Video gaming industry - bottom up analysis and product analysis

A foray into video gaming industry

As a past fervent gamer, I was particular interested in exploring gaming companies. Blizzard, Nintendo, Square Enix, Nexon, Electronic Arts are some of the prominent companies I have looked through on a deliberate basis. Due to my value investing approach, I was never able to find gaming companies with reasonable valuations from its PE, P/CF and free cash flow perspective. I have previously tried to research on Nexon after the release of Maple M and I find the CEO's narrative extremely compelling, as certain games exhibit the branding / franchise model often touted by Warren Buffet .Nonetheless, I lack the accounting understanding in invest in Japan equities, and the moat / stickiness of Nexon gaming franchise model. Personally, I find this video one of the most fundamentally rooted analysis of the gaming industry, and I will revisit the lessons I learnt from this CEO in this post.



 

How to avoid being the dumb money
1) Innovation and dare to fail must be rooted in the culture of the company. Not every game will be successful and good concepts does not necessary lead to commercial success.True successful game must be bold enough to venture into un-ventured  territory and truly original content.

Common Misconceptions














2) Jumping on new fads such as Virtual reality headsets does not necessary mean the company will be successful. Innovation does not stem from just producing a new experience but also coming up with intricate story lines and game play mechanics that will keep the player base engaged.

Just because you like to hear about it, and people like to talk about it, doesn't guarantee that the topic of discussion is relevant to the success of the product.



3) There is a significant difference in product life cycle and strategies of casual gaming compared to premium gaming brands.
Tencent casual gaming and Riot Gaming in the same company can have completely different nature of revenue streams
A fast follower (Copycat)strategy VS truly original content.
Engineering mass produced game like a winning formula VS Creating something truly original.
Racing to meet deadlines VS releasing a game only when is it fully ready

Different games has different revenue steams. SAAS subscription cash flow vs lumpy cyclical like  cash flows.

Product life cycle and cash flow













Product Strategy

















 4) Correlation does not necessary indicate causation. Certain companies may have impressive monetization models but that does not necessary mean those games will attract, and most importantly retain its player base. Ticking many check boxes does not mean that the game will be successful.















5) Leaky Bucket Model (Technology and gaming companies!)
What gets measured is what gets managed. Do not rely on App store ranking as they can be easily manipulated. Pump enough marketing dollars into a leaky bucket and it can get filled up fast. However, if it cannot retain its user base, the game will ultimately collapse. Life time value must exceed the effective cost of install. Do not over focus on launch / shipping dates as revenue growth driver and stock catalyst, but rather product life cycle to gauge its success.


















6) Financial Strength
Only invest in financially strong companies with games that has reasonable operating expenditure. Companies must have the financial strength to continually develop expansions sets, re-balancing the game-play with in game economy and content revisions / in game events. It should also have the political will to develop the next games if the present possibilities of its games are exhausted.

Age of Empires Online is one of the games that have a great franchise. However, due to poor balancing between the pay to win players and Free to pay players, it is unable to sustain its player base and most players left after the first 90 days. Without the financial power and will to continual develop its content and keep player base engaged, a successful franchise degenerated into a flop.

Nonetheless, overspending in larger companies does not necessary mean the game will be successful. Find a sustainable franchise (Incredible fun and unprecedented game-play) is far more important than massive marketing budgets





7) Client Feedback / Scuttle-bug analysis
Gaming forums, Twitch and reddit have open disclosure about what they like and don't like about the game, and whether is it sustainable.Games are about delivering experiences, and if it is fun, they will keep coming back. There is no definite formula for success as it is more of a art form.

There is possible implementation of technology such as Virtual Reality, voice recognition that can change the gaming experience to a different scope. It is very difficult to envision future games while only looking at the present. With increased computing power in mobile phones, there is large potential in porting strong desktop franchises into mobile experiences.

Machine learning (Dota 2) can innovate how games are played. They can observe statistics on delinquent gamer about to leave the game, and analyze and provide individualized  incentives to keep the gamer hooked into the ecosystem.


8) Flow and Satisfaction (Psychology elements in gaming experience)
Balance between Casual gaming and competitive gaming.
Balancing random elements and skill based elements.
Balance and nerfing overpowered characters / abilities / items and examining the meta-game
Balancing monetisation and free to play users.
Finding economists to create more complex in game economy (Steam - Greek Finance minister)

Meaningful work and clear goals
Clearly defined goals and immediate feedback / rewards / incentives.
Cooperation and interaction within communities

Matchmaking session to allow personalized intersection of difficulty with ability / skill level (Especially for PVP games like Dota 2, Hearthstone)

Interactive game-play and decision making vs passive absorbing of graphics and the narrative.
Non linear entertainment and creating your own story
















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