After a tough 2022 year (-7%) dragged down by unfavorable comparisons with a pandemic-driven 2021, videogame content sales in the US are showing signs of life with a 1% growth in February, according to industry tracking group Circana.
While this recovery is not impressive yet, hardware spending, which can be viewed as an early indicator of game content/software sales, jumped 68% in February thanks to increasing supply of PS5, suggesting that consumers will now spend on games running on their new consoles and making us confident that content sales growth will accelerate in coming months.
The increasing availability of PS5 and Xbox and their expanding installed base should also incentivize game publishers to accelerate their blockbuster release cadence. Over coming months, many blockbusters will ship, including Zelda, Diablo 4, Star Wars Jedi, Final Fantasy 16, Marvel’s Spider-Man 2, Assassin’s Creed Mirage and potentially Avatar Pandora, fueling the industry growth acceleration. The only source of continued weakness we identify is mobile gaming, as the population of casual gamers is less engaged since the economy reopening and as the mobile business model, that relies on digital advertising and in-app purchases, is more macro sensitive.
It’s also worth noting that Chinese video game makers are in a similar situation than their western peers. While Tencent showed a return to almost flat revenue growth in Q4 in its gaming business, a steep recovery is likely ahead for the Chinese giant and its rivals (NetEase, Bilibili…) as they will benefit from favorable comparisons and a new product cycle with most publishers rushing to release major games (Westward Journey, Pretty Derby…) now that the local regulatory environment has improved.
If the fundamentals are then heading into the right direction, there are also some positives on the M&A and regulatory fronts. In a surprising announcement in recent days, the UK’s antitrust watchdog “provisionally concluded” that the proposed $69 billion acquisition of Activision Blizzard by Microsoft, which has been pending since January 2022, would not reduce competition in the console gaming market and that it will now focus its inquiry on the competition implications on the cloud gaming market.
With other jurisdictions such as Japan’s FTC gradually greenlighting the Activision transaction and a US judge recently denying the US FTC’s request to block Meta’s acquisition of a VR game company, the probability to see the Activision – Microsoft deal go through has been materially increasing, all the more that Microsoft has offered antitrust remedies such as the commitment to release future Call of Duty instalments on the rival Sony and Nintendo consoles.
That suggests in our view that large M&A could make a comeback in video gaming with the likes of Netflix or Amazon showing strong interest for game publishers that own open-world environments that can easily turn into Metaverse worlds or large intellectual property libraries that can be monetized on streaming platforms.