Sunday, 16 August 2015

Gaming is the new sport?

Gaming as a sport it's a controversial statement. I believe it's more of a competition similar to chess rather than sport. That said the lines are blurring gamers are now being subjected to drug tests similar to sports. Online video channels like Youtube and Twitch have made gaming the world's largest unofficial sports league. Game developers like Activision Blizzard (ATVI) are really pushing sport comparisons and competitions because its good for their business. The amount of time spent on gaming is exploding (see below) with engagement levels even higher than sports.

Source: Activision Blizzard 10K


Gaming is sports in Asia
ATVI's CEO Bobby Kotak believes gaming is the sport of a new generation (see comments above). When you compare time spent its more than sports. Its a great analogy for ATVI as sports leagues make a ton of money. If they can monetise their franchises through tournaments they can generate broadcasting, licensing and merchandising revenue. It's an interesting way to think about the business. In the second quarter the amount of time gamers spent with ATVI grew by 25% year-over-year. Last quarter gamers logged nearly 3.5 billion hours of game play with ATVI's Heroes of the Storm, Hearthstone, World of Warcraft, Diablo, StarCraft, Skylanders, Destiny, and Call of Duty. Note this doesn't include the amount of time spent watching people play games on sites like Youtube.

ATVI is making steps towards its sports goals holding a Grand Final event for their Heroes of the Storm game on ESPN2. It created a lot of controversy at the time. So far it has been a flop with a 0.1 Nielsen rating meaning 0.1% of people watching TV at that time tuned in. While it was a flop for ESPN they are keeping up their commitment as younger generations are sticking with gaming rather than sport as they get older. In Asia gaming is massive Seoul's World Cup Stadium is consistently sold out with 40,000 fans (see below). The winning team took home $1million. Korea is truly the home of gaming with two television channels dedicated to the 'sport'.



Digital direct to the gamer
Digital sales have been a driver of the game developer's out performance of the market. Digital downloads are 46% of ATVI's revenue cutting out the retail middleman and giving ATVI the opportunity to increase the selling cycle of games. The downloadable content like extra maps and weapons increases sales at a high margin. Each game is producing more revenue per player than ever before. 

ATVI's annual report one of the best
ATVI puts together one of the more interesting annual letters to shareholders. Bobby Kotack the CEO models Buffet's annual report as an inspiration mentioning what went well and what could have been done better it's a refreshing read. ATVI operates in a tough industry gaming companies need to keep developing hit games every year ATVI's has had the most consistent track record similar to Disney's track record in films. Since 1991 the book value on their stock has increased from $0.01 to $9.76 a 37% compound annual return. ATVI has built some of the most successful franchises in gaming. Their latest franchise Destiny has active players spending more than 3 hours playing the game each day. Their three largest franchises Call of Duty, World of Warcraft and Skylanders accounted for 67% of revenues. Like Disney ATVI is making the most of their franchises with increasing digital sales and potential merchandising and broadcasting revenue. Gaming is not a sport but they do have in common high fan engagement. As gaming gets more popular on Youtube and Twitch it's likely that gaming revenue might become very similar to sports as we know it.


Jason


Decisive has no position in Activision Blizzard (ATVI).The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.