The “Marvel Entertainment of Videogames” & One of the Rare Few Remaining AAA Studios in the World | H.E.R.O. Issue 21, 8 February 2021
It's bigger and more social than ever! At US$180 billion in revenue, videogames have grown exponentially to become a bigger moneymaker than the global movie and sports industries combined, evolving from being a fringe activity for teenagers into a mainstream form of entertainment as they become a gathering place for friends and families to stay in touch and have fun together during stressful times in the physical world.
During the week, Sony announced its highest-ever profit for the year ending March at US$10 billion, boosted by its subscription-based gaming services which have continued to be popular among gamers, especially PlayStation Plus, which pulls in monthly subscription revenue for its online multiplayer games. Subscribers of PS Plus have exceeded 47 million users by the end of December, increasing 22% from a year ago as the pandemic kept many at home. Digital downloads and add-on content revenue have also jumped. Sony had so far sold 4.5 million units of its latest console, PlayStation 5, which was released in November 2020 and a smash hit with gamers.
Notably, the value chain profits in gaming is noticeably shifting from giant publishers to top quality game developers - and there are increasingly fewer and fewer of those with the capabilities to produce AAA-quality game IP with good Metacritic ratings on an efficient schedule. And pouring money cannot give birth to quality and creativity, as even Google announced during the week that it is shutting down internal development for its Stadia, making the cloud-based game-streaming service entirely dependent on titles from other game developers and publishers.
This week, we highlight one of our portfolio companies, The "Marvel Entertainment of Videogames", which is up +8.1% during the week (1 to 5 Feb 2021). This rising dividend-yielding highly profitable and cashflow generative innovator, with operating profit margin of 23.6%, ROE of 29.9% and a strong balance sheet with net cash at 34.6% of total assets, has also compounded 560% in capital gains since its listing in May 2017 vs MSCI ACWI World index +43.5%. This innovator has also launched on 2 Feb 2012 its latest multi-award winning action-adventure game on Sony's PS5 with breath-taking next-gen experience that also utilizes NVIDIA's ray tracing technology, in which subscribers play the character of a female protagonist trying to save the world from a supernatural entity, being thrust into wild new situations while gaining new superhuman abilities.
Founded in August 1995 by members of demoscene group who created their first game in a founding team member's basement in Finland's Espoo’s city, this innovator is a globally successful videogame company known for story-driven and visually stunning cinematic console and computer action games featuring a strong iconic central character, all with cult following and loyal fan base and long-term hit potential. The company has evolved into a category-defining, creative super-developer in the fast-growing global gaming industry, and is considered the “Marvel Entertainment” with its game series based on one of its characters becoming a Hollywood movie, and a TV series based on another character is announced in September 2018. The company is also one of the handful of independent AAA studios in the world that you can count with your fingers, which also makes the company an attractive acquisition target for several players.
Its story-first approach to game development is something that the industry is sorely lacking, distinctively standing out from the usual mindless and soul-numbing mass games of large gaming studios in slaying and shooting monsters. Themes like "World War II, dragons, hardcore sci-fi, or women with tight leather outfits" are something the studio would avoid. The team also aimed for "movie realism", where real-world believability was important. The team usually took inspiration from movies, TV shows and books rather than videogames as they wanted to create something unique for the videogame industry. When they were developing games, they always began by creating the story, which informed and guided other aspects of development such as gameplay. For its first game franchise, the team used real-life photos for the game's texture, though this was initially met with heavy resistance by the artists. The designers travelled from Finland to New York to research the city and get ideas for environments. Accompanied by two former New York Police Department bodyguards, they took thousands of photographs for mapping. Elements commonly found in crime fiction and film noir were introduced into the game. All of the company's games have attracted a community of loyal players who are interested in story-driven action games and are willing to invest more in the game.
Notably, the company has built a portfolio of recognized, growing game brand franchises with long-engagement revenue opportunities with its loyal fan base in a “Connected Universe” of events and characters. Like Marvel with the creation and marketing of its superhero action characters into long-lasting brand franchises, this innovator creates long-engaging games in immersive and expanding worlds where each game and game world creates opportunities for expansions, sequels, and spin-offs. The company creates and owns brands that grow over time, and out of these brands, it aims to create hit games. Each brand and game stands on its own legs and connects to a wider universe. Shared universes will help developers tell better stories, and better stories make better games and profits. For instance, this has led to the partnership with Epic Games announced in March 2020 in a two-game publishing deal with plans for release in the next few years to result in the ultimate “Avengers Extravaganza” for its fans.
The company has learned the importance of sequels that are easier to develop and the success of games often better and more predictable. The company has successfully transform into the multi-project model, i.e. the ability to develop several high-quality games simultaneously, with the release of its female-protagonist game franchise, first published for Microsoft Windows, PlayStation 4 and Xbox One on August 27, 2019 and available for download by Sony PS Plus subscribers on 2 Feb 2012. The game offers a longer gaming experience than its previous games, in addition to which new free additional features as well as paid extensions (DLC – downloadable content) are being introduced to the game. This game franchise was very well received by critics and the game was awarded the “Critics’ Choice ”award at the 2019 Golden Joysticks, as well as 8 nominations at the Game Awards gala (including Game of the Year), the second highest of all nominated games.
Having completed the foundation of the multi-project model with each title having a shorter development cycle, which brings continuity, diversifies risks and increases the pace of game releases in the future, the company hits its tipping point in the business model in generating exponential growth in sales and profits in the coming years with new games and / or add-ons appearing every year. The value of the company in the eyes of potential partners has risen since the release of this game, a reference from the company for its ability to produce an AAA-quality game with good Metacritic ratings on an efficient 3-year schedule, which will further enhance the company’s negotiating position for possible release agreements for new game projects.
The company has developed its own game engine and game development tools for its titles, which brings scalability and competitive advantage, as well as lower the risk in needing to sell many units of games to cover development costs. It has invested a lot in motion capture and partnered with Nvidia to streamline the motion capture process. The company is also expanding into multiplayer and live games with the Unreal game engine developed by Epic Games. The game could be released by the end of 2021, or by 2022 at the latest.
Noticeably, value chain profits in gaming shifting from giant publishers to top quality game developers. Market trends (subscription-based models, cloud gaming, digital distribution and long-lasting gaming services) is favorable for game developers. Publishers have historically been in a strong position in the value chain as publishers have acted as gatekeepers between game developers and distributors. Console manufacturers are also in a strong value chain position in their own closed platforms. However, the situation is changing when competition between digital distributors, subscription-based business models, cloud gaming and F2P models are shaping the market.
The business models of gaming studios may change, but their share of the value chain are growing, as the need for quality gaming content will only be emphasized in the future as competition between different players and digital distribution platforms intensifies. This allows the company attractive offers for game publishing or exclusivity agreements. One trend in AAA games is that the games offer a good gaming experience for an even longer period of time. Thus, players will buy even fewer games, but spend more money on them in the form of various additional content. Competitively, this makes the market even more difficult, as only the best gaming studios will succeed – and become more valuable.
CEO Mr. V summed up: "We focused on console and PC games that offer longer-lasting gaming experiences while still staying true to our core strengths of memorable characters, deep stories and polished action gameplay. The games we have been developing have followed these principles in a way that makes them stand out in the market and allows the underlying gaming franchises expand further. We have purposefully built our world-class competences and developed in phases, the most recent one being our big transformation which started in 2016. We have transformed from a single project organisation into operating on a multi-project model, in which we have simultaneous game projects at different stages of development. Consumer demand and the overall video gaming market continue to grow, while our industry evolves with new gaming platforms as well as subscription and streaming services during the next years. Signing the two-project deal with Epic Games demonstrates that the platforms, services and publishers have an exceptionally strong demand for new, high quality games. However, due to the industry consolidation and the high entry barrier to AAA game development, the number of independent and distinguished AAA developers has been decreasing. Our company transformed to a well-functioning multi-project studio with very good timing, and our latest game franchise is a proof of that – there are numerous great opportunities out there for us."