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Third Bridge’s Global Sector Lead for TMT, Scott Kessler, and Chris Collins, former Development Director at EA’s DICE Studio and owner of global video game consulting firm 16bit, discussed how the nature of gaming has changed, gaming as a precursor for the metaverse, and the sector’s biggest challenges and opportunities.

Episode Transcript

Catherine: [00:00:00] Welcome to The Signal, a new podcast presented to you by Third Bridge, the world’s leading independent research provider, exploring how some of the globe’s most investable industries are facing upheaval. My name is Catherine Ford, and I’m a journalist with a 20 year track record of reporting on a wide range of financial topics such as capital markets developments and M&A. In this episode of The Signal, we will explore the gaming industry, key players and an outlook on where the industry is going when it comes to the development of the metaverse. Joining me today are Scott Kessler, Third Bridge’s Global Sector Lead for Technology, Media and Telecommunications, and Chris Collins, former development director EA’s Dice Studio and owner of the global video game consulting firm, 16bit. Scott is based in the US while Chris is based in Sweden. Hello to both of you and thank you so much for joining me today. Can I ask you to briefly introduce yourselves?


Scott: [00:00:52] Sure. Thanks, Catherine. Great to be with you today. As you mentioned, I’m Scott Kessler. I am the global sector lead for TMT. That’s technology, media and telecommunications for Third Bridge’s forum business. But my involvement in the industry spans, I guess, to the prior decade and prior century when I did a variety of things primarily in and around equity research, focus on software, Internet and TMT more broadly.


Catherine: [00:01:23] Okay, thank you so much. An expert in the field and we’ve got another expert here with you. Chris, tell us a little bit about yourself.


Chris: [00:01:29] Thanks, Catherine. Flattery will get you everywhere. I’ve been in the games industry for some time, pretty much since I left education, where I also studied video game development in Manchester. So for me, most recently, as mentioned, I worked with places like EA. I was there for a decade, but I’ve also worked in the indie space. I’ve worked for small independent publishers like Codemasters, and I’ve worked all over the world in lots of different shapes and forms.


Catherine: [00:01:53] Okay, thank you very much. I’m excited to hear about both of you when it comes to the gaming industry, because it’s an industry that I think all of us have to agree has developed massively over the last decade or even more. What did the space initially look like and what does it look like now? What are the reasons for that evolution? What role has the pandemic played and how does the gaming industry relate to the metaverse? Those are all topics that I’d like to spend the first part of this podcast exploring a little bit. Scott, maybe I can pick your brain first of all. Tell me where we’ve come from. What did it used to look like before we get into, like, what does it look like now?


Scott: [00:02:30] I think it’s fair to say that there’s been a lot of evolution and change over the last, let’s call it, decade or two, in and around the gaming category. I think what comes to mind most readily is the fact that people are buying and engaging with games in very different ways than they used to. And I also think the nature of gaming has changed. I think initially you had to think very hard and fast about buying a game, playing a game, and I think it was a solitary, largely endeavour. I think it’s evolved quite a bit so that people really on a whim can download and play games and people are playing games are basically as young as, I don’t know, three, four or five, six years old and as old as anyone who’s around who’s using any kind of device. The other thing I’d say, which I think is really noteworthy, is it’s amazing to think that when you consider how people are consuming and playing games. I saw a stat recently that 60% of gaming revenues is derived from mobile, and the iPhone was only introduced in 2007 and the iPad introduced in 2010. Those were major drivers of opening up the market in that way.


Catherine: [00:03:53] What I’d like to move on to now is talk about the impact that the pandemic has had, because we’ve obviously heard from both of you about the exponential growth of the industry, how there is projected even more growth, but what role has the pandemic played in this and how much of the growth that we’ve seen would have happened anyway? Chris, from your perspective, first.


Chris: [00:04:14] I think we’ve seen growth in literally every sector. Doing a recent review for one of the products that one of the teams I’ve been working with, some of the older segments, some of the sort of the generations kind of that weren’t interested in games are now starting to jump on board. And this is largely, in fact, thanks to the pandemic. Obviously, people are spending a lot more time indoors. So gaming has just been something that, per Scott’s point, it is so accessible and it’s available in so many ways. And we are more connected now than we’ve ever been before. Your phone, your iPad, your TV, there are so many products that you can use to play games on that are just within reach. But one of the segments that really surprised me was this sort of the 45 to 54 segment. There was an article in Business Insider that in 2020, we saw an increase of around 60% in that demographic, which is considerable considering the sort of age range. But what’s even more exciting and more interesting is that spending in that same segment also went up by 76%. So not only are we opening up to new sort of demographics and finding new people, if we are reaching older demographics, they are more sort of ready to spend, ready to jump on and and have a good time.


Catherine: [00:05:23] And where is that spending being made? I mean, is it that they literally buy the game or they make in-game purchases or they buy the kit that they need? Where is the money going?


Chris: [00:05:33] It’s considerably biased towards Microtransaction or MTX as they’re  commonly referred, which are the in-game purchases. But we do see some growth in areas of games, Triple A particularly and of course subscriptions because subscriptions are something that have really been growing in this space over the last couple of years, and particularly due to the pandemic.


Catherine: [00:05:53] Sticking with the theme of the pandemic, Scott, from your perspective, the growth that we’ve seen, how much would you attribute that to the pandemic and how much does something that was a natural trajectory that the sector was in?


Scott: [00:06:04] Yeah, look, I mean, I think one of the phenomenons that we’ve seen over the last couple of years is that pandemic darlings, the companies that were most associated with success at the beginning of the pandemic. So I’m thinking about the Zooms, the Pelotons. Those companies have fallen on some more challenging times. And notwithstanding the fact that Zoom reported results recently, and I think a lot of people were encouraged by those, but the growth rates have come down substantially. When Microsoft reported results, I think it was in April of 2020 so really right after the pandemic hit in the US, he talked about this notion of seeing two years worth of digital transformation in just two months. I think there really has been and was a pull forward in terms of not just digital transformation but kind of associated demand. And so I think a lot of companies in and around the video game segment benefited handsomely over that first couple of quarters, couple of years of the pandemic. But now we’re seeing the flip side of that, right, where we’re seeing a lot of these companies grappling with the reality that people aren’t necessarily at home, they’re not locking down. They have a lot of other options and they want to pursue those in terms of what they’re doing day to day. And frankly, I think that’s one of the reasons why we’ve seen this kind of substantial M&A activity that really has taken place just over the beginning of this year in 2022. I think that’s definitely been one of the linchpins. I also think that, look, people that we speak to all the time talk about this notion that there definitely was kind of a spike in interest in demand and consumption related to video games. And there has been a drop off, but it hasn’t nearly been as dramatic as some people might have expected. And I think that just goes to the fact that people have discovered video games, that they have become gamers in their own right. And that doesn’t necessarily change just because hopefully the pandemic is going away.


Catherine: [00:08:14] Listen, guys, thank you so much for all that information about the gaming industry. And I think that’s set the tone very nicely for the rest of the conversation. I’d like to ask you just to explain to me and to listeners out there how the gaming industry relates to the metaverse, because I know those two are linked. But explain to me how. Chris, maybe you could have a stab at this.


Chris: [00:08:28] This could probably be a podcast all in itself. But the metaverse is one of these kind of terms that’s been coined as a way to describe interconnected experiences. Some people reference maybe it’s just a flat plane. Some people say there’s an actual globe. Some people it’s a bunch of just things that can jump in between but you can take stuff with you. From a design standpoint, from a sort of product standpoint, there’s a lot of lessons to be taken forward into that new technology from the game space. So I read an interesting article recently comparing Grand Theft Auto 5 to many of the new Metaverse concepts, and there are so many similarities in the way that companies need to look at how they set things up for the long term operationally, what they need to develop, what features players like some of the basic fundamental things. And this is information the games industries have been sat on, UX is so important, user experience, how people on board get into this sort of software, how they understand things. So the metaverse being what it could be because we’re still yet to see really how it’s going to take shape. There’s just so many parallels, I think, particularly from a development standpoint that we could take forward.


Catherine: [00:09:33] Scott, your two thoughts on that one as well, please?


Scott: [00:09:36] Well, I mean, I think people are very interested in the metaverse for a couple of different reasons. When I see major company executives that are involved in and around the metaverse talking about the opportunity being valued at $1 trillion, $2 trillion, trillions of dollars, that’s going to get people’s attention. A lot of people believe that this is going to be the next wave of technology, succeeding the current mobile age that I think all of us are very well aware of. I think the big question is, actually, when exactly is this going to reach critical mass? Meta platforms? Aptly, formerly Facebook, changed its name in part because they were reorienting the company and its branding around the metaverse. But they’ve talked about a billion users in the metaverse by the end of the decade. That’s a long time from now. And I think a lot of people wonder if people’s visions of the metaverse will evolve and change and perhaps dramatically over the next couple of years. The reason that people, I think, have gravitated to this concept that gaming is the likely precursor and maybe first version of the metaverse is because a lot of these companies already have environments that seem very similar to what people think the metaverse is going to be. And so it’s a logical kind of jump to take to say, Oh, well, I’m playing Roblox and this is kind of a virtual environment and that’s exactly what I’m going to be participating in down the road in the so called metaverse. So these companies, I think as Chris kind of touched upon, seem to have kind of offerings that are similar to, comparable to and probably connected to what we will see in terms of the metaverse in the years to come.


Catherine: [00:11:33] Now, I think that segues us very, very nicely into some of the more recent trends and themes that we’ve seen in that space. Chris, can I ask you, first of all, if you’re thinking ahead of sort of like where is this space going? What are your expectations with regards to some of the themes that you see evolving?


Chris: [00:11:50] Again, this is a topic that that has a myriad of answers. But one of the things that’s really, again, surprised me recently are things like early access models. We’re seeing it a lot with Microsoft and what we would call the first parties. So Sony, Microsoft and even Nintendo are dabbling with it. This is, again, a big shift for developers of all shapes and sizes. And it kind of plays into the hands, just as we finish talking about the sort of the pandemic, one of the things we didn’t touch on is really how that affected game developers, because especially for some of the larger companies and some of the EA’s and Activision’s of the world, I mean, you’ve got thousands of people touching a very, very complicated piece of software. Oskar Gabrielson, the previous head of Dice, said something at one of the company meetings, and he simply stated, making video games is really difficult and he’s extremely right. Even 30 years ago, it was difficult. So now you imagine you’ve got 1000 people and they’re all touching the games in different ways: production, customer service, marketing, development, whatever it might be, they all need to be aligned. The triple-A space has got some challenges, but things like early access models allow the consumer to understand what they’re walking into and it allows developers to breathe a little bit more and


Chris: [00:23:04] essentially, what I was just saying with an early access game is, hey, we know the game is not finished, but we think you’re going to have fun playing it, so try it out for cheaper. And this extremely popular, some of the biggest games in the last two years have come from this early access model. Valheim being a prime example and there’s even a game, one of the top sellers of last week, called V Rising, again on PC, but we’re seeing them on Xbox Game Pass now, even on streaming services. So they are starting to become more and more prolific and it does allow much more sort of ebb and flow from developers to the consumer, which previously was this very hard sort of – the game is now finished, go and play it like you would watch a movie. So I think there’s many, many offerings. We’ve talked about streaming, we’ve talked about subscription models and those sorts of things. They are all incredibly powerful, but I think there’s a few things that many people aren’t quite paying attention to that that are worth casting an eye over.


Catherine: [00:13:49] Scott, would you like to add your thoughts to that for me?


Scott: [00:13:52] I mean, one of the things that Chris said is the increasing importance of the folks responsible for producing and maintaining and supporting these games. It can’t be understated. There has been such a proliferation as we were talking about, about not just the number of games, but how they’re distributed and consumed. It really used to be that there were computers and there were consoles and that was pretty much it. So if you’re at a major games company, I’m not going to say it was relatively simple, but it was a lot easier to develop a game and maintain a game and support a game with only a handful of platforms. Now that there’s such proliferation in terms of everything from mobile to cloud, there really needs to be substantial teams that are very specialized across each of these platforms. And I was just looking at data from Take-Two Interactive, which is one of the biggest producers of video game software. In 2014, they had 1800 developers and now they have over 6000 developers. This is just one company, and there are companies that are far, far larger. The development community and Chris obviously knows a lot more about this than I do, but it’s grown so substantially and it’s become so much more specialized that it’s just become that much more complicated, I think, to kind of produce games. The other thing I’d say is, I think that dovetails with this notion of the consolidation that we’ve seen in the industry, particularly over the last couple of years, most pointedly, as I referenced a little earlier, towards the beginning of this year, because on one hand, I think there are so many different ways to produce and distribute games as I think the Wordle kind of example indicates. But to be able to build the scale and sophistication of a lot of these games that gamers expect and demand, you really need to be kind of a world class global organization to do that. And it’s one of the reasons I think we have seen and we will see a substantial consolidation in the category.


Catherine: [00:16:01] And we’re going to come to consolidation just in a little while. What I’d like to do now is talk about some of the key players in the space. Who, from your perspective, are the most interesting, the strongest operationally, the most innovation? Who are some of the newest entrants into the market? Chris, maybe give me your sort of trip through the industry. Who are some of the companies that you’re really interested in?


Chris: [00:16:24] I think what’s happening just from a, not from a consumer perspective, but from a professional perspective, I’m fascinated by what’s happening with Sony and Microsoft and watching their evolution. Nintendo – business as usual. But they even stated they have concerns around their new console. So they’re always very tight lipped about what’s next for them. So it’s going to be a very interesting transition, I think, across the board. But they always know what they’re doing. And no matter how much consumers complain or even developers denounce their new technology, they’re always on the ball. But Sony and Microsoft, they’ve taken two very divergent paths. Sony, again, the last 12 months, they’ve had some of the biggest blockbusters, I think, in the world, particularly, you know, IPs, they have in their stable like Horizon. Forbidden West came out last year. Absolutely just critically and commercially acclaimed, left, right and centre. Microsoft not having such hits. But as we’ve been talking about, you know, they’ve been going absolutely crazy with the M&A side of things and they’ve got some of the biggest IPs in the industry now. So again, that might start paying dividends for them in a few years.


Chris: [00:17:26] But then they’ve got the streaming side of things which Sony is struggling to play catch up with. And then if you look in the PC space, I mean, again, in the last five, ten years, you have had so, so, so much of a shift. You’ve gone from seeing basically Steam, a single store that everyone buys their games from, and now there is a ton of competition out there. EA have been trying to do it with Origin for years. And now you’ve got players like Epic and many, many others that are out there that are offering small to full scale teams access to consumers. So you’ve seen a shift in some of the big players like Activision’s and EA’s who have gone from this sort of product base to a sort of portfolio based approach to, okay, we’ll put these products out here and put it out there, see, which is better, see who we’re going to work with. And it’s just it’s blasted the doors open, I think, for developers to really level the playing field a little bit, which is fantastic.


Catherine: [00:18:17] Scott, talk to me about some of the companies. I mean, are there any new entrants to the market that you’re seeing? Are you seeing anyone behaving, developing certain games that you’re finding really exciting and interesting to look at? What is your impression?


Scott: [00:18:30] I focus on some of the largest companies in the category. I think what’s really interesting is Tencent is a company based in China, one of the biggest companies in the world. They essentially own or control three very important games businesses in the US and Europe. When you look at Epic, Riot and Supercell and that’s their operating model as it pertains to games, at least in the Western world. And then of course they’re very prominent and successful as it pertains to China and Asia. The other thing I’d mention, which I think is interesting, is the trend, as Chris touched upon, is this notion that if you look at the Big Three when it comes to the US games companies, those being Activision Blizzard, Electronic Arts and Take-Two Interactive, all of them now have engaged in pretty substantial M&A activity as it pertains to bringing casual gaming franchises into their operations to help them diversify their mix of players, of revenue, of different aspects of the business models. I think that’s actually really interesting. It’s something that I think a lot of the companies are acutely aware of at this point, and I think it’s super important as we think about the future going forward. And then the other kind of wild card I would say in this category is big tech. People don’t really think of the companies that we talk about in gaming as big tech, maybe Microsoft as an exception to that.


Scott: [00:30:10] But when you think about Apple, when you think about Alphabet/ Google, they have emerging cloud gaming offerings. And I think a lot of people are expecting them to invest very heavily to try to kind of gain traction and market share there. Apple has Arcade, Google has Stadia. I think one of the interesting things, at least as far as I’m concerned, is that those offerings really have not gained nearly as much traction as I think a lot of people expected over the last couple of years. And I think what that goes to show you is that just because you’re a massive company that’s had tremendous success in a variety of different contexts doesn’t mean that you can hire the best developers and pour hundreds of millions, maybe even billions of dollars into these initiatives and expect to be successful after just a couple of years. Microsoft has been amazing when you think about it. If you think about the last 20 years, this decade, I mean, Microsoft was just introducing the Xbox and now it’s one of the leading gaming consoles. They’re also obviously doing quite a bit on the software side, as we’ve touched upon, but that is a long road and these companies are just kind of getting a sense of that, I think.


Catherine: [00:21:23] Scott you got us very nicely onto the topic of M&A and consolidation. And you made this really nice point that we’re seeing an increasing desire to diversify and get into this sort of casual gaming, as you called it. Is M&A the only way to do that is that sort of what’s driving the M&A rather than actually going and developing things in-house? Chris, if you look at some of the deals that we’ve seen and the expectation that there will be more M&A activity in this space, what do you think some of the drivers for that activity?


Chris: [00:21:49] Again, this is something that there is a ton of answers to, but I think for me, one of the things that really stands out is ease of access to products that a lot of this M&A activity enables. And it also creates a new sort of walled garden. So, you know, if you are a consumer, you’re new to this space. We talked about this sort of 45 to 54 demographics. If you’re able to just pay a single subscription every month and get access to one company’s massive library, you know, if you pay for the Microsoft subscription, you get access to now this huge back catalogue of games that in themselves is experiences are pretty valuable. But five years ago, that same person who was interested would have had to go out and spend hundreds, maybe thousands of dollars to play those same experiences. Now they can do it for 9.99 a month. And a lot of this M&A activity means that some of those experiences are only now going to be available on certain platforms. And it’s actually a model Nintendo have been doing very, very well, extremely subtly for years. They only ever re-release games. You can buy Super Mario World on almost every single Nintendo console since the Super Nintendo, but you can’t play the original one on the latest consoles. So it’s really, really interesting to see how that’s going to evolve and of course, what ripples it sends through the industry as well. My ears really started tweaking when I saw players getting very concerned whether Call of Duty is going to continue to be available on Sony platforms where it has thrived and been the biggest, I guess, console platform for Activision. So yeah, loads of swings and roundabouts spinning all over the place.


Catherine: [00:23:23] Scott, staying with this theme of deal drivers for M&A activity in the space, what do you identify as some of the most important things to consider?


Scott: [00:23:33] Yeah this is one of the biggest and most important categories across all of entertainment. Depending on the data you’re looking at and analysis you’re conducting, it’s the biggest or one of the biggest across all of entertainment with the largest growth. So that obviously gets people’s attention. I also think that people have realized that there are tremendous scale benefits to owning and operating multiple studios and having considerable number of gaming franchises. It’s interesting, the gaming business has become very similar to what we’ve grown to understand has been successful for the movie business, which is really focused around big franchises and regular updates. And so that’s where we’re seeing a lot of the kind of dollars flowing. The other thing I’d keep in mind is that people are looking towards the metaverse. I think it’s no coincidence that you saw Facebook changing its name to Meta platforms, and then within a couple of months we saw the two single largest deals announced in the history of the video game industry, with Microsoft proposing to buy Activision Blizzard and then Take-Two Interactive indicating that they were looking to buy Zynga.


Scott: [00:24:49] I think all of these companies see the potential and possibility and the big payoff as it pertains to the metaverse and they want to make sure that they’re appropriately situated. And so I think that was also a pretty substantial catalyst. The other thing I’d keep in mind is that companies don’t want to be left in the cold. There are a lot of cases where there may be smaller companies and they’re looking for what their future is going to be without that kind of size and scale and operational heft. It’s probably prompted some of the players to consider M&A in a way that they may not have thought about before. And what’s interesting to me is when you think about the biggest players, it seems like a lot of them are either paired up or I think there’s a substantial amount of discussion in the marketplace about the likes of an Electronic Arts selling itself, about the likes of Ubisoft selling itself. Those are big companies that are now under pressure because it seems like the category is consolidating around them.


Catherine: [00:25:55] I’d like to circle back to the conversation around big tech before we look at sort of some of the opportunities that we’re seeing for investors in the space. How does everything that we are seeing going on in the gaming industry, we’ve spoken about the key players there, how does that all relate to big tech and is it something where we might have to be concerned about increased scrutiny in the space? Chris, maybe I could ask you for that one first.


Chris: [00:26:20] Obviously, some of the some of the companies we would label as big tech are already kind of knee deep in the industry and have been for some time. So I think it’s natural given a lot of the other companies, you look at companies like Apple, for example, they’ve always been just gently pawing at, really playing with games and getting more involved. I mean, Halo, a famous Microsoft game was originally an Apple game, but, you know, companies like Amazon, they’re trying to find every avenue they can to connect to it. So whether it is, look at Google releasing something like Stadia, which is a much more sort of direct product comparison to maybe some of the bigger gaming platform providers. But Amazon, AWS, powers so many of these experiences, they are, you know, Meta/ Facebook, they’ve been getting involved with gaming pretty much since the platform kind of emerged. And I know a lot of great people over at Meta as well who are working in the gaming space. So it’s all starting to kind of merge what was once I think when we started this conversation we were talking about walled gardens, high barriers to entry, very nerdy, male dominated hobbies. It’s a hobbyist thing originally. Now it’s everywhere, whether the companies are powering those experiences, developing those experiences, or just investing and making them happen. It’s intrinsic now.


Catherine: [00:27:38] Scott, can I just have your thoughts on big tech and the relation to the gaming industry?


Scott: [00:27:41] I’ve done a lot of work on big tech over the last couple of years. Chris is right, all the big tech companies that we all know and probably interact with regularly have varying degrees of interest and involvement in video gaming. Amazon has its own game studio. Netflix is pushing the envelope when it comes to building out its games business. That really accounts for all the, quote unquote, big tech companies based in the US. What I’ll tell you, however, is two things. Number one, I think just given the consolidation and the category that we’ve talked about, I think regulators, particularly those in Europe and the US, are increasingly focused on restricting and regulating big tech as it pertains to their general, let’s call it, footprint and their power. And so the implications of that, I talked to someone recently who basically said that he questions whether Microsoft is actually going to be able to close on the acquisition of Activision Blizzard, even though that deal is supposed to be consummated roughly within the next year or so, not necessarily because he saw any obvious kind of anti consumer or anti competitive implications to the deal.


Scott: [00:29:00] But because US interests, particularly those representing the Department of Justice as well as the Federal Trade Commission, just seem so hell bent on standing in the way of large companies buying other large companies, and really not necessarily for any other reason. And so you could see a situation where that deal, which, by the way, has already been pending for half a year and would be expected to take another year to close may take even more time to be consummated, if at all. And I don’t think people are considering those types of possibilities in the context of an Electronic Arts potentially being bought, for example, where if you look at the list of potential acquirers that I’ve seen, at least, you’re talking about a who’s who of big tech highlighted in that context, including the likes of Amazon. And I would include on that list that’s been highlighted big tech and big media. And I don’t think regulators in the US much care whether one is considered more obvious or the other.


Catherine: [00:30:06] I’d like to move on and spend a little bit of time talking about some of the key points that investors will need to have, sort of in front and centre of their mind when they look at this space. What are some of the opportunities it presents, but also what are some of the challenges it’s going to have to deal with over the coming years? Chris, could I hear your thoughts on that one?


Chris: [00:30:25] I’d like to talk more about, sort of, I think, some of the development challenges starting to face the industry. The industry is kind of looking back at itself in many different ways. Some of it is being forced to do. And some of it it’s kind of doing naturally. And some of the again, the Activision’s the EA’s of this world are really going to have to look at how they manage these projects going forward. What was a cinematic, just bombastic blockbuster a few years ago now requires a lot of organization, incredible amounts of human energy to go into it. We can’t keep applying the model we’ve been applying for the last 20 years to those future projects. It’s an old adage you don’t work hard, you work smart, right? And the games industry has to look at that because for the longest time it’s just been going, well, it took us two years to make the last one, so if we double the number of developers, we’ll get it out. And half the time it doesn’t work like that anymore because these technologies are so new, QA teams alone for some of these products are…they have to be massive because you can’t truly test something really now until it’s out there and doing what it should do in the public eye. By that point, if things are broken, it’s too late. So there’s got to be a fundamental shift. Definitely a challenge. Last year was a year when the majority of the indie games actually, from a critical and consumer sort of Metacritic perspective, Metacritic being one of many review aggregators for games that come out on all platforms, all of the indie and mobile experiences reviewed better with consumers and some of the triple-A experiences because it was much easier to manage those expectations. But again, I think if we can find that way, the experiences the players start to get a hold of are going to really, really start to trundle forward at an exciting pace.


Catherine: [00:32:09] Scott, coming back to you on the topic of what investors need to keep front and centre of their consideration as they look at the space. What do you think are things that they need to keep an eye on?


Scott: [00:32:18] I think a couple of things come to mind. If you think about the P&L, the growth is there. We talked about market opportunity in terms of the number of players and how that’s increasing and the different types of games and how the demographics are broadening out. I think all of those are very good fundamentally for the gaming business, but you’re seeing a lot of games to choose from and I think a lot of people are not necessarily as loyal to their core one or two games that they play as they used to be. So there’s a lot of competition, and that means that companies have to do what they can to differentiate. I think one way to do that is clearly through advertising and marketing, and I think companies have been spending very aggressively on that. In addition to that, look, I think Chris was touching upon earlier the notion of the importance and the value of developers. I went through some numbers as well, but that can’t be understated. We are right now in a period of time where there is, I would say, a severe shortage when it comes to developer talent. And what that means basically is that these companies, these studios are having to pay up tremendously for this talent.


Scott: [00:33:36] And so when that happens, a couple of things occur. One is you’re going to see a lot of turnover. And I think gaming talent, which can be very disruptive to companies that those people leave. In addition to that, I think, not surprisingly, you’re going to see related expenses going up very substantially for these companies, particularly if this trend continues. It’s not lost on me that I think within the last day or so, I think we saw the first gaming studio be unionized at Activision Blizzard. I think that’s a sign of things to come. I think you’ve seen the pendulum shift quite significantly to employees and developers in this case, and I think that’s actually going to be a challenge to some extent, especially for some of the smaller companies, as well as for some of the bigger companies where culture has been a huge issue for some of these companies. One could argue that the cultural and related management issues at Activision Blizzard actually contributed to and actually led to the eventual effort to sell the company to Microsoft. So to me, the biggest issue is in and around labour and developers and the related costs and expenses and how companies are going to try to manage that going forward.


Catherine: [00:34:57] It’s clearly an incredibly fast moving space with lots of interesting things going in, lots of interesting companies involved in it. Could we wrap up our conversation today with your thoughts on what this space might look like in the next 5 to 10 years? Chris, from your perspective, where do you think things could go?


Chris: [00:35:15] I mean, it’s anyone’s guess, obviously. But I think, again, as long as we continue on that path of making games more, I’m going to use accessible in the true sense of the phrase, you know, that many people have fewer barriers to entry and that includes costs, but it also includes people that can play games when it comes to physically able to play the games. But I would love for VR to take off, but the physicality, the practicalities of VR start to kind of butt up against it. And I think we’re seeing that with some of the current kind of Web Three, for want of a better phrase and kind of metaverse experiences, that onboarding. It’s great once you’re kind of in there doing it, but to get there is hard and that’s a difficult thing for consumers to really kind of overcome. But I do think the places like AR, VR and the Metaverse obviously are going to grow. Immersive gaming, I believe, is the phrase that’s currently becoming the norm. It’s just I just. Have you seen that movie Free Guy recently? Did you see the movie Free Guy puts the glasses on and all of a sudden there’s a world that’s just different around him, I think…


Catherine: [00:36:17] You don’t think that’s what it’s going to be?


Chris: [00:36:20] Well, I do. I do. I do think that’s the direction we’re going to eventually start heading. 100 years from now or whether that’s ten years from now is anyone’s guess.


Catherine: [00:36:26] Scott, from your perspective, gaze into that crystal ball for me and tell me what you see.


Scott: [00:36:30] Sure. There are a couple of things that come to mind, right? It’s amazing to think that this was an industry that was generating $8-10 billion in revenues at the turn of the century. Now we’re a little bit below $200 billion, perhaps going to $300-400 billion by the end of this decade. That implies that there has been and will be a lot of growth to come. So what are the different ways that that can play out? So number one would be this notion of the increasing coming together of gaming and media. Frankly, it’s been surprising that we haven’t seen more of that in a more kind of comprehensive and successful fashion. There have been attempts to do that, but I think it’s fair to say, based on the people that I speak to on a regular basis, that is coming where you’re essentially going to see these big gaming companies becoming more media companies. And so the implications there are that they are going to be producing not just video game content, but other types of content. Think about movies and television. Things along those lines, I think, are things that people should be anticipating at this point. And so whether it comes in the way of consolidation or just leveraging existing intellectual property in new and interesting ways. The other thing that I would be mindful of is something that Chris kind of touched upon with this notion of kind of AR and VR just becoming more kind of pervasive. The issue right now is those headsets, they cost a lot of money.


Scott: [00:38:22] I think a lot of people don’t really get them, don’t really have an interest in virtual reality, let’s say, and those types of experiences. And so I used this word earlier, the notion of democratization and this notion that this is going to become more of a mass market. And it’s not just about the expert that I spoke to who indicated that you could see 100 million of these consumer AR/VR headsets within the next five years. It’s other ways that people can experience this type of content without necessarily having a headset or glasses. You could go to a large space and have these kinds of experiences. Think about a mall, think about an amusement park, think about a stadium. I think all of those places, those big venues are where you can see this kind of coming together of media and gaming. So I’m kind of saying that, number one will be media and gaming coming together. And number two, more ways to experience AR and VR beyond headsets and beyond kind of sophisticated glasses, for lack of a better characterization.


Catherine: [00:39:36] Great. I feel like we’ve literally just scratched the surface of this incredibly interesting and complex sector that we are all engaging with increasingly as time goes on. But unfortunately, that’s all that we have time for today. So I’d like to say a huge thank you to Scott and Chris for sharing all your experiences and insights and a huge thank you to those of you listening to this episode of The Signal presented to you by Third Bridge, the world’s leading independent research provider. Join us again for the next episode when we will be discussing more upheaval in another of the world’s most investable industries. Please rate review and follow our podcast and if you like it, please tell a friend about it. Find us on Spotify, Apple Podcasts and wherever else you get your podcast from. Plus From me, Catherine Ford, that’s goodbye and until next time.

Key Takeaways

  • Mobile now represents well over half (60%) of gaming revenues
  • Big tech is a “wild card” but regulators are increasingly focused on the footprint and power of such behemoths
  • There has been a “dramatic” increase in US female gamers in a historically male-dominated hobby

Episode Guests

Scott Kessler

Third Bridge’s Global Sector Lead for TMT

Chris Collins

Former Development Director at EA’s DICE Studio and owner of global video game consulting firm 16bit