VIDEO GAMES: CLOUD INVADERS Bracing for the Netflix-Ization of Gaming
Total Page:16
File Type:pdf, Size:1020Kb
VIDEO GAMES: CLOUD INVADERS Bracing for the Netflix-ization of Gaming Citi GPS: Global Perspectives & Solutions June 2019 Citi is one of the world’s largest financial institutions, operating in all major established and emerging markets. Across these world markets, our employees conduct an ongoing multi-disciplinary conversation – accessing information, analyzing data, developing insights, and formulating advice. As our premier thought leadership product, Citi GPS is designed to help our readers navigate the global economy’s most demanding challenges and to anticipate future themes and trends in a fast-changing and interconnected world. Citi GPS accesses the best elements of our global conversation and harvests the thought leadership of a wide range of senior professionals across our firm. This is not a research report and does not constitute advice on investments or a solicitations to buy or sell any financial instruments. For more information on Citi GPS, please visit our website at www.citi.com/citigps. Authors Jason B Bazinet Thomas A Singlehurst, CFA U.S. Entertainment, Cable & Satellite Analyst Head of European Media Research Team +1-212-816-6395 | [email protected] +44-20-7986-4051 | [email protected] Kota Ezawa Mark May Co-Head of Global Technology Research U.S. Internet Analyst +81-3-6776-4640 | [email protected] +1-212-816-5564 | [email protected] Walter H Pritchard, CFA Alicia Yap, CFA U.S. Software Analyst Head of Pan-Asia Internet Research +1-415-951-1770 | [email protected] +852-2501-2773 | [email protected] Expert Commentators Luke Alvarez Ralf Reichart Wil Stephens Founding Managing Co-CEO of ESL CEO, Founder of Fusebox Partner, Hiro Capital Games Global Video Game Team Hillman Chan, CFA Arthur Lai China Internet & Media Analyst Greater China Technology Analyst +852-2501-2777 | [email protected] +852-2501-2758 | [email protected] Carrie Liu ` Atif Malik Taiwan Technology Hardware Analyst U.S. Semiconductor and Semi Equip Analyst +886-2-8726-9086 | [email protected] +1-415-951-1892 | [email protected] Rafal Materka Asiya Merchant, CFA Poland Investment Research Team U.S. IT Hardware & Tech Supply Chain Analyst +48-22-690-3288 | [email protected] +1-415-951-1752 | [email protected] Minami Munakata Catherine T O'Neill Japan Metals & Mining, Media Analyst European Media Analyst +81-3-6776-4632 | [email protected] +44-20-7986-8053 | [email protected] + Ashwin Shirvaikar, CFA Jim Suva, CPA U.S. Payments, Processors & IT Analyst IT Hardware & EMS, Telco & Network Equipment Analyst +1-212-816-0822 | [email protected] +1-415-951-1703 | [email protected] Kyle Twomey John Yu Europe Small Cap Analyst Korea Internet & Media Analyst +44-20-7986-7955 | [email protected] +82-2-3705-0721 | [email protected] © 2019 Citigroup 3 VIDEO GAMES: CLOUD INVADERS Bracing for the Netflix-ization of Gaming Kathleen Boyle, CFA What was your first memory of playing video games? Mine was playing Centipede Citi GPS Managing Editor at the local pizzeria. Armed with quarters and enough money for one slice of pizza, we would play until we were either broke or our fingers were sore from firing digital missiles. Eventually my friend got an Atari game system and after months of begging for the same, my Dad caved in and bought us a gaming system – an Intellivision game system. He told us over and over that it was a better system to Atari but it didn’t have all the cool games that my friends played. It was hard sometimes being the daughter of an engineer who cared about technology superiority, but at least the hockey game let you punch people. Game choices moved quickly after that – Tetris on my Macintosh Plus, Donkey Kong on my Nintendo DS, Brickbreaker on my Blackberry, and now Candy Crush on my iPhone. The common constraint through the years was that the games I played continued to be dependent on the device I owned. When the Internet came about, new firms started disrupting traditional media businesses such as newspapers, radio, and television by giving consumers what they wanted, when they wanted, and on the device they wanted. But it didn’t disrupt the video game industry. Game publishers were able to use the Internet to augment their revenues. They used the Internet to increase in-game sales and sell software directly to consumers, and tapped into the smartphone market and the growth of mobile gaming. Are video game publishers immune from disruptive threats? The authors of the report that follows answer with a resounding no. There is a technology on the horizon that has all the characteristics of a disruptive threat to the video game ecosystems — the cloud. The video game ecosystem has been evolving over the last few years — towards group play vs. single play, to in-game monetization vs. software sales, to renting vs. buying hardware, to video games being a spectator sport, and to software being made for all devices vs. software made specifically for hardware. These new trends in the video game industry could make it much easier for the big cloud players to come in and start pulling away revenue. The cloud-based providers will be able to offer low-cost access to cloud-based gaming and a wide array of gaming content. They will also be able to monetize gaming in non-traditional ways that play to their strengths — through in-game monetization, in-game advertising, broadcasting, and digital. For consumers, cloud will make it easier to play games on different platforms and allow players to be device agnostic, hitting pause on a PC game and picking it up again on a mobile device. Game developers will be able to support more devices as compatibility issues decrease between software and hardware. eSports, a $1billion business and growing, will have increased opportunities on the cloud and we believe game publishers will still be able to thrive in the emerging video game world but will have to adapt their business models to ensure they’re positioned appropriately.. If the report is right, I may finally be able to play PacMan! © 2019 Citigroup HOW CLOUD CAN DISRUPT THE VIDEO GAME INDUSTRY Over the last 18 years, video games have experienced rapid growth, topping $100bn in global sales with much of the growth fueled by Internet connectivity 120% Pre-internet Today 100% Play alone Group play 80% 60% Buy In-game software monetization 40% Play at Play 20% home anywhere 0% Play Spectator ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17 ‘18 on own Sport Arcade Console PC Handheld Mobile VR In the next wave of innovation, consumers will likely rent access to gaming hardware, using the cloud for processing. This will likely give the largest cloud infrastructure players an advantage. Amazon, Microsoft and Google make up 58% of the market. Cheaper processing power Rent Delay More processing power Software Buy Hardware Hardware Arcade Console Cloud Software Arcade Disc, Download Stream BENEFITS OF CLOUD GAMING PLATFORMS For game developers: compatability For console manufacturers: For consumers: every issues are reduced and more devices revenues can migrate from screen will experience the can be supported episodic to monthly recurring same level of play © 2019 Citigroup The shift from PC/Console processing to cloud Pricing for cloud services could be disruptive as cloud processing will prompt new business models. Cloud providers exploit the revenue disparity between hardware gaming is apt to exploit the rise of free-to-play (FTP) (small) and software (large). Cloud firms can also tap into and new revenues like eSports. fast growing revenues from eSports and AdTech. Distant past Past Present Future Total Gaming Revenues: Hardware Hardware Hardware Cloud Gaming FTP FTP FTP FTP FTP FTP FTP FTP 2008 Software In-game spend Software 2018 AdTech New monetization (eSports, Mobile, AdTech) eSports Hardware Buy Rent Free Emerging cloud providers have low exposure to legacy game revenue and high exposure to emerging game revenue. Traditional publishers can’t easily replicate assets owned by cloud providers (like mobile AdTech and eSports broadcasters). Amazon Microsoft Google Apple Incumbent Comments Only Microsoft will be incented to Hardware protect legacy HW revenue (Xbox) Incumbent software firms have Software material legacy software revenue to protect Legacy In-game Most cloud providers don’t generate Ads material in-game ad revenue Game Incumbents have material in-game monetization monetization revenue to protect Cloud Amazon, Microsoft and Google hardware are the large cloud providers Due to Android and iOS, Google AdTech Emerging and Apple apt to benefit from (Mobile) mobile ad growth Amazon (Twitch) and Google Broadcaster (YouTube) will be able to monetize gaming via broadcasting assets 6 Contents Summary 7 The Console/PC Value Chain 11 Layer I: Intellectual Property 12 Layer II: Game Developers 14 The Genres 20 AAA Versus Independent Games 21 Layer III: Game Publishers 26 Layer IV: Hardware 29 Arcades: Where the Games Begin 29 Console and Handsets: Where the Market Expands 30 Handheld Market 32 PC Market 38 Layer V: Distribution 40 Cloud Gaming 45 Layer VI: Consumer 53 Layer VII: eSports 55 Mode of Distribution 55 Live Streamers 58 Sponsorships 63 Subscribers 64 Ads 64 Donations 65 Professional eSports 69 Turnover of eSports Titles a Key Consideration 79 Grassroots Competition 80 Live Streaming vs. eSports: The Broadcaster’s Perspective 81 The Mobile Value Chain 83 Layer I: Intellectual Property 86 Layer II: Developers and Publishers 87 Layer III: Installs