Early last week, I thought, “I really hope there aren’t any new streaming launches because I’d love to find a longer view article for this week.” The closest risk was Hulu raising and lowering prices, so phew, we made it. Then, when I saw multiple descriptions of revenue in the video game industry, well I had my topic…
(Sundance and NATPE thoughts? Next week. Maybe.)
Most important Story of the Week – Video Game Revenue is Up! (Or Down)
How are video games doing as an industry?
Head over to “Byer’s Market” newsletter from 23-January, and you see just fine: the U.S. video game industry generated $43.4 billion in revenue in 2018, the same amount of revenue the US film industry generated in 2017. The difference? According to Byers, “The video game industry is growing by 18% annually, whereas the film industry is growing by just 2.2%.”
Then you head over to Bloomberg, and see that one analyst in London is forecasting that global video game revenue may drop year-over-year for the first time. (They also call it a $136 billion industry.) It may shrink by 1%. (Check out the chart in Bloomberg to see how the various categories are divided, between PC, Console, Mobile etc. I won’t steal the chart because I respect people making good nee great charts.) In the Economist World in 2019, they see a smaller $89 billion global revenue industry, according to Statista.
So what do we make of this? The reality is somewhere in between. And a case of definitions. Films make $43.4 billion globally, where video games are do $43.4 billion in revenue the US. Meanwhile, film revenue doesn’t include TV or network revenue, as far as I can tell, and probably Bloomberg/Economist are counting different parts of video games (for example, including or excluding mobile).
Moreover, the huge growth in video game revenue may be due to entirely to Fortnite. Video games are even more reliant on huge hits than movies. Let’s use that idea as a jumping off point into some thoughts on video games, with the caveat that this is an industry I know less well then filmed entertainment:
Thought 1: Video game success is logarithmically distributed.
I have been trying to make a chart showing logarithmic distribution of returns in video games for months now. The problem is most industry sources are behind paywalls. So I don’t have the “proof” in that I don’t have a clean data set of all games produced in a given year, but you can see the signs of the power law at action here.
Basically, every few years, a monster hit become “a thing”. In the late 2000s, the Rock Band/Guitar Hero trend helped boost console revenue. Last year, Fortnite did the same thing. In 2016, Pokemon Go took over mobile screen time. Add Mario, GoldenEye, Halo, Call of Duty and Candy Crush at various points to this trend. And yes, those are all US examples. In China, League of Legends is the tops. Meanwhile, thousands of games come and go and are never heard from again.
So yes, if I had a data set of all video game sales–by revenue or by units–broken down by category (mobile, console, etc), we’d see a logarithmic distribution of returns.
Crucially, two trends may be maximizing the gap between haves and have nots. First, mobile makes the barriers to entry for new games even lower. This means mobile game makers can enter even more games into the lottery to get a hit. That’s why the app store has so, so many games you’ve never heard of. And so, so many derivatives of successful games. The effects of “winner take all” are even more extreme in mobile. Not to mention, mobile gaming has opened up new consumer demographics that weren’t previously counted as “gamers”.
Second, in-app and in-game purchases make the revenue upside for winning games even higher. GoldenEye was one of the biggest games for a generation of video gamers (like me). Yet, once we bought the game, that was it. Now, the biggest game in the US is Fortnite, and you can buy all sorts of additional things within the game. That means that the revenue potential is multiples higher. So both the user base and revenue per user are higher, meaning the returns are multiple multiples bigger than the console games of the 1990s.
Thought 2: China is huge.
Another key sticking point in these bearish predictions seems to be China, which had slowed the pace of new, international games from entering under a new censorship regime. Like many fields, video games in China is a huge market. U.S. firms need China for growth, but China has clear strategic goals to support their domestic video game makers. Listen, I don’t have a great take for you should do about China from a strategic perspective. I don’t know enough and would be guessing. But much like feature films, a lot of future growth is in China, and that’s a tough market to crack.
Thought 3: Fortnite is a competitor…to Netflix? (Actually, all of filmed entertainment.)
This was the big quote from Netflix’s earnings report. Of course, I scoffed a bit. While companies should absolutely try to define the “competitors” broadly, they don’t get to define them exclusively. DisneyPlus (spelling) should worry Netflix, especially since they provide so much valuable content to Netflix, even if Netflix wants to win the PR war by denying this reality.
Netflix isn’t wrong, though. On a theoretical level, video games are an excellent substitute for streaming video viewing. And as Twitter follower @JacksonWharf noted, I could put Fortnite into my Google Trends data and would see…
…that Fortnite is generally more popular than any individual TV show I mentioned. So yeah. They are competing.
My caution? Well, all of entertainment needs to think about this. Not that Disney, for example, isn’t. They’ve repeatedly tried to get into the video game world and repeatedly failed at finding an acquisition that integrates and succeeds. Warner Bros. has also gotten into the gaming space to varying degrees of success, though nothing like Fortnite. Of course, not even traditional video game studios had Fortnite. Or Pokemon Go. Both were independetly made. So yes, Netflix is competing with Fortnite, but should they buy a video game studio? Not necessarily.
(Also, I was trained to think of the world in the “3Cs”: company, competitors and customers. I’ve begun to shift competitors to “competitors and potential partners”. In a world of zero sum, sure, it’s all about competitors. In a world of mutually beneficial growth, everyone could either be a partner or a competitor. That’s a gut reaction of mine opposing Trump-era zero sum thinking. Though CPP doesn’t fit in the acronym.)
Thought 4: Whither VR?
Four years ago, I saw a lot of huge projections for VR. I mean, big numbers with monster CAGRs. Look at the chart in Bloomberg and you see that the pace of integration is slower than some of those initial projections.
M&A Update: Viacom Buys Pluto for $340 million.
We had our first big deal of the year, though by the new standards of mergers this isn’t even a mega-deal. If you aren’t over a billion dollars, than it’s hard to even get noticed in today’s M&A landscape. That said, even for a small deal, I like this deal for Viacom.
Viacom has been on a bit of a buying spree recently–it acquired Awesomeness too last year–but Viacom still needed something in the digital space. As TV Rev pointed out, this could be another tiering strategy if Viacom and CBS merge:
PlutoTV – Free, with ads and lots of Viacom stuff.
CBS All-Access – Small sub fee with ads, lots of CBS and some Viacom stuff.
Showtime – Expensive, with premium Showtime content.
The difference between those tiers and the proposed AT&T tiers is that the value proposition is tied to specific, powerful brands. (Yes, channels are brands and TV isn’t dead yet.)
Moreover, listening to Andrew Wallenstein chat with PlutoTV founder, Tom Ryan, I think Pluto has identified a powerful customer need. Not all TV watching is the same. As many others have said, some is lean in (you don’t want to stop watching or you’ll miss it). But not all. And for that “not all” you may not want to pay a bunch and you’ll take some ads. Viacom could potentially be building that here. (Does Disney have that lean back content? Arguably, ESPN serves that purpose for sports fans.)
To bring it back to Netflix, because everything inevitably does, how have they done on lean back viewing? Arguably, a lot of their library provides this–syndication is the lean-back home for sitcoms–but maybe the very act of choosing a program encourages not leaning back. That’s why I like “linear channels” to solve certain problems for certain viewers, even in an OTT world. Amazon has experimented with this in Europe, while Netflix–from what I understand–refuses to even consider it.
Other Contenders: Layoffs in media.
Judging by the people I follow on Twitter, this story generated the most discussion, and it makes sense: I follow mostly journalists and the series of stories (layoffs at Buzzfeed, Huffpost and others) directly impacts the livelihoods of people in the field. A field I’m trying to get into. I don’t follow the “media” side as much as “entertainment” side–if there’s a difference–but like video games I find it fascinating. That said, I did want to know more on the context. How big is 1,000 people in the context of this industry? So I appreciated a tweet from Justin Fromm directing me toward Pew, who puts the layoffs in context: newsroom hires are down 23% from 2008 to 2017, to just 88K people. So it’s big, and part of a worrying trend.
Long Read of the Week: The Daily Podcast Bubble?
The Economist is ending one of my favorite weekly podcasts (“The Week Ahead”) to start a daily podcast on the day ahead. I may or may not subscribe. (I recommend the general Economist podcast feed, especially for Money Talks, but I avoid daily podcasts in general.) I asked on Twitter if we were in a bubble, and I don’t think we are. Everyone is trying to enter the daily podcast game, which makes the field crowded, but not necessarily overvalued. No one is paying huge multiples for these shows. Instead, this is like a gold rush, where everyone is entering to mine simultaneously and most will fail to strike it rich, as only a few daily podcasts rise to the top.
I see the rationale. Economically, advertising revenue is seductive. Do the math: if a weekly generates $1 million in revenue, then a daily could generate $5 million! That simple logic drives the push for more ads and hence shows.
For a good read, here is Nicholas Quah at Nieman Labs. He provides some good analysis on the business rationale, and he also used the “drilling for oil in the same spot” analogy like the gold rush analogy above. I like his thinking about differentiation, which is what too many daily podcasts are NOT doing, in my opinion.
Twitter Thread to Read – Peppa Pig in China by @CONNIECHAN
A new feature! As I spend more time on Twitter, I’ve stumbled across a great share of fascinating Twitter threads. Like this one from Connie Chan on Peppa Pig’s launch in China with an innovative trailer.
I’ve been following the Peppa Pig story for a few years now. (I spent a lot of time at a streaming company working on the kids TV business.) Peppa is HUGE globally, and it’s part of the reason why I proposed that Disney buy Entertainment One in my “conglomeration” series. Anyways, Peppa is poised to blow up in China, and Chan explains how the marketing teams built a tremendous trailer that went viral. The key is the trailer spoke to Chinese culture in a way that many failed U.S. movies do not. It’s a great lesson and for the streamers looking to “go global”. (Though honestly, the trailer tells a great story even for American viewers.)