Date: 11/19/2020
Author: Mr. X
As those of us who are parents can remember, the “Console Wars” were formative for many of our children–or depending on your age, maybe for you. Sega, Xbox, Nintendo, PlayStation… these were the demands of spoiled children and frazzled parents trying to get the right gaming system.
Four major trends have developed over the last few years that have changed gaming market since the days of Nintendo 64.
First, games are no longer released as set-alone, finished products. They are often released with additional material available for a smaller, future purchases (DLC, or Downloadable Content). There may not even be a physical component to the game, like the discs or cartridges that older games might remember cleaning or blowing in. Games can simply be downloaded from online services. There are also subscriptions associated with certain companies, for example, Xbox Gold.
Second, and related to this, many games are not tied to consoles. They are tied to smartphones. This is arguably where the most attention is now, because the costs are far smaller to develop a mobile phone game, often by learning a relatively simple coding language.
Third, platform control is all important. This is at the heart of the lawsuit that Epic (the creator of the wildly popular game Fortnite) has filed against Apple [AAPL]. Apple takes a significant percentage of every game sold via in-app purchases from the Apple app store. Perhaps in response to this lawsuit, Apple has already announced it will be taking a smaller commission on each in-app purchase made.
Finally, online gaming and Esports have surpassed the self-contained games of earlier years. While older gamers might remember Nintendo 64’s Goldeneye and straining to keep your eyes on one half of one TV, today games are played via online services with players all around the world, sometimes in different countries. Streaming companies include Twitch, Smashcast, YouTube Gaming and the Chinese companies Douyu International [DOYU] and Huya [HUYA], as well as many others.
Many of these services allow players to make money as they play by broadcasting what they are doing. “Game shows,” to many younger people, refers to watching their favorite personalities play video games.
Competitive gaming is also becoming a mainstream sport. Esports are far more popular in Asia than in in the United States, but American colleges including Georgia State University, Miami University, Virginia Wesleyan University and many others have varsity Esports programs.
Much of the action in this field is happening with personal computers. However, this month the new consoles from Microsoft [MSFT] and Sony Corporation [SNE] were released. Already, even with the financial difficulties many people are suffering because of the COVD-19 pandemic and the related lockdowns, demand has overwhelmed supply. Microsoft’s X Box Series X and X Box Series S and Sony’s PlayStation 5 are being sold out almost instantly as stores scramble to ensure supply. In Toronto, the demand is so great that even those who manage to get a hold of the console and “scalp” them at an inflated price are being robbed.
These consoles will almost certainly be the main targets for frenzied customers on Black Friday this year. If any are available at brick-and-mortar stores, social distancing guidelines probably won’t do much to keep the riotous crowds from trampling each other.
Some suggest this scarcity is part of a deliberate strategy by both companies. Overproduction would be catastrophic for businesses heavily dependent on what are essentially luxury goods. Microsoft vows that it is producing consoles as quickly as it can, and it reported late last month that demand surged for its video games and cloud services. That said, it also downplayed its financial forecast for the next quarter.
Bloomberg reported in April that Sony is restricting production of its console during the first year. Sony has not responded to more recent questions about this supposed strategy. Still, it is embarking on a bold advertising campaign. The iconic shapes on the controller’s buttons that PlayStation owners will instantly recognize were recently displayed on the walls of London’s Oxford Circus Station.
Which company will emerge triumphant from the console wars? PlayStation is focusing on exclusivity deals for popular franchises by approaching third-party developers. This has already reaped some rewards, including more benefits for Call of Duty: Black Ops Cold War players and having Spiderman as a playable character in the Marvel’s Avengers title.
Microsoft has directly purchased ZeniMax Media Inc., which created some of the most iconic franchises in gaming history, including the Elder Scrolls, Fallout, and Doom. While it won’t be able to do this immediately, Microsoft could have the option to limit future games in these franchises to personal computers and the Xbox. Microsoft also has an advantage when it comes to subscription services.
On paper, Microsoft would seem to have the advantage because of its greater access to cloud services and control over the most popular franchises. Yet short-term, the picture is murkier.
PlayStation 5 is reportedly outselling the Xbox in the Japanese market by more than five to one, impressive even considering that Sony is operating on its home territory. A study from earlier this year found that American PlayStation owners have the highest brand loyalty among console owners. One is reminded of the “I’m a Mac, I’m a PC” ads from 2006-2009, with Microsoft once again coming off as the more “basic” option. A critical question will be whether Sony can leverage its advantage in Asian markets into Esports.
Nintendo [NTDOY] is taking a different approach, capitalizing on its Switch console rather than seeking to challenge the new high-end Xbox and PlayStation models. Nintendo’s stock is up just shy of 38 percent over the last year. Microsoft is up over 40 percent over the same period (but down slightly over the last month) while Sony is up about 43 percent over the last year. However, Sony is up nearly 20 percent over the last month, though it has declined slightly this past week.
In terms of streaming services and control over franchises, Microsoft probably has the stronger long-term advantage and the greater potential for long-term gains. Sony’s customers have greater brand loyalty and, while this is subjective, a stronger “identity.” PlayStation inspires greater loyalty and recognition–something implied by Sony being able to display its controller buttons on a subway wall, confidently expecting almost everyone will know what they mean.
There is an alternative to trying to pick a winner in the console wars. Investors can also look at development companies that are not limited to a single console or franchise. Here, two stocks to watch are Corsair Gaming [CRSR] and Logitech International [LOGI]. CRSR is up almost 66 percent over the last month while LOGI is down about 10 percent, though above 94 percent for the year.
The safest bet may be to choose a gaming ETF. One to watch, and which is in our Rogue Investing Daily portfolio, is Global X Funds Global X Video Games & Esports ETF, with the easy to remember ticker [HERO]. It’s returned over 75 percent over this chaotic year and while any investment carries risk, it’s a safe choice for anyone who doesn’t want to commit to a single brand.
It’s never simple to predict the winner of a war in advance. Given pandemics, streaming technology, and the growth of Esports, betting on the growth of this entire sector seems a far easier choice.
