Metaverse Academy: Gaming

Virtual worlds, real opportunities

The concept of the Metaverse has evolved significantly in recent years and is more prevalent than ever when discussing the future of investible technology, its capabilities and opportunities. When seeking to understand what the Metaverse is all about and how it can be of use to investors, it’s key to realise that this is not an ephemeral nor abstract trend. It’s a continuation of the ground-breaking and increasingly sophisticated advances in technologies available to consumers and businesses alike, accelerated by the significant demographic shift towards online entertainment, socialising, working, and communicating.

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We classify the diverse opportunities associated with the growth of the Metaverse into four key sub-themes which help define but also highlight the rich and growing sources of attractive opportunities available to us. In this blog, we aim to dive deeper into the sub-theme that arguably started it all – gaming.

Gaming has been closely associated with the Metaverse since its genesis, and this theme is currently where we find the most advanced developments as a result. Virtual worlds are nothing new to the gaming industry and have been subject to increasing amounts of research and development as their success grew. Older generation virtual worlds or massively multiplayer online games (MMOs) such as Second Life or Runescape, once a more niche part of the internet, have been succeeded by hugely popular platforms such as World of Warcraft, and more recently Fortnite and Roblox. These have achieved mainstream acceptance and are popular with a range of age groups. Key to this shift are those huge leaps forward in technological capabilities, and crucially the accessibility and pricing of gaming consoles. The advances in the 3D worlds these programs provide require significant PC-based hardware investment, but consoles - with their powerful gaming engines - have a single price point and are far more wallet-friendly for consumers. Another tailwind for investing in gaming is that the process of buying a game is no longer a one-off. Downloadable content, subscription models, upgrades and paid-for character avatars to boost one’s appearance on the Metaverse mean that gaming companies benefit from a regular revenue stream from these microtransactions.

Gaming is no longer the preserve of the technically minded. The line between gaming and entertainment has blurred, which is a trend that existed before the COVID-19 pandemic, but which has accelerated significantly over the past two years as online interactions became the norm. Nintendo’s Switch console – so named due to its ability to double as both a TV dock and handheld gaming device – as well is its smaller cousin, the Switch Lite, sold out repeatedly during lockdown. The Animal Crossing: New Horizons game, which allows people to live vicariously through an avatar and create idyllic island worlds, came out at just the right time to fulfil a need for people to escape the immediate confines of lockdown and travel and connect with friends online for a more interactive form of home-based entertainment than, say, binge-watching TV shows. Pokémon GO, the online version of the popular video game franchise, provided another accessible way for consumers to access augmented reality capabilities through their mobile devices and overlay them with their immediate real-life environment, even when confined indoors.¹

It’s worth noting that younger generations have grown up with the internet at an advanced stage of fast, relatively low-cost wi-fi capabilities and are used to always being connected, further entrenched by two years of physical social isolation. The increased appetite for the world exploring via the Metaverse is only likely to grow with time. It’s also important to consider scale. The demand for tickets to traditional, physical concerts often outstrips supply. Bands with large fan bases can now use the Metaverse to tap into a huge opportunity without the confines and logistics of physical space. This trend first began in the Korean pop genre in the early 2000s but gained considerable traction when Duran Duran became the first globally popular artists to play a large-scale virtual concert. The British band, well known for their early adoption of technology since helping to pioneer the music video in the early 1980s, performed via the Second Life platform in 2006.² At the time, Second Life had a virtual population of under 400,000 users. Today is a very different story – chart-topping current artists are tearing up the rulebook. Popular American music producer and DJ Marshmello played to a virtual audience of over ten million people in 2020 via the video game Fortnite. This trend not only opens up a much wider audience for bands, record labels and technology providers, but it also has an additional benefit of making music and events safer and more accessible to people with mobility issues or other barriers to attending physical concerts. There is, of course, the safeguarding aspect of online performances to consider, and we’ll discuss this further on a future blog alongside cybersecurity, part of the ‘Enablers’ sub-theme.

Choose your players

There are numerous exciting gaming opportunities within the Metaverse universe. These range from the pure gaming plays such as Electronic Arts, who are the developers behind many current and robust gaming franchises such as The Sims, Apex Legends, and various Star Wars games. Roblox, the popular platform mentioned earlier, is a leader in the Metaverse space with over 50 million daily active users who use its proprietary gaming engine, Roblox Studio, to create, share, and buy and sell games with an online community. Take-Two Interactive Software owns names such as Rockstar Games, the developer behind such gaming behemoths as Grand Theft Auto and Red Dead Redemption. Square Enix appeals to another part of the market with its Dragon Quest and Final Fantasy franchises, as well as interactive stories aimed at more casual players such as its Life is Strange series. It’s also notable for deriving 54% of its revenue from mobile and online services.

M&A activity also has a huge impact on gaming stocks. Due to the competitiveness of this industry, the big developers are often keen to add both emerging and established success stories to their portfolio of franchises strategically and have been gobbling up other companies in a manner reminiscent of Pac-Man. Microsoft announced plans to acquire the high-profile gaming company Activision Blizzard at the seismic price of $69 billion. Whilst the deal is pending regulatory approval, this transaction would see Microsoft become the third biggest gaming company in the world. If the acquisition were to go through, it would add a strong suite of immersive and collaborative experiences to its armoury such as Call of Duty, World of Warcraft, Overwatch and Diablo. It also owns the popular Candy Crush mobile game which takes advantage of the smart phone transition. In 2022, it’s likely that almost everyone you know is carrying around a small convenient gaming device in their pocket.  

The gaming sub-theme can diversify further by considering the enabling technology and equipment manufacturers, such as Sony Group. This key technology enabler is developing a next-generation virtual reality (VR) headset which will amplify the immersive effects of both gaming, and virtual events and performing. The popularity of these occasions is only likely to rise as the virtual experience becomes more and more like the real thing. Equally key to driving the growth and success of the Metaverse are gaming engine developers, which underpin the user experience and provide the crucial tools needed to render powerful 3D worlds and simulate them to believable quality, speeds and resolutions. Tencent Holdings acquired a 40% share of Epic Games in 2012, the software company behind Fortnite and the commercially available Unreal game engine.³ Unity Software with its proprietary 3D gaming engine has made a series of acquisitions such as Weta Digital, the special effects studio used by popular film director Peter Jackson (Lord of the Rings franchise, amongst others). Unity added another revolutionary string to its bow by acquiring Ziva Dynamics in 2022, a leading simulation developer with real-time artificial intelligence (AI) creation and sophisticated machine learning abilities, bringing artificial characters and their appearance and behaviour within the Metaverse closer to reality and help continue to make it an increasingly exciting and realistic place to be for participants.⁴

Companies shown are for illustrative purposes only as of 15/07/2022. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities.

Risks

No assurance can be given that our equity strategies will be successful. Investors can lose some or all of their capital invested. Our strategies are subject to risks including, but not limited to: equity; emerging markets; global investments; investments in small and micro capitalisation universe; investments in specific sectors or asset classes specific risks, liquidity risk, credit risk, counterparty risk, legal risk, valuation risk, operational risk and risks related to the underlying assets.