Online gaming seems coronavirus proof, but is it recession proof?

Online entertainment and gaming companies are seeing COVID-19 surges in revenues, but are these businesses in a position to resist the pressures of a global recession?

With many countries around the world entering into recession due to the impact of the coronavirus pandemic, online gaming companies will face challenges like never before. Let’s not forget, this is a segment which did not exist during the last major financial downturn, the ‘Great Recession’ of 2008, and it is almost entirely reliant on discretionary income.

This is of course a massive question which should not be taken at surface value, but the up-coming recession has the potential to completely turn this industry on its head. However, for the moment, there is money to be made thanks to circumstance.

How are the gaming companies getting on now?

In short; very well.

Activision Blizzard has released its 2020 first quarter results, and while the figures might be down on the same period of 2019, outlook is considerably better than the forecasts provided by the company on February 6.

Total revenues for the three months ending March 31 were $1.79 billion, down 2.1% year-on-year, but 9% up on the guidance which was offered to investors in February. This guidance was offered before the full impact of COVID-19 was comprehendible, so it understandable that estimates were off.

The Call of Duty title has been credited with much of the success, most notably the mobile game which was launched in late-2019 and the Warzone addition. Warzone was launched under a free-to-play business model, with in-game purchases, and has attracted more than 60 million users.

Elsewhere, Electronic Arts has also released financial statements for the period ending March 31. Total revenues for the three months increased 14.4%, 3% higher than what was forecast in January while net income was up 5% on the guidance offered. Digital revenues now account for 78% of the total, a transformation which has been taking place over the last few years.

FIFA 20 and Madden NFL 20 both excelled for Electronics Art in the sports gaming segment, with the latter recording the “highest engagement levels in franchise history”, while Apex Legends was the most downloaded free-to-play game on the PlayStation platform in 2019 and continued to excel through 2020.

These are only two examples of gaming companies who have benefitted from societal lockdown protocols, but there are numerous others including Microsoft with Xbox and its cloud gaming platform Project xCloud.

In short, more people are locked in doors and need entertaining. More are turning to gaming.

Telco data backs up the financials

With more people staying at home, there was a risk strain would be placed on broadband networks as these are assets which have not been deployed with the current societal lockdown in mind.

Video conferencing is on the up, content streaming is skyrocketing, and gaming is entertaining adults and children alike. All of these elements add up to pressure on the network, though many are performing admirably.

In March, Telecom Italia Luigi Gubitosi suggested network traffic had increased by as much as 70% in some regions, with Call of Duty and Fortnite usage some of the more prominent contributors. Performance of the networks were a worry, but these fears have now been addressed.

Who should we be keeping an eye on?

There are a lot of companies who will be releasing financial statements over the next week, all of which will be inclusive of at least some of the lockdown period.

Due to the number of private companies and start-ups in this segment, it is difficult to gain full visibility into the financial gains, but usage reports and download statistics can help. Ultimately, it is a fair assumption this is a segment of the technology industry which is benefitting from the on-going COVID-19 pandemic.

The financial risks have been predicted

In October 2019, the International Monetary Fund (IMF) held a press conference during which the risk of indebtedness was discussed in detail.

“In the event of a material economic slowdown, the prospects would be sobering,” said Tobias Adrian, Director of the Monetary and Capital Markets Department of the IMF.

“Debt owed by firms unable to cover interest payments with earnings, which we refer to as corporate debt at risk, could rise to $19 trillion in a scenario that is just half as severe as the global financial crisis.”

$19 trillion would account for 40% of the total corporate debt in the worlds’ eight largest economies. Of course, much of this rhetoric refers to traditional organisations and those who are already in precarious situations, but it does demonstrate risk.

Adrian stated six months ago that there was a corporate debt bubble building. The accessibility of borrowing facilities over the last decade, as well as tendency to stretch asset valuations, has led to a tsunami of debt. External debt has risen to 160% of exports according to Adrian, compared to 100% in 2008.

This does not necessarily directly correlate to the online gaming sector, but it is good to place the current situation into context. Last October, the IMF warned of a corporate debt bubble which would burst during a recession, compounding the misery and extending the financial downturn. This is the reality which the world is facing today.

Could be a short, but sharp downturn

Coutts bank has recently suggested the financial downturn would be a recession, but the depth would not extend to a depression.

“The current recession will without doubt be very deep and widespread,” the company said in a blog post. “Unemployment has risen significantly, and a wide range of sectors are affected.

“But we think the recession will be short-lived, and that’s the key to our cautious optimism. With economic activity plunging so deeply, even a slow, partial re-opening of the economy is likely to lift activity from these extreme lows.”

Although financial data demonstrated the downturn has been dramatic, there are few deep-seated systemic problems standing in the way of a recovery. The economy will not bounce back overnight, but recovery should be swift assuming there is not a secondary wave of infections.

This is the big question which many companies will be facing; how long will the recession last?

There will be an inflection point on the horizon

Companies who are benefiting from the societal lockdown will have to be wary of the inflection point in fortunes.

People being locked indoors is fine for a while, but soon enough it will start having a very material impact on the economy. When this happens, unemployment could rise, and consumer spending habits are altered. Discretionary income could disappear, and belts would be tightened as a result.

In this scenario, money spend on online gaming habits would almost certainly be cut back, turning the fortunes into flounders.

What is worth noting is this is based on assumption. The online gaming segments were nowhere near as prominent as they are today. In 2008, online gaming was a niche, it was pre-4G hitting mainstream markets while few console games had the internet appeal they do today. eSports would have been considered an absurd idea.

We cannot explicitly state what would happen to the gaming industry during a recession, as there is no precedent, but it is a safe assumption that it would not do very well.

What could happen?

Speculation is always a good bit of fun and should the gaming industry head towards uncomfortable times there certainly could be a dramatic amount of disruption.

There are of course multinational corporations who have profited from the shift to online gaming, but there are numerous start-ups who have shot to fame on the back of a viral hit. The likes of Angry Birds catapulted Rovio to fortunes, while Imangi Studios has experienced sustained success from less complex games such as Tempe Run.

Outside these blockbuster hits, there are thousands of developers who have profited handsomely from online gaming, ensuring the ecosystem is incredibly wide and diverse. Many of these companies are still private, spurred on by revenues flowing through the app economy. Should a recession halt this flow of cash, these companies would suffer.

Industry consolidation could be a reality, with multi-nationals snapping-up cut-price opportunities. Tencent is one company which has grown via acquisition, taking up stakes in the likes of Riot Games, Supercell, Activision Blizzard, Glu Mobile and Grinding Gears Games. Organisations like this must be licking their lips with a prospect of a recession; an opportunity to grow a digital empire through the acquisition of distressed assets.

Venture Capitalists will also have an eye on this area, though this would allow the start-ups to maintain some level of independence. They may have to hand over stakes at depreciated valuations to do so, however.

Interestingly enough, a recession could also present a significant opportunity for the ad-supported, free games. Online advertising demand might decrease, but it certainly wouldn’t disappear entirely. And consumers will still have to be entertained. This could supercharge a segment which is often overlooked in favour of more attractive cousins in the online gaming ecosystem.

Just enough but not too much

The fortunes of the online gaming industry are hanging in the balance somewhat. Yes, societal lockdown is benefiting this segment right now, but recovery will need to come before the inflection point.

The longer this lockdown persists, the greater the risk of a longer-term recession and a downturn for the online gaming segment. Just enough lockdown is a profit machine, too long could mean a very detrimental net loss.

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