Major video game publishers like Activision Blizzard (ATVI) and Electronic Arts (EA) are predicting increased full-game downloads and sales of in-game extras through microtransactions, which should boost their bottom lines.
Those are some key takeaways by Morgan Stanley from the E3 video game conference this week. The three-day industry show in Los Angeles ends Thursday.
Morgan Stanley analyst Brian Nowak said his assumptions about digital game distribution might be low, based on his conversations with publishers at the show. He currently expects 50% of new games to be purchased digitally by 2019, up from 32% in 2016 and an estimated 38% this year.
That trend is bad news for specialty retailer GameStop (GME), a top seller of games on physical media. Digital downloads generate 1.3 times more gross profit dollars than physical discs, Nowak said in a note to clients Thursday.
The next shift in gaming is expected to be cloud streaming, he said. The experience will need to be improved because gamers have zero tolerance for latency issues.
“The pace of innovation in this area will be important to monitor because the extent to which cloud streaming becomes more prevalent over the next five to 10 years could prove to make our current digital download penetration assumptions too low,” Nowak said.
After Activision’s success with microtransactions in its “Call of Duty” and “Overwatch” games, EA is embracing the strategy with “Battlefield 1” and “Star Wars Battlefront 2,” Nowak said.
“We see EA starting to pivot its digital monetization strategy for ‘Star Wars Battlefront 2’ and ‘Battlefield 1’ and moving away from (selling) maps/expansions and instead focusing on live events and microtransactions,” Nowak said. “We believe this is the correct long-term strategy to maximize digital monetization (given that it eliminates the fracturing of the user base that comes with maps/expansions).”
Nowak reiterated his overweight ratings on Activision and EA. He has a price target of 67 on Activision and 126 on EA.
Activision shares closed up 0.8% at 58.91 on the stock market today, and EA rose 0.5% to 110.53.
Virtual Reality Biggest Bust At E3 2017
One of the biggest disappointments at E3 2017 was the diminished presence of virtual-reality gaming.
“Last year virtual reality was a common conversation topic and had a large presence on the floor,” Nowak said. “This year, virtual reality came up in only one meeting we sat in and had only a small presence. This is consistent with Facebook (FB) F8 year on year and speaks to how virtual reality (in our view) is unlikely to gain wide adoption anytime soon.”
Activision, EA Get Price-Target Hikes
Also Thursday, investment bank UBS raised its price targets on buy-rated Activision and EA.
UBS analyst Eric Sheridan said in a note to his clients that Activision and EA are benefiting from the shift to digital game sales and in-game microtransactions.
“The video/mobile game industry is undergoing a significant transition from a hit-driven business model to a media consumption model where monetization is layered on top of prolonged engagement with key franchises – driven by increased digital full-game downloads, increased digital content (mix of expansion packs, microtransactions and advertising to extend gameplay and increase monetization), and consumer intent around key franchises,” Sheridan said.