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Video game firms set to level up as Apple and Google change the rules with streaming services

Last month, the two heavyweights unveiled Apple Arcade and Google Stadia, video game streaming systems that could potentially change the market forever
Video game player
The global customer base for video games numbers around two billion, and is predicted to get even bigger with the advent of streaming services

Several London-listed firms in the video game sector are looking to ride an industry upswing after tech giants Apple Inc (NASDAQ: AAPL) and Google (NASDAQ:GOOG) unveiled plans to break into the market.

Last month, the two heavyweights unveiled video game streaming systems, a development that could potentially change the market forever.

READ: Keywords Studios profits jump 65% as acquisitions boost earnings in 2018

Apple Arcade, alongside its competitor Google Stadia, will both be subscription-based gaming services that allow players to play games from the online cloud on any screen without the need for console hardware like Sony’s PlayStation or Microsoft Corp’s (NASDAQ:MSFT) Xbox.

This approach, essentially the Netflix model but for video games, has the capacity to offer instant access and portability for gamers and explode the market beyond its already huge customer base of around two billion.

Given the global video game market is expected to be worth over US$174bn by 2021 and has a compound annual growth rate (CAGR) of around 9%, it’s no wonder they are looking for a slice of the pie.

Boon for developers and service providers

With the potential for an even bigger market and the accompanying demand for content, developers and companies that provide back-end services for video games are bullish on the future.

Andrew Day, chief executive of AIM 100 firm Keywords Studios PLC (LON:KWS) which provides creative and translation services for video game developers, is already predicting a “likely increase in demand” when the Apple Arcade and the Stadia are released.

Meanwhile, fellow back-end services firm Sumo Group PLC (LON:SUMO) is getting an early foot in the door, announcing in its full year results on Tuesday that it had secured a deal to develop two titles for Apple Arcade.

READ: Sumo levels up on “unusually” high earnings visibility for 2019

Sumo’s chief executive, Carl Cavers, also offered a bright outlook, saying the future for the firm was “as good as ever” with demand from the new cloud-based subscription platforms expected to drive growth in the sector.

The sentiment has been echoed by analysts at Liberum, who said in a note on Monday that video game streaming could become “a major delivery channel sooner than expected”.

“Increased reach of the cloud among gamers and higher game complexity (allowed by nearly unlimited processing power) should be a catalyst for higher demand for games services in the coming months”, the broker added.

Things have also been looking good on the developer side, with racing game maker Codemasters Group Holdings PLC (LON:CDM) saying in a trading update on 1 April that its adjusted earnings (EBITDA) for its latest full year were ahead of market expectations, citing a boost from digital sales.

Fortnite effect’ fading?

The bullish sentiment will likely come as a relief to investors following a particularly difficult year for London’s game stocks, who like many in the sector have been suffering from the so-called ‘Fortnite effect’.

Fortnite, an online, free-to-play video game launched in July 2017, has exploded in popularity over the last year and a half, drawing in more than 250mln players and raking in cash for its publisher Epic Games.

However, while Fortnite’s success has brought online video gaming squarely into the mainstream, many in the sector have suffered as a result of its dominance.

This ‘Fortnite effect’ is essentially a trend where other gaming companies have been pressured as Fortnite’s massive popularity has driven down their product sales, forcing them to cut back on spending for new projects.

This ‘mothballing’ then becomes a knock-on effect for the companies that provide support services, with shares on both sides of the development coin seeing declines over the last year.

However, with the coming dawn of Netflix-esque game streaming the shares seem to be mounting a recovery, with Keywords and Sumo having risen around 19% and 6.3% respectively in the last month.

For Fortnite, the new era may mean it becomes a victim of its own success as massive libraries of video games with cheap monthly subscriptions that require no console or PC hardware could effectively serve as a leech on its own player base, who seem to have been attracted mainly by its free-to-play offering.

It seems that by bringing the sector to prominence through its success, it may have inadvertently sounded its own death knell.

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