Earnings wrap-up: The gaming industry buckles down for a year of uncertainty

The key numbers:

• After a two-year-long pandemic-fueled boom, the gaming industry returned to Earth in 2022. Last year, the global games market generated $184.4 billion in revenue, declining by 4.3 percent year-over-year, according to Newzoo’s 2022 Global Games Market Report.
• This decline was reflected in the numbers reported by many of the major gaming companies for the past quarter. Nintendo’s net profits fell by 5.8 percent; Ubisoft cut its full-year revenue target following disappointing sales in 2022; and Electronic Arts reported a 7.1 percent net income decline, among other examples.
• Not all the numbers coming out of the gaming industry are doom and gloom, however. Activision Blizzard reported that its revenues were up by 8 percent — despite an overall decline in the company’s adjusted earnings.

Microsoft’s acquisition of Activision Blizzard is in jeopardy

Regulators in the United States, United Kingdom and Europe have all expressed concerns about the legality of Microsoft’s planned acquisition of Activision Blizzard, which the big tech company announced on January 18, 2022. With the deal hanging in the balance, Activision Blizzard declined to hold an earnings conference call or issue an earnings presentation providing detailed information about its financial performance in Q4 2022.

While the acquisition deal appears to be in peril, Activision Blizzard is still projecting confidence that it will be able to find a path forward with both Microsoft and the pertinent regulating bodies — at least, according to the game developer’s official messaging around its Q4 2022 results: “The two parties are continuing to engage with regulators reviewing the transaction and are working toward closing it in Microsoft’s fiscal year ending June 30 2023.”

Executives throughout the gaming industry are watching the Microsoft–Activision Blizzard deal with great interest — because if it falls through, its failure could have significant implications for other M&A deals in the gaming and esports space. As gaming companies feel increased pressure from investors and the recession heats up, M&A activity is likely to ramp up across all facets of the industry.

Sony’s numbers reflect changing business models

Sony’s Q3 2022 earnings call was the definition of a mixed bag. On one hand, the company enjoyed its biggest quarter for sales since the release of the PlayStation 5 in November 2020. On the other hand, Sony’s income before income taxes actually decreased by 63 billion yen year over year. These lopsided numbers show how Sony’s dependence on hardware sales could come around to bite the Japanese tech giant as gamers’ consumption habits continue to evolve. 

These days, as free-to-play and live service games continue to increase their market share, a gaming business predicated on sales of gaming hardware or premium console games is starting to feel increasingly out of date. Executives at Sony and beyond have taken note and are beginning to stress their efforts to take advantage of these newer business models. 

“We are focusing our R&D allocation towards more of our biggest IPs — and live-service types of games,” said Ubisoft CFO Frederick Duguet during his company’s Q3 2022 earnings call on February 16. “And that’s why we anticipate that, behind this strong growth in the coming years, behind the very rich lineup, we will get back to about 20 percent operating margin in the medium term.”

Nintendo has officially joined the IP adaptation party

Despite a reported 20 percent decline in console sales, Nintendo is confident in its future — and the Japanese gaming giant isn’t afraid to show it, announcing a 10 percent pay raise for its developers during its February 7 earnings call. 

It’s understandable that Nintendo is feeling good about the future. After all, the company has unlocked a brand-new revenue stream over the past couple of years: intellectual property adaptation.

“By creating opportunities for consumers to encounter Nintendo topics in areas outside of the dedicated video game platform, we aim to maintain the overall momentum of our business,” said Nintendo president Shuntaro Furukawa during the company’s February 7 earnings call.

After spending years avoiding adapting its wildly popular IPs, such as “Super Mario Bros.” and “The Legend of Zelda,” Nintendo went all-in in 2022, launching a dedicated film and television division in July. With the April 7 release of “The Super Mario Bros. Movie” growing near, Nintendo is leaning further into IP adaptation with brand tie-ins such as the new Super Nintendo World at Universal Studios Hollywood.

“Gaming companies are sitting on a tremendous amount of valuable IP,” said Tejas Dessai, a research analyst at Global X ETFs. “At the same time, we’re seeing a massive democratization in the Hollywood business model, with Netflix and a lot of buyers out there for good IP.”

Netflix leans further into gaming

Indeed, as gaming has ascended to become a significant pillar of popular culture, Netflix has taken note — and taken action. In addition to licensing popular gaming IPs such as “League of Legends” for original content, Netflix started serving games directly within its streaming platform in 2022. While Netflix executives mostly focused on other areas of the business during the company’s January 19 earnings call, the company’s growing role as a gaming platform came up several times, making it clear that games are still top-of-mind for Netflix leaders such as COO and CPO Gregory Peters.

“There’s not a lot of pivots away from a traditional legacy business model that what we have to go figure out,” Peters said during the call. “We’re planting some seeds, in terms of games and things like that, that if we execute well and we’re excited about the progress we’re seeing so far, will represent the future potential for us in terms of more profit opportunities.”

Esports is in trouble

Of course, this rundown would not be complete without acknowledging the treacherous waters in which the esports industry currently finds itself. Esports organizations have always been dependent on brand partnerships for the bulk of their revenue — but as the economic situation worsens, major brands are beginning to pull out of the space, making it imperative for esports companies to forge alternative pathways to profitability. So far, few have successfully done so.

Although the next earnings call for FaZe Clan, the largest and most prominent publicly traded esports org, is not until February 27, even a cursory look at the company’s financials shows just how difficult a position it — and the entire esports industry — is in. After experiencing an all-time high share price of $20 following its SPAC merger in July 2022, FaZe Clan stock currently sits at less than a dollar, and appears to be at risk of delisting due to Nasdaq rules requiring listings to trade for at least $1 per share.

In spite of these warning signs, some investors are still bullish on the long-term viability of the esports industry.

“We believe that esports is still towards the end of its early adopter sort of phase, where business models, various models of adoption, are actively being tested,” Global X ETFs’ Dessai said. “In this environment, any industry tends to be more volatile — but what’s really important to us is the expansion of audience, and almost 500 million people enjoyed some sort of esports-related entertainment event in 2022.”