Video gaming has been one of the big beneficiaries of the Covid-19 pandemic, as people look for sources of entertainment while cooped up in their homes. But the industry’s rise is not exceptional to this crisis – coronavirus has merely accelerated an underlying trend. As investors look for where the best opportunities lie, we think it’s worth examining companies with strong intellectual property (IP) – those that have built up enduring brands, franchises and fan loyalty that can be tapped into again and again.
According to Andrew Vaughan, manager of the CFP SDL Free Spirit Fund (GB00BYYQC271), IP makes for a good investment for two reasons: “The economic moat and the financial shape that IP provides. IP can generate revenues for many years to come and turn a business into a wonderful compounding machine.” IP is also a strategic driver of merger and acquisitions (M&A) activity, providing access to additional content, markets and customers. Hasbro (US:HAS) trotted away with formerly London-listed Entertainment One at the end of last year for £2.9bn, scooping up successful brands such as Peppa Pig, which is the most viewed pre-school show in the world on YouTube.
Matthew Ball, former global head of strategy for Amazon Studios, says popular IP “ages like whiskey and becomes increasingly rare”. With that in mind, we’ve set about examining how three big companies are harnessing this valuable resource.
Games Workshop opens up a new frontier
Games Workshop (GAW) designs, manufactures and sells miniature figurines used to simulate battles in tabletop games. Together with the accompanying mythology, its creations have garnered the following of an enthusiastic army of hobbyists. The mainstay of its earnings come from its signature Warhammer brand, namely original fantasy setting Warhammer Age of Sigmar and the futuristic space franchise Warhammer 40,000. Beyond the models, it has constructed an entire ecosystem of intertwining products, including novels and video games.
With more than 40 years of experience in building fictional worlds, Games Workshop has established a wealth of proprietary content, described as its “fortress wall”. This IP is one of the reasons it is a top 10 holding of the CFP SDL Free Spirit Fund. With customers having invested “time, money and passion” in their Warhammer collections, Mr Vaughan believes “such high-quality IP is attractive to the creators of movies and digital games”.
The group has been historically hesitant to wield its IP hammer and license its content to third parties. This changed with the appointment of current chief executive Kevin Rountree in 2015 . Operating profit from IP licensing – also known as royalties – has been ramping up in recent years as the Warhammer brand expands its presence across PC, console and mobile games, as well as other merchandise. Increasing by almost a fifth in 2019 to £10.6m (stripping out expenses), this growth was driven by strong performances from video game sequels Total War: Warhammer II and Warhammer: Vermintide 2. With little costs associated with licensing IP, the royalties are almost pure profit – the margin reached 93 per cent last year. They are still a relatively small part of the picture at 13 per cent of total operating profit. But the group is looking to work with “big, value-adding partners”, announcing a partnership with Marvel last year to publish Warhammer comics. It is also hoping to push further into mobile games, which only account for 7 per cent of royalties versus 87 per cent for PC and consoles.
Further momentum could come from the recent agreement with video game developer Frontier Developments (FDEV). Frontier has secured the rights to create a real-time strategy game based on Warhammer: Age of Sigmar, due to be released on PCs, games consoles and streaming platforms in the year ending 31 May 2023. Analysts at broker Peel Hunt believe the deal will “broaden the audience to the more casual gamer” and expand the reach of the ‘Sigmar’ IP given most game developers typically focus on the ‘40,000’ franchise. The deal’s timeline mean they expects only a small contribution to the forecasted £16m of royalties (excluding costs) this year." But Benji Dawes, manager of the Premier Miton UK Growth Fund (GB0031639007), believes it could eventually bring double-digit royalties.
Beyond video games, Games Workshop is also expanding into digital entertainment. The popularity of programmes such as Game of Thrones and The Witcher demonstrate how the fantasy genre has become mainstream. The group already has Warhammer TV but announced plans for a new television series based on its Eisenhorn novels last year. A broadcaster has yet to be announced, but a deal with a major streaming platform such as Netflix (US:NFLX) could supercharge royalties.
Nintendo: a gaming treasure trove
Gaming giant Nintendo (JPY:7974) is no stranger to the value of IP. The group’s success has been underpinned by its ability to build household names such as Super Mario Bros and The Legend of Zelda. It also owns a third of The Pokémon Company that controls the Pokémon brand. By harnessing its evergreen franchises and giving its beloved characters multiple afterlives, Nintendo has been able to keep millions of people entertained for decades. For example, Animal Crossing: New Horizons – which has seen its global popularity explode during the recent lockdown – is the latest iteration of a game originally launched in 2001. Selling 13.4m physical copies in the first six weeks of its life, this is more than the first two Animal Crossing games in their entire run. This has coincided with the company’s reinvigoration through the Switch console – something that has become harder to get your hands on than toilet paper during the pandemic.
Nintendo is popular with Lindsell Train, being a top 10 holding of its Global Equity Fund (IE00BJSPMJ28), Japanese Equity Fund (IE00B7FGDC41) and Lindsell Train Investment Trust (LTI). Alexander Windsor-Clive, an analyst at Lindsell Train, says the key attraction of Nintendo is “the enduring resonance of its ubiquitous IP”.
Nintendo has been slow off the mark in the burgeoning mobile games space. While mobile and IP related revenue jumped 12 per cent to ¥51.2bn (£390m) in the year to 31 March, this comprised just 4 per cent of total sales. It only has six mobile games at present. The company’s president, Shuntaro Furukawa, sees mobile more as a venue to brings consumers in contact with Nintendo IP rather than a focus for games development.
Like Games Workshop, the group has been fiercely protective of its IP, cautious of relinquishing control. But it is now looking to increase the value of that IP by reaching beyond its own platforms. Representative director Shigeru Miyamoto says that “how we bring our IP to consumers who don’t play on Nintendo’s dedicated video game systems on a daily basis is a crucial challenge for us”. Its solution is a more diversified entertainment strategy, akin to that of Disney (US:DIS). Comcast (CMCSA) plans to exploit Nintendo’s “iconic IP” by launching Super Nintendo World at its Universal Studios theme park in Japan – although the Covid-19 pandemic has delayed this process – with openings in the US in later years. Meanwhile, Nintendo has partnered with Illumination Entertainment to release an animated Mario movie in 2022. This follows the success of Sonic The Hedgehog, which grossed $307m worldwide on an $85m budget. The company has also inked deals with Levi Strauss (US:LEVI) and Lego for Mario-inspired clothing and toys.
Disney's quest for dominance
Disney is an IP powerhouse with a finger in perhaps every pie in the entertainment industry. It is the owner of numerous successful media franchises from the classic Mickey Mouse and Disney princesses to Star Wars and the Marvel Cinematic Universe (MCU). Under the stewardship of former chief executive Bob Iger, the group was willing to cough up for companies with valuable IP catalogues – this includes Pixar for $7.4bn in 2006, Marvel for $4bn in 2009 and Lucasfilm for $4bn in 2012. But these pale in comparison to last year’s $71bn acquisition of 20th Century Fox.
That’s not to say Disney cannot make its own IP – just look at the triumph of Frozen. But its M&A activity has created a seemingly boundless pool of IP to monetise across multiple channels from streaming and cinema to theme parks and cruises – although the latter could see lasting damage from the Covid-19 pandemic.
There is a hole in Disney’s empire, though – video games. The group withdrew from making its own content in 2016 and has since relied on licensing its IP. Its aversion to video game production was reiterated when it sold FoxNext Games and Cold Iron Studios, which it had obtained as part of the 20th Century Fox acquisition. Mr Iger said in 2019 that “we've found over the years that we haven't been particularly good at the self-publishing side, but we've been great at the licensing side”, noting the group’s partnership with Electronic Arts (US:EA) to develop games for the Star Wars universe. Still, film IP is underserved in the games market. With all the box office success of the MCU, it’s hard to believe there hasn’t been a coordinated attempt to master the video games space – those that have been released have not made big waves. Disney is looking to shake things up. According to The Hollywood Reporter, senior vice president for games and interactive experiences, Sean Shoptaw, said in February that the group wants to open its IP vault up to developers and encouraging original storytelling.
