Stock Synopsis: Video games continue to take both screen time and monetization from many other forms of entertainment.

Stock Synopsis: Video games continue to take both screen time and monetization from many other forms of entertainment.

We are broadly positive about the major global video game publishers in light of new AI mobile technology, greater social engagement among multiple players, and a fundamental shift to higher double-digit growth rates in digital sales, profits, and capital expenditures. The major video game publishers include Activision Blizzard (now as part of Microsoft), Electronic Arts (EA), Take-Two Interactive (TTWO), Microsoft (MSFT), Time Warner (WBD), Zynga (ZNGA), Glu Mobile (GLUU), Tencent (TME), and Japanese rivals such as Sony, Nintendo, Capcom, Sega, Konami, and Bandai Namco. Although the major game publishers show relatively high stock market valuation across the board, we believe both higher P/E and P/B multiples arise from historically high and steady top-line growth and further ongoing bottom-line momentum. In the meantime, we are quite mindful of the recent rapid rise, dominance, and uncertainty in association with the broader battle royale game mode (Fortnite and PUBG). This resultant global phenomenon continues to entertain more than 3 billion players worldwide.

Video games continue to take both screen time and monetization from many other forms of entertainment, such as live concerts, sports events, theme parks, movies, and TV shows. A recent Newzoo survey shows that the global video game market is likely to grow from only $115 billion in 2017 to $250 billion to $335 billion in 2024-2026. This positive growth outlook arises from double-digit growth in mobile games, high single-digit growth in console games, and low-to-medium single-digit growth in PC games on average. Over the past several years, video games have evolved dramatically with AI tools and avatars to result in greater social engagement, visual stimulation, and lower latency in comparison to legacy pre-digital video games. With significant improvements in high-performance semiconductor microchips (from Nvidia, AMD, TSMC, and most other wafer manufacturers), graphical processing units (GPU) and large language models (LLM), many video games now run at faster bandwidth speeds. Also, these video games now tend to achieve greater global reach and digital penetration in many different countries worldwide. The more socially interactive environment contributes to the recent mass-market successes and surprises in the broader battle royale game mode, especially Fortnite, PUBG, Knives Out, Rules of Survival, Garena Free Fire, and so on. New, non-obvious, and creative innovations in both game design and social media engagement substantially improve opportunities for greater social interactions and more immersive game experiences. As a result, these popular video games have become a major social outlet for consumers. Many players have fun, compete, collaborate, and then watch other gamers on platforms such as Twitch, PlayStation, X-Box, Steam Deck, iOS, Android, and so forth. From Dota, Street Fighter, and Overwatch to StarCraft to Counter Strike, Super Smash Bros, and League of Legends, Esports have become much more popular over the past few years with substantially more consumer engagement and support from many video game publishers. For the dominant video game publishers, Esports broadcast their titles, broaden their global target audiences, and further deepen their worldwide fan attachments.

Meanwhile, the major video game distributors compete with several other sources of human entertainment such as motion pictures, live concerts, TV shows, social networks, podcasts, and theme parks etc. For the major video game publishers, the secular growth in both sales and profits continues to be high, robust, and steady in the next few years. These major video game publishers face intense competition from several oligopolistic foreign rivals, especially some private companies in Japan and South Korea. In terms of competitive advantages, all of these video game publishers secure and retain well-known intellectual property franchises in their respective game specialties.

In a fundamental view, the video game industry is similar to the film business. Specifically, there are substantial barriers to entry, and these barriers to entry include capital investments in game design, AI cloud services for mobile access, licenses for special intellectual property resources such as movies, TV shows, songs, storylines, novels, and theatrical plays. These mainstream licenses often help the major video game publishers secure higher, more stable, and more predictable sales, profits, and cash flows worldwide. From time to time, however, the leaner, faster, and smaller studios sometimes come up with individual games that rapidly gain global popularity almost overnight with only word-of-mouth (but virtually few or minimal advertisements). In due time, this opportunity provides smaller studios with the mass-market potential to create surprise breakout hits. These hits can turn into new niche franchises and then can cause potential sea changes and ripple effects in the global competitive landscape. After all, creativity plays a prominent role in game features, functions, and social interactions among the gamers.

The current dominant video game publishers include Activision Blizzard, Electronic Arts (EA), Take-Two Interactive (TTWO), Microsoft (MSFT), Time Warner (WBD), Zynga (ZNGA), and smaller video game publishers such as Glu Mobile (GLUU), Tencent (TME), and Japanese rivals and competitors such as Sony, Nintendo, Capcom, Sega, Konami, and Bandai Namco. In recent years, some small game publishers such as Bluehole Studio and Epic Games have become battle royale leaders with significant social-engagement sales and profits from their games, PlayerUnknown’s BattleGrounds (PUBG) and Fortnite respectively. The top-of-mind battle royale gameplay has become tremendously popular in light of the long prevalent fun elements of survival-and-shooter games in fast and furious game segments and storylines with substantially greater social engagement and immersion. The current battle royale genre blends the creative and explorative adventures of survival games with the last-man-standing gameplay of many multi-player and first-person shooters. This survival gameplay challenges each player to secure weapons, shields, and sheaths etc to fight opponents; and at the same time, each player has to avoid falling into traps outside of a shrinking safe base. In the battle royale gameplay, the ultimate winner is the last man standing on scarce and finite amounts of weapons, shields, sheaths, and several other resources.

The rapid rise of the battle royale gameplay has garnered significant attention in recent years. With the ongoing steady and remarkable momentum of Fortnite specifically, we believe most institutional investors focus more on the positive financial impact of these shooter games in the broader context of greater social engagement. With substantial capital investments over the past few years, each successful battle royale launch can provide long-term monetization across the mobile, console, and PC markets for video games. For this fundamental reason, the battle royale gameplay is not just another short-term fad. As the battle royale gameplay further attracts the younger and female demographic segments into the brave new world of video games, the resultant global phenomenon continues to expand the broader economic pie for video games worldwide.

Over the past decade, digital games have significantly grown to be the dominant part of total video game sales and profits due to the relative ease of digital downloads for many full video games. The major video game publishers further make available numerous digital treasures, accessories, live services, and other bonus contents. Global smartphone adoption can help accelerate the broader rapid growth, diffusion, and proliferation of mobile games worldwide. In terms of scale economies with respect to digital downloads, each game provides a hefty 85% gross margin in stark contrast to a 55%-to-65% gross margin for physical purchases of both console and PC games. For this reason, video games have increasingly become more digital over the past decade. In this positive light, the current digital transition continues to help improve both sales and profits across the entire global video game industry. Many video game publishers further benefit from new technological features, functions, and capabilities with in-game purchases (digital contents, avatar packs, accessories, and micro transactions etc). These in-game purchases help extend monetization capabilities well beyond the initial game purchase. The resultant online services extend the lifespan of each game by creating greater player engagement. At the same time, the longer lifespan of each game offers high-margin digital dollars to many video game publishers. These online services not only provide higher profit margins than the legacy business models, but the substantially more immersive user experiences also help digital games become the dominant sales streams. Specifically, downloadable contents and micro transactions often result in higher 60%-to-80% operating margins, in comparison to 25%-to-45% operating margins for traditional software packages. As many video game publishers continue to offer in-game purchases to professional gamers and retail consumers, the overall profit margins for video games should continue to improve in due course. The broader user adoption of Internet-connective mobile devices, especially smartphones and tablets, also helps expand the total addressable market (TAM) for mobile games. Free-to-play options, mobile games, and freemium business models tend to attract more casual potential gamers. All these product features and functions allow mobile games to be more immersive and more attractive to casual gamers, whose free-to-play preferences may differ dramatically from the technical preferences of hardcore gamers. In time, all these fundamental factors and forces help make mobile games more mainstream in the next few years. Specifically, mobile games can grow to account for more than 85% of worldwide sales and profits for the dominant video game publishers (Activision Blizzard, Electronic Arts (EA), and Take-Two (TTWO)) over the current decade. At its current growth pace, the global video game market is likely to reach $585 billion to $650 billion by 2030-2035 in accordance with the broad estimates of a recent Newzoo survey.

We structure our stock market investment thesis for the global video game industry in terms of 5 fundamental factors, forces, and considerations.

First, digital live services continue to drive higher double-digit growth in global game sales, profits, and cash flows.

Second, mobile technology continues to increase both the screen time and global reach of video games worldwide.

Third, the relatively high concentration of game franchises results from the greatest hits with intellectual property protection in movies, songs, storylines, novels, and theatrical plays, all of which create, form, and become part of our modern life culture.

Fourth, Esports have become a unique and separate game genre in terms of both worldwide popularity and screen time.

Fifth, some secular fundamental tailwinds continue to drive both P/E and P/B premiums for the dominant video game publishers in terms of their favorable stock market valuation.

Below we delve into each of these fundamental themes in support of the broader investment thesis with respect to the global video game industry. A rising tide lifts all boats. Hence, we are broadly positive on the major global video game publishers in light of new AI technology, greater social engagement among multiple players, and a fundamental shift to high double-digit growth rates in digital sales, profits, and capital expenditures. Nowadays, the dominant video game publishers include Activision Blizzard (now as part of Microsoft), Electronic Arts (EA), Take-Two Interactive (TTWO), Microsoft (MSFT), Time Warner (WBD), Zynga (ZNGA), Glu Mobile (GLUU), Tencent (TME), and Japanese rivals such as Sony, Nintendo, Capcom, Sega, Konami, and Bandai Namco.

 

Digital live services continue to drive higher double-digit growth in global game sales, profits, and cash flows.

Over the next few years, Newzoo expects the global video game market to sustain double-digit growth in global game sales, profits, and cash flows. Specifically, the global video game market is likely to grow from only $115 billion in 2017 to $250 billion to $335 billion in 2024-2026. In the current decade, mobile games are likely to account for more than 85% of total video game sales worldwide, as both PC and console games experience low-to-mid single-digit growth in sales, profits, and cash flows. In North America, Europe, and some parts of East Asia, video game sales have become increasingly mobile and digital. This mass-market sea change results from the relative ease of digital downloads, broad smartphone adoption, and greater availability of digital contents, podcasts, live services, avatar packs, accessories, and many more.

In favor of more digital and more mobile video games, another fundamental factor is the long prevalence of social interactions among professional gamers and retail players. As a result of the more immersive user experiences, digital games combine with mobile devices to open up a new social outlet for consumers. A recent survey from the U.S. Entertainment Software Association shows that more than 75% of frequent gamers connect with their friends through mobile games. Moreover, the same survey shows that 45% of frequent gamers think mobile games help them spend time with their family. In our increasingly global society, we believe the mobile games that embed social features into their platforms empower many video game publishers to develop more meaningful relationships between their contents and consumers. Many video game publishers continue to leverage social media platforms, Facebook, Twitter, Instagram, and TikTok etc, to engage with professional gamers, retail players, and potential customers. Social media creates more peer involvement in video games as consumers often share game hints, tryouts, and progress video clips on some websites such as Twitch, MLG, YouTube, and so on. This positive feedback loop further enhances and reinforces immersive gamer experiences through online social interactions.

Internet influencers can help promote better, greater, and faster social engagement in video games, especially through broad viewership of digital contents. For instance, more than 600 thousand people watched rappers Drake, Travis Scott, and NFL wide receiver JuJu Smith-Schuster play Fortnite on Twitch alongside one of the most popular streamers, Ninja, on the same platform. This session broke the record for peak concurrent viewers on an individual channel. This practical example highlights how the concurrent integration of both large and passionate communities builds brand awareness for a specific game title. In the meantime, Activision Blizzard attracts and retains 71 million gamers for Candy Crush, 27 million gamers for Farm Heroes, 25 million gamers for Call of Duty, 9 million gamers for Bubble Witch, 7.5 million gamers for World of Warcraft, 6.5 million gamers for Overwatch, 4 million gamers for Diablo, and 3 million gamers for Destiny, across both Facebook and Twitter. By comparison, Electronic Arts (EA) attracts and retains 23 million gamers for FIFA, 20.5 million gamers for Need for Speed, 18 million gamers for The Sims, 9.5 million gamers for Battlefield, 5.5 million gamers for NFL, 2.5 million gamers for StarWars, and 2 million gamers for NHL, across both Facebook and Twitter.

 

 

In support of broad video game usage, another fundamental factor relates to the low cost of video game entertainment. For the major video game publishers such as Activision Blizzard, Electronic Arts (EA), and Take-Two (TTWO), each hour of video game entertainment costs only $0.55, in comparison to $0.85 for a cable TV show, $5.75 for an in-theater movie, and well over $30 for a live concert. Today, video games have become a major social outlet for gamers to spend time with their family and friends.

As digital games increasingly account for a greater fraction of total video game sales around the world, these digital games serve as a major secular tailwind for video game publishers. This secular tailwind can prove to be particularly vital as gamers switch from physical game purchases to digital downloads. This switch often leads to higher net profits and cash flows. We believe this digital transition remains an ongoing competitive advantage for many video game publishers. During this transition, digital games can grow substantially to account for more than 85% of total game sales worldwide; whereas, both PC and console games wane in terms of subpar sales, profits, and cash flows in the next few years. The mainstream video game publishers continue to enjoy the resultant profit margin expansion in light of this recent digital transition.

PC and console games continue to face technical obstacles, barriers, and limitations for the foreseeable future. The major headwinds include finite storage space on PCs and consoles, consumer education, slow bandwidth speed, and online payment verification. Many PC and console gamers remain reluctant to delete old games to free up finite storage space for new games, although it has become both cheaper and easier for consumers to save their favorite video games with 2-terabyte PC and console storage. However, these workaround practices have become more common in recent years as PC and console storage space is finite and scarce. A more significant barrier for PC and console gamers is the relatively low bandwidth speed and high latency, especially in some parts of the world outside North America, Europe, Australia, and East Asia etc. Another significant barrier is a lack of cashless payments, in-game purchases, and micro transactions in some parts of the world with virtually few feasible protocols for credit cards and mobile payments.

Digital live services often help prolong game engagement and monetization opportunities. Many video game publishers benefit substantially from new technological advances such as artificial intelligence (AI), large language models (LLM), virtual reality (VR) headsets, electric vehicles (EV), 5G high-speed telecom networks, and the metaverse. The new technological advances allow video game publishers to offer in-game purchases (digital contents, avatar packs, accessories, and micro transactions). These in-game purchases extend monetization capabilities well beyond the initial game purchase. The resultant online services extend the lifespan of each game by creating greater player engagement. At the same time, the longer lifespan of each game provides higher-margin digital dollars to many video game publishers. These online services not only secure higher profit margins than the legacy business models, but the substantially more immersive user experiences also help digital games become the dominant sales streams. Specifically, downloadable contents and micro transactions usually lead to 60%-to-80% operating margins, in comparison to 25%-to-45% operating margins for traditional software packages. As many video game publishers continue to provide in-game purchases to professional gamers and retail consumers, the overall profit margins for video games should continue to improve in due course.

As video game developers increasingly offer live services in their games, we can expect to see even higher gamer engagement and longer gameplay. These positive results often lead to higher gamer expenditures in the common form of in-game purchases. Over time, those video game publishers that offer live services most effectively can benefit not only financially, but also more broadly in terms of longer-term brand equity and gamer loyalty. Nevertheless, we believe many video game publishers still attempt to explore different approaches to their live services and in-game purchases in different types of games because of the potential for monetization fatigue and pay-to-win perceptions. To avoid monetization fatigue, video game publishers should not make gamers view live services and in-game purchases as some sort of mercenary exploitation. To avoid pay-to-win perceptions, game publishers should ensure that their video games have fair game progressions with no, minimal, or only a few in-game purchases. Indeed, there is a delicate balance for gamers of what seems fair in video games in terms of what these gamers can earn and what they can buy. It is vital for game publishers to respect this balance to maintain fair game progressions. Most live services and in-game purchases relate to cosmetic features, maps, and minor game hints etc. These items either do not affect game play, or provide significantly greater value with new player modes without affecting fair game progressions.

 

Mobile technology continues to help increase both the screen time and global reach of video games worldwide.

Over the past few years, the global mobile game industry has grown significantly due to the increasingly broader user adoption of mobile devices, primarily smartphones and tablets. In practice, this tech trend helps boost screen time spent on mobile games. Also, many video game publishers launch free-to-play mobile games to monetize in-game ads and purchases. In the next few years, Newzoo projects smartphone users to increase at double-digit annual growth rates in Latin America, India, Middle East, Africa, and East Asia outside China and India. Over the same time frame, Newzoo projects smartphone users to increase at mid-to-high single-digit annual growth rates in the mature mobile markets such as China, Eastern Europe, Western Europe, and North America.

The broad user adoption of Internet-connective smartphones and tablets helps expand the total addressable market (TAM) for mobile games. Free-to-play options, mobile games, and freemium business models tend to attract more casual potential gamers. All of these product features and functions make mobile games more immersive and more attractive to casual gamers, whose free-to-play preferences often seem to differ dramatically from the premium preferences of hardcore gamers. In time, all these fundamental factors and forces help make mobile games more mainstream in the next few years. Specifically, mobile games can grow to account for more than 85% of worldwide sales and profits for many video game publishers (Activision Blizzard, Electronic Arts (EA), and Take-Two (TTWO)) in the current decade. At its current growth pace, the global video game market is likely to reach $585 billion to $650 billion by 2030-2035 in accordance with the broad estimates of a recent Newzoo survey.

Here we focus on the stock market investment thesis for Activision Blizzard (now as part of Microsoft (MSFT)). Activision Blizzard seeks to capitalize on the fundamental shift to digital mobile games. This shift represents a long-term tailwind to further compound growth in sales, profits, and cash flows. For Activision Blizzard, we expect to see an increasingly vital portion of video game sales to arise from digital downloads on smartphones. In light of this transition, Activision Blizzard has the potential to further monetize live services and in-game purchases. For Activision Blizzard, digital downloads tend to represent a unique opportunity for console, PC, and mobile platforms, because many gamers enjoy playing Blizzard titles on PC, King console, and mobile devices. For the Call-of-Duty game franchise, the latest installment sets a Sony PlayStation console record with the biggest Day 1 digital release of all time. Activision Blizzard’s other key franchise Destiny has a higher digital unit sales mix (historically 30% to 40%). The latest installment, Destiny 2, now represents about 45% of the digital game sales for Activision Blizzard in recent quarters. In addition, Activision Blizzard distributes another key franchise, Overwatch, primarily through PC and console platforms. We can expect this franchise to show higher market penetration in global digital mobile games over the next few years. Digital distribution further allows Activision Blizzard to better monetize its extant game library. This game library includes the Crash Bandicoot Sane Trilogy, StarCraft, Guitar Hero, CoD Infinite Warfare, CoD Online in China, Diablo, Skylanders, and Heroes of the Storm. In recent quarters, these game franchises seem to decline in terms of total sales and in-game purchases. Activision Blizzard’s shooter games face intense competition from the viral battle royale hits Fortnite and PUBG.

Here we focus on the stock market investment thesis for Electronic Arts (EA). For Electronic Arts (EA), full-game console download sales represent more than 20% of total digital sales, and about 17% of total game sales in recent years. We believe Electronic Arts’s (EA) digital downloads should benefit substantially from the wider fundamental secular tailwind of game purchases in favor of both digital platforms and mobile devices. In broader terms of industry rotation, Electronic Arts’s (EA) remains several years ahead in the current transition toward digital downloads and mobile games. Over the past several years, Electronic Arts (EA) has experienced a broad increase in full-game console downloads across its extant portfolio of video games in line with global industry trends. More than 37%-43% of Electronic Arts’s (EA) game sales are digital in favor of X-Box, PlayStation, and Twitch etc. As Electronic Arts (EA) continues to drive gamers toward digital downloads via digital-only promotions and special digital packages, we expect full-game console downloads to move closer toward the higher market penetration level of PC games. This fundamental shift offers some new profit margin expansion for Electronic Arts (EA), even though its current gross margin is specifically higher in the reasonable range of 75% to 77%. In the current decade, Electronic Arts’s (EA) digital downloads tend to skew toward the lower industry benchmarks due to the global nature of FIFA and Battlefront II. However, 60% of its gamers may have technical issues with cashless transactions and bandwidth limits. For these reasons, it may take longer for Electronic Arts (EA) to reach the longer-term 85% market penetration level for digital mobile games.

Electronic Arts’s (EA) live services and in-game purchases represent almost 60% of digital game sales, and about 40% of total game sales in recent years. These sales improvements arise primarily from the recent titles FIFA, Madden Ultimate Team, Battlefield, and The Sims, in North America, Western Europe, and some regions of East Asia outside China and India. We believe Madden Ultimate Team generates more than $1 billion annual sales and thereby represents more than 50% of live services for Electronic Arts (EA). For the non-sports games, we expect live services to grow at double-digit percentages each year over the next decade. For Battlefield, Battlefront, and some other first-person shooter games, Electronic Arts (EA) faces intense competition from the battle royale hits Fortnite and PUBG. Electronic Arts (EA) manages to make iterative continuous improvements with A/B tests, tweaks, and updates. These efforts help Electronic Arts (EA) better monetize live services and in-game purchases for the non-sports games.

Electronic Arts (EA) further offers the new subscription services EA Play and EA Play Pro. Electronic Arts (EA) persists at the forefront of the video game industry for its bold transition to new subscription services with EA Play ($5.99 per month or $39.99 per year) and EA Play Pro ($16.99 per month or $119.99 per year). Also, diehard gamers can purchase the top EA Play Pro subscription for $119.99 for a full year. With these all-you-can-play subscriptions, Electronic Arts (EA) blazes the trail for gamers to better enjoy the EA-exclusive titles. In this unique fashion, these premier subscriptions help live services and in-game purchases more meaningfully contribute to digital downloads and total game sales in recent years. Electronic Arts (EA) discloses the mainstream results of its internal empirical studies: gamers generally play twice as many games, for twice as long, and further spend twice as much money with some subscription because there is no additional cost for these gamers to try out new games. Newzoo characterizes these premier subscriptions as the foundational disruptor across the global video game industry. These subscriptions can increase gamer engagement with the wider Electronic Arts (EA) ecosystem of video games. As a result, these subscriptions often lead to steady sales streams with positive network effects, scale economies, and information cascades. These rare unique services set Electronic Arts (EA) apart from its close peers in the global video game industry.

 

The relatively high concentration of video game franchises results from the greatest hits with secure intellectual property protection in movies, songs, novels, and theatrical plays, all of which create, form, and become part of our modern life culture.

The major video game publishers include Activision Blizzard, Electronic Arts (EA), and Take-Two (TTWO), in addition to Microsoft (MSFT), Time Warner (WBD), Tencent (TME), Zynga (ZNGA), Glu Mobile (GLUU), and Japanese rivals Sony, Nintendo, Capcom, Sega, Konami, and Bandai Namco (plus some smaller private companies). Given the exponential growth in the video game industry in terms of both screen time, gamer engagement, and monetization, there is intense competition across the fundamental landscape. Most video game publishers invest substantially in game design, development, and intellectual property protection in light of the worldwide potential upside for successful games (even battle royale hits as part of our modern life culture).  

Several major franchises such as Call-of-Duty for Activision Blizzard and FIFA for Electronic Arts (EA) provide relatively steady sales streams. This steady state helps smooth out volatile fluctuations in both sales and profits for the traditionally hits-driven video game industry. In this broader context, longer-term gamer engagement makes each game more important in both social and financial views. Specifically, the greatest battle royale hits now, Fortnite and PUBG, empower gamers to immerse themselves in real-time battle interactions, first-person shooter teams, and survival modes etc. These gamers interact with their teammates via live chat rooms during each fast and furious battle. The resultant intense social engagement can be great fun for both professional gamers and retail players around the world.  

The relatively high concentration of video game franchises results from the greatest hits with secure intellectual property protection in movies, songs, novels, and theatrical plays, all of which create, form, and become part of our modern life culture. As each hit can capture the predominance of game sales worldwide in a relatively short time frame, many video game publishers now design, develop, and distribute fewer games each year. Over the past few years, the total number of annual AAA game releases has decreased dramatically from more than 55 to 27 as many video game publishers focus more on launching big tent-pole games to drive exponential gains in gamer engagement and monetization for each game franchise. The resultant longer lifespan of each game helps these video game publishers better design the next big hits; and each of these hits often secures steady monetization over many years. Indeed, the track record of success for top video game publishers places high expectations on specific properties of the greatest hits. For this reason, many video game publishers now attempt to connect new intellectual property protection to their game releases. From time to time, this new intellectual property protection arises from viral movies, songs, storylines, TV shows, sports, and theatrical plays etc.

The battle royale gameplay has become tremendously popular in light of the long prevalent elements of survival-and-shooter games in fast and furious game segments and storylines with substantially greater social engagement, teamwork, and immersion. The current battle royale genre blends the creative and explorative adventures of survival games with the last-man-standing gameplay of many multi-player first-person shooters. The survival gameplay challenges each player to secure weapons, shields, and sheaths etc to fight opponents; and at the same time, each player has to avoid falling into traps outside of a shrinking safe base. In the battle royale gameplay, the ultimate winner is the last man standing on finite amounts of weapons, shields, sheaths, first aid kits, medical supplies, and several other resources.

The rapid rise of the battle royale gameplay has garnered significant attention in recent years. With the ongoing steady and remarkable momentum of Fortnite specifically, we believe most institutional investors focus more on the positive financial impact of these shooter games in the broader context of greater social engagement. With substantial capital investments over the past few years, each successful battle royale launch can provide long-term monetization across the mobile, console, and PC markets for video games. For this fundamental reason, the battle royale gameplay is not just another short-term fad. As the battle royale gameplay further attracts the younger and female demographic segments into the brave new world of video games, the resultant global phenomenon continues to expand the broader economic pie for video games worldwide. As of mid-2024, PUBG attracts 1.3 billion gamers worldwide; and Fortnite attracts more than 650 million gamers worldwide. Moreover, PUBG and Fortnite retain 9 million and 15 million viewers on Twitch respectively. In terms of total viewership on Twitch and YouTube for Gamers, a recent Newzoo survey shows 57 million hours for PUBG (9%) and 83 million hours for Fortnite (13%). In terms of total screen time, these battle royale hits seem to be more popular than many Hollywood movies and Netflix shows.

In the longer run, we believe the battle royale gameplay creates new opportunities for some video game leaders and trailblazers, Activision Blizzard, Electronic Arts (EA), and Take-Two (TTWO), to capitalize on this active consumer interest. Game designers and developers can incorporate the broader battle royale mode into their new titles and storylines in support of better social engagement among professional gamers and retail players. Also, many gamers are happy to pay for new live services and in-game purchases (digital contents, avatar packs, accessories, and micro transactions) in a unique cost-effective way. To the extent that these extra services ensure fair game progressions of the battle royale theme, these live services and in-game purchases would not inadvertently promote pay-to-win perceptions. Each new battle royale launch can condition the younger and more casual gamers to spend money on season passes, cosmetic features, digital treasures, first aid kits, medical supplies, and other accessories etc, in order to receive greater entertainment value from the gameplay. In this positive light, we expect to see high monetization potential for Battlefield from Electronic Arts (EA) and Call-of-Duty from Activision Blizzard.

In light of the high concentration of video game franchises today, we briefly list and describe the current portfolios of video games for Take-Two (TTWO), Microsoft (MSFT), Time Warner (WBD), Zynga (ZNGA), Tencent (TME), Nintendo, Sony, Capcom, Konami, Bandai Namco, Sega, Epic Games, and Bluehole Studios, in addition to Activision Blizzard and Electronic Arts (EA) above. It is vitally important for us to point out that some of the world’s major asset managers continue to own hefty equity stakes in the dominant video game publishers. These asset managers include BlackRock, Vanguard, State Street, Fidelity, Nomura, Invesco, DFA, DE Shaw, Millennium, as well as some sovereign wealth funds and pension funds.

Take-Two’s (TTWO) current portfolio includes Grand Theft Auto, NBA 2K, Redemption, Red Dead, and Midnight Club.

Microsoft’s (MSFT) current portfolio includes Halo, Age of Empires, Gears of War, and Mine-craft.

Time Warner’s (WBD) current portfolio includes Mortal Kombat, Injustice, Batman, Middle-earth.

Zynga (ZNGA)’s current portfolio includes Farmville, Mafia Wars, Words with Friends, and CSR Races.

Tencent’s (TME) current portfolio includes League of Legends, Clash of Clans, and Clash Royale.

Nintendo’s current portfolio includes The Legend of Zelda, Pokémon, New Super Mario, and Wii Sports.

Sony’s current portfolio includes Rachel & Clank, God of War, Killzone, and Spider Man.

Capcom’s current portfolio includes Monster Hunter World, Resident Evil, Megaman, Street Fighter, and Devil May Cry.

Konami’s current portfolio includes Metal Gear Solid, Silent Hill, Castlevania, Dance Dance Revolution, and Frogger.

Bandai Namco’s current portfolio includes Dark Souls, Tekken, Pac Man, Dragon Ball Z, and Naruto.

Sega’s current portfolio includes Sonic the Hedgehog, Tetris, and NBA Jam.

Epic Games’s current portfolio includes Fortnite, Battle Breakers, Infinity Blade, and Robo Recall.

Bluehole Studios’s current portfolio includes PUBG, Tera, Devilian, and Bowling King World League.

 

Esports have become a unique and separate game genre in terms of both screen time and global popularity.

Many video game publishers refer to Esports as the online Wild West of Sports. The global target audiences are large and still continue to grow exponentially. Esports help boost sales for many video game publishers in close comparison to traditional sports on a per fan basis. The current balance between Esports and traditional sports draws in many new video game publishers, event promoters, social media platforms, teams, and investors. All of these real stakeholders expect to see substantial room for monetization in Esports.

Esports involve competitive video gamers. In a fundamental view, Esports have been around ever since video games started attracting casual players in the late-1980s and early-1990s. From ESL to MLG, the mainstream Esports organizations persist at the forefront of Esports. As of September 2024, the largest mainstream Esports organizations are TSM, 100 Thieves, Team Liquid, FaZe Clan, Cloud9, G2, Fnatic, Gen.G, NRG, and T1, each worth at least $220 million to $540 million worldwide. In the past few years, Esports have grown considerably in light of significant improvements in visual, audio, mobile, and even AI technology, ubiquitous online communities, low-latency video-streaming live services, and hefty capital investments from video game publishers, teams, sponsors, and event organizers worldwide. As a brand-new concept, competitive Esports have become more mainstream today. In January 2016, ESPN began its unique coverage of Esports through vertical integration. Soon Yahoo Sports followed suit several months later. Now almost all of the mainstream video game publishers broadcast their own Esports through online live services worldwide.

We highlight 4 central aspects of Esports that differentiate themselves from traditional sports. First, there is more than one sport within Esports. Each video game title on its own can serve as a separate sport with a rare unique set of teams, events, sponsors, and competitors. For example, the Chinese tech titan Tencent showcases and broadcasts League of Legends as one of the most popular Esports through Riot Games (a smaller game publisher in California) with more than 10 different competitions each year.

Second, Esports are online and mobile first. The primary medium for Esports is the Internet through digital platforms such as Twitch, YouTube, and Smashcast in America, Douyu TV in China, and Naver in South Korea. In effect, these platforms serve as online communities for global fans, professional gamers, and casual players to interact through Esports.

Third, Esports are global. Because the fan bases for individual game titles are global, so are the target audiences for the numerous Esports competitions. A recent Newzoo survey shows that approximately half of Esports fans, gamers, and casual players reside in the Asia-Pacific region, especially China, Japan, South Korea, and Taiwan. In both Japan and South Korea, Esports continue to serve as their national pastimes. The global popularity of a new Esports title is vitally important for many video game publishers.

Fourth, video game publishers ultimately own the Esports. As intangible assets help secure steady sales streams worldwide, each Esports title belongs to some video game publisher. With high stock ownership, each Esports publisher controls complete rights for commercial usage, brand equity, and gamer loyalty. In contrast, no party owns traditional sports such as basketball, baseball, and football. In Esports, for instance, Valve Corporation not only owns Counter Strike, but also retains the unique ability to fundamentally change the game through new versions, updates, and twists and turns in the storyline.

A recent Newzoo survey shows that the global market for Esports is worth at least $2 billion annual sales as of June 2024. With fair and reasonable projections, we can expect the global market for Esports to grow significantly at 20%-25% to reach $9 billion annual sales by 2035. Across the Esports competitive landscape, these sales arise from worldwide advertisement, sponsorship, merchandise, media rights, e-tickets, promotions, and game publisher fees. In stark contrast to the 4 major American sports leagues (MLB, NBA, NFL, and NHL), Esports still seem to under-monetize their respective fan bases. For Esports, annual total sales hover around only $5 per fan and so seem to show significant under-monetization (in comparison to more than $45 per fan for the 4 major American sports leagues). For this reason, we can expect Esports to garner greater sales momentum in the broader context of significant future opportunities for further monetization.

 

Some secular fundamental tailwinds continue to drive both P/E and P/B premiums for the dominant video game publishers in terms of their favorable stock market valuation.

We are broadly positive on the major global video game publishers in light of new AI mobile technology, greater social engagement among multiple players, and a fundamental shift to higher double-digit growth rates in digital sales, profits, and capital expenditures. Both digital downloads and mobile devices can help encourage greater global video game consumption, profit margin expansion, and further monetization via live services and in-game purchases. In light of all of these fundamental factors, forces, and considerations, we believe the global video game sector deserves both P/E and P/B premiums relative to the broader global stock market. Specifically, we view the major video game publishers more favorably relative to the traditional mega media stocks within our current coverage. For Activision Blizzard, Electronic Arts (EA), and Take-Two (TTWO), the current P/E and P/B multiples are 21-to-24 times and 155%-to-185% respectively. By comparison, the current P/E and P/B multiples are 13-to-23 times and 115%-to-145% respectively for the mega media stocks Disney (DIS), Paramount (PARA), and Netflix (NFLX). In long-run stock market history, the S&P 500 index often trades at P/E and P/B multiples of 16-to-18 times and 1.5-to-2.5 times respectively. In sum, secular fundamental tailwinds continue to drive both P/E and P/B premiums for the dominant video game publishers in terms of their favorable stock market valuation.

 

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