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The 2019 DreamHack videogame festival in Leipzig, Germany.
Photograph by Jens Schleuter/Getty Images
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The shift toward digital distribution—and, eventually, toward a
Netflix
-like (NFLX) streaming model—is generally seen as a good thing for videogame publishers, which can expect wider margins, sustainable revenues, and a bigger market.
But there’s a possible downside, too, according to new research: If there isn’t enough competition in streaming, PiperJaffray analyst Michael Olson wrote Monday, publishers could find themselves having to fork over too much money to platform owners.
“Companies with a strong cloud presence and existing gaming brand appear best positioned to emerge as the ‘Netflix of videogames,’” Olson wrote. “The only scenario in which we see streaming as a potential negative for publishers is an environment with only one or two major streaming platforms, which would allow those platforms to demand egregious economics.”
The long-term vision for the industry is one where just about any internet-connected device might be able to play just about any game.
Olson sees tech giants—including
Alphabet
(GOOGL),
Amazon.com
(AMZN),
Apple
(AAPL), and
Microsoft
(MSFT)—as among the likely leaders of the move toward streaming games. (Barron’s Jack Hough took a look at the notion in a cover story last year.)
The notion that platform owners might try to extract fees that publishers find too high isn’t crazy. We’ve recently noted a parallel case, in which Netflix has tried an end-run around Apple’s App Store fees.
“Whether full game download or streaming is the primary mode of game consumption in the future, both offer higher margin potential to publishers,” Olson wrote. “We believe next-gen consoles coming in holiday 2020 will be a catalyst for accelerating full game download growth and, simultaneously, advancements in streaming will be ongoing.”
There are, naturally, likely losers in this scenario, including retailers like
GameStop
(GME), which has seen its business—and, notably, the market for used games—come under heavy fire.
But for companies like
Activision Blizzard
(ATVI),
Electronic Arts
(EA), and
Take-Two Interactive
Software (TTWO), which publish the games, profits should expand. Olson estimates that publisher gross margins, now around 60%, could top 80% as streaming and digital downloads replace more—or, potentially, all—physical game sales.
Email David Marino-Nachison at david.marino-nachison@barrons.com. Follow him at @marinonachison and follow Barron’s Next at @barronsnext.
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