I have had two very distinct ‘getting old’ moments in the last couple of weeks. The first was when I was introduced to a very nice and clearly very smart intern who is, it transpires, two years younger than my son… ouch. The second, however was when I was scrolling aimlessly on my iPad and I came across the latest trailer for Grand Theft Auto VI (GTA VI), which has now had its November launch date confirmed.
The trailer is, frankly, amazing, introducing the viewer to the incredibly realistic digital state of Leonida (based on Florida). Now, why would this make me feel old? Well I remember buying the first Grand Theft Auto game way back in 1997, almost a decade before our latest intern was even born.
To give you an idea of the likely scale of the upcoming launch of GTA VI, its predecessor, the imaginatively titled GTA V, pulled in $800m in its first 24 hours and had crossed the $1bn mark by day three. The more bullish analysts out there suggest that GTA VI could sell more than 25 million copies on launch day, but even if it ‘only’ sells 15 million at $80 it will clear $1bn in gross revenue on day one.
Bigger than Hollywood
For comparison, the biggest ever launch in cinema history to date was Avengers: Endgame, which brought in an estimated $300m globally on day one and hit the $1bn mark by day five. To be fair, comparing a cheaper, single-use cinema ticket to a premium upfront video game is a stretch, but that is exactly what makes the maths so staggering. The fact that gaming can command a luxury $80+ price tag and still mobilise a global audience to clear a billion dollars on day one reveals what could be described as ‘extreme’ pricing power. GTA VI is positioned to achieve in hours what Hollywood's greatest juggernaut needed a week to pull off.
The fact that gaming can command a luxury $80+ price tag and still mobilise a global audience to clear a billion dollars on day one reveals what could be described as ‘extreme’ pricing power.
These are clearly big numbers. My job is to process numbers like these and forecast in a cold, unemotional way, how much has been priced in to the relevant stock (in this case Take Two Interactive). But on this occasion, I couldn’t help but to look backwards at my own gaming journey and reflect on how that particular industry has changed.
The gaming industry has clearly come an awfully long way. I suspect most of us can remember the first time they played on some kind of console over the years, but it is the way the industry has evolved that reveals some of the most profound lessons about consumer behaviours, corporate moats and digital disruption.
I am slightly embarrassed to say that my introduction into this world began with the Sinclair ZX81 This wonderful piece of kit had exactly 1KB of memory and loaded data via a standard cassette player. If I compare the ZX81 to the latest bit of kit I recently purchased, the Apple MacBook Neo, my Neo contains exactly eight million times as much memory. The Neo is a fantastic product but not particularly high spec. If we were to introduce the latest PlayStation 5 Pro into this conversation, that eight million goes up to 18 million.
I then moved up to the Commodore 64 which was already a big step forward. First, the memory moved up from 1KB to a massive 64KB but what blew my and my brother’s minds at the time was that the games were in colour whereas the ZX81 could only output black text or shapes onto a white background. We played ‘The Way of the Exploding Fist’ for hours. “Fist” as we called it was, to my mind, the grandfather of the modern fighting game. I have played many of this type of game over the years, games like Mortal Kombat (which sounds particularly edgy for a fund manager from Chiswick) but it remains at the absolute peak of its popularity, having sold over 85 million copies with an estimated lifetime revenue of over $5bn.
But it was during my university years that the emotional hook of gaming truly got me. For my generation, the battleground wasn't an online multiplayer server, it was a cramped, messy student flat with four of us sitting around a Super Nintendo (SNES). We spent a scandalous amount of time locked in hyper-competitive, fiercely contested MarioKart tournaments. It was here that I learned two things. First, that I could skilfully drift around the track firing red shells at the princess in front of me, but second that gaming at its core isn’t just a technological experience, it can also be a very social one.
With each generation, gaming has crept further into the mainstream. It is now a long way from the bedroom floor and sits firmly in the centre of modern culture. What used to be seen as a bit of a sideshow is now an industry that comfortably generates more revenue than film and music combined.
With each generation, gaming has crept further into the mainstream.
Now, when I look at consumer discretionary stocks whilst doing my day job, I like companies that, among other things, have pricing power, high barriers to entry and a sticky, loyal customer base. Within the gaming sector we see two clear strategies that lean into this. They are both successful, but also completely different.
I would describe the first strategy as ‘the power of the vault’. While its main competitors have slugged it out in a brutal battle for hardware supremacy for the last 20 years, Nintendo chose a different path. Yes, they have hardware, but while consoles like the Wii and the Switch are great, they are, from a tech perspective, quite a way off the competition. Instead, Nintendo quickly realised the power of multigenerational intellectual property.
From bedrooms to boardrooms
I played MarioKart all those years ago and, when I became a parent, I continued to buy later versions of the game to play with my son. That moustachioed plumber made his first appearance in the 1981 arcade classic Donkey Kong, yet he has evolved into arguably the most valuable piece of intellectual property (IP) in entertainment history. For more than 40 years, Mario hasn't just survived the industry’s massive shifts he has steered them, serving as the creative ‘frontman’ for every major hardware leap Nintendo has made. Today, his value extends far beyond the console, he drives a massive ecosystem of merchandise, theme parks, and blockbuster movies. For Nintendo, Mario is the ultimate economic moat. He is that multi-generational anchor that keeps the company insulated from the volatile whims of the market.
At Nintendo, Mario has some pretty successful friends, notably Princess Zelda. The Zelda franchise has been astonishingly successful since its launch in the mid-1980s and is also extremely valuable, selling many millions of copies of the various Zelda titles. The other key IP in the Nintendo toolbox is its stake in Pokémon. Originally launched in Japan back in 1996 it has grown into an absolute financial titan. As of recent audited figures, Pokémon has generated a mind-boggling $150 billion in lifetime revenue, making it the single highest-grossing media franchise of all time, sitting comfortably ahead of both Star Wars and the Marvel Universe. Decades later, whether on mobile apps like Pokémon GO or through mainline console games, the Pokémon brand remains as valuable as ever.
By prioritising the shared human experience and protecting their legacy characters, Nintendo built the ultimate defensive moat. They don’t need to spend billions on creating a hyper realistic world like GTA VI; they own a little spot in their customers’ hearts, which cannot be replaced by processing power.
If Nintendo is built on nostalgia, the strategy at the other end of the industry and where GTA VI will live, is what one might describe as the ‘live service’ or perhaps ‘living micro economy’ path. This is where the initial game launch is just a gateway into a hopefully decades-long virtual world filled with internal economies, continuous updates and social spaces. This path, so successfully navigated by GTA V, has fundamentally rewritten the financial rules of the entertainment industry.
While I have already mentioned how successful the GTA V launch was, its true financial legacy came via its online multiplayer add-on, GTA Online, a platform that allowed the developers to take those loyal customers and continuously monetise them via in-game currency and additional subscription models like GTA+. It is these ‘add-ons’ that pull in close to half a billion dollars per year, more than a decade after launch. Crucially for Rockstar, the studio behind the franchise, this micro economy and the financial runway it provided allowed them to spend a decade perfecting the next instalment of the series without the boom or bust revenue pressures that plague the usual developer model.
Electronic Arts (EA) with its football franchise, now EA Sports FC (formerly the FIFA series) is arguably the undisputed king of this model. Rather than just treating the game as a simple online sports simulator, EA introduced the Ultimate Team mode where players pay the full retail price just to enter a digital ecosystem where they must buy randomised packs of player cards which allow them to build a competitive team. EA successfully manufactured a fluctuating digital transfer market complete with real-time player values, in-game inflation, and seasonal content ‘drops’. This dynamic adds a dimension that helps hook a segment of their players and persuades them to part with their cash in a fairly small, but regular way.
This dynamic adds a dimension that helps hook a segment of their players and persuades them to part with their cash in a fairly small, but regular way.
These examples illustrate the very significant shift in how value can be generated in gaming. The more traditional risk in entertainment is to find significant funding for a movie or a game, release it and then hope that it makes a profit before the hype fades. Now, if a player has spent three years building a digital world inside GTA online or within EA Sports FC, that player faces a very high psychological cost to leave that ecosystem for a competing game. And on top of this, having that fairly predictable cash flow, similar to the ‘software as a service’ model, replaces the old boom and bust cycle and can actively fund future research and development projects.
I have dwelt a little long on my past gaming journey, but what does the future look like? As with so many other areas today, the absolute wildcard on the radar is Generative AI. Right now, creating a massive game like GTA VI is an incredibly heavy financial grind. It has taken thousands of artists, programmers, and writers years to come up with something so vast and this whole approach is pushing to its absolute limits. AI could be about to change that significantly and crash the cost of creation. Instead of spending months designing and creating the game environment or writing baseline code, AI engines can spin much of it up in minutes. Suddenly, a nimble team of 50 developers will have the structural output capacity of a massive 500-person studio, opening the door for high-margin innovation from smaller indie outfits who used to be largely priced out of the market.
I suppose the most exciting shift driven by AI will be how it actually feels to play a game. In my day, those background characters, the non-playable characters (NPCs) as gamers call them, just stand there repeating pre-scripted dialog. In an AI-driven future, those characters will be hooked up to large language models and will actually feel alive with their own personalities, chatting with you fluently and in real time and remember how you treated them earlier in the game. The entire game world will organically bend and adapt to the choices you make in game. We will likely move away from buying a finished, static product off the shelf and step into an era of hyper-personalised and endlessly generated digital realities.
One last game
I don’t quite know how I feel about that; I am sure this newer world of gaming will never be far from controversy as it evolves, but the old gamer in me will be intrigued to see how it goes. I do, however, have a choice to make. My son has now left home and is making his way in the world, which is lovely to see. However, he was the excuse I used whenever I wanted to buy a new game. Come November, I have no such excuse. GTA VI will be everywhere in the coming months, on buses and taxis, all over social media – none of us will be able to avoid it. It will be easily the biggest launch in entertainment history.
My prime gaming years are behind me, but while I will deny it to myself right up to launch day, and my wife will roll her eyes and judge me, I just know I will buy the game, I won’t be able to resist… but just for professional reasons, of course!
For professional investors only. This material is not suitable for a retail audience. Capital at risk. This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.
