Slides from Michael Pachter's keynote at November 2013's London Games Conference.
Michael, Research Analyst at Wedbush Securities shares insights and analysis on both the state of the video games market and where the opportunities are
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Video games, by the numbers - Michael Pachter, Wedbush Securities
1. Video Gaming
State of the Union
Presented By:
Michael Pachter
Research Analyst, Entertainment Software, Wedbush Securities
Wedbush does and seeks to do business with companies covered in its research reports.
Thus, investors should be aware that the firm may have a conflict of interest that could affect
the objectivity of this presentation. Investors should consider this presentation as only a single
factor in making their investment decision. Please see page 16 of this presentation for analyst
certification and important disclosure information.
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2. London Games Conference 2013
The video gaming market is BIG!!
âThe addressable market (North America and PAL) purchased $22.6
billion of packaged software in 2008 and an estimated $3 billion in
digital product sales, for total sales of $25.6 billion.
âPackaged goods sales declined to $18.4 billion in 2011, $14.2 billion in
2012, and $13.8 billion in 2013 (estimated), but . . .
âDigital product sales have grown to approximately $13 billion (up over
300%), for total sales of $26.8 billion in 2013.
Source of all figures NPD Group and Wedbush Securities estimates
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3. London Games Conference 2013
What has kept sales high?
âMore people play on a greater number of devices
â˘Device proliferationâPCs, consoles, smart phones, iPods and tablets
â˘Non-traditional gamers augment the coreâgames played by EVERYONE
â˘InnovationsâDS, Wii, Kinect, Move, Wii U, tablets, smart phones
â˘New productsâ3DS, PS Vita, Wii U, PS4, Xbox One, tablets
âLower price erosion for packaged software
â˘Higher starting price pointsâ$60 is the new $50, and $70 is the new $60
â˘Stubborn price pointsâweighted ASP console/HH drops 1.5%/year
âNew forms of distribution
â˘Smart phone/tablet games distributed by carriers, Android/iTunes Stores
â˘Online games, including Facebook and mid-core
â˘New channelsâOuya, Gamestick and PS Vita TV
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4. London Games Conference 2013
The console installed base has peaked:
âDifferent content delivery mechanisms drive digital migration
â˘PSN, XBLA, Wii Channel, App Store
â˘Digital sales are impossible to trackâno voluntary reporting
âConventional measures are less relevant
â˘Few people will buy a game on multiple devices (console, handheld,
mobile device, PC)
â˘More choices = lower tie ratios = NPD data may not reflect the big picture
âNontraditional gamers have different purchase habits
â˘25 year-old women trained by Nintendo
â˘45 year-old women trained by Nintendo
â˘65 year-old women trained by Nintendo
â˘Nintendo is losing market share, period
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5. London Games Conference 2013
The next generation of consoles is probably the last:
âWii U performance to date is underwhelming
â˘Essentially a DS split into two parts (game pad plus TV)
â˘Not innovative enough to drive huge interest, but . . .
â˘Itâs possible (but unlikely) that exciting new titles will reinvigorate growth
âPS4 is impressive as a gaming device
â˘Graphics are phenomenal, and huge RAM makes innovation likely
â˘Multimedia features remain unclear, but CPU power allows huge
improvement
âMicrosoftâs Xbox One is impressive as a multi-media device
â˘Weâre sticking with our prior prediction of a built-in TV tuner, Kinect
bundled with every console, integration of Skype and a lot more
(eventually)
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6. London Games Conference 2013
The next generation of consoles is probably the last:
âAt current sales rate, Wii U likely to sell 30 million units lifetime
â˘The Wii sold 100 million units LTD
â˘We think that the Wii U is too similar to current generation consoles, and
priced too close to likely launch prices for PS4 and Xbox One to thrive
âPS4 is likely to sell 100 â 120 million units lifetime
â˘PS3 sold 73 million units LTD
â˘Pricing is $399 and launch is not a year late
âXbox One is likely to sell 90 â 110 million units lifetime
â˘Xbox 360 sold 75 million LTD
â˘Pricing is $499âtoo high relative to PS4, people donât understand why
they must pay for Kinect
â˘TV functionality a huge driver, with ultimate potential for an MSO subsidy
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7. London Games Conference 2013
The next generation of consoles is probably the last:
âTotal next generation sales will likely be 220 â 260 million
â˘Last generation has sold 246 million units LTD
â˘Our prediction has Nintendo losing market share, Sony/Microsoft gaining
âTechnology may not advance much in the next 10 years
â˘3D and 4K/8K TV broadcast requires increased bandwidth
â˘Without TV broadcast, displays are not likely to change much
âInstead of new console launches, we expect frequent model updates
â˘7 Xbox 360 models, 12 PS3 models (so far)
â˘This compares to one Xbox and two PS2s
â˘New models are likely to enhance multimedia (wireless cable box powering
multiple televisions?)
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8. London Games Conference 2013
What changed?
âSocial Games/Free-to-Play Games
â˘In the West, Nintendo trained FTP gamers
â˘Low barriers to entryâaverage cost is $50,000 â 500,000
â˘Constantly changing economiesâbalance is key to success
â˘Facebook gaming flat; non-Facebook gaming proliferating
âMobile Gaming Platforms
â˘Smart phones and tablets are cannibalizing dedicated handheld market
â˘Tablets are the new laptopsâgames getting more sophisticated
âGaming in the cloud ? ? ?
â˘OnLive an early flame out . . . but
â˘Sonyâs acquisition of Gaikai may reinvigorate the cloud
â˘Single player cloud based games easy to implement
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9. London Games Conference 2013
Digitally accessed games will continue to gain share
âThe migration to digital is an opportunity, not a threat
â˘If managed properly, digital revenues should supplement, not cannibalize
â˘Nintendo expanded the market to non-traditional gamers
âPublishers should embrace new business models, not fear them
â˘DLC averages 10 â 15% of packaged goods sales (for games with DLC)
â˘Next generation hard drives are big, likely to become huge (except for Wii
U), making full-game downloads likely; expect 1 â 2 TB drives in 2015
â˘Smart phones and tablets train gamers or gamersâ parentsâthis is why
Nintendo should consider placing GBA content on phones/tablets
â˘Social/FTP games as an opportunity on any platformâEA mobile success
âLearn from othersâ success/failures
â˘World of Warcraft subscription model/Riot Games FTP model
â˘Call of Duty multiplayer opportunity/failure?
â˘Zynga lack of profitability
â˘Clash of Clans/Hay Day successâ$2 million per day/$1.5 BILLION exit?
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10. London Games Conference 2013
On the positive side:
âConsumer choice/demand is driving digital growth
â˘More consumers want games in bite-sized chunks
â˘Free-to-play has the right price = $0.00!
âThe casual/social opportunity is attracting new entrants
â˘Low barriers to entry
â˘Phenomenal success storiesâRovio, Supercell, King.com
â˘Proliferation of phones and tablets creates a growing opportunity
â˘Facebook made casual/social gaming socially acceptable
On the negative side:
âLow barriers to entry keep some players away (Activision)
âFree-to-play is âfreeâ, making profits elusive for most
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11. London Games Conference 2013
Looking into my crystal ball . . .
âConsoles may not be relevant in 10 years
â˘Devices are increasingly more connected
âSmart TVs might not be necessary at all; however . . .
âThe device connected to the TV must be smartâincludes PC
â˘Storage will become less essential, if . . .
âThe cloud works (a big ifâsee SimCity launch), and
âConsumers are willing to embrace the cloud
â˘Console gaming is increasingly multiplayer
â1 million players in 2003, 6 million in 2007, 35 million in 2013
âPackaged goods will lose share to digital distribution
â˘Still few, if any, day-date downloads
â˘That will change with next gen Sony/Microsoft consoles
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12. London Games Conference 2013
Looking further into my crystal ball . . .
âThe gamer demographic will continue to broaden
â˘Traditional gamers with high standards; non-traditional with low standards
â˘Games âeverywhereâ; some players may be device agnostic
â˘Smarter devices allow the same experience on multiple devices
âGames will evolve into multi-faceted options
â˘Packaged goods will still exist for traditional gamersâused games are safe
â˘Full downloads will be offered of every game (or no downloads)
â˘Games may be sold in installments
â˘Microtransactions will become ubiquitous
â˘Subscriptions will become ubiquitous
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13. London Games Conference 2013
Looking even further into my crystal ball . . .
âEvery game will have a digital component
â˘Traditional games may split single/multiplayer into two
â˘Single player sold at high price
â˘Multiplayer sold as a subscription or in installmentsâDestiny???
â˘Technology may allow same game progress on multiple devices
âThe non-traditional audience will continue to grow
â˘Todayâs Nintendads are tomorrowâs Candy Crush moms
â˘Games are more socially acceptable than ever
âNon-traditional business models will continue to evolve
â˘Advertising is likely to proliferate, especially in FTP games
â˘Better balancing of economies could drive higher revenues
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14. London Games Conference 2013
PREDICTIONS . . .
âMicrosoft loses the next generation (until they cut price)
â˘The TV tuner and Skype are killer apps that people wonât pay for
â˘Both lend to subsidies from MSOs or ISPsâthat changes the playing field
âSony thrives in the next generation
â˘Still playing catch-up, but gamer focus, Gaikai and content are advantages
âNintendo software still king, but . . .
â˘Console hardware sales will be challenged
â˘Handheld hardware sales will lose share to smart phones/tablets
âWe wonât lose any more publishers to bankruptcy
âWe may see consolidation
âThe PC as gaming device will make a comeback
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15. London Games Conference 2013
Thank you for your indulgence.
Questions?
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16. ANALYST CERTIFICATION
I, Michael Pachter, certify that the views expressed in this presentation accurately reflect my personal opinion and that I have not and will not, directly or indirectly, receive compensation or other payments in connection with my specific recommendations or views contained in this presentation.
IMPORTANT DISCLOSURES
The analysts responsible for preparing this presentation do not receive compensation based on specific investment banking activity. The analysts receive compensation that is based upon various factors including WSâ total revenues, a portion of which are generated by WSâ investment banking activities.
WS makes a market in the securities mentioned herein.
For a complete analysis of the companies mentioned in this presentation that are covered by the Research Department, please refer to the respective research reports.
Applicable disclosure information is also available upon request by contacting Ellen Kang in the Research Department at (213) 688-4529, by email to ellen.kang@wedbush.com, or the Business Conduct Department at (213) 688-8090. You may also submit a written request to the following: Business Conduct Department, 1000 Wilshire Blvd., Los Angeles, CA 90017.
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