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October 19, 2017

MRP is Recalibrating Our Long Gaming Theme to Focus on Video Games

Last year, Pokémon GO, a GPS-based, augmented reality mobile game became a cultural phenomenon unlike any game before it, becoming the fastest mobile game to reach $1 billion in revenue, taking only six months to do so. The hype did have precedent though. Other popular mobile games like Candy Crush and Angry Birds have inspired a TV show and a feature-length film respectively. Mobile games have carved out their own space, breaking from hardware-based platforms like console (Xbox, PlayStation, Nintendo) and PC. Mobile game downloads from the App Store and Google Play totaled approximately 9.2 billion worldwide in Q2 2017. This represents a 19 percent year-over-year increase from 7.7 billion in Q2 2016.

What makes the mobile game industry so competitive is the low barrier for new entrants over PCs and consoles. Mobile games can be developed in lesser time and cost, whereas it takes years to develop games for PCs and consoles and it involves a huge investment of millions of dollars. Similar to the way that mobile devices they’re played on broke away from the landline telephone, games is breaking away from the wires at a rapid pace.

Today, 42% of video game industry revenue comes from mobile games on smartphones and tablets. This advance has largely been driven by in-game spending, where mobile games dominate. In game-spending alone could approach 50% of industry revenue by 2019. In that same year, the number of total mobile gamers could swell to 209.5 million worldwide. While most mobile games begin as free to play, they can become extremely addictive. Small fees to add premium features such as exclusive expansions, power-ups, and other modifications to the vanilla version of the game add up when multiplied across an audience of millions.

In-game advertising is also much more advantageous for mobile games since they are application-based and completely downloaded or streamed, unlike disc-based console titles. While console and PC games are moving toward being downloadable as well, it is still unusual to see very much advertisement aside from product placement in traditional video games. Applications can be constantly updated to reflect new and varying advertisers. Mobile games are on track to generate $39.8 billion in ad revenue this year, up nearly 90% from $21.1 billion in 2015. And this figure is projected to reach $49 billion next year. Game developers have even begun rewarding users for viewing ads to help them further monetize existing users not making in game purchases.

Audience growth can largely be attributed to the proliferation of smartphones across the developing world, but especially in Asia. Chinese video game giant Tencent Holdings Ltd has taken the top spot in the ranking of Newzoo's Top 25 Companies by Game Revenues list, generating $7.4 billion in the first half of this year, a 50 percent increase over the same period last year. The Asia-Pacific (APAC) mobile game market already dwarfs the rest of the world at a total valuation of $27.5 billion, almost 33% larger than the rest of the world combined, while only 32.5% of the APAC population have yet to own a smartphone. While most are probably well-aware of Japan and China’s infatuation with video game culture, the strongest growth is actually coming out of Southeast Asia, a region where mobile game revenues are growing at a CAGR of 45.3% between 2015 and 2019, well above the global average of 14.6%.

Going forward, mobile games will continue to become more advanced and integrated with Virtual Reality and Augmented Reality tech. While consoles and PCs will also work to integrate this technology, they haven’t been nearly as successful. AR has undoubtedly outpaced VR in popularity as integration is much simpler. This is especially true for smartphones and tablets with built in cameras. TechCrunch believes that mobile AR could become the primary driver of a $108 billion VR/AR market by 2021, and now, thanks to the arrival of Apple ARKit and Google ARCore, which allow developers to create AR projects right on their current smart devices, AR will soon be available to millions of people worldwide without necessarily requiring a new hardware investment.

It is no secret that people are constantly using their smartphones to avoid even a moment of boredom and games have become an omnipresent time-consumer in planes, trains and cars. In 2016, mobile games ranked second, only behind social media activity, in hours spent on devices. The time consumers spent playing games was equivalent to 1.15 billion hours per month.

Narrowing the Focus of our Long Gaming Theme

MRP initiated a long recommendation on the Gaming Industry on April 17. At the time, we wrote:

“The gaming industry seems to have the wind at its back. As the global economy continues to mend, consumers will have more discretionary income to spend on leisure activities like gaming. The easing of regulation in some large markets will also draw more customers into gaming. Removal of Brazil's gambling ban, for example, could be a game changer for the industry, making Brazil the largest regulated gambling jurisdiction. Moreover, technology has helped the industry remain relevant to a younger generation.”

We made particular note of the fact that “the future of the industry is increasing being reshaped by three trends: mobile gaming, e-sports, and virtual reality”, and we provided some insight into each of these three areas. Then on May 30, we published a special report on e-sports, highlighting six industry groups that will benefit as that segment of gaming goes mainstream. Today’s report highlights how rapidly the mobile gaming segment is growing.

Our original Long Gaming recommendation combined the gambling and video gaming sides of the industry, and we have been monitoring the theme through the VanEck Vectors Gaming ETF (BJK). Today, however, we are recalibrating the theme and shifting its focus entirely to the video gaming side (i.e. mobile games, e-sports, and VR/AR), where we believe transformational change is unfolding. Given this narrower focus, MRP will be tracking the theme via the ETFMG Video Game Tech ETF (GAMR) rather than BJK.

Video Games vs Gaming vs S&P 500