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  • Industry spotlight
  • gaming

Why is mobile the next big thing in gaming?

The pandemic was a bonanza for video game developers, as people in lockdown turned to gaming to while away the time. This triggered a surge in downloads of mobile games that many are expecting to persist indefinitely.

  • Microsoft wants to build out Xbox’s presence in the mobile gaming market.
  • Anthony Ginsberg, CEO of GinsGlobal Index Funds, believes the greater sector could grow to five times the size of Hollywood.
  • The VanEck Video Gaming and Esports ETF is up 15.6% over the past six months.

The global proliferation of smartphones has been a bonanza for gaming.

Mobile is expected to generate more than half of all revenue in the industry by 2030, according to GlobalData research published last September. The market will be driven by cloud gaming, which essentially means games can be hosted and played in the cloud, without needing to download them to a device.

While cloud mobile gaming is still in its nascent stage, a number of big hitters have recognised the opportunity.

Japanese gaming giant Sega Sammy Holdings [6460.T] announced in April that it was acquiring Rovio [ROVIO.HE], the developer of the hugely popular Angry Bird mobile games, for €706m.

“The mobile gaming market has especially high potential, and it has been Sega’s long-term goal to accelerate its expansion in this field,” declared CEO Haruki Satomi in a statement.

Then there’s Microsoft’s [MSFT] attempt to buy Activision Blizzard [ATVI] for $69bn.

Speaking on The Verge’s Decoder podcast last November, Phil Spencer, CEO of Microsoft Gaming, explained that the deal is about mobile gaming, not its Call of Duty franchise.

“It’s critical that if you’re trying to run an at-scale global gaming business, you meet your customers where they want to play, and mobile is more and more that place,” said Spencer.

“Mobile is a place where if we don’t gain relevancy as a gaming brand, over time the business will become untenable,” he added.

Microsoft-Activision deal in limbo

However, there are big question marks over the Microsoft-Activision deal. While it was approved by China, the EU and Korea in May, it has been rejected by the UK, and the US Federal Trade Commission (FTC) filed a lawsuit to block it in December of last year.

In its reasoning for rejecting the deal, the UK’s regulator, the Competition and Markets Authority (CMA), argued that Microsoft’s plans to enter mobile gaming “were far from certain, especially in current circumstances”. Mobile OS app stores currently impose limits on the ability to monetise content, the CMA added.

In an official response to the FTC, Microsoft pointed out that, while 75% of Activision's gamers and a third of its revenue come from mobile, Xbox “has next to no presence in mobile gaming … where 94% of gamers spend their time today”. A deal would help make Activision's mobile offerings more accessible, it stated.

Nevertheless, the Microsoft-Activation deal could still go ahead despite the legal challenges.

Microsoft could launch own gaming app store

According to data collated by Sensor Tower, Microsoft’s mobile app revenue was $57m in May 2023, comprising $40m from iOS apps and $17m from Android apps. Its apps were downloaded onto iOS devices 28 million times, and 41 million times onto Android smartphones.

A key driver of growth starting in early 2024 will be the EU’s Digital Markets Act (DMA), which will force Apple [AAPL], among others, to allow third-party app stores on iOS devices.

The legislation is designed to prevent large platforms from acting as “gatekeepers” and to ensure “these platforms behave in a fair way online”, according to the European Commission’s website.

Assuming Microsoft’s Activision acquisition does eventually go ahead, the tech giant is planning on launching its own app store for gamers on iPhones and Android smartphones.

Ahead of the annual Game Developers Conference in San Francisco in March, Spencer told the Financial Times that the EU’s DMA is “a huge opportunity”.

Online gaming: more deals to come

The EU’s DMA should open up new revenue streams for many players in the mobile gaming industry. Anthony Ginsberg, CEO of GinsGlobal Index Funds, told Opto Sessions recently that, based on conversations he’s been having, there could be plenty more dealmaking à la Microsoft-Activision.

On the broader trend of online and cloud gaming, Ginsberg sees the market growing to five times the size of Hollywood in the near future, up from four times currently.

“Here I am in Los Angeles. Hollywood gets a lot of hype, but actually it’s shrinking in size relative to gaming … Online gaming is a very, very impressive industry,” said Ginsberg, adding that “the technology behind graphics is often superior to what you see in Hollywood”.

AI to improve player experience

Ginsberg sees plenty of potential cloud gaming growth in South Africa and countries in Latin America, “where the cost of consoles is just beyond many folks”, due to lower wages and income, but where mobile penetration is high.

More exciting, though, is that fact that the technologies underpinning online and cloud gaming — “the plumbing”, as Ginsberg puts it — are going to continue advancing. In the future, 5G mobile networks will improve streaming speed, ensuring a smoother and near-seamless user experience.

Artificial intelligence (AI) is also likely to play a role in improving the quality of the experience. For example, AI-powered testing could uncover bugs, improve game mechanics and even ensure match-making in multiplayer games is fairer and more balanced.

Funds in focus: VanEck Video Gaming and Esports ETF

AI’s potential to power the future of gaming could explain why Nvidia is a long-term top-10 holding in the VanEck Video Gaming and Esports ETF [ESPO]. Communications services account for 66.5% of the portfolio, while the information technology (IT) and consumer discretionary sectors make up 21.8% and 11.5% respectively, as of 30 April. The fund is up 2% in the past year and up 15.6% in the past six months.

The Global X Video Games and Esports ETF [HERO] is also focused primarily on the communications services sector (88.5%), while IT and consumer discretionary account for 10.70% and 0.90% respectively. The fund is down 14.5% in the past year and up 1.5% in the past six months.

The Betashares Video Games and Esports ETF [GAME.AX] offers significant exposure to the interactive entertainment sector (79.10%), over interactive media and services (8.00%), leisure products (6.00%), application software (5.50%) and IT consulting and other services (1.40%), as of 28 April. The fund is down 2.3% in the past year, but up 14% in the past six months.

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