Expansion into Western markets by China-based game developers such as Perfect World may provide one route through which the gaming industry could bolster slowing growth. (Imagine China/Newscom)
As the U.S. moved to provide South Korea with a missile defense system to safeguard against an ever-aggressive North, China clamped down. Calling the move a threat to its own interests, China barred a number of South Korean companies from, among other things, the world’s largest mobile games market.
South Korea’s mobile games developers reported they were no longer able to obtain licenses and, in turn, publish their products within China’s borders. Investors mashed the “sell” button. Shares of Korean gaming companies plunged.
In an odd way, the exchange signaled that the industry — which has grown from arcades, “Pong” and “Pac Man” into PC bangs, e-sports, “Pokemon Go” and “Mobile Strike” — had finally reached some form of adulthood.
The global video game industry became a roughly $100 billion market last year. The total number of gamers is expected to reach 2.2 billion this year, according to industry tracker Newzoo. But that growth, as it does for any industry with 12-digit revenue, has begun to slow. That fact has begun to turn attention to China’s prospects in the West, virtual reality’s chances of a breakthrough, and options for the industry outside of gaming.
The global video game market turned out double-digit growth in 2014 and 2015. But that rate of acceleration cooled to 8.5% last year. Newzoo expects the market to ease to 5.4% growth by 2019.
“I don’t think there’s a reasonable expectation that we’re gonna see double-digit yearly growth,” Gartner analyst Brian Blau said. “That is hard to imagine, because there’s a limit to the number of devices that people are going to buy and the amount of time they have. And we are starting to see some of those limits.”
“After 40-plus years … this is something that’s mature,” Blau said. “And investors have to treat it like that.”
Factoring In The Candy Crush Wild Card
Consistent double-digit growth might be out of reach, but IBD’s Computer Software-Gaming industry group rose 17.2% in the eight weeks to Thursday — the second-best advance among the 197 industries tracked by IBD. That moved the group to a No. 65 ranking on Thursday, up from No. 101.
Electronic Arts (EA) and Activision Blizzard (ATVI) are two of the group’s biggest names. Take-Two Interactive (TTWO) is smaller, but its shares have staged an impressive 4-1/2-year rally and the company is expected to post strong sales and earnings growth for the next two years.
Chinese companies are also taking a larger share of the market. Tencent (TCEHY) is arguably the world’s largest gaming provider. NetEase (NTES) is a staunch competitor and listed as IBD’s top-ranked stock in the industry group.
IBD’S TAKE: Research has shown that nearly 50% of a winning stock’s strength owes to the strength of its industry group and sector at the time of its breakout.
Unlike many maturing markets, video gaming still offers some opportunity for explosive, IPO-type gains.
Game publishers, Blau said, can rise to worldwide popularity with a single introduction — think Rovio’s “Angry Birds” or King’s “Candy Crush Saga” of years past. (Activision Blizzard acquired King for $5.9 billion in February 2016.)
Publishers can also get significant boosts from game franchises, like EA’s ever-enduring “Madden” NFL series, Blau said. Sales come either after customers buy the games themselves — a one-time purchase — or by downloading a game for free and then making smaller in-game purchases over time that enhance the game overall.
There is also the industry’s old standby, console makers — essentially Sony (SNE) and its PlayStation; Microsoft (MSFT) and its Xbox — and online gaming platforms from companies like Tencent.
Digital Athletes, Eyes On The Prize
The overlap between video games, sports and the broader entertainment industry may deepen, analysts say. Gaming, through virtual reality and other means, is becoming more immersive, and professional gamers are building athlete-like status.
“E-sports is the future of entertainment and is accelerating the convergence of industries such as telecom, sports, entertainment and media,” Newzoo CEO Peter Warman said over email. He later added that as competitive gaming becomes more popular, “prizes are becoming an integral part of any game in development.”
Virtual reality appeared to be among the main take-aways from this year’s Game Developers Conference, which ended March 3 in San Francisco. Demonstrations there made the technology seem almost certain to reshape the industry’s game development and storytelling, and expand its hardware offerings.
Processing chip sets from Qualcomm (QCOM) have provided the foundation for new headsets using inside-out tracking, including a new headset on display at the conference from Pico Interactive, reported online magazine AnandTech. Inside-out tracking attempts to more closely tailor the view seen through a headset to the dimensions of the wearer’s actual physical space. Inside-out tracking has also attracted the likes of Microsoft and Facebook‘s (FB) Oculus. Other developers are tinkering with eye-tracking technology.
As films, television and online shows move beyond the two-dimensional TV screen into 3-D digital space, VR development and engineering talent will probably migrate accordingly, said Gartner analyst Tuong Nguyen. Game play and design — and the cues to move a player through a particular setting — will have to be rethought and made more about the way a player moves their entire body.
VR could also help strengthen the prospects of PC gaming, which has done well amid doubts in an expanding world of mobile devices. Graphics-card makers Nvidia (NVDA) and AMD (AMD) have found more ways to deepen screens with additional pixels, and their technology could potentially make virtual reality gaming seem less virtual.
Analysts debate whether we’re ready for VR. But Blau also notes that people have been tweaking the technology for generations. To an extent, the culture is always open to its advances — glitches and all.
“So when you say, ‘Are we at a time that’s ready?’ Well, people have wanted it since the beginning,” Blau said.
But he said that VR is unlikely to suddenly be everywhere within the next year or two.
“I think it’s going to be a slower transition,” he said. “I think, five to 10 years from now, when we’re looking back, we’ll say, ‘Oh yeah, that was kind of fast.’ But in reality, day-by-day, it doesn’t seem like that.”
China, The World’s Great Walled Garden
China’s lockout of South Korea is a reminder that its plans for expansion depend in large part on how it handles other countries.
“Will the China ban hurt the Korean games industry? Yes, but to be honest both markets are dominated by local players anyway,” Warman said, adding that retaliation from South Korea would only hurt that nation, given China’s size.
What’s more, Tencent, the gaming world’s leader by sales, and NetEase control roughly 70% of China’s video game market. As a result, Pacific Epoch analyst Benjamin Wu said over email, “there is little potential for (China’s) gamer population and mobile game penetration rate to expand over the next few years.”
But as China looks outward to compensate, it faces problems in engaging the rest of the world.
NetEase’s mobile games have yet to show signs of doing well in Korea, Warman said. And games from China’s developers that focused on martial arts and Asian culture haven’t really appealed to audiences outside of Asia, Wu said, so they have been trying to incorporate themes with a more global appeal. NetEase, in particular, is hoping for a crossover hit with its game “Onmyoji.” It eventually plans an English version of the game for release in the U.S.
Yet China’s understanding of the gaming landscape in the West, despite many attempts to get a read on it, is still limited, analysts say.
“I think probably the wiser move is to buy content that’s popular already in the West, understand why those games work in the West, and understand the data systems behind those games that are necessary,” IDC analyst Lewis Ward said.
Tencent has already acquired its way into Western markets. The company bought a majority stake in Riot Games, which develops “League of Legends,” for $231 million in 2011, than acquired the remaining 7% of the company in 2015. It also reportedly holds a 12% stake in Activision Blizzard. Tencent and others last year also agreed to buy an 84% stake in Supercell, the Finland-based maker of “Clash of Clans,” from Japan-based SoftBank (SFTBY).
NetEase, meanwhile, has partnered its way in. It has worked with Blizzard to offer “World of Warcraft” in China, and also offers “Overwatch” in the nation.
“By embracing this type of model,” Wu said, “Chinese developers are also able to expand their pipeline and release blockbusters in the local market, while providing their development teams with opportunities to learn from top game developers and rapidly improve their in-house capabilities.”
Still, working with China comes with considerable financial risk, Ward said. “Warcraft,” “Overwatch” and EA’s FIFA online games have done well there. But companies outside China looking to do business would have to form a joint venture, clear regulatory hurdles and pass muster with the Ministry of Culture, then split profits, he said.
“China’s still kind of a walled garden,” Ward said, “so everything in there is different, more complex than it is elsewhere.”
‘Game of War’ — Big Data Treasure Chest
Newzoo’s Warman sees gaming technology being incorporated into loyalty programs, point-of-sale interfaces and mobile services. The more people obsessively pour their time into gaming, the more gaming companies gather tons of consumer intel. That data can be directed into all kinds of lucrative and useful purposes.
In just one unexpected example, the free-to-play game giant Machine Zone, which makes “Game of War,” has lent its tech capabilities to Auckland, New Zealand’s public transit system. Machine Zone hopes to develop a way to provide “a real-time view of every single bus on the road, down to the second,” the New Zealand Herald reported in October.
“Similarly,” Warman said, “who has put the first driverless connected minibuses on the ground in Japan? NTT Docomo and DeNA, a game company.”
Activison Blizzard Hits A New High, Analysts Fear Top Near
GameStop, Best Buy Hit As Microsoft Prepares Netflix-Style Online Gaming Plan
Sohu, Changyou: Verifying Institutional Interest In China Gaming Plays
An Aging Video Gaming Industry Wars Against Slowing Growth
- The biggest PC gaming stories of the week
- Learn the Technical SEO Skills Needed to Rank Higher on Google
- Adobe MAX 2019: Photoshop on iPad arrives, Adobe Aero debuts on iOS, more updates to Creative Cloud apps
- Why the University of Arizona changed its abbreviation for SEO
- Blizzard and Secretlab Partner for Overwatch Gaming Chairs