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'A Network Effect': New Model For Video Games Relies On In-Game Cash

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'A Network Effect': New Model For Video Games Relies On In-Game Cash

The phenomenal success of "Fortnite" and its biggest competitor, Electronic Arts Inc. (NASDAQ: EA)’s "Apex Legends," points to a new model for how video game companies are increasingly making their money.

The launch earlier this month of the free-to-play "Apex Legends" — which quickly drew more than 25 million players, surpassing "Fortnite" in downloads — highlights the rise of the free-to-play game.

The model relies on selling players upgrades or accessories in the game that enhance their experience for monetization. "Fortnite" was the first free title reliant on in-game sales to become a cultural phenomenon, and the success of the two together will likely lead other game makers to focus more on the model.

The companies “have almost adopted a subscription service-type model — you get the initial adoption, and what you have to do is turn that into a stream of cash flow,” Shawn Cruz, senior trading specialist at TD Ameritrade, recently told Benzinga in a phone interview. “And that’s what a lot of these companies are doing with in-game sales.”

'A Network Effect' 

The concept is not completely new, nor is it exclusive to free games like "Apex Legends" and "Fortnite."

Take Two Interactive Software, Inc. (NASDAQ: TTWO), the company behind the "Grand Theft Auto" and "NBA 2K" franchises, said last year that such in-game spending — known as microtransactions — made up more than 60 percent of revenue in the first quarter. The metric shows how important in-game purchases are, even for games that aren't free to buy.

“If it was just the ‘one and done’ where people bought the game and they’re done, it wouldn't be that exciting,” said Cruz. “But now you get that installed base in there, and you really get a network effect where revenue from the game could be exponentially bigger."

Video game stocks are still ultimately judged based on new game development, making the industry similar to the pharmaceutical business, Cruz said. “Video game stocks are … getting evaluated in a similar manner to how we evaluate a pharmaceutical company. They put a lot of money into research and development, and you don’t know if it's going to be a flop or not,” Cruz said.

Video game companies “put a lot of time and money to getting the IP going, and if they flop, you have to get another game in the pipeline. Investors are immediately thinking 'what are you going to do now?' It's the same way in health care."

Esports As A Marketing Tool 

"Apex Legends" has boosted its popularity by recruiting well-known gamers with large followings to play the game on streaming feeds on Twitch. It's not a new phenomenon, but is definitely an embedded part of the video gaming culture and, increasingly, the business.

EA “did a phenomenal job of getting the influencers to play it first, feeding the market on Twitch and then watching everybody starting to play the game,” Andy Miller, CEO of esports company NRG Esports, told The Associated Press in a story published Wednesday on the success of the new game.

Miller mentioned another key factor: “the game is good,” he said.

Related Links:

Strong 'Apex' Release Continues To Boost EA Shares, Sell-Side Has Mixed Reaction

There's A Lot Of Capital In The Gaming Industry, And It's Not Just In eSports

Spencer Israel contributed to this report. 

Screenshot courtesy of Electronic Arts. 

Latest Ratings for EA

DateFirmActionFromTo
Jan 2020MaintainsEqual-Weight
Dec 2019MaintainsBuy
Nov 2019MaintainsBuy

View More Analyst Ratings for EA
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