Video Game Industry Growth Prospects 2023

Video games will win in 2023.

After a slow 2022, the gaming industry is expected to unlock new levels of growth next year as more big-budget, high-profile games and next-gen consoles hit the market. In fact, 2023 is likely to be a year of inflection, as publishers continue to release new “triple-A games”, considered the best of their kind. The recovery could even begin as early as the end of this year, when new titles will be launched in anticipation of the end-of-year celebrations, thus creating a first window of opportunity for investors.

“Video game development teams are seeing better productivity and efficiency. At the same time, stocks that have been strategically pushed back now look more likely to launch in 2023,” said Seyon Park, Morgan Stanley Research analyst in charge of telecommunications and internet stocks in Seoul. “We view an abundance of quality content as the most important factor behind our expectations for a strong market rally heading into the upcoming holiday season.”

A few key factors are likely to drive the game’s growth, Seyon says, including:

More next-gen consoles and new games: Updated game consoles will be available to more households next year as supply chain issues ease. For example, a major console maker is expected to sell around 18 million units by March 2023, bringing the installed base of game consoles to a total of around 37 million units sold since 2020. The increase in consoles Next-gen gaming is in turn fueling triple-A game development. Many third-party publishers have pushed back game launches amid these global supply chain disruptions, and so Morgan Stanley Research expects that the launches of new titles accelerate until 2023.

Change of regulations in China: To combat youth gambling addiction, in 2021 the Chinese government banned gamers under the age of 18 from playing on school nights and one-hour gambling on weekends and holidays. That’s subject to change, Seyon says. “We see the impact of regulatory measures in China diminishing and gradually recovering as restrictions on minors normalize,” he says, noting that China approved several new gaming licenses in September. “These are the first signs that the regulatory environment has turned the corner,” adds Seyon.

Defense in the event of a potential slowdown: Recessions aren’t necessarily bad for gaming: staying home to fight zombies is usually cheaper than a night out with friends, even with the initial investment in games and consoles. “Games sales have proven resilient to down economic cycles,” says Omar Sheikh, an analyst with the European media team. This offers investors the opportunity to quickly accumulate holdings in a sector that offers attractive valuations.

Historically, consumers have continued to spend on video games during recessions.

Despite the general optimism, some factors could mean the end of growth:

  • Rely on proven content rather than developing new games: Like many entertainment industries, game publishers typically invest in proven winners rather than pouring money into new genres. This mindset is a potential problem, because “innovative content is what brings new players into the gaming world,” says Sheik. “The strong pipeline of new games in 2023 may demonstrate that creativity is still thriving in the gaming world, but if that were to fail, we could see a downside to our longer-term growth prospects.”
  • A slowing mobile market: The user base is already large and mobile gaming penetration is starting to reach saturation, especially for the US, Korea, Japan and China markets. “That means spend per player will have to be a big driver of growth, so we’re focusing on quality content,” says Seyon.
  • The threat of the short video: Short-form video platforms have caught the attention of many potential gamers, who choose the format over other online entertainment, especially in China. Quality gaming content has long been an industry driver, says Seyon, but “short video could be a risk for more casual genres.”

Overall, however, Morgan Stanley analysts remain bullish on the industry. “Content is a key driver of market growth, especially for more mature markets, and investors should focus on publishers with well-established intellectual property and creative development teams,” says Sheikh. “Valuations at multi-year lows are very attractive for long-term investors, as companies with a track record and strong pipeline could see earnings growth beyond next year.”

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