Australia’s games and esports sector is growing fast, but ASX games developers are taking a global view to their future expansion plans.

That’s the view of both PlaySide Studios (ASX:PLY) and iCandy Interactive (ASX:ICI), who spoke with Stockhead recently for an update on the sector outlook.
 

ASX games developers — looking abroad

The interviews followed the release of the Australian Entertainment and Media Outlook report, released annually by consulting firm PwC.

The report said domestic revenues from interactive games and esports reached $3.4bn in 2020, and will rise to $4.9bn by 2025.

Those numbers are well and good, PlaySide CEO Gerry Sakkas says, “but for us, we generate less than 10% of our revenues from Australia.”

PLY’s core market is North America where it generates more than 50% of its income.

“So in that context, the $3.4bn revenue figures sounds good. But globally, the games industry is worth more like $200bn and that’s where our focus is,” Sakkas said.

It’s a similar story for iCandy, which to date has generated most of the revenue from its flagship titles through North America.

So how are ASX games developers trying to capitalise on that global opportunity?

Both Sakkas and iCandy chairman Lau Kin Wai shared insights on the current macro trends and what their companies are doing operationally.
 

Consumer behaviour

For investors assessing the revenue outlook for ASX games developers, Sakkas said the ‘freemium’ model is still dominant.

To grain traction, games need to be free to download. Then they can be monetised through in-app purchases and advertising.

“For mobile games as industry, freemium is only thing that works. No one really does paid apps,” Sakkas said.

From there, whether revenue is made through product-purchase or advertising really depends on the type of game you make.

One of PLY’s most popular titles, Animal Warfare, is an advertising-based game due to the nature of its arcade-style that’s easy to pick up.

Conversely, its development titles based on popular movie franchises — the Godfather and Legally Blonde – will generate the bulk of their revenue through in-game purchases.

“For in-game purchases there’s maybe a smaller amount of users that spend, but they often spend a lot and make up for users that don’t,” Sakkas said.

“Whereas for an ad-based game you’re monetising everyone. So they’re just two very different game styles and you have to factor that in when you build them.”
 

Macro moves

In the post-COVID economy, gaming was often grouped alongside streaming companies and other home entertainment as a pandemic beneficiary.

But Sakkas said it hasn’t all been smooth sailing.

“Obviously it really slowed things down from an events standpoint. And as a developer I’d rather people were on trains and buses every day playing mobile games.”

“So I don’t think it’s been a surge like it has been for say, Netflix, but obviously I think it will keep growing at a rapid rate.”

Kin said he’d also noticed some changing consumer behaviour patterns amid the broader growth metrics applied to the gaming sector.

“I think it’s well known that the broader gaming population is always growing. So that’s not new, but what is new is the level of engagement,” Kin said.

“People are playing games for longer and things like in-game purchases are becoming familiar concepts.”

“So there’s an opportunity to capitalise there if you can make the right game because payment methods have also increased in line with that shift.”

“It’s not just credit cards, there are lots of options (such as gift cards) and that’s something that’s changed noticeably compared to say five years ago.”
 

Esports

PlaySide has picked up direct exposure to the sector through its investment in local consulting group Big Esports.

And while many investors would be familiar with the space by this point, Sakkas reckons not everyone has a clear grasp of what the next 5-10 years will look like.

“For esports as a whole, there’s no doubt whatsoever that anyone who’s not looking closely at that sector doesn’t understand how big it’s going to be,” he said.

“Take the Olympics which were just on. They know they’re going to have to do something with esports and they don’t know what to do. But if they don’t move on it – whatever you think viewership for the Olympics is, there’ll be esports events that are 10 times that.”

In that context, Sakkas says it will become increasingly normal for kids who are primary-school age to pursue esports over the next 10 years.

“What works with esports is that it’s so accessible. You don’t need to be athletic or go out and stand in the cold on a Saturday morning to play.”

“So that’s an area where I also think the growth over the next 10 years will be tremendous, and that’s why we’ve dipped our toes in the water with the Big Esports investment.”
 

Major players

Looking at the gaming sector more broadly, Kin noted some recent moves by major entertainment players to get more access to the sector.

Last month, Netflix announced plans to offer video games on its platform and (TikTok owner) ByteDance is also eyeing off the space.

In that context, Kin said that for investors with an interest in ASX games developers, sector consolidation is another trend to keep an eye on.

“In terms of capital markets, all games developers require risk capital, and that capital typically hasn’t as accessible from the VC industry compared to other sectors,” he said.

“That’s probably changed a bit in the last couple of years. But prior to that investors were a bit shy because with the production model there is risk – when you make a product you don’t always know if it works or not.”

As a result, the market has matured in an interesting way, Kin said. There’s global giants such as Hong Kong-listed Tencent, which generates around 50% of its revenue from gaming.

In that context, the cohort of ASX games developers are at the smaller end of the spectrum, with sub-$150m market caps. And right now, there’s “no one really in between”.

“There are very few mid-cap – say, $500m companies — in many parts of the world,” Kin said.

“So smaller microcap companies will hopefully be the winners as they emerge and grow over the next few years.”

“The major companies will realise there are no M&A deals at the top end and they have to come to the mid-cap market.”

“Part of our strategy in being public is to give ourselves the proper governance and reporting structure. And if you look at that M&A potential, ASX companies are building a track record in well-known jurisdictions which could make them more attractive targets than private companies.”
 

Putting it together

While there are plenty of interesting broader long-term trends for investors to mull over, Sakkas concluded by detailing PlaySide’s operational approach as it looks to capitalise on the industry’s growth.

The strategy is built around a broad product suite — PC games, arcade-style mobile games, movie title licences and co-developments with gaming influencers.

The rationale for that strategy is that, as Kin alluded to earlier, in games development “you never know which product’s going to work”, Sakkas said.

“If you do one thing or two things in a financial year and one doesn’t work, you’ll be behind,” he said.

“We’ve got 12 products launching over next year and they don’t all need to work. Even if they all perform OK we’ll still hit our revenue targets.

“So our goal is to keep digging in the gold mine and find something that skyrockets. Then the entire company will fall in behind that product and we’ll start making other products like it.”

He cited the example of Finnish games developer Supercell, which built the flagship title Clash of Clans and now focuses primarily on mobile strategy games.

And for some big-picture thinking, Sakkas said not to rule out the themes in 2018 science fiction film Ready Player One — larger virtual worlds — becoming a reality.

“If you look at future growth for industry, it’s probably going to come out of augmented/virtual reality,” he said.

“There’s a lot of chatter about the metaverse (a collective virtual space) and how that’ll work — who owns it, how assets play into it. Maybe NFTs play into it as a way to measure what you have in that world.”

“So the future of games is something almost like a global multiplayer product that everyone has — a social network and gaming platform all in one.”

“And we’re focused on who’s involved in that and helping create it so we can be there as a gaming company involved in that shift.”

At Stockhead, we tell it like it is. While iCandy Interactive is a Stockhead advertiser, it did not sponsor this article.

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