Video games, much like movies, are a lumpy business. Every so often a hit comes along upon which a publisher can build a long-running franchise—Activision Blizzard’s Call of Duty, for example, just released a well-received 21st installment. Other times, you can find gamers and investors alike grumbling over the industry delays, bugs, and titles that completely flop.
Still, for a lumpy business, the gaming industry is consistently very profitable. Just look at how it stacks up against the Consumer Staples sector, which is arguably the definition of consistency due to the reliability of demand for basic goods. Economic returns, as measured by cash flow return on investment, have not been as stable for video-game companies over the past 30 years as they have been for consumer staples, but their averages are closer than you might expect—and gaming companies have grown faster:
Global Providers of Interactive Home Entertainment vs. Consumer Staples Companies
Source: Harding Loevner, HOLT database.
Recently, some gaming companies have hit a rough patch. French publisher Ubisoft pushed back the release of Shadows, the next installment of its Assassin’s Creed franchise, from November 12 of this year to February 14 next year, citing the need to “further polish” the game and refunding customers who pre-ordered. Ubisoft said it took these steps after learning from its experience with Star Wars Outlaws, an August release plagued by bugs and criticism over the gameplay. The consecutive disappointments led the company to lower its financial forecasts for the year, which also dragged down its stock price.
Additionally, in September, Sony pulled its shooter game Concord off the market two weeks after it was released, saying the game “didn’t land the way we’d intended.” Like Ubisoft, the Japanese conglomerate issued refunds. There is also speculation that Grand Theft Auto VI, which has long been in development at Take-Two Interactive, may get delayed until 2026—13 years after the previous installment in the series was released.
News such as this tends to restart the debate over whether gaming is just a bad industry for investors. In fact, the industry structure seems challenging. The barriers to entry are somewhat low, and the number of substitutes and competitors—including new entrants in China and South Korea—are both high, factors that generally limit a company’s ability to generate sustainably high profits. But the charts above do not depict such a terrible situation. Rather, there may be some weak players, but there are clearly others that have managed to become more profitable and stable over time.
One way some publishers have done this is by building diversified franchises, which leaves them less prone to revenue lulls and limits the impact that a failed release has on the company’s overall finances. Electronic Arts, for example, has a number of successful franchises, including FIFA, Madden, Apex Legends, and The Sims. Activision Blizzard, in addition to Call of Duty, has World of Warcraft, Candy Crush, and Overwatch, among others—a collection Microsoft found so attractive that it acquired the company for about US$70 billion last year (Microsoft owns Xbox). Other diversified players include Tencent and NetEase, both based in China.
Another way that some in the industry have generated more consistent revenue and profits is through add-on digital content. Twenty years ago, video-game publishers were essentially consumer-goods companies. Their games were a physical product, and manufacturing, shipping, and selling these discs carried a significant cost. Playing them was also a one-off experience. Digital technology changed all this, with players increasingly downloading games rather than purchasing new or used discs. This has allowed game developers and publishers to boost the revenue generated by a game after it’s released by offering so-called expansion packs for online purchase, as well as virtual cosmetics to enhance a player’s avatar and virtual currencies. For example, Call of Duty: Black Ops 6 was released October 25, but you can almost guarantee that at some point, perhaps in six months or so, an expansion pack with additional content will become available. Extending the useful life of each game in this way relieves the pressure on developers to quickly crank out the next one. In the second quarter of 2023, Activision Blizzard’s last earnings report before its sale to Microsoft was completed, the company said that downloadable content and micro-transactions accounted for 63% of its net bookings.
The industry’s earnings consistency also has to do with the other types of companies involved in gaming: console makers, such as Microsoft and Sony, as well as businesses that sell tools and services to developers and publishers. One example is Keywords Studios, a provider of game-ready art and quality-assurance testing. Gaming platforms and toolmakers capture a portion of the industry’s revenues, which means they benefit from the overall growth without taking on the risk of any single game.
The recent challenges at Ubisoft and other companies reflect two industry trends that are worth watching. One is that game development has slowed. It’s unclear whether this is due to increased remote work, developers missing deadlines because they’re trying pack more interactive features into a game, pushback against the industry’s overtime habits, or perhaps all the above. In any case, these would seem to be temporary challenges.
Another is that some gamers seem to be spending less money on the hobby, which describes a change in user habits that could be more permanent. However, there’s not enough data to know if that’s the case. Instead, what we can gather from 30 years of financial data is that some gaming companies are built to ride out the rough patches, and so it would be a mistake for investors to write off the whole industry.
