Game companies turn to tentpole franchises to reverse post-pandemic crisis
As the pandemic-induced growth of the video game industry dissipates, game companies are pinning their hopes on shiny new installments of tentpole franchises.
With consumers spending less time playing games than they were during the peak of COVID-19 lockdowns in 2020, the year-over-year growth rate of gaming content revenue has declined halving in 2021 and is expected to slow further this year, according to estimates from Kagan, a media research group at S&P Global Market Intelligence.
Despite slowing growth trends, analysts remain bullish on the industry’s ability to regain its luster thanks to the enduring strength of popular game franchises, many of which are poised to launch new installments both on dedicated and mobile gaming hardware in the near future.
“It was unrealistic to expect games to maintain the engagement they’ve seen during the pandemic,” said Michael Goodman, director of digital media strategies at Strategy Analytics. “On the other hand, a lot of the chaos caused by the pandemic has also started to subside, paving the way for businesses to start churning out new hits with minimal disruption.”
The woes of COVID-19
While the pandemic has resulted in record levels of in-game engagement, it has also caused severe workflow disruptions across most major studios, leading to longer development cycles and even delays for a slew of titles. large scope.
These disruptions also impacted major titles that managed to launch, including Activision Blizzard Inc.’s Call of Duty: Vanguard and Electronic Arts Inc.’s Battlefield 2042 franchises, they underperformed during the crucial period. celebrations.
As a result, Activision and EA missed analyst estimates in the March quarter. Activision Blizzard revenue for the March quarter was $1.48 billion, versus $1.80 billion according to S&P Capital IQ estimates. EA’s revenue for the quarter totaled $1.75 billion in the quarter, just below estimates of $1.77 billion. Take-Two Interactive Software Inc., which has suffered from a slew of delayed games since 2021, also missed analyst estimates on its earnings forecast for the coming quarters.
Another lingering issue game publishers are grappling with is the continued supply chain shortage that has crippled production of video game consoles, including Microsoft Corp’s Xbox Series X. and Sony Group Corp’s PlayStation 5. unable to get their hands on the devices, publishers continue to launch most of their titles on the latest generation Xbox and PlayStation consoles.
While this strategy will ensure that publishers’ games are accessible by a much more established install base, there are also downsides that could impact long-term sales, Kagan analyst Neil Barbour said.
“Without a healthy installed base for new consoles, developers will have to continue to heed older hardware, which will prevent them from fully leveraging the new power to roll out exciting new features and better graphics,” said Barbour. “It’s going to make consumers feel like they’re not getting their money’s worth, especially for these annualized deductibles.”
Despite the lack of current-gen hardware, things are looking more promising on the software side of the game, with development cycles back to normal in most parts of the world, Goodman said.
“With COVID hopefully in the rearview mirror now, studios can get back to operating at full capacity and focus on producing hits that aren’t constrained by work-from-home limitations,” Goodman said.
That sentiment was echoed by stock analysts, most of whom maintained their positive ratings on shares of the three major US publishers, even as shares of EA and Take-Two stumbled.
After its latest Call of Duty game failed to make a big splash in the market, Activision hopes to turn the tide this holiday season with the next installment, Modern Warfare 2. Benchmark analyst Mike Hickey, who maintained a $100 price target and “buy” rating on the company’s stock, Activision said may see growth in 2022 when the game launches.
Hickey also believes Microsoft’s impending acquisition of Activision has created a “valuation floor” for the games company. Additionally, if the U.S. Federal Trade Commission ends up rejecting the deal, Activision would still have a good year thanks to Modern Warfare 2 as well as its growing roster of mobile titles, the analyst added.
In mid-January, Microsoft agreed to acquire Activision Blizzard for $95.00 per share in cash, making it Microsoft’s largest acquisition ever by value. The deal is expected to close during Microsoft’s fiscal year ending June 30, 2023. Speculation is rife that regulators could target the deal.
EA’s pipeline for its 2023 fiscal year ending March 2023 also includes a lineup of heavy hitters, including a sequel to Star Wars: Jedi Fallen Order, a remake of cult-favorite horror title Dead Space, and new annual installments. in the best-selling FIFA franchise.
Earlier this month, EA announced that it was ending the nearly three-decade licensing agreement it had with FIFA. From 2023, the new installments of the football game will be called EA Sports FC. Analysts believe the rebranding won’t derail the game franchise’s market power.
“With a healthy balance sheet, consistent and strong free cash flow generation, and a stable of other healthy franchises already on hand, EA is fairly well set up to weather continued market volatility,” said analyst Clay Griffin. of Moffett Nathanson, upgrading the company’s stock. to a “buy” rating with a price target of $141.
MKM Partners analyst Eric Handler, who has a “buy” rating and $162 price target on EA, said investor sentiment has been “too negative” in recent years.
“The basic building blocks appear to be in place to better leverage and accelerate growth with the company’s sports franchises and other major brands over the next two years,” Handler said.
Take-Two is set to complete its acquisition of mobile game developer Zynga Inc. on June 23. Following the acquisition, Take-Two will inherit a collection of mobile titles, teams that know how to execute them, and capabilities that can cross paths. with theirs to do better in free titles, Griffin said.
“But the main attraction remains: Take-Two’s pipeline of upcoming games from its sizable IP portfolio,” Griffin said.
The company plans to launch 69 games by fiscal year 2025, including what is expected to be the next installment in its hit Grand Theft Auto franchise. Since its launch in 2013, Grand Theft Auto V has sold over 160 million units, making it one of the best-selling video games of all time.
“Grand Theft Auto is a gift that keeps on giving, and you can be sure the next game will be absolutely massive, so I wouldn’t bet against Take-Two anytime soon,” Goodman said.