Ark: An industry set for 'hockey-stick' growth

Already dominating global entertainment and with further exponential growth ahead, the once-niche segment of games has grown into a US$150 billion industry that should be on investors radars, says Catherine Wood, CIO of Nikko AM ARK Global Disruptive Innovation Fund. 

Far from the realm of 15-year-old boys playing online games in their parents' basement, games now reach a far wider spectrum of individuals including expanding ranks of female gamers and diverse users in countries around the world.

“Many investors are shocked to learn that the sale of virtual goods now generates revenue of about $130 billion around the world today,” says Wood, referring to non-physical objects and money purchased for use in online communities or online games.

“Gaming is often dismissed as a niche area, but we think it’s going to more than double over the next five years, projecting a compound annual growth rate of more than 20%.”

Wood recently interviewed YouTube’s head of gaming Ryan Wyatt – a former eSports commentator who now leads Google’s gaming, virtual and augmented reality business – during ARK’s Big Ideas Summit 2020.

“The best way I’ve ever been able to describe the size of the industry to people is referring to 2018 data that compared Netflix and game viewing on YouTube,” Wyatt says.

“Netflix did 51 billion hours of watch-time on their platform in 2018; and gaming did over 50 billion hours of watch time in the same year.”

In the last year alone, mobile gaming has continued to accelerate along with gaming content consumption.

“It’s always been a really big revenue driver, but we’re also starting to see people watch others playing mobile games,” Wyatt says. He also emphasises how games on mobile devices are becoming more sophisticated, far surpassing the basic social games like CandyCrush, Bejeweled and Puzzle Quest. And mobile technology is boosting penetration in markets like Southeast Asia and Latin America, where the rate of gaming console ownership lags developed markets.

“This is creating a new wave of gamers, and now they’re watching content too…it blurs the lines between watching and playing games in a new kind of way,” Wyatt says.

Esports is another area that has already garnered plenty of media attention, and one that Wyatt believes will outrank traditional sport within a decade. A view shared by ARK’s Wood: “I think that’s another area set for hockey-stick growth in the future.”

Game engine development – which are to games what Microsoft Word is to an author, or Microsoft Excel to a finance manager – underpin the success of the sector, enabling developers to create new games quickly and easily.

Prominent companies in the space include Unity – a platform for creating and operating interactive 3D game content – and Epic’s Unreal Engine, a suite of tools for developing games and related content. Unreal is best-known as the company behind the viral hit game Fortnite that now has more than 350 million user accounts worldwide. Epic was founded in 1991, now employing more than 2,200 employees across 35 global offices.

“There are great success stories that come out of the ability to democratise game development, so I love what these two companies are doing and they’re definitely companies to keep your eye on,” says Wyatt.

“There will also be a lot of work in the proprietary game engine development by a lot of companies.”

Other big names within the category are Activision Blizzard (Nasdaq: ATVI) a Fortune500 company founded in 2008 and one of the world’s most successful stand-alone entertainment and gaming companies. It’s best-known creations are the World of Warcraft and Call of Duty game franchises.

Over the next five years, Wyatt tips livestreaming of games and game-watching – driven by video on demand – will grow by around 17% a year: “It’s a very interesting space long-term, and Youtube is heavily invested.”

He also sees games-as-a-service – where games or content operate on a continuing revenue model similar to software-as-a-service– exploding: “It’s kind of ‘leap and the net will appear’ kind of investment, but it’s really where the industry is going in a meaningful."

Not everyone sees the next big thing coming

Click to visit the Nikko AM ARK Global Disruptive Innovation Fund Profile to learn more about the Fund, fees and performance.

Click to visit the Catherine Wood Contributor Profile, to discover her investment philosophy and content.