What's your entertainment for the day?
The almost "perfect" business model
If you look at the video game industry as a whole, from Arcade to Console to PC to Mobile, you will realise that while the platform had changed, the various platforms remain as viable format.
For many gamers, they continue to go to the arcade when they are out, play on their consoles when they are playing single player or family type games, go on to the PC to play multi-player online games to communicate and hang out with friends and play games on mobile when they are on the go.
There is two investing implication here. We could invest in
prospecting for the gold or
selling the shovel.
The easiest way is to invest in selling the shovel which everyone had recognise.
There is only two main shovel selling companies (game engine which power the game),
Unreal Engine by Epic Games - privately owned, Tencent and Sony are shareholders in Epic
Unity - newly listed on NYSE
We are very keen on investing in Unity and would most likely take a small stake in the near future pending the ability to understand the valuation.
Lets move to the prospecting of the gold which is the main part of the article here.
“We compete with (and lose to) Fortnite more than HBO… There are thousands of competitors in this highly fragmented market vying to entertain consumers and low barriers to entry for those with great experiences.”
-Reed Hastings CEO Netflix
We believe the shift in entertainment from passive to active type of entertainment is a cross-generational trend. There is only 24 hours per day and there is only so much media that we can consume. Just like movies business had to suffer when more people watches TV and cable reduces TV viewership, the same can be said on the shift to video game.
The more pertinent question to us is in what type of business model would create a superior video game business?
This will depend of a few factors
the way the media had been consumed
active vs passive engagement
single player or multi-player engagement
short form or long form or never-ending if it is social
the production cost of the media
require lots of professionals or just a small number of professionals
across one platform or multiple platform
100% professionally generated content or + user generated content
the type of IP generated
transactional IP (pay to win games)
cosmetics skin IP (to make your character look nicer)
expansiveness of the story IP or social factor
If we are to use the criteria we had above, the ideal video gaming company would be a exact opposite of Netflix more akin to a Youtube model.
A media which can be consumed through active engagement by having multiple short form games on a multi-player basis (social network) which could be created by a small number of professionals and the rest of should coming from user-generated content.
Instead of charging pay to win which kills the economics within a game, the model way is to allow the player to link his perceived gaming persona by allowing for purchase of cosmetics skin items.
If we are to link all these together, we will realise that there are a few companies out there that satisfy the condition stated above.
Roblox which had just confidentially filed to go public is one of them. Roblox was valued at USD 4b in the last round lead by Andreessen Horowitz.
If the IPO succeed, they should be coming onto the market at USD 8b. It has 150m active users (thou most of them are young kids age between 7 - 14 years old), and make it one of the more interesting social network that had existed for young kids.
Currently, Roblox’s filing with the SEC is confidential. That means investors won’t be able to look at the company’s data until at least 15 days before the offering.
As we continue to understand the video game industry, we are getting more bullish on it. It is a well recognised thesis and we will have to dig hard to find companies that we like and has an edge in.
This will be an area where we will be digging for our Unrecognised Growth Portfolio.
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Footnote: My daughter is a budding developer on Roblox. The game development is surprisingly easy with minimal coding. For parents who have kids on Roblox, it is time to divert them to create their own games! Youtube is a good teacher here.