The Future Of Gaming Is Not In New Consoles
Historically, new product launches have been the sun around which the gaming industry operates.
Take the last console cycle in 2013. Launched days before Black Friday, Microsoft Corporation’s (NASDAQ:MSFT) Xbox One and Sony Corp’s (NYSE:SNE) PlayStation 4 combined to sell over 4 million units in the first three and a half weeks—a nearly $2 billion record haul1.
And though demand is through the roof this time around, the story of the Xbox Series X and PlayStation 5 launches has instead been one of limited supply.
Strong pre-order sales and supply chain bottlenecks—both a direct result of the pandemic—has resulted in massive shortages that have left retailers and manufacturers unable to keep up with demand.
As Wedbush analyst Michael Pachter noted, GameStop (NYSE:GME) was the only retailer that even promised to have in-store inventory of the PlayStation 5 and Xbox Series X Black Friday—and they only promised to have at least two of each. Such a development would have been unheard of in prior cycles.
This constraint, combined with the fact that there are very few new games available for each console, has some wondering if buying the latest editions is even worth it. That refrain is familiar, according to JP Lee, product manager at VanEck.
“This happens every console launch. The console comes out and then people are trying to figure out ‘Why should I buy a PlayStation if there are only three new games? Why should I buy an Xbox when there are not any Xbox exclusives on launch day?’ I do not believe [the first few weeks] will make or break these consoles, whether it's PlayStation or Xbox. The demand is already there.”
Not that investors need any convincing. Fueled by stay-at-home orders, the gaming and eSports trade has been among the hottest of the year.
The VanEck Vectors Video Gaming and eSports ETF (NYSE: ESPO), which offers exposure to video gaming and esports stocks, is up 77% year-to-date2, as of December 14. The fund has also taken in $445 million in inflows this year3 (for comparison’s sake, the Wedbush ETFMG Video Game Tech ETF (NYSE: GAMR) is up 68% year-to-date as of December 144 and has taken in $9 million of inflows5).
ESPO 2020 performance; Source: Benzinga Pro; Data as of December 14.
It’s Not About The Consoles—It’s About The Platforms
Even with current supply shortages, expectations for console sales are high across the board.
Sony Chief Financial Officer Hiroki Totoki reportedly told analysts in October that he expects to sell 7.6 million PS5 units by April.
But Lee cautions not to get hung up on sales figures from the latest consoles. Instead, investors should be watching how these manufacturers use their latest consoles and exclusive intellectual property to grow their online platforms.
“Companies are trying to become less dependent on these tentpole launches,” he said. “By the end of this newest console cycle, it will be all about the platform.”
He pointed to Microsoft’s recent $7.5 billion acquisition of ZeniMax Media.
“That to me is a huge plus in Microsoft's case, because now they own Elder Scrolls, Fallout, Quake and Doom. If Microsoft owns all this IP and if they actually make it Xbox exclusive, that's a large incentive for consumers to go with Microsoft. You would then expect PlayStation to try and mimic that in other ways, buying another development studio and owning other IP that they're going to have PlayStation exclusives for.”
According to Lee, this focus on platforms will be one of the major drivers of the gaming industry for the next decade.
“Ten to 15 years down the line, we will be talking about cloud gaming in the same way we talk about mobile, today.”
2Source: Benzinga data
4Source: Benzinga data
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