People in their forties undoubtedly already knew it, but video games have been around for more than fifty years now. They may think back with some nostalgia to their first console from Nintendo, which was launched in 1977. Or that of Activision, which saw the light two years later. And the end of the consoles is far from in sight, despite the rise of gaming via your phone with games like Roblox.
That became clear in the last quarter of 2020 when Sony launched it’s PlayStation 5 and Microsoft launched the Xbox S and X. We are talking about the ninth (!) generation of consoles here, but that did not stop consumers from purchasing them. The game consoles sold out within a few minutes of being offered for sale last November. And the same thing happened with the second charge that Microsoft and Sony brought to the market. All the more special because the stores in many countries were closed due to the corona pandemic.
This sales success is of course good news for the big players in the gaming industry, of which Morningstar follows the following four publicly traded parties: Activision Blizzard, Take-Two, Electronic Arts, and Ubisoft. Incidentally, of these four, only one does not come from the US – namely the French Ubisoft. The continued popularity of consoles shows that they have not been supplanted by gaming via your phone – at least not among people who have been gaming for a long time.
Two routes possible
The two ways of gaming can coexist, thinks Morningstar, which recently analyzed the gaming industry. If that thought is correct, there is still a lot of money to be made for Sony and Microsoft, who bet on both.
Now you may be thinking: ‘not so surprising that so many of those new consoles are being sold because with all the lockdowns and the mandatory working from home, everyone is gaming drowsy. That’s true, but it’s still special: you don’t have to buy the PlayStation 5 and the Xbox S and X because there are so many new, revolutionary games on them. The harvest this time is rather poor. Starting with ‘Halo Infinite, Microsoft’s biggest must-have game on the Xbox: the launch of which has been postponed until sometime later this year.
For most other new games from Microsoft, you can also play them via other platforms, such as ‘Assassin’s Creed Valhalla’ or ‘Sega’s Yakuza: Like a Dragon’. They also work for players with an older type of Xbox. If you look at Sony, it did provide a few exclusive titles on the PlayStation 5, such as ‘Astro’s Playroom’, ‘Sackboy: A Big Adventure’, and ‘Demon’s Souls. But his showpiece, ‘Spider-Man: Miles Morales, can also be played on a PlayStation4. And it’s not that the two new consoles have unique features or interfaces, like the Nintendo Wii or Switch.
Xbox Game Pass subscriptions
With the smooth compatibility between Xbox and games, Microsoft is also trying to reach and retain a new customer base. Namely, those people who are gaming on the Xbox platform for the first time. They want to pull Microsoft towards the Xbox Game Pass, the subscription that gives members permanent access to exclusive games that Microsoft has developed in its studios, including golden oldies. In that sense, the subscription is similar to Netflix, according to Morningstar.
Morningstar does have a caveat to this business model, based on the Xbox Game Pass’s unlimited-food menu. Gamers often play one or two games very intensively and stick to that. That is an essential difference with how consumers work with non-interactive media such as Netflix and HBO: they binge-watch x-number of different series through each other or in succession. Such a consumer gets his money’s worth if he opts for an unlimited-food menu; for gamers who go blind for 45 hours a month for one or two games, that’s just the question.
That doesn’t change the fact that Microsoft’s Xbox Game Pass has grown faster than expected. However, this is a side effect of the corona pandemic with its lockdowns and the suddenly limited opportunity for entertainment outside the door. Since people are more confined to their homes, they spend a lot more time gaming. During the first six months of the pandemic, a whopping 79 percent of Americans played a video game, and of those between the ages of 18 and 24, 66 percent played a game during the first month of the pandemic.
But if the lockdowns and other restrictions are eased or lifted, Morningstar expects that many gamers will pick up their old gaming habits again and start gaming less. And then it is very questionable whether they keep their subscription to Game Pass.
Acquisitions by Microsoft
However, Microsoft is serious about the subscription formula. This is evident from the large investments it has made in this. For example, it took over several game developers in recent years, such as Last September ZeniMax Media, known for ‘Elder Scrolls’, ‘Fallout’, ‘Doom Eternal’ and ‘Rage’, among others. That cost Microsoft 7.6 billion dollars, converted LOOK UP! EuroAnd in 2018 it already took over seven renowned parties, such as Obsidian (who released ‘Pillars of Eternity) and Ninja Theory (known from ‘Hellblade: Senua’s Sacrifice’).
The cloud-based gaming service that Google first launched at the end of 2019, called Stadia, doesn’t seem like a serious competitor for Microsoft: there are only about 130 games in this library, almost half of which date from before 2018. In addition, users must quickly pay extra or purchase additional accessories if, for example, they want to play Cyberpunk 2077 and do not have the latest console or want to use the game through their television screen. Some die-hard fans of certain games from the Stadia library may be willing to do that, but Morningstar doesn’t think there will be enough to make the game service profitable.
It is also highly questionable whether Luna will become a tough competitor, amazon’s cloud gaming service. It is still being tested but will offer a subscription for games from Ubisoft, including newcomers such as ‘Watch Dogs Legion’, ‘Assassin’s Creed Valhalla’, and ‘Immortals Feynx Rising’, which were only released a few months ago.
What is clear is that Microsoft has invested so much in the traditional infrastructure of games outside the cloud (via console or PC) that it will not give it up in favor of the new route via the cloud. Microsoft wants to combine these two sports. Those who have a premium subscription to the Xbox Game Pass get the xCloud for free, the cloud gaming service that Microsoft launched last year. It has a much larger library than Luna and Stadia: it contains more than 200 games, including exclusive games from the Xbox such as ‘Forza Horizon 4’ and ‘Gears 5’.
XCloud vs Luna and Stadia
However, the xCloud does have technical limitations: there is only an app for smartphones that run on Android, and not for Apple users. The latter will be able to use the xCloud via their web browser from April and will be available to PC users from the end of this year.
The double track that Microsoft follows with, on the one hand, continuing with the traditional infrastructure for gamers via console and PC and on the other hand betting on gaming via the cloud and by mobile phone, is wise, according to Morningstar. It believes that the demand for cloud gaming will be more limited than the market and vendors expect – at least for the next three years. Players like Google who unilaterally bet on cloud gaming with Luna can only break through if they manage to produce new hits that you can only play through Luna.
How alive and kicking the console business still is, is also evident from the figures. Take-Two, for example, gets even more than 70 percent of its revenue from console games, EA 65 percent, and Ubisoft more than 55 percent. This is even though they all also focus on gaming via PC and mobile phone. In addition, the price of games for the latest, ninth-generation consoles also seems to be finally going up. It has been stuck around $ 60 since 2006, but both Take-Two and Sony are now going to charge $ 70 for new games.
Conclusion: Fair Value versus Current Value
Due to the many positive developments in and prospects for the gaming industry described above, Morningstar now estimates the fair value of the four major gaming players higher than it did in September 2019. It has therefore increased the so-called Fair Value of these four stocks – Activision Blizzard, Take-Two, Electronic Arts, and Ubisoft. But even if you take that into account, the current value on the stock market of these shares is already fair – so there is not a big rally in it, morningstar thinks.
Finally, about the competitive advantages of the four, they have them to a limited extent, which translates into a Narrow Moat rating.