In the latest edition of his column, Tom Waterhouse of WaterhouseVC turns his attention to the video game sector. Here, he notes the potential of developers targeting live service products, including loot boxes, but says there is a balance in integrating these features.
Dopamine is responsible for the pleasure that comes from any ‘feel-good’ activity, such as sports, music and even gaming. In video games, dopamine is released when players receive a reward for participation and/or skill, such as getting a kill, scoring a goal, or opening a loot box. Casinos know that this mechanism works in gambling, by winning a jackpot or hearing the sound of a slot machine.
A critical question we ask when looking at both gaming and gambling products is, “Will the product be of interest to the customer? Is there any excitement?” In gaming, that thrill can be big jackpots or small but frequent rewards, there has to be a feature that keeps the player engaged.
Changing the game
There are 3 billion video gamers worldwide and 54% of frequent gamers believe gaming helps them connect with their friends, according to a survey by the Entertainment Software Association (ESA).
The first PlayStation was released in 1994 and the first Xbox followed in 2001. Runescape was released in 2001 and paved the way for the growth of MMORPG (Massively Multiplayer Online Role Playing Games), allowing millions of players to connect, chat and interact with each other. could compete.
When PC and console gaming grew in popularity in the 1990s, developers got their entire revenue from pre-sales of the games, and no additional content was added to the game after its initial creation. CDs typically sold for $40 (£32.70/€38.70) and that was the end of the relationship between the player and the game developer.
As technology has progressed, online stores such as the Xbox Live Marketplace have emerged where gamers can complete software updates, purchase additional games, and make in-game purchases.
Technological advances combined with the popularity of the MMORPG to support the spread of ‘live services games’. In live services games, new content is added to a game after launch to increase a player’s amount of time and engagement with each game, while significantly increasing the game developer’s revenue per player. As early as 2010, companies recognized the significant revenue opportunities in games with live services.
“I used to buy a whole bunch of titles and play them for three weeks and then move on and never look at them again… the business model needs to evolve and recognize a little bit that there’s a big service component.” – John Riccitiello, ex-CEO of Electronic Arts (2010).
Live services games, such as Fortnite and GTA V, introduce new weapons, skins, maps, player clothes, missions, NFTs… The possibilities are endless. We discussed the incredible value of the “virtual worlds” in games in our August 2021 newsletter. For example, nine years after its launch in 2013, GTA V (owned by Take-Two Interactive) continues to generate more than $250 million in quarterly revenue .
Electronic Arts (EA): It’s in the game
Founded in 1982, EA is one of the largest digital entertainment companies, providing games, content and services to 580 million active players across consoles, PCs, mobile phones and tablets. The $36 billion company owns a portfolio of the highest quality brands, including Apex Legends, Battlefield, FIFA, F1, Madden NFL, Need for Speed, Plants vs Zombies and The Sims.
Live Services and Other is EA’s fastest growing and largest segment, accounting for 71% of total revenue in FY2022, compared to 59% in FY2017. This is mainly driven by FIFA Ultimate Team and Apex Legends.
Apex Legends is one of the best live service games in the industry, with over 113 million active players, including 28 million new players who joined in the year ending March 31 this year. FIFA is the largest and most popular sports video game franchise in the world, with over 325 million units sold since its launch in 1993. The franchise has far surpassed all other popular sports video game franchises.
| Franchise | Number of games sold (millions) |
| Pro Evolution Football | 111 |
| NBA 2K | 118 |
| Madden NFL | 130 |
| FIFA | 325 |
EA’s Mobile Opportunity
In 2021, EA CEO Andrew Wilson said he expected EA to more than double its mobile business to $2 billion in annual net bookings by 2024. This view is supported by the worldwide adoption of mobile devices, which has especially increased the popularity of mobile devices. free to play games.
The live services business model allows consumers to play these games for free and monetize them through in-game purchases. For example, EA developed the FIFA franchise with FIFA Mobile, a free-to-play mobile offering. In the most recent quarter, FIFA Mobile posted its biggest quarter ever in terms of revenue, with the number of unique new players increasing nearly 80% over the previous year.
Loot boxes, an element of chance
Players buy loot boxes with real money to reveal the contents of in-game mystery boxes. These are unknown items that can be used in games, such as skins, new player features or upgraded weapons.
Loot boxes have been rife since around 2010, but have recently come under particularly scrutiny for their gambling-like properties, as real money is used to purchase an unknown virtual item. In March, EA successfully appealed a fine it had received in the Netherlands for loot boxes in FIFA Ultimate Team. The rationale for the decision came down to the court’s definition of FIFA Ultimate Team as primarily “a game of skill”, with loot boxes that “add an element of chance”. It said a central factor in determining that the products were not a gamble was that the prizes available were only in-game items rather than a product that could be available separately from the game.
While loot boxes enhance the player experience and undoubtedly contribute to the release of dopamine, video game companies should always make sure they are not the center of games. Loot boxes are only a viable revenue stream for video game companies if they are ethically and seamlessly integrated.
Valuation Statistics
EA is highly cash-generating, with operating cash flow of US$1.9 billion in 2022, financing approximately US$1.5 billion in share buybacks and dividends in 2022. The company is currently valued at 11.4x EBITDA compared to the 17.4x median EBITDA multiple of its peer group.
| Company | 5 year EPS CAGR (% per annum) | Current EV/EBITDA | Current Free Cash Flow Return (%) |
| Activision Blizzard | +11.1 | 17.4 | 3.5 |
| Bandai Namco | +14.4 | 13.5 | 0.0 |
| Capcom | +30.0 | 19.4 | 4.3 |
| CD Project SA | -4.6 | 22.1 | 0.1 |
| Keywords Studios | +36.2 | 19.3 | 3.3 |
| Konami Group | +17.7 | 9.8 | 6.8 |
| Nexon | +41.0 | 24.0 | 3.4 |
| Nintendo | +42.9 | 10.5 | 0.0 |
| Paradox Interactive | +0.5 | 19.1 | 0.6 |
| Square Enix Holdings | +18.1 | 9.4 | 0.0 |
| Take-Two interactive software | +17.4 | 22.8 | 0.6 |
| Ubisoft Entertainment | +9.8 | 5.3 | 11.7 |
| Electronic art | +12.4 | 11.4 | 4.7 |
| Median | +17.4 | 17.4 | 3.3 |
All the best,
Tom
Since its inception in August 2019, Waterhouse VC has achieved a total return of 1.957% as of July 31, 2022, assuming the reinvestment of all distributions. See our long-term performance table below:
Please note the above information regarding Activision Blizzard, Bandai Namco, Capcom, CD Projekt SA, Keywords Studios, Konami Group, Nexon, Nintendo, Paradox Interactive, Square Enix Holdings, Take-Two Interactive Software, Ubisoft Entertainment and Electronic Arts is based on publicly available information relating to the Company and should not be considered or interpreted as advice on financial products. Waterhouse VC has a position in Electronic Arts. The information in this document is general information only and does not constitute investment or other advice. Readers should consult professional investment advice and rely on their individual circumstances.
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