Leading game companies reported a significant increase in engagement during the most recent quarter with people staying home amid the COVID-19 pandemic. Take-Two Interactive (NASDAQ:TTWO) called its engagement levels "exceptional" as GAAP revenue and earnings climbed 16% and 21%, respectively, for fiscal 2020. 

However, Take-Two is not forecasting any continued strength in player engagement beyond the fiscal first quarter, since no one knows how long people will keep playing video games at these elevated levels once the economy fully reopens.

One analyst asked management during the May 20 conference call about the recent engagement trend and how sustainable it is. CEO Strauss Zelnick pointed to a recent study by Activate, a media consulting firm, that shows time spent with interactive entertainment could grow faster than time on linear forms of entertainment, such as movies and TV, in a post-COVID-19 world.

A man sitting on the floor with a video game controller.

Image source: Getty Images.

Time spent playing video games is way up

Last quarter, Take-Two reported that recurrent consumer spending (or in-game spending) made up 61% of net bookings, growing an impressive 47% year over year. This was driven by outperformance in Grand Theft Auto Online, NBA 2K20, Red Dead Online, Borderlands 3, and Social Point's mobile games, including Monster Legends and Dragon City

Activate's research sheds light on why recurrent consumer spending was so high. The time spent in video games across the industry increased 39% during the shelter-in-place period. But video games trailed the growth in linear entertainment, where time spent increased 43%.

It's expected that engagement with video games would still trail watching movies and TV shows. Nielsen's Games 360 U.S. Report for 2018 showed that people who play video games spent 23% of their leisure time watching TV and movies compared to just 11% playing video games or watching esports content. 

But here's the most important finding of Activate's research that Zelnick referenced. The study shows that once the COVID-19 pandemic is over, time spent in video games could decelerate to a growth rate of 14%, but that is higher than the expected rate for linear entertainment of 8%. 

Zelnick called the shift toward video games a "sea change" in the interactive entertainment industry. During the call, he explained that during the pandemic, former players returned to gaming and new people started to play too: 

And they realized not only it's beautiful, not only it's engaging, not only is it fun and potentially competitive depending on the game, not only are they great stories and characters, but you can also be engaged with friends and communities all around the world.

This comment summed up the main reasons why the amount of money spent on video games has doubled since 2012. The reference to the "beautiful" visuals is spot on. A game like Red Dead Redemption 2 is a great example. The game has striking graphics fidelity, which can be enough on its own to attract players. The game has sold 30 million units since its launch in the fall of 2018. 

A character from Take-Two's Red Dead Redemption video game riding a horse through an old western town.

Screenshot from Red Dead Redemption 2. Image source: Rockstargames.com.

The other factor Zelnick mentioned that will continue to drive the growth in the industry is the social connection during gameplay. Grand Theft Auto V has sold 130 million units since 2013 and continues to be one of Take-Two's top moneymaking titles. Grand Theft Auto V's success is largely based on the multiplayer mode, Grand Theft Auto Online, which serves as a virtual sandbox for players to complete missions together. Take-Two's Rockstar Games, the creator of the Grand Theft Auto franchise, continues to release new content for the game, which has kept it a fresh gaming experience for six years -- an eternity in the gaming industry. 

Looking ahead

Take-Two has a bright future with the deepest pipeline in its history. Management announced as many as 93 new titles in various stages of development. The releases on tap this summer are Disintegration, a new science-fiction shooter; the Mafia: Trilogy remake; and PGA Tour 2K20

As stores reopen and people return to a normal routine, the next quarter will tell us more about engagement in video games. But if the findings of the Activate study prove true, it would just provide a big tailwind to what should already be a promising decade ahead for Take-Two.