When you start to dive into gaming, the industry can be a little confusing at first. There are developers, publishers, tournaments, and all sorts of different vehicles of investing. So here’s a high-level guide to understanding how the core of the video gaming industry works.
Part 1: The companies that make and distribute the games
- Also known as: Studios and publishing
- Think of it as: Movie studios and distribution (20th Century Fox)
- Worth reading about: The history of Fortnite (popular game title)
- Notable companies: (US / Canada): Epic Games (Fortnite), Axion Ventures (AXV)
This is the gaming equivalent to Hollywood. Game development and distribution comes down to making video games and finding ways to get them in front of people. Game studios are typically highly creative that have a lot of similar titles to the movie making world (directors, art direction, music direction, etc.), they are responsible for making games. Game publishers are responsible for distributing the games and typically license a game from a game studio for distribution. Large game companies like Take Two Interactive have both game studios and publishers as subsidiary companies, just like the dominant companies of the movie business.
Where’s the value:
Currently the creation and distribution of game content accounts for the lion’s share of the US$140B global gaming industry. Very few tech products can compete with successful game intellectual property (IP) for economic gain. Fortnite reportedly generated US$3B of profit in 2018 for Epic Games and single handily brought Epic Games from a fledgling studio into one of the most prolific game companies today.
Currently, there is a quiet bull market for quality game studios. A lot of the good ones are getting quietly acquired. Game content, particularly strong game IP with opportunity for updates (like Fortnite) or sequels (like Red Dead Redemption), will only continue to become more valuable as the gaming industry matures.
Part 2: The Hardware of Gaming
Also known as: The tech stack, console manufacturers
Notable companies: Nintendo, Sony, Microsoft, Nvidia
Where’s the value:
This encompasses everything from the companies that make game consoles like the Nintendo Switch or the Sony PlayStation, to the computer manufacturers that make gaming PCs, to the chip manufacturers like Nvidia that power them. There is a ton of hardware that, to this day, underpins the gaming industry.
We could be wrong, but we are of the opinion that we are seeing the last generation of video game consoles, at least in the traditional sense. New technologies like game streaming and immersive technology like AR/VR coupled with global themes like PC gaming and mobile gaming will likely eat into console manufacturers. On the other hand, chip manufacturers like Nvidia will likely power much of the future of the gaming industry with their graphics chip technology.
Part 3: The Infrastructure
Notable companies: Google, Shaw, Cox
Where’s the value:
This is the stuff you don’t see. It’s the servers that run the games and deliver them to your device in the cloud. This is the telecom infrastructure that supports the data on your phone so you can play other people around the globe, live, in massive mobile titles like Clash of Clans.
The long-term trend here is more data, more bandwidth requirements, and greater speed requirements from the end-user. Morgan Stanley did a great deep dive in 2017. Fifth generation (5G) wireless is the next paradigm shift in infrastructure and will offer up to a 100x increase in internet speed to power the next generation of technology content.
Part 4: Esports Platforms
Also known as: Streaming
Think of it as: Netflix, CBS, ABC
Notable companies: Twitch, Mixer
Esports is quite simply competitive video gaming. People enjoy watching other people play video games, just like people like watching football. Twitch is a platform owned by Amazon that lets video game players live broadcast their screen to millions of people so they can watch them play in real time. The best way to think of this would be as the gaming industry’s equivalent of the broadcasting and content delivery business for movies.
Twitch is the 800-pound gorilla in the platform space. It is by far the largest game streaming platform in North America and captures the vast majority of value currently in esports.
Looking Ahead: A wide variety of companies are looking to leverage Twitch and the network it has created as well as leveraging the esports community using a variety of game platforms. We see the streaming world likely fragmenting in the future, just as the movie/tv show business is fragmenting amongst a variety of providers. Google is already looking to become a strong competitor to Twitch through Youtube Gaming and its game streaming platform.
Part 5: Esports Teams and Influencers
Also known as: Orgs
Think of it as: Athletes (in sports) or actors (in the movie business) and the talent
agencies that represent them
Notable companies: Luminosity (soon to be public), Splyce, FaZe Clan
The short version is in the past 5 years, largely as a result of Twitch, professional game streamers have built massive followings for the original content they produce on Twitch. In response to this, esports ‘teams’ were formed. Many were formed under the guise that they would win prize money in the space. What they really were forming was talent agencies. The best teams in the world would be able to keep their best talent, attract new talent, grow and market their existing talent, help them with content production, link them with sponsors, and structure revenue share deals on the content production. Sound familiar? It’s the talent agency business.
Where’s the value:
Capturing the most prolific streamers, having the strongest brand relationships, identifying and developing new streaming talent, and perhaps most importantly in the brand of the org and/or streamer.
In the past we’ve walked through Apex Legends, and how game streamers drove its unprecedented growth. We see storm clouds on the horizon between the traditional game studios/publishers as esports organizations start to flex their distribution muscles and look to try their hand in the game content space.