Words fail to capture the enthusiasm of the seasoned gamer. There is nothing quite like the jubilation of a bleary-eyed player emerging in the early hours of the morning from a serious session of Call of Duty, resolute in the belief it was eight hours well spent. It’s that immersive, addictive quality that has turned gaming into a $116bn (£86bn) industry, capable of generating more revenues than the global television market.
Debbie Bestwick is one such enthusiast. In 1990, she and several others from north-west England founded Team17, a video game developer that has enjoyed commercial success with self-made titles such as Worms and The Escapists, and partnered projects including Yooka-Laylee and My Time at Portia.
Now, with £30m in annual sales and an estimated market capitalisation of £217m, she’s bringing Team17 to Aim, hoping it will benefit from the extraordinary growth enjoyed by other, global listed video games makers in recent years.
| Market cap growth of global video games makers | ||
| Company | 3yr Market Cap Growth (%) | Market Cap ($bn) |
| Ubisoft | 372 | 10.0 |
| Nintendo | 254 | 64.0 |
| Acivision | 218 | 58.0 |
| EA | 167 | 40.0 |
| NCSoft | 157 | 8.0 |
| UK companies | ||
Frontier Developments | 681 | 0.8 |
| Keywords Studios | 1000 | 1.5 |
| Sources: Peel Hunt, Thompson Reuters, IC | ||
Fortune or fad?
Ash Sony, Peel Hunt’s video games analyst, points to recent technological developments – which have given way to a richer field of content – as one reason for the industry's growth. The “gamification of reality” invites wider audiences to participate in highly life-like games, while once-stilted and unrealistic titles have been remastered thus attracting older, perhaps nostalgic, audiences.
Digital development has also played a vital role in the market's expansion. People rarely visit HMV to buy a video game when downloads are instant via platforms including Playstation, Xbox and PC. Mobile apps also make it easier to play on the go, while technological developments have vastly improved the gaming experience. That’s why industry expert Newzoo expects gaming revenues to grow at a compound annual rate of 8 per cent between 2017 and 2020. Modest growth from traditional platforms such as consoles and PCs could be boosted by a flurry of demand for mobile games which, by 2020, are forecast to account for 41 per cent of the global gaming market (up from 34 per cent in 2017).
But simply launching a new game and hoping it floats on a rising tide doesn't lay the foundations for sustainable revenues. Maintaining popularity is the key to commercial success. As demonstrated by Pokemon Go’s brief time in the spotlight, it doesn’t take long for a viral game to lose the audience's attention.
Premium brands continue making money from existing games by issuing new versions. Call of Duty, for example, has had 12 new iterations since the first instalment in 2003 – with sales peaking in 2011 for the Call of Duty: Modern Warfare 3 game. Grand Theft Auto has also steadily increased in popularity, with 2013’s fifth model generating $70m-worth of sales.
For smaller players – of which there is a growing number in the UK – brand power isn't always enough. Aim-traded Frontier Developments (FDEV) captures audiences' attention over the long term by releasing ‘paid downloadable content’ made available via in-house or platform stores. These recurring sales contribute roughly a quarter to Frontier’s top line and have ensured steady sales for the group’s Elite franchise for more than a decade.
By contrast, Team 17 doesn’t offer many in-game add-ons. The group’s chief financial officer, Paul Bray, explains that keeping customers on board is more important than additional purchases. “We’ve got a corking community brand,” he says, which means a franchise’s lifecycle is extended by launching new versions of the game. What’s more, the group can roll out new titles far more quickly than its AAA premium counterparts, such as EA, Activision and Ubisoft. Games take between three and 11 months to develop and the group has seven ready for release in 2018 alone.
Multiple market growth
As well as boosting the overall market, digital development has evened out the playing field between corporate behemoths and their smaller, ‘indie’ counterparts. The latter has a better understanding of the mobile industry, which allows them to develop games that customers will pay for. That’s why small developer Rovio had success with Angry Birds, while Nintendo struggled to get Super Mario Run (with its £7.99 price tag) up and running.
Considering mobile is the fastest growing segment of the sector (Newzoo forecasts 14 per cent compound annual revenue growth to 2020), it stands to reason that smaller players will be the biggest beneficiaries of changing market dynamics. Broker Peel Hunt expects to see "more indie developers and mobile games becoming mainstream”. That said, big multinationals are likely to maintain the largest footprint in the space. The broker analysed 4,551 global gaming companies and found that 80 per cent of the market revenue is serviced by just 20 per cent of multinational companies – a figure likely to remain stable in the short term.
But smaller firms could still benefit from the success of their larger counterparts thanks to a growing level of outsourcing and partnerships. For example Sperasoft, a Keywords Studios (KWS) company, is in the process of co-developing Assassin’s Creed, a Ubisoft title. In fact, the increasing complexity of games means that technical partners are often brought on board, meaning growth in the global co-development market is expected to outpace the wider industry.
Mr Sony says increased complexity of video games means it's difficult to manage the entire development process in-house and, for higher-quality product specialists are in high demand. These companies can be used to locate and manage content bugs or to co-develop new titles. UK-listed Sumo (SUMO) is a development partner for blue-chip games publishers including Sony, Microsoft and Sega. Its primary digital division provides tech solutions to longstanding, blue-chip clients, while Atomhawk (which was acquired in 2017) creates novel visual effects.
Entertainment breeds entertainment
Then there's eSports, a relatively novel market even for the most seasoned gamer. Essentially, eSports involves watching other gamers play competitively. Those who partake say they watch for the same reason any sports fan or player watches their peers: for entertainment or to improve their own skills.
The ascendance of eSports has been astounding. Just as with traditional sport, professional gaming can attract big television and sponsorship deals, which has helped the industry’s annual revenue grow from $325m in 2015 to $696m last year. Gfinity (GFIN) hosts a professionals league that attracts super-star eSportsmen from around the world. In 2016, West Ham became the first football club to sign their first FIFA game-playing professional. Finally, Epic Games announced its prize fund for this year's inaugural Fornite gaming competition would top $100m.
