The new age of gaming

We are inundated with multiple smartphone releases every year. Apple (US:AAPL) bombarded us with no less than three new models of the iPhone 12 last month and Samsung Electronics (KR:005930) has also released a new phone every year for the past decade. Yet the release of a new video game console is a rarer thing – the intervening years between the new devices means that each one marks a real step forward into the next generation of technology. Last week gaming geeks stumbled into the light of the new age, as Sony (JP:6768) and Microsoft (US:MSFT) released new consoles: two models of the PlayStation 5 and the Xbox Series X and Series S. 

The machines are much more powerful than their predecessors: on the PS5, players can download games up to 19-times faster compared with the last model. Meanwhile, a more powerful CPU (central processing unit) chip in the Xbox means that games can load in a matter of seconds. For both, a graphically intensive technique known as 'ray tracing' means that consoles realistically render light and shadows – which means that players can catch their reflection in car windows or puddles. 

This extra computing power has not been lost on developers: the capacity of the headline title games are enormous. Watch Dogs: Legion lets players explore a realistic map of London, that recreates streets in the centre of the capital, as well as seven other boroughs. Sony’s Spider-Man also has a sprawling, although less accurate, map of Manhattan for users to explore. 

Both consoles mark a real step forward in the gaming industry’s technological capacity. Yet, conversely, some of the most popular games this year were Epic Games’ Fortnite and Roblox, online platform-based games that do not require a console or a disc. More than that – they are reshaping the gaming experience as a whole, and the role it plays in our social lives. Indeed, this year both games hosted virtual concerts by American rap stars Travis Scott and Lil Nas X.

The past year has been stellar for the gaming industry – in fact, academics at Oxford found this week that gaming can improve mental wellbeing, based on the feeling of competence and social interaction. Given 2020 has left much to be desired in terms of social interaction for us all, the social element of gaming is arguably becoming more central to its widespread appeal. A joint study by Google and Savana found that globally over a third of mobile gamers are playing more in order to connect with family and friends.  

Moving parts

Neither Microsoft or Sony have given the market an idea of what sales are currently shaping up to look like – but research group Ampere Analysis projects that Sony will ship 10m PS5 units within six months of launch, around a third higher than PS4 sales in 2013. However, in a rapidly changing market that increasingly leans more towards casual online gameplay, there are concerns that this generation of consoles could be the last. Indeed, head of PlayStation Jim Ryan said in an interview with the Financial Times that he was not sure if the company would create another console. What's more, Microsoft maintains that the industry is transforming from “a device-centric era to a player-centric era”. 

A hit to the console market would blow a bigger hole in Sony’s income statement than in Microsoft’s in the long run. At the moment, Sony relies on its gaming division for nearly a quarter of its top line, compared with just under a tenth at Microsoft. While Sony currently has the lead over the US giant in terms of console market share, Microsoft has the edge in the subscription direction that the industry appears to be leaning towards. 

That is not to say that Sony has not been diversifying away from its console sales. In fact, out of the 107m monthly active users on the PlayStation network, 46m are paying subscribers on the ‘Plus’ programme and 2.2m players stream games through ‘Now’ memberships on PCs and the PS4. 

Even game developers themselves are considering dabbling in subscription models. Fortnite, for example, is reportedly researching potential interest in a subscription model among its users. A leaked survey asked existing players what they would expect from a monthly subscription service, such as special outfit packs for avatars or bundles of in-game currency.  

Yet Microsoft arguably has the edge with subscription models, having presided over the mammoth suite of Office softwares for several decades. The tech giant is pedalling its Game Pass service to its customer base, which allows players to stream games from the Xbox One, as well as PCs that run on Windows 10 and any Android smartphone via the cloud. 

This platform agnostic approach should cushion a blow to the console market, if one does eventually arrive. Microsoft and Sony are not the only ones to have cottoned on: Alphabet (US:GOOGL) launched its Google Stadia platform in 2019,  shortly followed by Amazon (US:AMZN)’s service Luna this year. Facebook (US:FB) has also introduced a basic gaming platform, although it will generate revenues from advertising rather than subscriptions. 

What’s the effect on developers? 

For developers, the more powerful the console, the greater the canvas on which they can paint. Stronger CPUs and GPUs (graphics processing units) allow for more complex software. However, cloud streaming and mobile gaming typically cannot support games that are so technically intense – growth in these markets will require content that is simple, but still well designed. 

It is perhaps little wonder then that Microsoft has been on a studio shopping spree. The giant now presides over 23 creative teams, including those it bought as part of the whopping $7.5bn Zenimac acquisition that it announced in September. That far surpasses Sony’s 14-strong team of studios.  

In fact, the industry appears to be buzzing with takeover activity. Even on our own shores Codemasters (CDM) received a bid from US developer TakeTwo Interactive (US:TTWO) in a deal that values the company at around £740m. UK-listed developers Sumo (SUMO) and Team17 (TM17) could equally attract attention of larger US publishers, especially as they develop their intellectual property portfolio and diversify away from big consoles and further into mobile gaming.

A growth spurt not a purge

The gaming industry has opened up its arms to a wider and more diverse user base this year – with a growing proportion of female players, and from more varied platforms and devices. While this marks a shift in the direction of the industry, investors should be wary. Consoles were supposed to mean the death of PC gaming in the 1990s and the early 2000s. Later, mobile gaming was the apparent end of consoles in 2013. Now the cloud is meant to kill them both.

Yet cloud-based gaming also relies on not just a stable, but a fast internet connection. Judged against the typical lifecycle of major consoles, that gives the cloud gaming providers around seven years for speedy internet connections to proliferate across the market. Given fibre networks are only expected to reach around half of US households by 2025, we do not think investors should count on that. 

There will always be a core market for geeks who want a powerful machine that can run the heavy-weight games. The astronomical success of Nintendo’s (JP:7974) Switch handset this year indicates that there is still an appetite from casual gamers, too. However, a wider move towards interactive over linear media means that companies should move quickly to capitalise on the scale that comes with mass appeal, as well as the platforms that facilitate it.