Video games: developers need to level up

Like their customers, video game companies are looking to power up.

After two years of coronavirus pandemic-fuelled growth, the industry hit a slowdown last year as people returned to work or school. Overall spending on video games fell 4.3 per cent in 2022 to $184.4bn, according to gaming data company Newzoo. Results from big, established video game companies have fanned fears that the downturn could continue this year.

Both Electronic Arts and Take-Two Interactive Software reported results below Wall Street expectations. Full-year sales and profit fell at Call of Duty game maker Activision Blizzard. Microsoft, which seeks regulatory approval to buy Activision, said revenue at its Xbox content and services division dropped 12 per cent in the latest quarter.

Valuations have fallen accordingly. The price-to-forward earnings multiples for EA, Take-Two and Activision are all below their five-year averages. Even Roblox, the company behind the hugely popular gaming platform that allows kids to build their own games and virtual worlds, trades at just 12 times revenue, compared to 50 times 20 months ago.

A slate of high-profile releases could help the industry unlock new levels of growth this year. Even so, not everyone will be able to win. Take-Two, for example, is behind the hugely successful Grand Theft Auto franchise. But there is no official release date yet on the next instalment of the series. Meanwhile, its acquisition of Zynga, the mobile games company behind FarmVille last year, looks increasingly ill-timed.

Mobile gaming depends on the advertising industry. Apple’s privacy changes have made it harder for advertisers to gauge the effectiveness of their campaigns, prompting cutbacks in spending.

For investors, game publishers focused on community building remain a better bet than those whose fortunes are tied to one or two blockbuster titles. Roblox, whose games engine also functions as a social network, fits the bill.