Moore's Law is fundamental in the computing world. This generally accepted law states that the number of transistors (building blocks of a computer chip) that can be put economically in a computer chip approximately doubles every 18 months. This is the underlying reason why video games and consoles have advanced so quickly.
Chip companies' relentless pursuit of Moore's Law has led to an explosion in the amount of computing power that can be had for relatively little cost. To provide some perspective, the main processor inside the Microsoft Xbox One game console -- which combines eight processor cores, as well as a beefy graphics processing unit -- offers over one teraflop of computing performance. This is as much computing grunt as packed by 1997's fastest supercomputer, ASCI Red.
As Moore's Law drives substantial performance increases in everything from smartphones to game consoles, the game industry has never been more vibrant.
What are video games?
A video game is, according to Merriam-Webster, "an electronic game played by means of images on a video screen and often emphasizing fast action."
Though this definition is technically correct, video games are really forms of interactive entertainment that blend science, mathematics, music, art, and architecture to deliver unique and exciting experiences. In fact, many marquee video games rival even the best that Hollywood has to offer in terms of production value, with the recently released Grand Theft Auto V from Take-Two Interactive allegedly costing $266 million to develop and market.
What is the history of video games?
Though the beginnings of video games can be traced to the 1950s and 1960s, the industry as we know it today really began in earnest during the 1970s. Nutting Associates launched the very first commercial arcade game, known as Computer Space, in 1971. A year later, Atari launched the classic title Pong, now widely regarded as the first commercially successful arcade game.
The market for video games -- and the hardware they ran on -- grew and evolved rapidly. Early video games and home consoles shipped with a limited set of games programmed directly in the hardware. This meant that when customers bought a game system, it could run only those games that came as part of the system.
As general purpose microprocessors became viable for gaming console use, there was a fundamental paradigm shift. Instead of hard-coding the games onto the system, the system would feature a general purpose processor that could run any compatible game code. For these newer consoles, those programs would be introduced to the systems by way of a read-only memory fused to a cartridge.
Video games, however, didn't stop there. With the birth of the personal computer, games were no longer the exclusive domain of dedicated home consoles and arcade machines. Companies like id Software (responsible for genre-defining titles including Wolfenstein 3D, DOOM, and Quake) turned the gaming world upside down by showing that common PC hardware could handle cutting-edge games.
After DOOM, computers and consoles alike began to employ dedicated 3-D accelerator processors. These helped to take games to the next level visually, as dedicated 3-D processors could handle more sophisticated world and character detail. Additionally, with the graphics rendering moved away from the central processor and onto a dedicated graphics chip, the main processor was free to handle other tasks like more advanced artificial intelligence and physics.
As a product of all that advancement (driven by Moore's Law), we now have cutting-edge titles like Crysis 3, Battlefield 4, and many others that deliver phenomenal visual quality.
And the best part? It'll only get better from here.
How many video games are there?
Each year, many big-name titles are launched for the various game consoles and the PC. However, in recent years, mobile platforms such as smartphones and tablets have become powerful enough that they have gained real mind-share from developers large and small. NVIDIA, a leading vendor of graphics processors for PCs, says game developers today target mobile devices more than even game consoles (keep in mind, though, that what can pass as a mobile game is significantly less complex than what passes as a PC game).
The takeaway is this: there are lots of games, and that number will only grow as more gaming-capable devices reach consumers.
Why invest in video games?
Admittedly, gaming-related industries can be a bit difficult to invest in as entertainment is a very subjective thing and the performance of certain titles can be hard to predict. That said, companies such as Electronic Arts and Activision Blizzard have strong, established franchises. As long as the macroeconomic situation is good, and as long as the latest titles in these franchises are compelling, there's a real level of "predictability" to these companies' results (at least directionally).
For more risk-hungry investors, betting on small companies for which the success or failure of a single title can be a game changer or a deal breaker can be interesting, though difficult.
Investors can also look to companies such as Sony and Microsoft, which sell game consoles and collect a royalty per title sold. A caveat: Microsoft is large enough such that its Xbox console won't make or break its financial results, and even Sony has its fingers in enough pots that its PlayStation consoles don't drive the company's fate.
Finally, NVIDIA and Advanced Micro Devices -- which both provide dedicated PC graphics processors, while the latter provides the main brains for the major game consoles -- are also interesting ways to play the secular trends in gaming, though both have substantial businesses outside of gaming, as well.