Older forms of entertainment are proving more resilient than digital competitors. In the struggle for consumer attention, Bloomsbury Publishing (BMY), Games Workshop (GAW) and Hollywood Bowl (BOWL) have all kept growing this year, while video games developers have issued a string of profit warnings.
In the mid-2000s, Warhammer, Harry Potter and ten-pin bowling were some of the most popular pastimes for younger generations. Since then, billions of dollars have been invested in content creation, video games, virtual reality and artificial intelligence (AI) in a bid to drag attention towards screens. Thankfully, 20 years on, we are just as obsessed as ever with picking up a book or socialising in person.
In 2023, Games Workshop’s revenue is expected to reach £448mn, 8 per cent more than last year and 75 per cent ahead of 2019 levels. Ten-pin bowling business Hollywood Bowl is expecting revenue to hit £202mn, 55 per cent ahead of its pre-Covid figure. Bloomsbury Publishing said Harry Potter and the Philosopher’s Stone was the third most popular children’s book in the UK this year, 26 years after its first publication, and it is also benefiting from a general upswing in book sales.
The promise of the new
Given the pace of change in the world around us, there is a comfort in the performance of these three businesses. Companies are always promising to change the way we entertain ourselves. Iast month, Apple (US:AAPL) revealed its Vision Pro virtual reality headset just days after Meta (US:META) announced its third-generation headset, Quest 3.
Last week, games engine developer Unity Software (U:US) released a suite of AI tools for the 1.8mn developers that use its products. The AI will help them generate graphics and artwork as well as improving non-player character responsiveness and logic. “All the hardware manufacturers are aware of the need to optimise for AI, and mobile devices are now reserving space on their chips for real-time machine learning,” Danny Lange, the former vice-president of AI at Unity, told Investors' Chronicle last October.
Old games keep performing
However, despite the hype around these technologies, it is other types of entertainment that have proved to be a lot more resilient so far in 2023. During the Covid-19 pandemic, the narrative was that lockdowns were just accelerating forward the inevitable rise of video games, TV streaming and virtual reality. Given time constraints, this logically had to be at the expense of visits to bowling alleys, Games Workshop outlets and bookstores.
A glance at changing analyst forecasts shows how badly this prediction has played out. In January 2021, the market consensus expected Hollywood Bowl to make £150mn of revenue in 2024. However, while other economic prospects have diminished, analysts have become increasingly bullish on Hollywood Bowl. They now think it will make £219mn next year, 46 per cent ahead of their prediction of two years ago.
The graph above shows a very similar path for analysts’ expectations for Bloomsbury. Out of these three companies, Games Workshops is the only one where sales assumptions are below 2021 levels. However, in the past year, analysts been consistently upgrading their forecasts for the tabletop figurine company. In comparison, video games developers and steaming companies have had a harsh comedown.
Fickle fans ditch new entertainment
At the end of last month, video games developer TinyBuild (TBLD) said its first-half performance was “below expectations”, and it is now expecting “material reductions” in its 2023 and 2024 revenue and adjusted cash profit (Ebitda). Off the back of this announcement, house broker Numis reduced its 2023 revenue forecast by 39 per cent to $49.5mn and its adjusted cash profit by 77 per cent to $6.3mn.
These are significant downgrades – especially given that, as the house broker, Numis is likely to be more optimistic. The problem TinyBuild cites is that “distribution platforms have been significantly downsizing the number of investments in non-AAA games”. In other words, the perceived market for video games is shrinking, or at least evolving in a way that creates fewer winners.
Games developer Frontier Developments (FDEV) is facing the same issues. In June, it announced it was closing its third party publishing businesses “due to disappointing financial performance and increased competition among third-party publishers”. This came after management decreased its full-year revenue forecast in January by around 25 per cent.
A similar dynamic is playing out in video streaming, where large platforms are trimming costs to offset underperforming movies and TV shows. Bloomberg has reported that Amazon (US:AMZN) chief executive Andy Jassy is taking a "hard look" at how much the studio spends on original programming. Last year, it spent $400mn on the series Rings of Power – making it the most expensive TV show of all time – yet the show failed to land with fans. Internal Amazon data leaked to the Hollywood Reporter showed just 37 per cent of viewers that started watching the series ended up completing it.
Post-pandemic viewers across the board are becoming more discerning with how they spend their time and money. A 2022 KPMG survey found a fifth of consumers had already cancelled at least one streaming service due to inflation, and another 37 per cent said they would do so if the cost of other goods kept rising.
Technologists misinterpreted the government-enforced lockdowns as a genuine affection for their products. In the ultimate misplaced show of faith, Facebook chief executive Mark Zuckerberg renamed his company Meta. He genuinely believed people would want to play and work in his digital realm. But just because something can be made doesn’t mean people will want to use it. In 2022, revenue from Meta's virtual reality division fell from $2.3bn to $2.2bn, while operating losses widened to $13.7bn.
Ten-pin bowling and tabletop figurines have been entertaining kids and adults since the Victorian period. Hollywood Bowl and Games Workshop introduced a few new technologies, such as self-righting pins and injection moulding machines, to maintain margins, but the games themselves are fundamentally the same. And although competition from other types of entertainment is fierce, as market leaders in mature industries these businesses now have fewer competitors within their respective niches.
In 1995, Nintendo released a 'Virtual Boy' console. Aimed at building on the success of the Game Boy, it had users put a headset over their face. It was a commercial failure and people complained it gave them headaches. New technologies are exciting, but not all are guaranteed to take off – and if they do, then competition will rapidly emerge. At least with our most ancient pastimes, we know they are popular. We have been reading books and gathering with friends for hundreds of years, and hopefully for hundreds of years more. For the likes of virtual reality gaming, the jury is still out.
