In this episode of Industry Focus: Consumer Goods, Emily Flippen chats with gaming expert and Motley Fool advisor Aaron Bush about how the novel coronavirus has affected the gaming industry. Aaron provides a unique perspective on the gaming industry for both gamers and investors. They cover the latest trends, upcoming platforms, future technologies, and much more.

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This video was recorded on April 7, 2020.

Emily Flippen: It's Tuesday, April 7th, and I'm your host Emily Flippen. So, this is your Tuesday consumer goods focused episode of Industry Focus. And there's an industry that I really want to cover that I'm going to make the argument that can be seen as a consumer goods industry and that's really the gaming industry. So, I'm joined by our resident gaming expert, Motley Fool advisor, Aaron Bush. Aaron, thank you for joining me.

Aaron Bush: Thanks for having me. This will be fun.

Flippen: Yeah, I'm eager to have this conversation because the gaming industry has been so affected from the break of COVID-19. And I know that you and Jason met, I think it was the first-ever Industry Focus Wildcard Wednesday earlier this year. And you talked a little bit about the gaming industry and also your blog, Master the Meta. But I think it's fair to say that the gaming industry has probably changed a little bit since you guys talked.

Bush: [laughs] Yep. I think that's probably an understatement, but it's been a silver lining for the most part throughout this whole COVID-19 quarantine event that's going on.

Flippen: Yeah, so you made a really great post on Master the Meta where you got in-depth into some of the impacts that we've been seeing in the industry. But before we kick off the discussion, I do just want to highlight how refreshing Master the Meta has been. I know that this is a project that you started last year, and I'm a relatively recent subscriber myself, but I am really enjoying it, and I get the email updates. But I'm, both, a very, very casual gamer and an investor. So, it's really nice to read about the industry from both perspectives. And I'm kind of just personally curious, what got you started with Master the Meta and just the gaming industry?

Bush: Yeah. So, Master the Meta, it's not really about investing, it's more, like, my take on the business strategy of different companies. So, it still might be useful to some investors, but that's not really my intention. But I really made it because I wanted it in the first place. So, like, I was looking for someone, something that was covering the video game industry, regularly digging into what different companies are doing, what's going on in the world, different parts of the world. And I didn't really find anything that I liked, so I just decided to make it myself. And hopefully it's been useful to lots of different people out there.

But I decided to do it for that reason, but also, the video game industry is a lot bigger than people think. A lot of people are fond of saying, it's larger than the music and movie industries combined, and that's true, and it's growing even faster. But at the same time, even though it's big, there is, like, an attention gap where this industry doesn't get the same level of media attention that it deserves, but I firmly believe that that will change in time.

Plus, just as this industry becomes more relevant in pop culture, you know, big media companies, technology companies are going to get more involved. So, it really is an industry that is underfollowed, is going to get a lot bigger that I'm personally interested in and there just wasn't anything good enough out there that really served my interest. So, that's why I decided to jump and make Master the Meta in the first place.

Flippen: Well, I've been really enjoying reading it, and I'm going to kick off here with a really extremely unfairly broad question which was the center of, I think, your most recent article, if not your most recent last few articles on Master the Meta. And that is, how do you see COVID-19 impacting the gaming industry thus far?

Bush: Yeah, that is a big question. I would say on the consumption layer, it's breaking records. The concurrent player counts are way up across tons of different games, across tons of different platforms. Verizon was even noting that on their network gaming activity had increased 75% over the past month or so. Different networks are saying other similar things.

Also, concurrent viewer counts are way up on platforms like Twitch and YouTube Gaming and even esports is becoming more relevant than it has been in the past. And really, what's driving all of this is that essentially the only way to actually do something with friends, while everyone is remote is to play games. And so that's what millions and millions of people are doing, that's why [laughs] everyone staying home playing games is breaking records. That won't stay forever as people start going back to work, but it is changing behavior to some degree.

But I would also say that on the operating layer, though, it is more challenging for companies. Teams face the same challenges that everyone else in most other industries are facing too. Companies have to figure out how to work while remote, have to figure out how to develop and ship games when everybody is working differently, which is hard. Companies have to figure out what's going on in the advertising world as mobile games are trying to get downloads, and figuring out what is the customer acquisition cost that makes sense. How are lifetime values going to change? So, there are challenges there too.

And I think what we'll really see is that, even though on the consumption layer, again, like, games are breaking records, what's going on at the operating layer is going to lead to more game delays, slower content updates, probably continued supply chain challenges for a little while longer. Again, this stuff isn't permanent and we're only starting to see these things happening, but I think we'll see more of that.

So, I would say as a whole, it's a net positive for the gaming industry, just because of how consumption has trended higher, but there still are challenges when you look closer at the individual companies.

Flippen: Yeah, one of the things you mentioned was people using games as a way to connect with friends and family. Obviously, Zoom has been a hot company simply because people are using it more than ever to connect with people. But when you look at the gaming industry, as games continue to develop into the future, after COVID-19 is over, what does this put emphasis on. Is it just multiplayer functionality, VR, or something else entirely?

Bush: Yeah, so I would call out a few things. One, is just really the free-to-play element. I think that that will remain incredibly popular, it just lowers barriers to getting started. And it's also, just throughout a recession, it's a good value for the money. Cross-play is going to become the norm, I think. There's always been, kind of, like a divide between people on PlayStation can't play with people on Xbox, People on Xbox can't easily play with people on PC. And I think that that's going to change. And Fortnite was really the original catalyst where companies were missing out from, like, if they can't let people play together, then people just aren't going to be playing on their platform. But I think that's going to become much more the norm. And times like now show why that's important, when everyone with different devices wants to play together.

Also, I think, cloud services will have a place just from letting you play anywhere, you don't need expensive hardware. So, it's another way to lower barriers to getting started for lots of people to play together, but that will take some time to play out.

You mentioned virtual reality. I think that VR has a place. There's a big debate about how big VR is going to be? Is VR going to be as big as consoles or is it going to be as big as the mobile phone where billions of people have it? And I think it's going to fall somewhere in the middle, but it's going to take, probably, five more years for that to really play out. We're starting to see the first AAA VR games, but it's not really at a point where enough people own headsets and there aren't enough people putting heavy resources into developing those games for that suite, like, really move the needle for connecting with each other yet.

Flippen: I want to quickly go back to cloud gaming, and I realize I'm shooting myself in the foot here, because the last time you and I, Aaron, talked about cloud gaming, I think I said that Google Stadia, which is Google's initial attempt at cloud-based gaming, I think I had some positive things to say about it --

Bush: [laughs] Yeah, you were excited.

Flippen: [laughs] I'm still excited about the cloud gaming space. But I'm kind of interested about your perspectives on that. Clearly, people have not been spending a lot of time on Google Stadia during this outbreak. So, cloud gaming is not quite where it could be. But how do you see that developing in the future? Is that going to be a go-to for most people or is it just consoles.

Bush: I think it will have a place. And I like how Microsoft is approaching it, where they're sort of working on both consoles and cloud services, just almost as a way of even like hedging their own bets against the future. Consoles will remain important for a really long time, because that's where you get the most powerful gameplay, just having your own device right in front of you. But not everybody needs that. And that goes for, both, consoles connected to the TV and gaming PCs, which are also pretty expensive.

So, cloud gaming definitely has a place. It's just kind of a matter of when that will take off. I don't think it's ready yet. And part of why Google Stadia struggled was because they couldn't -- like, there's sort of like a chicken and egg problem where they couldn't win-over gamers, partially because the tech didn't work perfectly, but also because [laughs] there just wasn't enough content and not enough publishers were supporting Google Stadia for all the new games to be there. So, there's that.

And then also if the games aren't there then the consumers aren't there, if the consumers aren't there then publishers won't really want to waste resources on modifying their games to be played on Stadia. So, it's a two-way street. Also, the feature set wasn't really flushed out. So, there were a lot of problems with Stadia at the time. It still might make a comeback at some point, but by that time, Microsoft is going to be ramped up much more with the xCloud.

Amazon, is probably going to be coming out with their own cloud gaming platform. It's, right now, code-named Project Tempo. And Amazon is even going to be -- like, they're dedicating hundreds of millions of dollars to creating their own games too.

So, as you look at these tech companies, you really have to think about it as an ecosystem with cloud gaming at the center of it. It will have a place, but it's going to be pretty competitive and we're still a ways away from that actually going mainstream.

Flippen: So there clearly are some big companies that are trying to get into the gaming space in one form or another. You mentioned Microsoft, Amazon, Google [Alphabet], but one of the points that you made in your most recent Master the Meta post -- that I thought was really salient -- was the conclusion that big entertainment empires, and that doesn't mean Amazon, it means the movie industry or Disney, would need to eventually get into the video game space. I mean, how do these behemoths even get started doing that?

Bush: Yes. So, the problem is that they all have relied on IP licensing, which is fine, it just means that they make a little bit of money to have everybody else make games for them. But now that video games are so big and so relevant and growing, like, these companies don't want the most engaging, immersive way for people to engage with their brands to be owned and run by other people. So, a lot of these companies -- like, in the past -- and some of them like Warner Bros., have their own internal gaming studio. They tried internal development, but it's failed.

So, I think the way that they have to get started is through acquisitions and they have to be big acquisition, so that they can get large teams with proven track records, with the proper infrastructure, the right leadership that already have track records of making, of working and creating valuable IP, of working with IP like Star Wars or Marvel, things like that. So, I don't know, I don't really want to speculate on who would buy who.

If I had to name names, I would say, "Yeah, maybe Disney should look to acquire someone like EA," because EA has Madden and FIFA, could connect to ESPN. EA makes most of the Star Wars games. So, there could be some connection there. But there are other gaming companies like Take-Two, Red Dead Redemption, Grand Theft Auto, those are huge IPs that someone like Warner Bros. would be interested in owning.

And, yeah, I mean other things like Roblox is kind of interesting where it's a smaller company, maybe like a $4 billion company, private, but they essentially have a platform where anybody can build games and let anybody play them. And I think that type of thing which, Matthew Ball, who's a great writer in this space too on the internet, he kind of calls these the digital theme parks. And I think that's incredibly interesting when you think about Disney. Disney with their physical theme parks, with people are going to be spending more time in digital theme parks, how do they need to adjust their brands and their investments and their thinking over the long-term? And really the only way they can do this is through big acquisitions to get started, I think.

Flippen: You mentioned connections through companies and industries like ESPN. I know you've been a skeptic of the esports space, but surely COVID-19 has benefited that sector at least over the short-term, right?

Bush: Yeah, it definitely has benefited over the short-term for the most part. There are some parts that are still negative. Really to back up, I was skeptical of esports businesses, because unlike traditional sports where there's no one company that owns football or basketball. Games are owned by publishers here, they're owned by single entities who can turn the economics in their favor, and they're all doing that, which just leaves less profits for everyone else. So, the actual esports organizations, like, they tend to have raised a lot of money to not make that much money. And they are still all trying to compete with each other, so I was pretty convinced that we would see, like, a shakeout of some type where the weaker esports orgs fall out, the stronger get stronger; and we still may. But the acceleration of engagement with esports and the acceleration of esports legitimization, pro-athletes are now playing esports on ESPN, that will definitely make it easier for companies to raise money or at least delay the inevitable of that shakeout.

So, it definitely is a positive. It's what esports would have been in 2023 is now happening in 2020. So, it's just kind of like pulling the future forward faster. So, for the most part it definitely is a positive, but I would say, the events themselves, the physical events that people go to, those have been canceled still.

And the fact that esports are still hitting record engagement despite the fact that there are no physical events, to me, that really just shows that the physical events exist to juice the economics of something that could totally exist in its native digital form, which is fine, like, there still is a place for those physical events. But what's going on right now is really showing [laughs] what really matters. And with companies like Activision and the Call of Duty League or the Overwatch League trying to force city-based leagues with their own arenas and things into existence. Like, you can really just tell that it really is them forcing something more than what is natural, which is what we're seeing right now.

But esports as a whole, yeah, it still is exciting. It's going to be much, much bigger one day. It's going to be incredibly global, potentially more so than traditional sports. So, there still is a lot of long-term upside, but a lot of those issues at the micro level of just weak companies with not great economics and seeing some shakeout there, I still think that that will happen. It's just going to take a little bit longer to play out than it would have if there weren't tons of quarantining going on right now.

Flippen: And amid this quarantine that you kind of alluded to it earlier, is the potential for connection and an easier spread of video games through free-to-play, but at the same time we're seeing, or at least anecdotally I'm seeing, some success in platforms, in new game launches. So, how do you reconcile the free-to-play space with, I'm going to call it, the traditional Nintendo model, which is, send out a new console, sell some expensive video games for it, it has higher barriers to entry but potentially higher profitability for them, makes it more cyclical. I mean, where do you see the future going? Is it physical gaming, is it free-to-play or is there a future for both?

Bush: So, I think there is a future for a lot of things. This is a massive market, there are two billion gamers in the world or so. And obviously, like if you divide that up, there are some people that are super-hardcore gamers, there are some people that are super-casual gamers, there are some people that like playing on PCs, there are some people that like playing on their phones. So, there is room for lots of different winners that are focusing on different things. Really, just like the bottom-line is that more people are spending more money playing more games in more ways in more places [laughs] and it is just more, more, more.

So, yeah, I think people still will be buying great games. People will still be buying consoles. I think free-to-play is still going to be relevant for a really long time. Mobile gaming is the biggest and fastest-growing component of video games and most mobile games are free-to-play, most of the biggest esports are free-to-play. And companies are getting better at finding other ways to monetize, primarily, with, like, battle passes, season passes that offer special in-game content for those free-to-play games.

But, yeah, I think people will be buying VR headsets and VR games. Honestly, if a company makes an outstanding game, it will find an audience of some people who are interested. It's a really big world out there, but, yeah, I'm probably, out of all of that, I'm still most bullish on the free-to-play games, especially right now, just where the quarantine, specifically, people are losing their jobs, just the amount of money that people want to spend is decreasing. And this recession, as happens in all recessions.

And gaming, originally, is a tremendous value for what you pay. If you pay $50, $60 for a game that you put hundreds of hours into, that's an outstanding deal compared to movies or TV. And right now, at least, it's impossible to beat free. So, I do think gaming will stay relevant at the free layer, but there will always be people who buy great games too.

Flippen: So, I guess the last question I have for you before we head off is, do you see any -- and this is, again, a big question, [laughs] I apologize, but any sustainable changes in gaming consumption or habits that once we all go back to work after the COVID-19 outbreak is yesterday's news, do you see any changes that are actually sustainable, that we're going to see persist after this or do we all go back to regular life?

Bush: Yeah, I do think that we will see some changes. Obviously, engagement will drop back off, just as people go back to their normal lives, because they're just not sitting at home anymore with their consoles or PCs, but yeah, definitely, remnants of what's going on right now will live on. There are new console owners, people who bought new devices, who will continue playing on them. A ton of gaming groups, people playing together have formed, those people will still continue to play together. And, yeah, at least tens of thousands of people just started watching esports and several of those will stick with it.

But all of that said, I do think that video games are just going to become more relevant. Pop culture has accelerated its adoption of thinking about incorporating video games into the broader narrative. But thinking even bigger picture than that, I think that what is fascinating is the idea of the metaverse. And we've talked about this a little bit. And really just to define that, that means that in the future, people will spend more time in digital worlds. And other trends, like, augmented reality, virtual reality, crypto, 5G, in my mind, those are really all just building blocks that make the metaverse or the next evolution of the internet possible.

Over the next decades, people will be spending more time in digital worlds through more immersive devices and for more reasons: to work, to learn, to play. And that they'll definitely take time to play out, but the first iterations of that metaverse concept are video games. And it still is the only way, as I mentioned earlier, to actually do things with people who are far away. Games on platforms like Roblox and Fortnite, to a lesser extent, are making it easier for anybody to build and own experiences in digital worlds. And, yeah, I mean we'll see how digital economies, with crypto and cloud features with cloud gaming, can make even more possible.

So, all that said, yeah, habits are changing because of quarantining, but we're still, in my mind at least, just at the tip of the iceberg for how behaviors will shift over time. This has accelerated the future in some ways, but the future here and how it connects to other technologies and how video games are really just the beginning of broader changes for other industries, that's why I think this industry is so fun and meaningful to follow.

So, hopefully that answers your question a little bit.

Flippen: Yeah, it does, Aaron, thank you so much for taking the time out of your day and, yeah, teaching me a lot of things about gaming. Maybe I can not be a casual gamer one day, [laughs] maybe I can say I'm a gamer without all the caveats.

Bush: Well, I'm sure you're putting a bunch of hours into Animal Crossing, though, right?

Flippen: [laughs] I may be playing way more Animal Crossing. I also just downloaded the reboot of Mount & Blade, so that might be my night tonight.

Bush: Awesome! Yeah, that game looks pretty fun.

Flippen: Well, Aaron, thank you, again, for coming. And I do want to say, for everybody listening out there, if they're interested in reading more of your stuff, I mean, this podcast, for as short as it is, really didn't give nearly as much depth or insight as I know that you have on your website. So, if anybody is interested in reading more or learning more, you can always go to masterthemeta.com, I think that's it, right, Aaron?

Bush: Yeah, you nailed it. And thanks so much, Emily.

Flippen: Yeah, thanks again for coming.

Listeners that does it for this episode of Industry Focus. If you have any questions or just want to reach out, you can always shoot us an email at IndustryFocus@Fool.com or tweet us @MFIndustryFocus.

As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear.

Thanks to Austin Morgan for his work behind the screen today. For Aaron Bush, I'm Emily Flippen, thanks for listening and Fool on!