In today’s Exponential Investor…
- US$7.5 billion for some video games?
- A Japanese alliance?
- Looking where others aren’t
Exactly this time last week I wrote to you about the size and scale of the video game industry.
Today gaming companies have become enormous, giants of industry. Activision Blizzard (NASDAQ:ATVI) ($64 billion) and Electronic Arts (NASDAQ:EA) ($41 billion) are just two titans of gaming. King Digital Entertainment was another, but Activision snaffled them up a few years ago for about $5.9 billion.
Zynga (NASDAQ:ZNGA) is another with a current market cap over $10 billion.
Another and arguably one of the most powerful game companies today is Epic Games. It’s the creator of the juggernaut game Fortnite. It’s estimated to be worth about $17.3 billion.
You can read the full piece here if you missed any of it. I suggest you do read it, because what’s happening in the game developer and publishing industry right now is huge.
And it’s going to have a ripple effect that could open a short-term window of opportunity for switched-on investors.
We’re on the brink of a new gaming war that could see game stocks shoot higher and then ultimately end up under the control of what we know as “the big two”, Sony and Microsoft.
There’s just one thing investors need to figure out – what’s the hot property and what’s not.
Slaying demons or stealing cars?
This week Microsoft, the manufacturer of the Xbox and owner of game developers such as 343 Industries, Turn10, Rare, Obsidian and The Coalition, made a huge announcement.
This announcement was the US$7.5 billion acquisition of ZeniMax Media. That’s a lot of cash (and yes, it’s US$7.5 billion in cash) for a company most people have never heard of.
But ZeniMax is the parent company of publisher Bethesda Softworks and game developers such as Bethesda, id Software and Arkane Studios.
The current roster of games that sits under ZeniMax’s umbrella include,
- The Elder Scrolls
- The Elder Scrolls Online
There are more, but some of those are the biggest franchise names in gaming history.
Now, they all belong to Microsoft for the bargain basement price of US$7.5 billion.
There’s no doubt this will have sent the proverbial rocket up the backside of Sony. I also suspect it’s put all game publishers and developers on notice that at the right price, the “big two” are prepared to pay for the best in gaming.
Not long after the announcement on Monday, Rockstar and Konami started trending online. The view being that if Microsoft was willing to cough up US$7.5 billion for ZeniMax, then perhaps Sony should get the chequebook out and start talks with Take-Two (TTWO) or Konami Holdings (LSE:KNM).
Take-Two is the really interesting play here. You see Take-Two is a giant in its own right, and for good reason.
Take-Two owns Rockstar Games and 2K. Rockstar is in the same ilk as Bethesda. It’s a massively successful studio with games (and game franchises) under its hood including,
- Red Dead Redemption
- Grand Theft Auto
- Midnight Club
- Max Payne.
Estimates are that the lifetime revenues of the Grand Theft Auto franchise alone are up around (but likely now in excess of) US$10 billion. That makes it easily one of the most successful franchises ever. And more successful than any of the games that ZeniMax has in its roster.
Add to the mix the huge success of Red Dead Redemption and Rockstar alone, you’ve got to consider it would be worth more than the US$7.5 billion that Microsoft paid for ZeniMax.
Then there’s the 2K company. It’s more known for sports games from global leagues like the NBA and PGA Tour. But also from the WWE. Titles like NBA2K, WWE2K and PGA Tour 2K are commonplace every year from 2K games.
And it’s also got the massive Borderlands franchise too.
Take-Two trades on the Nasdaq and has a current market cap of around US$18.7 billion. Does that make Take-Two fair value or perhaps a take-over target now that Bethesda has been snapped up by Microsoft?
Then there’s Konami Holdings. Konami is listed on multiple markets – primarily Japan but it also has a dual listing here in the UK. Konami is a name that’s been around since I was first playing video games.
Most notably for me, I recall Konami’s success with Teenage Mutant Ninja Turtles, Teenage Mutant Ninja Turtles: Turtles in Time and Simpsons games for the NES, Super NES and arcades.
In the 90s Konami was huge. Dance Dance Revolution was pioneering. It was everywhere and is one of the most successful arcade franchises in history. In fact, it’s still going 22 years after its initial release.
And Konami is still huge today. It still makes arcade games and video games. Its current big-name game titles include Castlevania, Yu-Gi-Oh!, Metal Gear and Pro Evolution Soccer (PES).
PES is one of the most successful games of all time as well. Its lifetime revenues put its franchise up and over US$6 billion. It’s the second most successful sports game franchise ever, only behind the FIFA games which help make EA Games so huge.
Konami though compared to its peers is relatively small. With a market cap around £4.7 billion, considering its history, its current titles and arcade business, Konami could actually present a compelling case for the likes of Sony or Microsoft to come along and swoop over.
As Konami is Japanese in origins, it does make a more aligned play perhaps for its Japanese brethren, Sony. But my take is that neither Take-Two or Konami is the one Sony (or Microsoft) should be looking at.
And it all comes down to a world-changing game released in 1987.
Sony’s Final Fantasy?
On 18 December 1987, a company called Square releases a game for the Nintendo Entertainment System (the Famicom in Japan).
That game is Final Fantasy, a sci-fi, fantasy role-playing-game (RPG). Since its release 33 years ago, the Final Fantasy franchise has gone on to deliver more than US$11 billion in revenue.
One of its most successful titles under the franchise, Final Fantasy VII, was the second biggest selling game of all time on the original PlayStation, shifting over 10 million copies.
Final Fantasy VIII wasn’t far behind with over 8.6 million, making it the fourth highest selling game on the original PlayStation.
Final Fantasy X would become the fifth highest selling game and Final Fantasy XII the eight highest selling game on the PlayStation 2.
Final Fantasy XIII would be the 18th highest selling game on the PlayStation 3.
Final Fantasy VII (the remake) would be the 11th highest selling game and Final Fantasy XV the 16th highest selling game on the most recent PlayStation 4.
In short, since home game consoles hit the market in the 80s, and since its release, Final Fantasy and subsequent iterations of it have been some of the highest selling games across all consoles.
It has a widespread, incredibly loyal and devoted fan base that will continue to eat up titles called Final Fantasy – even if some of them are utter rubbish, which a number of them have been.
Next to come is Final Fantasy XVI which will be an exclusive title for the PlayStation 5.
It could prove to be the biggest and best of the whole franchise yet.
Square, which made the original Final Fantasy, is now Square Enix (TYO:9684). It trades on the Tokyo Stock Exchange with a market cap of around £6 billion.
Its announcement made just last week about FFXIV being a PlayStation exclusive no doubt will have an impact on console sales – and may have even been the motivating straw that broke the camel’s back, pushing Microsoft to finalise the ZeniMax deal.
For me, Square Enix is the one that really makes sense for Sony to completely absorb. Sony had a stake in Square Enix previously. But at the time, Sony was battling more than it is now.
With Sony on the hard turnaround and Square Enix trading with a rough market cap of around £6 billion, I think if we’re about to see consolidation in the game industry, that’s the one I’d be targeting if I was Sony.
Take-Two is perhaps a little pricey, and would take a big coup to swoop in and take over. Konami, while there’s great history there and it’s relatively cheap, I don’t think has the mega-name titles it needs.
Square Enix has the pedigree, the mega-name titles and the value that I think puts it in the sights of the big players.
Watch this space.
Editor, Exponential Investor