Gaming all over the place

Corona functioned as a booster in some sectors. This also includes the home entertainment industry, in particular video games are some of the strongest beneficiaries. The major developers of mobile games also recorded high growth rates. "Before the outbreak of the pandemic, earnings growth was in the low single digits. In the second and third quarters of this year, it rose to 20 to 25%," explains Erling Haugan Kise, Portfolio Manager in the DNB Technology Fund team and responsible for the gaming sector, among other things. The situation was similar for the Twitch video streaming service, which users used twice as long in this period as in the corresponding quarters of the previous year. Measured against the active use of the Internet sales platform for computer games Steam, PC gamers also spent more time in front of the screen: From a low single-digit number before the crisis, game times increased in the second and third quarters to almost 50% year-on-year. The data also shows that weekend peaks are less pronounced, as games are played more evenly throughout the week.

No indications for a reversal of the trend

The acceleration of the trend is driven by the reactivation of older players and the acquisition of new users, more than increasing spend from the existing base. "We view post-covid growth driven by user growth as more structural in nature than growth driven by increased spend (ARPU – average revenue per user). Our view is that ARPU growth will revert to trend as society reopens, however, we believe reactivated or new active users will be sticky with a majority not churning post reopening. The bottom line is that the long-term growth prospects for the industry have thus improved," says Kise, summarizing the outlook. This is also confirmed by major consulting institutes, which have noted an improvement in the secular growth trend from 8 to 14%. One month after the end of the fourth quarter, the growth trends for PC, console and mobile games are still very strong and show no signs of slowing down.

Digital distribution is picking up speed

"With regard to video games, we are currently in a very exciting time. In the current quarter, Sony and Microsoft will launch their next generation consoles. Nintendo is expected to upgrade its switch console next year. Last but not least, we will see full backwards compatibility with the new generation and probably the end of console cycles as we have seen them in the past," said Kise.

In addition, the digital distribution of games is gaining momentum, which will benefit the revenues and profits of vendors and platform owners. The price for a user stays the same, but there are no costs for packaging and physical distribution. This leaves manufacturers with $37 from the digital distribution of a game worth $60, compared to only $27 for traditional physical distribution.

There will be a series of price increases for AAA video game titles from $60 to $70 in the fourth quarter of this year as well as next year. Some of the licensed titles are now so strong that they have pricing power, which has a direct impact on the gross margin. In addition to Sony and Nintendo, the video game and manga producer Square Enix, the US video game development company Glu Mobile as well as the computer and video game group Activision Blizzard and Electronic Arts currently seem promising.