‘Fort­nite’ suc­cess shows ap­peal of gam­ing firms

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The run­away suc­cess of the Fort­nite video game has re­newed in­vestors’ in­ter­est in the gam­ing sec­tor. Fund man­agers be­lieve the in­dus­try’s move to­wards down­load­able games, on­go­ing sub­scrip­tions and “mi­cro­trans­ac­tions” has in­creased its prof­itabil­ity. Rather than mak­ing a one-off £50 pur­chase of a new game, say, cus­tomers now down­load a ti­tle on­line and are en­cour­aged to make smaller pur­chases while they play to un­lock new fea­tures. Gamers can also be charged a sub­scrip­tion by the con­sole man­u­fac­turer or the game pub­lisher.

Neil God­din, a fund man­ager at Kames Cap­i­tal, said es­chew­ing phys­i­cal me­dia had re­duced costs for pub­lish­ers. En­cour­ag­ing play­ers to make trans­ac­tions on an on­go­ing ba­sis also meant games con­tin­ued to make money long after their re­lease.

“His­tor­i­cally the sec­tor was driven by hit games and com­pa­nies strug­gled to make con­sis­tent re­turns,” he said. “But the in­tro­duc­tion of on­go­ing pay­ments has re­duced this volatil­ity. Be­ing able to down­load games and re­quir­ing mem­ber­ship to ac­cess on­line play or a full cat­a­logue of con­tent means rev­enues from each ti­tle are pro­longed and more sus­tain­able.”

Fort­nite, an on­line bat­tle game, has taken this model one step fur­ther. The game it­self is free, but users pay to down­load cus­tomis­able cos­tumes for their in-game char­ac­ters. Su­perData, an in­dus­try an­a­lyst, has es­ti­mated that the game has gen­er­ated $1bn (£770m) in rev­enue for its pub­lisher, Epic Games.

De­mo­graphic trends are also en­cour­ag­ing. Gam­ing has shaken off its im­age prob­lem and is no longer seen as the pre­serve of teenage boys. GameTrack, an in­dus­try an­a­lyst, said 46pc of Bri­tish gamers were fe­male in the first quarter of this year. More peo­ple are also gam­ing on the go us­ing their mo­bile phone.

Michael Lind­sell, a fund man­ager at Lind­sell Train, said: “The num­ber of video gamers has in­creased ten­fold over the past decade thanks to the pro­lif­er­a­tion of smart­phones. The av­er­age age of the gam­ing pop­u­la­tion has also in­creased, which is an­other pos­i­tive trend. As a re­sult, con­sumer spend­ing on gam­ing is grow­ing.”

While Fort­nite is owned by Epic Games, a pri­vate com­pany, there are a num­ber of listed gam­ing stocks for in­vestors to con­sider. Ac­tivi­sion Bl­iz­zard, EA, Take 2 and Ubisoft are the four big­gest. Mr God­din said Ubisoft,

pub­lisher of the danc­ing game Just Dance, had been his big­gest hold­ing in 2018 and had per­formed well.

“Ubisoft has been able to in­crease mar­gins through dig­i­tal adop­tion and grow re­cur­ring rev­enues through ingame mon­eti­sa­tion,” he said.

“Just Dance is a game my chil­dren like; you buy the game but to get the full cat­a­logue of songs you must pay a yearly mem­ber­ship.”

Mr God­din said Ten­cent, the Chi­nese tech gi­ant that has a stake in Fort­nite via its 40pc own­er­ship of Epic, had bought 5pc of Ubisoft ear­lier this year to help sell its ti­tles in China, some­thing that West­ern games firms have strug­gled to do. But the growth of the sec­tor will not boost just the big games pub­lish­ers, he said. Mr God­din’s fund also holds a stake in Key­word Stu­dios, which pro­vides out­sourc­ing ser­vices to game de­vel­op­ers.

Stephen Yiu, a fund man­ager at Blue Whale, sounded a note of cau­tion

about tra­di­tional gam­ing firms. He sold his stake in EA ear­lier this year amid fears that the sec­tor might move to­wards the free-to-down­load busi­ness model used by Fort­nite. “If any pres­sure builds on the in­cum­bent gam­ing com­pa­nies to move to a new model, this would se­verely threaten their prof­itabil­ity,” he said.

How­ever, he added that, even if this did oc­cur, the big play­ers would be well placed to ben­e­fit in the longer term as they own the gam­ing in­dus­try’s most pop­u­lar fran­chises. Mr Lind­sell said he had in­vested in pub­lish­ers Square Enix and Nin­tendo be­cause of the pop­u­lar­ity of their ex­ist­ing fran­chises.

Some firms have al­ready sought to ad­dress the risk. Ac­tivi­sion Bl­iz­zard bought mo­bile gam­ing firm King Dig­i­tal, owner of the free-to-play Candy Crush game, in Fe­bru­ary 2016 to help it tap into new mar­kets.

The growth of “e-sports”, where play­ers com­pete with each other in tele­vised broad­casts, rep­re­sents an­other po­ten­tial rev­enue stream for the in­dus­try, Mr God­din and Mr Yiu said. Rights to e-sports com­pe­ti­tions are al­ready be­ing ac­quired by tra­di­tional broad­cast­ers, with po­ten­tial for sig­nif­i­cant fu­ture growth.

New rev­enue streams and po­ten­tial fu­ture growth are at­tract­ing in­vestors to video game pub­lish­ers, writes Adam Wil­liams ‘The num­ber of video gamers has in­creased ten­fold over the past decade’

Gam­ing has shaken off its bad im­age: al­most half of Bri­tish gamers are fe­male

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