In this week's Wildcard Wednesday, Jason Moser talks with video game industry analyst Aaron Bush about the business of games. Aaron explains what the industry really looks like today -- like how it's so much bigger than music and movies, and that a massive majority of it is in mobile -- and where it seems to be going in the next few years.

Listen in to learn what trends to watch in video games, which companies are set up to win, why e-sports might be fast approaching the trough of disillusionment -- and when it might rebound -- where VR and AR fit in, and much more.

Interested in more video game business analysis? Be sure to check out Aaron's newsletters at

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Jan. 8, 2020.

Jason Moser: It's Wednesday, Jan. 8. I'm your host, Jason Moser. As you may have heard on our 2019 wrap-up shows a couple of weeks back, we have a bit of a new format here for Industry Focus on Wednesdays. It's what we're calling Wildcard Wednesdays, where we basically have a blank canvas more or less that we can dive into whatever we're feeling that week. We'll try to push the envelope and cross some lines. Maybe we will; maybe we won't. But I'm feeling like today, our inaugural Wildcard Wednesday, I feel like I'm up for a good gaming conversation. That's why my guest today here is the one and only Aaron Bush. Aaron, thanks for being here.

Aaron Bush: Thanks for having me. I'm honored to be on the first Wildcard Wednesday.

Moser: The first Wildcard Wednesday! Well, the neat thing about Wildcard Wednesday, we can take it in whatever direction. We're taking the place of what was traditionally Healthcare on Wednesdays. And it's not to say that we won't ever talk about healthcare, folks. We definitely will. But we thought this could be an interesting way to open up some topics for conversation that we might not normally cover in our traditional lineup.

So what really planted the seed for this being the show for today, a lot of listeners probably out there don't know what you've been up to recently here, Aaron, with something you've been working on called Master the Meta. I think the best way to describe this, from my perspective, at least, it's a weekly newsletter devoted to the gaming industry. But now, what I find unique and refreshing, and really what keeps me coming back, is that this is coming from a gamer as well as an investor. So you're bringing your acumen from the gaming world as a gamer, but you're also bringing that investor mindset, which to me is great because I learn a lot in the process, and while I don't game as much today as I used to back in the day, I do still enjoy it from time to time. And it's neat to see how this industry shapes up. It's a massive market opportunity, as you know. So we thought it would make for a great discussion today.

I'm going to let you kick it off here in just a second and let people in on exactly what prompted getting this ball rolling with Master the Meta. But before we do, I want to remind our listeners, if you want to learn more about Master the Meta, check it out at You can sign up for the weekly newsletter. You can follow him on Twitter. I think that if you had any interest in this industry whatsoever, this is really required reading from my perspective.

Aaron, tell us a little bit about what got this ball rolling for you.

Bush: Sure. I appreciate that. It's pretty simple. I love gaming; always have, my whole life. I love business; always have, most of my life. I think I was craving some type of ongoing insight about the business of gaming, and I didn't see anything out in the world that had that. And why I wanted that insight is because the video game industry is massive. This year, it's about a $150 billion industry. For context -- it's almost a meme to say this at this point, with people who follow gaming -- it's bigger than the film and music industries combined.

Moser: Well, if we look at entertainment, gaming is the biggest market opportunity out there.

Bush: It is. And it's the fastest growing. So, to me, it strikes me as not only as gaming like a cultural force that's taking over, a business force that's taking over, but there's a pretty major attention gap between where the money is going and how people spend their time compared to what people are actually studying. I feel like the business of gaming has not been getting enough attention. And just because there wasn't something good out there that I wanted to follow myself, I figured, "You know, I could probably do this myself and do a decent job." So here we are.

Moser: Well, I would say you're doing better than a decent job. We're going to give it a little bit more attention today. I want to lead off with something I was reading from Master the Meta just a few weeks ago in regard to, you're looking back in 2019, sort of a year in review. And you were keying in on some of the big-picture topics in the industry, mobile and cloud gaming, to consoles, and more. But I was wondering, all that stuff I read, was there one thing, or maybe a couple of things, in particular you felt like in 2019 that stood out to you as more significant than the others.

Bush: Yeah. I'll call a couple things out. First, let's say that 2019 was really a transitional year and an anticipatory year for the industry. The current console generation is winding down. Mobile is still doing its thing. Free-to-play still represents $4 out of every $5 produced in the industry. So a lot of these ongoing trends are still here.

But to call out a couple of things -- one, if you're going to study the business of video gaming, you'd be crazy to not be closely studying mobile gaming, which is the largest and fastest-growing category of the video game industry. Mobile gaming, people might think of Candy Crush or something like that, but really, the types of games that are showing up on mobile are changing. There are lots of opportunities within that change. Within that, mobile e-sports, I think, had a pretty gangbusters 2019 and is still picking up as a massive trend. Think about Call of Duty, but on mobile. Call of Duty mobile did launch in 2019. Within two or three months, it amassed about 200 million downloads, which is a lot. It's not a perfect game. It has some room to monetize.

But there are other games out there that most people probably haven't heard of. There's one called Free Fire, which is produced by a company in Asia that has amassed over 450 million downloads in the past couple of years. PUBG Mobile has amassed over 600 million downloads in the past couple years. So these games, the downloads are on par with the biggest and best internet properties in the world.

And engagement is pretty strong. As I play things forward, it's very clear to me that mobile e-sports, especially because most of the world is mobile-first, is going to get much more engagement, much more downloads, and will dramatically improve monetization over time. So that's a big deal.

Also, just to call out another pretty big change in the industry in 2019, we saw a paradigm shift with live streaming. Most people are probably familiar with Twitch. Twitch has been the dominant player in terms of video game live streaming, where people can watch their favorite gamers play games.

Moser: An Amazon (NASDAQ:AMZN) property, right?

Bush: Yeah, it was purchased by Amazon several years ago. But there was a paradigm shift this year. It started when Ninja, who was the biggest gaming personality in the world, decided to move from Twitch to a platform called Mixer. The big deal here wasn't even necessarily that he moved platforms, but that he moved platforms based on terms where Mixer was paying him a contract to move to Mixer. So I view that as the shot heard 'round the gaming world, where all of the sudden, now all of these top streamers are like, "Well, if Ninja can get a paid deal on a platform, then so can we."

So now, we're seeing an evolution. Twitch used to be very dominant, and it used to be very much a platform business where it got all of its content for free, sort of like YouTube. YouTube doesn't pay anybody for content that goes on the platform. But now that somebody has -- and Mixer is a Microsoft (NASDAQ:MSFT) property -- now, all of these different streaming platforms are having to start competing based on deals that they're making with all of these different content producers. So there's an evolution of these websites moving from being platform-based businesses to content-based businesses, which has pretty meaningful effects on the margin profile of these companies and how profitable they can be.

So we're starting to see some market share shifts. YouTube Gaming is now getting into this. Facebook Gaming is now getting into this. 2019 was the beginning, but we'll see even more deals from even more players be made over the coming years.

Moser: I think that segues nicely into something else I wanted to ask you about. Because you've got Twitch as an Amazon property, you've got Mixer as a Microsoft property. There's a common thread here in that these big techs are finding their way through this gaming landscape. And you mentioned in something you wrote recently, the emerging ecosystem wars. To me, when I read that, that sounds like it could be its own game. Maybe you could develop that for us. It could have some kind of investing angle, who knows. But let's talk about that a little bit, because I think we talk a lot about ecosystems with these big tech companies, and whether it's in entertainment or retail, now gaming, obviously, being another front on this battle here. What are some of the examples of this emerging ecosystem war that's shaking out here?

And what are the companies you feel like are dictating the terms? Because, I mean, the neat thing, as we watch this space develop, and the Ninja example here, it seems like Twitch could probably try to remedy this by offering up some consideration for people on their platform. And maybe that is the direction this all goes, is paying up more for content and for the players in the space, so to speak. But talk a little bit about more of this emerging ecosystem war, and how you see this playing out.

Bush: Yeah. So I think it's sort of similar to what you see with video streaming. I don't like how people are framing that up as a streaming war. Those are very much ecosystem wars, too. A streaming service is just part of a broader... like Disney ecosystem or something like that. It really is like the same thing here. This isn't a games war; this is an ecosystem war where companies are starting to compete based on multiple dimensions.

I think the best example is Microsoft, who is now starting to compete based on more dimensions than they ever have before. They're competing based on their hardware, their consoles; they're competing based on their exclusive games that they're bringing to the platform, based on live operations, based on subscriptions that they're building, based on cloud gaming that's coming out, based on live streaming through Mixer. And all of these pieces reinforce the others. Something like this, with Mixer, which paid millions of dollars to acquire Ninja, they're probably not making money, but that's OK if they're bringing more people into this broader Microsoft ecosystem, where they'll spend more money in lots of other ways. That's the general thinking.

And because this industry is becoming even more infrastructure-based as cloud streaming, as all these subscription services are rolling out, the tech companies are really the best titans in position to build an ecosystem in lots of different ways. Amazon, they own Twitch. They own Amazon Web Services, which will give them a big edge in the cloud gaming wars. I expect them to unveil their own cloud gaming service next year. They will also try build a game engine, which publishers use to build all of their different games, Google, they own an app store that has a ton of mobile games. They own YouTube, which is the biggest place in the world to see gaming content, like lots of videos. And, of course, they're trying to make Stadia work. [laughs]

Moser: Microsoft is bringing some kind of a cloud-based platform. Maybe they're watching what Alphabet, what Google has done with Stadia.

Bush: It won't be hard to top. They made a lot of mistakes. Facebook's doing this Epic Games, which is behind Fortnite. Not only do they have Fortnite itself, but they own the Unreal Engine, which is the second largest gaming engine. They've pointed the Fortnite audience to the Epic Games store, which is a storefront where people can buy lots of different games from other third parties. There are lots of different ways in which ecosystems can build. I expect that as these ecosystem wars pick up, and as companies must compete on multiple dimensions, we'll probably see some consolidation. A lot of like independent game engines, certain publishers, they'll be acquired by these companies that are trying to bolster their own ecosystems.

Moser: I feel like that would make a lot of sense. I hate the "content is king" saying, because I don't think it's that cut and dried. But clearly, content matters. That's what drives engagement in a lot of cases. So bringing those publishers in with that experience in developing successful IP today, it would only make sense. You've sort of cracked that content nut, and you can figure out new ways to distribute it. And if you're big tech, well, that's one of your biggest advantages, is distribution.

Bush: Yeah. And honestly, like the dark horse in all this -- actually, a lot of these console makers on that side of the ecosystem, they will buy publishers and developers. Probably the smaller ones. But as a trend to look forward to, it really wouldn't surprise me if we start to see traditional media companies starting to become much more interested in gaming, because gaming is massive. It's quickly growing, and pretty much all of these traditional companies have zero exposure.

And as you think about, just as an example, The Witcher TV show just came out on Netflix. And it's a top-rated show, super popular. But there are Witcher video games and books. We see The Witcher 3 was Game of the Year in 2015, I want to say, but there are more people playing Witcher 3 today, when the TV show came out, than were playing in 2015 because of a TV show. So again, all these pieces of an ecosystem reinforce each other. And increasingly, especially when it comes to these really big brands, I think a lot of the brand-centric media companies will recognize that they can get more exposure to more of the future of what brands will be in entertainment by buying the biggest video game brands.

Moser: Yeah. On the flip side of that, because it isn't just about having that name. The thing that comes to mind, I know Activision Blizzard (NASDAQ:ATVI), at one point, they tried to do this with World of Warcraft to a degree, right? There was a World of Warcraft movie. And I don't know that was considered all that successful. Maybe it was just a toe in the water to figure out how to navigate that new environment. But having the IP is important, but that really is just one piece of the puzzle. The Witcher example has been phenomenal. I've seen that on Twitter. That thing has just exploded in the interest that it's created, really bringing two worlds together from gaming to entertainment. I mean, you're seeing something now that hasn't happened to this degree until just now, it feels like.

Bush: Yeah. Take-Two Interactive, they have Grand Theft Auto, which is one of the biggest entertainment brands, period. It busted records for biggest opening weekends. Their other game, Red Dead Redemption 2, also did the same. But just as an example of something that might make sense, think about like a Disney-Electronic Arts merger. Electronic Arts has most of the biggest sports games. I could see immediate ESPN tie-ins. Electronic Arts creates most of the Star Wars games. Pulling that in house would be awesome. They also own brands like Dragon Age, Mass Effect, which a lot of gamers will recognize as really great storytelling, universe-building brands that have never gone beyond video games at this point, but could make really interesting movies and TV shows. I don't know if Disney will buy Electronic Arts. I bet they'll buy something at some point.

Moser: It would make sense. I could see that.

Bush: But there are many ways that these companies coming together could build value, just through a transmedia lens.

Moser: Let's talk about esports for a second. I think that's something that has been a buzzword in the industry. Certainly in our industry over the past couple of years. It is a polarizing issue, even for people who don't really care. You ask some people about it, and they're like, "I don't understand how that's even a thing." You ask other people, and they're like, "I totally get it."

Bush: Lots of misconceptions.

Moser: Yeah, I think so. It took me a long time to really study and learn it and get it. I fully understand. I understand why it'd be popular. It makes sense to me. You can sit there and watch a football game, sit there and watch a baseball game, you're watching someone who's expert doing something that you're interested in. Gaming is the same thing, basically. So from that perspective, I could see a world where esports really takes off. But it sounds like to me that maybe you're thinking we're on the way to the trough of disillusionment with e-sports before we get back to accelerating happy days.

Bush: Yeah, I think that esports is short-term overvalued but long-term undervalued. I think that the long-term future of esports is massive. If billions of people are playing games, it makes sense that there'll be a massive audience for people watching the best gamers. But right now, esports is a bad business. We've seen the hype cycle really pump people up, and lots of companies have raised a ton of money. Buy-ins to leagues like Call of Duty and Overwatch have been extraordinary. Teams have to pay $25 million to like $40 million to just have a seat.

I think so far, most of these pure-play esports teams have failed to build any type of competitive advantage. They're all kind of the same. They have trouble building brands. They have trouble monetizing their audiences. It would not surprise me, in 2020 or 2021, if esports winter hits. It'll start by funding drying up from companies that need it most. And it'll force all of these esports teams to take a really hard look at how they run their business. And they'll recognize that the costs that they have, in terms of player salaries, in terms of league buy-ins, all of those things are way too high and will have to be cut back.

That'll have ripple effects for publishers who own the games. But also, a company like Activision essentially convinced other players like Twitch to spend a lot of money for exclusive rights to their leagues. Viewership has been OK but hasn't exploded in a huge way. So I also expect there will be a step back in terms of how much money will be settled in those deals before it steps forward again in the future.

So really, I just think expectations have to reset. But because these businesses have been used to easy money and have built really bad business models -- if you think about it, because these games are owned by publishers, it's different from traditional sports. Nobody owns soccer. Nobody owns football. But these games are literally owned and controlled by a certain company. They're going to build their e-sports presidents in a way that's favorable to them, and that makes it harder for other companies within that ecosystem to really win. I don't know if that's the best approach. Ideally, if you're building an ecosystem, you want to find a way for everybody to win, to make it sustainable. But companies have been greedy. And I think that's going to backfire.

Again, in the long run, esports will be a big deal. But how these businesses have been built so far, and how terms have been struck with all of these different players, it's not sustainable, and I think it will absolutely have to take a step back before it takes another step forward. 

Moser: Easy money is a blessing and a curse, right? It can open up a lot of doors, but it can also encourage a lot of frivolous spending and short-term thinking, I think. That makes a lot of sense. That's a really important point you made there in regard to football, soccer, sports, baseball. It's not really owned by someone, right? But this IP in esports, this stuff is, and those economics dictate all of that decision-making, really.

Bush: Yeah, they control how the game works, any updates that change the gameplay. They control, usually, the terms of who can compete and how they compete. They control everything. That's just so different. Yeah, comparing esports to traditional sports, I understand why people want to make those comparisons, but they fall apart so fast. You really can't do it.

Moser: Doesn't sound like it. I want to ask you real quick. One company we haven't really talked about yet, but it's one that's out there and making its own waves is Apple. Apple Arcade. I haven't fiddled around with Apple Arcade at all much. But we saw the introduction here at the last Apple event. That's an interesting subscription model there as well. Opens up a lot of gaming content, it seems like, for Apple users. Where is Apple right now in comparison with these companies like Amazon and Microsoft and Facebook? Is Apple same level? Kind of an also-ran? How do you feel about Apple Arcade and its future?

Bush: Apple is one of the largest gaming companies in the world. Most of the spending on the App Store is gaming. So it makes sense for them to figure out a way to build a subscription that brings the most engaged gamers together in a way to play games that is beneficial to them economically and how people spend their time. I went on record before, I think on MarketFoolery, saying that I think Apple Arcade has the potential to be one of Apple's most successful services in terms of how many people are engaged with it, but also in terms of how much money they make on it, because video games are software, and so there is zero marginal cost to scaling it up. Compared to something like music, where you have to pay for every single play, it is a better business. 

That said, I think so far, Apple Arcade has disappointed me a little bit. I think their scope, in terms of the types of games that they are focused on, and therefore what niche audience that they capture, I don't think that they've done a great job getting tentpole games or lots of different types of games to appeal to a much broader audience. That can change, but it'll take some time. But either way, Apple's distribution is unparalleled in the world. If you look at the App Store, the five buttons at the bottom that you can pick, one of those is Apple Arcade. So they're serious about this. Gaming is a huge part of what already goes on in the App Store.

Moser: They certainly have all the resources in the world. So while that doesn't solve every problem, it certainly is a big one. OK, let's look toward 2020 now. We talked a little bit about what was going on in 2019, things that you felt like stood out. But what are you looking at in the industry for 2020? And in particular, I was reading more about your personal goal, your effort to dive more into mobile, and learn even more about mobile and how that's shaping the gaming industry. You have six big trends in mobile that you're looking at for 2020. I have to believe that mobile is going to be part of the answer here. Talk a little bit about what you've got your eyes on for 2020.

Bush: Yeah, mobile, definitely is, in lots of different ways. I think mobile esports in particular is really exciting just because the scale of what those companies are achieving. And I think the retention and runway that they have is really cool. I'll hit on some quick things here. Asia is increasingly dominant in mobile gaming. Something like 23 of the top 30 grossing mobile games in 2019 were either fully owned or partially owned by Asian companies. I have a feeling that trend will continue. But at the same time, Western publishers will learn to adapt. Not all of them will, successfully, but the ones who do in finding those early on should bring good rewards.

One topic that has been really interesting to me is the idea of the metaverse. I know you probably think about this a little bit, think about AR and VR and that type of thing.

Moser: All the time. I'm still knee-deep, I'm probably about 80% of the way through Ready Player One. I wish that book would go on forever. I'm so glad I didn't go see the movie, because I absolutely love the book. And that was per your recommendation, so thank you.

Bush: Yeah, it's a good book. I think we are seeing some very early stage examples of what the metaverse could be. You see in Fortnite, we're starting to see live events and things. There was a live concert earlier in the year. There was a live demonstration of a Star Wars event and advertisement that happened there as well.

So Fortnite is testing things. I think over the next 12 months or so, we'll see them evolve from being a game to a platform. And I think to make that shift, they will have to better prioritize user-generated content and letting the community have more of a say in creating things in the Fortnite universe. We're seeing that happen in games like Minecraft, which is a massive game. Roblox has taken off. It's kind of an app, but games within the game that people are creating all these different experiences.

I think the long-term runway of this is that user-generated content will become much more important. And the companies that can really evolve to empower creators will become the next $100 billion companies. That is going to be really exciting. And that's going to take course over many years. Right now, we're starting to see that take place in PC, console, and mobile. But, yeah, VR is starting to pick up. It still is very niche right now.

But it wouldn't surprise me -- right now, we see Oculus Quest, for example, the sales are accelerating more than it ever has before. Probably the next version of that in 2021 or so will be when we start to see VR go more mainstream. I bet the best metaverse-type players that are really capturing the creativity and minds of a new generation, like, what are all the possibilities that you can build in digital worlds? I think it's really going to take off. The idea of building digital economies and digital worlds, and being able to literally make money building digital things, doing digital work, all of these things that can take place in digital worlds. I think that can be a trend of the 2020s. I'm really excited to see how that goes.

Microsoft owns Minecraft. Epic Games owns Fortnite. Nobody owns Roblox yet. It'll be really interesting to see who probably acquires them. It could be someone like Google. It could be someone else. But that is a big trend I'm looking forward to.

Then, of course, as I mentioned before, seeing how traditional media reacts and starts entering this industry, and seeing how consolidation occurs from both big tech and big media, and what ripple effects it has for the industry, that will also be fascinating to watch. There's just so much going on. It's a massive industry, and no shortage of interesting trends.

Moser: It is. And when you think about that concept of the metaverse and the way that you can build on that concept, essentially it's endless. In theory, it is endless. You can go forever. And all it really takes is some creative mindsets to build cool stuff.

Bush: Yeah. Ready Player One, it was a pretty enlightening read, just like getting your mind spinning about what's possible. I think Snow Crash is another one. That was written in the '90s, and it's even more prescient, I think, in terms of how things have played out. But yeah, good science fiction can get you thinking about where the world is heading.

Moser: For sure. Well, at heart, we're stock guys, Aaron. I think a lot of our listeners are stock guys and gals, too. So let's wrap up this discussion today, let's leave our listeners with a couple of stocks that you'll be giving a little extra attention in 2020. Maybe a couple of ideas you think have potential for not just 2020, but for the years beyond as we do invest here at The Motley Fool.

Bush: Yeah. So I'm interested in Activision Blizzard. I think for a lot of investors, this was controversial because they've seen Activision go through a lot of problems, cultural problems. They had to sell off one of their biggest franchises, Destiny. Not all of their attempts with mobile and such have been successful. Esports, again, is overrated. You can create a checklist of reasons like why they're struggling and could be negative. But really, at the end of the day, what matters most is just great brands and great games.

And they have no shortage of outstanding brands. I think even if esports fades away for a while, their ability to take those brands to mobile, I think out of all the Western publishers, they'll be the smartest ones to do. I think that's what we've seen so far out of the legacy publishers. Call of Duty mobile is really just the first step. I think that will continue to improve. Diablo Immortals is their next game. But if you think about all the things they could do with World of Warcraft and Overwatch, and all of these different things, spinning up new types of Call of Duty games, I think their mobile upside is massive. So I'm really interested to see what they do there, despite all the risk and things that people would tell you to avoid.

Another example -- this is a company I want to learn more about -- is Sea Limited (NYSE:SE). This has been one of the best, might have been the best performer in the S&P 500 or so in 2019. The stock more than tripled last year. And it's because it's the company behind the game Free Fire, which I mentioned before, that has amassed over 450 million downloads. It's become a massive esport in both Southeast Asia and in Latin America. So, I'm curious to see what they do with that, if they're able to extend the lifetime and improve the monetization of that one game. I also want to see if they can make other games. But also, what's interesting about this company is that they own Shopee, which is one of the emerging e-commerce players in Southeast Asia. And, they own AirPay, which is an emerging payments company.

Moser: You know how I feel about payments.

Bush: I know, I know. They have an interesting mix of businesses. I feel ashamed that I didn't find them earlier. But when you see a company perform so well, and the whole idea of adding to winners and things like that, this is a company that is winning on every level. So it's a sign to me that I should probably take a deeper look. If they're on a tear right now, they're really onto something big, their $30 billion market cap or so could be a lot bigger. So I'm interested to learn more about Sea Limited.

Moser: All right. If you have any interest at all in the gaming industry, or if you are interested in expanding your circle of competence and learning about a new industry, an exciting and growing industry, you have to go check out. Check it out, Aaron Bush, thanks so much for joining us this week.

Bush: Thank you! This has been a lot of fun, Jamo.

Moser: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Today's show was produced by Austin Morgan. For Aaron Bush, I'm Jason Moser. Thanks for listening, and we'll see you next week.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.