Efforts to slow the spread of COVID-19 have led to a global economic downturn, but the gaming industry is booming.
With hundreds of millions of people sequestered in their homes, game usage has spiked. And while the economic repercussions will persist after people cease physical distancing, gaming is positioned to fare well during a recession.
Video game usage increased 75% during peak hours
Video game usage during peak hours increased 75% in the first week many Americans began staying home, according to Verizon data. Game distribution platform Steam set a record for peak concurrent users (more than 20 million) on March 16 without any notable new releases driving demand. Gaming chat platform Discord saw its servers go down briefly last week even after the company increased capacity by more than 20% to handle surging usage.
According to Siamc Kamalie, manager of hedge fund Skycatcher, “average time spent per user on mobile games grew 41% during Chinese New Year in 2020 versus 2019, and was up 18% versus the week prior to Chinese New Year in 2020.” (Chinese New Year is when widespread stay-at-home orders began in China.)
All of the gaming industry professionals I’ve spoken to over the last week noted increased popularity of their games, though most were wary of sharing their strong performance publicly, given the unfortunate circumstances.
People don’t just turn to games for entertainment; especially when in-person interactions are restricted and most of the most popular games are multiplayer in one form or another — games also serve as social hangout spots.
Gaming in past recessions
Gaming is arguably the most cost-efficient form of digital entertainment. For no upfront cost, or for about $40 in the case of most console games, consumers can entertain themselves for tens of hours without an overly repetitive experience.
Peter Levin, managing partner of Griffin Gaming Partners, said this makes the industry more resilient.
“Gaming traditionally has been counter-cyclical to downturns in the economy…[it’s a] much higher return on investment in terms of how much entertainment you get for your money,” he says. Whereas “traditional forms of media have diminishing returns on repeatability,” games can become more exciting as players advance their skills and interact with others.
In past recessions, declining spending on video games by some consumers has generally been balanced by new spending on video games by consumers opting not to spend their money on more expensive entertainment options. Nielsen surveyed [PDF] 2,400 gamers in 2009, finding that more than 80% claimed they were playing more or equal to the prior year and 35% of respondents planned to spend more money on games in 2009 than 2008, whereas only 27% planned to spend less.
As David Cole, founder of industry research firm DFC Intelligence, wrote to me: “we saw 2001-to-2003 video game revenue soar to record levels. This occurred again in 2008 to 2010, when once again video games were up significantly, 2008 was up 25% over 2007 with additional growth in 2009 and 2010.”
Reports in 2009 of declining game industry sales solely tracked retail sales of consoles, games and accessories, which were all in a secular decline relative to the then-recent rise of digital downloads and mobile games. According to investment bank Cowen, leading publicly traded gaming companies Activision, EA, Take Two, Ubisoft and THQ did see their stocks decline an average of 33% between November 2007 and March 2009, pulled down by the overall market, but experienced smaller declines than the market average of 52%.
In-app purchases
Growth in the number of players or time spent playing doesn’t necessarily translate to revenue growth in games that monetize only through in-app purchases. Games focused on converting users to subscriptions or to buy coins or virtual goods may find that new users from a demographic that doesn’t game often is less inclined to spend money. Conversions from free to paid users could increase during the work-from-home period of this crisis, but with a lower ARPU (average revenue per user) if new users are more conservative in their spending.
There hasn’t been a major recession since free-to-play mobile games became massively popular (during 2008-2009 the comparatively tiny mobile games market still centered on premium games with upfront cost to download). The ability to play so many games without upfront cost — including massively multiplayer games like Call of Duty: Mobile and Fortnite — will likely only cause more consumers to turn to games this year when they look to save money, however. As new players get emotionally invested, they then are more likely to spend money.
Having studied consumer spending trends going back to the Great Depression, Cole says “entertainment spending remains fairly steady as percentage of income even in tough times. In other words, if you have a $1,000, you set aside $100 for entertainment. If you only have $100, you still set aside $10 for entertainment.”
Advertising
Mobile gaming accounted for 45% of global gaming industry revenue last year ($61.7 billion), according to research firm Newzoo. While most mobile game industry revenue comes from in-app purchases and upfront payments, in-game advertising is a $3 billion market in the U.S. and the main monetization strategy among hyper-casual mobile games.
The advertising market is closely tied to GDP — it declines during recessions. When corporate finances and consumers’ wallets get tighter, companies rein in their marketing spend. During 2009, U.S. ad spending dropped 12%. Declining demand to fill ad space will cause ad revenue to decline for many mobile games.
That said, a huge portion of advertising in mobile games is from other games that monetize through in-app purchases, so the industry is somewhat insulated from volatility. Increased overall use of free-to-play mobile games could very well make up for lower ARPU as well.
Customer acquisition cost
For many years, the fundamental challenge for new mobile-game studios has been the high cost of user acquisition as the digital advertising market became more competitive. In the early years of mobile games, studios could acquire new users in the U.S. and Europe through ads on Facebook or other games for a few cents. Now average cost per install (CPI) in the U.S. can be $2-5 (or much more given the context). May 2019 data from Liftoff found that the average CPI for mobile midcore and strategy games in the U.S. was $4.34, while the average cost to convert one person to make in-app purchases is $37.42.
From this angle, a weakened digital ads market is actually good news for many gaming companies. It means they won’t have to spend as much on user acquisition. Assuming the lifetime value of a game’s users doesn’t shrink at the same rate CAC decreases, there’s increased margin.
The most helpful explanation I’ve received on the potential market impact here was from EQT Ventures partner, and former VP of Mobile at King, Lars Jörnow, who said he groups games into three buckets:
Positive impact: The game is monetizing mainly through in-app purchases and is growing with performance marketing. An economic downturn has a largely positive impact as cost for new users goes down but monetization remains largely intact. (Examples: Empires & Puzzles, Brawl Stars, Gardenscapes, etc. Most of the top grossing games.)
Neutral impact: The game is monetizing through ads and is growing with performance marketing. Neutral short-term as both the cost of new users and the lifetime value of those users goes down, potentially they can make less net profit per user but acquire many more users as their potential reach increases when the brand marketing decreases. (Examples: hyper-casual or idle game studios, like Popcore that we have backed, Voodoo, Madbox, Ketchapp, etc.)
Potentially negative impact: The game grows organically, or doesn’t grow at all but instead has a loyal user base and monetizes through ads. Negative impact as advertising revenue per user is decreasing in a recession (Examples: Words with Friends, Ruzzle, etc).
Exit opportunities
The gaming industry has been highly active terrain for startup acquisitions over the last few years. A weakened economy will likely decrease overall deal activity, but the relative strength of this industry will keep exit opportunities available for startups that build successful (i.e. profitable, fast-growing) games.
One of the most active investment bankers in gaming, Aream & Co. founding partner Kartik Prabhakara, provides the following context: “Once there is weakness and uncertainty in the public markets, companies want to hold cash and will be more cautious about acquisitions. Debt and other financing sources will be more limited or expensive… The most active acquirers recently have been the mid-size companies like Zynga, Stillfront, Playtika and Scopely, rather than EA and Activision Blizzard. The mid-size companies will likely continue to actively evaluate opportunities, especially if they deliver strong near term financial results.”
Now is a good time to launch a new game given a larger audience looking for games and lower acquisition costs, and if the environment remains stable for established games despite a likely recession.
