How to play the galloping growth of the gaming sector

Digital games have become so popular that the market is now bigger than both the television-streaming and film industries. Yet years of expansion still lie ahead, so buy in now, says Matthew Partridge

Video or computer games, once a niche pursuit for geeks, have become firmly entrenched in everyday life. According to the market research firm Savanta, 86% of people in the UK have played at least one in the past year. These games are so prominent now that they have begun to set the cultural agenda. 

“In the recent past, it was usual for computer games to be based on films. However, now you’re starting to see it’s going in the other direction with films and TV shows based around computer games and Hollywood stars attending games-industry events,” says Rob Leane, games editor at Den of Geek.

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Little wonder, then, that the global games market “is now larger than television, television streaming, the movie industry and digital music”, says Katen Patel, co-manager of JP Morgan’s UK Smaller Companies Fund, Smaller Companies Investment Trust and Mid Cap Investment Trust. 

The global market was worth $130bn in 2018 and is growing so fast that it could be on course to hit $300bn by 2025, according to consultancy GlobalData. Savanta estimates that 40% of Britons now spend more than £100 on games every year. With an array of listed firms poised to benefit, the investment case is compelling.

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The market’s explosive growth

There are several reasons for the market’s explosive growth, says Patel. One is “the significant technological advances” that have enabled a “much-improved user experience”, delivering smoother, more detailed graphics and more complex games. By contrast, while other sources of entertainment such as television and music may have seen some incremental improvements (larger televisions and more convenient ways of downloading songs, for instance), the core experience has remained the same.

The growing social acceptance of games has also been crucial. When Patel was growing up, gaming was still regarded as only suitable for children and there was a general feeling that too much gaming was harmful for children. He remembers that parents tended to encourage their children “to put down the video-games controller and go outside”. However, having grown up with games, today’s parents “are much more relaxed about letting their offspring play”. What’s more, they are likely to be gamers themselves, “with half of gamers over 35”.

Another factor that will help keep the industry growing for at least another decade is the large increase in sales in emerging markets, especially in Asia. Not only is the expanding middle class spending money on consoles and computers, but those countries are also removing restrictions on what was previously seen as a harmful Western import. 

Even China, which has been traditionally hostile to computer games, has taken steps to ease restrictions. While every game still needs to be officially approved and there are restrictions on late-night online gaming by children, Beijing finally dropped a long-standing ban on computer consoles in 2015, opening up a “huge market” to the industry.

The shift towards digital delivery

Not only are more people buying video games, but the way games are bought has also changed dramatically over the past few years, says Walter Price of Allianz Global Investors. There has been a shift from copies of games on DVDs to digital downloads. 

The struggle of many bricks-and-mortar retailers such as the American chain GameStop, which saw its sales fall by 25% year-on-year in the final quarter of 2019, and the fact that many of the newest games consoles (the computer hardware used for games) have no optical DVD/Blu-ray drive, show that the days of physical distribution may be numbered.

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The move to digital downloads may be bad news for those working in games stores, but it will benefit games companies in two main ways, says David Leahy of asset managers Gresham House. 

By removing the need to burn discs, package them and then ship them to retailers, the move to digital will reduce production and distribution costs. Cutting out stores will also allow games companies to keep a greater slice of their revenue. While Steam, one of the major online stores, still charges a fee of 20%, this is much less than the amount demanded by high-street retailers.

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