Over the past year, a new type of multiplayer game mode called "battle royale" has completely captivated gamers. The most played battle royale games currently are Fortnite and PlayerUnknown's Battlegrounds (PUBG) which have become extremely popular for their Hunger Games-style gameplay, where a player is dropped on a large in-game map to fight to the last man standing. In May, Twitch -- an Amazon property that streams digital video services, mostly games -- viewers spent over 180 million hours watching others play these two games.
Since Activision Blizzard (NASDAQ:ATVI), Electronic Arts (NASDAQ:EA), and Take-Two Interactive (NASDAQ:TTWO) don't as of yet have any games that feature a "battle royale" mode, there's naturally been concern from investors that games like Fortnite are peeling gamers away from these companies' core franchises.
We'll review where these companies stand on the issue, what the success of these new games say about the state of the industry, and why the industry leaders will quickly begin introducing their own battle royale games very soon.
Success of Fortnite points to a growing market
As of the most recent quarter, there's still no evidence that the big game makers are feeling any competitive pressure. Activision, EA, and Take-Two reported healthy player engagement levels with core franchises, judging by the growth of in-game spending. In the first quarter, Activision reported increased engagement levels with Call of Duty and Overwatch. This helped drive a record first quarter for in-game revenue of about $1 billion. Take-Two's in-game spending grew 15% year over year, while EA reported a 31% increase. These results came during a quarter in which Fortnite was seeing its strongest engagement to date, judging by viewership on Twitch.
Each of these companies have taken a similar position that ground-breaking games like Fortnite are actually helping their businesses by expanding the gaming market to new audiences.
Here's how Activision CEO Bobby Kotick summed up this argument:
Our continued ability to set new records speaks to the breadth and enduring nature of our portfolio of franchises against the backdrop of a large and growing interactive industry. Gaming is constantly evolving and innovating, which often expands the marketplace. The success of Fortnite is no exception. This game is attracting new players of all ages and gender and it is helping gaming become even more mainstream entertainment.
The reason I think we're seeing ground-breaking new games like Fortnite hit the market is that there are more people than ever playing on PC, which is incentivizing game makers of all sizes to invest more in games knowing that there's a big market to sell into.
The industry is so strong right now that market researcher Newzoo has had to raise its industry growth estimate to 8.2% per year from 6.2%. The reason cited in its report is the higher time spent in games based on the rising popularity for team-based games (e.g., Activision's Overwatch), in-game leaderboards, and live streaming.
As long as the market is growing, there will very likely continue to be more innovative games released that try to capture a large audience. In fact, Fortnite and PUBG already have a new competitor in Realm Royale, a new battle royale game that just released this month and has been attracting a lot of interest.
It's always possible that the popularity of battle royale games could take some players away in the short term from Activision or EA's major titles, but long term, this is an opportunity for the likes of Activision to take advantage of the clout that a game like Call of Duty has by offering its own battle royale feature to draw a huge audience.
There's too much profit at stake
Game companies want to deliver the experience gamers want to play, but they are also in business to make money, and Fortnite is making a fortune.
In April and March alone, Fortnite made over $500 million, according to SuperData. It's a free-to-play game, which means that $500 million is from gamers spending money for extra content while playing the game.
Creating incentives for players to spend money while playing is the modus operandi of the top game makers. Take-Two and EA generate close to half of their annual revenue from in-game spending. In 2017, Activision generated 56% of its $7.2 billion in revenue from this category. In-game add-ons are digitally delivered and are relatively cheap, which helps these companies generate a high volume of sales that boost margins.
The success of Fortnite is showing game companies another way to design games to keep players engaged, spend money, and expand margins. It's clear gamers want more battle royale gameplay, and with Fortnite raking in the cash, game makers with large resources will likely shift their approach to game design to cash in on the trend.
Industry leaders are already adapting
Activision has a big opportunity to capitalize on battle royale with the upcoming Call of Duty: Black Ops 4 this fall, which will feature its own battle royale game mode for the first time. Call of Duty is one of the industry's most recognized franchises, so it's not surprising that the unveiling of its new battle royale gameplay experience attracted 80 million views online. There are even reports that Take-Two may be including a similar mode in its upcoming Red Dead Redemption 2.
Just as Doom popularized the first-person shooter in the 1990s, PUBG and Fortnite have improvised on the shooter format with a new multiplayer game mode that is laying the groundwork for other companies to build on and grow.
Activision and EA didn't invent the first-person shooter, but that didn't stop them from eventually releasing Call of Duty and Battlefield, which are two of the top selling shooters in the industry. If battle royale proves to be more than a fad and becomes its own genre, expect the big players to get in on the action very soon -- just as they have before.
John Ballard owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard and Take-Two Interactive. The Motley Fool recommends Electronic Arts. The Motley Fool has a disclosure policy.