The video game industry is not just about making hit games anymore. With esports on the rise, and with games becoming more of a service because of digitally delivered in-game updates, video game companies are expanding their reach to new audiences worldwide, and margins are expanding.
Let's review where the three leading U.S.-based game publishers currently stand, and what's in store for these companies in 2018.
Looking to build on last year's solid gains
This should be a big year for Activision Blizzard (NASDAQ:ATVI), which has its new professional esports league -- Overwatch League -- beginning its inaugural season. Advertising will be a focus for Activision this year, starting with King's mobile games and with Overwatch League. Activision will also release a major expansion for its World of Warcraft franchise.
Electronic Arts (NASDAQ:EA) is licking its wounds after a gamer backlash over Star Wars: Battlefront 2's handling of micro-transactions. Not surprisingly, this issue hurt sales of the game during the holiday quarter, but EA still delivered a strong quarter thanks to a diversity of games that performed well as a group. EA enters 2018 with solid performance in its EA Sports titles, in which the Ultimate Team digital card game continues to drive the growth in EA's digital revenue. EA is also making a big push into esports with Madden, FIFA, and Battlefield.
Take-Two Interactive's (NASDAQ:TTWO) Grand Theft Auto V continues to grow, with sales exceeding 90 million units since the game's 2013 release. The next big release everyone is waiting for is Red Dead Redemption 2, which seems to finally have a firm release date in fall 2018. Fiscal 2019 ending in March should be the company's biggest, with management guiding for $2.5 billion in revenue and roughly $700 million in cash from operations.
Expanding revenue opportunities
Game makers are not completely dependent on new game sales anymore. Instead, these companies are increasingly focused on releasing a hit game that draws a mass audience, and then steadily releasing a stream of content updates that keep players spending money long after the initial sale of the game.
Activision, EA, and Take-Two all generate around half or more of their annual revenue from in-game spending, and this strategy has particularly helped Take-Two generate a more consistent level of profitability compared to years past.
In addition to in-game spending, console gamers are starting to download full game purchases directly to their consoles, as opposed to buying physical copies in stores. Currently, game companies generate about a third of console unit sales from full game downloads, which have been steadily increasing every year. This will be an important driver for margin expansion going forward.
Also, game companies are starting to take advantage of the popularity of their franchises by expanding into broader entertainment categories. Activision has been the most proactive in expanding its operations beyond strictly making games. Here's how the company views this opportunity, as included in Activision Blizzard's third-quarter 2017 filing with the SEC, which speaks for the opportunity across the industry:
Given the passion our players have for our franchises, we believe there are emerging opportunities to drive player investment outside of game purchases. These opportunities include esports, film and television, and consumer products. Our efforts to build these additional opportunities are still relatively nascent, but we view them as potentially significant sources of future revenues.
Activision is clearly emerging as the game maker that is best positioned for non-game-making opportunities, but other companies, including Ubisoft and Nintendo, are following suit with their own movies and consumer product initiatives.
During 2018, investors should watch how non-game-making opportunities develop, because, to a certain degree, the soaring stock prices and high P/E ratios of video game stocks reflect the expectation that these companies will be able to diversify their revenue and keep annual profitability more consistent than in the past.