流媒體：下一個游戲玩法

FOCUSU.S.InternetStreaming:TheNextPlayInGamingTheKeyTakeaway:Thefuturestateofgamingwherecomputingshiftsfromlocalconsolestoremoteserversandthevastmajorityofcontentisconsumedinthecloud

INDUSTRYUPDATEU.S.InternetPOSITIVEUnchanged

EquityResearch7March2019(likewealreadyseeinmovies/music)willbegintotakeshapethisyear.Thepotential winnerswhenstreamingreplacesgamesalesasthedefaultdistributionincludeEAandUBIonthecontentsideduetofrequencyofgamesandvaluableIP,whileMSFTseemsbest-positionedontheplatformsidetotakedisproportionateearlyshare

U.S.SoftwarePOSITIVEUnchangedgivenacomboof1Pcontentandcloudassets.Muchhasbeenmadeaboutthefuture stateofgamingwhere–andforgoodreason-Streaminga)lowersthefinancialbarrierstoentrybyover70%,b)increasestheTAMforconsolegamesbyover10x,c)shiftsuniteconomicsinfavorofpublishers,andd)mayleadtomoregamesintheindustry.It’searlytofactorbenefitsintomodelsatthispointgiventechhurdlesahead.However,therhetoricfrompublishersandplatformswillonlyintensifystartingthismonthwitheventcatalystsincludingGOOGL/MSFTatGDCinMarch,publictrialsforProjectYeti/xCloudin2H19,andAMZN’sexpectedlaunchin2020.AfterDigitalization,StreamingIsTheNextSecularTailwindForGamingStocks:Wesaidatthestartof2019thatsectormultiplesmayremainrangeboundatlevelswesawcomingoutofthe“digitalization”eraofgaming(15-20x),aswedidnotseeanear-termcatalystthatwouldgiveinvestorsreasontore-ratethesectorbacktothepriorhighsof2017-2018(20-30x).Streamingshouldincreasehowmany/howlongplayersengagewithgameswhilemaintaining(ifnotexpanding)profitmarginsforcontentcreators–ararecombinationinthebroadertechlandscape.Visibilityonthebusinessmodelandpotentialtimelinein2019/2020shouldprovideaP/Ecatalystforthegroup.StreamingGivesPublishersMoreLeverage;APositiveForMargins:Subscriptionsisoftenmentionedwithstreamingandmarginimprovementwouldcomefromashifttolicensedcontent(100%margin)fromgamedistribution(70-90%).DeveloperscansecuremultipledealsformoreaggregateGPthanwhatispossiblefromthestatusquo.Or,streamingplatformsmaysimplyreplacedigitalstorefrontsandsellaccesstoindividualgames.Eitherway,moreplatformscompetingforgamersandcontentputsthenegotiatingleveragebackinthehandsofpublishers.Allelseequal,a20%increaseinengagementfromstreaminganda10-pointimprovementingrossmargincouldpositivelyimpactFY20/CY19EPSforgamingstocksbyalmost10%onaverage.SeveralBreakevenScenariosForPlatforms,AllOfWhichSeemFeasible:At100%streamingand100%subscriptions,aplatformwithexclusiverightstoallgamescouldbebreakevenonGPat$99/Yron~70mnsubs.Thatsameservicecouldbreakevenat~45mnsubswithexclusivecontentrightstojusttheBig-4publishers.Allofthisseemsfeasiblegiventhe~170mnconsolesgloballytodayandUSgamerspendof$90-100/Yronnewgames.ThereisreportedinterestfromAMZN,MSFT,GOOG,VZ,NVDA,SNEandmoreinthisspaceandwhicheverisfirsttomarketwillbeattractedtotheopportunitytoreachthe~1.5bngamingdevicesgloballyonconsole,PC,andmobile.

U.S.InternetRyanGeeyan.gee@BCI,USRossSandleross.sandler@BCI,USMarioLu+12125264885mario.lu@BCI,USU.S.SoftwareRaimoLenschow,CFA+12125262712raimo.lenschow@BCI,USPreeGadey+12125263156pree.gadey@BCI,USalnrtealnrtenI-detcitrsReCapitalInc.oneofdoesandseekstodoinitsresearchAsabeawarethatthemayhaveaofthattheofconsiderthisasonlyafactorinmakingtheirPLEASESEEANALYSTCERTIFICATION(S)ANDIMPORTANTDISCLOSURESBEGINNINGONPAGE25.CONTENTSWhyVideoGameStreamingMattersToday 3PlentyOfEventCatalystsIn2019RelatedToStreaming 3StreamingIsTheNextSecularTailwindForGamingStocks 4amingDsupsTheCuntDtbutnM;nfttngMagns 5ManyTechGiantsInvestingInStreaming 5TheTechnologyForStreamingIsImproving;MayGetThereThisYear 6PotentialStreamingWinners 7StreamingMakesBusinessSenseForManyReasons 8PlayerTAMIncreasesAsFinancialBarriersComeDown 8GrossProfitMarginIncreasesInAStreamingWorld 9StreamingEnablesMoreContentAndDiversity,ButAlsoMoreCompetition 10NotSoClearSubscriptionsMakeAsMuchSense 11Piracy/UnbundlingContributedToStreaming/SubscriptionMusic 11Daily/MonthlyEngagementWithGamesTrailsTV/Music 12MostGamingSubscriptionServicesStillSub-Scale 13EngagementCouldIncreaseWithSubscriptionServices 13PotentialBusinessModelsExplained 14FixedRate:AnnualLicenseModel 15VideoGamesAreProducedLikeOtherMedia,ButNotConsumedTheSame 16VariableRate:AffiliateFeeModel 16VariableRate:“CostPer”Model 17Multi-TierPricingModels 17DiscsSalesStillHaveAPlace;ExpectHybridModelOverForeseeableFuture 18StreamingCanBeProfitableForPlatforms,Too 19Nearly$12bnSpentOnConsoleGamesEachYear 19StreamingTransfersLeverageBackToPublishers 21All-CloudIstheDream,ButAHybridModelIsTheReality 23WhyVideoGameStreamingMattersTodayMuchhasbeenmadeaboutthefuturestateofgaminginwhichthecomputingpowershiftsfromlocalhardware(i.e.,videogameconsoles)toremoteservers(i.e.,cloudinfrastructure)andforgoodreason.Streamingwouldpositivelyimpacttheoutlookforgamingstocksinthefollowingways:Lowersthefinancialbarrierstoentryforplayersbyover70%IncreasestheTAMforconsolegamesbyasmuchas10xShiftsuniteconomicsbackinfavorofpublishersShouldleadtogreaternumbersandvarietyofgamesintheindustryDigitaldownloadswillsoonsurpassphysicalgamesalesastheprimarymeansofbuyingnewgames,playersarespendingmoretimeplayinggamesonlinenowthaneverbefore,andcloud/telecommunicationtechnologiesareevolvingtoapointwherethenotionofstreaminggamesisevenfeasible.Further,weareapproachingtheperiodwherethecurrentPS4andXboxOneconsolesaredueforarefresh,andweseenolessthanfivecompaniesinvestinginthisspace.Allthismakesusoptimisticthatremotecloudhardwareeventuallyreplaceslocalgamingconsolesandstreamingreplacesgamesalesasthedefaultdistributionmodel.PlentyOfEventCatalystsIn2019RelatedToStreamingWethink2019willbethejumpingoffpointforcloudgamingbeginningwiththeupcomingGameDevelopersConferenceinSanFrancisco(March18-22).Googlehasalreadysentoutinvitationstoanalystsandmembersofthemediapromisingsomegamingrelatedannouncementsduringitskeynoteaddress(10:00PTMarch19)thatmayrevealmoreonProjectYeti(pricing,content,oralaunchdateannouncement).Microsoftalsohasanhour-longpanelatGDCcalled“TheFutureofStreamingXboxGamesonMobileDevicesandBeyond”thatcouldhaveanannouncementforapublictrialofxCloud(sometimein2019).FIGURE1TimelineofGameStreamingSource:BarclaysResearchAtE3June11-13,weexpectMicrosofttofurtherdiscussitshybridstrategy(ProjectScarlett)ofpushingtheindustrytowardsstreamingdistributionwhilecontinuingtosupportphysicalanddigitalgamesaleswithatraditionaldisc-basedconsolemodel.AndtherearereportsthatAmazon’sstreamingservicecouldlaunchin2020.StreamingIsTheNextSecularTailwindForGamingStocksWesaidatthestartof2019thatsectormultipleswouldremainmoreorlessrangeboundatlevelswesawcomingoutofthe“digitalization”eraofgaming(2013-2016)andthatwedidnotyetseeathemethatcouldgetthesectortorevisitthepriorhighsof2017-2018.Wethinkstreamingcouldprovidethatseculartailwindfortheindustryasithasthepotentialtosignificantlyshifttheeconomicsofgamesalesbacktowardsthepublishersandsaidmarginexpansionpotentialcouldcausemultiplesfortheentiresectortore-ratehigher.FIGURE2FY2P/E(ex.Cash):EATradingNearHighOfDigitalizationEraRange3025201510502011-2013 2014-2016 2017-2018

FIGURE3FY2P/E(ex.Cash):ATVITradingAtMidpointofDigitalizationEraRange(2014-2016)353025201510502011-2013 2014-2016 2017-2018Source:Refinitiv Source:RefinitivFIGURE4FY2P/E(ex.Cash):TTWOTradingNearLowOfCurrentConsoleCycle3025201510502011-2013 2014-2016 2017-2018

FIGURE5FY2P/E(ex.Cash)ForGamingStocksVs.Market454035302520151050EA ATVI TTWO UBIP.PA SP500Source:Refinitiv Source:RefinitivAlotoftheinnovationrequiredisyettorollout(i.e.,5G)andthejuryisstilloutonwhether/howmanyplayerswould/couldadoptstreaming.Hence,wedonotthinkthebenefitsofstreamingarepricedintothestocksatthispoint.However,therearemanysmartcompaniesinvestingtoenablestreaminggamingonaglobalscale,andthethemewillbegintomovethesectorasweseethetechnologyimproveandwegetmorevisibilityintothepotentialbusinessmodels(winners/losers).StreamingDisruptsTheCurrentDistributionModel;BenefittingMarginsThescenariooftenoverlookedistheonewherethereisnorealchangeinhowplayerspurchasegamingcontenteveninastreamingworld.Digitalgamesalesarealreadysettosurpassphysicalgamesalesinthenearfuture:soascloudserversreplaceconsolesasthesourceofcomputing,weseefewreasonswhyplayerscouldnotcontinuetopayforaccesstoindividualtitles.Inpractice,playersmaysimplypayafee($40-60)foraccesstoagameintoperpetuityanytimefromanydevice.ThiswouldresembleApple’siTunesintheCloudservicewhereusersstillpurchaseindividualsongs,butsongsarestoredinthecloud–notthephone–andaccessiblefromanydevice.ThenumberofgameretailerswouldexpandbeyondSonyandMSFTtodaytoincludeGoogleandAmazon(whichalreadyoperatedigitalstorefronts),andthiscompetitioncouldputdownwardpressureonthe~30%oftransactionsthatdeveloperscurrentlygiveuponMSFT’sXboxLiveandSony’sPlayStationNetwork.FIGURE6EstimatedEPSImpactFromHigherEngagementAndBetterEconomics8%8%8%8%4%EA ATVI TTWO UBISource:BarclaysResearch;ScenarioAssumes10%IncreaseInEngagementAnd500bpIncreaseInGrossMarginWeestimatepublishersgenerated~$25-35ingrossprofitforeachunitsoldonconsolesandassuminga20%increaseintheplayerbase(asaresultofbroaderadoptionofstreaming)anda500bpimprovementingrossmargin(alsoasaresultofmorefavorableuniteconomics),weestimatetheaverageimpacttoannualEPScouldbe~7%(allelseequal).A30%increaseintheplayerTAMandfull10-pointimprovementingrossmarginwouldresultinan11%impacttoaverageEPS.OuranalysisshowsthatTTWOcouldseealargerbenefitgivenitsabove-averageexposurestoconsoles.ManyTechGiantsInvestingInStreamingThereissignificantinterestfromawiderangeoftechcompanies,eachwithvariouscorecompetenciesingaming,cloud,hardware,andtelecommunications.Microsoftappearstobeinvestingmostaggressivelyinthisspaceandcouldbefirsttomarketwithagamingservicethatisa)100%cloud-basedandb)basedonsubscriptions.ThecompanyrevealedxCloudinOctoberlastyear,whichpromisestostreamconsolequalitygamestomobiledevices,andtherearereportsMSFTwillbringXboxgamestotheNintendoSwitchviastreaming.PublictrialsforxCloudwillbeginin2019.MSFThasalsoindicatedthatitisworkingonitsnextgenerationofgaminghardware(tobelaunchedin2020)andmediareportssuggestmultipleSKUswhereplayerscanelecttobuyadisc-lessconsole(capableofdigitalgamesalesand/orstreaming)oratraditionalconsolewhereplayerscontinuetobuydigitalandphysicalcopiesofgames.Googleisreportedlyworkingonasubscription-basedstreamingservicethatleveragesGoogle’sChromecastorotherhardwarespecifictoGooglecodenamedProjectYeti.Thecompany’sProjectStream,whichconcludedearlierthisyear,wasatechnicaltestfeaturingUbisoft’sAssassin’sCreedOdysseystreamingonthePCviatheChromebrowser.ProjectStreamistheclosestexperiencewehaveseenyettoreplicatingwhatSonyandMSFTconsolesofferrightnow,butwewouldstillwanttoseeimprovementsbeforewewouldconsidermakingthejump.Googledoesn’thavegamingexpertise,however,soitwillhavetosignpartnershipsandacquireexclusivecontenttohelpitsservicestandout.Amazonisreportedlyalreadyindiscussionswithpublishersaboutpossibletitlesforitsownstreamingonlinegamingservice.Theserviceisstillintheearlystages,butcouldbeavailableby2020,accordingtomediareports.Amazon’sAWSprovidesdevelopertools,backendservices,andanalyticstomanyofthebiggestdevelopersandgamesintheindustryincludingEpicGames’Fortnite.Thoseexistingpartnershipsspeaktoitsabilitytohelpdevelopastreamingservicethatcaterstotheneedsofdevelopers.Amazondoesnothaveanyconsole-qualitystudiosatitsdisposalandwillneedtomakeanacquisitionorpayupforexclusivecontenttomakeitsstreamingservicemoreattractivethanwhatwethinkMSFTcoulddeliver.VerizonhasbeendevelopingagamestreamingserviceandisreportedlymuchfartheralongthanGoogleorAmazon.ThecompanyconcludedatestinJanuarythisyearthatincludedover135gamesusingNvidia’sstreamingdevice(NvidiaShield).Reports(theVerge)suggestVerizonwilleventuallymoveovertoAndroidtostreamtomobilephones.ScreenshotsoftheserviceshowgamesincludingEA’sFIFA18,TTWO’sRedDeadRedemption2,Epic’sFortnite,andActivision’sOverwatch.NvidiaisconductinganongoingfreebetaofGeForceNOWcloudserviceforPCs.Itisseenasanalternativetobuyinggamingspecificlaptopsandhashadsuccessstreaminggamesatclosetothenativeresolution.GeForceNOWsupportsover400gamesincludingPUBGandFortnite.EAistheonlythird-partygamedeveloperweareawareofthatistestinganin-housecloud-gamingplatform.Thecompany’sdemolastyearfeaturedthreegames(Titanfall2,Inside,FIFA17)streamingtothreedifferentdevices(anInternet-enabledHDTV,astandardgradebusinesslaptop,aSamsungGalaxyS7phone)andwasaccessinggamesfromthepubliccloud(notalocalEAserver).TheTVhada~20MbpsethernetconnectionwhilethelaptopandsmartphonewereonalocalWiFinetwork.EAonlyshowedsingle-playerexperiencesanddidnotallowforanyhands-ontime,sothedemowassomewhatofacontrolledenvironment.EAsaidtheservicestillneedstosolvesometechnicalissuestobecomewhatitconsidersa“premium”service(hencetheacquisitionlastyearofateaminIsraelfromGameFly)andwouldn’tcommittoapossiblelaunchyear.TheTechnologyForStreamingIsImproving;MayGetThereThisYearThetechnologyhurdlesinthewayofthatfuturestate,however,cannotbeignoredandthepresshasalreadypublishedextensivelyonsomeofthekeyrequirementsforthistechnologytobecommercialready(i.e.,serverdensity,5Gmobilenetwork,hardwareupgradecycle,etc.).Ourreportassumesthatsuchrequirementsarealreadymetsoastomovetheconversationforwardtodiscussingthepossiblebusinessmodelsthatcouldevolvearoundstreaming.Sufficetosay,however,thatthefeasibilityofstreamingcomesdowntolatency.Basedonseveraltechmediastudies,itseemslikethefinelinebetweenaseamlessstreamingexperienceandonethatplayerswoulddeemsimplyun-playablecomesdowntototallatencyof~40-60ms.Thatisthetimeaservicemusta)compressanimage,b)sendtheimagewirelessly,c)decompresstheimage,andd)displaythatimageonthescreen.Sendingcontrollerinputsbackfurthercomplicatesthatlatencyequation.FIGURE7StreamingGamingProcessOverviewSource:BarclaysResearchMilli-secondsarethetargettoreplicatewhatplayersexperiencenowwithlocalhardwaredoingallthecomputing.Streaminghas,infact,beenaroundforsometime.ButneitherSony’sPlayStationNownorOnlivebeforeitwasabletodeliveracompellinguserexperience(duetolatency).Google’sProjectStreamwasmuchbetteratmaintainingaconsistentrefreshrateduringourearlierbetatestandgivesusreasonforoptimismthat2019couldseemajorimprovementsonthatlatencyequation.MostofthemajorUScarriers(Verizon,AT&T,Sprint)expect5Grolloutsin2019,whileT-MobilesaysitisontrackforaUSlaunchin2020.Publisherstellustherolloutof5Gspectrumwillenablefastertransmissionofdatabackandforthandisseenasacriticalfirststeptowardsstreamingtechnologytakingoff.PotentialStreamingWinnersThemovetostreamingwouldbeaclearwin-winforthegamingstocksandthestreamingtideshouldraiseallboats.WeviewMSFTaswell-positionedearlyontotakeadisproportionateshareofstreaminggivenitscombinationoffirst-partygamingcontent,aswellasitsdeeppocketsandexperiencetoinvestincloud(thoughitwouldloseprofitsfromXboxconsolesales).WearemostpositiveonEA(frequencyofcontent)followedbyUBI(frequency,valuableowned-IP)havingleveragetonegotiatefavorabledistributionrightsand/ortogotomarketwithanin-housestreamingplatform.AlsoEAhastheflexibilitytolicenseitscontentouttooneormorestreamingplatformsand/orlaunchitsownstand-alonesubscriptionservice.Thekeytoasuccessfulstand-alonestreaming-mediasubscriptionserviceisfrequencyofnew/exclusivecontentorahighly-desirablelibraryofcontent.EAcertainlyfallsintothefirstbucketasithasmorenewreleasesperyearthananyothergamingpublisher.Further,EAisalreadygainingsometractionwithitsEAAccessandEAOriginAccessPremiersubscriptionservice(weestimate2-3mnsubs),whichgivesubscribersunlimitedaccesstoaselectcatalogoftitles.Implementingthissubscriptionserviceacrosstheentireportfolioofnewandcataloggameshastheadvantageofdeliveringamorepredictablestreamofrevenue,potentiallybroaderengagement,andhaspotentialtodeliverhigherLiveServicesmonetizationasaresultofthebroaderengagement.Thetradeofftothismodelwouldbethatlaunchingastreamingservicecouldoffsetrevenueandgrossprofitfromgamesales.WeestimateEAgenerated~$1.16bningrossprofitfromconsolegamesalesin2018andassumingitmoved100%tosubscriptionsand100%tostreaming,webelieveitcouldgeneratethatsameamountofgrossprofitfrom25mnsubscriberspaying$60peryear.Alternatively,wethinkEAcouldseeparityat18mnsubscribersassumingsomeofthoseplayersdriveincrementalLiveServicesrevenue.FIGURE8EA’s“AllYouCanPlay”StreamingSubscriptionServiceMustOffsetOver$1.16bnInGrossProfitFromConsoleGameSalesSource:BarclaysResearchStreamingMakesBusinessSenseForManyReasonsPlayerTAMIncreasesAsFinancialBarriersComeDownShiftingthecomputingfromplayertoplatformprovidershoulddramaticallyreducethefinancialbarrierstogamingbyasmuchas70%.Playerscouldutilizeexistingdevices(TVs,Computers,Smartphones,Routers)toplaygames;eliminatingtheneedtobuygaming-specifichardware(upwardsof$400)oranythingbeyondagamingcontroller.Playerscouldseeameaningfulreductioninthecostperengagement(i.e.,games-played,sessions,minutes),resultingingreater,morefrequentexposuretoAAAgamingexperiences.FIGURE9GamingServicesShowMoreAttractiveVideoGameEngagementAndCostPerEngagementMetrics~$49

75%

7xMoreGamesPlayed22Games~$143GamesCostperGame GamesPlayedAvg.USGamer GameflySubSource:BarclaysResearch,GameFlyS-1FiledFebruary10,2010InitsIPOfilingfrom2010,GameFlydisclosedthatsubscriberstoits“allyoucanplay”videogamerentalservicerent~22gamesperyearatacostbelowthepurchasepriceoffivenewvideogames(~$300).TheaverageplayerintheUSonlyboughtthreegamesonSonyandMSFTconsolesduringthatsameperiod,highlightingtheincreaseinplayerengagement(7xmoregamesplayed)andthelowercostperengagement(>75%lowerpergame).ThiscostreductionhasthepotentialtoinitiallyexpandtheUSplayerTAMfromthe~63mnconsoleownersatpresenttosomewheremuchclosertothe~120mnTVhouseholdsandeventuallytothe~1.5bngamersgloballyacrossalldevices(Consoles,Mobile,PC).Withmoreplayersaccessingconsolequalitygamesacrossmoredevices,theindustryshouldseeadramaticinfluxofplayerspendongamingservices,aswellasextracontent.FIGURE10EstimatedUSDeviceMarketSize2462102462101206342250200150500Smartphones Internet-TVDevices

TotalTVHouseholds

GamingConsoles SmartTVHouseholdsSource:BarclaysResearch,NielsenWhilebroadbandpenetrationintheUSisupwardsof80%,videogamingconsoleshavehistoricallybeentheleadinginternet-connectedTVdeviceforUSconsumers.Infact,Nielsenestimatesthatonlyalittlemorethanone-thirdofTVhouseholdsintheUScurrentlyhaveaninternet-enabledTVthatcouldperhapshandleasubscriptionstreamingservice.Thiscomparestothe60mn-plusvideogameconsolesweestimatearealreadyavailableintheUSacrossallmanufacturers.ManyexpectSmartTVsalestopickupasweapproach2020whenmostareexpectedtohitthe6-7yearreplacementwindow.WhileSmartTVswillincreaseasapercentageoftotalTVsets,TVpenetrationislikelytoremainunchanged.Somemayarguethatitisn’tentirelyclearadirecttoconsumersubscriptionservicewouldenablepublisherstoreachalargerTVTAMbeyondwhatis(intheory)alreadyaccessible.ForPublisherslikeEA,TTWO,andUBI,mobilegaminggrowthisproblematicastechnologylimitsthetypesofgamesthatcanbeplayedonmobiledevicesandmostoftheircoretitlesdonottranslateverywell.Bymovingallgamesintothecloud,andstreamingconsolequalitygamestomobiledevices,thesedevelopersshouldbeinabetterpositiontocapitalizeofthegrowthofmobilegaming.GrossProfitMarginIncreasesInAStreamingWorldThisfuturestreamingstatepresentsanopportunityforcompaniestodeliverAAAgamestomoreplayersonpotentiallymoredevicesatalowercost,resultingingrossmarginabovewhatispossiblefromphysicalanddigitalgamedistribution.FIGURE11$1.0031%$1.00$1.0031%$1.0073%$1.00$1.00$1.00$1.0090%91%100%StreamingPlatform

StreamingPlatform

StreamingContentProvidor

PhysicalSales

DigitalGameSalesGrossProfitMargin RevenueShare Bandwidth&Data Payments&Cust.Serv.Source:BarclaysResearchThesesavingswillprimarilycomefromashifttolicensedcontentprovider,whichweestimateisa100%margingrossmarginbusiness,fromgamedistributor,whichisonlya70-90%grossmarginbusiness.Savingsareprimarilyfromeliminatingphysicaldistributioncosts(i.e.,printing,packaging,shipping,etc.),butdeveloperscouldalsobypassthefeescurrentlypaidtoconsole(andperhapsmobileOSmakers)fordistributingcontentonthosedevices.Theplayersshouldseesomeportionofthesecostsavingsthroughlowercostperengagement.StreamingEnablesMoreContentAndDiversity,AlsoMoreCompetitionTheindustryisputtingoutfewergamesthanitusedtoaswebelievecostsofphysicaldistributionisstiflingexperimentationandgamediversity.ThenumberofgamesonSonyandMSFTconsolesfelleveryyearintheUSfrom2011to2015andthenumberofgamesreleasedlastyearintheUSwasroughlyhalfthenumberreleasedin2011,accordingtoTheNPDGroup.Whilethisispartlyduetothesignificantnumberofstudioclosureslastcycle,thedeclineisalsoaresultofstrategicdecisionstofocusonROIandTAMorwhatsomepublishershavereferredtoasa“fewer,bigger,better”strategy.Foritspart,EAreleased54newfrontlinetitlesinFY10,buthadjustsevennewreleasesinFY19.StreamingcoulddoforindependentgamedeveloperswhatSpotifyandNetflixhavedoneforup-and-comingartistsandfilmmakers.Whichistosaythatstreamingeliminatesthephysicaldistributioncostsassociatedwithgamingtodayandprovidessmallerdeveloperswithapotentiallymoreaffordablemarkettomonetizeworks.Thiscouldleadtoanincreaseinthenumberofdevelopersmakinggameseachyear,aswellasthenumberofgamescomingtomarketthatreachabroadaudience.Further,developerscanbenefitfromadiscoveryengineinmuchthesamewaythatSpotifyandNetflix’srecommendationenginesdriveagreatdealofengagementonthoseplatforms.FIGURE12NumberofNewConsoleGameReleasesperYear(USOnly)

FIGURE13NumberofNewPCGameReleasesperYearOnSteam200720082009201020112012201320142015201620172018200620072008200920102011201220132014201520162017Source:BarclaysResearch,TheNPDGroup,LimitedToGamesSelling>50KUnits Source:200720082009201020112012201320142015201620172018200620072008200920102011201220132014201520162017Acquisitionanddistributioncostsfordevelopersareaconsiderationwhendecidingwhattypesofgamestodevelop,aswellashowmanygamestodevelop.Ithasresultedinmarketshareconcentratingtoasmallernumberofgenres,titles,andpublishersoverthepastdecade.Valve’sSteamnetworkhighlightswhatweexpecttoseewhendistributioncostsmakegamedevelopmentmoreaffordable.Specifically,developersreleased~7,600gamesonthePCin2017upfrom~4,200in2016.Thiscomparestothe~200titleslaunchedeachyearonconsolesintheUSoverthesameperiod.NotSoClearSubscriptionsMakeAsMuchSenseWiththepotentialforstreamingtobringconsole-qualitygamestoamuchlargerplayerbaseandatalowercostforplayersanddevelopersalike,thisfuturestateisaclearwin-wininourmindsundertheassumptionthatthetechnologyactuallyworks.Ouronlyrealreservationwiththecurrentnarrativesurroundingstreaming,however,isthatconsensusseemscertainthemodelwillfollowthe“allyoucanplay”subscriptionpathofstreamingvideoandstreamingmusicservices(i.e.Netflix,Spotify).Weseethepotentialtomonetizeinthismanner,butaremorecautiousthatthisisthebestmethodgivenseveralfactorsincludingcurrentengagement,currentspend,andcompetitionforothermedia.Theotherkeydistinctionisthatpiracyofmusic,andmoviestoalesserdegree,inthelate-90s/early-2000scausedsalesofmusictofallsharplywhereasvideogamespendinghasbeenlargelyimmunetopiracyandcontinuetogrowincludingextracontentanddigitaldownloads.Inthatsense,streamingenabledlabelsandstudiostore-monetizeanaudienceitotherwisewasn’tabletoandwasthereforealifelineforthoseindustries.Forgamedevelopers,streamingmustbeapproacheddelicatelyifbundledwithsubscriptions.Ifplayerscanconsumeanunlimitedamountofcontentforlessthanitwouldcosttobuythatsamecontentindividually(seeGameFly’s22gamesfor$300vs.$1,320dynamic)thenpublishersareclearlyleavingmoneyonthetableandwillneedothersourcesofrevenue/profittomakeupfornotimplementingsomesortof“costper”revenuemodel.Thatsourcecouldbeincrementalextracontentspendfromplayersnewtothemarket.FIGURE14StreamingGrowingMusicAgainPostPiracyAndAlbumUnbundling…

FIGURE15…ButVideoGameSoftwareSpendingUnaffectedByPiracyAndContinuesToGrowTitleTitleDigital987654321096 98 00 02 04 06 08 10 12 14 16Source:BarclaysResearch,IFPI Source:BarclaysResearch,TheNPDGroupDaily/MonthlyEngagementWithGamesTrailsTV/MusicAlsoconsiderthattheaverageadultintheUSwillspend~143hoursonTVcontentpermonth(~5hoursperday)accordingtoNielsen’s1Q18TotalAudienceReport,whereastheaverageUSadultwillspend~13hourspermonthwithgameconsoles.AdultsintheUSalsospend~53hourseachmonthlisteningtoAM/FMradiocontent(~2hoursperday)and~128hourspermonthincludingtheportionoftimestreamingoninternet-enabledsmartphones,laptops,andtablets.Ifwelimitourscopetoonlythosethatplaygames,thegamingindustry’stradeassociationstillestimatesthattheaveragegameronlyspends~30hourspermonthplayingonline(althoughtimespentonlineincreased~17%Y/Yin2018).FIGURE16AverageTimeSpentWithSelectDevices(HoursPerMonth)14312814312811453287140120100806040200

FIGURE17Daily/YearlyConsumptionByMedia15-205-105-102-3TV Internet MusicStreaming

Radio GameConsoles

Gamers(Online)

#SongsperDay

#TVShowsWatchedper

#VideoGamesBoughtperYear2018 2017Source:BarclaysResearch,EntertainmentSoftwareAssociation,NielsenTotalAudienceReport

Source:BarclaysResearch,TheNPDGroupFurther,USretailsalesdatashowusthattheaveragegameronlyboughttwonewgamesinallof2018andwethinkagamermayonlyplay2-3uniquetitlespermonthwhereasitispossibleapersoncouldwatch5-10differentpiecesofTVcontentperday(dependingonlength)or15-20individualsongsonAM/FMradioeveryday(andsubstantiallymorewithpaidmusicstreaming).Withthoseengagementstatisticsasabackdrop,itisnotimmediatelycleartousthataservicerequiringgamersto“prepay”foraccesstocontentisacompellingpropositionfortheaverageplayerandservicesmaybechallengedtogetanybutthemostent