Video game sector: attractive investments but with a need for active engagement
The Janus Henderson Global Technology team has invested in a number of video game developers and publishers (including Activision Blizzard, Tencent and Electronic Arts) in recent years. The team is attracted by the growing ubiquity of gaming as an entertainment form, driven by a strong demographic tailwind, as well as the diversity of gamers in the millennial generation. Strong player engagement with games, the importance of content, higher-margin digital distribution, the opportunity in mobile gaming, increasing monetisation of time spent on games and the improved management of video game stock – as well as an increasing focus on a smaller number of hit franchises – has enhanced the industry’s attractiveness to investors. As part of a wider focus on the sustainable growth of our investments, however, we are actively engaged with these companies, given some of the issues facing the industry.
Sustainable growth: preserving digital health will preserve long-term profits
The video game industry has enjoyed phenomenal growth over the years, evolving from the PC era, through console, to today’s thriving mobile games ecosystem. Video games have also become a key entertainment medium for younger demographics via the games themselves as well as by watching other gamers play via streaming platforms such as Twitch. This has exacerbated wider, longer-term concerns about excessive screen time, violence and questionable monetisation tactics, including ‘loot boxes’ and ‘play-to-win’, which encourage gambling and addiction. While the vast majority of gamers continue to play video games in a responsible way, there is a minority at risk. This led the World Health Organisation to list ‘gaming disorder’ as a mental health condition for the first time last year, defining it as a pattern of persistent or recurrent gaming behaviour so severe that it takes “precedence over other life interests". The longer-term sustainable growth of the video game industry requires an appreciation of the risks related to digital health.
Active engagement: ensuring portfolio companies make the right choices for the long term
The video game industry is highly successful and profitable, but to sustain this in the longer term, video game companies must be responsible stewards of their industry. Otherwise, they run the risk of negative media coverage, parental and gamer backlash and ultimately regulation. Over the years, the companies we invest in have demonstrated a willingness to respond to these challenges, for instance implementing age restrictions on games and limiting playing time for minors. As investors, we continue to actively engage with our investee companies to ensure that they are making the right choices to sustain longer-term growth and profits in a fast-evolving industry. This also forms a core part of our formal investment process in assessing growth prospects and risk.
We were one of the first asset managers to talk to industry management about the social impact of their products. As part of our ongoing active engagement and due diligence with Activision Blizzard, we have discussed the company’s philosophy on consumer digital wellbeing and how that is integrated into games as part of our assessment of the quality of its franchise. Taking this further, we have engaged on the culture and compensation structures of its in-house studios, and what types of overarching central direction exists in terms of design framework to ensure company-wide adherence. We have also looked into the types of telemetry the company gathers from its games and whether or not there are mechanisms that would trigger an action if problematic behaviour was identified. Finally, we have probed its monetisation strategies and actively argued for better practices; again to promote sustainable growth and to reduce risk.
In China, regulation has been more austere. Game approvals were frozen in early 2018 as part of a wider ministerial restructuring and the government announced policies to combat excessive game playing by minors, which it believed in some cases was resulting in social breakdown and health issues like myopia. New games are now screened more stringently for inappropriate content. In response, Tencent has tightened its existing restrictions on game time for minors as well as introducing national ID registration to ensure enforcement. We have actively engaged with the company to encourage it to be more proactive on these issues, and to look beyond minors to gaming addiction in adults given the significant amount of time and money Chinese smartphone users spend playing games. We believe this will help strengthen Tencent’s long-term gaming outlook and reduce regulatory risk.
Virtuous cycle: better companies, better investments, better world
This is an ongoing process. As stewards of client capital, our identification of these wider issues and our active engagement creates a virtuous cycle of ensuring our investee companies are proactive in addressing wider industry concerns. This in turn promotes longer-term sustainable growth and reduces the risk of regulation and other challenges to a company’s earnings power; making for better investments. Our partnership with clients and investee companies in this area can help deliver superior risk-adjusted returns with the additional benefit of having a positive impact on the world.
Loot box: a virtual item that can be purchased or won and which can be redeemed to receive a randomised selection of further virtual items, such as customisation options for a player's character.
Pay-to-win: games in which players pay for items and upgrades, or certain mechanics to gain an advantage.