game market (about 27% of the market for 2022 according to NewZoo), that is, video games on stationary and portable consoles such as PlayStation, Xbox and Nintendo. Due to the COVID-19 pandemic and the quarantine associated with it, as well as the release of a new generation of PS 5 and Xbox Series X/S consoles, the demand for consoles has grown significantly, which even caused a shortage in the market.

Mordor Intelligence predicts that the market for gaming consoles in the period from 2021 to 2026 will grow annually by an average of 18.4%.

Basically, the console market earns on physical and digital copies of games, their add-ons, seasonal subscriptions and microtransactions. Console game manufacturers are holding a share thanks to the introduction of new features, such as streaming support, online multiplayer games, multi-purpose support, for example, web browsing. The games themselves are becoming more and more impressive and exciting, with many releases primarily coming out for consoles.

In recent years, the life cycle of game consoles has changed and become shorter compared to previous generations. Many games from Sony and Microsoft are not compatible with older platforms, which is why gamers are forced to update their consoles. At the same time, companies like Valve and Google are making efforts to change the dynamics of the console market by offering cloud services and games to eliminate the need for certain consoles.

4. Cloud gaming

A promising direction in the gaming industry, which has been gaining momentum lately, is cloud gaming. Cloud gaming allows you to play video games on any smartphone, tablet, laptop or PC with fast internet. This happens due to the transfer of computing power from the user's device to a remote device.

This trend is growing largely due to the general acceleration of the Internet and the development of 5G, as well as due to the fact that in cloud gaming, gamers no longer need to regularly update gaming equipment. Examples of cloud gaming services include Microsoft's xCloud, GeForce Now, Google Stadia, PlayStation Now, and others.

The global cloud gaming market has the highest growth prospects. Many experts expect a real revolution in the gaming sector from cloud gaming, as this direction allows you to reach a much larger audience of players and gives game developers, publishers and platforms more ways to monetize.

According to Mordor Intelligence, in 2020, the volume of sales in cloud gaming was estimated at $ 612 million, and by 2026 the market is expected to grow almost nine-fold to $ 5.37 billion. On average, cloud gaming is projected to increase by 45.2% annually.

5. VR and AR games

In recent years, games using virtual reality (VR) and augmented reality (AR) technologies have also become actively distributed. In the first case, the player is completely immersed in virtual space, for which VR glasses or a helmet are used, in the second case, virtual objects complement the real picture. AR is used in mobile games. The most famous example is the Pokemon Go game.

According to the forecast of Mordor Intelligence, virtual reality in games will grow annually by an average of 32.8% until 2026. In general, the number of gamers of VR and AR games, according to NewGenApps forecasts, will increase to 216 million people by 2025.

6. Esports

Esports is a special direction at the junction of the video game industry, sports and shows. The esports industry is one of the fastest growing and high-margin in the world. Esports competitions often gain more audience than championships in hockey, basketball and other traditional sports. In terms of the number of viewers, sometimes only football can compete with esports.

According to Newzoo, the number of people interested in esports worldwide by 2022 was around 532 million. At the same time, 261 million of them are the audience that watches esports content more than once a month. It is assumed that in the coming years the number of esports fans will grow and reach 640 million people by 2025, while revenues from this direction will increase from $ 1.38 billion to $ 1.87 billion. So, despite the positive forecasts, the market volumes still cannot be called gigantic compared to other areas of the gaming industry.

The main reason for the growth of esports is the increase in the number of gamers and their high activity. A wider range of people can afford to become an esports athlete than in traditional sports, where everything is tied to physical development. And since popular online games do not have very high requirements, they can be “pulled" by any modern computers.

Esports events are actively funded from various sides. Sponsors can be gaming companies, sports clubs, manufacturers of gaming platforms, and betting platforms. Another source of income for the organizers is the sale of the rights to display cyber competitions. All this allows the organizers to set high prize money for the winners.

Also, the development of streaming broadcasting and the popularity of NFT technology, which will allow buying more game items and increase funding to this sector, are called as possible drivers of the growth of esports.

How to Invest in Video Games

You can invest in video games in various ways and with completely different capital at your disposal.

Investment options in the gaming industry:

• Independent development and promotion. The most expensive option, in which you create your own studio, hire a team of game designers, screenwriters, programmers, artists, sound engineers, marketers. Just to create a mobile game, you may need a staff of 10-15 people, and it can take from 7 to 60 thousand dollars to develop one simple mobile game. Subsequently, you can earn money by developing custom games.
• Investing in other people's startups or existing projects. You find a development team that is just entering the market and preparing its first product, or you finance an already experienced team that is trying to expand its business and is looking for funds either to create new games, or to enter new operating systems and popular consoles, or for marketing, covering working expenses, attracting new employees, etc.
• Investing in video game game items. A way in which you buy cheaper items in one place and sell more expensive in another, invest in it or offer your own price comparison service or a game item store. Keep in mind that the virtual items market is considered a gray area with a large number of scammers and speculators, and gaming platforms prohibit transactions with virtual items from games.
• Portfolio investments. If you do not have large sums for direct investment in startups and operating game studios, no one prevents you from investing in the business of well-known gaming companies. To do this, you can create an investment portfolio from a set of securities and purchase stocks, bonds and units.

It is worth mentioning separately about investing in the esports segment. Here the investor can invest in such ways as:

• Investing in an esports team. You invest in the creation of your own team and count on a certain share of the profits from its success. This option is quite expensive and extremely risky. After all, you can achieve high results no earlier than in six months. And that is provided that you manage to attract and unite high-level players. The cost of even maintaining a mid-level team will cost about 150 thousand dollars per month.
• Investing in the opening of a cyber arena. An option in which you invest in the creation of an esports club or cybercafe in which esports fans can play, train, participate in competitions or watch major events from the esports world. The number of esports clubs has increased noticeably now, so it is increasingly difficult for beginners to start on their own. In this regard, more and more often a bet is placed on franchises whose business is already well-established and well-packaged.
• Organization of esports tournaments. The most expensive and at the same time highly profitable way to invest in esports. The entry threshold here starts from $2,000,000. The organizers earn money by attracting large sponsors, and if it is difficult to attract them at the initial stage, then the bet is on holding competitions in new disciplines.
• Esports school. Another promising option against the background of the growing popularity of esports. So far, there are no requirements for this format in terms of equipment and training programs for students. All these issues and nuances will need to be solved by the investor himself, attracting specialists with experience to help. You can start here with amounts in the region of $ 200,000-$400,000.

Most often, investing does not mean the independent development and creation of games, and not the opening of their own esports arenas, but investments in third-party game projects. What methods can be used to finance them?

Popular methods of investing in other people's projects:

• Investing in the company's capital. This is a contribution to the authorized capital of the company. This option is possible when entrepreneurs are looking for business partners who will participate in management.
• Direct loans. The investor acts as a lender and gives the project a loan with a certain percentage.
• Equity participation. The investor acquires a certain share in the company, can receive part of its income and take part in its management. Large public companies implement this option by selling stocks and bonds.
• Investing through crowdfunding. This is a modern method of fundraising from a large number of small private investors, mediated by a crowdfunding platform where an investment project is presented.
  Buying shares of gaming companies

If an investor does not have serious capital, then it is possible to invest in gaming companies even with a few hundred dollars in his pocket. One of the obvious options is to purchase shares of game developers and publishers, as well as shares of creators of popular gaming platforms.

Buying shares allows you to earn either by increasing their value over time with subsequent resale, or by paying dividends. You can invest in shares of a gaming company after searching and selecting a broker and opening an account.

Among the world's leading development companies are the Chinese company Tencent (TCEHY, 0700), the American company Activision Blizzard (ATVI), which created such games as World of Warcraft and Call of Duty, the Japanese company Nintendo (7974), Electronic Arts (EA), Ubisoft (UBIP), Take-Two Interactive (TTWO) and others.

Although the video game market is constantly growing, this does not mean that the shares of a company from the gaming industry will show constant growth, the volatility here is quite high. In addition to macroeconomic factors, other factors affect the dynamics, such as the number of users, releases of new games, the discrepancy between the new game and user expectations, in-game bugs and related scandals.

The success or failure of any new game is extremely difficult to predict adequately. It is very difficult for studios to prove the quality of the game for the investor and justify the need for investments in it. In addition, the gaming industry is strongly influenced by rapidly changing trends. In general, for these and other reasons, shares of digital entertainment companies are considered a rather risky asset. Therefore, during periods of economic decline and protracted crises, the practice of dumping such securities is common among investors.

In this regard, in search of a stable and long-term growth strategy, video game creators usually choose one of the following development options:

• They rely on increasing the audience of users. That is, they develop games that people with different gaming preferences would like to play. For example, these can be games with an open world and the ability to realize any desires in them (these are games such as GTA, Assassin's Creed, Minecraft, Forza Horizon).
• Create a franchise and bet on the continuation of famous games. The user is more likely to purchase a game not with a new name, but a continuation of one of the past successful games.
• Buy up small game companies and studios. This strategy is followed by large investment companies and tech giants with large amounts of capital.

The basic rule of investing in stocks is asset diversification. You should not invest all your capital in 1-2 companies, or invest entirely in one industry, for example, exclusively in developer shares. After all, after the failure of the game, any such company will have high financial losses. You can diversify assets by countries, income currencies, industries, company sizes, and so on.

For example, you can dilute the portfolio with small and medium-sized companies engaged in the production of mobile and indie games that focus on the international market. The mobile segment is now actively growing, and the audience and revenue are rapidly increasing through mobile app stores. Large traditional developers like Ubisoft, Activision Blizzard and Electronic Arts sometimes find it more difficult to refocus on mobile games, which is why they do not bring the expected returns.

In addition to developer shares, you can consider shares of hardware and chip manufacturers, such as Sony and Microsoft, Intel, NVidia, Apple, Alphabet, Asus, Intel, or shares of leading operating systems companies for most games - these are the same Apple, Alphabet and Microsoft.

To access all the world's securities, you will need either a broker account or the status of a qualified investor.

In general, investing in video games or esports does not require any deep knowledge in narrow areas. An investor does not need a thorough understanding of all the subtleties of programming or game design. Usually, general knowledge about gaming cuisine and game development is enough, plus tracking announcements of news from the gaming world and industry trends.
Investing in gaming ETFs
A good way for an investor to diversify his portfolio quickly and with minimal investments without having to buy individual stocks is to buy securities of ETF funds. ETF funds are exchange-traded funds consisting of baskets of securities.

ETFs are easy to buy and sell, you can do this at any time of the exchange. This tool can allow an investor to earn both on the growth of the value of assets and on dividends - many ETFs pay them. In addition, it is a less volatile investment tool than stocks, although volatility is also not excluded here, and no one promises you a guaranteed profit.

ETFs can bet on shares of companies in a certain industry, on sectors of the economy or on any topic. There are also thematic gaming funds that invest in shares of companies from the gaming industry. Examples of such ETFs include:

• VanEck Gaming ETF (BJK);
• VanEck Video Gaming and eSports ETF (ESPO);
• Roundhill BITKRAFT Esports & Digital Entertainment ETF (NERD);
• Global X Video Games & Esports ETF (HERO);
• Roundhill Sports Betting & iGaming ETF (BETZ).
  Game funds are available on American platforms and to purchase them, you will need to trade through a broker with access to these markets. They can also be purchased by qualified investors, but this option is quite difficult and has many difficult requirements for the investor's education and capital (at least $ 600,000 is needed).

Thematic ETFs are generally considered a good way to complement the investment portfolio to the main set of assets. With them, you can conveniently and timely invest in a whole segment on the eve of expectations of its explosive growth. At the same time, the main disadvantage of any thematic funds, including gaming funds, is that they are less diversified compared to the funds of the broad stock market, which means that the risks in them are higher.